| Ferrarella v Godt |
| 2015 NY Slip Op 06571 [131 AD3d 563] |
| August 19, 2015 |
| Appellate Division, Second Department |
[*1]
| Annette Ferrarella, Appellant, v Kenneth H.Godt et al., Defendants, and John DiMario et al.,Respondents. |
Barnes & Barnes, P.C., Melville, N.Y. (Matthew J. Barnes of counsel), forappellant.
Balsam & Goldfield, New York, N.Y. (Edward Lopez and Andrew K.Sinzheimer of counsel), for respondents.
In an action, inter alia, to rescind a contract based on fraud, the plaintiff appeals, aslimited by her brief, from so much of an order of the Supreme Court, Nassau County(Driscoll, J.), entered December 11, 2012, as denied her motion to stay arbitration and forpreliminary injunctive relief.
Ordered that the appeal from so much of the order as denied that branch of theplaintiff's motion which was for preliminary injunctive relief is dismissed as academic;and it is further,
Ordered that the order is affirmed insofar as reviewed; and it is further,
Ordered that one bill of costs is awarded to the respondents.
The plaintiff owned Village Chapels, Inc. (hereinafter Village Chapels), a funeralhome business, located in Middle Village, Queens. Village Chapels held title to the realproperty on which the funeral home business was situated. In September 2010, theplaintiff began negotiations to sell Village Chapels to her longtime employees andfriends, the defendants John DiMario and George Luhring. The plaintiff retained thedefendant Kenneth H. Godt, who had previously represented the plaintiff and her familyfor more than 20 years, as her attorney in connection with the subject sale. On December4, 2010, the plaintiff executed a power of attorney appointing Godt as herattorney-in-fact.
In February 2011, the plaintiff and DiMario, Luhring, and the defendant JosephNunziata (hereinafter collectively the defendant purchasers) entered into a stock purchaseagreement (hereinafter the February Stock Purchase Agreement). It is undisputed that theFebruary Stock Purchase Agreement comported with the plaintiff's wishes and intentions.Pursuant thereto, the plaintiff agreed to sell 100% of the shares of Village Chapels forthe purchase price of $2.8 million. That stock sale would include the realproperty, subject to certain terms and conditions as set forth in an attached agreement ofpurchase and sale dated February 15, 2011 (hereinafter the February Purchase and SaleAgreement). Both the February Stock Purchase Agreement and the February Purchaseand Sale Agreement were personally executed by the plaintiff. The February [*2]Stock Purchase Agreement contained an arbitration clausewhich provided, in pertinent part: "In the event any dispute shall arise pursuant to anyterm or provision of this Agreement, the same shall be settled by arbitration inaccordance with the rules and regulations of the American Arbitration Association(hereinafter 'AAA') within the County of Queens."
The defendant purchasers allegedly were unable to procure financing because theirlender required that the sale of the real property "be bifurcated and sold separately" fromthe stock of Village Chapels. In April 2011, a new stock purchase agreement (hereinafterthe April Stock Purchase Agreement) and agreement of purchase and sale (hereinafterthe April Purchase and Sale Agreement; hereinafter together the April agreements) wereexecuted by DiMario, Luhring, and Godt, who signed as the "attorney-in-fact" for theplaintiff. In effect, the April agreements bifurcated the sale of the stock from that of thereal property. Specifically, 100% of the stock of Village Chapels would be sold for thesum of $900,000 and the real property would be sold for the sum of $1.9 million.Notably, the April Stock Purchase Agreement contained an arbitration clause that wasidentical to the one included in the February Stock Purchase Agreement.Additionally, the April Stock Purchase Agreement stated: "Except as otherwise set forthherein, all other agreements dated prior to the date of this Agreement, if any, among theCorporation and the Stockholders relating to the disposition of the Stockholders' interestsin the Corporation . . . are hereby superseded in their entirety by the termsand provisions of this Agreement."
The closing took place in August 2011, at which time the plaintiff personallyappeared with Godt. At the closing, the plaintiff executed an indemnity agreement. Theindemnity agreement recited that the parties entered into the February Stock PurchaseAgreement, which "was modified and separated into two transactions" by the Aprilagreements, wherein Village Chapels sold the real property to the defendant DiNunzluGroup, LLC, for $1.9 million and the funeral business was acquired by the defendantpurchasers for $900,000. At the closing, the plaintiff also executed an escrow agreementwherein Godt was to retain $500,000 to pay any tax liabilities resulting from the closing.With the consent of all parties, the defendant purchasers assigned the April Purchase andSale Agreement to Dinunzlu Group, LLC, and the plaintiff executed the deed to theproperty naming Dinunzlu Group, LLC, as grantee.
Sometime in August 2011, the plaintiff's accountant allegedly notified her of certaintax consequences relating to the subject sale, and the plaintiff purportedly learned, for thefirst time, that, on December 7, 2010, Godt had been suspended from the practice oflaw.
In April 2012, the plaintiff commenced this action against, among others, Godt andthe defendant purchasers, among other things, to rescind the April agreements based onfraud. The plaintiff alleged that she had consistently informed Godt and the defendantpurchasers that she would not agree to an asset sale, as opposed to a stock sale, due to thepotential tax consequences. She further alleged that Godt did not have the authority toexecute the April agreements. According to the plaintiff, the defendant purchasers knewand concealed these facts, affirmatively misleading her into believing that the transactionwas still a single stock sale.
In July 2012, the defendants filed for arbitration. Thereafter, the plaintiff moved tostay the arbitration and for preliminary injunctive relief. The Supreme Court, inter alia,denied the plaintiff's motion. The plaintiff appeals.
Arbitration is a favored method of dispute resolution in New York (see Board ofEduc. of Bloomfield Cent. School Dist. v Christa Constr., 80 NY2d 1031, 1032[1992]; Matter of Weinrott [Carp], 32 NY2d 190, 199 [1973]). "[T]he announcedpolicy of this State favors and encourages arbitration as a means of conserving the timeand resources of the courts and the contracting parties" (Matter of Nationwide Gen.Ins. Co. v Investors Ins. Co. of Am., 37 NY2d 91, 95 [1975]). "New York courtsinterfere 'as little as possible with the freedom of consenting parties' to submit disputes toarbitration" (Matter of 166 Mamaroneck Ave. Corp. v 151 E. Post Rd. Corp., 78NY2d 88, 93 [1991], quoting Matter of Siegel [Lewis], 40 NY2d 687, 689[1976]). Parties to arbitration agreements should be prevented from using the courts as avehicle to protract litigation (see Matter of Weinrott [Carp], 32 NY2d at 199).The threshold issue of whether there is a valid agreement to arbitrate is for the [*3]courts (see Matter of Primex Intl. Corp. v Wal-MartStores, 89 NY2d 594, 598 [1997]; Matter of County of Rockland [PrimianoConstr. Co.], 51 NY2d 1, 6-8 [1980]). Once it is determined that the parties haveagreed to arbitrate the subject matter in dispute, the court's role has ended and it may notaddress the merits of the particular claims (see Matter of Praetorian Realty Corp.[Presidential Towers Residence], 40 NY2d 897, 898 [1976]; see Matter of Prinze[Jonas], 38 NY2d 570, 577 [1976]; Brown v Bussey, 245 AD2d 255,255-256 [1997]).
Initially, the April Stock Purchase Agreement superseded the February StockPurchase Agreement in its entirety (see Matter of Minkin [Halperin], 279 AppDiv 226, 228 [1951], affd 304 NY 617 [1952]). Thus, the issues raised on theappeal relate to the validity of the arbitration clause contained in the April StockPurchase Agreement, not the February Stock Purchase Agreement. Essentially, theplaintiff contends that the arbitration clause set forth in the April Stock PurchaseAgreement is invalid because (1) Godt forged the April Stock Purchase Agreement byexceeding his authority under the power of attorney, and (2) fraud permeated the entireApril Stock Purchase Agreement. These contentions are without merit.
Contrary to the plaintiff's assertion, the arbitration clause contained in the AprilStock Purchase Agreement was not invalid on the basis of forgery. Godt did not forgethe plaintiff's signature to the April Stock Purchase Agreement. Instead, that agreementwas signed by Godt, as the plaintiff's attorney-in-fact, pursuant to a valid power ofattorney which was executed by the plaintiff on December 4, 2010. Thus, there was noforgery by Godt with respect to the April Stock Purchase Agreement (see PenalLaw § 170.00;People v Ippolito, 20 NY3d 615, 624 [2013]; People v Cunningham, 2 NY3d593 [2004]).
Similarly, the plaintiff's contentions regarding fraud are lacking in merit. InMatter of Weinrott (Carp) (32 NY2d at 190), the Court of Appeals ruled that anarbitration clause is generally separable from substantive provisions of a contract, so thatan agreement to arbitrate is valid even if the substantive provisions of the contract areinduced by fraud (see id. at 198; Anderson St. Realty Corp. v New Rochelle Revitalization, LLC,78 AD3d 972, 974 [2010]). However, if a party can demonstrate that "the allegedfraud was part of a grand scheme that permeated the entire contract, including thearbitration provision, the arbitration provision should fall with the rest of the contract"(Matter of Weinrott [Carp], 32 NY2d at 197; see Riverside Capital Advisors, Inc. v Winchester Global Trust Co.Ltd., 21 AD3d 887, 889 [2005]). "To demonstrate that fraud permeated theentire contract, it must be established that the agreement was not the result of an arm'slength negotiation, or the arbitration clause was inserted into the contract to accomplish afraudulent scheme" (Anderson St. Realty Corp. v New Rochelle Revitalization,LLC, 78 AD3d at 974 [citations omitted]).
Here, the plaintiff failed to make such a showing. The plaintiff clearly intended toconvey Village Chapels to the defendant purchasers for the total price of $2.8 million.Upon the defendant purchasers' inability to obtain financing under the February StockPurchase Agreement, and in order to effectuate the sale intended by the plaintiff, the newApril Stock Purchase Agreement was drafted. Significantly, the February Stock PurchaseAgreement, which the plaintiff executed and was in complete agreement with, includedan arbitration clause that was identical to the clause contained in the April StockPurchase Agreement. It cannot be said that the insertion of the identical clause in theApril Stock Purchase Agreement was effected to accomplish a fraud. Indeed, the plaintiffapparently had no objection whatsoever to the arbitration clause that was contained in theFebruary Stock Purchase Agreement. It was only after she discovered that there would becertain tax consequences relating to the sale that she raised protestations regarding theApril Stock Purchase Agreement, which contained the never-before-objected-toarbitration clause.
To the extent that the plaintiff attempts to challenge the execution of the April StockPurchase Agreement based on fraud, the plaintiff completely ignores the fact that Godthad actual authority to bind the plaintiff pursuant to the power of attorney validlyexecuted by the plaintiff on December 4, 2010 (see Best v Best, 302 AD2d 295[2003]). Contrary to the dissent's assertion, any admission by Godt resulting from hisfailure to interpose an answer to the complaint is of no consequence to the issuespresented herein. Even if Godt is deemed to have admitted the allegation in the complaintthat he did not have authority to enter into the April Stock Purchase Agreement, that[*4]admission would not be binding with regard to theremaining defendants.
In addition, the plaintiff appeared at the closing and personally executed documentswhich clearly referenced the bifurcation of the sale of Village Chapels' stock from that ofthe real property. The plaintiff is presumed to have read the closing documents. Areading of these documents would have readily advised the plaintiff that the sale was nolonger a pure stock sale, and that the April agreements bifurcated the transaction into astock sale and a real estate asset sale (see Morby v Di Siena Assoc., 291 AD2d604, 605 [2002]; see also Pimpinello v Swift & Co., 253 NY 159, 162-163[1930]). A party who signs a document without any valid excuse for not having read it is"conclusively bound" by its terms (Gillman v Chase Manhattan Bank, 73 NY2d1, 11 [1988]; see Sorenson vBridge Capital Corp., 52 AD3d 265, 266 [2008]).
Notwithstanding our dissenting colleague's position, an evidentiary hearing is notwarranted in this case. The record is sufficiently developed to permit a determination asto the validity of the arbitration clause. The arbitration clause in the April Stock PurchaseAgreement is valid and binding on the parties. Any issues regarding the substantiveprovisions of the April 2011 agreement are to be resolved by the arbitrator. Accordingly,the Supreme Court properly denied that branch of the plaintiff's motion which was tostay arbitration.
The appeal from so much of the order as denied that branch of the plaintiff's motionwhich was to preliminarily enjoin arbitration pending the determination of the stayapplication must be dismissed as academic (see generally Matter of Hearst Corp. vClyne, 50 NY2d 707, 714 [1980]). Rivera, J.P., Leventhal and Hinds-Radix, JJ.,concur.
Barros, J., dissents, and votes to reverse the order insofar as appealed from, grant thatbranch of the plaintiff's motion which was to permanently stay arbitration only to theextent that arbitration be temporarily stayed pending an evidentiary hearing, and remit thematter to the Supreme Court, Queens County, for an evidentiary hearing to determinewhether a valid arbitration agreement was made on April 4, 2011, and a newdetermination thereafter on that branch of the plaintiff's motion which was for apermanent stay of arbitration, with the following memorandum: The threshold issue ofwhether there is a valid agreement to arbitrate is for the courts (see Matter of PrimexIntl. Corp. v Wal-Mart Stores, 89 NY2d 594, 598 [1997]; Matter of County ofRockland [Primiano Constr. Co.], 51 NY2d 1, 6-8 [1980]; Matter of Jalas v Halperin, 85AD3d 1178, 1181 [2011]). "The party seeking a stay of arbitration has the burden ofshowing the existence of sufficient evidentiary facts to establish a preliminary issuewhich would justify the stay" (Matter of Hertz Corp. v Holmes, 106 AD3d 1001, 1002[2013] [internal quotation marks omitted]).
The Supreme Court denied the plaintiff's motion to stay arbitration based, in part,upon an arbitration clause contained in the February Stock Purchase Agreement betweenthe plaintiff and the defendants John DiMario, George Luhring, and Joseph Nunziata(hereinafter collectively the defendant purchasers). However, the respondents' demandfor arbitration indicates that it was based upon an arbitration clause contained in theApril Stock Purchase Agreement, which, by its terms, expressly superseded the FebruaryStock Purchase Agreement in its entirety (see Matter of Minkin [Halperin], 279App Div 226, 228 [1951], affd 304 NY 617 [1952]). Accordingly, I agree withthe majority that the Supreme Court should have only considered whether there was avalid agreement to arbitrate in the April Stock Purchase Agreement.
Since the plaintiff's allegations and evidentiary submissions raise triable issues offact as to whether there was fraud in the execution of the April Stock PurchaseAgreement, as well as whether fraud permeated the entire transaction, I disagree with themajority that the determination of whether there was such fraud is for the arbitrators, andnot the courts, to decide.
In support of her motion to stay arbitration, the plaintiff submitted, among otherthings, her own affidavit, in which she averred that she was the owner of VillageChapels, Inc., a funeral home business, and that in September 2010, she begannegotiating to sell the business to her[*5]"longstandingemployees and friends," DiMario and Luhring. During those negotiations, she"specifically told" DiMario and Luhring that, upon the advice of her attorney andaccountant, she would only agree to a stock sale rather than an asset sale, and DiMarioand Luhring expressed their understanding of that requirement.
She averred that, because she was planning to leave the country to do missionarywork, she executed a power of attorney dated December 4, 2010, authorizing herattorney, the defendant Kenneth H. Godt, to execute a stock sale agreement. However,the plaintiff did not leave the country and was able to personally execute the FebruaryStock Purchase Agreement and the February Purchase and Sale Agreement (hereinaftertogether the February stock sale agreement).
Thereafter, the defendant purchasers were unable to get financing to close on theFebruary stock sale agreement. The plaintiff averred that, unbeknownst to her, Godtnegotiated a new contract with the defendant purchasers that structured the transaction asan asset sale, and that using the power of attorney dated December 4, 2010, signed theApril Stock Purchase Agreement and the April Purchase and Sale Agreement, datedApril 4, 2011 (hereinafter together the April asset sale agreement), on her behalf, withouther knowledge.
Structuring the deal as an asset sale caused the plaintiff to have an additional taxliability of $830,000. Unbeknownst to the plaintiff, Godt had been suspended from thepractice of law by decision and order on motion of this Court dated December 7, 2010.As a result of the transaction, the plaintiff alleges that Godt converted the sum of$239,500 from the proceeds of the sale.
In Matter of Weinrott (Carp) (32 NY2d 190 [1973]), the Court of Appealsheld that "[a]s a general rule . . . under a broad arbitration provision theclaim of fraud in the inducement should be determined by arbitrators" (id. at 199;see Anderson St. Realty Corp. vNew Rochelle Revitalization, LLC, 78 AD3d 972, 974 [2010]). "[A]narbitration clause is generally separable from substantive provisions of a contract, so thatan agreement to arbitrate is valid even if the substantive provisions of the contract areinduced by fraud" (Anderson St. Realty Corp. v New Rochelle Revitalization,LLC, 78 AD3d at 974, citing Matter of Weinrott [Carp], 32 NY2d at 198).This holding departed from prior case law (see Matter of Wrap-Vertiser Corp.[Plotnick], 3 NY2d 17 [1957]), which held that "fraud in the inducement, coupledwith a claim for rescission, is always a matter for judicial determination prior toarbitration" (see Matter of Weinrott [Carp], 32 NY2d at 194).
Since the plaintiff alleges fraud in the execution, not fraud in the inducement, theholding of Matter of Weinrott (Carp) (32 NY2d 190 [1973]) is not applicablehere.
Fraud in the execution "generally connotes an attack upon the very existence of acontract from its beginning, in effect alleging that there was no legal contract and that theinstrument never had a valid inception. The attack is upon certain facts which occurred atthe time of the alleged execution of the agreement, upon which facts the validity of theagreement depends" (Mix v Neff, 99 AD2d 180, 182 [1984]; see Gilbert vRothschild, 280 NY 66, 71 [1939]).
"To be distinguished is the claim where an opponent of a contract asserts the defenseof fraud in the inducement, which, if proven, renders the contract voidable. This form offraud is usually based on facts occurring prior or subsequent to the execution of acontract which tend to demonstrate that an agreement, valid on its face and properlyexecuted, is to be limited or avoided" (Mix v Neff, 99 AD2d at 182-183[citations omitted]; see Mangini v McClurg, 24 NY2d 556, 563 [1969]). "Tosustain a claim for fraudulent inducement, there must be a knowing misrepresentation ofmaterial fact, which is intended to deceive another party and to induce them to act uponit, causing injury" (Sokolow, Dunaud, Mercadier & Carreras v Lacher, 299AD2d 64, 70 [2002]).
Here, the plaintiff does not claim that a misrepresentation by the purchasers inducedher into executing the April asset sale agreement. Rather, she alleges that she neverexecuted the contract at all, and that Godt, a suspended attorney acting against herexpress instructions for his own personal benefit, had no authority to bind her to theApril asset sale agreement.
[*6] Despite theplaintiff's averments to the contrary, and Godt's suspension from the practice of law, themajority determines, without a hearing having been held, that Godt had actual authority,by virtue of a power of attorney, to bind the plaintiff to the April asset sale agreement.However, Godt did not interpose an answer to the complaint and, therefore, is "deemedto have admitted all factual allegations contained in the complaint and all reasonableinferences that flow from them" (see Woodson v Mendon Leasing Corp., 100NY2d 62, 71 [2003]; Rokina Opt. Co. v Camera King, 63 NY2d 728, 730[1984]). In this regard, the complaint alleged, among other things, that Godt did not haveauthority to enter into the April asset sale agreement.
The plaintiff also contends that the purchaser's reliance on Godt's apparent authorityto execute the April asset sale agreement on her behalf using a power of attorney wasunreasonable (see Hallock v State of New York, 64 NY2d 224, 231 [1984] ["athird party with whom the agent deals may rely on an appearance of authority only to theextent that such reliance is reasonable"]; Collision Plan Unlimited v Bankers TrustCo., 63 NY2d 827, 831 [1984] [a party who invokes the doctrine of apparentauthority assumes a duty of reasonable inquiry]). In this regard, the plaintiff averred thatthe purchasers knew, through their prior conversations, that the plaintiff would not agreeto an asset sale. Also, the plaintiff claims that a duty of reasonable inquiry arose in lightof the extraordinary material change between the February stock sale agreement and theApril asset sale agreement, which increased the tax liability from about $500,000 to $1.3million dollars, and the fact that the subject power of attorney, dated December 4, 2010,was not used to execute the February stock sale agreement.
The plaintiff also submitted the affidavit of her accountant, in which he stated, ineffect, that at all relevant times, he communicated with the plaintiff and Godt that thetransaction must be structured as a stock sale because the projected tax liability for anasset sale would be more than twice than that of a stock sale.
The plaintiff's affidavit and other submissions, which are contradicted by therespondents' submissions, raise threshold issues as to whether there was fraud in theexecution of the April asset sale agreement, which includes the arbitration clause. Whilethe majority correctly determines that the plaintiff's allegations as against Godt, even iftrue, would not constitute the crime of forgery (see Penal Law§ 170.00; People vIppolito, 20 NY3d 615, 624 [2013]), they sufficiently allege fraud in theexecution.
Moreover, the evidence also demonstrates the existence of triable issues of fact as towhether the April asset sale agreement was "permeated with fraud, such that thearbitration clause would fall with the rest of the agreement" (see Matter of Kennelly v MobiusRealty Holdings LLC, 33 AD3d 380, 382-383 [2006]; see also Matter ofSilverman [Benmor Coats], 61 NY2d 299, 308 [1984]; Matter of Weinrott[Carp], 32 NY2d at 197).
In reaching its conclusion, the majority relies upon the fact that the plaintiff appearedat the closing in August 2011, and personally executed documents, including anindemnity agreement, referencing the April asset sale agreement. However, the plaintiffaverred that, in June 2011, after the contract execution but before the closing, DiMarioassured her that the deal remained structured as a stock sale. At the closing, none of thedocuments stated that the plaintiff would have to pay $1.3 million in taxes as a result ofthe restructure as an asset sale. Indeed, the escrow agreement provided that Godt retainonly $500,000 in escrow to pay taxes, which is consistent with the plaintiff'sunderstanding that the transaction was still structured as a stock sale. In executing theclosing documents, the plaintiff may have been entitled to rely on the representation ofGodt, her attorney for many years, without conducting an independent inquiry (see Frame v Maynard, 83AD3d 599, 602 [2011]). "[R]atification is a question of fact unless the evidence isundisputed and different inferences cannot reasonably be drawn from it, and [a]necessary element of ratification is intent" (see Robinson v Day, 103 AD3d 584, 586 [2013] [internalquotation marks and citations omitted]). Here, again, the circumstances of the April assetsale agreement demonstrate issues of fact as to whether the plaintiff ratified the Aprilasset sale agreement at the closing in August 2011.
Where a triable issue of fact is raised with respect to the validity of an arbitration[*7]clause, "the Supreme Court, not the arbitrator, mustdetermine it in a framed-issue hearing, and the appropriate procedure under suchcircumstances is to temporarily stay arbitration pending a determination of the issue" (Matter of Hertz Corp. vHolmes, 106 AD3d 1001, 1003 [2013]; see Matter of Kennelly v Mobius Realty Holdings LLC, 33AD3d 380, 382-383 [2006]).
Accordingly, I dissent, and vote to grant that branch of the plaintiff's motion whichwas to stay arbitration only to the extent that the matter be remitted to the Supreme Court,Nassau County, for an evidentiary hearing (see CPLR 7503 [a]), and a newdetermination on that branch of the plaintiff's motion seeking a permanent stay ofarbitration.