“Inextricably Interwoven” Issues Support Stay of Litigation Pending Outcome of Arbitration

• Posted on: Aug 10 2020

In the past, we have written about many aspects of arbitration. Our articles have covered issues such as the duty to arbitrate, as well as the bases upon which to confirm or vacate an arbitral award. Rarely, if ever, have we examined a motion to stay a court proceeding pending the outcome of an arbitration. Today, in discussing CMBSW Grp., LLC v. Inverness Counsel, LLC, 2020 N.Y. Slip Op. 32525(U) (Sup. Ct., N.Y. County July 31, 2020) (here), we do so.

Typically, a party will move to stay an arbitration because there is no valid agreement to arbitrate. CPLR § 7503(b). Courts will not require a party “to arbitrate unless [it] has clearly consented to do so.” Matter of Chemoleum Corp. [Continental Grain Co.], 22 A.D.2d 865, 865 (1st Dept. 1964). The intention to arbitrate “must be clear and direct”. Matter of Marlene Indus. Corp. [Carnac Textiles], 45 N.Y.2d 327, 334 (1978). “An agreement to arbitrate must be express, direct and unequivocal as to the issues or disputes to be submitted to arbitration.” Robert Stigwood Organization, Ltd. v. Atlantic Recording Corp., 83 A.D.2d 123, 126 (1st Dept. 1981) (citations omitted).
Sometimes, as in CMBSW Grp., a party moves to stay a court proceeding pending the outcome of an arbitration to avoid the “risk of inconsistent adjudications, application of proof and potential waste of judicial resources.” Zonghetti v. Jeromack, 150 A.D.2d 561, 563 (2d Dept. 1989). Such risks occur because the issues in the arbitration are “inextricably interwoven” with the issues in the lawsuit (e.g., Berg v. Dimson, 151 A.D.2d 362, 363 (1st Dept. 1989); NAMA Holdings. LLC v. Greenberg Traurig, LLP, 62 A.D.3d 578, 579 (1st Dept. 2009)) or “there is such a commonality of parties and issues that the resolution of one proceeding will substantially determine the others.” C.B. Strain & Son, Inc. v. J. Baranello & Sons, 90 A.D.2d 924, 925 (3d Dept. 1982) (stay granted in interest of judicial economy because of overlapping issues and common questions of fact).

CMBSW Grp. arose from a dispute between plaintiffs CMBSW Group, LLC (f/k/a the Solaris Group LLC), CMBSW Asset Management LLC (f/k/a Solaris Asset Management LLC), and CMBSW Advisors, LLC (f/k/a Solaris Advisors LLC) (collectively, “Plaintiffs”) and its former employee, Timothy Ghriskey (“Ghriskey”). The gravamen of the dispute concerned an allegation that Ghirskey secretly diverted Plaintiffs’ clients immediately before joining Inverness Counsel, LLC in January 2018.

Pursuant to Ghriskey’s employment agreement, on August 7, 2019, Plaintiffs filed a statement of claim and demand for arbitration with the American Arbitration Association against Ghriskey (the “Arbitration”). In the Arbitration, Plaintiffs asserted four claims against Ghriskey: (i) breach of contract; (ii) breach of fiduciary duty; (iii) breach of the duty of loyalty; and (iv) unjust enrichment.

Subsequently, on January 27, 2020, Plaintiffs commenced a court proceeding against Defendants alleging: (i) aiding and abetting the breach of fiduciary duty; (ii) tortious interference with contract; (iii) tortious interference with existing and prospective business relationships; and (iv) unfair competition.

Defendants moved to stay the court proceeding pending completion of the Arbitration. Defendants argued that a stay was appropriate because (i) the same conduct formed the basis of the claims asserted in the Arbitration as in the court proceeding, (ii) Defendants’ liability in the court proceeding could not be established without proving claims in the Arbitration, namely, whether Ghriskey breached any contractual or fiduciary obligations to Plaintiffs, and (iii) Plaintiffs should be estopped from relitigating Ghriskey’s breach of contract and/or fiduciary duty in the court action. Plaintiffs opposed, arguing that the Arbitration would not resolve the claims in the court action against Defendants and the Arbitration and the lawsuit did not have a complete identity of parties, claims, and damages.
The Court granted the motion, finding Plaintiffs’ argument to be “unavailing”. Slip Op. at *3.

Finding support in Oxbow Calcining USA Inc. v. American Indus. Partners, 96 A.D.3d 646 (1st Dept. 2012), the Court held that “notwithstanding the lack of total identity of the parties, the [A]rbitration could … dispose of or limit the issues to [be] resolve[d] in the action.” Id. at *4. In Oxbox, the Appellate Division, First Department held that a stay of the lawsuit pending arbitration was appropriate because the arbitration statement of claim and complaint contained overlapping factual allegations and sought the same damages. Oxbox, 96 A.D.3d at 652.

The Court explained that, similar to Oxbox, “[t]he statement of claim in the Arbitration and the Complaint contain[ed] nearly identical factual allegations and [sought] the same damages – i.e., $10,000,000” and had “overlapping issues of law and common questions of fact.” Slip Op. at *4. In that regard, the Court noted that the underlying elements of Ghriskey’s breach of contract and breach of fiduciary duty claims in the Arbitration were the same as Plaintiffs’ claims for aiding and abetting the breach of fiduciary duty and tortious interference with contract against the Defendants. Id. “Further,” said the Court, “while Mr. Ghriskey’s purported breach of contract and/or breach of fiduciary duty are not dispositive elements of the Plaintiffs’ claims for tortious interference or unfair competition, the Plaintiffs acknowledge that the underlying factual findings are nonetheless relevant to the resolution of these claims.” Id. at *4-*5. “Thus,” concluded the Court, “the resolution of the Arbitration is likely to either limit or dispose of the issues in the present action.” Id. at *5.
The Court also found “a significant risk of inconsistent findings of fact with respect to Mr. Ghriskey’s conduct should the Arbitration and [the court] action proceed concurrently.” Id. at *5. The Court reasoned that both the Arbitration and the lawsuit alleged “that Mr. Ghriskey conspired with the Defendants to steal the Plaintiffs’ clients and to commit various wrongful acts.…” Id.

Finally, the Court rejected Plaintiff’s concerns about the application of collateral estoppel. Id. at *5. Plaintiffs argued “that any award in the Arbitration may have limited estoppel effects against the Defendants” because Plaintiffs would not have “a full and fair opportunity to litigate the issues determined in the arbitration proceeding.” Id. The Court held that “[w]hile a finding of wrongdoing by Mr. Ghriskey may not be preclusive as to all issues against the Defendants, ‘[b]ecause mutuality of parties is not required, a defendant may preclude a plaintiff from relitigating an issue resolved against that plaintiff in an earlier arbitration with a different defendant.’” Id. (quoting Bernard v. Proskauer Rose, LLP, 87 A.D.3d 412 (1st Dept. 2011) (explaining that arbitration awards may be given preclusive effect in a judicial action)).

Takeaway

CPLR § 2201 allows the court to grant a stay of proceedings “upon such terms as may be just.” Parties may invoke CPLR § 2201 based on another pending action or proceeding. As with motions to dismiss under CPLR § 3211(a)(4), the court has broad discretion when making this determination.
In order to stay a proceeding, “it is necessary that there be sufficient identity as to both the parties and the causes of action asserted in the respective actions.” White Light v. On The Scene, 231 A.D.2d 90, 93 (1st Dept. 1997). Complete identity is not required; substantial identity will do. See Syncora Guar. Inc. v. J.P. Morgan Sec. LLC, 110 A.D.3d 87, 96 (1st Dept. 2013); White Light, 231 A.D.2d at 94 (“With respect to the subject of the actions, the relief sought must be the same or substantially the same.”) (citations and internal quotation marks omitted). But see Lessard Architectural Grp., Inc. P.C. v. X & Y Dev. Grp., LLC, 88 A.D.3d 768 (2d Dept. 2011) (noting that a stay “should not be granted … unless the other action presents complete identity of parties, causes of action, and relief sought”). Thus, as in CMBSW Grp., where the two proceedings involve substantially similar parties and overlapping subject matter and seek the same damages for substantially the same alleged injuries, a court may properly find that the actions are substantially similar for purposes of CPLR § 2201.