Matter of Shepotkin v Kordonsky (2007 NY Slip Op 50045(U))

Matter of Shepotkin v Kordonsky

2007 NY Slip Op 50045(U) [14 Misc 3d 1216(A)]

Decided on January 9, 2007

Supreme Court, Kings County

Demarest, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and will not be published in the printed Official Reports.

Petitioners Shepotkin and Karapetyan have petitioned this Court, pursuant to CPLR Article 78, to void the grievance findings against them which resulted in the termination of their rights as shareholders of Dial Car, Inc. (Dial) to receive radio transmissions through a car radio/satellite system directing the driver to transportation jobs ("radio rights"). Petitioners herein are also plaintiffs in a companion shareholder derivative suit (Boris Malkinzon v. Michael Kordonsky, Index No. 20932/06) also pending before this Court and allegations relevant to both actions are contained in the petition. However, since the derivative suit seeks different relief, the decision herein relates only to the Article 78 regarding the grievances. Petitions seek reversal and annulment of the decisions of the Grievance Committee, alleging that such determinations were arbitrary, capricious, in violation of due process, contrary to the procedure established in the By-Laws and intended to thwart and retaliate for petitioners' actions in initiating the derivative action.

By Order to Show Cause returnable September 13, 2006, petitioners sought a preliminary injunction enjoining the termination of their radio rights and the involuntary sale of their shares of Dial. Petitioners further sought consolidation of this Article 78 proceeding with an Article 78 brought by their fellow shareholder and co-plaintiff in the derivative suit, Boris Malkinzon, currently pending before another judge, and with the derivative suit pending before me. [*2]Consolidation of this Article 78 proceeding with the similar proceeding relating to a different person, in which another judge has already acted, is inappropriate and is denied. Consolidation of this Article 78 proceeding, seeking review of the grievance proceedings relating to the alleged actions of petitioners, with the derivative suit, charging respondents with violating their duty to the corporation, is also not appropriate and is further obviated by the decision herein.

Following argument upon the application for the Order to Show Cause, in which respondents' counsel participated, a TRO was issued staying the termination of petitioners' radio rights and the forced sale of their shares and directing that petitioners continue to receive driving assignments conditioned upon their compliance with the rules set forth in the "Grievances" provisions of Dial's Drivers Procedures and Rules (hereinafter "Rules").

Respondents opposed the preliminary injunction and have cross-moved to dismiss and for summary adjudication of the petition.

Respondent Dial is a co-operative "black car" transportation company which provides to its shareholders dispatching services through radio transmissions to drivers who respond to customers' requests at their own discretion. Each shareholder is limited to four shares and shares are sold in two-share units, each unit entitling the owner to receive signals to equipment installed in vehicles owned by the shareholders or their lessees. All shareholders/drivers are also subject to the rules of the Taxi and Limousine Commission. The individual respondents are officers and members of the Board of Directors elected to manage the company.

On August 7, 2006, following hearing, Petitioner Shepotkin was found guilty of a major violation of the Dial Rules for approaching the representative of a client at Pier 12 in Brooklyn to complain that he was getting assigned only short trips and grabbing a voucher from the client dispatcher's hands on July 3, 2006. By letter, the client representative, Floyd Banks, complained of this incident, which was also witnessed by fellow Dial driver Zeev Krimkevitch. Mr. Shepotkin was found guilty of jeopardizing an account, a violation of Major Offense "S" under Dials' Rules, and assessed a 45-day suspension. Upon subsequent review of prior violations sustained against Mr. Shepotkin including, on May 10, 2006, an anti-semitic discussion with a client, and on October 26, 2005, overcharging a client, among others, Mr. Shepotkin was terminated as permitted under the terms of the Shareholder's Agreement, Service Agreement and License Agreement signed by Mr. Shepotkin. Mr. Shepotkin did not avail himself of the arbitration provisions contained in section 15 of his Proprietary License Agreement for review of disciplinary findings, and did not appeal to Dial's Board of Directors. Petitioner Shepotkin was notified of the Grievance Committee's decision to terminate his rights and that, as a result, his shares and the attendant radio rights would be sold on September 1, 2006.

On July 31, 2006, a hearing was conducted regarding ten separate grievances against Petitioner Karapetyan alleged to have occurred within the prior two and a half months. The charges include two instances of a violation of Rule V, checking into a checkpoint though not present at such checkpoint, a Major Offense; six instances of violations of Rule J, spreading false and malicious lies and rumors about Dial's officers, directors and shareholders, a Major Offense, together with related accusations under Rule K, conduct or speech adverse to Dial's interests, Rule P, defacing or tampering with Dial property, and Rule CC, acts detrimental to the company, all Major Offenses under the Rules; and a violation of Rule 4, loitering in the dispatch room, a [*3]Minor Offense, which was not found to be sustained by the evidence. The charges under Rules J, K, P and CC all related to petitioner Karapetyan's publication of a cartoon depicting fellow shareholders "kissing the ass" of Respondent Kordonsky and his letters and conversations with other drivers accusing respondent Board members of bribery, stealing and corruption. Upon all of these offenses, except the charge of loitering in the dispatch room, Mr. Karapetyan was found guilty. He was assessed a 45 day penalty and, based upon his record, Mr. Karapetyan's Shareholder Agreement, and his Service and License Agreements were terminated. Petitioner Karapetyan was apprised of his right to appeal to the Board of Directors later the same day, but he failed to do so. He was subsequently notified by letter of August 23, 2006, that his shares would be transferred to a buyer acceptable to Dial on September 1, 2006.

Dial's By-Laws provide that "Every shareholder shall execute a shareholders contract ("Shareholders Agreement") outlining the rights and obligations of the shareholders and the company" (Art. II, §9). The Board of Directors is authorized to amend the Shareholders Agreement and "the shareholders shall accept all such amendments" (Art. II, §9). Article V, section 5 provides for a Grievance Committee "to conduct a fair hearing of all complaints against shareholders and their lessees", to be composed of a Chairman, who is also a Director elected by a majority of votes cast by the shareholders, and four members, also elected by the shareholders, plus an alternate appointed by the Chairman, none of whom are officers or members of the Board of Directors. The By-Laws also create an Ombudsman, who is not a member of the Board but must be elected by a majority of the shareholders, charged with receiving "concerns and/or suggestions from shareholders" and acting as a liaison between the shareholders and the Board. The Ombudsman is authorized to "represent the interests of all shareholders . . . at all grievance proceedings to ensure protection of their rights and the rights and interests of Dial Car, Inc." (Art. III, § 13 (b) (4)).

Pursuant to the By-Laws, the Rules Committee has formulated and promulgated the aforementioned Rules which define offenses and provide for the grievance procedure to be implemented by the Grievance Committee. There is no question that the procedure, as outlined in the Rules, was followed in both hearings at issue and with respect to all charges. Petitioners were properly notified at least 72 hours in advance of the hearing, granted requested postponements, and afforded a full opportunity to defend themselves. The Rules preclude representation by counsel but require the Ombudsman, if requested, to "represent the accused". The petitioners were afforded the opportunity to remove the Grievance Committee member of their choice, as provided in the Rules. The Rules expressly permit hearsay testimony at the discretion of the Chairman. The Chairman is authorized to determine the penalty, as provided in the Rules manual, giving "due consideration to the prior record of the party charged." Pursuant to the Rules, all of the Major Offenses charged against petitioners "constitute grounds for termination of a driver's Service Agreement."

be heard at the scheduled Board Meeting.

Immediately following the announcement of the Grievance Committee's findings, both petitioners were apprised of their rights to appear before the Board at a meeting scheduled later the same day. Petitioner Shepotkin refused outright, indicating his intent to "bring you all to the court" (Tr. of 8/7/06, p.16). Petitioner Karapetyan's response was equivocal, but he failed to avail himself of the appeal.

On May 5, 2004, both petitioners executed the Shareholders Agreement mandated by the By-Laws, initialing each page in addition to signing at the end of the document. The Shareholders Agreement does not confer upon the shareholder the right to receive dispatches via a radio pursuant to a contract with Dial. Such radio rights are granted only pursuant to a separate "Proprietary License Agreement" (the License) which entitles a shareholder to install the necessary equipment in a car and receive notice of requests for transportation services from Dial's customers. Yet another "Service Agreement" governs driving privileges which may be executed by a shareholder who wises to drive his own car or by a third party, approved by Dial, to whom the shareholder has leased his radio rights. The Service Agreement is optional within the discretion of Dial based upon a screening process and may be terminated by Dial "upon determining that Shareholder has failed to comply with any provision contained within the Agreement or any of Dial's rules and regulations as established by Dials' Rules Committee, or upon the determination of Dial's Grievance Committee, in its sole discretion, that Shareholder is no longer qualified to service Dial's customers, or that his continued affiliation as a driver is not in the Company's best interests." (Paragraph 3 (b)).

Pursuant to Paragraph 4 of the Shareholders Agreement, petitioners agreed to abide by all Rules and By-Laws. Paragraph 4 further provides:

In virtually identical language, both petitioners seek to avoid the effect of their duly-executed Shareholder Agreements claiming that such Agreements were executed under duress, in a darkened room without opportunity to review the terms thereof and that they would not have signed such Agreement if they had had full opportunity to examine its terms. Petitioners have also provided identical affidavits from other shareholders attesting to the truth [*5]of petitioners' argument. ^[FN1] In addition to disputing the alleged circumstances of execution, respondents contend, and it is not controverted, that prior grievances have been prosecuted against petitioners under the terms of the Agreements in which no such complaints were made.

"[T]he law is well settled that a party seeking to repudiate a contract procured by duress must act promptly lest he or she be deemed to have elected to affirm it (see, Chalos v. Chalos, 128 AD2d 498; see also, Beutel v. Beutel, 55 NY2d 957; Sheindlin v. Sheindlin, 88 AD2d 930)." Dann v. Nisson Motor Co.,Ltd. 262 AD2d 444, 445 (2d Dep't, 1999); see also, Morad v. Morad, 27 AD3d 626 (2d Dep't, 2006). Having failed to act to rescind their Agreements prior to commencement of this Article 78 proceeding, the Shareholder Agreements signed by Petitioners on May 5, 2004, are binding upon them.

It is not disputed that the scope of Article 78 review is limited and that the court will not substitute its judgment for the decision of a governing body where proper procedures have been followed. See Nawaz v. State University, 295 AD2d 944 (4th Dep't, 2002) ("Judicial scrutiny of the determination of disciplinary matters . . . is limited to determining whether [the institution ] substantially adhered to its own published rules and guidelines for disciplinary proceedings so as to ascertain whether its actions were arbitrary or capricious."); Kendrick v. Watermill Beach Club, Inc., 8 Misc 2d 798, 802 (Sup. Ct., Suffolk Co, 1957) ("The court is not concerned with . . . the merits of the ultimate findings of the board. It is concerned with compliance with the by-laws in instituting the procedure . . ."). As noted, the undisputed evidence of written notices to petitioners and the recordings and transcripts of the hearings and documentary evidence admitted therein satisfy this Court that the proceedings were in full compliance with the By-Laws and all applicable Rules and Agreements.

Petitioners' arguments that the Ombudsman did not assist in their defense of the charges is unfounded. Based upon the language of the By-Laws, the Ombudsman's role is to act as a liaison and to ensure the integrity of the disciplinary process for the benefit of both shareholders and Dial. The Ombudsman was present at the hearings and urged petitioners to take advantage of their right of appeal. The complaints against petitioners were brought, not solely by Dial or the Board, but by other shareholders and customers and were supported at the hearings by live testimony, documentation and video tapes. Petitioners were afforded a full opportunity for cross-examination and to present a defense. Although petitioners pled not guilty, they subsequently acknowledged, implicitly or explicitly, that they had actually committed some of the acts charged. Specifically, petitioner Karapetyan acknowledged writing a letter and posting notices within the company premises attacking President Kordonsky and others as corrupt and dishonest, claiming that such activities are protected speech under the state and federal constitutions. It is well established, however, that such protection applies only to government [*6]action and not to private commercial enterprises. Shad v. Smith Haven Mall, 66 NY2d 496 (1985). No authority is cited which affords impunity from disciplinary consequences to an employee, albeit a shareholder, who publicly accuses corporate management of corruption or dishonesty. Harmon v. Matthews, 27 NYS2d 656 (Sup Ct, Bronx Co, 1941), cited by petitioners, is inapposite.

Respondents have moved to dismiss the petition herein on three grounds: that the Agreements executed by petitioners preclude judicial review of the proceedings before the Grievance Committee which "constitute final and binding arbitration"; that petitioners failed to exhaust their available remedies prior to instituting suit; and that petitioners have not demonstrated an entitlement to the relief requested upon the record before the Court. Respondents must prevail for all of the reasons cited.

The Contract to Arbitrate

The Proprietary License Agreements, signed and initialed by each of the petitioners on May 5, 2004, contain an arbitration provision (Paragraph 15) which states in relevant part:

Committee. Licensees of Dial maintain a self-imposed and self-regulated security committee ("Grievance Committee")

Agreement shall be submitted to binding arbitration administered by Dial's Grievance Committee in accordance with the rules set forth in the Drivers' Rulebook and by-laws.

subject to review by a court of law.

The Service Agreements executed by both petitioners on May 5, 2004, further provide (Paragraph 21 (a)):

or relating to Dial's rules and regulations and/or Shareholder-Driver's affiliation with Dial or termination thereof, shall be

procedures set forth in this Agreement.

Such provisions are binding and enforceable against petitioners. See CPLR § 7501; Nachman v. Jelelo, 25 AD3d 593 (2d Dep't, 2006); South Huntington Jewish Center, Inc.v. Heyman, 282 AD2d 684 (2d Dep't, 2001). Even the contractual waiver of judicial review may be effective to [*7]preclude litigation where it "is freely and knowingly made and not the product of coercion or duress." McEwan v. New York City Retirement System, 159 AD2d 238 (`1st Dep't, 1990); see also, Abramovich v. Board of Educ., 46 NY2d 450, 456 (1979); Harms v. Riordan-Bellizzi, 223 AD2d 624 (2d Dep't, 1996). However, it is unnecessary, upon this record and in light of petitioners' contentions that they signed the Agreements under duress, to decide the motion to dismiss on this ground alone.

Failure to Exhaust Remedies

Respondents further rely upon petitioners' undisputed failure to avail themselves of the right of appeal to the Board of Directors as provided in the Rules. It is well-established that the failure to exhaust available alternative remedies precludes the maintenance of an Article 78 proceeding. CPLR § 7801 (1); Plummer v. Klepak, 48 NY2d 486 (1979); Hammond v. Village of Elmsford, 8 AD3d 484 (2d Dep't, 2004).

Petitioners' contentions that an appeal to the Board of Directors would be futile is unavailing. Petitioners argue that the prosecution of the grievances against them was instigated by the Board in response to the derivative action in which petitioners appear as two of nine named plaintiffs. This contention is factually belied by the fact that most of the complaints at issue, as well as those previously determined, were initiated, not by Board members or even the Grievance Committee, but by other shareholders offended by the actions of Mr. Karapetyan and by Dial customers, such as a partner in the law firm of Jones Day who wrote a lengthy letter complaining of Mr. Shepotkin's persistent anti-semitic remarks in the course of transporting him to LaGuardia Airport, and Floyd Banks, the representative-dispatcher for US Gateway, who also complained of an altercation with Mr. Shepotkin. Moreover, no charges have been brought against six of the other seven plaintiffs in the derivative suit, other than Boris Malkinzon whose Article 78 proceeding (Index No. 22602/03) appears to have been initiated well prior to the institution of the pending derivative suit (Index No. 20932/06).

In order to establish that exhaustion of a remedy would be futile, it must be shown that there exists an unwillingness to consider the facts and/or that the outcome is predetermined. Beyah v. Scully, 143 AD2d 903 (2d Dep't, 1988); Pfaff v. Columbia-Greene Commun. College, 99 AD2d 887 (3d Dep't, 1984); see generally, Lehigh Portland Cement Co.v. New York State DEC, 87 NY2d 136 (1995). The Board of Directors is comprised of seven members, one of whom, Alan Fishman, as the Chair of the Grievance Committee, assessed the penalties and would be unlikely to alter his decision on appeal. Specific claims of self-dealing and corruption have been made respecting Dial's President and CEO, Michael Kordonsky. However, with respect to the other five elected members of the Board, notwithstanding petitioners' allegations of general corruption, there is no indication that the results of an appeal were predetermined.

" [I]t is not sufficient . . . merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers'" to establish the futility of seeking administrative remedies. Marx v. Akers, 88 NY2d 189, 199-200 (1996), quoting Barr v. Wackman, 36 NY2d 371, 379. More than mere conclusory allegations were required in Marx, a stockholder derivative suite, and in Bildstein v. Atwater, 222 AD2d 545 (2d Dep't, 1995), also a derivative suit, in order to establish the futility of making the required demand upon the Board prior to commencing suit. Here, where petitioners seek relief very specific to their personal [*8]circumstances through an Article 78, the need to demand compliance with the statutory pre-requisite to exhaust alternative remedies prior to commencing suit is particularly compelling. Petitioners have not met their burden to demonstrate the futility of such compliance sufficient to excuse their failure to do so. The petition must accordingly be dismissed.

Lack of Entitlement to Relief

Finally, as heretofore noted, upon review of the evidence, including the transcripts and tape-recorded hearings, this Court finds that petitioners were afforded a fair hearing in strict compliance with the procedures outlined in the Rules, the By-Laws and their Agreements. The evidence before the Grievance Committee clearly supports the findings of guilt.^[FN2] Together with the fact that findings were upon "Major Offenses" which alone warrant termination, the record of prior disciplinary action supports the determination to terminate both petitioners. Petitioner Shepotkin had had two prior findings and suspensions within seven months of the complaints that are the subject of this Article 78 proceeding. Petitioner Karapetyan's termination is justified by the fact that he had nine separate sustained complaints within a few months, all of which are challenged herein. Respondent Fishman explains in his affidavit that he also considered Mr. Karapetyan's prior disciplinary record going back to 1999, which, as Mr. Karapetyan notes, appears to violate the Rules which provide "History of major offenses shall remain in effect for a period of ONE (1) year . . ." . However, since under the Rules, each of the nine Major Offenses upon which Mr. Karapetyan was found guilty constitutes grounds for termination of the Service Agreement, his termination was not arbitrary or capricious or in violation of the established rules.

Respondents' motion to dismiss the Article 78 petition as to both Valentin Shepotkin (Car 440) and Armen Karapetyan (Car 99) is granted for the reasons stated herein.

In light of this disposition, it is unnecessary to determine the merits of petitioners' application for a preliminary injunction. The temporary restraining orders previously entered are hereby vacated. [*9]

The Article 78 petition is dismissed. All other requested relief is denied as moot.