Sklaroff, S. v. Zaken, I. ( 2017 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
STEFAN SKLAROFF : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
:
v. :
:
:
ILAN ZAKEN, CELLA LUXURIA, LLC, :
DR. DENIM, INC., 1216 CHESTNUT, :
LLC, 331 SOUTH ASSOCIATES, LP, : No. 3841 EDA 2016
CASA BY CELLA LUXURIA, LLC, MIRA :
PROPERTIES, LLC AND MIRA :
CONSTRUCTION, LLC :
:
Appellants :
Appeal from the Order Dated November 15, 2016
In the Court of Common Pleas of Philadelphia County
Civil Division at No(s): May Term, 2016 No. 160502802
BEFORE: BOWES, SHOGAN, JJ., and STEVENS, P.J.E.*
MEMORANDUM BY STEVENS, P.J.E.: FILED AUGUST 18, 2017
Appellants1 appeal from the orders entered in the Court of Common
Pleas of Philadelphia County denying their petition to compel arbitration, as
____________________________________________
*
Former Justice specially assigned to the Superior Court.
1
Appellants are Ilan Zaken and his various companies in which he had a
majority interest, including Cella Luxuria, LLC, Dr. Denim, Inc., 1216
Chestnut, LLC, 331 South Associates, LP, Casa by Cella Luxuria, LLC, Mira
Properties, LLC, and Mira Construction, LLC.
J-S51032-17
well as their preliminary objections seeking to compel arbitration, in a
dispute with Appellee Stefan Sklaroff.2 After a careful review, we affirm.
The trial court has aptly set forth the relevant facts and procedural
history underlying this appeal as follows:
On May 23, 2016, [Appellee] commenced the instant
action by way of writ of summons. On July 21, 2016, [Appellee]
filed his first complaint against [Appellants]. On September 2,
2016, following the filing of preliminary objections, [Appellee]
filed an amended complaint as of right.
In his amended complaint, [Appellee] averred as follows:
“[Appellant] Ilan Zaken...is a wealthy entrepreneur with a vast
portfolio of real estate holdings throughout Philadelphia, Florida,
and New Jersey. [Appellant Zaken] also operates numerous
retail businesses, as well as a construction company. In 2012,
[Appellant] Zaken recruited [Appellee] to open a furniture store
with [him] and manage that store. [Appellant] Zaken induced
[Appellee’s] participation by offering [Appellee] a 25%
ownership share in the new furniture company, [Appellant] Cella
Luxuria, LLC [(“Cella Luxuria”)], and a position as co-director of
the Cella Luxuria board. [On November 5, 2012, Appellant
Zaken, Appellant Cella Luxuria, and Appellee executed an
Operating Agreement.3]
____________________________________________
2
The denial of a petition to compel arbitration, as well as the denial of
preliminary objections seeking to compel arbitration, are appealable as an
interlocutory appeal as of right. 42 Pa.C.S.A. § 7320(a)(1); Pa.R.A.P.
311(a)(8).
3
Relevantly, the Operating Agreement set forth the creation of Cella Luxuria
and provided that Appellee had a 25% interest with Appellant Zaken having
a 75% interest in the company. See Operating Agreement, 11/5/12, at 3.
Further, the Operating Agreement set forth the purpose of Cella Luxuria was
to engage in the retail sale of furniture with Appellant Zaken as the chief
executive officer and Appellee as the general manager. Id. at 4. Moreover,
the Operating Agreement provided that Cella Luxuria was to be managed by
a board consisting solely of Appellee and Appellant Zaken, with Appellee
having one board vote and Appellant Zaken having two board votes. Id.
(Footnote Continued Next Page)
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According to [Appellee], “[Appellant] Zaken subsequently
exploited his control as majority shareholder and reaped
enormous personal financial benefits at [Appellee’s] expense.”
This exploitation include[d], “[o]ver [Appellee’s]
objections,...drain[ing] Cella Luxuria of over $1 million in
resources through blatant self-dealing, including, inter alia, the
payment of outsize rents at numerous buildings owned by
[Appellant Zaken], and gross overpayment for construction
services to [Appellant Zaken’s] construction company.” This
exploitation also include[d] “open[ing] a competing furniture
store, through a separate LLC, on the same block as [the] Cella
Luxuria store.”
“Having pillaged Cella Luxuria in gross violation of his
fiduciary duty to [Appellee], [Appellant] Zaken then terminated
[Appellee’s] affiliation with Cella [Luxuria] without cause, in
February 2016,” according to [Appellee]. Then, [as asserted by
Appellee,] “[c]onsistent with his blatant disregard for any
obligations to [Appellee], [Appellant] Zaken refused to purchase
[Appellee’s] [Membership Interest] at an appropriate value upon
termination, refused to make tax payments on behalf of
[Appellee] for 2015, and refused to provide [Appellee] with
financial information to which he was entitled.” As a result
thereof, [Appellee] brought “this action against [Appellant]
Zaken for breach of fiduciary duty, breach of contract, fraud, and
against [his] various businesses for knowingly facilitating [his]
wrongdoing.”[4]
_______________________
(Footnote Continued)
Additionally, the Operating Agreement indicated that, upon termination of a
member’s employment with Cella Luxuria, the other member would
“purchase all of the Membership Interest owned by the Terminated Member
at the time of such termination. A sale under this Section shall be deemed
to have occurred on the date of termination of the Terminated Member.” Id.
at 18. Also, the Operating Agreement set forth the distribution for the
payment of taxes for Cella Luxuria. Id. at 12.
4
Specifically, Appellee alleged in his amended complaint the following:
Count 1-Appellants Cella Luxuria and Zaken breached the Operating
Agreement by failing to purchase Appellee’s stock at fair market value,
making tax distributions on behalf of Appellee, making expenditures in
excess of $10,000 without proper consent, and failing to provide Appellee
with access to corporate books; Count 2-Appellant Zaken breached his
(Footnote Continued Next Page)
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On September 21, 2016, [Appellants] filed preliminary
objections to the amended complaint. On this date, however,
[Appellants] also filed a petition to compel arbitration. In both
the preliminary objections and the petition to compel arbitration,
[Appellants] argued a valid agreement to arbitrate exists in this
case. More specifically, [Appellants] asserted:
On or about November 5, 2012, [Appellee] and
[Appellants] Cella [Luxuria] and Zaken entered into
the Operating Agreement whereby [Appellee] owns a
25% membership interest in Cella [Luxuria] and
[Appellant] Zaken owns a 75% interest.
Subsequently, [Appellee] and [Appellant] Cella
[Luxuria] entered into an Employment Agreement,
with an effective date of January 1, 2013.[5] The
Employment Agreement modifies and supersedes the
Operating Agreement and contains an agreement to
arbitrate.
_______________________
(Footnote Continued)
fiduciary duty under the Operating Agreement; Count 3- Appellant Zaken’s
various companies aided and abetted Appellant Zaken in breaching his
fiduciary duty under the Operating Agreement; Count 4-Appellant Zaken
engaged in fraud by making material misrepresentations regarding market
rates, values of goods, and services related to the operation of Cella
Luxuria; and Count 5-Appellee sought to pierce the corporate veil as to
Appellant Zaken’s companies.
5
The Employment Agreement was executed between Appellant Cella Luxuria
and Appellee, and provided that Appellant Cella Luxuria “desires to employ
[Appellee] and [Appellee] desires to be employed by the Company upon the
terms and conditions set forth herein.” Employment Agreement, executed
1/1/13, at 1. The Employment Agreement indicated that Appellee was being
employed as the general manager of Appellant Cella Luxuria and appointed
to the board of the company. Id. The Employment Agreement set forth
Appellee’s salary, compensation, reimbursable expenses, and other
employee benefits. Id. at 2-3. The Employment Agreement further set
forth that Appellee’s employment was “at-will,” included an employee
confidentiality provision, and set forth how notice of termination of
employment was to be given. Id. at 3-6. Further, as discussed infra, the
Employment Agreement contained an arbitration provision.
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As such, [Appellants] sought in their preliminary objections
to have “all counts of [Appellee’s] amended
complaint...submitted to binding...arbitration...and any counts or
portions of counts not directed to binding arbitration stayed
until...after a final binding ruling on all matters submitted to
arbitration.” [Also, Appellants] sought in their petition to compel
arbitration to have “[Appellee]...ordered to participate and
present his claims related to [Appellants] Cella [Luxuria] and
Zaken and the Operating Agreement in the arbitration matter to
be filed by [Appellants] Cella [Luxuria] and Zaken within ten
days of receipt of this Order[.]” [Further, that] “any claims that
[Appellee] has or may bring against any and all [Appellants]
herein stayed until...after a binding ruling on all matters
submitted to arbitration.”
[Appellee] filed responses in opposition to both the
preliminary objections and the petition to compel arbitration.
Regarding arbitration, [Appellee] stated in sum:
[Appellants] have filed preliminary objections
seeking to compel arbitration, and have filed a
petition to compel arbitration. In doing so,
[Appellants] seek to re-cast [Appellee’s] amended
complaint against [Appellant] Zaken and his many
companies as a dispute concerning [Appellee’s]
Employment Agreement with Cella [Luxuria], which
contains an arbitration clause. But [Appellee] has
not asserted any claim under the Employment
Agreement. By conflating the Cella [Luxuria]
Operating Agreement with the entirely separate
Employment Agreement, [Appellants] disingenuously
attempt to impose an arbitration provision on a
foundational corporate agreement that made no
mention of arbitration. What is more, [Appellants]
ask the court to require arbitration of [Appellee’s]
claims against [Appellant] Zaken and his other
companies despite the fact that none of those
[Appellants] were party to [Appellee’s] Employment
Agreement.
More specifically, [Appellee] relied on cases such as Elwyn
v. DeLuca, 48 A.3d 457, 461 (Pa.Super. 2012), which provide a
two-part test to determine whether to compel arbitration with
the first determination being “whether a valid agreement to
arbitrate exists” and the second determination being “whether
the dispute is within the scope of arbitration.” [Appellee] then
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asserted “the Operating Agreement contains no arbitration
clause; [Appellee’s] Employment Agreement with Cella
[Luxuria], to which [Appellant] Zaken is not a party, did not
supersede the Operating Agreement; and the vast majority of
[Appellee’s] claims are against [Appellant] Zaken and his
companies, who were not parties to the Employment
Agreement.” And, finally, [Appellee] argued “under the standard
set forth by the Superior Court in Elwyn, arbitration is improper
as to [Appellee’s] claims.”
By orders dated November 15, 2016, and docketed
November 16, 2016, [the trial court] denied [Appellants’]
petition to compel arbitration and overruled [Appellants’]
preliminary objections. On December 1, 2016, [Appellants] filed
a notice of appeal to those orders. Subsequently, the [trial
court] ordered [Appellants] to file a [Pa.R.A.P.] 1925(b)
statement, which they timely did so on December 21, 2016.
[The trial court filed a responsive Pa.R.A.P. 1925(a) opinion.]
Trial Court Opinion, 1/19/17, at 1-4 (citations to record and emphasis
omitted) (footnotes added).
On appeal, Appellants present the following issues:
1. Whether the trial court erred in denying Appellants’ petition to
compel arbitration and for a stay of proceedings and preliminary
objections to compel arbitration pursuant to the Pennsylvania
Arbitration Act because the written Employment Agreement of
[Appellee] contained an enforceable arbitration agreement and
the claims in the amended complaint fall within the scope of the
arbitration agreement?
2. Whether the trial court erred in holding that [Appellee’s]
Employment Agreement with Appellant Cella Luxuria did not
amend, modify, or supersede the Cella Luxuria Operating
Agreement?
3. Whether the trial court erred in failing to recognize that
related parties are bound by the valid arbitration agreement
governing the dispute[?]
Appellants’ Brief at 3-4.
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Appellants issues are intertwined. Essentially, Appellants contend that
the execution of the Operating Agreement on November 5, 2012, was
modified and/or superseded by the execution of the Employment Agreement
on January 1, 2013. Further, Appellants allege that the Employment
Agreement contains a valid arbitration agreement and the claims presented
in Appellee’s amended complaint fall within the scope of the Employment
Agreement.
We review the trial court’s denial of a petition to compel arbitration, as
well as the trial court’s denial of preliminary objections in the nature of a
petition to compel arbitration, for an abuse of discretion and to determine
whether the trial court’s findings are supported by substantial evidence.
Gaffer Ins. Co., Ltd. v. Discover Reinsurance Co., 936 A.2d 1109, 1112-
13 (Pa.Super. 2007); Smay v. E.R. Stuebner, Inc., 864 A.2d 1266, 1270
(Pa.Super. 2004). “[W]e employ a two-part test to determine whether the
trial court should have compelled arbitration.” Smay, 864 A.2d at 1270
(citation omitted). The first determination is whether a valid agreement to
arbitrate exists. Id. The second determination is whether the dispute or
claims at issue fall within the scope of the agreement. Id.
“[A]rbitration cannot be compelled in the absence of an express
agreement to arbitrate.” Gaffer Ins. Co., Ltd., 936 A.2d at 1113 (citation
omitted).
The touchstone of any valid contract is mutual assent and
consideration. The issue of whether parties agreed to arbitrate
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is generally one for the court, not the arbitrators. When
addressing that issue, courts generally apply ordinary state law
contract principles, “but in doing so, must give due regard to the
federal policy favoring arbitration.”
Bair v. Manor Care of Elizabethtown, PA, LLC, 108 A.3d 94, 96
(Pa.Super. 2015) (citations and quotation omitted).
The scope of arbitration is determined by the intention of the parties
as ascertained in accordance with the rules governing contracts generally.
See id.
[Since] [a]rbitration is a matter of contract,...parties to a
contract cannot be compelled to arbitrate a given issue absent
an agreement between them to arbitrate that
issue....[A]rbitration agreements are to be strictly construed and
such agreements should not be extended by implication.
In general, only parties to an arbitration agreement are
subject to arbitration. However, a nonparty, such as a third-
party beneficiary, may fall within the scope of an arbitration
agreement if that is the parties’ intent.
Elwyn, 48 A.3d at 461 (quotations omitted).
In the instant case, the issues presented are strictly of contract
interpretation. In interpreting a contract, we are guided by the following
legal precepts:
When a written contract is clear and unequivocal, its
meaning must be determined by its contents alone. In
construing a contract, we must determine the intent of the
parties and give effect to all of the provisions therein. An
interpretation will not be given to one part of the contract which
will annul another part of it.
We emphasize that the contract must be interpreted as a
whole, and an interpretation that gives effect to all of the
contract’s provisions is preferred. In addition, a preferred
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contract interpretation ascribes under all circumstances the most
reasonable, probable, and natural conduct to the parties.
Gaffer Ins. Co., Ltd., 936 A.2d at 1113 (citations, quotation marks, and
quotation omitted).
In the case sub judice, Appellants acknowledge that the Operating
Agreement (executed between Appellant Zaken, Appellant Cella Luxuria, and
Appellee on November 5, 2012) does not contain an arbitration provision;
however, Appellants initially aver the Employment Agreement (executed
between Appellant Cella Luxuria and Appellee on January 1, 2013) contains
a valid arbitration provision, which superseded and/or modified the
Operating Agreement.
In developing their argument, Appellants point to the following
paragraphs of the Employment Agreement. Paragraph 12 of the
Employment Agreement provides, in relevant part, that “[a]ny claim or
controversy arising out of or relating to this Agreement or any breach
thereof shall be settled by arbitration[.]” Employment Agreement, executed
1/1/13, at 7. Moreover, in paragraph 15, the Employment Agreement
provides:
15. Modification.
This Agreement sets forth the entire agreement and
understanding of the parties concerning the subject matter
hereof and supersedes all prior agreements, arrangements and
understandings between the parties hereto. No representation,
promise, inducement or statement of intention has been made
by or on behalf of either party hereto that is not set forth in this
Agreement. This Agreement may not be amended or modified
except by written instrument executed by the parties hereto.
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Id. (bold in original).
In addressing Appellants’ claim that a valid agreement to arbitrate
existed in the Employment Agreement and such agreement modified and/or
superseded the Operating Agreement, the trial court held as follows:
While the Court agree[s] [with Appellants] that Paragraph
12 [of the Employment Agreement] contains a valid agreement
to arbitrate, the Court does not agree Paragraph 15 caused the
Employment Agreement to modify or supersede the Operating
Agreement.
First, Paragraph 15 state[s] that the Employment
Agreement “sets forth the entire agreement and understanding
of the parties concerning the subject matter hereof....” By its
terms, the Employment Agreement only concerned the
employment of [Appellee] by Cella [Luxuria]. By contrast, the
Operating Agreement addresses the creation, operation, and
governance of Cella [Luxuria]; it in no way addressed Cella
[Luxuria’s] employment of [Appellee] (or any other person).
Therefore, [Appellants] cannot credibly claim the Employment
Agreement modifies and supersedes the Operating Agreement,
and the Court will not read a boilerplate “no oral
modification”/merger provision to do so.
***
[Moreover,] the Employment Agreement only purports to
supersede prior agreements, arrangements and understandings
“between the parties [thereto].” The parties to the Operating
Agreement and the Employment Agreement, however, are
distinct: [Appellee], Cella [Luxuria], and [Appellant] Zaken are
all [named] parties to the Operating Agreement, whereas only
[Appellee] and Cella [Luxuria] are [named] parties to the
Employment Agreement.
***
The Court’s conclusion that the Employment Agreement
did not modify or supersede the Operating Agreement is further
supported by Paragraph 1(d) of the Employment Agreement,
which states “[t]he Company [(Cella Luxuria)] represents and
warrants to Employee [(Appellee)] that this Agreement has been
duly and validly authorized and executed by and on behalf of the
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Company in accordance with its certificates of organization and
operating agreement and that constitutes [a] lawful and valid
obligation of the Company.” [Cella Luxuria’s representation in
the Employment Agreement] that the Employment Agreement
constitutes a valid corporate obligation undertaken in accordance
with the Operating Agreement is plainly inconsistent with
[Appellants’] argument that the Employment Agreement
superseded the Operating Agreement. Rather, this
representation [in the Employment Agreement] clearly
establishes that the two agreements independently cover two
different subjects: the Employment Agreement governed
[Appellee’s] employment, whereas the Operating Agreement
governs [the] operation of the business, including the
repurchase of a Terminated Member’s Membership Interest.
Therefore, the Employment Agreement did not supersede the
Operating Agreement, but rather was an independent
agreement.
Trial Court Opinion, filed 1/19/17, at 7-10 (citations to record and emphasis
omitted).
We agree with the trial court’s reasoning in this regard. In applying
the rules of contract interpretation, we agree with the trial court that the
Employment Agreement is a separate, independent agreement which did not
supersede or modify the Operating Agreement, particularly as it relates to
the arbitration provision at issue in the Employment Agreement. See
Gaffer Ins. Co., Ltd., supra.
Further, with regard to Appellants’ suggestion that Appellant Zaken, as
well as his other companies being sued by Appellee, were third party
beneficiaries of the Employment Agreement, the trial court rejected this
argument as follows:
[N]othing in the Employment Agreement suggests that
[Appellant Zaken and his other companies were] third-party
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beneficiar[ies] [of the Employment Agreement]. [Even if
evidence outside of the contracts was considered], [Appellants
have not] offered any factual support for their assertion the
parties desired to make [Appellant Zaken and his other
companies] beneficiar[ies] of the Employment Agreement, other
than the fact that [they] would now rather arbitrate [Appellee’s]
claims under the Operating Agreement than litigate them.
Trial Court Opinion, filed 1/19/17, at 9-10.
We agree with the trial court’s reasoning in this regard. While third-
party beneficiaries may fall within the scope of an arbitration agreement,
there is no support for Appellants’ argument that such was the parties’
intent with regard to the Employment Agreement’s arbitration provision. See
Elwyn, supra.
Finally, we agree with the trial court that the issues presented in
Appellee’s amended complaint otherwise fall within the scope of the
Operating Agreement, for which there is no arbitration agreement, and not
within the scope of the Employment Agreement. As the trial court aptly
indicated:
In determining whether [the] arbitration provision [in the
Employment Agreement] applies to [Appellee’s] causes of action,
“the critical analysis...hinges on whether the dispute arises out
of the contract”...[and the] “degree of applicability of [the]
arbitration clause is controlled by the scope of the agreement.”
Here, [Appellee’s] claims fall outside the scope of the
Employment Agreement. Pursuant to the Operating Agreement,
[Appellee] alleges [in his amended complaint that] Cella
[Luxuria] failed to purchase [Appellee’s] Membership Interest at
fair market value and failed to make a tax distribution on behalf
of [Appellee] for 2015. Pursuant to the Operating Agreement,
[Appellee] alleges [Appellant] Zaken failed to issue a tax
distribution on behalf of [Appellee] for 2015; made expenditures
in excess of $10,000 without unanimous consent of the board of
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directors; and failed to provide [Appellee] with access to
corporate books and records. Clearly, the instant dispute arises
out of the earlier, broader Operating Agreement, [and] not the
later, narrower Employment Agreement.
[T]he alleged breaches [in Appellee’s amended complaint]
have nothing to do with the Employment Agreement, which
solely governed [Appellee’s] employment[.]
Trial Court Opinion, filed 1/19/17, at 10-11 (quotation omitted).
We agree with the trial court’s reasoning in this regard. See Setlock
v. Pinebrook Personal Care & Retirement Center, 56 A.3d 904, 910
(Pa.Super. 2012) (holding that, once the court determines a valid agreement
to arbitrate exists, the court should order arbitration only as to those
disputes within the scope of the arbitration provision). Although the
arbitration provision in the Employment Agreement has a “broad reach,”
there is no support for Appellants’ argument that the parties intended the
arbitration provision to reach beyond claims arising from or relating to the
terms of the Employment Agreement itself. Accordingly, since the claims
raised in Appellee’s amended complaint pertain to the Operating Agreement,
for which there is no arbitration agreement, we conclude the trial court did
not abuse its discretion in denying Appellants’ attempts to compel
arbitration. See Smay, supra.
For all of the foregoing reasons, we affirm the trial court’s orders.
Orders Affirmed.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/18/2017
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