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Commercial Division Renders a Split Decision on a Petition to Stay an Arbitration

Recently, the Commercial Division rendered a split decision on a petition to stay an arbitration in Gol v. TNJ Holdings, Inc., Index No. 652304/2020, Doc. No.  75 (Sup. Ct., NY Cnty. Aug. 13, 2020).  Based on an analysis of the relevant shareholder agreements and the positions taken by the parties in another litigation, Justice Joel M. Cohen denied the petition to stay arbitration as to the claims brought by the TNJ respondents, but granted the petition to stay arbitration as to the claims brought by the Kahlon respondents—the owners of TNJ.

The petition to stay and the underlying arbitration involve a constellation of shareholders and other parties associated with Project Verte, Inc., an e-commerce services company.[1]  As noted by the Court, “[t]he company was founded by Petitioners Jane Gol (‘Gol’) and Amir Chaluts (‘Chaluts’) and Respondents Jossef Kahlon (‘Jossef’) and Julian Kahlon (‘Julian’). The founders’ stakes in the company currently are held through various entities.  The Gol interests are held through Petitioners JG Group Holdings LLC, PGFT LLC, JGFT LLC, and the Chaluts interests are held through AC Group Holdings LLC, and Chaluts Trust (collectively the ‘AJ Entities’).  The Kahlons interests are held through Respondent TNJ Holdings, Inc. (‘TNJ’).”  There are three shareholders agreements at issue in this matter: the Initial Stockholders Agreement (“ISA”), the Share Forfeiture and Note Transfer Agreement (“SFNTA”), and the Amended and Restated Stockholders Agreement (“ARSA”).  The parties to the agreements, except for Project Verte, are listed in the table below.

In response, on June 5, 2020, the Petitioners filed a petition to stay the arbitration in the New York County Commercial Division.  The Petitioners made the following arguments: (1) the ISA could not compel Gol and Chaluts to AAA arbitration because it was superseded by the ARSA to which they were not parties; (2) the SFNTA could not be the basis to compel arbitration because the arbitration claims do not relate to the SFNTA; and (3) “even if there is an agreement permitting TNJ to arbitrate claims against one or more of the Petitioners, TNJ’s owners Jossef and Julian Kahlon (who are not parties to the ISA or SFNTA) cannot do so.”

On May 15, 2020, the Respondents—TNJ, Jossef, and Julian—initiated a AAA arbitration against Gol, Chaluts, the AJ Entities, and others,[2] “claiming that Petitioners (through Gol and Chaluts) abused their powers as controlling shareholders and have harmed Respondents and Verte itself.”  The Respondents “allege in their arbitration pleadings that their claims arise out of or relate to the” ISA and SFTNA, “both of which contain mandatory arbitration provisions to which Petitioners (including Gol and Chaluts individually) are contractually bound.”

The Court rejected the Petitioner’s first argument on the status of the ISA.  The Court acknowledged that the ARSA had a provision stating that it “supersede[s] all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter.”[3]  Nonetheless, the Court noted that there were compelling arguments that the ISA was still a valid and binding agreement to arbitrate, because the ISA specifically stated that the arbitration provisions survived its termination and the ISA required all of the Initial Stockholders to agree to an amendment in writing; this includes Gol and Chaluts, who were not parties to the ARSA at face. 

Apart from the contractual interpretation arguments, the Court noted that equitable estoppel was in play.  After Gol filed the petition to stay in the Commercial Division, Project Verte (under Gol’s signature) filed a complaint in a Delaware Chancery Court “on June 16, 2020 against TNJ and Jossef Kahlon seeking to enforce the terms of a Rider to the ISA. (NYSCEF 44).”  In a footnote, the Court cited to the oral argument, where “counsel for Petitioners conceded that these two positions ‘can’t be squared,’ and that ‘a party may be able to be held liable under the terms of the first agreement’.”  Taking all of these considerations into account, the Court held that “[o]n balance, the ISA suffices to satisfy the threshold showing of an agreement to arbitrate.”

The Court also rejected the Petitioner’s second argument on the applicability of the SFNTA.  The Court noted that “the First Department has held that ‘[w]here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’.”[4]  The SFNTA incorporated the AAA rules and, therefore, the question of whether the Respondents’ claims fell with the SFNTA was up to the AAA arbitrator.

The Court did accept the Petitioner’s third argument that the Kahlons could not compel arbitration under the shareholder agreements.  The Court began by stating the axiom that an arbitration is based on an agreement, and a party that is subject to the agreement cannot be forced to arbitrate by a party not subject to the agreement.  The Court noted that the Respondents did cite cases where non-signatory corporate officer defendants were able to compel an arbitration under agreements signed by the corporations, but distinguished those cases on the grounds that they were situations where the defendant “may be permitted to compel arbitration of a claim that is, effectively, against the signatory (acting through its non-signatory corporate officer).”  The Court observed that the Kahlons were not faced with claims based on their association with TNJ or Verte, and the Respondents could not cite any cases where a non-signatory plaintiff was able to “enforce an arbitration agreement as a sword rather than as a shield.”  Therefore, the Court did not see any reason to deviate from the axiom and imposed a stay on arbitrating the claims asserted by the Kahlons.

The Court’s decision serves as a good reminder on the intricacies involved with interpretation and enforcement of arbitration clauses. 

By Alvin Li and Muhammad U. Faridi

[1] Full disclosure, the respondents in this matter are represented by David Slarskey, a former Counsel at Patterson Belknap Webb & Tyler LLP.

[2] Defendants in the arbitration also included Sara Rubenstein, Continental Ventures Realty LLC, Yafit Lev Aretz, Andrew Hulsh, and Pepper Hamilton LLP. See Gol, Doc. No. 5.  Rubenstein and Continental Ventures Realty LLC were also petitioners in this matter, but—as the Court noted in footnote 1 of the opinion—they were withdrawn from the Amended Arbitration Complaint.

[3] ARSA § 8.07.

[4] Citing to Zachariou v. Manios, 68 A.D.3d 539, 539 (1st Dept 2009).