Court Opinion

ID: 4204090
Source: CourtListenerOpinion
Date Created: 2017-09-18 13:10:58.214646+00
Date Added: 2024-06-11T14:41:08.030524
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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.

          [(Emphasis added).]

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.

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