In re the Arbitration between Cullman Ventures, Inc. & Conk

Citations: 252 A.D.2d 222; 682 N.Y.S.2d 391; 1998 N.Y. App. Div. LEXIS 13952

Court: Appellate Division of the Supreme Court of the State of New York; December 28, 1998; New York; State Appellate Court

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Respondents, members of the Conk family and a related trust, previously held a majority stake in Day Dream, Inc., which sold its shares to petitioner Cullman Ventures, Inc. This transaction sparked arbitrations and civil actions in both Indiana and New York. Petitioners aim to consolidate all claims from the Indiana arbitration into the New York arbitration, citing a common factual basis. However, respondents argue that the claims are governed by separate agreements with distinct arbitration clauses that specify different forums. The court reviewed whether the IAS Court correctly enjoined the Indiana arbitration and determined it did not, therefore reversing the injunction.

The Conk family owned a 51% interest in Day Dream, operated by Edward W. Conk, and entered a stock purchase agreement with Cullman Ventures on March 24, 1997. This agreement, governed by New York law, stipulated that disputes would be arbitrated in New York under AAA rules unless waived. Concurrently, an employment agreement was established for Edward W. Conk, effective April 11, 1997, requiring cause for termination and a 10-day notice period, governed by Indiana law with arbitration in Indiana.

Edward W. Conk was terminated on October 3, 1997, leading him to initiate arbitration on December 17, 1997, claiming procedural violations regarding his termination. He also filed a defamation lawsuit on December 16, 1997, against Day Dream and Cullman in Indiana, which did not reference the stock sale, contradicting the IAS Court's finding that it was related to claims in the New York arbitration.

Cullman and Day Dream filed a motion to dismiss a defamation action, arguing that the claims were subject to arbitration clauses in existing agreements. This motion was granted, although Conk did not appeal and plans to incorporate the defamation claim into Indiana arbitration. Following the initiation of Indiana arbitration related to an employment agreement, Cullman began separate arbitration in New York against former Day Dream shareholders, alleging fraud and breach of contract regarding a stock purchase agreement. Day Dream sought to dismiss the Indiana arbitration based on a claimed failure to provide proper notice to Conk. Conk then attempted to amend his claims to include a “substantive breach of contract,” contesting the reasons for his termination and asserting a breach of the employment contract.

Despite petitioners’ assertions that Conk's disclaimers aligned with claims in the New York arbitration, this connection was not clear from the amendment's language. On February 20, 1998, Conk and others responded to the New York arbitration with a counterclaim for rescission, citing unpaid escrowed funds and unfulfilled promises regarding employment. They later filed a second action in Indiana seeking to prevent asset transfers and to assert their rights pending the counterclaim's resolution. This complaint referenced misrepresentations by Cullman and included allegations of fraud and unjust enrichment, seeking injunctive relief to maintain the status quo.

Cullman and Day Dream subsequently removed this state action to federal court in Indiana, where a declaratory relief claim was dismissed. On February 24, 1998, they initiated a special proceeding to compel Conk to arbitrate in New York and to prevent him from pursuing claims elsewhere. The court granted this petition, directing arbitration of the defamation and breach of contract claims in New York and enjoining Conk from further litigation of these matters in Indiana, finding that all claims were interconnected through allegations of fraud.

The court expressed concerns that a ruling in the New York arbitration favoring the petitioners on claims of fraud and misrepresentation could conflict with a potential ruling in the Indiana arbitration that might validate Conk's defamation claim and challenge the claims of financial misrepresentation. It determined that the procedural breach of contract claim regarding defective notice remained arbitrable in Indiana, as it did not relate to the grounds for Conk's termination. The court criticized the IAS Court for improperly consolidating separate arbitrations under different agreements and involving different parties, which intruded on the binding nature of those contracts. Under the Federal Arbitration Act (FAA), arbitration agreements must be enforced as written, and courts cannot consolidate arbitrations contrary to the parties' agreements, even for efficiency. Moreover, courts lack the authority to dictate the arbitration forum if it deviates from the specified agreement. The FAA allows for piecemeal resolution to uphold arbitration agreements, even if this leads to inconsistent outcomes across separate arbitrations. The IAS Court did not have the authority to enjoin the Indiana arbitration or dictate its proceedings, and relevant New York law provisions governing arbitration do not apply to the circumstances presented.

Conk is pursuing his right to arbitrate his termination under his employment contract with Day Dream, without opposing the New York arbitration related to a stock transaction. The court found that the Indiana arbitration, where Conk is contesting his termination, is not substantively linked to the New York arbitration. Even if the reasons for Conk's termination mentioned the stock transaction, they are not the sole basis for his dismissal and pertain to events prior to his employment. The arbitration clause permits Conk to challenge his termination in Indiana, regardless of any connections to the New York arbitration.

The Indiana arbitration, initiated three weeks before the New York arbitration, should not be subordinated to the latter. The motion court's stay of the Indiana arbitration based on CPLR 7502 (c) was not justified, as the outcome of the Indiana arbitration solely affects Conk and does not impact the other parties involved in the New York arbitration. Day Dream is not a party to the stock purchase agreement, further distancing the relevance of the two arbitrations. Concerns about issue preclusion are mutual; the New York arbitration's findings could potentially affect the Indiana arbitration. Ultimately, the petitioners did not establish a likelihood of success, irreparable harm, or favorable equity to warrant the requested injunction under CPLR 7502 (c).

CPLR 7502 injunctive relief in this matter conflicts with the Federal Arbitration Act (FAA), which emphasizes the enforcement of arbitration agreements. The Supreme Court of New York County's order from May 18, 1998, directing arbitration in New York for disputes related to a defamation action by Edward W. Conk against the petitioners in Indiana, is to be reversed. The order had mandated that Conk could not pursue litigation on these claims pending the New York arbitration and restricted any litigation concerning the "stock purchase agreement" to the New York arbitration. The appellate court concluded that the petition should be denied entirely, resulting in the dismissal of the proceeding without costs. Judges Milonas, Ellerin, Rubin, and Saxe concurred with this decision.