DECISION + ORDER ON MOTION
ANDREA MASLEY, Judge.
On January 16, 2019, plaintiff Brent Satterfield initiated this action against VStock Transfer, LLC (VStock), a stock transfer agent which currently holds the shares of nonparty Co-Diagnostics, Inc. (CODX) at issue here, with a summons with notice, wherein plaintiff alleged:
Though not filed under Article 75 of the CPLR, this case was originally framed as one in support of arbitration, the forum being in either New York or Nevis-St. Kitts. To preserve the status quo, the court issued a preliminary injunction enjoining VStock from releasing the remaining CODX shares in its possession. (NYSCEF Doc. 47.) However, plaintiff has since filed a complaint in which he seeks damages, only, and mentions nothing of arbitration. (NYSCEF Doc. 11.)
Now before the court is plaintiff's motion sequence number 04, brought by OSC, to enjoin defendants America 2030 Capital, LLC (America 2030) and Bentley Rothschild Capital Ltd. Corp.
Plaintiff also filed motion sequence number 06 on March 15, 2019 to amend motion 04 to add America 2030 Capital Limited and Bentley Rothschild Financial LLC (collectively, Nevis Defendants) and Bentley Rothschild Investments, XYZ Corporation (1-10 fictitious names) and Val Sklarov to the court's TRO (NYSCEF Doc. 133) consistent with the complaint filed on March 13, 2019. (NYSCEF Doc. 130). On March 8, 2019, the court signed the OSC and directed service on the new defendants consistent with the CPLR. (NYSCEF Doc. 143). As of now, there are no affidavits of service filed with the court demonstrating that the Nevis Defendants were so served. Accordingly, this decision and order is directed to those entities that have been served with process.
Plaintiff is an inventor of a rapid DNA test used in the medical and agricultural industries and a founder of CODX to exploit his invention; CODX is one of several start-up companies plaintiff had been involved in. (NYSCEF Doc. 130, Complaint ¶ 5; NYSCEF Doc. 164, Satterfield Aff of Direct Testimony, April 19, 2019 [4/19/19 Aff] at ¶¶ 5, 6.) Plaintiff is an officer and director of CODX, and its Chief Technology Officer. (Id.) CODX is traded on the NASDAQ, having gone public on July 12, 2017. (4/19/19 Aff at ¶ 7.) Plaintiff received 2.3 million restricted shares of CODX as part of the public offering. (Id.) The restriction arises from SEC Rule 144 (17 CFR § 230.144), which restricts the sale of certain shares held by particular shareholders, such as insiders, as to amount, manner, and timing. The restriction on half of plaintiff's shares was to expire in December 2018. (NYSCEF Doc. 60, Satterfield Aff, February 9, 2019 [2/9/19 Aff] at ¶ 17.)
This action arises from the Master Loan Agreement (MLA), providing for a $1.5 million "Non-Recourse Title Transfer Loan" from America 2030, executed by plaintiff, the borrower, on March 30, 2018 and Val Sklarov, as managing member of America 2030,
An April 3, 2018 addendum increases the amount of the loan to $3.5 million and reassigns voting rights to plaintiff. (NYSCEF Doc 62, at pp. 1-2, §§ I, II [d].) A November 30, 2018 addendum amends the MLA to assign the loan to America 2030 Capital Limited, a Nevis corporation, and identifies Bentley Rothschild Capital Limited of Nevis as a second assignee which is also in possession of shares of CODX held by VStock "awaiting 6 month time frame for removal of restriction legend as a result of its acceptance of transfer of shares to it." (NYSCEF Doc. 62 at p. 3, § I [e]; see also id. at § I [c], [d].) The arbitration provision was also amended to provide for arbitration of the "existence, validity, interpretation and resolution" of the agreement in St Kitts & Nevis with the law of the United States governing. (Id. at p. 4, § I [a].) There is also a May 29, 2018 addendum clarifying that plaintiff's pledge of 2,269,795 shares was not intended to establish defendants as "affiliates" of plaintiff as exemplified by "reassigning voting rights back to [plaintiff]," thus avoiding SEC Rule 140. (Id. at pp. 9-10.)
The closing was set for December 15, 2018. (2/9/19 Aff at ¶ 18; NYSCEF Doc. 63, Closing Agreement.) On December 26, 2018, plaintiff received a disbursement of $66,709. (2/9/19 Aff at ¶ 20.) On December 27, 2018, Sklarov issued a "margin call." (NYSCEF Doc. 102.)
Defendants sold through Bank of New York 10,760 shares on December 13, 2018; 28,800 shares on December 14, 2018, before plaintiff signed the MLA; and continued selling until a total of 905,926 shares were sold by January 22, 2019, 37,315 of which were sold on January 18, 2019, the same day that this court issued the VStock TRO. (4/19/19 Aff at ¶ 60.) 70,321 were sold on January 22, 2019, after the court had issued the TRO enjoining Defendants. (Id.; see also NYSCEF Doc. 41.) Meanwhile, the CODX price, which was at a high of $5.28 on June 5, 2018, dropped from $2.1509 on December 13, 2108 to $1.0824 on January 22, 2019. (See https://finance.yahoo.com/quote/CODX?p=CODX&.tsrc=fin-srch-v1 [submitted by Defendants but not filed in NYSCEF].)
In motion sequence number 01, filed by OSC on January 17, 2019 at 1:39 p.m., plaintiff moved for an injunction preventing VStock from selling, transferring, assigning, encumbering or otherwise disposing of any shares of CODX. (NYSCEF Doc. 11.) The court signed the TRO enjoining VStock but directed additional service of the TRO on America 2030 because its interest in trading CODX would be affected by the TRO against VStock. Accordingly, the preliminary injunction against VStock was served with supporting papers at the office of America 2030 on January 18, 2019 at 2:38 p.m. by hand delivery to Shalonda M. White, a secretary. (NYSCEF Doc. 26.) It was also served by Federal Express (tracking no. 774250478926) on January 22, 2019 at 9:42 a.m. (NYSCEF Doc. 75.) VStock did not appear on the return date and did not oppose the motion for a preliminary injunction which was granted on the record at argument on January 23, 2019; however, counsel for Defendants were present and thus aware of the TRO granted against VSTOCK. (NYSCEF Doc. 161, Tr. at 2:8-24.) A written order issued February 4, 2019. (NYSCEF Doc. 47.)
On January 18, 2019, plaintiff filed an amended summons with notice adding Defendants. (NYSCEF Docs. 19, 20.) Simultaneously, plaintiff filed motion sequence number 02 by OSC for a TRO enjoining Defendants from selling, transferring, assigning, encumbering or otherwise disposing of any shares of CODX. (NYSCEF Doc. 41.) Consistent with the court's rules, on January 18, 2019 at 1:53 p.m., plaintiff's counsel notified America 2030 by email and stated that plaintiff would be seeking a TRO enjoining Defendants from selling shares of CODX. (NYSCEF Doc. 35.) At 3:23 p.m. the same day, Steven Roberts, Esq. responded by leaving a voicemail for plaintiff's counsel, admitting receipt of plaintiff's email notice. (See NYSCEF Doc. 90.) In addition, plaintiff provides documentary evidence of the relationship between Defendants and Roberts who gave an opinion letter on behalf of Defendants, dated January 18, 2019, identifying the seller of the CODX shares as Bentley Rothschild Financial, LLC, which includes the Seller's Representative Letter signed by Sklarov on behalf of Bentley Rothschild Financial LLC to VStock requesting that VStock lift the trading restriction on the CODX shares. (NYSCEF Doc. 65.)
The court signed motion sequence number 02 with the TRO and directed service consistent with the CPLR. The TRO with the amended Summons with Notice was hand delivered to Defendants on January 22, 2019 at 2:40 p.m. (NYSCEF Docs. 27, 28.) The TRO against America 2030 was also sent by Federal Express (tracking no. 77423882493) to America 2030 at a Georgia address and delivered there on January 23, 2019 at 3:03 p.m. (NYSCEF Doc. 76.) It was also returnable on January 23, 2019. Defendants' counsel was present with the court granted the motion for a preliminary injunction on the record. (NYSCEF Doc. 112.)
On January 18, 2019, America 2030 Capital Limited, Nevis, issued plaintiff a notice of default. (NYSCEF Doc. 103.) Specifically, Sklarov listed plaintiff's failure to comply with the December 27, 2018 margin call. In addition, Sklarov asserts that plaintiff violated the MLA when he tendered CODX shares in April 2018 which were restricted.
America 2030 Capital Limited (Nevis) and Bentley Rothschild Capital Limited (Nevis) initiated arbitration in Nevis. The application, signed by Sklarov and dated January 20, 2019, is stamped "The Arbitrator received January 21, 2019." (NYSCEF Doc. 66.) In the application, claimants object to plaintiff's filing of this action as an interference with their ability to dispose of the securities but fail to assert what relief is sought. Though Defendants deny "awareness" of the TROs until January 22, 2019, (NYSCEF Doc. 71, Defendants' memo of law at p. 2), Claimants reference this action in the Nevis arbitration application dated January 20, 2019. (NYSCEF Doc. 66.)
Defendants' demand for a complaint is dated January 24, 2019. (NYSCEF Doc. 108.)
On February 8, 2019, plaintiff filed motion 03 for contempt. (NYSCEF Doc. 48.)
Another Nevis arbitration application is stamped "The Arbitrator received February 4, 2019" with America 2030 Capital Limited (Nevis) and Bentley Rothschild Capital Limited (Nevis) as claimants 1 and 2 respectively, and Sklarov as claimant 3. This application, dated February 2, 2019, is executed three times by Sklarov, individually, and as operations manager of claimants 1 and 2. (NYSCEF Doc. 68.) The claimants allege plaintiff's defamation of the claimants arising from statements in documents filed in this action. (NYSCEF Doc. 66.)
On February 11, 2019, Salman Ravala, Esq. filed a notice of appearance which states that he is designated to accept service of pleadings and papers in this litigation for defendants America 2030 and Bentley Rothschild Capital Ltd. Corp. (NYSCEF Doc. 70.)
On February 11, 2019, plaintiff filed motion 04 by OSC, seeking to stay the arbitration in Nevis as amended by 06. (NYSCEF Doc. 59, 143.)
On March 4, 2019, Defendants filed a cross motion pursuant to CPLR 7503 (a) to compel arbitration and dismissing or otherwise denying plaintiff's OSC, motion 04, to stay arbitrations filed February 10, 2019. (NYSCEF Doc. 91.)
On March 7, 2019, Defendants filed motion sequence number 05 to dismiss the action for failure to serve a complaint. (NYSCEF Doc. 105.) Plaintiff cross-moved for time to serve. (NYSCEF Doc. 129.)
On March 13, 2019, the court heard argument on the pending OSCs and directed expedited discovery and a hearing on contempt and whether the second arbitration provision was permeated with fraud.
On March 20, 2019, Sklarov wrote to Dolphin Financial explaining that America 2030 is a UK entity, and thus, not subject to this court's order. (Plaintiff's 6B at the April 22, 2019 hearing, email from Skarov to Dolphin Financial [not filed in NYSCEF].)
Plaintiff filed a complaint dated March 13, 2019 alleging (1) fraud against Sklarov; (2) aiding and abetting fraud against Sklarov defendants;
Certainly, arbitration is favored over litigation, especially where the arbitration provision is broad, as it is here. (Matter of Weinrott (Carp), 32 N.Y.2d 190  [for discussion of language evidencing scope of arbitration clauses].) New York's "CPLR arbitration provisions (CPLR 7501 et seq.) evidence a legislative intent to encourage arbitration," and serve as the basis for the strong federal policy favoring arbitration in the cases relied upon by defendants. (Id. at 199.) Accordingly, the only issue reserved for the court is whether the parties have agreed to arbitration. (Matter of Kennelly v Mobius Realty Holdings LLC, 33 A.D.3d 380 [1
Here, plaintiff argues that the MLA and its amendments are permeated with fraud, and thus, he has not agreed to arbitration. "To demonstrate that fraud permeated the entire contract, it must be established that the agreement was not the result of an arm's length negotiation, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme" (Markowits v Friedman, 144 A.D.3d 993, 997 [2d Dept 2016] [internal quotation marks and citation omitted].) Here, plaintiff alleges both. However, "where a party to a contract containing an arbitration agreement or clause, with knowledge of alleged fraud or misrepresentation affecting the contract, affirms the validity of the contract by accepting the benefit of a material provision thereof or by taking or participating in an action or proceeding to enforce a claim or right existing by virtue of the contract, he is precluded from avoiding the arbitration agreement or clause on the basis of the alleged fraud or misrepresentation." (Housekeeper v Lourie, 39 A.D.2d 280, 282-283 [1
Plaintiff does not deny he executed the MLA and received $60,000 pursuant to it. Plaintiff also asserts red flags, that may evidence fraud or misrepresentations. (4/19/19 Aff at ¶¶ 10, 15, 19, 26, 28, 34, 35.) The question is whether these flags were enough to give plaintiff knowledge of fraud and misrepresentation affecting the MLA or the addendums. If so, plaintiff could not avoid the arbitration provision and whether the MLA, the addendums, or the arbitration provision are permeated with fraud would be arbitrable. (Housekeeper v Lourie, 39 AD2d at 283.) The question is which arbitrator, New York or Nevis.
Defendants assert that the November 30, 2018 addendum puts the arbitration in Nevis. Plaintiff objects that he did not agree to the Nevis arbitration because the November 30, 2018 addendum and its arbitration provision are also permeated with fraud. Plaintiff may challenge his agreement to one arbitration provision even if he agreed to a prior arbitration provision. (See Kennelly, 33 A.D.3d 380 [defendant agreed to two prior agreements but specifically objected to third agreement].) The question is whether plaintiff accepted the $60,000 knowing that the MLA, the addendums or both were affected by fraud or misrepresentation.
The virtues of arbitration are speed and finality. (Matter of Weinrott (Carp), 32 NY2d at 198.) Here, an immediate hearing to determine whether the arbitration proceeds in Nevis or New York furthered those purposes. (See Oberlander v Fine Care, 108 A.D.2d 798 [2d Dept 1985] [an evidentiary hearing is necessary to resolve the issue of whether the entire agreement including the arbitration provision is permeated with fraud].) Accordingly, the court held a hearing on April 22 and 24, 2019 at which plaintiff testified and submitted documentary proof to support his claim that the November 2018 addendum, specifically the Nevis arbitration clause, was permeated by fraud. Defendants' attorney was present, but failed to present any evidence on the issue.
Plaintiff seeks a preliminary injunction enjoining Defendants from participating in the Nevis arbitrations. A preliminary injunction is a "drastic remedy." (Edgeworth Food Corp. v Stephenson, 53 A.D.2d 588, 588 [1st Dept 1976].) Before a court may issue a preliminary injunction, the movant must establish (1) a likelihood of success on the merits of the action, (2) the danger of irreparable harm in the absence of a preliminary injunction, and (3) a balance of equities in favor of the moving party. (Gliklad v Cherney, 97 A.D.3d 401, 402 [1st Dept 2012] [citations omitted].)
Plaintiff testified that he is a bioengineer and experienced inventor, but financially naive. (4/19/19 Aff at ¶ 5.) When he decided to use his CODX shares as collateral for a loan of $500,000
Plaintiff may be irreparably harmed if his CODX shares are transferred or removed from the jurisdiction. Money damages may not be calculable if the price of CODX shares is artificially depressed by the sale of a large number of shares. (See https://finance.yahoo.com/quote/CODX?p=CODX&.tsrc=fin-srch-v1.) Further, trading history evidences a thin market for CODX shares and volatile prices.
Finally, the balance of equities favors plaintiff because Defendants failed to identify any equities favoring them. Defendants' only argument in opposition to motion 04 is that the Nevis arbitration and the MLA arbitration provision preclude this court from exercising jurisdiction. (NYSCEF Doc. 92). In light of the MLA's New York arbitration provision, the court has authority to maintain the status quo. However, a court order directing the parties to arbitration before AAA must await the court's resolution of Defendants' motion to dismiss.
Accordingly, it is
ORDERED that motion 04 is granted and defendants America 2030 Capital, LLC, Bentley Rothschild Capital Ltd. Corp, and Val Sklarov are enjoined from participating in the Nevis arbitration until further order of this court; and it is further
ORDERED that plaintiff shall file an undertaking of $10,000; and it is further
ORDERED that the parties are directed to file trial exhibits and transcripts not already filed in ECF.