Coscarelli v. Esquared Hosp. LLC
| Decision Date | 28 January 2021 |
| Docket Number | 18-CV-5943 (JMF) |
| Parties | CHLOE COSCARELLI, CHEF CHLOE LLC, CC HOSPITALITY HOLDINGS LLC, and CKC SALES, LLC, Plaintiffs, v. ESQUARED HOSPITALITY LLC and BC HOSPITALITY GROUP LLC, formerly known as CCSW LLC, Defendants. |
| Court | U.S. District Court — Southern District of New York |
This decision addresses the most recent developments in a longstanding struggle between celebrity vegan chef Chloe Coscarelli and father-and-daughter restauranteurs James Haber and Samantha Wasser over control of the "by Chloe" brand. In 2014, Coscarelli, Haber, and Wasser established a joint venture called CCSW LLC ("CCSW") to develop what became the "by Chloe" chain of vegan, fast casual restaurants. See ECF No. 172-1 ("Partial Final Award"), at 7. In 2017, Coscarelli and three LLCs of which she is the sole owner or member (collectively, "Plaintiffs") were terminated from CCSW for cause. Id. at 14-15. Defendant ESquared Hospitality LLC ("ESquared"), which was controlled at various times by Haber and Wasser, see id. at 18-21, immediately repurchased Plaintiffs' membership interest in CCSW at no cost, see id. at 15. Plaintiffs challenge the validity of the repurchase. See ECF No. 76 ("First Am. Compl."), ¶¶ 101-24. The parties' jointly selected arbitrator, the Honorable Faith S. Hochberg, former United States District Judge for the District of New Jersey, agreed with Plaintiffs that the repurchase violated the CCSW Operating Agreement. See ECF No. 172-1 ("Partial Final Award"), at 31-60; ECF No. 175-2. For relief, Judge Hochberg reinstated Plaintiffs' 50% Membership Interest in CCSW, now called BC Hospitality Group LLC ("BCHG"). See Partial Final Award 87; First Am. Compl. ¶ 16. Judge Hochberg also awarded Plaintiffs attorney's fees and costs pursuant to a contractual cost-shifting provision. See ECF No. 212-1 ("Partial Fee Award") (citing ECF No. 175-1 ("Operating Agreement"), § 20.7); ECF No. 212-2 ("Complete Final Award").
Now pending are Plaintiffs' motions to confirm the two arbitration awards (the "Arbitration Awards" or "Awards"), ECF Nos. 173, 226, and Defendants' cross-motions to vacate them, ECF Nos. 185, 208. Complicating matters, on December 14, 2020, while these motions were pending, BCHG filed a bankruptcy petition in the United States Bankruptcy Court for the District of Delaware, see ECF No. 245, resulting in an automatic stay of the proceedings against BCHG, see 11 U.S.C. § 362(a)(1). The Court ordered the parties to submit supplemental briefing and held a conference to explore the effect, if any, of the automatic bankruptcy stay on the Court's power to grant relief against the non-bankrupt co-defendant, ESquared. See ECF Nos. 246-55. Having considered the parties' arguments on that threshold issue and on the cross-motions themselves, the Court reserves judgment on whether to confirm or vacate the remedy portion of Judge Hochberg's Awards, but confirms the liability and fee portions of the Awards now.
The essential facts, which are undisputed, are drawn from the Arbitration Awards under review. Coscarelli is a vegan chef and cookbook author who became famous after winning the Food Network show "Cupcake Wars" in 2010. Partial Final Award 2, 7; see also First Am. Compl. ¶ 2. ESquared is a hospitality company founded by Haber. Partial Final Award 2. On November 7, 2014, Coscarelli, Haber, and Wasser formed CCSW to develop the "by Chloe" restaurant chain. Id. at 7. The company was co-managed by Coscarelli and Wasser, id. at 9, and co-owned by ESquared and Chef Chloe, LLC ("Chef Chloe"), a limited liability company that is in turn wholly owned by Coscarelli, id. at 2, 9; see also First Am. Compl. ¶ 7. The first "by Chloe" restaurant opened on July 28, 2015, on Bleecker Street in New York, to positive reviews. ECF No. 188-1 ("2017 Arbitration Award"), at 12. In light of this early success, Coscarelli, Wasser, and Haber collectively decided to expand the "by Chloe" concept to additional locations in New York and other metropolitan areas. Id. Soon thereafter, however, the relationship between Coscarelli, on one hand, and Wasser and Haber, on the other, began to deteriorate and, in 2016, ESquared invoked the arbitration clause of the CCSW Operating Agreement, contending that Coscarelli had breached the agreement in several respects. Partial Final Award 13-14; see Operating Agreement § 20.19. On March 21, 2017, in an award that is not under review here, an arbitrator determined that Coscarelli had acted with gross negligence on two occasions and that she had misappropriated CCSW's intellectual property. 2017 Arbitration Award at 44-46. Based on these findings, Chef Chloe's membership interest in CCSW was terminated pursuant to Section 19.3(a) of the Operating Agreement, which provides that "[a] Service Member may be removed from [its] Position . . . for cause." Id. at 42, 46.
On March 22, 2017, the day after the 2017 Arbitration Award was issued, ESquared exercised its "Repurchase Right" pursuant to Section 19.5(a) of the Operating Agreement, which provides that, as "long as ESquared . . . owns more than twenty[-]five percent (25%) of the issued and outstanding Membership Interests or controls the vote of the Company . . . , then upon termination of [a] Service Member . . . by the Company for Cause before March 7, 2023, . . . the Terminated Service Member . . . is deemed to have offered to sell all of its Membership Interest to the Company." Operating Agreement § 19.5(a); see Partial Final Award 15. "If the termination occurs prior to March 7, 2019, the purchase price shall be equal to the positive value of such Member's Capital Account." Operating Agreement § 19.5(b)(a). Relying on these provisions, ESquared repurchased Chef Chloe's 50% Membership Interest in CCSW at no cost, because the value of Chef Chloe's capital account was then zero. Partial Final Award 15.
It is worth pausing now to describe a series of intrafamily transactions that occurred on October 15, 2015, long before Chef Chloe's termination from CCSW, which are central to the claims at issue. Before October 15, 2015, ESquared was held entirely by BLT Restaurant Group LLC, which Haber controlled. Id. at 19. Eighty-five percent of BLT Restaurant Group LLC was held indirectly by three trusts — one for each of Haber's children, including Wasser. Id. On October 15, 2015, BLT Restaurant Group LLC transferred its 100% membership interest in Esquared to ESquared Holdings LLC in exchange for $250,000, and ownership of ESquared Holdings was divided equally, in thirds, between Wasser outright and two newly created trusts for Haber's other two children. Id. at 20-21. The effect of these transactions was to remove Haber from the line of ownership between ESquared and his three children and to grant Wasser more direct control of the family restaurant businesses. Id. at 20-21. Haber testified at an arbitration hearing that a tax attorney had recommended the $250,000 purchase price so that the transaction would "be respected for sale purposes." Id. at 35.
The October 15, 2015 series of transactions is significant because Section 19.5(e) of the CCSW Operating Agreement provides that "the Repurchase Right set forth" in Section 19.5(a) "shall automatically terminate and be of no further force or effect upon the occurrence of . . . an ESquared Hospitality Liquidity Event." Operating Agreement § 19.5(e). Thus, if the 2015 series of transactions was a Liquidity Event, then the Repurchase Right that ESquared exercised in 2017 — to repurchase Chef Chloe's 50% membership interest in CCSW — was void. An "ESquared Hospitality Liquidity Event" is defined as "a sale, financing, public offering or other change of control transaction involving ESquared Hospitality (or its parent entity) and/or no less than a majority of the restaurants that ESquared Hospitality and its Affiliates have an ownership and/or management interest in." Id. § 1.1. Whether the 2015 transactions qualify was the central question in the arbitration proceeding at issue. On May 13, 2020, Judge Hochberg issued a detailed, ninety-page award, agreeing with Plaintiffs that Defendants' repurchase of Chef Chloe's 50% membership interest violated the CCSW Operating Agreement; as a remedy, she reinstated Chef Chloe's 50% membership interest in CCSW. See generally Partial Final Award. Judge Hochberg also awarded attorney's fees and costs to Plaintiffs, as the prevailing party. See generally Partial Fee Award; Complete Final Award.
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., generally requires a reviewing court to confirm an arbitration award. 9 U.S.C. § 9; see also STMicroelectronics, N.V. v. Credit Suisse Sec. (USA) LLC, 648 F.3d 68, 74 (2d Cir. 2011). A court "may" vacate an award, however, "where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). Significantly, the Second Circuit has "consistently accorded the narrowest of readings" to this provision. ReliaStar Life Ins. Co. of N.Y. v. EMC Nat'l Life Co., 564 F.3d 81, 85 (2d Cir. 2009) (internal quotation marks omitted). "If it were otherwise, the ostensible purpose for resort to arbitration, i.e., avoidance of litigation, would be frustrated." Id. (internal quotation marks omitted). Thus, a reviewing court's analysis "focuses on whether the arbitrators had the power, based on the parties' submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue." Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 220 (2d Cir. 2002) (emphasis added) (internal quotation marks omitted).
The Court must confirm the arbitrator's award "as long as the arbitrator [wa]s even arguably construing or applying the contract and acting within the scope of his authority"; even "a court's conviction that...
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