Court Opinion

ID: 4197278
Source: CourtListenerOpinion
Date Created: 2017-08-18 18:12:07.168013+00
Date Added: 2024-06-11T14:39:46.080641
License: Public Domain

J-S51032-17

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37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.

                                            -4-
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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.

                                     -6-
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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

                                      -7-
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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

                                     -8-
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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.

                                      -9-
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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

                                   - 10 -
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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

                                   - 11 -
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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

                                    - 12 -
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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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