January 14, 2010
KASIL KARZHEVSKY AND GREGORY KARZHEVSKY, PLAINTIFFS-APPELLANTS,
LOVING CARE AGENCY, INC., LCA HOLDING, INC., A DELAWARE COMPANY, MTS LCA LLC, MTS HEALTH PARTNERS, L.P., MTS INVESTORS LLC, MTS INVESTORS, LP, MTS INVESTORS C, LP, MTS INVESTORS D, LP, STEVE VELLA, ROBERT CREAMER, ROBERT FUSCO, CURTIS B. LANE, KENTON ROSENBERRY, ADAM PIERCE, AND MICHAEL P. HARMON, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-4428-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 7, 2009
Before Judges Reisner, Yannotti and Chambers.
Plaintiffs appeal from an order entered by the trial court on September 12, 2008, dismissing their complaint without prejudice, and an order entered on October 24, 2008, denying their motion for reconsideration. We affirm.
Plaintiff Kasil Karzhevsky (Kasil) and his wife Emily emigrated to the United States from the Soviet Union in 1976. In 1992, Kasil and Emily formed Loving Care Agency, Inc. (Loving Care), an entity that provides pediatric nursing and home health aid services. Plaintiff Gregory Karzhevsky (Gregory), who is Kasil's and Emily's son, began working for Loving Care in 1995. Eventually, Gregory became Loving Care's Director of Operations.
In January 2006, LCA Holding, Inc. (LCA) entered into a Stock Purchase Agreement (SPA) which provided for the purchase by LCA of the Karzhevskys' stock in Loving Care for about $33 million. In the SPA, the Karzhevskys represented that, at the time of the sale, Loving Care was "in compliance with, and [had] conducted the Business in accordance with . . . all applicable Laws, including those Laws governing participation in all federal and state health care programs[.]"
The SPA additionally stated that, for a period of five years, the Karzhevskys would not "directly or indirectly" compete with Loving Care, or engage in a substantially similar business throughout the United States, Canada and Mexico. In addition, the SPA provided that the Karzhevskys would not "solicit, aid, induce, encourage, hire, retain or employ" any of Loving Care's employees or clients for five years.
The SPA also includes a provision whereby the parties "irrevocably and unconditionally" consent to the submission of any actions "arising out of or relating to" the SPA for resolution in the federal or state courts located in New York. In addition, the parties agreed in the SPA that the agreement and their legal relations would be governed by and construed in accordance with New York law "applicable to contracts made and performed in such State and without regard to conflicts of law doctrines."
At the time the parties entered into the SPA, LCA entered into employment agreements with Kasil and Gregory. The employment agreements contained a provision stating that Kasil and Gregory would not work in the home health aide and home nursing service industry anywhere in the United States for a period of one year after termination of employment. In addition, Gregory's employment agreement prohibited him from the solicitation for employment or hiring of any LCA or Loving Care employee for a period of one year following the termination of his employment.
According to LCA, prior to its purchase of the Loving Care stock, Loving Care failed to accurately report the number of its employees to its workers' compensation insurance carriers. LCA claims that, as a result of this improper and unlawful practice, Loving Care's premiums for workers' compensation insurance were "significantly lower" than they would have been if Loving Care had accurately reported the number of persons on its payroll.
LCA asserted that this practice continued for about eight years, during which time four carriers provided Loving Care with workers' compensation coverage: New Jersey Casualty Insurance Company (NJCIC), Liberty Mutual Insurance Company (Liberty Mutual), American Zurich Insurance Company (Zurich), and Reliance Insurance Company (Reliance). LCA also asserted that in this time, Loving Care obstructed attempts by the insurers to audit the company's payroll records.
In March 2004, NJCIC commenced an action against Loving Care, seeking payment of the premiums that Loving Care would have paid for workers' compensation coverage if it had accurately reported the number of persons on its payroll. This action resulted in a settlement, under which Loving Care agreed to pay NJCIC $1.85 million, plus interest. In addition, Loving Care entered into an agreement with Liberty Mutual, whereby Loving Care paid Liberty Mutual $1.6 million to settle potential claims arising from the inaccurate reporting of the number of its employees.
In June 2006, after the parties entered into the SPA, Zurich filed a complaint in the New Jersey Superior Court against Loving Care, Emily, Kasil and certain related entities. In August 2006, Reliance's statutory liquidator filed a complaint in the United States District Court for the District of New Jersey against Loving Care, LCA, the Karzhevskys and certain related entities. In these actions, the plaintiffs sought, among other damages, the premiums that Loving Care should have paid to provide workers' compensation coverage for its employees. In those lawsuits, LCA and Loving Care asserted cross-claims against the Karshevskys for indemnification pursuant to the SPA.
On or about April 2, 2007, Loving Care terminated Kasil's employment, effective May 2, 2007. Kasil entered into an agreement with the company and received a severance payment. According to plaintiffs, this agreement released Loving Care from certain claims but it did not affect Kasil's rights to ownership of LCA or Loving Care, or his rights under the SPA. On April 9, 2007, defendant Robert Creamer (Creamer) became Loving Care's CEO, replacing Robert Fusco (Fusco) who had been serving as interim CEO.
On November 21, 2007, Loving Care also terminated Gregory's employment. As grounds for Gregory's termination, Loving Care asserted that Gregory failed to disclose before or after the parties entered the SPA that Loving Care had "significantly underpaid" its workers' compensation premiums and had taken affirmative steps to prevent two insurers from "discovering this misconduct[.]" Loving Care also asserted that Gregory made false statements and failed to disclose material facts concerning Loving Care's business in connection with the SPA and was "not forthcoming" with regard to these matters in an interview with LCA's attorney.
On April 24, 2008, LCA commenced an action against the Karzhevskys in the New York courts by filing and serving a summons with notice. The summons and notice indicated that LCA was seeking to recover damages for certain fraudulent representations made by the Karzhevskys which allegedly induced LCA to enter into the SPA. The summons with notice also stated that LCA was seeking the recovery of damages estimated to be in excess of $12 million, along with prejudgment interest, costs, disbursements and such other relief deemed to be just and proper. The Karzhevskys filed a notice of appearance in the New York action dated May 28, 2008, and demanded a copy of the complaint and related documents.
On June 17, 2008, LCA filed its complaint and demand for a jury trial in the New York lawsuit. In its complaint, LCA alleged that Loving Care violated New Jersey law by underreporting the number of its employees to its workers' compensation carriers, with the result that Loving Care's premiums were "significantly lower" than they would have been had it accurately reported the number of persons on its payroll. LCA alleged that the Karzhevskys misrepresented and concealed facts concerning their unlawful actions and fraudulently induced LCA to enter into the SPA.
LCA additionally claimed that it paid $33.16 million for the stock of Loving Care but the value of the stock was substantially less because Loving Care faced: liabilities for the underpayment of workers' compensation insurance premiums and related claims; the possibility of losing its Medicare/Medicaid licenses; and costs arising from the increased difficulty in obtaining financing. LCA sought compensatory damages arising from the Karzhevskys' alleged fraudulent representations as well as consequential damages, including legal fees.
On June 11, 2008, Kasil and Gregory filed their complaint in this action. Gregory alleged that he was terminated by LCA and Loving Care because of his national origin, ancestry and religion in violation of the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 to -42 (LAD). Gregory additionally alleged that he had been subjected to unlawful retaliation in violation of the LAD for complaining about the "harassing and discriminatory conduct" by Steve Vella (Vella), Loving Care's Chief Financial Officer. Gregory additionally alleged that Vella, Creamer and Fusco violated the the LAD by aiding and abetting Loving Care and LCA in the unlawful discrimination and retaliation. He also asserted defamation claims against Creamer and Vella.
Gregory also sought a judgment declaring that the restrictive covenants in the SPA and the employment agreement are unenforceable. In addition, Kasil and Gregory asserted claims as oppressed minority shareholders; for breach of LCA's "Non-Qualified Stock Option Agreement" pursuant to its "2006 Stock Option Plan;" for breach of fiduciary duties; for breach of the duty of good faith and loyalty; and civil conspiracy.
On July 25, 2008, defendants filed a motion seeking dismissal of plaintiff's complaint on comity grounds. The trial court found that Gregory's LAD claims turned on essentially the same factual allegations that have been asserted in the New York lawsuit. The court further found that a comity dismissal was warranted because the matters were substantially the same and because special equities exist for deferring to the exercise of jurisdiction by the New York courts.
The trial court additionally pointed out that in the SPA, the parties had agreed to litigate disputes related to that agreement in New York. The court noted that dismissal of the New Jersey case was consistent with the public policy of this State, as reflected in the entire controversy doctrine, which is to avoid fragmented litigation and inconsistent results. The court also pointed out that the New Jersey case had been filed improperly after plaintiffs received notice of the commencement of the New York lawsuit and plaintiffs violated Rule 4:5-1(b)(2) by failing to disclose that the subject matter of this case was the subject of the pending New York action.
The court accordingly entered an order dated September 12, 2008, granting defendants' motion and dismissing the complaint without prejudice. Thereafter, plaintiffs filed a motion for reconsideration. The trial court entered an order dated October 24, 2008, denying the motion. This appeal followed.
Plaintiffs argue that the trial court abused its discretion by dismissing their complaint. They contend that their New Jersey complaint was filed first and defendants failed to establish grounds for deferring to the exercise of jurisdiction by New York in the action pending in that state.
"New Jersey has long adhered to 'the general rule that the court which first acquires jurisdiction has precedence in the absence of special equities.'" Sensient Colors, Inc. v. Allstate Ins. Co., 193 N.J. 373, 386 (2008) (quoting Yancoskie v. Del. River Port Auth., 78 N.J. 321, 324 (1978)). The New Jersey court may, however, "disregard" the deference traditionally "paid to the first-filed action" when "[s]pecial equities" are present. Id. at 387. "Special equities are reasons of a compelling nature that favor the retention of jurisdiction by the court in the later-filed action." Ibid.
The decision as to whether to grant a comity stay or dismissal is committed to the sound discretion of the trial court. Id. at 390. The trial court's determination will be upheld in the absence of a clear showing that the court abused its discretion. Id. at 397.
As we stated previously, LCA commenced its action against the Karzhevskys in New York on April 24, 2008, by filing a summons with notice with the Supreme Court of New York and serving it upon the defendants. The Karzhevskys entered an appearance in that action on May 28, 2008, and demanded a copy of the complaint. The complaint in the New York lawsuit was served on June 17, 2008; however, Gregory and Kasil filed their complaint in this action on June 11, 2008.
In New York, an action is commenced by the service of a summons. N.Y. C.P.L.R. 304 (McKinney 2010). "If the complaint is not served with the summons, the summons shall contain or have attached thereto a notice stating the nature of the action and the relief sought, and, except in an action for medical malpractice, the sum of money for which judgment may be taken in case of default." N.Y. C.P.L.R. 305(b) (McKinney 2010).
It appears that even though the New York action was commenced before this action, the New York courts would probably consider this action to have been "filed" before LCA's New York lawsuit. See Harrison v. Harrison, 793 N.Y.S. 2d 5, 6 (App. Div. 2005) (holding that the plaintiff's action was the first-filed action because the plaintiff commenced her action with a summons and complaint, whereas the defendant commenced his lawsuit with a summons and notice). Nevertheless, the "first-filed rule is not an inflexible doctrine." Sensient, supra, 193 N.J. at 387. Indeed, "the presence of special equities may lead a court to disregard the traditional deference paid to the first-filed action[.]" Ibid.
In Century Indemnity Co. v. Mine Safety Appliances Co., 398 N.J. Super. 422, 438-41 (App. Div. 2008), we affirmed the dismissal of a first-filed New Jersey action, finding that special equities favored weighed in favor of having the dispute resolved in Pennsylvania. We noted that dismissal was warranted when an action is commenced as a preemptory action, in order to obtain a forum advantage. Id. at 438.
We observed that the plaintiff had acted with "unseemly haste" in commencing its action in an effort to obtain jurisdiction in a state whose law favored the plaintiff's position. Id. at 439. We declined to enforce the "first-filed" rule under these circumstances. Ibid. We are similarly convinced that it would be inappropriate to enforce the "first-filed" rule in this case.
Here, the trial court correctly found that LCA's New York lawsuit involves issues that are substantially similar to issues that lie at the heart of the LAD claims in this lawsuit. In this case, Gregory alleges that LCA and Loving Care terminated his employment on the basis of his national origin and religion in violation of the LAD. Furthermore, Gregory's LAD retaliation claim is based upon his assertion that he objected to this alleged unlawful discrimination.
To show unlawful discrimination in violation the LAD:
(1) the plaintiff must come forward with sufficient evidence to constitute a prima facie case of discrimination; (2) the defendant then must show a legitimate non-discriminatory reason for its decision; and
(3) the plaintiff must then be given the opportunity to show that defendant's stated reason was merely a pretext or discriminatory in its application. [Dixon v. Rutgers, The State Univ. of N.J., 110 N.J. 432, 442 (1988) (citing Peper v. Princeton Univ. Bd. of Trustees, 77 N.J. 55, 82-83 (1978)).]
In responding to Gregory's LAD claim, defendants will undoubtedly maintain that Loving Care had a legitimate non-discriminatory reason for terminating Gregory's employment, specifically his alleged involvement in and failure to disclose to LCA the alleged unlawful underpayment by Loving Care of its workers' compensation insurance premiums. Gregory would then have to prove that this was merely a pretext for unlawful discrimination. Thus, the LAD claims in this case and the fraud claims in LCA's New York lawsuit both involve the same issue: whether Gregory participated in and failed to disclose to LCA the scheme to underpay the insurers who provided Loving Care workers' compensation coverage.
The trial court also correctly found that "special equities" warranted dismissal of this action in deference to the exercise of jurisdiction by the New York court in LCA's lawsuit. As the trial court determined, plaintiffs filed this action after having been served with notice of LCA's New York lawsuit. This was an apparent attempt by plaintiffs to avoid the forum selection clause of the SPA, which applies to all claims arising from and related to that agreement.
In our view, Gregory's LAD claims are subject to the SPA's forum selection clause because they relate to the fraudulent acts that allegedly induced LCA to enter into that agreement. Furthermore, in this case, Gregory seeks to invalidate the non-competition agreement in the SPA. This claim also relates to the SPA and is covered by the forum selection clause.
A forum selection clause "play[s] an important part in [the] comity analysis." Exxon Research & Eng'g Co. v. Industrial Risk Insurers, 341 N.J. Super. 489, 517 (App. Div. 2001). The fact that the parties to the SPA agreed that disputes arising under and related to that agreement would be litigated in New York "militate[s] against the existence of special equities in favor of" allowing plaintiffs to proceed with this action. Ibid. (citing Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 325-27 (9th Cir. 1996); Ensign-Bickford Co. v. ICI Explosives USA, Inc., 817 F.Supp. 1018, 1032-33 (D.Conn. 1993)).
Plaintiffs nevertheless argue that the trial court erred by dismissing their complaint on comity grounds because New Jersey has a strong public policy in enforcing the LAD. Plaintiffs note that Gregory's LAD claims relate to his employment in New Jersey and actions allegedly taken by defendants in this State. We are not convinced, however, that New York is any less committed than New Jersey to addressing unlawful discrimination in employment on the basis of national origin and religion. See Freudenthal v. County of Nassau, 784 N.E.2d 1165, 1168 (N.Y. 2003) (noting that New York's Human Rights Law provides a comprehensive statutory scheme that protects employees from unlawful discrimination).
Plaintiffs additionally assert that New York would be a less favorable forum for adjudicating Gregory's LAD claims because New York's law does not allow for the award of punitive damages in employment discrimination cases. See Thoreson v. Penthouse Int'l, 606 N.E.2d 1369, 1372-73 (N.Y. 1992). Plaintiffs have not established, however, that the New York courts would refuse to apply New Jersey law to Gregory's discrimination claims. Even were the court to apply New York law, we do not believe that the inability to obtain punitive damages would substantially undermine New Jersey's strong policy of eradicating unlawful discrimination, particularly in view of the availability of other remedies under New York law, including compensatory damages. Id. at 1372.
Plaintiffs also argue that the trial court erred by enforcing the SPA's forum selection clause in the SPA. We disagree. Forum selection clauses are enforced in New Jersey unless they are the result of fraud or unequal bargaining power, are contrary to public policy, or would make it seriously inconvenient for trial. Wilfred MacDonald Inc. v. Cushman, Inc., 256 N.J. Super. 58, 63, 64 (App. Div.), certif. denied, 130 N.J. 17 (1992) (citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12-16, 92 S.Ct. 1907, 1914-16, 32 L.Ed. 2d 513, 522-24 (1972)).
Here, the forum selection clause was part of a multi-million dollar transaction between parties of substantially equal bargaining power. In addition, as we have explained, its enforcement in this case would not be contrary to New Jersey's public policy. Moreover, requiring plaintiffs to litigate their claims in the New York "'will [not] be so gravely difficult and inconvenient'" that it will "'for all practical purpose'" deprive plaintiffs of their day in court. Id. at 65 (quoting Bremen, 407 U.S. at 18, 92 S.Ct. at 1917, 32 L.Ed. 2d at 525).
Plaintiffs further contend that defendants waived their right to rely upon the forum selection clause in the SPA because they asserted claims against the Karzhevskys in the lawsuits brought by Zurich and Reliance in New Jersey to recover additional premiums for providing workers' compensation coverage to Loving Care and other damages. Again, we disagree.
Zurich and Reliance commenced those actions in this State and defendants asserted cross-claims for indemnification against the Karzhevskys, as required by Rule 4:7-5(b) and the entire controversy doctrine. In our judgment, LCA's assertion of those cross-claims was not a waiver of its right to enforce the SPA's forum selection clause in any other dispute arising from or related to that agreement.
© 1992-2010 VersusLaw Inc.