NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-1580-15T1
KONSTANTINE H. ZOGRAFOS, individually and as a shareholder in SOZA CLINIC, LLC,
Plaintiff-Appellant,
v.
DR. ANTHONY WEHBE, individually and as a shareholder in SOZA CLINIC, LLC,
Defendant-Respondent. ____________________________________
Submitted September 11, 2017 – Decided September 18, 2017
Before Judges Sabatino and Ostrer.
On appeal from Superior Court of New Jersey, Law Division, Gloucester County, Docket No. L-1362-14.
Gilmore & Monahan, attorneys for appellant (Angela M. Koutsouris, on the briefs).
Subranni Zauber, LLC, attorneys for respondent (William P. Rubley, on the brief).
PER CURIAM
Plaintiff in this business dispute appeals the Law Division's
October 30, 2015 order. The order denied plaintiff's motion to reopen this civil action, which the court had dismissed a year
earlier pursuant to a contractual binding arbitration provision.
The order also denied plaintiff's request for leave to file an
amended complaint, to compel defendant to produce additional
documents, and for counsel fees. For the reasons that follow, we
affirm.
We recite only the most pertinent background.
Defendant Anthony Wehbe is a physician. Through various
related business entities, defendant and other individuals
established several weight loss clinics in New Jersey and
Pennsylvania. The weight loss establishments were known and
marketed as the "Soza" clinics. Among these business enterprises
were two limited liability companies: Soza Northeast, LLC, formed
in Pennsylvania in 2012, and Soza Clinic, LLC, formed in Delaware
in 2013. Dr. Wehbe directly or indirectly held ownership interests
in these enterprises. Plaintiff Konstantine Zografos, a friend
of Dr. Wehbe and who attended college with him, began working for
Soza Northeast, LLC in 2012.
Initially, Dr. Wehbe paid for many of the clinics' expenses
through charges on his personal American Express credit card.
According to plaintiff, in the spring of 2013, American Express
reduced the monetary limit on Dr. Wehbe's credit card. In order
to maintain the operations, Dr. Wehbe asked plaintiff to place
2 A-1580-15T1 business charges on plaintiff's own credit card. Plaintiff
willingly did so for several months, until such time as Dr. Wehbe's
credit improved and he began using his own credit card again. Dr.
Wehbe reimbursed plaintiff for a portion of the amounts that had
been charged on plaintiff's card. Plaintiff characterizes the
sums charged on his card as a "loan," although the arrangement was
not memorialized in a written loan agreement.
The weight loss business entities were reorganized in 2013,
when Soza Clinic, LLC was formed under Delaware law. As part of
the reorganization, plaintiff was assigned a fourteen percent
interest in that LLC. The reorganization documents included an
Operating Agreement and a Reorganization Plan.1 A separate
Investment Agreement, to which plaintiff was not a party, reflected
the new capital contribution of a third party.
Plaintiff did not make a contemporaneous capital contribution
in exchange for his equity interest in Soza Clinic, LLC. Instead,
defendant asserts that the unreimbursed portion of plaintiff's
prior credit card debts were deemed by agreement to be the
consideration for plaintiff's equity share. Plaintiff, however,
1 The copies of these documents supplied in the Joint Appendix are unsigned. However, plaintiff admits in his proposed amended verified complaint that he "reluctantly signed" the agreements, but claims that he was not supplied with a "fully signed copy" of them. For purposes of this opinion, we shall presume, as the trial court did, that the agreements were mutually executed.
3 A-1580-15T1 disputes that characterization. He instead contends that his
equity share was granted in exchange for the uncompensated or
undercompensated services he provided to the business as an
employee. He maintains that the unreimbursed charges on his credit
card continued to be a loan, which defendant was obligated to
repay in full.
After the clinics sustained financial problems, plaintiff
filed a verified complaint and order to show cause in the Law
Division in October 2014 against Dr. Wehbe. The complaint sought
various forms of relief for plaintiff, in both his individual
capacity and as a shareholder of Soza Clinic, LLC. Judge Anne
McDonnell immediately ordered certain temporary measures,
including placing restraints on the distribution of company
assets.
Defendant thereafter moved to dissolve the restraints and to
dismiss the lawsuit for lack of jurisdiction, citing a mandatory
arbitration provision within the Operating Agreement. That
provision, set forth in Section 12.8, prescribes as follows:
12.8 Arbitration: Dispute Resolution. Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity hereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be resolved through final and binding arbitration in Philadelphia, Pennsylvania. The arbitration
4 A-1580-15T1 shall be administered by either JAMS pursuant to its Comprehensive Arbitration Rules and Procedures or by the American Arbitration Association in accordance with the applicable rules of the American Arbitration Association then in effect. Judgment on the arbitration award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction. Before either party may proceed to arbitration, he or it shall first provide each other party with 30 days prior written notice explaining the nature of the dispute and an opportunity to cure said alleged breach.
[(Emphasis added).]
Before ruling on the jurisdictional motion, Judge McDonnell
dissolved the temporary restraints. However, on October 9, 2014
she ordered defendant to undertake certain actions, including to
perform an accounting of the income and expenditures of Soza
Clinic, LLC, and to make the business's books and records available
for review. The judge directed defendant to pay eighty-six percent
of the costs of the accounting, and for plaintiff to bear the
remaining fourteen percent.
After hearing oral argument, Judge McDonnell granted
defendant's motion for dismissal, in anticipation that the
parties' dispute would be resolved through binding arbitration.
In her bench opinion on October 29, 2014, the judge made the
following key observations:
5 A-1580-15T1 [Section] 12.8 of the Operating Agreement does include what I would describe as a broad arbitration clause. I think it does permit the plaintiff to seek Court relief, as they have done in this matter. But, I found no reason to continue the restraints. I'm satisfied that I've set up a process whereby there will be an accounting, and the accountant will be paid. And, that there is no need for me to continue to keep this matter open.
The Court is always open in the event that something emergent arises. But, I am satisfied that, based on the Operating Agreement, and the broad arbitration language, and the fact that it's construed consistent with Delaware law, which like New Jersey law, strongly favors the enforcement of the arbitration provision.
I am satisfied that it is appropriate to grant the Cross-Motion for Dismissal at this time.
Judge McDonnell accordingly entered a conforming order on November
6, 2014 dismissing the complaint.
Nearly a year later, in September 2015, plaintiff,
represented by new counsel, filed a motion to reinstate the civil
action, to amend the complaint to include additional parties and
legal theories, and to compel defendant to produce more documents
needed for the accounting. With respect to the discovery issues,
plaintiff asserted in his supporting certification that defendant
"left large amounts of disorganized documents, office equipment,
6 A-1580-15T1 garbage and various items" when he left one of the clinic
locations. Plaintiff asserted that he was unable to find the
missing accounting information when he sorted through those
abandoned documents.
Defendant countered, through his own certification, that he
had made himself available to the reviewing accountants as
required, that they had never requested further materials or
information from him, and that he had produced every record for
the business in his possession. Defendant argued that there was
no need for the dismissed civil action to be revived or expanded,
and that the additional matters that plaintiff sought to litigate
should be handled in the arbitration.
Following oral argument, Judge Jean B. McMaster denied
plaintiff's motions. Among other things, Judge McMaster noted
that "plaintiff's claims . . . relate to the same facts and
circumstances of the original matter that was dismissed earlier.
Nothing has changed in that regard." Judge McMaster expressed
agreement with Judge McDonnell's earlier finding about the
broadness of the arbitration provision in the Operating Agreement.
She also noted that the "public policy favors resolution by
arbitration."
Having been advised of the court's oral decision to not reopen
the case, plaintiff requested Judge McMaster to compel defendant
7 A-1580-15T1 to provide the additional documents needed to complete the
accounting, invoking the order entered previously by Judge
McDonnell. Judge McMaster denied that request as well, accepting
Dr. Wehbe's representation that he had already supplied all
documents in his possession, and discerning no reason to continue
the court's involvement.
In his present appeal, plaintiff does not contest Judge
McDonnell's decision in October 2014 to dismiss his original
complaint and to refer those particular pleaded claims to
arbitration. In fact, plaintiff explicitly agrees with Judge
McDonnell's finding that Section 12.8 of the Operating Agreement
contains a "broad" arbitration clause, and that the claims
encompassed in his original complaint are indeed subject to that
arbitration mandate. However, plaintiff contends that his
proposed amended complaint would add parties and causes of action
that are outside of the scope of the Operating Agreement and are
thus non-arbitrable. Among other things, plaintiff contends that
the unwritten "loan agreement" with Dr. Wehbe is not covered by
the Operating Agreement. Plaintiff further asserts that the trial
court at least should have reopened this matter to compel defendant
to provide additional "meaningful" discovery. We disagree.
As a threshold matter, we note that both the Operating
Agreement and the Reorganization Plan include provisions
8 A-1580-15T1 designating the laws of Delaware as the governing law.
"Ordinarily, when parties to a contract have agreed to be governed
by the laws of a particular state, New Jersey courts will uphold
the contractual choice if it does not violate New Jersey's public
policy." N. Bergen Rex Transp. v. Trailer Leasing Co., 158 N.J.
561, 568 (1999) (quoting Instructional Sys., Inc. v. Comput.
Curriculum Corp., 130 N.J. 324, 341 (1992)). We discern no such
public policy impediment here, and therefore apply Delaware law
to the parties' dispute.
Consistent with federal law principles, Delaware law
generally recognizes that courts, not arbitrators, have the
primary authority to decide whether an arbitration agreement is
valid and applicable, a concept known as "substantive
arbitrability." See, e.g., First Options of Chi., Inc. v. Kaplan,
514 U.S. 938, 944, 115 S. Ct. 1920, 1924, 131 L. Ed. 2d 985, 993
(1995); James & Jackson, LLC v. Willie Gary, LLC ("Willie Gary"),
906 A.2d 76, 79 (Del. 2006). More specifically, Delaware enforces
the federal rule that "courts should not presume that the parties
agreed to arbitrate arbitrability unless there is 'clear and
unmistakable evidence that they did so.'" Willie Gary, supra, 906
A.2d at 79 (quoting First Options, supra, 514 U.S. at 944, 115 S.
Ct. at 1924, 131 L. Ed. 2d at 994).
9 A-1580-15T1 Here, Section 12.8 of the Operating Agreement refers to
mandatory arbitration to be conducted by either the American
Arbitration Association ("AAA") or, alternatively, the JAMS
dispute resolution agency. The Delaware Supreme Court has
"adopt[ed] the majority federal view that [a contract's] reference
to the AAA rules evidences a clear and unmistakable intent to
submit arbitrability issues to an arbitrator." Id. at 80. This
principle "applies in those cases where the arbitration clause
generally provides for arbitration of all disputes and also
incorporates a set of arbitration rules that empower arbitrators
to decide arbitrability." Ibid.; see also GTSI Corp. v. Eyak
Tech., LLC, 10 A.3d 1116, 1120 (Del. Ch. 2010) (applying this
approach). The narrow exception to this rule is that "a court
need not defer to an arbitrator if the assertion that the
underlying dispute would be arbitrable is 'wholly groundless.'"
GTSI Corp., supra, 10 A.3d at 1120-21. Such a determination
requires "a clear showing that the party desiring arbitration has
essentially no non-frivolous argument about substantive
arbitrability to make before the arbitrator." Id. at 1121 (quoting
McLaughlin v. McCann, 942 A.2d 616, 626-27 (Del. Ch. 2008)).
Here, plaintiff's proposed amended complaint centers around
two central disputes: (1) whether his alleged "loan" was repaid
or partially repaid with equity in Soza Clinic, LLC under the
10 A-1580-15T1 Reorganization Plan, and (2) whether any of the defendants in the
proposed amended complaint breached fiduciary duties prescribed
in the Operating Agreement. These disputes manifestly fall within
the broad arbitration provisions of the agreements, both of which
extend to "[a]ny dispute, claim or controversy arising out of or
relating to" their respective agreements. (Emphasis added).
Defendant's invocation of these arbitration provisions is not
frivolous or "wholly groundless." The disputes appear to concern
the relationships between the parties with respect to their
business dealings within the overall Soza Clinic enterprise, and
appear to logically "relate to" the Operating Agreement.
Moreover, both arbitration provisions explicitly apply to
"the determination of the scope of applicability of [the] agreement
to arbitrate." They specifically require that either the AAA
rules or JAMS rules shall apply to any arbitration brought under
them. Given the Delaware Supreme Court's holding in Willie Gary,
supra, 906 A.2d at 80, the arbitration provisions require an
arbitrator, not the court, to decide in the first instance the
issue of arbitrability for all claims in the proposed amended
complaint against all of proposed defendants who executed these
agreements. We yield to have an arbitrator make that
determination.
11 A-1580-15T1 Plaintiff further argues the arbitration provisions cannot
be enforced against any of the proposed defendants who did not
sign either the Operating Agreement or the Reorganization Plan.
He asserts that "[t]he proposed additional defendants are not
bound to the parent company's operating agreement or arbitration
clause." That argument is unavailing.
The Federal Arbitration Act, 9 U.S.C.A. §§ 1-16, requires
courts to enforce an arbitration agreement "notwithstanding the
presence of other persons who are parties to the underlying dispute
but not to the arbitration agreement." Moses H. Cone Mem'l Hosp.
v. Mercury Constr. Corp., 460 U.S. 1, 20, 103 S. Ct. 927, 939, 74
L. Ed. 2d 765, 782 (1983). The United States Supreme Court has
held that "[b]ecause 'traditional' principles' of state law allow
a contract to be enforced by or against nonparties to the contract
through 'assumption, piercing the corporate veil, alter ego,
incorporation by reference, third party beneficiary theories,
waiver and estoppel,'" nonparties to a contract may be bound by,
or be able to enforce, arbitration provisions featured therein.
Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631, 129 S. Ct.
1896, 1902, 173 L. Ed. 2d 832, 840 (2009).
Indeed, a Delaware court has applied the doctrine of equitable
estoppel to compel signatories to an arbitration agreement to
arbitrate disputes with non-signatories in certain contexts.
12 A-1580-15T1 Douzinas v. Am. Bureau of Shipping, Inc., 888 A.2d 1146, 1153
(Del. Ch. 2006). "One circumstance that frequently warrants such
estoppel is 'when the signatory to the contract containing an
arbitration clause raises allegations of substantially
interdependent and concerted misconduct by both the non-signatory
and one or more of the signatories to the contract.'" Ibid.
(citation omitted). Refusal to compel arbitration in such a
setting "would render the arbitration between the signatories
meaningless and thwart the state and federal policy in favor of
arbitration." Ibid. This approach is consistent with the strong
public policy in Delaware to "minimize claim splitting," and to
bind parties "for fairness and efficiency's sake to litigate in
one place, and not force the defendants to unnecessarily expend
resources on what would essentially be the same defense in multiple
venues." Ashall Homes Ltd. v. ROK Entm't Group, Inc., 992 A.2d
1239, 1251 (Del. Ch. 2010) (citing McWane Cast Iron Pipe Corp. v.
McDowell-Wellman Eng'g Co., 263 A.2d 281 (Del. 1970)).2
Such estoppel principles equitably and sensibly apply here.
In each count of the proposed amended complaint, plaintiff alleges
2 Notably, similar principles enabling non-signatories to be included at times within contractual arbitrations are followed under New Jersey law, subject to certain limitations. See, e.g., Hirsch v. Amper Fin. Serv., LLC, 215 N.J. 174, 192 (2013); Alfano v. BDO Seidman, LLP, 393 N.J. Super. 560, 569 (App. Div. 2007).
13 A-1580-15T1 that both signatories and non-signatories to the agreements are
liable for fundamentally the same wrongful conduct. Given the
apparent interdependency and overlap of his proposed claims, and
the signatories' likely reliance on the arbitration clause,
plaintiff should not be permitted to circumvent the mandatory
arbitration provisions of the Operating Agreement and the
Reorganization Plan by the device of adding non-signatories to his
pleadings. That is especially a fair and just conclusion, after
nearly a year had passed since the time the court dismissed this
complaint.
Although it is not essential to our analysis, we further note
that the integration clause in the Operating Agreement set forth
in Section 12.3, specifies that it comprises the parties' "entire
agreement . . . with respect to the subject matter," and that it
"supersedes any prior agreement or understanding among the
parties." This provision undercuts plaintiff's contention that
the alleged oral loan agreement that preceded the Operating
Agreement is unaffected by the latter's arbitration mandate.3
3 In any event, we note that plaintiff's counsel advised this court in a March 22, 2017 letter that plaintiff and Dr. Wehbe individually settled the debt claim in bankruptcy proceedings, leaving only the additional claims set forth in the proposed amended verified complaint.
14 A-1580-15T1 Lastly, we see no reason to overturn Judge McMaster's denial
of plaintiff's post-dismissal motion to compel additional
discovery from defendant. We recognize that Judge McDonnell did
state in October 2014 that the trial court would remain "open in
the event that something emergent arises." Even so, there is a
mechanism within the arbitration process itself for plaintiff to
seek additional discovery under the rules of the AAA or,
alternatively, from JAMS, depending upon which of the two of those
arbitration forums is selected.4 We offer no advisory opinion on
whether such discovery should or should not be granted by an
arbitrator.
Affirmed.
4 See Am. Arbitration Ass'n, Commercial Arbitration Rules & Mediation Procedures (amended & eff. Oct. 1, 2013), available at https://www.adr.org/sites/default/files/Commercial%20Rules.pdf. See also JAMS, Comprehensive Arbitration Rules & Procedures (eff. July 1, 2014), available at https://www.jamsadr.com/rules- comprehensive-arbitration; JAMS, Recommended Arbitration Discovery Protocols for Domestic, Commercial Cases (eff. Jan. 6, 2010), available at https://www.jamsadr.com/arbitration- discovery-protocols.
15 A-1580-15T1