Court Rejects Arbitral Award

On November 7, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Matter of Kleinbart (Build Green Solutions LLC), 2014 NY Slip Op. 51599(U), granting a motion to reject an arbitral decision.

In Matter of Kleinbart, the court denied a motion to confirm an arbitral award and instead granted a motion to reject the award. As an initial matter, the court rejected the argument that the arbitration agreement was not valid:

An arbitration award may be vacated only upon the grounds enumerated in CPLR 7511 (b). CPLR 7511 (b) (2) permits vacating an arbitration award if the party seeking vacatur did not participate in the arbitration or receive notice of the intention to arbitrate and, among other circumstances, no valid arbitration agreement existed. Respondents herein contend that Tombak received no proper summons and that both his execution of the Arbitration Agreement and purported participation in the Givas Hamorah proceeding resulted from fraud, coercion or duress.

To sustain a claim for fraudulent inducement, there must be a knowing misrepresentation of material fact, which is intended to deceive another party and to induce them to act upon it, causing injury. Here, respondents argue that the notice Givas Hamorah used to call Tombak before the tribunal and its general conduct led him to believe that he was present only as a witness, not a party. Although the contents of the notice can be read as implying that Givas Hamorah sought testimony from Tombak in an arbitral proceeding against Volkovitz and Kornitzer, the Arbitration Agreement made clear that Tombak was agreeing to submit to binding arbitration (individually, and on behalf of corporations, LLCs, and all other entities involving this matter) all the controversies (claims and counter claims) between the undersigned parties. Such language unambiguously conveyed that Tombak was agreeing to appear before Givas Hamorah as a party to arbitration, not merely as a witness. A person who signs a document, even if misled as to its contents, is under an obligation to read the document before signing it, and cannot generally avoid the effect of the document on the ground that he or she did not read it or know its contents.

Tombak further asserts that he signed the Arbitration Agreement only because the Givas Hamorah panel threatened to issue a siruv against him, thus rendering the agreement voidable as a product of coercion or duress. The Appellate Division, Second Department, has established, however, that a threat of a siruv will not be treated as duress. While the facts in these cases may differ somewhat from the facts that produced the Arbitration Agreement herein, the case law indicates that prior refusals to consider siruv threats as coercive reflected the inherent nature of a siruv, rather than the circumstances particular to those cases. Accordingly, the Arbitration Agreement must be treated as valid and binding upon respondents.

(Internal quotations and citations omitted). The court went on, however, to vacate the award:

Judicial review of an arbitrator’s award is very limited, and an arbitrator need not observe substantive law or evidentiary rules in issuing a decision. New York favors arbitration as a method of dispute resolution, but CPLR 7511 (b) (1) permits vacating an arbitration award if, among other circumstances, the arbitrator exceeded his power or so imperfectly executed it that a final determination and definite award upon the subject matter submitted was not made.

An award may be found to have exceeded the arbitrator’s powers if it violates a strong public policy, is totally irrational or breaches an explicit limitation on such power. On review, an award may be found to be rational if any basis for such a conclusion is apparent to the court based up on a reading of the record.

Here, no apparent rational basis exists to justify an award to petitioner of $150,000. Petitioner makes no attempt to refute, and submits evidence that seems to confirm, that his claim sought a 7.5% commission on a $24,700 sale, thus equal to $1852.50, of which BGS had already paid half. No party attempts to explain how a claim pursuing $926.25 resulted in an award of more than 160 times that amount.

Furthermore, no rational basis supports holding Tombak personally liable for any failure by BGS to pay petitioner a sales commission. Petitioner formed an agreement with Volkovitz to seek buyers of BGS equipment for a specified commission, and petitioner does not contend that he had any direct interaction whatsoever with Tombak before the arbitration process. Petitioner erroneously relies on the general precept of contract law that an agent who forms a contract on behalf of an undisclosed or partially disclosed principal may be held personally liable for obligations thereunder. Tombak, though an agent of BGS, was indisputably not the agent who formed any agreement with petitioner, and, therefore, could not be held personably liable even if petitioner successfully established that BGS was inadequately disclosed as the true party to the contract. As no plausible basis exists for the Arbitration Award, it must be vacated and the petition to confirm it must be denied.

(Internal quotations and citations omitted). As to a remedy, the court ruled that “[t]he Arbitration Agreement, however, remains binding, and the controversy must, therefore, be remanded for further proceedings in accordance with this decision and order and the requirements of CPLR article 75.”

Court Enforces Agreement to Arbitrate

On October 29, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Reed v. Yankowitz, 2014 NY Slip Op. 32843(U), enforcing an agreement to arbitrate.

In Reed, the parties’ dispute related to a joint venture involving real property. The defendants moved to dismiss the plaintiffs’ lawsuit on the ground that the parties had agreed to arbitrate their dispute. The court agreed, writing:

Before commencing this action the parties appeared before Rabbi Leichtag, one of the arbitrators mentioned in paragraph 8 of the agreement. It appears that Rabbi Leichtag directed that an accountant review the books and records of the venture, and that he failed to appear at the further arbitration sessions scheduled. Thereafter, defendant contends that plaintiff refused to schedule any further sessions until defendant paid plaintiff $50,00.00.

Plaintiff’s argue that they are entitled to a judicial determination rather than an arbitration of this dispute, positing that the arbitration clause of paragraph 8 by its clear terms only requires arbitration of decisions, voting, control and management of the joint venture. As the clause states, one of the two enumerated rabbis would have the deciding vote on such issues as may arise between the partners involving control and management of the company. This arguably would not cover the present issue, which goes beyond the day to day operation of the business, inasmuch as one party is alleged to have unilaterally and fraudulently sold the property that was the subject of the joint venture. Plaintiff contends that the general arbitration clause of paragraph 16 only refers back to paragraph 8, and means that the American Arbitration Association (AAA) shall be the default arbitrator of decisions, management and control of the venture if the parties do not wish to utilize one of the rabbis selected in paragraph 8 to be a tie breaking vote.

The court held both that this contention was not supported by the text of the parties’ agreement and,

In any event, the plaintiffs’ appearances before an arbitrator without having sought a stay of arbitration pursuant to CPLR 97503(b) or otherwise preserving their right to have the issue of arbitrability judicially determined waives that right. Where the contract contains a valid arbitration agreement, a party’s participation in the arbitration hearings constitutes a waiver of the claim that the arbitrators do not have jurisdiction over the matter. Moreover, even questions of fraud fall under general arbitration clauses unless specifically excluded. As such, although plaintiffs may not have pleaded fraud sufficiently to withstand a motion to dismiss, that claim can still be considered in an arbitration.

(Internal quotations and citations omitted.)

Federal Arbitration Act Does Not Apply to California Insurance Law Requiring Arbitration Agreements to be Filed With State

On September 11, 2014, the First Department issued a decision in Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA., 2014 NY Slip Op. 06158, addressing the interplay between the Federal Arbitration Act’s preemption of state rules invalidating arbitration agreements and the McCarran-Ferguson Act, 15 U.S.C. § 1011, which prevents federal statutes from preempting state laws “regulating the business of insurance,” unless the statute “specifically relates to the business of insurance.”

In Matter of Monarch Consulting, an insurance carrier sought to enforce arbitration provisions in payment agreements collateral to workers’ compensation insurance policies. The policyholders argued that the arbitration provisions were unenforceable because the payment agreements had not been filed with the California Division of Insurance, as required by California law. Ordinarily, notwithstanding state laws to the contrary, the Federal Arbitration Act requires that disputes concerning the validity of a contract containing an arbitration provision (as opposed to a challenge to the validity of the arbitration clause alone) are to be decided by the arbitrators in the first instance, rather than the courts. In this case, the analysis was complicated by the McCarran-Ferguson Act, which, in an effort to preserve the supremacy of the states in regulating the insurance industry, establishes a rule of “reverse preemption”: i.e., that no federal statute “shall be construed to invalidate, impair or supersede any law by any State for the purpose of regulating the business of insurance,” unless the federal statute “specifically relates to the business of insurance.” The First Department held that “applying the FAA to mandate arbitration in this case would, in fact, invalidate, impair, or supersede the California Insurance Code. Therefore, the McCarran-Ferguson Act prevents the FAA from preempting the Code.” The Court explained:

As noted above, the McCarran-Ferguson Act was an attempt to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation. Courts have established a four-part test to determine whether the McCarran-Ferguson Act precludes application of a federal statute (in this case, the FAA). Under this test, a federal statute is precluded if: (1) the statute does not specifically relate to the business of insurance; (2) the acts challenged under the statute constitute the business of insurance; (3) the state has enacted laws regulating the challenged acts; and (4) the state laws would be invalidated, impaired, or superseded by application of the federal statute.

First of all, the FAA does not specifically regulate the business of insurance, and an act specifically relating to the business of insurance is the only type of federal legislation that can preempt state insurance law under McCarran-Ferguson. Furthermore, application of the FAA would modify California law because it would mandate arbitration even though National Union did not, as required by California law, file the payment agreements, and the payment agreements, in turn, contained the arbitration clauses.

* * *

While the California Insurance Code § 11658 does not provide any prohibition against arbitration, enforcing the arbitration clause in this case would nonetheless undermine the goals of California law relating to workers’ compensation insurance by enforcing the arbitration provision in a payment agreement that National Union failed to file. Indeed, the filing requirements are a fundamental underpinning for California’s regulation of workers’ compensation insurance, and those filing requirements are intended largely to permit review of arbitration provisions — provisions, as we noted above, with which the CDI has stated that it is particularly concerned.

(Internal quotations, elision and citations omitted.)

Justice Gische dissented in an opinion joined by Justice Manzanet-Daniels. The dissenters concluded that application of the FAA to require arbitration did not “impair” California insurance law, and therefore “the arbitrators, and not the court, should decide the gateway issue of whether the Payment Agreements containing the arbitration clauses are enforceable”:

Neither California Insurance Code § 11658, nor any other provision of the California Workers’ Compensation Laws, provide an express or implied prohibition against arbitration in insurance disputes. . . .

Relatedly, arbitration does not impair the California legal requirement that workers’ compensation insurance policies must be filed, thereby providing the Commissioner of Insurance with an opportunity to review the policies, because California law does not restrict the power of an arbitrator to address whether the Payment Agreements in these cases were required to be filed, and if so, what the consequences for the failure to file the agreements would be.

(Citations omitted).

Matter of Monarch Consulting is second recent First Department Decision on commercial arbitration that is likely headed to the Court of Appeals, given the 2-justice dissent at the First Department. On August 25, we blogged about the Court’s decision in In re Flintlock Construction Services, LLC v. Weiss, NY Slip Op 05818, which held (by a 3-2 vote) that a choice of law provision providing that the parties’ agreement was to be “construed and enforced” in accordance with New York law was not sufficient to invoke the state’s public policy against the imposition of punitive damages in a private arbitration, and therefore, the issue of punitive damages could be submitted to the arbitrators. We will continue to follow both of these cases.

New York Choice of Law Clause Not Sufficient To Invoke New York Rule Against Punitive Damages Awards In Arbitration

On August 14, 2014, the First Department issued a decision in In re Flintlock Construction Services, LLC v. Weiss, NY Slip Op 05818, ruling (by a 3-2 vote) that a choice of law provision providing that the parties’ agreement was to be “construed and enforced” in accordance with the law of New York was not sufficient to invoke New York’s public policy against the imposition of punitive damages in a private arbitration, and therefore, the issue of punitive damages could be submitted to the arbitrators.

In In re Flintlock, investors in a real estate project commenced an arbitration against real estate development companies and their principals, alleging fraud and breach of contract, and seeking punitive damages. The transactions at issue were governed by two LLC operating agreements, which contained identical choice of law clauses, providing that the agreements “shall be construed and enforced in accordance with the laws of the State of New York.” The defendants moved before the arbitration panel to dismiss the punitive damages claim on the ground that such a claim was not arbitrable under New York law. Specifically, the Court of Appeals held, in Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 356 (1976), that under New York law, arbitrators “ha[ve] no power to award punitive damages, even if agreed upon by the parties.” By contrast, under the Federal Arbitration Act (which applies to any claim concerning a “transaction involving interstate commerce”), punitive damages are available if the parties’ agreement so provides. See Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 58 (1995) (where parties “agree to include claims for punitive damages within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration”). The panel denied the motion to dismiss “without prejudice to renewal at the hearing, based on a more complete record as to whether the claim affected interstate commerce, and thus, mandated application of the [FAA].” The defendants then commenced a special proceeding in New York Supreme Court to permanently enjoin the arbitration, under CPLR 7503(b), on the grounds that the arbitrators had exceeded their authority, and lacked the power to award punitive damages. The motion court denied the motion, holding that the movants had “charted their own course” by “actively litigat[ing]” before the arbitration panel, and waived any argument as the arbitrability of punitive damages claims.

The First Department, in a decision by Justice Manzanet-Daniels (and joined by Justices Acosta and Saxe), affirmed. The majority rejected the argument that the New York choice of law provision in the contracts mandated application of the Garrity rule barring punitive damages claims in arbitration:

Merely stating, without further elaboration, that an agreement is to be construed and enforced in accordance with the law of New York does not suffice to invoke the Garrity rule. The Supreme Court has made clear that in order to remove the issue of punitive damages from the arbitrators, the agreement must “unequivocal[ly] exclu[de]” the claim (id. at 60). The agreement in this case, which provided only that it was to be “construed and enforced” in accordance with the law of New York, did not unequivocally exclude claims for punitive damages from the consideration of the arbitrators. . . . A New York choice-of-law provision does not constitute a manifestation of unequivocal intent sufficient to invoke the Garrity rule.

(Citations omitted) (emphasis added).

The majority went on to hold that the defendants had waived their right to seeks a stay of the arbitration by their active participation in the arbitration:

Petitioners’ motion to stay the arbitration should be denied for the further reason that they have participated in the arbitration, precluding late resort to CPLR 7503(b). CPLR 7503(b) authorizes motions to stay arbitration by parties “who ha[ve] not participated in the arbitration.” Petitioners participated in the arbitration process for nearly eight months — selecting arbitrators, participating in preliminary proceedings — before registering an objection to the arbitrability of respondent’s claim for punitive damages. Even then, petitioners chose not to move to stay the arbitration, but to make a motion to dismiss the claim, squarely placing the issue of the arbitrability and availability of punitive damages before the arbitrators. Having “charted their own course,” in the words of the motion court, they cannot now avail themselves of the mechanisms set forth in CPLR 7503(b).

Justice Renwick wrote a dissenting opinion, which was joined by Justice Andrias. The dissenters argued that the Supreme Court’s decision in Mastrobuono, on which the majority relied, was distinguishable because the choice of law provision at issue in that case provided only that the agreement would be “governed” by New York law, which the Court interpreted as requiring the application of the “substantive principles that New York courts would apply, but not . . . special rules limiting the authority of the arbitrators” (i.e., the rule precluding the award of punitive damages). The choice of law provision in In re Flintlock, calling for the agreement to be “construed and enforced” in accordance with New York law, had been construed by the New York Court of Appeals, in Matter of Diamond Waterproofing Sys., Inc. v. 55 Liberty Corp., 4 N.Y.3d 247, 252 (2005), to mandate application of New York’s law requiring statute of limitations issues to be resolved by the Court, not the arbitrators. The dissent held that, under Diamond, the choice of law clause at issue in In re Flintlock required application of the Garrity rule precluding arbitrators from awarding punitive damages:

Diamond and its progeny make clear that, even if the FAA applies to an agreement, the parties may still limit the arbitrator’s power by invoking New York law. To do so, however, the parties must not only make the agreement subject to New York law, but must also make its “enforcement” subject to New York law. By using such language, the parties “unequivocally” invoke the limitations on arbitration under New York State law.

The majority, however, finds it significant that the language at issue here, that “an agreement is to be construed and enforced’ in accordance with New York law, has [never] been held to displace Mastrobuono.” The majority finds that Diamond is not controlling here because it “involved application of the statute of limitations and does not speak to the issue sub judice.” The majority’s refusal to acknowledge that Diamond is controlling here appears to be based upon a fundamental difference in its approach to distinguishing between substantive and procedural law. The procedural law establishes whether the arbitrators have the power to address punitive damages claims, while the substantive law establishes whether certain circumstances are proper for granting such remedy.

For example, in an international commercial arbitration case with the situs of New York and with a general choice-of-law clause providing for New York law, New York law would be the substantive law for the dispute, and the FAA would be the procedural law governing the arbitration. New York’s procedural rule would not be the proper procedural law for the aforementioned scenario, absent the critical language limiting the power of the arbitrator. Thus, the Garrity rule prohibiting arbitrators from awarding punitive damages would not be part of the procedural rule governing this international arbitration. In this hypothetical, the arbitrator would have the power to award punitive damages. As New York law is the substantive law for the case, however, New York law would be applied by the arbitrator to determine whether punitive damages are warranted.

The dissent also rejected the argument that the defendants had waived the right to seek a stay by participating in the arbitration:

[T]he majority finds that the motion to stay arbitration of punitive damages should be denied because petitioners “have participated in the arbitration, precluding late resort to CPLR 7503(b).” I disagree. The grant of a permanent stay of respondent’s claim for punitive damages would not interfere with the ongoing arbitration proceeding. Moreover, a waiver is akin to an implicit agreement. Indeed, there can be no implicit agreement to submit punitive damages to an arbitrator where the parties’ “unequivocal choice-of-law provision” is intended to incorporate the Garrity rule.

In re Flintlock is the second significant decision from the First Department this month on arbitrability and waiver issues in the arbitration context. We previously blogged about the Court’s August 7 decision in Cusiamo v. Schnurr, which reaffirmed the broad application of the FAA even to intrastate activities that “affect” interstate commerce. Both decisions demonstrate the New York Court’s implementation of the strong pro-arbitration policy of the FAA, even when that policy conflicts with New York law. The contrasting standards in the two decisions for waiver of the right to arbitrate vs. waiver of the right to move for stay of arbitration illustrate the point: In Cusiamo, the First Department held that the plaintiff had not waived the right to arbitrate, despite filing a lawsuit in New York state court, and only commencing the arbitration when the complaint was dismissed with leave to replead; in In re Flintlock, by contrast, the Court found that participation in preliminary proceedings in the arbitration effected a waiver of the right to move for a stay of the arbitration.

We can expect further litigation in In re Flintlock, since the appellants have an appeal as of right to the Court of Appeals, given the 2-justice dissent in the Appellate Division.

First Department Addresses Scope of Federal Arbitration Act

On August 7, 2014, the First Department issued a decision in Cusimano v. Schnurr, 2014 NY Slip Op. 05702, addressing two issues that arise frequently in the context of commercial arbitration: (1) whether the parties’ arbitration agreement is covered by the Federal Arbitration Act (FAA), in which case threshold issues, such as the timeliness of the claims, are determined in the first instance by the arbitrator; and (2) whether the claimant waived the right to arbitration by first pursuing litigation in court.

In Cusimano, the plaintiffs brought suit against their former accountants for allegedly conspiring with plaintiffs’ business partners to misappropriate distributions and assets from an entity, commit tax fraud, and fraudulently induce one of the plaintiffs to sell her interest in a property. Justice Ramos of the New York County Commercial Division dismissed plaintiffs’ fraud and breach of fiduciary duty claims for lack of specificity under CPLR 3016(b) with leave to replead. Rather than filing an amended complaint, however, the plaintiffs commenced an arbitration with the American Arbitration Association, asserting claims similar to those raised in the lawsuit, and moved, under CPLR 7503(a), for a stay of the lawsuit pending the arbitration. The defendant accountants cross-moved for a permanent stay of the arbitration, under CPLR 7503(b), on the ground that the arbitration claims were time-barred. Plaintiffs opposed the cross-motion, arguing that because the parties’ arbitration agreement was covered by the FAA, the issue of timeliness should be decided by the arbitrator, not the court. Justice Ramos found that the FAA was inapplicable because the agreements at issue “do not involve interstate commerce.” He proceeded to hold that many of the claims were time-barred, and that plaintiffs waived any right they may have had to arbitrate those claims by commencing, and participating in, the litigation in New York Supreme Court.

The First Department (in a decision by Justice Richter) reversed. First, the Court found that the FAA applied given the broad interpretation the courts apply to the term “involving commerce” as used in the statute:

The FAA governs agreements which “evidenc[e] a transaction involving commerce” (9 USC § 2). In determining if the FAA applies to a contract, the central question is whether the agreement is a contract evidencing a transaction involving commerce within the meaning of the FAA.

Courts have interpreted the term “involving commerce” broadly. In Allied-Bruce [Terminix Companies, Inc. v. Dobson, 513 US 265, 270 (1995)], the United States Supreme Court concluded that the purpose of the FAA — to reduce the amount of litigation through the enforcement of arbitration agreements — supports a broad interpretation of the term “involving commerce” (513 US at 275). The Court declined to restrict transactions involving commerce only to those “activities within the flow of commerce” (id. at 273 [internal quotation marks and emphasis omitted]). Rather, it found the phrase “involving commerce” to be the equivalent of “affecting commerce,” a term associated with the broad application of Congress’s power under the Commerce Clause (id. at 273-274).

. . .

Based on a broad application of the term “involving commerce,” we find that the FAA applies to the agreements at issue. Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property. FLIP’s rental property, which is located in Florida, is leased by a CVS drug store; Berita owns an interest in an entity that in turn owns a Marriott Hotel; and Seaview owns two commercial buildings. Because commercial real estate can affect interstate commerce, the ownership of and investment in the commercial buildings here, one of which is occupied by an international chain hotel and another which houses a national chain drug store located out-of-state, renders the FAA applicable to these agreements.

We reject respondents’ claims that the FAA is inapplicable because, in their view, this is a dispute about the mismanagement of the family entities in New York State. The proper inquiry is whether the economic activity in question represents a general practice that bears on interstate commerce in a substantial way. This dispute not only involves substantial commercial transactions covering real properties, some of which are not in this state, but as plaintiffs note, the properties are part of national hotel and drug store chains.

Second, the Court found that the fact that plaintiffs filed a lawsuit in Supreme Court did not effect a waiver of the right to arbitrate, as the parties did not engage in “protracted litigation” prior to the commencement of the arbitration, and there was no prejudice to the defendants:

Although a party may have a right to arbitrate, the court may determine that a party has waived this right by having participated in litigation. There is a strong federal policy favoring arbitration, and waiver should not be lightly inferred under the FAA. A party does not waive the right to arbitrate simply by pursuing litigation, but by engaging in protracted litigation that results in prejudice to the opposing party.

In determining what constitutes protracted litigation for the purposes of waiver, there is no bright line rule. Rather, the court should consider three factors: (1) the amount of time between the commencement of the action and the request for arbitration; (2) the amount of litigation thus far; and (3) proof of prejudice to the opposing party Indeed, the key to a waiver analysis is prejudice. Prejudice may either be substantive prejudice or result from excessive delay or costs caused by the moving party’s pursuit of litigation prior to seeking arbitration, though cost alone is not sufficient to establish prejudice. A party may be substantively prejudiced when the other party is attempting to relitigate an issue through arbitration, has participated in substantial motion practice, or seeks arbitration after engaging in discovery that is unavailable in arbitration.

Applying these principles, we find that plaintiffs’ actions in this litigation have not prejudiced respondents such that the court must find waiver. Although plaintiffs commenced this action in court, they did not engage in aggressive litigation involving multiple motions addressed to the merits, nor did they pursue state court appeals. Importantly, the only substantive motion in this action was made by the accountants. Plaintiffs moved only to disqualify defense counsel, relief which could have been sought in arbitration. In any event, this type of motion would be insufficient to constitute waiver under the federal case law. Respondents point to the fact that plaintiffs requested subpoenas while the motion to dismiss was pending, but no actual discovery took place. Therefore, plaintiffs did not obtain any evidence that would not be available to them in arbitration.

Respondents assert that plaintiffs, by seeking arbitration, are attempting to relitigate the issues they lost before the motion court. However the motion court gave plaintiffs leave to replead with specificity, effectively giving plaintiffs “another bite at the apple,” at least as to the sufficiency of the pleadings. Thus, plaintiffs have not received any greater advantage by filing a statement of claim in an arbitration than they would have obtained had they filed an amended complaint. In any event, respondents point to no case finding waiver solely because a party filed an arbitration demand after limited motion practice, particularly where, as here, only one year had passed and no discovery had been exchanged.

The accountants argue that plaintiffs’ delay in seeking arbitration is prejudicial because it caused them to experience unnecessary delay and expenses. They stress the amount of time that passed between plaintiffs’ filing their complaint and pursuing arbitration and argue that they incurred legal fees in challenging plaintiffs’ subpoenas. A delay of one year does not, in itself, amount to protracted litigation, particularly where a delay was not accompanied by substantial motion practice or discovery. Further, the expense the accountants incurred in responding to plaintiffs’ procedural motion and subpoenas does not, by itself, establish waiver. Indeed, this Court has found that “pretrial expense and delay, without more, does not constitute prejudice sufficient to support” waiver.

Although plaintiffs could have sought arbitration sooner, the fact that they did not file a substantive motion or obtain discovery material that would not have been available in arbitration weighs in favor of allowing arbitration to proceed. Indeed, when assessing the question of waiver, any doubts concerning whether there has been a waiver are resolved in favor of arbitration. In light of the strong preference for arbitration and the lack of prejudice to respondents, we find that no waiver has occurred.

(Citations omitted).

Petition to Stay Mandatory Mediation Dismissed

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Matter of Albee Development LLC v. Casino Development Group, Inc., 2014 NY Slip Op. 31959(U), dismissing a petition to stay a mandatory mediation.

In Matter of Albee Development LLC, the respondent initiated an arbitration with the petitioner regarding a contract dispute. The petitioner petitioned to stay the arbitration because, among other grounds, the clause upon which the respondent relied in initiating the arbitration called for mandatory mediation, not arbitration. The court denied the petition, explaining:

[T]he court rejects as meritless petitioners’ assertion that [the petitioner] did not expressly agree to arbitration. Specifically, the contention that the subject agreements do not require [the petitioner] to submit to arbitration of disputes because the provisions specify “binding mediation” as the dispute resolution procedure instead of the word “arbitration” lacks merit. This distinction is not relevant for the purposes of CPLR Article 75; as respondent correctly observed, a trial court of this state has applied Article 75 to a “binding mediation” in confirming a mediation award. Moreover, given if this court were to find a meaningful distinction between the two expressions, in either situation, [the petitioner] has agreed to be bound by the decisions of a neutral third-party that, resolve disputed claims up to the applicable threshold-each contract provides that, unless a contrary agreement is made, “mediation shall be in accordance with Construction Industry Mediation Rules of the American Arbitration Association[.]” Given that the demands served by respondent appear to comply with the applicable rules of the subject organization, this court shall not interfere with the bargained-for alternative dispute resolution process based on the distinction between “binding mediation” and arbitration.

(Internal quotations and citations omitted).

Motion for Stay in Favor of Arbitration Denied When Complete Identity of Parties Lacking

On July 10, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Interventure 77 Hudson LLC v. Falcon Real Estate Investment Co., LP, 2014 NY Slip Op. 31878(U), denying motions to compel arbitration.

In Interventure 77 Hudson LLC, three defendants moved for a stay in favor of arbitration “on the grounds that there is a parallel proceeding filed in arbitration and the claims in the arbitration proceeding factually overlap the claims brought in this action.” The court denied all three motions. The court began by explaining the standard:

The court may grant a stay under CPLR 2201 in a proper case. When the decision in one action will determine all the questions in the other action, and the judgment in one trial will dispose of the controversy in both actions, a case for a stay is presented. Where a party seeks the stay of an action pending the outcome of another action, complete identity of parties, causes of action and judgment sought are required. Although these elements are not specifically set forth in CPLR 2201, they are generally adhered to.

(Internal quotations and citations omitted) (emphasis added). The court went on to deny all three motions, finding in each case that there was “not complete identity of the parties between the current action and the arbitration.”

Opportunity to Comment on Proposed Change to Joint Rules of the Appellate Division

The Office of Court Administration has asked for public comment on a proposed change to the Joint Rules of the Appellate Division.

The proposed new rule would require law firm engagement letters to inform clients about the ADR programs available on the Unified Court System’s website.

E-mail comments to by September 8, 2014.

NOTE: Schlam Stone & Dolan partner John M. Lundin was a member of the City Bar Association Committee on Alternative Dispute Resolution, which recommended this rule change.

New York County Commercial Division Updates Rules, Includes Pilot Mandatory Mediation Program

The New York County Commercial Division has updated the Rules and Procedures of the Alternative Dispute Resolution Program to include rules for the pilot mandatory mediation program discussed in our January 1, 2014 post. The new rules take effect on July 28, 2014.

UPDATE Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

On June 3, 2014, we posted about dueling requests for “emergency” interim relief in a dispute concerning a Deutsche Bank investment advisory team joining the investment advisory and private wealth management firm HPM Partners. Here is an update:

On June 3, 2014, the two most senior departing Deutsche Bank employees, Benjamin Pace and Lawrence Weissman, filed notices of appeal in both actions. The pre-argument statements are available here and here. The principal asserted grounds for reversal are: (1) the absence of any agreement between Deutsche Bank and Pace; and (2) the theory that both were constructively discharged without cause – rendering any restrictive covenants unenforceable.

Also on June 3, HPM moved by order to show cause for expedited document and deposition discovery in anticipation of the scheduled June 24 hearing on the parties’ respective requests for preliminary injunctions. The discovery sought focuses on the relevant employees’ personnel files (and hence the existence or non-existence of applicable covenants in written employment agreements) and Deutsche Bank’s conduct with respect to the investment instruments that Pace and Weissman claim they were being pressured to sell their clients. HPM’s brief in support of its motion for discovery is here.

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.