Petitioner James C. Witham ("Petitioner") seeks a preliminary injunction in aid of arbitration pursuant to CPLR 7502(c) to enjoin Respondents VFinance Investments, Inc. ("VFinance") and National Financial Services, LLC ("NFS") (collectively "Respondents") from the sale or other disposition of Petitioner's common stock in AquaCell Technologies, Inc. ("AquaCell") held in a brokerage margin account with VFinance.

Traditionally, the Courts, in considering provisional remedies pursuant to CPLR 7502(c), looked exclusively to whether the arbitration award would be ineffectual without the grant of an injunction. In Natl. Telecom. Assoc. v Natl. Communications Assoc. (189 AD2d 573, 573 [1st Dept 1993]), the court held that irreparable harm and a likelihood of success on the merits are an inappropriate standard for deciding a motion for preliminary injunction pursuant to CPLR 7502(c) because the only grounds for such a motion is whether the award may be rendered ineffectual without it. (See also H.I.G. Capital Management, Inc. v Ligator, 233 AD2d 270, 271 [1st Dept 1996] (holding that the courts may issue a preliminary injunction in aid of arbitration "but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. This is the sole applicable standard."); County Natwest Sec. Corp., USA v Jesup, Josephthal & Co., 180 AD2d 468, 469 [1st Dept 1992]; Drexel Burnham Lambert Inc. v Ruebsamen, 139 AD2d 323, 327-328 [1st Dept 1988].) These cases support Petitioner's position that the sole applicable standard for a motion for a preliminary injunction in aid of arbitration is that the arbitration award would be ineffectual without the grant [*4]of such an injunction.

However, the Courts later began to consider the general criteria under Articles 62 and 63 for granting a preliminary injunction (likelihood of success on the merits, irreparable injury and a balance of the equities) in conjunction with the ground of an ineffectual award at arbitration under Article 75. In Matter of Cullman Ventures, 252 AD2d 222, 230 [1st Dept 1998], the court held:

"[W]e apply the general criteria governing the issuance of injunctive relief to an application for a preliminary injunction under CPLR 7502 (c) [citations omitted], and, on this record, petitioners have failed to demonstrate a likelihood of success on the merits, irreparable injury, or that the equities balance in their favor."

(See also New York City Off-Track Betting Corp. v New York Racing Assn., 250 AD2d 437, 440-441 [1st Dept 1998]; Koob v IDS Fin. Servs., 213 AD2d 26, 32-33 [1st Dept 1995].) Thus, Respondents' position that the traditional criteria for a preliminary injunction must be shown when applying CPLR §7502(c) also has support in New York law.

The United States Court of Appeals, Second Circuit noticed this ambiguity in New York case law, stating that:

"Notwithstanding [the decisions where the Appellate Court held an ineffectual arbitration award the sole ground under CPLR 7502(c)], New York caselaw is at best ambivalent about whether or not Section 7502(c) requires that traditional equitable criteria for the granting of temporary relief be met, and several cases hold or imply that Article 63 criteria must be applied to a motion under Section 7502(c)." (SG Cowen Securities Corp. v Messih, 224 F.3d 79, 82 [2d Cir 2000].)

Although the decisions of this Court vary on the applicable standard under CPLR 7502(c), (compare GBI Capital Partners, Inc. v Aivaliotis, 2001 WL881105 [Sup Ct, New York County 2001], with CanWest Global Communications Corp. v Mirkaei Tikshoret Ltd., 9 Misc 3d 845 [Sup Ct, New York County 2005]), we are bound by the most recent decisions of the Appellate Division, holding that the traditional elements of a preliminary injunction (irreparable harm, likelihood of success on the merits and a balance of the equities) are necessary in conjunction with a determination that the arbitration award would be rendered ineffectual without provisional remedies. (See e.g. Founders Ins. Co. v Everest Natl. Ins. Co., 41 AD3d 350, 350 [1st Dept 2007]; Erber v Catalyst Trading, LLC, 303 AD2d 165 [1st Dept 2003] ("the criteria for provisional relief set forth in CPLR articles 62 and 63 are not relaxed when such relief is sought in aid of arbitration pursuant to CPLR 7502 (c).").)

Therefore, an appropriate standard of review for granting a preliminary injunction in aid of arbitration for this court is, first, whether the arbitration award would be rendered ineffectual without injunctive relief. Then, the Court must consider: (1) likelihood of petitioner's success on the merits; (2) danger of irreparable harm to the petitioner if the preliminary relief is denied; and (3) a balance of the equities in the petitioner's favor. The burden of proof all of the elements rests with the petitioner.

Whether the Arbitration Award Will Be Rendered Ineffectual

As stated above, the first consideration for determining whether a preliminary injunction under CPLR 7502(c) should be granted is if the arbitration award would be rendered ineffectual [*5]without provisional relief. Petitioner argues that without provisional relief Respondents are permitted to do exactly what he seeks to prevent in Arbitration, transfer the stock in the Witham Account. Aside from the financial benefits of stock ownership, there are also corporate control rights associated. Petitioner argues, and the Court agrees, that control of the company through stock is an important aspect. The arbitration panel will determine who has rightful ownership of the stock, or portions thereof, in the Witham Account. If a transfer occurs prior to an arbitration determination of who rightfully has ownership of the stock, then the control of the company would be transferred prior to figuring out who has the rights to it. Thus, an arbitration award would be rendered ineffectual without provisional relief because Petitioner would lose the right to control his stock and the company through voting the shares, a right he would be unable to regain with an arbitration award in his favor.

Likelihood of Success on the Merits

A party moving for a preliminary injunction need not establish a certainty of success. (See Props for Today, Inc. v Kaplan, 163 AD2d 177, 178 [1st Dept 1990].) Rather, a prima facie showing of an entitlement to relief is sufficient. (See Parkmed Co. v Pro-Life Counseling, Inc., 91 AD2d 551, 553 [1st Dept 1982].) Respondents argue that Petitioner failed to make such showing. In particular, they argue that "[t]he only issue that Respondents need prevail on is the fact that they are authorized to sell the stock at issue" and "[t]he margin agreement executed by petitioner clearly gives Respondents this right." (Respondents' Affirmation in Opposition, ¶ 16.)

Petitioner does not dispute terms of contract, but rather argues that he was fraudulently induced into the contract. In the Arbitration complaint, Petitioner raises a number of causes of action. Among them he claims he was defrauded into transferring his AquaCell stock into the Witham Account, margining his shares and loaning the proceeds of the loan to Somerset; that CSC/NFS were aiding and abetting this fraud and thus that the margin agreement with CSC/NFS was an element in the fraudulent scheme.

Rescission of a contract may be granted when a party was induced to enter into it by fraud or misrepresentation. If Petitioner can establish fraud during the Arbitration proceedings, then the whole margin agreement would be void. This means that the claims of fraud, aiding and abetting fraud, and breach of fiduciary duty have an effect on Respondents' rights to liquidate the stock. Therefore, contrary to defendants' argument, Petitioner needs to show a likelihood of success on his arbitration claims in general.

Petitioner alleges that CSC/NFS either played an active role in the fraudulent scheme or, alternatively, aided and abetted the fraud and the breach of fiduciary duty. Petitioner alleges that a fiduciary relationship developed between him, Thompson, Toth and VFinance as well as between him, CSC/NFS and Cucchia. (Petitioner's Statement of Claim, ¶¶ 72-75.) The relationship then developed during the long business relations with Respondents. He also alleges that Thompson and VFinance breached their fiduciary duties when they induced him to collateralize his AquaCell stock to CSC/NFS, loan the proceeds to Somerset and never intended to repay the loan. (Petitioner's Statement of Claim, ¶ 76.) (See Apple Records, Inc. v Capital Records, Inc., 137 AD2d 50, 57 [1st Dept 1988].)

Petitioner also claims that CSC/NFS aided and abetted the breach of fiduciary duty by Thompson and VFinance. In particular, CSC/NFS knowingly participated in such breach when it allowed Thompson and VFinance to use assets of other VFinance clients improperly to [*6]collateralize the Witham Account. Petitioner argues that he would not have entered into the margin agreement but for the misrepresentation and/or omissions made by Thompson and CSC/NFS had knowledge of such misrepresentation and/or omissions.

Furthermore, petitioner argues that he was fraudulently induced into the agreement and therefore it is unenforceable. Respondent does not present any arguments that there was no fraudulent inducement scheme involved other then saying that it is "not relevant" because it has an absolute right under the agreement to sell the shares. Such claims are relevant however in that if the petitioner was fraudulently induced into the agreement, the defendant may not exercise his rights under the agreement.

The elements of fraudulent inducement are: (1) a misrepresentation of material existing fact, (2) which is false and known to be false by the defendant when made, (3) for the purpose of inducing plaintiffs' reliance, (4) plaintiffs' justifiable reliance on the alleged misrepresentation or omission and (5) injury. (Century 21, Inc. v F.W. Woolworth Co., 181 AD2d 620, 620 [1st Dept 1992].)

Petitioner alleges that Respondents misrepresented material existing facts, which were false and known to be false by Respondents. Specifically, Petitioner argues that Thompson, Toth and CSC/NFS misrepresented to him the true purpose of getting the loan. Additionally, Petitioner argues that Thompson, Toth and CSC/NFS knew that the money was not going to be used to help fund a Somerset "offering", rather they all were aware that the money would be used to keep Somerset afloat and meet its "net capital" requirements. Further, Petitioner claims that the purpose of the misrepresentation was to induce reliance. Thompson and Toth issued a promissory note to repay the loan in 30 days thereby inducing Petitioner to justifiably rely on the misrepresentation. Finally, Petitioner claims that he was injured because the loan remains unpaid. Moreover, when the calls were made on his AquaCell stock, Petitioner was in a position where he might lose his stock. Thus, Petitioner makes a prima facie showing of fraudulent inducement into the contract.

Additionally, Petitioner is arguing that Thompson and Toth fraudulently induced him into the contract by promising to repay the loan in 30 day when, in fact, they never intended on repaying the loan. (Witham Affidavit, ¶ 17). However, recent cases from the Appellate Division First Department state the exact opposite: a "cause of action for fraud does not arise, where the only fraud alleged merely relates to a contracting party's alleged intent to breach a contractual obligation." (Caniglia v Chicago Tribune-New York News Syndicate, Inc., 204 AD2d 233, 234 [1st Dept 1994] citing Comtomark, Inc. v Satellite Communications Network, 116 AD2d 499, 500 [1st Dept 1986].) As a result, Petitioner's argument is not a strong support of his position, but a likelihood of success on the fraudulent inducement claim still exists on other grounds, as discussed above.

Therefore, based on the foregoing, it appears that Petitioner has sufficiently established a likelihood of success on the merits on his claims.

Irreparable Injury

Irreparable injury is found where an award for monetary damages is not adequate compensation. (See Credit Agricole Indosuez v Rossiyskiy Kredit Bank, 94 NY2d 541, 544-545 [2000].) Petitioner argues, and VFinance agrees, that if the stock in the Witham Account is transferred to VFinance, an arbitration award in his favor will only permit him to recover the [*7]amount the stock was sold after the transfer. However, in the event the stock is at a higher price, Petitioner will have to reinvest more money into re-purchasing the amount of shares liquidated by VFinance even though it did not have the right, as per the arbitration determination, to liquidate the shares. In that instance, money damages would not be an adequate remedy.

Moreover, Petitioner, as a director and officer of AquaCell, would not appear to have an adequate remedy for an improper transfer due to the loss of rights associated with the stock. Although AquaCell is a publicly traded company, AquaCell, as a small business, is similar to a close corporation where control of the company through stock ownership is very important. Due to the importance of control, "damages would thus not appear to be an adequate remedy for an improper transfer." (Kurtz v Zion, 61 AD2d 778, 779 [1st Dept 1978].) Therefore, an improper transfer would not only cost Petitioner money, but rights in the company.

Balance of Equities

Finally, Petitioner is merely seeking to maintain the status quo until a determination is made with respect to his claims in Arbitration. Without a preliminary injunction, VFinance can transfer the stock at issue in Arbitration, which may then be liquidated in order to cover the margin calls of the loan at issue. If an arbitration award is in Respondents' favor, they will be able to sell any stock necessary to cover the loan and will be unaffected by the issuance or not of a preliminary injunction. If an arbitration award is in Petitioner's favor, without a preliminary injunction, he will have already lost control of his stock and all rights associated with it. VFinance contends that they will bear the risk of the loan without transfer of the stock. However, pursuant to CPLR 7502(c) and 6312, this court will require Petitioner to post an undertaking in conjunction with preliminary injunction in the amount of $37,500. Therefore, the balance of the equities is in Petitioner's favor.

For the reasons stated above, it is

ORDERED that petitioner's motion for a preliminary injunction in aid of arbitration is granted and it further

ORDERED Petitioner to post an undertaking in conjunction with preliminary injunction

in the amount of $37,500.

Dated: November 21, 2007

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J.S.C.