Coscarelli v. Esquared Hospitality LLC

Background

Chloe Coscarelli, Chef Chloe LLC, CC Hospitality Holdings LLC, and CKC Sales, LLC sued Esquared Hospitality LLC and BC Hospitality Group LLC, formerly known as CCSW LLC. In 2014, Coscarelli, James Haber, and Samantha Wasser formed CCSW to develop the “by Chloe” restaurant chain. Coscarelli and Chef Chloe, LLC held a 50% membership interest in CCSW.

In 2017, Coscarelli and the related plaintiffs were terminated from CCSW for cause. Esquared then exercised a contractual repurchase right and repurchased Chef Chloe’s 50% interest at no cost because the value of its capital account was zero. The plaintiffs challenged that repurchase in arbitration.

The arbitration focused on transactions from October 15, 2015, in which ownership of Esquared was transferred to Esquared Holdings LLC in exchange for $250,000. The arbitrator, former Judge Faith S. Hochberg, determined that the transactions were a “Liquidity Event” under the CCSW operating agreement. That event automatically ended Esquared’s repurchase right. The arbitrator therefore concluded that the 2017 repurchase was invalid and violated the operating agreement, and reinstated the plaintiffs’ 50% membership interest. The arbitrator also awarded attorney’s fees and costs under the agreement’s fee-shifting provision.

Bankruptcy stay

While the parties’ motions were pending, BC Hospitality Group filed for bankruptcy. The bankruptcy filing automatically stayed proceedings against that company. Esquared argued that the entire case should also be stayed because the claims against Esquared and BC Hospitality Group involved common facts and legal issues.

The court rejected that argument. It held that Esquared had not shown the unusual circumstances required to extend the bankruptcy stay to a non-bankrupt co-defendant. The arbitrator had found that Esquared and BC Hospitality Group were individually and jointly responsible for breaching the agreement, so Esquared’s liability rested on its own breach.

The court nevertheless concluded that the stay prevented it from deciding whether to confirm or vacate the remedy requiring restoration of the plaintiffs’ ownership interest. Deciding that issue could affect assets within the bankruptcy estate. The court determined that it could review the liability ruling and the fee award because those rulings did not create an immediate claim to assets in the bankruptcy estate. It also held that the defendants were jointly responsible for the fee award under New York law and that confirming the fees against Esquared would not violate the stay.

Review of liability award

Under the Federal Arbitration Act, a court generally must confirm an arbitration award. Vacatur, meaning cancellation of an award, is permitted only on narrow grounds, including when the arbitrator exceeded the arbitrator’s authority or acted in manifest disregard of the law. The court’s task was not to decide whether the arbitrator interpreted the contract correctly, but whether the arbitrator had authority to decide the issue and had at least a legally reasonable basis for the result.

The court confirmed the liability portion of the award. It held that the arbitrator reasonably interpreted the operating agreement to treat the 2015 ownership transfer as a “sale” and therefore a Liquidity Event, even if a sale did not also require a change of control. The court found that the agreement was at least ambiguous on that point and that the arbitrator properly used contract-interpretation principles to resolve the ambiguity. The defendants did not meet the demanding standard for vacating the award.

Attorney’s fees and costs

The court also rejected each of the defendants’ challenges to the fee awards. It held that the arbitrator did not act unlawfully by applying a 1.25 multiplier to the lodestar—the reasonable hours multiplied by reasonable hourly rates—to account for the risk counsel accepted by taking the case on a contingency basis.

The court upheld the use of New York billing rates for two attorneys based in Minneapolis. It concluded that the arbitrator had at least a legally reasonable basis for applying New York rates because the arbitration involved New York-based limited liability companies, a New York forum-selection clause, New York litigation counsel for Esquared, and work originating from the firm’s New York office.

The court also upheld fees for the plaintiffs’ unsuccessful motion for a preliminary injunction. The arbitrator had found that the motion was a substantial or “catalytic” factor in the plaintiffs’ later success in arbitration. The court found no compelling reason to disturb that fact-based conclusion.

The court upheld fees for the proceedings seeking confirmation of the arbitration awards because the operating agreement authorized reimbursement of costs and expenses incurred to enforce a breach. It also upheld fees for developing a plan to implement the arbitrator’s equitable relief. The court held that the arbitrator still had authority to address implementation planning and had not improperly enforced the award before judicial confirmation.

Disposition

The court held that the plaintiffs’ motions to confirm the Partial Final Award, Partial Fee Award, and Complete Final Award were granted in part, and that the defendants’ motions to vacate those awards were denied in part. The liability portions and attorney’s-fee and cost awards were confirmed against Esquared. The court reserved judgment on confirmation or vacatur of the remedy requiring reinstatement of the plaintiffs’ ownership interest because of the bankruptcy stay. The court also suspended existing dates and deadlines and directed the parties to file a joint status letter by March 12, 2021. The Clerk was directed to administratively terminate the pending motions.