Preview
FILED: NEW YORK COUNTY CLERK 07/06/2016 06:00 PM INDEX NO. 653381/2016
NYSCEF DOC. NO. 23 RECEIVED NYSCEF: 07/06/2016
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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In the Matter of the Application of
KRAMER LEVIN NAFTALIS & FRANKEL Index No. 653381/2016
LLP, et al,
IAS Part 45
Petitioners,
Hon. Anil Singh
For a Permanent Stay of Arbitration Pursuant to
Article 75 of the Civil Practice Law and Rules,
- against -
MICHAEL C. CORNELL, et al,
Respondents.
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RESPONDENTS’ MEMORANDUM OF LAW
IN OPPOSITION TO PETITION TO STAY ARBITRATION
AND IN SUPPORT OF CROSS-MOTION
TO DISMISS AND TO SEAL THE RECORD
JEFFREY A. JANNUZZO, ESQ.
Counsel for Respondents
10 East 40th Street, 35th Floor
New York, NY 10016-0301
(212) 932-8524
jeff@jannuzzo.com
Dated: New York, NY
July 6, 2016
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TABLE OF CONTENTS
TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii
PRELIMINARY STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF FACTS. ......................................................3
ARGUMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
I. PETITIONERS BROUGHT THIS PROCEEDING IN THE
WRONG COUNTY AND IT CANNOT PROCEED HERE. ......................6
II. PETITIONERS ARE EQUITABLY ESTOPPED FROM AVOIDING
THE ARBITRATION AGREEMENT. .......................................8
A. Under Well-Established Law, Non-Signatories Can Be Compelled to Arbitrate. .8
B. The Petitioners Are Compelled to Arbitrate Because They Themselves Swear
They Received a Direct Benefit from the Arbitration Agreement. . . . . . . . . . . . . 10
C. The Petitioners Are Compelled to Arbitrate Because They Were Agents Acting
Unlawfully or Acting as a Mixture of Agent and Principal. . . . . . . . . . . . . . . . . . 13
D. Because the Dispositive Facts Are Not Disputed with Evidence,
All Questions Of Arbitrability Are for the Arbitrator. . . . . . . . . . . . . . . . . . . . . . 16
III. THIS PROCEEDING SHOULD BE DISMISSED BECAUSE OF
PETITIONERS’ FAILURE TO JOIN NECESSARY PARTIES . . . . . . . . . . . . . . . . . . . 18
IV. THE RECORD HEREIN SHOULD BE SEALED TO PREVENT THE TYPE OF
HARM THAT PENAL LAW SECTION 135.60 WAS ENACTED TO PREVENT. . . . 19
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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TABLE OF AUTHORITIES
Cases
Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349 (2d Cir. 1999). . . . . . 9, 12, 15
Am. Transit Ins. Co. v. Carillo, 307 A.D.2d 220 (1st Dep’t 2003). . . . . . . . . . . . . . . . . . . . . . . . 18
Ariel Mar. Grp., Inc. v. Zust Bachmeier of Switzerland, Inc., 762 F. Supp. 55 (S.D.N.Y. 1991). 14
Aveta Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Belzberg v. Verus Investments Holdings Inc., 21 N.Y.3d 626 (2013). . . . . . . . . . . . . . . . . . . . 9, 11
Booth v. 3669 Delaware, 92 N.Y.2d 934 (1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
CDC Capital Inc. v. Gershon, 282 A.D.2d 217 (1st Dep’t 2001).. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Crawford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 35 N.Y.2d 291 (1974) . ...........9
Cusimano v. Schnurr, 26 N.Y.3d 391 (2015). ........................................8
Cylich v. Riverbay Corp., 74 A.D.3d 646 (1st Dep’t 2010).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
D.M.C. Const. Corp. v. A. Leo Nash Steel Corp., 70 A.D.2d 635 (2d Dep’t 1979). ...........6
Feffer v. Goodkind, Wechsler, Labaton & Rudolf,
152 Misc. 2d 812 (Sup.Ct. N.Y.Co. 1991) aff’d sub nom,
Feffer v. Goodkind, Wechsler, Labaton & Rudoff, 183 A.D.2d 678 (1st Dep’t 1992). . . . . . . . . . 21
Ferrando v. New York City Bd. of Standards & Appeals, 12 A.D.3d 287 (1st Dep’t 2004). . . . . 18
Hendler & Murray, P.C. v. Lambert, 67 N.Y.2d 831 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Hirschfeld Prods., Inc. v. Mirvish, 88 N.Y.2d 1054 (1996). . . . . . . . . . . . . . . . . . . . . . . . . . 10, 13
Hitchcock v. Boyack, 256 A.D.2d 842 (3d Dep’t 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
HRH Const. LLC v. Metro. Transp. Auth., 33 A.D.3d 568 (1st Dep’t 2006). . . . . . . . . . . . . . . . 12
Jetblue Airways Corp. v. Stephenson, 31 Misc.3d 1241(A) (Sup.Ct. N.Y.Co. 2010),
aff’d, 88 A.D.3d 567 (1st Dep’t 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966 (2d Cir. 1987).. . . . . . . . . . . . . . . . . . . . 14
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Mangini v McClurg, 24 N.Y.2d 556 (1969). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Masefield AG v. Colonial Oil Indus., Inc., 2005 WL 911770 (S.D.N.Y. 2005). . . . . . . . . . . . . . 16
McAllister Bros., Inc. v. A & S Transp. Co., 621 F.2d 519 (2d Cir.1980).. . . . . . . . . . . . . . . . . . . 9
McMahan & Co. v. Bass, 250 A.D.2d 460 (1st Dep’t 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
New England Whalers Hockey Club v. Nair, 474 A.2d 810 (Conn. 1984). . . . . . . . . . . . . . . . . . 14
Powe v. Miles, 407 F.2d 73 (2d Cir. 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
R. L. Rothstein Corp. v. Kerr S.S. Co., 21 A.D.2d 463 (1st Dep’t 1964),
aff’d w/o opin, 15 N.Y.2d 897 (1965). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Seguros Banvenez, S.A. v. S/S Oliver Drescher, 761 F.2d 855 (2d Cir. 1985) . . . . . . . . . . . . . . . 14
Staten Island Hosp. v. All. Brokerage Corp., 166 A.D.2d 574 (2d Dep’t 1990) . . . . . . . . . . . . . 19
Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773 (2d Cir. 1995). . . . . . . . . . . . . . . . 9, 13
TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335 (1998) .. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Travelers Indem. Co. of Illinois v. Nnamani, 286 A.D.2d 769 (2d Dep’t 2001). . . . . . . . . . . . . . . 6
Weinstein v. Barnett, 03/24/95 N.Y.L.J. 29, col. 2 (Sup.Ct. N.Y.Co. 1995). . . . . . . . . . . . . . . . . 21
Statutes
22 N.Y.C.R.R. § 216.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9 U.S.C. § 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CPLR 1001(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CPLR 511.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CPLR 7502(a)(i). ..............................................................6
CPLR 7502(a)(ii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Penal Law 135.60.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 20
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Other Authorities
3 N.Y. PRAC., COM. LITIG. IN NEW YORK STATE COURTS § 25:10. . . . . . . . . . . . . . . . . . . . . . . . 21
New York Bill Jacket, 2000 S.B. 6672, Ch 226. ......................................7
RESTATEMENT, AGENCY (SECOND) § 348 (2016 ed.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RESTATEMENT, AGENCY (SECOND) § 359A (2016 ed.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Siegel, N.Y. PRAC. § 132, at 199 (2d ed.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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PRELIMINARY STATEMENT
The Petitioners brought this special proceeding in the wrong court. Under CPLR
7502(a), venue does not lie in New York County, because no party seeking arbitration resides
here. CPLR 7502(a) is quite clear, and under its plain text, it does not matter whether the
persons seeking to stay arbitration are “parties” to the arbitration agreement or not. Under CPLR
7502(a)(i), the special proceeding must be brought in a county “where the party seeking
arbitration resides or is doing business.” (Emphasis added.) Because such a county exists, the
fall-back provision of CPLR 7502(a)(ii) for placing venue in “any county” does not apply.
There is no discretion in a motion to change venue in a special proceeding under
CPLR 7502(a). This case can proceed, if at all, only in Westchester County, where Respondent
Michael Cornell resides. In addition, the Petition must be dismissed unless Petitioners join
necessary parties, i.e., the Petitioners’ own clients, who are signatories to the arbitration
agreement and who are parties to the pending JAMS arbitration, but whom Petitioners
intentionally never served nor joined in this proceeding.
If Petitioners choose to continue the case in the proper venue and with all the
necessary parties, their Petition to stay arbitration still must be dismissed on the merits. The
doctrine of equitable estoppel to compel non-signatories to arbitrate is applicable here.
Petitioners spent most of their moving papers incinerating a strawman argument:
that they were not signatories to the Separation Agreement. That strawman argument
overlooked that Respondents never based the Demand for Arbitration on any such contention.
Rather, and right at the outset of the Statement of Claim itself, Respondents made quite clear that
the arbitration proceeding was based on two doctrines that are well-accepted by the federal
courts, the courts of New York, and the courts of pretty much everywhere else. Non-signatories
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are equitably estopped from asserting that they cannot be compelled to arbitrate, where they
received a direct benefit in the very text of the arbitration agreement, or where they were either
agents who acted unlawfully or without authority, or who acted in a mixed capacity of agent and
principal on their own behalves.
Here, the Petitioners were not acting merely as arm’s-length lawyers in negotiating
against people who were never their clients. Here, the Petitioners did things that no lawyers
should ever do, much less do to their own clients, and extorted the Separation Agreement and
Release by unlawful threats to publicize accusations within the meaning of Penal Law ‘ 135.60,
and then negotiated on their own behalves to obtain the direct benefit of a release for what they
did.
Further, Petitioners used extortionate threats to invoke their own previously-
undetected breach of fiduciary duty (allowing some adverse person to slip language into an
amended 14,000 word LLC agreement that purportedly rendered their client’s rights to some $35
million in earned compensation to be terminable-at-will), and then used that extortionate threat
to obtain the direct benefit of a release. These Petitioners were not merely lawyers, but agents
who acted either unlawfully or without authority, or persons who acted as a mixture of agent and
principal on their own behalves.
The Petition should be dismissed. To prevent dissemination of the same
accusations which Petitioners unlawfully threatened to disclose, the record of this case should be
sealed. If a case record can be sealed to protect “mere” trade secrets, then it can certainly be
sealed to prevent the harm which Penal Law Section 135.60 was enacted to prevent, and to
prevent lawyers who used their own prior breach of duty to extort an agreement from their client
from benefitting from what they did.
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STATEMENT OF FACTS
The facts relating to Petitioners: (a) receiving a direct benefit contained in the very
text of the arbitration agreement, and (b) acting as agents who behaved unlawfully, or as
principals on their own behalves, are briefly described herein. The Court is respectfully referred
to the Statement of Claim, which has now been verified by the witnesses with knowledge of the
facts, Alan and Michael Cornell; and to the affirmation of Richard E. Weill, Esq. regarding his
communications with Petitioners.
The lawyer-client relationship began more than 12 years ago, when the Cornells
retained Petitioner Goldman, then at a different firm, to negotiate the sale of the family business,
Loew-Cornell, Inc. Exhibit A at ¶ 32. The lawyer-client relationship continued when Petitioner
Goldman joined Petitioner Kramer Levin, when Michael Cornell and Alan Cornell brought client
relationships to the firm regarding numerous Cornell family-related entities. Id. at & ¶¶ 33-39.
In 2012, Michael Cornell founded a private equity firm that aimed at creating value
in leading brands in children’s toys. Id. at ¶ 26. One of the firm’s first acquisitions was the
POOF-Slinky business, whose brands included the well-known children’s toy Slinky®. Id. at ¶¶
27-29. Up until the events herein, Michael Cornell owned 45% of that company and was its
chairman. Id. at ¶ 30. When the LLC agreement for PEP II was negotiated, Petitioners
represented Mr. Cornell individually in that negotiation. Id. at ¶¶ 41-44. PEP II itself had
independent counsel. Id. at ¶ 42.
Michael Cornell was also the CEO of the company that actually operated the
children’s toy businesses, POOF-Slinky LLC. Id. at ¶ 46. When Mr. Cornell negotiated his
Employment Agreement with POOF-Slinky, Petitioners represented Mr. Cornell individually
against the company. Id. at ¶ 47-50.
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As described in great detail in the now-verified Statement of Claim, it was these
companies as to which Petitioners acted against their own client Michael Cornell and obtained
his ouster by extortionate means in January 2016. Id. at ¶¶ 66-92. To obtain the objective of
ousting Michael Cornell from the companies he founded, the Petitioners repeatedly made threats
falling within the definition of Penal Law 135.60, that they would publicize or cause to be
publicized accusations of wrongdoing by Michael Cornell, that would “ruin” Mr. Cornell, that
would cause him to become “damaged goods,” such that he “would never work in the industry
again.” Id. at ¶¶ 79, 83-84, 86; Weill Aff. These threats were made by a lawyer, Petitioner
Goldman, whom the Cornells had trusted for twelve years. Id. at ¶ 32-40.
To make matters worse (if that were possible), this law firm which the Cornells had
trusted to defend their interests in the negotiation of the LLC agreements that governed the
private equity fund enterprise, threatened to use against Michael Cornell its own breach of
fiduciary duty and malpractice, that rendered the management company PEP II to purportedly be
terminable at will, such that all of its accrued earnings for building the private equity enterprise
would be subject to forfeiture without recourse. Id. at ¶¶ 51-54.
In the original LLC agreement for the Propel Fund, there was no way to oust Mr.
Cornell’s company PEP II as the Manager of the Propel Fund without amending the LLC
agreement, and it was not possible to amend the LLC agreement without the consent of Mr.
Cornell and PEP II. Id. at ¶ 51-54. However, when a new large investor later entered the
enterprise, Petitioners either negligently or worse allowed nine words to be slipped into the 40-
page, single-spaced, 14,000-word LLC Agreement for the Propel Fund, that purportedly
rendered PEP II’s status as Manager terminable at will, which in turn would cause the forfeiture
of tens of millions of dollars of “carried interest” that PEP II had earned by creating the
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children’s toy enterprise. Id. at ¶¶ 55-65. Petitioners’ threat to use their own breach of duty
against him stood to cost Mr. Cornell approximately $35 million. Id. at ¶¶ 30, 85-86, 88-90.
In January 2016, Petitioners staged an ambush of the Cornell family, after secretly
arranging the lockout of Michael Cornell from his company’s offices. Id. at ¶¶ 76-77.
Petitioners then telephoned his 70-year-old father Alan Cornell in Florida, and demanded that he
travel to New York from Florida on a few hours’ notice to meet with them, stating that if his son
did not agree to leave all of the companies immediately on terms that Petitioner Goldman said he
would outline at the personal meeting, that his son’s career would be “ruined” by accusations
that Petitioners were prepared to publicize. Id. at ¶ 78-81. Petitioner Goldman and another
Kramer Levin partner confronted Alan Cornell with those accusations at a meeting Kramer
Levin’s offices in New York the following day. Id. at ¶ 82-86.
Even after Michael Cornell retained distinguished counsel to represent him (after
having been betrayed by lawyers he had trusted for years), Petitioners continued to make their
threats, and demanded that Mr. Cornell accede to their extorted terms between a Friday night and
the following Monday. Weill Aff.
Having made threats that fall within the definition of Penal Law Section 135.60,
and having relied upon their own breach of fiduciary duty that according to Petitioners, rendered
the Cornells’ control of the private equity enterprise terminable-at-will, Petitioners negotiated for
and obtained releases for themselves, which the Verified Petition makes quite clear these
Petitioners consider their legal right. Exhibit B at ¶ 18. Petitioners stated under oath that they
had obtained valid and effective releases of themselves as “attorneys,” and Petitioners even
boldfaced the word attorneys, so that their point could not be accidentally overlooked. Id. at ¶
18. Nowhere in their papers in this proceeding did the Petitioners even remotely suggest that
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they were prepared to give up the release rights that they swore they obtained.
ARGUMENT
I. PETITIONERS BROUGHT THIS PROCEEDING IN THE
WRONG COUNTY AND IT CANNOT PROCEED HERE
Article 75 of the CPLR 7502(a) contains special provisions for venue for
proceedings to stay arbitration, which supersede the other CPLR provisions regarding venue.
Travelers Indem. Co. of Illinois v. Nnamani, 286 A.D.2d 769, 770 (2d Dep’t 2001). When a
motion regarding venue is made at or before the time the answer is due, the respondent in a
special proceeding to stay arbitration is entitled to change venue as a matter of right. CPLR 511;
See D.M.C. Const. Corp. v. A. Leo Nash Steel Corp., 70 A.D.2d 635, 636 (2d Dep’t 1979) (it is
only when the venue motion is not timely served that there is discretion).
CPLR 7502(a) provides for a hierarchy of three, and only three, places where a
proceeding to stay arbitration may be brought. The first provision in the hierarchy provides for
venue in “the county specified in the agreement.” CPLR 7502(a)(i). That provision would only
apply here if the Petitioners acknowledged that they were signatories to the arbitration
agreement. Obviously, Petitioners cannot and will not do that, for to do so would moot their
Petition. In fact, the Verified Petition does not rely on the “specified in the agreement” venue
provision. Exhibit B at ¶ 6.
The second provision in CPLR 7502(a) provides for venue as follows:
If the name of the county is not specified, proceedings to stay or
bar arbitration shall be brought in the county where the party
seeking arbitration resides or is doing business, . . . . (Emphasis
added.) CPLR 7502(a)(i).
That provision does not support venue in New York County, because even the
Petition itself does not contend that any party seeking arbitration resides or does business in New
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York County. Exhibit B at ¶ 10-13.
The third provision in the hierarchy is contained in a separate paragraph, CPLR
7502(a)(ii), and expressly is limited to situations where neither the first nor the second venue
provisions of CPLR 7502(a)(i) apply:
If there is no county in which the proceeding may be brought
under paragraph (i) of this subdivision, the proceeding may be
brought in any county. (Emphasis added.)
There is nothing in CPLR 7502(a) that concerns whether the person seeking to
stay the arbitration is, or is not, a “party” to the arbitration or a “signatory” to the arbitration
agreement. The legislative history shows that it was the intent of the Legislature to provide
protection for the person seeking arbitration, because applications for stays are disfavored:
If no such provisions are contained in the agreement, then an
application to stay or bar arbitration is to be brought where the
party seeking arbitration resides or is doing business. Since stay
applications are disfavored, and impose additional costs over and
above the arbitration, such an application should be brought where
it will not impose undue hardship on the party seeking to arbitrate.
(Emphasis added.) New York Bill Jacket, 2000 S.B. 6672, Ch
226.
The Petition herein expressly relies on the third venue provision, contained in the
separate subsection CPLR 7502(a)(ii), alleging that the third provision applies because “there
exists no agreement to arbitrate between Kramer Levin and Respondents.” Exhibit B at ¶ 6.
However, there is simply no statutory basis for the use of CPLR 7502 (a)(ii), and it is contrary to
the legislative history. Petitioners are in effect asking the Court to read words into the statute
which are not actually there.
The Verified Petition admits that the first-named Respondent, Michael Cornell,
resides in New York. Id. at ¶ 10. Michael Cornell has verified the allegation in the Statement of
Claim that he resides in Westchester County. M. Cornell Aff; Exhibit A at ¶ 15.
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There thus exists a County in which a party seeking arbitration resides, and the
third venue provision for “no county” is not applicable. The CPLR allows for no discretion in
the matter of venue of a proceeding to stay arbitration. This case must proceed, if at all, only in
Westchester County.
II. PETITIONERS ARE EQUITABLY ESTOPPED FROM AVOIDING
THE ARBITRATION AGREEMENT
Petitioners are compelled to arbitrate under two-well accepted doctrines, arising
from common-law principles of agency and contract, that compel non-signatories to arbitrate
where they have either received a direct benefit from the arbitration agreement, or where they
acted as agents or as a mixture of agents and principals on their own behalves. What makes the
case so strong here, and what distinguishes it from situations where lawyers “merely” are
included in a general release, is that as shown in the Statement of Facts herein and in great detail
in the now-verified Statement of Claim, these Petitioners used threats that fall within the
definition of Penal Law 135.60, their own prior breach of fiduciary duty and malpractice, and the
fact that they were still counsel to the Claimants (or led them to believe they were), right up until
the day they set out to, and did, extort Michael Cornell’s ouster from the companies he founded.
A. Under Well-Established Law, Non-Signatories Can Be Compelled to Arbitrate
Petitioners beat a strawman for the first 15 pages of their Memorandum, citing the
general principle that non-signatories cannot ordinarily be compelled to arbitrate. That is not
and has never been the point. Respondents were quite clear in their Statement of Claim that
these Petitioners can be compelled to arbitrate under either of two well-accepted principles under
both federal and state law. And although New York law is congruent with federal law, under
controlling Court of Appeals law, it is the Federal Arbitration Act (“the FAA”) that applies here.
9 U.S.C. § 1 et seq; Cusimano v. Schnurr, 26 N.Y.3d 391, 399 (2015) (FAA applies so long as
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the type of activity has an effect on interstate commerce); Am. Bureau of Shipping v. Tencara
Shipyard S.P.A., 170 F.3d 349, 352 (2d Cir. 1999) (where estoppel applies to non-signatory to
arbitration agreement concerning commerce, FAA applies).
Case law under both the Federal Arbitration Act and New York law recognizes five
situations where non-signatories are estopped from avoiding arbitration agreements, based on
“common law principles of contract and agency.” McAllister Bros., Inc. v. A & S Transp. Co.,
621 F.2d 519, 524 (2d Cir.1980); Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 776
(2d Cir. 1995):
Those theories arise out of common law principles of contract and
agency law. Accordingly, we have recognized five theories for
binding non-signatories to arbitration agreements: (1)
incorporation by reference; (2) assumption; (3) agency; (4) veil-
piercing/alter ego; and (5) estoppel. (Emphasis added.)
Because these rules arise from common law principles, rather than the Federal
Arbitration Act itself, they are likewise recognized in New York. See CDC Capital Inc. v.
Gershon, 282 A.D.2d 217, 218 (1st Dep’t 2001) (acknowledging that “the recognized
common-law grounds for enforcing an arbitration agreement against a non-signatory” appear in
Thomson-CSF, S.A. v. American Arbitration Association, supra, 64 F.3d at 776.
Numerous Court of Appeals cases have applied those common-law grounds. TNS
Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998) (recognizing the “alter ego” rule
but declining to apply on the facts presented); Crawford v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 35 N.Y.2d 291, 300 (1974) (applying incorporation by reference rule to compel
arbitration); Hendler & Murray, P.C. v. Lambert, 67 N.Y.2d 831, 833 (1986) (applying
assumption rule to compel arbitration); Belzberg v. Verus Investments Holdings Inc., 21 N.Y.3d
626, 631 (2013) (recognizing the direct benefits rule but declining to apply it on the facts
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presented); Hirschfeld Prods., Inc. v. Mirvish, 88 N.Y.2d 1054, 1055 (1996) (recognizing the
agency rule to permit non-signatories to compel arbitration).
B. The Petitioners Are Compelled to Arbitrate Because They Themselves Swear
They Received a Direct Benefit from the Arbitration Agreement
Respondents’ Statement of Claim provided quite clearly that one of the two bases
to compel arbitration was that these Petitioners insist that they received the direct benefit of
releases for their own misconduct in connection with extorting the Separation Agreement.
Exhibit A at ¶ 12.
Petitioners acknowledge the direct benefit rule, but seek to avoid it by citing
irrelevant cases where New York courts found that the non-signatory received no “tangible
benefits.” Pet. Memo. 16. Petitioners then boldly declare that they have “not invoked,
exploited, or derived any benefit of any provision of the separation agreement to date. (Italics
original, underscoring added). Id. at 17. Essentially, the Petitioners’ entire argument against
the application of the direct benefit rule is that they have not had any benefit “to date,” the
operative words being “to date;” meaning that they have “not yet” used the release language that
they swear protects them against these claims.
The Verified Petition, however, made quite clear that these Petitioners actually
intend to invoke that direct benefit. Indeed, the Verified Petition so states, under oath. Exhibit B
at ¶ 18. This would be a different case if the Petitioners were denying under oath that they ever
received, or ever intended to utilize, that direct benefit. The fact that they have taken an oath
that they intend to utilize it renders their argument about not receiving any benefit “to date”
almost comical.
It is beyond genuine dispute that these Petitioners actually inserted contract
language for themselves, upon which they actually rely, for the proposition that they are released
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from any liability, in the document that they primarily drafted, which declares itself to be a
Separation Agreement and Release. The Verified Petition expressly relies on the language that
these Petitioners obtained, which they contend, under oath, applies to them:
Specifically, Mr. Cornell provided a release “on behalf of himself and
each of his heirs, representatives, predecessors, successors, assigns
and affiliates” to all “Company Releasees,” defined to include all
Parties and the Company Entities, and each of their “past and present
officers, directors, . . . representatives, investors, attorneys, . . . (and
those acting on their behalf in any capacity whatsoever). Pet. Memo.
at Exhibit B at ¶ 18. (Boldface in original.)
By their own swearing, the Petitioners have conceded that they themselves believe
they obtained a valuable legal right, as a direct result of the actual text of the contract, which
Petitioners took care to boldface in their Verified Petition. Their argument that they have not
received that direct benefit “to date” makes no more sense than someone who received a
promissory note for $100 million arguing that they did not receive any direct benefit because the
promissory note had not yet come due and might perhaps be uncollectible. Once a person
swears that they have obtained a valuable legal right as a result of language that they obtained in
an arbitration agreement that they co-drafted, there can logically be no more discussion of
whether they obtained a direct benefit.
The leading New York case on direct benefit is Belzberg v. Verus Investments
Holdings Inc., supra, 21 N.Y.3d at 631, which defined the “guiding principle” as follows: “The
guiding principle is whether the benefit gained by the non-signatory is one that can be traced
directly to the agreement containing the arbitration clause.” (Emphasis added.) Belzberg
distinguished situations where there were merely “attendant circumstances that proved
advantageous to the non-signatory,” which Belzberg said would be a test for what is “indirect.”
Thus, in Belzberg, the Court of Appeals found that the non-signatory’s appropriation of the
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profits in question to be an indirect benefit because it was not based on the text of the contract
itself: “Belzberg’s ability to divert those profits [was] . . . . certainly not based on the underlying
agreement between those parties.” Id. at 634. (Emphasis added.)
Obviously, a non-signatory who steps into the shoes of a signatory to obtain a
benefit is bound to arbitrate. HRH Const. LLC v. Metro. Transp. Auth., 33 A.D.3d 568, 569 (1st
Dep’t 2006) (purchaser expressly undertook predecessor’s obligations); Am. Bureau of Shipping
v. Tencara Shipyard S.P.A., 170 F.3d 349, 352 (2d Cir. 1999) (insurers of ship “stood in the
shoes” of shipowners). But even those cases are a lower level of “direct benefit” than what the
Petitioners themselves swear they received here. The “stand in the shoes” non-signatories were
bound by circumstances that only arose long after the contract was signed. The Petitioners here
rely on what they swear are valuable rights that they obtained at the moment that the contract
was signed.
Because both federal courts and the New York courts apply common law principles
of contract and agency to determine whether a non-signatory is bound, cases decided under the
common law of other states are equally persuasive. Here, the contract that Petitioners co-drafted
is controlled by Delaware law. Exhibit C at pp. 13-14. Delaware applies the same principles as
New York. Aveta Inc. v. Cavallieri, 23 A.3d 157, 182 (Del. Ch. 2010) (“A non-signatory to a
contract will be estopped from arguing that a dispute-resolution provision does not apply when
the non-signatory ‘consistently maintain[s] that other provisions of the same contract should be
enforced to benefit him.”)1 Here, Petitioners not only “maintain” that the release provisions of
the contract benefit them – they do so even under oath.
Petitioners’ argument that they have “not yet” acted upon the releases is also flatly
1 Aveta Inc. v. Cavallieri, supra, concerned a forum selection clause, but the principles involved are
identical.
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contrary to the law governing releases. Booth v. 3669 Delaware, 92 N.Y.2d 934, 935 (1998),
quoting Mangini v McClurg, 24 N.Y.2d 556, 563 (1969) (if a written release is valid, it is valid
immediately upon signing); McMahan & Co. v. Bass, 250 A.D.2d 460, 461 (1st Dep’t 1998) (“A
release is a provision that intends a present abandonment of a known right or claim.”) (Emphasis
added.)
Petitioners’ reference to the language about not creating rights in any “third-party
beneficiary” is irrelevant, because it is overcome by: (a) Petitioners’ own reliance on the actual
text of the contract, and (b) their own swearing that they were indeed intended beneficiaries of
the releases. Petitioners’ reference to limitation to “the parties” is further overcome by the
federal and state case law that when someone obtains a direct benefit as a result of an arbitration
agreement, they are estopped from denying that they are a “party” to the agreement.
C. The Petitioners Are Compelled to Arbitrate Because They Were Agents Acting
Unlawfully or Acting as a Mixture of Agent and Principal
Petitioners acknowledge the rule that agents can be compelled to arbitrate under the
five-factor test described above in Section A, which expressly includes “agents.” Pet. Memo.
20, citing, e.g., Hirschfeld Prods., Inc. v. Mirvish, supra, 88 N.Y.2d at 1056 (1996). See, e.g.,
Thomson-CSF, supra, 64 F.3d at 776. Petitioners’ argument is that the doctrine regarding agents
cannot be used against a non-signatory agent, and they cited cases where “mere” “agents of
disclosed principles” could not be compelled to arbitrate.
However, both as a matter of law, and on the evidentiary record in this proceeding,
this case presents a situation quite distinct from cases involving “mere” agents.
As noted throughout, the case law regarding compelling non-signatories to arbitrate
is based on common law principles of contract and agency. Under basic common law principles
of agency in New York “an agent for a disclosed principal still may be liable on a contract in
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place of the principal if (1) it acted outside the scope of its agency . . . 2) it acted fraudulently . . .
or 3) it clearly manifested its intention to bind itself instead of, or in addition to, its principal . .
.” Ariel Mar. Grp., Inc. v. Zust Bachmeier of Switzerland, Inc., 762 F. Supp. 55, 60 (S.D.N.Y.
1991) (internal citations omitted); Seguros Banvenez, S.A. v. S/S Oliver Drescher, 761 F.2d 855,
860 (2d Cir. 1985) (“an agent might be held liable if it acted outside the scope of its agency.”)
Under common law principles of agency, even where an agent is acting for a
disclosed principal, the agent himself is liable for his own wrongful acts. Katara v. D.E. Jones
Commodities, Inc., 835 F.2d 966, 972 (2d Cir. 1987); Powe v. Miles, 407