By order to show cause, dated the 13th day of September, 2006, the plaintiffs petitioned this court for an order to 1. have issues of fraud alleged by the plaintiff resolved at trial, pursuant to CPLR §3126(1); 2. preclude the defendants from offering evidence upon the trial of this action pursuant to CPLR §3126(2); 3. strike out the defendants' affirmative defense that an arbitration agreement prevents this court from exercising jurisdiction, pursuant to CPLR §3126(3); and, 4. have the defendants held in contempt for defying this court's January 18, 2006 order, pursuant to Judiciary Law §753(1).

To assist it with regards to the fraud issue, this court (by order, dated the 16th day of December, 2005) had appointed an auditor to review the accounts of Acqua Salon Systems, Inc. and Delacqua Salon, Inc. in the conduct of said businesses.

On September 28, 2006, the defendant's attorney requested substitution of the court appointed auditor due to ". . .the pattern of non-response to my correspondence and phone calls, the wrong information delivered by his office to my law clerk. . .the fact that Mr. Howard [the auditor] communicates more effectively and frequently with my adversary, and the instance of un-received correspondence from his office to mine. . ." Concomitant with that request, counsel noted that the defendants had supplied plaintiff with monthly reports of the accounts of Acqua Salon Systems, Inc. up to and including June 2006, with the proviso that the defendants had engaged a new accountancy firm which was not yet up to speed with the defendants' accounting systems; however, the defendants would be able to produce up to date reports within one month.

The plaintiffs are the parents-in-law of the individual defendant. Hearing testimony adduced that the Mesrs. Bederoff and Shmulevich had entered into an agreement whereby the plaintiffs would invest money ($110,000.00) and the defendant would contribute his business acumen and contacts to develop Acqua Salon, Inc. into a fully operational beauty salon. Mr. Bederoff contends that he did make pecuniary contributions to the enterprise as well; to wit, $57,000.00 in cash, $70,000.00 in product, initially, followed by $48,000.00 in 2004 and $65,000.00 in 2005.

In dispute are the actual monetary amounts contributed by the defendant, whether his exclusion of the plaintiffs from the business was warranted, and to what extent, if at all, he has [*2]made a proper allocation of disbursements and profits, if any, between the parties. Mrs. Shmulevich, who represents herself as an "experienced business woman, being a graduate engineer and manager of a retail travel business[,]" contends that she was an employee of the beauty salon who has been deprived of her earned remunerations, which were to be determined once the business turned a profit, and is therefore entitled to payment on a quantum meruit basis in the amount of $100,000.00. This contention is disputed by Mr. Bederoff who asserts that she had no prior experience in the salon business, was providing no salon business, and was there solely for the purposes of "learning the business and giving her something to do." In any event, he asserts that a seasoned hair salon manger only earns between $22,000.00 to $27,000.00 per annum. Defense counsel adds that such a claim should be barred under the doctrine of laches, dismissed for failure to state a cause of action as per CPLR §3211 (a )(7), or stayed pending the completion of arbitration since Mrs. Shmulevich, though alleging that she began her employment on June 2, 2002 and was forced out on July 6, 2003, did not assert her claim until on or about July 26, 2004. Counsel argues that "[t]his inexplicable lapse in time will serve a tremendous detriment on the defendant corporation should Mrs. Shmulevich be allowed to proceed at this late stage. Had defendant corporation had any notification of her intention to pursue a claim that she was in fact employed, at the very least, it would have availed itself of the necessary precautions regarding the filing of federal and state taxes on her behalf, at the relevant time, in addition to various other accounting provisions, whether or not her claim was valid, which it is not."

It is Mr. Bederoff's position that the Shmuleviches became disruptive in the conduct of the business, to staff and clients alike, and were therefor barred from the premises. Mr. Shmulevich thereupon took possession of the then corporate books, which recorded the first nine months of the business' operation. It is also to be noted that in response to a request by the Shmuleviches attorney for inspection of the corporate books on April 1, 2004, Mr. Bederoff through his attorney had indicated that the same had been stolen in the course of a recent robbery at the business premises. Mr. Shmulevich also asserts that he terminated the three corporate credit card accounts utilized by the business on the ground that Mr. Bederoff was appropriating the same for his personal use. That stoppage, according to Mr. Bederoff, resulted in the corporation losing its buying power and reductions in the business revenue and average weekly dividends (of approximately $1,500.00) paid to Messrs. Bederoff and Shmulevich.

There is the added confusion in the within matter that Acqua Salon, Inc., owned fifty (50%) percent by the plaintiff, Ilya Shmulevich, and fifty (50%) percent by the defendant, commenced operations under the assumed name Delacqua Salon. The defendant, Mr. Bederoff, is one-hundred (100%) percent owner of an entirely separate entity known as Delacqua Salon, Inc., which is engaged in the wholesale of beauty products and holds the lease to the second and third floors of the same premises wherein Acqua Salon, Inc. (d/b/a Delacqua Salon and/or Delacqua) leases the first and basement floors. The Schmuleviches contend that Mr. Bederoff has siphoned off the profits of Acqua Salon, Inc. (d/b/a Delacqua Salon and/or Delacqua) to Delacqua Salon, Inc., which Mr. Bederoff now claims to be defunct.

At present there are in place two injunctions designed to maintain the status quo. One bars the Shmuleviches from entering the business site. The other refrains Mr. Bederoff from transferring any business assets and requires him to furnish bi-monthly accountings of the [*3]business to the Shmuleviches' attorney (which accountings he claims are delayed by the running of the business and, therefore, should be reduced to a monthly reporting requirement).

Mr. Bederoff also posits that his shareholders' agreement with Ilya Shmulevich requires that any disputes in the matter sub judice be submitted to arbitration. Ilya Shmulevich argues that Mr. Bederoff's rampant fraud obviates the need therefor; i.e., that he never agreed to arbitrate the issues of fraud, corporate waste, or the unilateral takeover of this corporation by Mr. Bederoff. In addition, Ilya Schmulevich asserts that Mr. Bederoff's operation of Delacqua Salon, Inc. violated their agreement's restrictive covenant not to compete in any entity in the same or similar business within an eight mile radius for four years. Furthermore, the agreement contained an unconscionable clause that required Mr. Shmulevich, as director or shareholder, to vote in favor of Mr. Bederoff.

In short, Ilya Shmulevich requests that this court issue an order enabling him to enter the business premises to examine the books, records, and bank records thereof; that his name be reinserted on the corporate bank account; and that his causes of action for fraud, misappropriation, and failure to pay (Mrs. Shmulevich) be placed on the trial calendar upon the filing of a note of issue.

Mr. Bederoff's counsel, however, insists that arbitration is mandatory herein inasmuch as "a written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award." (Citing CPLR §7501). In addition, CPLR §7503 requires a stay of court proceedings when the issues therein are subject to a valid arbitration agreement.

In Kennelly v. Mobius Realty Holdings, LLC, 33 AD3d 380, 822 NYS2d 264, wherein a petitioner claimed to have been duped into signing an agreement to arbitrate brokerage fees as to a particular parcel of land, the Appellate Division, 1st Department held that "[i]f the petitioner did not sign the. . .agreement he cannot be compelled to arbitrate respondent's claim; even if the signature is genuine, an issue is present regarding whether the. . .agreement was permeated with fraud, such that the arbitration clause would fall with the rest of the agreement." Referenced in this ruling are the holdings in Matter of Weinrott [Carp], 32 NY2d 190, 344 NYS2d 848 and Matter of Silverman [Benmor Coats, Inc.], 61 NY2d 299, 473 NYS2d 774, which make it clear that a broad arbitration clause requires the submission to the arbitrator questions of fraud in the inducement, except as related to the arbitration clause itself, any specifically exempted matters, or as the alleged fraud can be shown to permeate the entire contract. In other words, since an arbitration provision of a contract is separable, the agreement to arbitrate is valid even if the substantive portions of the contract were induced by fraud.

Injunctive relief will not lie where there is an adequate remedy at law (See Nassau Roofing & Sheet Metal Co. v. Facilities Dev. Corp., 70 AD2d 1021); hence, a preliminary injunction requires that its seeker demonstrate the likelihood of success on the merits; irreparable injury absent the granting of preliminary injunction; and a balancing of the equities (See W.T. Grant Co. v. Srogi, 52 NY2d 496, 438 NYS2d 761; Nassau, Supra; Tucker v. Toia,

54 AD2d 322; Albini v. Solork Assoc., 37 AD2d 835). In balancing the equities, the court must determine whether the "...irreparable injury to be sustained by the plaintiff is more burdensome to it than the harm caused to the defendant through imposition of the injunction (See Edgeworth [*4]Food Corp. v. Stephenson, 53 AD2d 588).

By letter, dated November 15, 2006, the auditor appointed herein concluded that ". . .an audit in accordance with generally accepted auditing standards cannot be performed of the two corporations. The lack of inventory and costs of goods sold records makes it impossible to audit the costs of goods sold and expenses of the wholesale business. . . .also, the accounting records were not prepared in accordance to the minimum requirements of generally accepted accounting standards. . . .Books records were not closed on a fiscal period basis. . . . the information is not clearly classified and identified." The auditor detailed some of the problems; to wit, 1. Accounting records show cash salaries in 2002. Tax returns for that year show no salaries. 2. As of May 2003, $114,292.65 was reported in cash salaries. The tax return for 2003 only shows cash salaries of $7,842.00. 3. $62,305.00 in additional cash sales was reported on the 2002 tax return as opposed to the accounting records for that year. 4. No sales records to substantiate $560,674 for Delacqua Salon and $1,364,988 for Acqua Salon System, Inc. in the 2003 tax returns. 5. Numerous cash withdrawals and personal expenses paid out of business for Mr. Bederoff. 6. Sales revenue in accounting records not traceable to bank statements.

In light of the preceding, it would appear that the subject businesses Delacqua Salon, Inc. and Acqua Salon, Inc. have been utilized by the defendant for his personal use, without regard to the sharing of profits as had been the parties' understanding. It may well be that the defendant has not only defrauded his business partner but governmental tax authorities as well. This appearance indicates that the equities of this case would tend to lie in favor of the plaintiff who has a strong likelihood of winning on the merits. This is certainly not the case for the defendant. What neither side has established, however, is an instance of irreparable injury for which there is no adequate legal remedy (i.e., money damages). Accordingly, both sides must be denied injunctive relief.

In addition, even if there were a claim of fraud in the inducement in the within matter (which there was not), since there is no clear and convincing proof of permeation with fraud (in the agreement) such as would invalidate the entire agreement, the matter (i.e., issues of fraud [in conduct] and misappropriation) must proceed to arbitration.

In the interim, it would seem to this court that the prudent thing would be the appointment of a receiver; however, inasmuch as neither side has so requested, this court is not in a position to so direct. Afterall, the Appellate Division, Second Department has determined that the extraordinary remedy of the appointment of a receiver is an improvident exercise of discretion where ". . .the complainant did not seek the appointment of a receiver, and no party ever requested such relief (see Natoli v. Milazzo, 35 AD3d 823 [2006]; Rotary Watches (USA), Inc. v. Greene, et al., 266 AD2d 527, 699 NYS2d 106 [1999]; and, Matter of Breiterman v. Chemical Bank, 181 AD2d 675, 580 NYS2d 463).

Insofar as the issue of any wages due to Mrs. Shmulevich is concerned, this court is unpersuaded by the arguments of prejudice advanced by the defendant in support of his laches claim. In addition, since Mrs. Shmulevich's wages were not a part of the subject agreement, it is not an arbitrable dispute and must therefore proceed to trial.

Therefore, plaintiff's requests to have issues of fraud alleged by the plaintiff resolved at trial, pursuant to CPLR §3126(1), and to strike out the defendants' affirmative defense that an arbitration agreement prevents this court from exercising jurisdiction, pursuant to CPLR [*5]§3126(3) are denied. Plaintiff's additional demands to preclude the defendants from offering evidence upon the trial of this action, pursuant to CPLR §3126(2), and to have the defendants held in contempt for defying this court's January 18, 2006 order, pursuant to Judiciary Law §753(1), are denied as moot.

This constitutes the decision and order of this Court.

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Hon. yvonne lewis