Opinion
601342/06.
Decided September 11, 2007.
Motion sequence numbers 010, 011 and 012 are consolidated for disposition.
In this action alleging, inter alia, that defendants breached their fiduciary duties to plaintiff, Rony Zodkevitch ("Zodkevitch") and acted in concert to deprive him of his management and ownership rights in Toughlove America, LLC ("TLA") and American Family Health Services Group, LLC ("AFHSG"), plaintiffs move, in Motion Sequence 010 (the "second contempt motion") to hold Igal Feibush ("Feibush") and Steven Spiegel ("Spiegel") in contempt for failure to comply with the escrow provisions in this court's August 1, 2006 order granting a preliminary injunction. (Lowe, J) Feibush cross moves to vacate the preliminary injunction and Spiegel cross moves to stay his compliance with the escrow provision pending a decision on his appeal of the August 1, 2006 order.
Spiegel has perfected his appeal and it is scheduled to be heard during the October, 2007 term.
In Motion Sequence 011, Spiegel, Feibush and Phyllis and David York ("The Yorks") move and cross move to stay this proceeding pending a decision in the pending arbitration between plaintiff, Rony Z, LLC ("Rony Z") and the Yorks. Plaintiffs cross move for sanctions.
In Motion Sequence 012, (the "third contempt motion"), plaintiffs move to hold Feibush in contempt for failure to comply with paragraph 1 of the August 1, 2006 order and a November 9, 2006 discovery order. Plaintiffs also seek to strike Feibush's answer for his failure to comply with the discovery order and for appointment of a temporary receiver for TLA and AFHSG.
BACKGROUND
Plaintiff Zodkevitch, a psychiatrist, founded AFHSG in 2001 to provide self-help services to parents of troubled teenagers. AFHSG uses Toughlove techniques. Toughlove is a trademarked program developed in the 1970's by the Yorks. According to the license agreement between Rony Z and the Yorks, Zodekevitch agreed, inter alia, to establish for-profit treatment centers throughout country, and develop materials and programs for those centers, based on the Toughlove techniques and philosophy. Zodkevitch consulted with Feibush, who held himself out to be an experienced businessman and Spiegel, an attorney, about a business model for the Toughlove business venture and, based on their advice, Zodkevitch formed Rony Z, a limited liability company, to hold the Toughlove license. According to the complaint, Spiegel advised Zodkevitch to sub-license the Toughlove trademark to a new entity, AFHSG and he also recommended that Feibush receive a minority equity interest in that entity. The AFHSG Operating Agreement names Zodkevitch as the clinical managing member with a 70% ownership interest and Feibush as the business managing member with a 30% ownership interest. The Operating agreement names Spiegel as AFHSG's general counsel. In 2003, Zodkevitch granted Spiegel a 5% equity interest in AFHSG, and thus reduced his own equity interest to 65%.
In early 2005, Spiegel and Feibush recommended that Zodkevitch establish another subsidiary, TLA, to exploit media opportunities associated with Toughlove, including the promotion of a book, The Toughlove Prescription, that Zodkevitch had just finished writing. On information and belief, AFHSG is TLA's sole member and Zodkevitch is TLA's chairman. Spiegel prepared a private placement memorandum ("PPM") for the purpose of offering minority ownership interests in TLA to outside investors and Feibush and Spiegel hired a securities broker to help sell the offering at the price of $67,500 for a 0.5% interest. By January, 2006, three investors had subscribed and in accordance with Spiegel's instructions the investors deposited a total of $747,500 into his attorney escrow account. At about the same time, Spiegel and Feibush entered into negotiations with Zodkevitch to increase their equity positions in AFHSG. Zodkevitch resisted their proposals and hired independent counsel to review all the underlying contracts and documents.
Neither party has produced a signed copy of TLA's operating agreement.
Thereafter, in March, 2006 the Yorks issued a notice of default to Rony Z under the license agreement alleging, among other things, improper use of the Toughlove trademark and Zodkevitch's failure to develop clinical treatment centers, per the agreement. It is undisputed that the plaintiffs did not cure the alleged breaches as directed in the notice, and the Yorks have commenced an arbitration proceeding for a declaratory judgment that Zodkevitch and Rony Z defaulted under the terms of the license agreement and that the Yorks properly terminated the agreement.
THE COMPLAINT
The amended complaint alleges twelve causes of action. In the first cause of action, Zodkevitch alleges that Feibush breached his fiduciary duty by: a) withholding business information about AHFSG and TLA; b) retaliating against Zodkevitch for his refusal to give Feibush a greater equity stake in AFHSG; c) refusing to comply with adopted resolutions of AFHSG's members and d) acting in concert with Spiegel and the York's to Terminate Rony Z's license agreement.
The second cause of action alleges that Spiegel breached his fiduciary duty to Zodkevitch by: a) withholding business information about AHFSG and TLA; b) retaliating against Zodkevitch for his refusal to give Feibush a greater equity stake in AFHSG; c) refusing to comply with adopted resolutions of AFHSG's members and d) acting in concert with Spiegel and the York's to Terminate Rony Z's license agreement and by obtaining a 5% interest in AFHSG in violation of the New York attorney disciplinary rules
The third cause of action is a conversion claim against Feibush and Speigel and the fourth cause of action alleges that Feibush fraudulently represented that he was a wealthy financier with the ability to raise significant capital and that based on these representations, Zodkevitch agreed to grant Feibush a 30% equity interest in AFHSG. The fifth cause of action, on behalf of both Zodkevitch and Rony Z, states a legal malpractice claim against Spiegel. In the sixth cause of action, Zodkevitch charges Spiegel and Feibush of violation of the AFHSG operating agreement and their April 24, 2006 oral agreements. In the seventh cause of action, Zodkevitch and Rony Z allege that Feibush and Spiegel tortiously interfered with the license agreement by: a) making false and inflammatory statements to the Yorks about Zodkevitch and Rony Z's performance; b) encouraging the Yorks to terminate the agreement and c) refusing to turn over books and records to allow Zodkevitch to defend himself against the York's charges.
The eighth cause of action seeks an accounting and the ninth cause of action seeks a reformation of the AFHSG operating agreement. In the tenth cause of action, Zodkevitch accuses all the defendants of defamation and the eleventh cause of action states a claim against the Yorks for tortious interference with prospective economic advantage. The final cause of action, by Zodkevitch and Rony Z seeks a declaratory judgment that Spiegel and Feibush have ignored several resolutions that were duly adopted at a May 5, 2006 special meeting.
PRIOR PROCEEDINGS
A. Preliminary Injunction
On May 25, 2006, plaintiffs moved for a preliminary injunction to restrain Feibush and Spiegel from disposing of any TLA funds until: 1)Dr. Zodkevitch had an opportunity to inspect the books and records of TLA and AFHSG, 2) Feibush and Spiegel provided a complete accounting of the sources and uses of those funds and 3) they obtained Dr. Zodkevitch's express written consent to the disposition of the funds. The plaintiffs also sought an order directing Feibush to restore the Toughlove.com website to its April 6, 2006 form; restraining the Yorks from making any statements to the effect that Zodkevitch was no longer affiliated with AFHSG or TLA; enjoining Spiegel from holding himself out as AFHSG and TLA's general counsel and restraining Spiegel and Feibush from transferring any equity in AFHSG or TLA to any third party or from appointing any third party as an officer of those entities.
Plaintiffs argued that an injunction was necessary because Spiegel and Feibush had dissipated $383,473 of the $747,000 that had been raised based on the PPM. They produced records that demonstrated that Spiegel transferred $75,000 from the escrow account directly into his personal account and that he then transferred $438,995 from escrow to a North Fork bank account that Feibush established in the name of TLA. Feibush used that account to pay himself $105,493; to pay the Yorks $48,000 and to pay a media consultant, Lifschultz, who was also Spiegel's brother-in-law, another $33,635. The evidence produced at the hearing of the preliminary injunction demonstrated that the $48,000 to the Yorks was paid as "fees" for relicensing the Toughlove mark to a new company that was 95% owned by Feibush.
In opposition to the preliminary injunction, defendants Feibush and Spiegel argue that they were entitled to the money they took because TLA's budget contemplated that they would be compensated for their work once TLA raised capital.
The court rejected defendants' arguments stating,
No matter which way you want to put it, however you want to look at it, Mr. Spiegel, at least at this stage, it appears to the Court, and Mr. Feibush for lack of a better word, conspired, agreed, violated every conceivable duty of loyalty and fiduciary obligations to AHFSG in general and Dr. Zodkevitch in particular.
* * * * *
This preliminary injunction is granted in its entirety, including the [oral] request to return those funds that have been taken out and restored in an escrow account by a neutral party, and, if necessary, those funds can be placed in an escrow account with this court.
(7/11/07 Moses Aff., Ex. 7, p. 74)
On August 1, 2006, Justice Lowe signed the order granting the preliminary injunction, the order was entered on August 15, 2006 and on that date it was served upon all the defendants with notice of entry.
The preliminary injunction states, in pertinent part: 1. Defendants Feibush and Spiegel, . . ., are hereby ENJOINED from spending, transferring, paying, conveying, dissipating or making any other disposition of the funds invested in non-party . . . [TLA] pursuant to its pending private placement, or any other funds or assets belonging to TLA or its parent, non-party . . . [AFHSG], until said defendants have turned over the books and records of AFHSG and TLA for inspection by Dr. Zodkevitch, have provided a complete accounting of the sources and uses of the funds of AFHSG and TLA, and obtained Dr. Zodkevitch's express written consent to the use or disposition of those funds or other assets.
* * * * *
6. Defendants Feibush, Spiegel, David York and Phyllis York, . . ., are ORDERED to deposit, into an escrow account to be established by plaintiffs at JPMorgan Chase Bank or a comparable a (sic) non-party financial institution of plaintiffs' choosing, any and all monies paid, transferred or conveyed on or after February 6, 2006, from AFHSG or TLA, directly or indirectly, to or for the benefit of these defendants, their relatives (including, but not limited to Mathew Lifschultz) and/or their counsel (including but not limited to Alice Gosfield)
B. Plaintiffs' First Contempt Motion
The defendants failed to comply with the escrow obligations articulated in Paragraph 6 of the preliminary injunction order and, consequently plaintiff moved for civil contempt sanctions and appointment of a temporary receiver. In response, Spiegel cross moved to reargue the preliminary injunction. Feibush joined in the reargument cross motion (9/7/06 Feibush Aff, para. 4)
At oral argument of the first contempt motion, the Yorks argued that the court lacked jurisdiction over them and they submitted an affidavit from their daughter stating that both of the Yorks are infirm and destitute and that any money they had received had been spent on necessities. Spiegel and Feibush both argued that any money they received had been approved as part of the budget and was for services they rendered for the company. In addition, Feibush argued that he, too, was destitute, and did not have the funds to return to escrow.
The judge reserved decision on the Yorks' jurisdictional motion until discovery was complete and denied the cross motions to renew and reargue (7/11/07 Moses Aff, Ex. 8, p. 53, 54). As to the contempt motion, the court denied the motion as to the Yorks and Feibush ruling that plaintiffs would be required to establish that the Yorks and Feibush had funds to return to escrow before he would allow plaintiffs to renew the contempt motion for failure to place money in escrow. (7/11/07 Moses Aff., Ex. 8, pp. 56-57. The court directed Spiegel to place the funds into the escrow account within 30 days, or seek a stay from the Appellate Division. Thereafter, by decision and order dated September 21, 2006, (7/11/07 Moses Aff, Ex. 9) the court denied that branch of the motion that sought appointment of a temporary receiver holding that the preliminary injunction was sufficient to protect the remaining assets and that plaintiffs failed to demonstrate that TLA's assets were in such danger of dissipation that a receiver was warranted because Feibush provided a partial accounting. The court also stated that plaintiffs failed to demonstrate that the license termination was fraudulent and not the result of Zodkevitch's default. Moreover, the court found that plaintiffs' assertions that Feibush would continue his "end-run" around the preliminary injunction to be too speculative to warrant the appointment of a receiver. (7/11/07 Moses Aff, Ex. 9, pp. 5-6).
C. The Stipulation Pending Mediation
On October 11, 2006, counsel for plaintiffs and Spiegel entered into a stipulation, in contemplation of court ordered mediation, that states, in pertinent part:
Spiegel shall promptly post an undertaking, in the amount Of $108,635 [the contemplated escrow amount], that if the Order Granting Preliminary Injunction, or any part of it, is Affirmed, or if the appeal is dismissed, Spiegel shall pay said $108,635, or the part of it as to which the Order Granting Preliminary Injunction is affirmed, into an escrow account At JP Morgan Chase Bank as directed by the Order Granting Preliminary Injunction.
(5/7/07 Moses Aff, Ex. J, para. 3)
Spiegel posted the undertaking, and, as noted above, the appeal from the Order Granting Preliminary Injunction is scheduled to by heard at the Appellate Division's October, 2007 term.
D. November 2, 2006 Discovery Order and the Stay
Because of the ongoing discovery dispute in this matter, Justice Lowe referred the discovery issues to Special Master Edward Tanenhaus who met with the parties on November 2, 2006 and helped them work out a stipulation that was later "so ordered" by the court. Paragraph one of the stipulation states that by November 28, 2006, Feibush will produce documents in response to plaintiffs' second request for the production of documents. Plaintiffs allege that, notwithstanding the discovery order, Feibush has not produced the requested documents. The last bank statement that Feibush produced showed that on October 31, 2006, $165,054.17 remained in TLA's North Fork account.
Thereafter, on November 22, 2006, the parties entered into a 90 day stay of all proceedings to facilitate a settlement of this lawsuit. The stay was subsequently extended for an additional 30 days. Unfortunately, the parties were unable to reach a settlement agreement, and the stay was lifted on March 21, 2007.
THE CURRENT MOTIONS
A. The Second Contempt Motionand Cross Motions (Motion Sequence 010)
Plaintiffs argue that Feibush and Spiegel should be held in civil contempt and fined and incarcerated for their failure to comply with the escrow provisions of the preliminary injunction because, since the expiration of the stay, on March 21, 2007, Spiegel and Feibush have refused to escrow the funds as directed in the Order Granting the preliminary Injunction and that they have even refused to sign the escrow agreement to set up the account. Moreover, plaintiffs argue that Feibush has not produced AFHSG and TLA's book and records for Zodkevitch's inspection, in particular, he has not produced TLA's North Fork Bank statements from November, 2006 to the present. Plaintiffs claim that defendants' conduct has impaired, impeded and prejudiced their rights because defendants' recalcitrance has increased the risk that plaintiffs will be unable to recover their money.
In opposition, and in support of the cross motion to stay enforcement of the escrow provision, as to him, Spiegel correctly argues that pursuant to CPLR 5519(a)(2) and the October 11, 2006 stipulation, by posting the bond in the full amount of his alleged obligation, enforcement of the escrow provision in the Order Granting Preliminary Injunction is stayed pending resolution of the appeal.
CPLR Section 5519(a)(2) provides:
[S]ervice upon the adverse party of a notice of appeal or an affidavit of intention to move for permission to appeal stays all proceedings to enforce the judgment or order appealed from pending the appeal or determination on the motion for permission to appeal where:
(2) the judgment or order directs the payment of a sum of money, and an undertaking in that sum is given that if the judgment or order appealed from, or any part of it, is affirmed or the appeal is dismissed, the appellant or moving party shall pay the amount directed to be paid by the judgment or order, or the part of it as to which the judgment or order is affirmed. . . .
Here, in conformance with CPLR 5519(a)(2), Spiegel posted an undertaking in the full amount of his escrow obligation. (5/18/07 Berlin Aff, Ex. A) Moreover, plaintiffs' counsel expressly agreed that Spiegel could post a bond, in lieu of escrow, pending a decision on his appeal. (5/07/07 Moses Aff., Ex. J, para 3) Plaintiffs have not shown how they will be, or have been, prejudiced by the undertaking nor have they show that the stipulation, to which they agreed to, is insufficient to ensure that the funds will be paid into escrow if the Order Granting the Preliminary Injunction is affirmed on appeal. Accordingly, that branch of plaintiffs' motion seeking to hold Spiegel in contempt for failure to deposit the escrow funds as per the Order Granting the Preliminary injunction, is denied.
That branch of the contempt motion that seeks to hold Feibush in contempt for failure to deposit funds in escrow is also denied. In his decision on the first contempt motion, Justice Lowe placed the burden on plaintiffs to demonstrate that Feibush had "funds that can be returned to escrow, then I will allow you to renew your contempt motion." This has not been done. Although plaintiffs state that "Feibush gives the court no reason to believe that he is being truthful concerning his personal finances." (5/24/07 Moses Aff., para 25), they have failed to come forward with a scintilla of evidence to demonstrate that he indeed has the money to deposit in escrow. Moreover, plaintiffs have not demonstrated that they have requested documents concerning Feibush's personal finances, and that he has failed to comply with that request.
However, that branch of the contempt motion that seeks to hold Feibush in contempt for failure to produce AFHSG's and TLA's books and records is granted and Feibush's cross motion to vacate the preliminary injunction is denied as it is duplicative of his September 7, 2006 motion to renew, reargue and/or vacate that the court denied, on the record, on September 11, 2006. (Trans, p. 54, 11. 22-24)
Pursuant to paragraph 4 of his September 7, 2006 affidavit, Feibush, "join[ed] in [Spiegel's] motion for reargument, renewal, vacatur, modification, and a stay of the preliminary injunction."
The Order Granting the Preliminary Injunction is enforceable through civil contempt proceedings. CPLR 5104; NY Jud. L. Section 753(A)(3)."In order to find that contempt has occurred in a given case, it must be determined that a lawful order of the court, clearly expressing an unequivocal mandate was in effect. It must appear with reasonable certainty, that the order has been disobeyed. Moreover, the party to be held in contempt must have had knowledge of the court's order. . . ." ( McCormick v. Axelrod, 59 NY2d 574, 583 [citations omitted]) The elements are satisfied here because, in this case, the court issued its clear, lawful order that was served with notice of entry on Feibush on August 15, 2006. Feibush has still not produced the books and records called for in that order. "The mere act [of disobedience], regardless of motive, is sufficient to sustain a finding of civil contempt if such disobedience defeats, impairs, impedes or prejudices the rights of a party." ( Commissioner of Labor v. Hinman, 103 AD2d 886, 887 [3rd Dept 1984])
Feibush has failed to come forward with an explanation regarding his failure to turn over AFHSG's and TLA's books and records, as ordered in paragraph one of the Order Granting Preliminary Injunction. The stay in this matter was lifted in March, and Feibush still has not produced TLA's North Fork Bank statements for November 2006 through the present. Feibush's willful conduct is in direct contravention of the court's Order Granting Preliminary Injunction and its directive at the September 11, 2006 hearing where the court again ordered Feibush to turn over the documents (5/7/07 Moses Aff, Ex. C, p. 51) and it has prejudiced and impeded plaintiffs' ability to discover whether Feibush has dissipated additional money in the account in contravention of the Order Granting Preliminary injunction.
The court stated, "[t]his is very simple. Until such time as internally you all work out who represents the company, you [Feibush] will turn over the documents."
B. The Third Contempt Motion (Motion Sequence 012)
The third contempt motions seeks sanctions against Feibush for his violation of paragraph 1 of the Order Granting Preliminary Injunction in that, the evidence reveals that Feibush wrote 26 separate checks to himself totaling $104,000 and made $20,000 in other payments from TLA's North Fork Bank account without turning TLA's and AFHSG's books and records over to Zodkevitch and without Zodkevitch's express written approval. Plaintiffs also seek an order striking Feibush's amended answer for his persistent failure to comply with the court's orders directing him to produce AFHSG's and TLA's books and records and for a default judgment against him.
On July 16, 2007, after he was served with the order to show cause to hold him in contempt, Feibush cashed an additional $6,000 check to himself from TLA's account, without Zodkevitch's approval. (8/9/07 Zodkevitch Aff, Ex. B)
Order Granting Preliminary Injunction; 9/11/06 order on the record at the hearing; 11/02/06 order (7/11/07 Moses Aff, Ex. 3)
The motion to hold Feibush in civil and criminal contempt is granted. It appears, from the bank statements produced by North Fork Bank, pursuant to plaintiffs' subpoena, (7/11/07 Moses Aff, Ex. 2) that Feibush began writing checks to himself in November, 2006, without Zodkevitch's knowledge and approval, and that he concealed his actions for over eight months by failing to comply with discovery requests that would have revealed his conduct. Moreover, the bank statements demonstrate that Feibush also used TLA funds to make electronic payments to American Express, also without Zodkevitch knowledge or consent.
Feibush's argument that he merely paid himself salary that was agreed to in the PPM is without merit because the court rejected that argument when it issued the preliminary injunction to stop Feibush who had paid himself $105,000 from the same account in early 2006 payments he tried to justify as salary.
Criminal contempt sanctions, including a $1,000 fine and incarceration for up to 30 days in jail, are available where a party has engaged in wilful disobedience of a court's lawful mandate. (NY Jud. L. Sections, 750(A)(3); 751(1); People v. Metropolitan Police Conference of NY, Inc., 231 AD2d 445 [1st Dept. 1996]). A "lawful mandate" is any order of a court of competent jurisdiction not void on its face. ( See, e.g. Dalessio v. Kessler, 6 AD3d 57, 65 [2nd Dept 2004]) Criminal contempt requires a finding of willful disobedience. ( Dalessio, 6 AD3d at 66. In Dalessio, the court stated that, "[k]nowingly failing to comply with a court order gives rise to an inference of willfulness . . ." ( Id)
Here, it appears that Feibush's failure to comply with paragraph one of the Order granting the Preliminary Injunction was willful. Feibush does not deny that he received the preliminary injunction order and, it appears that by failing to comply with discovery requests, Feibush attempted to conceal his ongoing disobedience of that order. Criminal contempt does not require the movant to show that it has been prejudiced, because the purpose of criminal contempt is to . . . vindicate the authority of the court. ( Dalessio, 6 AD3d at 65) Even so, in this case, the plaintiffs have been prejudiced by Feibush's unauthorized dissipation of the funds.
In civil contempt, on the other hand, a fine, as a sanction for contempt, should be "designed to compensate the injured private party for the loss of or interference with [his] right. ( McCormick v. Axelrod, 59 NY2d 574, 583) The fines that may be imposed for a civil contempt are found in Judiciary Law Section 773. The statute provides for two types of awards; one where actual damage has resulted from the contemptuous act in which case an award sufficient to indemnify the aggrieved party is imposed and one where the complainants rights have been prejudiced but an actual loss or injury is incapable of being established. In that situation, the fine is limited to $250 plus the complainants loss and expenses. ( Department of Housing Preservation and Development v. Deka Realty Corp., 208 AD2d 37 [2nd Dept. 1995]) The award of sanctions for civil contempt should be formulated not to punish the offender but to compensate or indemnify the private complainant. ( State of New York v. Unique Ideas, 44 NY2d 345 Coercive incarceration, as a sanction for contempt, may be imposed immediately or after a set period during which the contemnor must comply with the order. ( See, e.g. Freihofner v. Freihofner, 2005 WL 1798362,*11 [Sup. Ct. Westchester County] [giving contemnor 90 days to pay fine and place money in escrow as originally ordered, on pain of incarceration on the 91st day])
Accordingly, that branch of the motion seeking to hold Feibush in criminal contempt is granted and Feibush is directed to pay a fine of $1,000 directly to plaintiffs. In addition, the court finds that Feibush is in civil contempt and he is directed to pay $127,430 into an escrow account maintained by plaintiffs' counsel, which amount is the total of the unauthorized withdrawals Feibush made from the North Fork account in violation of paragraph one the court's Order Granting Preliminary Injunction ( See, Jud. L. Section 773; See, 7/11/07 Moses Aff, Ex. 2 and 8/9/07 Zodkevitch Aff, Ex. 2) Such payment shall be made no later than 2:00 p.m. on October 19, 2007. Feibush is directed to appear before this court on that day and time and demonstrate that he has paid the amounts as indicated above or, if he has failed to pay such amounts, he will be incarcerated for up to 30 days. The escrowed amount shall be maintained by plaintiffs' counsel pending further order of this court.
Moreover, that branch of the motion that seeks to strike Feibush's answer for failure to respond to plaintiffs' July, 2006 discovery requests, is granted unless Feibush responds to such discovery request on or before October 1, 2007. (CPLR 3126). Such a remedy is appropriate, where, as here, a party has engaged in a "year-long pattern of noncompliance" with the court's discovery orders. ( Goldstein v. CIBC World Markets Corp., 30 AD3d 217 [1st Dept 2006]; Min Yoon v. Costello, 29 AD3d 407 [1st Dept. 2006]) Here, Feibush has ignored not only plaintiffs' discovery requests, but the court's repeated directions that he comply with that request.
For the reasons stated below, that branch of the motion that seeks appointment of a receiver is held in abeyance pending a decision in the arbitration between Rony Z. and the Yorks.Plaintiffs may renew their request, if appropriate, at that time.
C. Motion to Stay Proceedings (Motion Sequence 11)
The motion and cross motions to stay this proceeding pending a decision in the arbitration between Rony Z and the Yorks is granted and the remainder of this action is stayed Plaintiffs' cross motion for sanctions is denied. However, notwithstanding the stay, Feibush must respond to plaintiffs' discovery requests and comply with the court's direction regarding sanctions for criminal contempt, as described above.
Pursuant to CPLR 2201, "[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case upon such terms as may be just." Moreover, is well settled that courts in this state have found it a prudent exercise of discretion to grant a stay in civil proceedings when issues involved in that proceeding are "closely related to issues raised in the arbitration . . . and . . . the issues in the overall dispute between the contracting parties are inextricably interwoven with the claims. . . ." ( Pacer/Cats/CCS v. Moviefone, Inc., 226 AD2d 127 [1st Dept. 1996])
Here, the question of whether the York's acted properly to terminate Rony Z's licence to the Toughlove trademark, which is the subject of the arbitration proceeding (7/6/07 Edwards Aff, Ex. 1), is inextricably interwoven with several causes of action in complaint. In the first and second causes of action, plaintiffs allege that Feibush and Spiegel breached their fiduciary duties by acting in concert with the Yorks to terminate Rony Z's license agreement and in the seventh cause of action plaintiff's complain that Spiegel and Feibush tortiously interfered with Rony Z's contract with the Yorks and in the eleventh cause of action, plaintiffs charge the Yorks with tortious interference with prospective economic advantage based on their statements that Zodkevitch was no longer affiliated with the Toughlove program. Moreover, plaintiffs allege that Spiegel and Feibush retaliated against Zodkevitch by "acting in concert with the Yorks to effect the transfer of licence rights. . . ." (Complaint, para. 53); that "[t]he collapsing of the TOUGHLOVE licensing structure . . . has for sometime been a cherished goal of Spiegel and Feibush" (Complaint, para. 54) and that the defendants "began soliciting the Yorks-behind Dr. Zodkevitch's back-to terminate the license agreement with Rony Z. . . ." (Complaint, para. 54)
To establish a cause of action for tortious interference with contract, plaintiff must establish: (1) the existence of a valid contract between plaintiff and a third party; (2) the defendant's knowledge of the contract; (3) defendant's intentional procurement of the third party's breach and (4) damages.
The fact that neither Feibush nor Spiegel are parties to the arbitration does not change the result. "New York courts have stayed litigation proceedings that included parties who were not signatories to the arbitration agreement, where the nonsigning party . . . is closely related to the signatories and is alleged to have engaged in substantially the same improper conduct. ( Promofone, Inc. v. PCC Managment, Inc., 224 AD2d 259 [1st Dept. 1996]; Berg v. Dimson, 151 AD2d 362 [1st Dept. 1989] ["the entire action was properly stayed pending arbitration because although some of the defendants [were] not signatories to the arbitration agreements . . . the issues to be determined in arbitration are inextricably interwoven with the remaining issues."]) Here, the question of whether the Yorks properly terminated the license based on plaintiffs alleged defaults under the license agreements is the subject of the arbitration and it also lies at the heart of several of plaintiffs' claims against the Yorks, Spiegel and Feibush.
Indeed, as to plaintiffs' request for a temporary receiver, if the license was properly terminated, there is a question regarding the continued viability of TLA and AFHSG and whether a receiver would be necessary and if so, what the receiver's role would be.
Accordingly, a stay of this action will promote judicial economy by permitting the arbitration panel to resolve the license termination question before the parties and the court commit additional time and resources to the resolution of this matter.
Settle order.