Court Stays Lawsuit Pending Resolution of Prior Pending Arbitration

On July 31, 2020, Justice Borrok of the New York County Commercial Division issued a decision in CMBSW Group, LLC v. Inverness Counsel, LLC, 2020 NY Slip Op. 32525(U), staying a lawsuit pending the resolution of a prior pending arbitration, explaining:

The Defendants argue that a stay is appropriate because (i) the same conduct forms the basis of the claims asserted in the Arbitration as in the Complaint, (ii) the Defendants' liability in this action cannot be established without proving claims in the Arbitration, namely, whether Mr. Ghriskey breached any contractual or fiduciary obligations to the Plaintiffs, and (iii) the Plaintiffs should be estopped from relitigating Mr. Ghriskey's breach of contract and/or fiduciary duty in this action. In their opposition papers, the Plaintiffs argue that the Arbitration will not resolve the claims in this action against the Defendants and the Arbitration and this lawsuit do not have a complete identity of parties, claims, and damages. For the reasons set forth below, the Plaintiffs' arguments are unavailing.

Pursuant to CPLR § 2201, unless otherwise prescribed by law, a court may grant a stay of proceedings in a proper case upon such terms as may be just. It is within the sound discretion of the trial court to grant a stay in order to avoid the risk of inconsistent adjudications, application of proof and potential waste of judicial resources.

In this case, a stay is warranted. The First Department's decision in Oxbow Calcining USA Inc. v American Indus. Partners, 96 AD3d 646 [1st Dept 2012] is instructive. There, the plaintiff operated a calcining plant purchased through the entity GLC, which had an agreement with the Port Arthur Steam Energy LP (PASE) to process certain waste emissions through a steam plant. The plaintiff first initiated arbitration against PASE for breach of contract and related duties associated with the purported failure of PASE to make certain repairs to its pollution control system, for which the plaintiff paid approximately $6,000,000 to $9,000,000. The plaintiff then commenced an action against the former directors and controlling shareholders of GLC for fraud before and during the sale of its steam plant to PASE and for breach of fiduciary duty. The First Department held that a stay of the state court action pending arbitration was warranted because the arbitration statement of claims and complaint contained overlapping factual allegations and sought the same damages for the cost of the repair work. The Court explained that notwithstanding the lack of total identity of the parties, the arbitration could also dispose of or limit the issues to resolve in the action.

Here, similarly, the Defendants are not parties to the Arbitration. The statement of claim in the Arbitration and the Complaint contain nearly identical factual allegations and seek the same damages - i.e., $10,000,000. In particular, there exist overlapping issues of law and common questions of fact because Mr. Ghriskey's purported breach of contract and breach of fiduciary duty in the Arbitration are underlying elements of the Plaintiffs claims against the Defendants for alleged aiding and abetting breach of fiduciary duty and tortious interference with contract. Further, while Mr. Ghriskey' s purported breach of contract and/or breach of fiduciary duty are not dispositive elements of the Plaintiffs' claims for tortious interference or unfair competition, the Plaintiffs acknowledge that the underlying factual findings are nonetheless relevant to the resolution of these claims. Thus, the resolution of the Arbitration is likely to either limit or dispose of the issues in the present action.

In addition, because the Complaint alleges that Mr. Ghriskey conspired with the Defendants to steal the Plaintiffs' clients and to commit various wrongful acts, there is a significant risk of inconsistent findings of fact with respect to Mr. Ghriskey' s conduct should the Arbitration and this action proceed concurrently.

For the avoidance of doubt, to the extent that the Plaintiffs argue that any award in the Arbitration may have limited estoppel effects against the Defendants as they will not have had a full and fair opportunity to litigate the issues determined in the arbitration proceeding, this misses the point. While a finding of wrongdoing by Mr. Ghriskey may not be preclusive as to all issues against the Defendants, because mutuality of parties is not required, a defendant may preclude a plaintiff from relitigating an issue resolved against that plaintiff in an earlier arbitration with a different defendant. Therefore, because there are overlapping issues of law and common issues of fact in the Arbitration that are likely to limit or even dispose of the claims in this action, the Defendants' motion for a stay pursuant to CPLR § 2201 is granted.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.