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Uni-World Capital LP v. Preferred Fragrance, Inc.

United States District Court, S.D. New York

March 6, 2014



PAUL A. ENGELMAYER, District Judge.

This lawsuit, like so many, arises from a business deal gone bad. The pending motion, however, does not concern issues of liability or damages, but rather, whether this Court should abstain from exercising jurisdiction in favor of a related case filed a month earlier in New York State Supreme Court in Brooklyn (the "Brooklyn Action"). In the case here, the entities that bought Preferred Fragrance, Inc. ("Preferred Fragrance") sue Preferred Fragrance, two of its former officers, and its shareholders who signed the Asset Purchase Agreement that governed the transaction. In the Brooklyn Action, Preferred Fragrance and a former officer sue two plaintiffs here. Defendants here ask that this action be stayed or dismissed in favor of the Brooklyn Action. For the reasons that follow, that motion is denied. This Court will continue to exercise jurisdiction over this case.

I. Background[1]

In late 2010, an investment bank introduced Uni-World Capital, L.P. ("Uni-World") to Preferred Fragrance, which sold "designer-inspired fragrance products" to retail chain stores such as Family Dollar and CVS. Am. Compl. ¶ 19. Uni-World began considering whether to buy Preferred Fragrance. During 2011, Uni-World performed due diligence on and negotiated with Preferred Fragrance, its chief executive officer (Ezriel Polatsek), and its chief financial officer (Harry Polatsek). Id. ¶¶ 19-26. In anticipation of purchasing Preferred Fragrance, Uni-World created two entities: Fragrance Acquisitions, LLC ("Fragrance Acquisitions"), which would take over Preferred Fragrance's operations, and Fragrance Holdings, LLC ("Fragrance Holdings"), Fragrance Acquisitions' parent (together, the "Fragrance Entities"). Id. ¶ 27.

On October 12, 2011, the Fragrance Entities purchased the assets and business of Preferred Fragrance pursuant to an Asset Purchase Agreement ("APA") with Preferred Fragrance and its stockholders, Ezriel Polatsek, Sara Polatsek, Solomon Tyrnauer, Bent Philipson, Joseph Rubenstein, and Benjamin Landa. Id. ¶ 28. As part of the transaction, Uni-World acquired equity in Fragrance Holdings, which in turn acquired equity in Fragrance Acquisitions. Id. ¶ 31. Also as part of the transaction, Ezriel Polatsek entered into an employment agreement, by which he became Fragrance Acquisitions' president and chief operating officer (COO). Id. ¶ 79. The employment agreement also included a non-compete clause. Id. ¶ 85.

At some later point, the Fragrance Entities concluded that the sellers, during the negotiations, had failed to disclose certain information that would have materially affected the purchasers' interest in, or the purchase price they would have paid for, Preferred Fragrance. Id. ¶¶ 39-78. The Fragrance Entities also concluded that Ezriel Polatsek was engaging in misconduct and breaching his duties as COO, and confronted him about certain alleged misconduct. Id. ¶¶ 86-110.

On April 8, 2013, the Fragrance Acquisitions sent most of the defendants here-Preferred Fragrance, Ezriel Polatsek, and the Preferred Fragrance stockholders who signed the APA-a letter stating that it would seek indemnification for lost profits against them under the APA as a result of their alleged omissions in connection with Preferred Fragrance's sale. Dkt. 39 ("Dockwell Decl.") Ex. D; Am. Compl. ¶¶ 111-12. Fragrance Acquisitions and defendants then had multiple settlement discussions. Am. Compl. ¶ 114. On or around September 10, 2013, after these discussions reached an impasse, counsel for Fragrance Acquisitions told defendants' counsel that the Fragrance Entities would be "moving toward litigation." Id.

Before such litigation was filed, however, on September 13, 2013, Preferred Fragrance and Ezriel Polatsek filed the Brooklyn Action in New York Supreme Court in Kings County. The case, captioned Preferred Fragrance, Inc., et al. v. Fragrance Acquisitions, LLC, et al., Index No. 505426/2013, seeks two declaratory judgments: that (1) Preferred Fragrance and Ezriel Polatsek did not breach the APA and thus are not obliged to indemnify the Fragrance Entities for lost profits, and (2) Ezriel Polatsek's non-compete clause is void and unenforceable. See Am. Compl. ¶¶ 116-17.

On October 10, 2013, Fragrance Acquisitions terminated Ezriel Polatsek's employment, stating that the termination was for cause pursuant to the employment agreement. Id. ¶ 118.

On October 11, 2013, plaintiffs here-Uni-World, Uni-World Capital AIV L.P., Fragrance Holdings, and Fragrance Acquisitions-filed the original Complaint in this action. Dkt. 1. It alleged one claim under federal law, specifically, a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "10b-5 claim"). It also brought state-law claims for common law fraud and breach of contract; sought declaratory judgments that the termination of Ezriel Polatsek's employment had been for cause and that the non-complete clause is valid and enforceable; and sought attorneys' fees.

On October 25, 2013, the Fragrance Entities moved, in State Supreme Court, before the Hon. Carolyn E. Demarest, to dismiss or stay the Brooklyn Action in favor of this one. See Dkt. 43 ("Pl. Br.") at 7. On December 17, 2013, defendants here moved to stay or dismiss this action in favor of the Brooklyn Action, Dkts. 23, 27, arguing that this Court should abstain from hearing this case under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976). Defendants also argued that plaintiffs' sole federal claim, under Rule 10b-5, was deficiently pled, because it did not allege that defendants "used the mails or other instrumentalities of interstate commerce to commit the alleged fraud." Dkt. 24 at 21.

On January 7, 2014, plaintiffs filed the Amended Complaint, which attempted to cure the asserted defect in the 10b-5 claim. See Am. Compl. ¶ 130.

On January 8, 2014, Justice Demarest heard argument on the motion to dismiss or stay the Brooklyn Action. Pl. Br. 8. Justice Demarest declined to rule at that time; she instead stayed discovery and scheduled a next conference, pending this Court's decision on the instant motions. Id.

On January 24, 2014, the defendants here again moved to stay or dismiss this action, in favor of the Brooklyn Action, under Colorado River, Dkts. 34, 37, and filed supporting memoranda of law, Dkt. 35 ("Polatsek Br."), Dkt. 38 ("Landa Br."). This time, however, defendants did not move to dismiss the 10b-5 claim, or assert that that claim was improperly pled.[2] On February 14, 2014, plaintiffs filed an opposition. Pl. Br. On February 21, 2014, defendants replied. Dkt. 47 ("Polatsek Reply Br."), Dkt. 49 ("Landa Reply Br."). On February 26, 2014, the Court heard argument. Dkt. 56 ("Tr."). At the close of argument, the Court announced that it would not abstain from exercising ...

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