Results matching “levine”

Choice of Law: Characterization of Facts Determines the Outcome

By Gerald M. Levine

Although there may be no disagreement about the facts, what law applies often depends on how the facts are characterized. An illustration of this is seen in the Cusimano, et al v. Schnurr decisions from the motion court, 40 Misc.3d 1208 (2013) and appellate division, 2014 NY Slip Op 05702 (1st Dept. August 7, 2014). The dispute turns on the nature of the economic activity of the parties' enterprise. For Justice Ramos,"[a]s [a] result of plaintiffs' flagrant forum shopping, [the] issue of statute of limitations defense was for court, rather than for arbitrators to decide."

An equally important but secondary issue in Cusimano--what level of litigation activity will result in a waiver--is for the court under New York law, although it may also implicate the rules of the arbitration forum. For example, the American Arbitration Commercial Rules provide that:

[a]ny party who proceeds with the arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection in writing shall be deemed to have waived the right to object (Rule 41).
The motion court found "that the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration." The appellate panel disagreed. It explained that the phrase "involving commerce" is to be broadly construed (Decision at 4). It is the "equivalent of 'affecting commerce,' a term associated with the broad application of Congress's power under the Commerce Clause" (Id.). This brings the dispute within the ambit of the FAA which assigns the limitations defense to the arbitrator. Cusimano had reached the appellate division after plaintiff filed a demand for arbitration that Justice Ramos denied because he had already previously given plaintiffs leave to replead their complaint.

The dispute in Cusimano involved three separate real estate properties, one located in Florida and two in New York. Justice Ramos found "the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration" (Decision at 17). Veering to arbitration after commencing an action, he ruled, is a flagrant example of forum shopping - dressed up as a professed concern for judicial economy - to get a second bite at the apple in arbitration. The Court will not and does not accept such a gaming of the litigation process, and any right that Rita may have had to insist on arbitration of her claims against the accountants has been waived by her resort to, and aggressive participation in this litigation. (Id., at 19).

The appellate panel characterized the facts differently and not as "a flagrant example of forum shopping":

Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property.... Because [these properties] ... 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 (Decision at 5).

Therefore, the timeliness issue was for the arbitrator to determine.

However, the secondary issue of waiver was held to be properly before the court although plaintiffs argued it too was for the arbitrator. Whether there is a waiver is informed by state and federal policies favoring arbitration. The appellate panel held that "waiver should not be 'lightly inferred' under the FAA," citing federal decisions. The answer of how much litigation bars arbitration turns on what has actually been done and whether what has been done is prejudicial to a party to have to defend itself anew in the arbitral forum. "A party does not waive the right to arbitrate simply by pursuing litigation, but by 'engag[ing] in protracted litigation that results in prejudice to the opposing party'" (Kramer v. Hammond, 943 F2d 176, 179 [2d Cir 1991]). Justice Ramos viewed the filing for arbitration as a "gaming of the litigation process." (Id.)

The appellate panel commenced its analysis with a caution:

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."
Costs could be a factor but it is not alone "sufficient to establish prejudice."

Litigation becomes too much where the party opting for arbitration seeks to relitigate issues lost before the motion court. However, in Cusimano:

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.
Further, as the appellate division noted, defendants
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. (Id. at 6-7).
The resolution of this tension between court and arbitrator depends largely on the posture of the case. Since Cusimano started in court, certain determinations are within its jurisdiction depending on the applicable law. Although both waiver and limitations determine an outcome, only waiver prevents a party from proceeding with arbitration. On the other hand, where a case reaches court after an arbitrator's ruling on waiver his determination is likely to be respected.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book to be published in March 2015 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

Arbitrators Acting Within and Exceeding Their Powers

By Gerald M. Levine

Finding that an arbitrator has exceeded his or her powers is exceedingly rare. An arbitrator's interpretation of the parties' contract prevails even if there is "arguably a better [one]." American Postal Workers Union, AFL-CIO v. United States Postal Service, __ F.3d __ (2d Cir. June 6, 2014) (reversing the judgment). Exceeding powers is not satisfied by poor reasoning or bad logic. It requires showing the arbitrator has acted "outside the scope of his contractually delegated authority." Oxford Health Plans LLC V. Sutter, 133 S.Ct. 2064, 2068 (2013).

In American Postal Workers Union, the plaintiff moved to vacate the award on the basis that the arbitrator exceeded his powers by applying the doctrine of collateral estoppel against plaintiff. However, the parties' contract contained an issue preclusion provision. In the district court's view "[i]f one were to draw any inference from [the provision], it would be the converse inference that, because the [provision] explains where principles of preclusion do apply, those principles do not apply elsewhere" (emphasis in original). While the Circuit panel may have agreed that the district court's interpretation made more sense and was better reasoned, it nevertheless concluded that it erred in substituting its own judgment for that of the arbitrator and remanded the matter with instructions to confirm the arbitral award.

That different arbitrators may interpret the law and facts differently goes without saying. That one may find for the claimant and another for the respondent is not impossible, but neither does it require a conclusion that either exceeded his or her powers. In Aerotel, Ltd. v. IDT Corp., 13-3085 (2d Cir. June 3, 2014) the Court of Appeals noted that "[t]he District Court properly concluded that while another panel might have reached a different conclusion, the panel in this case, whether correctly or not, was unquestionably applying the governing law."

What does it take for a finding that an arbitrator exceeded his or her powers? To judge from a variety of decisions from different circuits the answer is that it is exceedingly difficult. The "showing required to avoid confirmation is very high," D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95 (2d Cir 2006). In Bain Cotton Company v. Chestnutt Cotton Company, 531 Fed.Appx. 500 (5th Cir. June 24, 2013) (Unpublished) (which involved issues regarding the management of an arbitration), the Court emphasizes an important overriding principle: it observed that "[t]his appeal presents a quintessential example of a principal distinction between arbitration and litigation, especially in the scope of review. Had this discovery dispute arisen in and been ruled on by the district court, it is not unlikely that the denial of Bain's pleas would have led to reversal; however, under the "strong federal policy favoring arbitration, judicial review of an arbitration award is extremely narrow." Id., at 500-501.

To clear the bar for exceeding powers, the movant must offer proof that the arbitrator "abandoned [his] interpretative role." Oxford Health Plans, supra. In distinguishing Oxford from Stolt-Nielsen S. A. v. AnimalFeeds Int'l Corp., 559 U. S. 662, 684 (2010), the Supreme Court held the arbitrator had "construe[d] the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration." Section 10(a)(4) "permits courts to vacate an arbitral decision only when the arbitrator stray[s] from his delegated task of interpreting a contract, not when he performed that task poorly." Id. This standard grants arbitrators a wider space for their choices and decisions and supports a "narrow[er]" role for the court.

For this reason, if the only argument the losing party can muster is that the arbitrator was mistaken in construing the contract, there is no basis for vacating the award. This was made clear in American Postal Workers Union, supra, i.e., even though a different interpretation would have changed the result in favor of the losing party, the arbitrator's judgment is paramount. "The crux of the excess-of-powers standard is 'whether the arbitrator's award draws its essence from the [agreement]," citing St. Mary Home, Inc. v. Serv. Emps. Int'l Union, Dist. 1199, 116 F.3d 41, 44 (2d Cir. 1997). If the evidence does not support movant's contention that "the arbitrator act[ed] outside the scope of his contractually delegated authority." Oxford Health Plans, supra., there is no legal basis for vacating the award.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book to be published in Fall 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

By Gerald M. Levine

A recent decision from the Third Department, Bianchi v. Katz, 111 A.D.3d 1012 (2013) is a warning against untimeliness in taking steps to confirm an award. Every procedure has its time limitations. A party seeking to stay an arbitration must make its application within 20 days of service of the demand (CPLR 7503), failing which it "shall thereafter be precluded from objecting that a valid agreement was not made." An application of a party "to vacate or modify an award may be made by a party within ninety days after its delivery to him" (CPLR 7511). If an award is to be confirmed, the application has to be made within a one-year period running from the date the award is delivered to the party (CPLR 7510). Between the bookends there are still other times that have to be obeyed for modifying an award. At the front end all that is lost is that the moving party will have to submit to arbitration, but at the back end all is literally lost: untimeliness renders the award unenforceable.

In Bianchi, the arbitrator issued an award of damages to petitioners, but petitioners' counsel informed the arbitrator of an alleged error in the computation. Respondent's counsel "vehemently" object to any modification. Petitioners' counsel failed to follow up; the arbitrator was not put in a position that it had to act, and did not do so. More than a year later, petitioners applied to the Supreme Court for an order of confirmation of the original arbitration award. Supreme Court denied the petition as untimely, as did the Appellate Division whose reasoning is straight forward. This is not an issue of first impression. An arbitrator's power to modify an award is extremely limited. The procedure is governed by CPLR 7509 and 7511. The Court explained that there are two different limitation periods:

In particular [CPLR 7509] ... provides that a written request for modification must be made within 20 days of the delivery of the original award with written notice to the other parties, that written objections must be served upon the arbitrator and other parties within 10 days of receipt of such notice and that the arbitrator must issue a decision within 30 days of the date of the filing of the objections or the expiration of the time within which to do so.

Absent compliance with the statutory requirements, an arbitrator is without authority to modify an award, although application can still be made to the court (CPLR 7511, the ninety day rule). Petitioners' counsel (whether the original or his successor) struck out on all the time periods. His letter to the arbitrator informing him of an alleged error was sent 34 days after delivery of the original award so there was understandable cause for respondent's "vehemen[ce] objecting to any modification [of it.]" He made no application to the Court. Then, he failed to confirm the award within the one-year statutory period.

Object lessons are hard against counsel who provide the warnings that others learn from. The Appellate Division cites seven cases that in one way or another are concerned with (un)timeliness with one or more of the statutory dates. Bianchi is simply added to the list. The result of missing the first date meant that even if the arbitrator had acted on the request for modification it would have been deemed a nullity, which is probably the reason he took no action after the respondent rebuffed claimant's request for a modification. "Given the noncompliance with CPLR 7509, there is no impact on the statute of limitations set forth in CPLR 7510." The hard lesson is that missing a statutory date that is one of several that has to be obeyed for counsel and the awardee to avoid the ultimate loss of having an unenforceable award.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book in Spring 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

By Gerald M. Levine

A nonsignatory to an arbitration agreement is not generally subject to it and cannot be compelled to submit to the proceedings, but there are equitable circumstances that may warrant a different result. MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). The MAG court identified five theories under which a nonsignatory to an arbitration agreement may still be bound by it: "1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." With regard to the fifth theory, estoppel is based on a finding that the nonsignatory received a direct benefit: "a nonsignatory may be compelled to arbitrate where the nonsignatory 'knowingly exploits' the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement."

There are two concepts expressed in the MAG court decision, namely "knowingly exploits" and "benefits flowing directly from" that support compelling a nonsignatory to submit to arbitration. Importantly, both concepts require that the "knowing exploitation" and the "receiving benefits" flow directly from the agreement containing the arbitration clause. The theory does not extend to nonsignatories receiving benefits indirectly, which means from a business relationship independent of the agreement containing the arbitration clause. Distinguishing direct from indirect requires a discriminating analysis as illustrated in the case of Belzberg v. Verus Investments Holding Inc., 2013 NY Slip Op 06729 (October 17, 2013) which landed in all three levels of our judicial system. The New York Court of Appeals properly notes in Belzberg that "it can be difficult to distinguish between [direct and indirect benefits]." It notes further that it is an issue federal courts have "grappled with," citing to several decisions that "provide[] useful guidance on how to apply the theory."

The difficulty noted by the Court of Appeals in Belzberg is dramatized by the different results from the motion court and the Appellate Division. The motion court concluded after an oral hearing that petitioner (the party sought to be added to the arbitration) "did not receive a benefit which flowed directly from the [agreement that contained the arbitration clause]." The appellate division unanimously reversed and held that petitioner received a direct benefit in a unanimous decision of the five member panel. The court held that because "Belzberg knowingly exploited and directly benefitted from the Verus-Jefferies customer agreement, he should be estopped from avoiding the agreement's obligation to arbitrate," 93 AD3d 713 (1st Dept. 2012). The Court of Appeals (with Justice Abdus-Salaam not taking part because she had been a member of the Appellate Division panel) concluded otherwise and reversed the Appellate Division. Counting the trial justice who ordered arbitration permanently stayed against petitioner, the score was seven judges to five in petitioner's favor. Petitioner walked away with profits from the transaction while Verus and Jefferies (the parties to the arbitration agreement) were left with tax obligations.

The Court of Appeals' decision rests as it noted on decisions from the Second Circuit and district courts within the Circuit analyzing a variety of factual circumstances brought on by parties seeking to compel or resisting arbitration. The outcome in these decisions depends upon the documented source of a party's benefit. Arbitration may be compelled even if the party did not execute the agreement containing the arbitration clause. Thus, in Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993) the Court held that the resisting party was estopped from denying its obligation because it "knowingly accepted the benefits of the Agreement" by operating under "the trade name 'Deloitte' in exchange for compliance with the dictates of the agreement." In a more recent decision by the resisting party,13-CV-00872 (EDNY 2013) the district court concluded that although plaintiff was a nonsignatory it nevertheless derived a direct benefit "from the agreements in the form of liens on the used cars." These rulings to compel arbitration rest on the proposition that the resisting party is not relieved of obligations that can be said to be the quid pro quo for future benefits. Carvant cites approvingly Lee v. Grandcor Med. Sys., Inc., 702 F.Supp. 252, 255 (D. Colo. 1988) ("A third party beneficiary must accept a contract's burdens along with its benefits.").

In contrast, an indirect benefit "derive[s] from a business relationship independent of the contract containing the arbitration provision." Lang v. First Am. Tit, Ins. Co., 12-CV-266S (WDNY 2012). In Lang, the Plaintiff's benefit involved securing a refinanced mortgage it derived from the "mere fact of the contractual relationship between the lender and Defendant, the existence of which was a condition of [the lender] refinancing Plaintiffs' mortgage." The underlying agreement incorporated the New York State approved policy rates. The court held "plaintiffs' ability to secure a refinanced mortgage from a lender" was "incidental" to the lender title policy and independent of the "'contractual relationship' between the lender and Defendant [title insurer]."

Belzberg's benefit was also indirect because it too was incidental. However, the factual circumstances were complicated by Belzberg's actions in directing the underlying transaction. Both the Appellate Division and the Court of Appeals commented unfavorably on Belzberg's conduct. The Appellate Division expressed its critical view in noting the inconsistencies of Belzberg's written and oral testimony: "Belzberg's contradictory statements on these material issues cast doubt on his present claim that the loan came from Winton and not him, and warrant our rejection of his factual characterization of the money transfer." This clearly raised an ethical question which the Appellate Division transposed into a basis for compelling arbitration, but the described conduct is not the key to compelling arbitration. It may be true that "Belzberg's use of the profits attributed to Winton's original investment may breach his duty or some role assumed on behalf of Winton, or otherwise constitute an opportunistic self serving exercise of his position with Winton." However, the critical fact in Belzberg's favor was that "the use of such monies does not flow from the Jefferies-Verus agreement [that contained the arbitration clause]." Opportunism is not "[t]he guiding principle." Rather:

[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause. The mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract.

Of course, the result does not preclude prosecuting claims actionable in a court of law; it merely postpones the reckoning on the grounds suggested by the Court of Appeals. Merely setting the transaction in motion and benefitting from an independent agreement is not a sufficient basis for applying the estoppel theory, even if there is a sense that the party is getting away with something.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book in Spring 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.


By Gerald M. Levine

Parties in two recent cases, one in the Appellate Division, 1st Department and the other in the 2nd Circuit have been disappointed by decisions reversing trial court orders to vacate awards on the grounds that the arbitrators exceeded the scopes of their authority. The results illustrate two points: (1) the difficulty in vacating awards; and, (2) strategic missteps by counsel in presenting their evidence.

In Caruso v. Viridian Network, LLC, 2013 NY Slip Op. 05780 (9-10-2013) the Appellate Division reversed the trial term's order vacating an arbitration award and remanding the case to a new arbitrator. Petitioner complained she was excluded from certain portions of the arbitration proceedings (approximately 5% of the proceedings). There was no dispute that the arbitrator had "exceeded the scope of his authority" (CPLR §7511(b)(iii), as well as violated Rule 23 of the American Arbitration's Commercial Arbitration Rules, but the Appellate Division held that "the exclusion [was] harmless error, since the result would have been the same had she been present." The arbitrator had found that "petitioner was fired for her repeated, and severe, violation of the conflict of interest provisions of her contract." Although not fully detailed, the arbitrator had also sanctioned petitioner's counsel "for violating the confidentiality order." Thus, in reversing the vacatur despite a finding that the arbitrator had exceeded the scope of his authority, the Appellate Court in Caruso set a high bar for vacating an award: Procedural error cannot trump affirmative findings in favor of the confirming party where the arbitrator's challenged act was not so "imperfectly executed" as to warrant vacatur.

In the Second Circuit case, LJL 33rd Street Associates, LLC v. Pitcairn Properties Inc. 11-5425-cv (7-31-2013) the Court was presented with two issues: the arbitrator's refusal to receive hearsay evidence and the scope of his authority. LJL 33rd involved a dispute between parties who were the equity owners of a limited liability company whose sole asset was a luxury high-rise apartment complex in Manhattan. Their underlying agreement contained a contingency that triggered plaintiff's right to purchase defendant's interest in the property. The arbitration followed plaintiff's election to exercise its right. Plaintiff contended that the arbitrator was required to decide both the "Stated Value" of the property (essentially its fair market value) and the "Purchase Price" to be paid by plaintiff for defendant's interest (defined as the fair market value minus liabilities). The arbitrator determined Stated Value, but refused to determine the Purchase Price, putting plaintiff in the rare position of moving to confirm one branch of the award and vacate another. Defendant also moved to vacate the award on the grounds that the arbitrator had excluded evidence on the issue of Stated Value.

On the issue of Purchase Price, the problem for plaintiff was the limited scope of the arbitrator's authority. The Court of Appeals found that the parties "elected arbitration of narrow precisely specified issues" by virtue of an arbitration clause that read:

In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of the Agreement and may only determine the issue or question present as their award.

The arbitrator had determined that the Purchase Price was not within his jurisdiction, a finding which the district court upheld. However, the district court vacated the arbitrator's determination of fair market value based on its conclusion that the arbitrator had violated the Federal Arbitration Act by excluding certain evidence offered by defendant. The Court of Appeals affirmed the district court's order on the issue of the arbitrator's authority, but disagreed with the district court that the arbitrator's exclusion of evidence violated Section 10(a)(3) of the FAA - "refusing to hear evidence pertinent and material to the controversy."

In reversing the district court's order for partial vacatur, the Court of Appeals pointedly laid fault with defendant's strategic decision in proffering only hearsay evidence, which consisted of an asset summary report, a valuation of the property, a letter, and a non-binding "letter of intent" to purchase the property. Defendant's submissions posited that the Stated Value was as much as 20% higher than that testified to by the appraiser retained to make the appraisal. In siding with the defendant, the district court held that "the arbitrator's decision to exclude this evidence constituted illegal 'misconduct'." Section 10(a)(3) of the FAA provides that "a reviewing court may vacate an arbitration award 'where the arbitrator [is] ... guilty of misconduct in ... refusing to hear evidence pertinent and material to the controversy." In the district court's view, this exclusion "prevented Pitcairn from effectively demonstrating" that the property had a higher market value than the arbitrator determined.

While "it is indisputably correct [in the words of the Court of Appeals] that arbitrators are not bound by the rules of evidence and may consider hearsay, it does not follow that arbitrators are prohibited from excluding hearsay." Instead of calling the "makers of the exhibits as witnesses," Pitcairn offered only the fruits of their work. Although, the Court noted, "Pitcairn may well have been harmed by the exclusion of its exhibits," the harm was self-created. If counsel's strategy in offering only the exhibits was to keep the makers away from cross-examination, it backfired. The court cited Rule 31(b) from the American Arbitration Association's Commercial Arbitration Rules that "[t]he arbitrator shall determine the admissibility, relevance, and materiality of the evidence offered and may exclude evidence deemed by the arbitrator to be cumulative or irrelevant." By denying plaintiff the "opportunity to test the makers' conclusions by cross-examination" counsel's decision not to call the makers created risk inherent in offering hearsay evidence, that it will be deemed inadmissible.

Two lessons can be gleaned from the Court of Appeals' decision in LJL 33rd: (1) parties are bound by the jurisdictional scope they agreed to; and (2) self-created problems "can[not] be considered unfair" where, as in this case, the moving party "could have cured the problem simply by calling the makers of the exhibits as witnesses." On neither issue did the arbitrator 's determination constitute "illegal misconduct" or "impair the 'fundamental fairness' of the proceeding."

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http://www.udrpcommentaries.com.

By Gerald M. Levine

Over the past few years there has been increased economic pressure on disputants to explore alternatives to court litigation and a corresponding increase in taking advantage of the more cost-efficient processes offered in commercial arbitrations/mediations. Counsel representing clients in these ADRs now have the means of protecting their fees in these proceedings through a charging lien due to a recent amendment to Judiciary Law §§ 475 and 475-a. Prior to this amendment, charging liens were only available where a court proceeding had been commenced. To the New York City Bar, which proposed the amendment in 2008, it made no sense that the "fruits of productive attorney labor should [not be protected by a charging] lien - even absent the commencement of a court proceeding." (Our section endorsed the amendment.) In the New York State Senate Introducer's Memorandum in Support of a bill to amend sections 475 and 475-a, Senator Sampson stated that "[t]he practice of law has changed tremendously since Section 475 was last revised in 1946 and Section 475-a was adopted in 1955." The Senator went on to explain that "[a]lternative dispute resolution also benefits the court system by taking disputes that are ripe for resolution out of the often overtaxed courts."

Before the amendment, counsel in arbitration and mediation were at a disadvantage in securing their fees. In re Taylor, Jacoby & Campo, 208 A.D.2d 400, 401 (1st Dept. 1994); In re Matter of Weldon v. De Martini, 231 N.Y.S.2d 530, 533 (Queens Cty 1962) ("The action or proceeding must have actually been commenced and the attorney seeking to enforce the lien must have appeared in the action or proceeding as attorney of record.") If the only appearance was to confirm or vacate the award only that portion of counsel's fee could be charged as a lien. The only way of protecting against "the knavery of his client" [In re City of New York, 5 N.Y.2d 300, 307 (1959)] was to commence a lawsuit or (less expensively) a mediation or arbitration under Part 137 of the Rules of the Chief Administrator of the Court (limited to fees under $50,000 unless otherwise agreed to by the client). At one time the predecessor statute to CPLR 7502, section 1459 of the Civil Practice Act classified arbitration as a special proceeding, but the successor statute "omitted any such reference and instead sought to avoid imposing the formality of a judicial proceeding upon arbitration until the first application is made to a court." Spinello v. Spinello, 70 Misc.2d 521, 525, 334 N.Y.S.2d 70 (NY Sup. 1972). Dropping reference to a "special proceeding" had the unintended result of making it more difficult for an attorney to protect the "fruit of [his or her] productive ... labor," which the Legislature has now corrected.

The amendments which became law on January 1, 2013 (effective January 19, 2013) expand coverage - from "the commencement of an action, special or other proceeding in any court" - to include mediation, arbitration and settlement negotiations. Post January 19, 2013, counsel has the right to a charging lien. In the amendments, the Legislature made two additions Section 475. The first which is substantive, adds the words "commencement of an action..." following "or the initiation of any means of alternative dispute resolution including, but not limited to, mediation or arbitration, or the provision of services in a settlement negotiation at any stage of the dispute, the attorney who appears for a party has a lien upon his or her client's cause of action, claim or counterclaim." The second addition is more in the nature of correcting male gender specific grammatical usage by adding the pronoun "her" so that the law now reads that counsel has a right to a charging lien "upon his or her client's cause of action, claim or counterclaim." In fairly recent history, "his" was regarded as gender neutral. This change was Legislature driven and was not part of the proposal made by the bar associations.

One of the first questions raised under the new law was whether the amendment was retrospective or prospective. In a recent decision, Justice Louis York held that law is prospective. In Bonnaig v. Walton, 110429/11 (NY Sup. 6-3-13), he stated:

"In the amendment at hand, there is no express discussion of the issue of retroactivity. However, the amendment does state that "[t]his act shall take effect on the ninetieth day after it shall have become a law." NY Jud. Law. Section 475. A postponement of the effective date of a statute is strong evidence that the Legislature did not intend for it to be retroactive."
Justice York rejected the plaintiff's argument that the law "should apply retroactively to lien cases which currently are pending in the Court system." The plaintiff had represented a client in an EEOC proceeding that was concluded before the enactment of the Section 475 amendment. "Had the amendment occurred prior to the commencement of the EEOC mediation, Plaintiff undisputedly could have enforced a charging lien," the Court added.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http://www.udrpcommentaries.com.

By Gerald M. Levine

Applications for court intervention in an arbitration or objection to confirmation frequently succeed or (most likely) fail on the language of the parties' arbitration clause and their subsequent agreements where the clause is unclear. Parties are free to write into their arbitration clause the arbitrator's jurisdiction and issues within his or her authority, but in retrospect this calls for a level of prescience difficult to summon at the start of a commercial relationship. Who anticipates endings when beginning are so bright with hope? From the U.S. Supreme Court: "The question whether the parties have submitted a particular dispute to arbitration ... is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise'." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (quoting AT & T Techs., Inc. v. Commc'ns Workers of America, 475 U.S. 643, 649 (1986)). The parties can "clearly and unmistakably provide otherwise" initially in their arbitration clause, or subsequently by agreement. In Oxford Health Plans LLC v. Sutter, 12-135 (U.S. 6-10-2013) because the arbitration clause did not provide for class actions the parties agreed to have the issue determined by the arbitrator. In effect, the parties expanded the arbitration clause by making their agreement "unmistakably clear[er]" (reversing the words in the original quotation, but not changing the sense). The irony in Oxford (particularly in view of American Express Company v. Italian Colors Restaurant, 12-133 (U.S. 6-20-2013)) is noted by Justice Alito when he states that "[t]oday's result follows directly from petitioner's concession and the narrow judicial review that federal law allows in arbitration cases." In American Express the arbitration clause contained a class action waiver which was also "unmistakably [clear]" even if the result of its clarity is "Another Blow to Class Action," New York Times Editorial, June 22, 2013 at A18.

For a party to succeed in either affirming or denying relief under the arbitration clause the language has to clearly state what is within or outside its scope. One way to do this is to make it explicitly clear (as the parties did each in their own way in Oxford Health Plans and American Express). Another way is to incorporate a tribunal's rules. To take a recent example from our circuit: in Schneider V. Kingdom of Thailand, 688 F.3d 68 (2nd Cir. 2013) the parties incorporated article 21 of the UNCITRAL rules, which reads:

The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement.

In consequence, "[w]here 'parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator," citing Contec Corp. v. Remote Solution, Co. Ltd., 398 F.3d 205, 208 (2d Cir.2005). "That is precisely what occurred here [that is in Schneider]. Thus, Thailand is not entitled to [an] independent court adjudication of" the issue it sought to have the court adjudicate. Ruling: award confirmed on the ground that "the parties clearly and unmistakably provide[d] otherwise."

To bring these thoughts down to a gateway issue under New York law, consider N.J.R. Assoc, v. Tausend, 19 N.Y.3d 597, 602 (2012). CPLR § 7502(b) provides that statute of limitations issues are initially reserved for the court, but they can be waived [CPLR § 7503(b)]. Determination of limitations issues are also affected by the language of the arbitration agreement. "A contract may be governed by the Federal Arbitration Act yet subject to the New York rule if the agreement between the parties so provides." N.J.R. at 602, citing Matter of Smith Barney, Harris Upham & Co. v.Luckie, 85 NY2d 193 (1995) and Diamond Sys v. 55 Liberty, 4 NY3d 247 (2005). CPLR 7502 (b) provides that "If, at the time that a demand for arbitration was made or a notice of intention to arbitrate was served, the claim sought to be arbitrated would have been barred by limitation of time had it been asserted in a court of the state, a party may assert the limitation as a bar to the arbitration on an application to the court as provided in section 7503. . .." This procedural rule is reversed under federal law where it is for the arbitrator except where the parties explicitly agree to leave timeliness issues to the court. The "presumption is that the arbitrator should decide 'allegation[s] of waiver, delay, or a like defense to arbitrability'." Howsam, supra. at 84 quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 US 1, 25 [1983]).

CPLR 7503(b) provides that a statute of limitations defense may be raised in state court by "a party who has not participated in the arbitration .... " (emphasis added). However, to leave the timeliness issue to the court in New York the phrasing of the arbitration clause must be precisely phrased. For example, the sentence "[t]his Agreement shall be governed by, and construed in accordance with, the laws and decisions of the State of New York" sounds as though it should invoke New York law, but the language of the arbitration clause controls. In Diamond Sys 4 NY3d at 253 the parties agreed only that the '[t]he Contract shall be governed by the law of the place where the Project is located'." The Project was located in New York. The imprecision in draftsmanship (if it was that, or counsel at the last moment simply commandeered a standard clause) places the decision with the arbitrator and not the court where the "subject project 'affect[s] interstate commerce."

For New York law to apply, the choice of law provision must state that New York law shall govern both "the agreement and its enforcement" (emphasis added). Luckie, 85 NY2d at 201. So that while the gateway statute of limitations questions are for the courts, in "the absence of more critical language concerning enforcement, however, all controversies, including issues of timeliness, are subjects for arbitration," Id. These factors illustrate the importance of carefully considering whether the client wants these issues to be decided in court or arbitration if a dispute arises and crafting the clause to achieve that goal, rather than relying on standard clauses. The lesson from N.J.R. is not that the moving party participated in the arbitration (although it appears to be a persuasive reason in that particular case) but that the parties' agreement was deficient in reserving that gateway issue to the court. For Justice Smith, "this case turns on whether the governing rule is supplied by the F[ederal] A[rbitration] A[ct] or by New York law. The FAA governs if the contract containing the arbitration clause -- the NJR partnership agreement -- is 'a contract evidencing a transaction involving commerce' within the meaning of FAA § 2."

To cycle back to the two recent arbitration decisions from the U.S. Supreme Court and without dwelling on whether the arbitrator in Oxford and the Court in American Express were wise in their judgments the parties made the beds in which they were to lie. The policy issues are now lobbed to the legislative branch of government.


Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http://www.udrpcommentaries.com.

By Gerald M. Levine

An award that allows the losing party to pay some portion of the judgment "in kind" is not a reprieve from its having to deliver the equivalent of cash to satisfy the judgment. In In re Pine Street Associates, L.P. v. Southridge Partners, 2013 NY Slip Op 02854 (1st Dept. April 25, 2013) the arbitrator rendered the following award in favor of Pine Street:

1. Notwithstanding any other provision of the Agreement, (a) within thirty (30) days from the date of this Award, [Southridge] shall redeem no less than forty percent (40%) of the balance of [Pine Street's] interest in [the Fund] in cash; and (b) within ninety (90) days from the date of this award, [Southridge] shall complete the redemption of [Pine Street's] interest in [the Fund] in cash or in kind ....

2. Within forty five (45) days from the date of this Award, [Southridge] shall provide [Pine Street] with an accounting of [Pine Street's] interest and position in [the Fund] (represented to be $8,079,457.85 [sic] as of December 31, 2008) from January 1, 2008 to said date.

In satisfaction of the award, Southridge had made the 40% payment "in cash" and delivered a promissory note and securities "in kind" for the 60% balance. It was naturally disturbed when Pine Street applied to confirm the award and for entry of judgment. Southridge argued in opposition that "the motion was belated, and that because it had satisfied the award some time before, the confirmation was unnecessary." Southridge did not affirmatively state that the in-kind payments equaled in value the 60% balance and Pine Street did not at that time dispute Southridge's representation that the award had been paid in full. The Supreme Court granted the petition to confirm the award and subsequently entered judgment.

Although silent in its confirmation application as to the value of the "in kind" payments, it was precisely their value that underlay Pine Street's application. Its ultimate goal was to collect the full amount of the judgment which required an evaluation of the in-kind payments. The dispute as to the value of securities in lieu of cash came into focus in a subsequent application by Southridge to enjoin and restrain Pine Street from seeking to enforce the judgment "unless and until the Court determined the terms and conditions of such enforcement." This, in effect, crystalized the issue. Pine Street argued that the in-kind portion paid in securities was worth "far less" than (in fact a fraction of) the $4.5 million (the remaining 60%) to which it was entitled under the award. The trial court rejected this construction of the award and granted Southridge's application. It stated that "Pine Street's interest consists of a certain amount of stock" and that "the term 'in kind' did not have to equal a certain dollar amount."

The appellate division disagreed. Such a construction would be anomalous in relieving a party of having to satisfy its full obligation. The majority concluded that it would be "patently absurd ... to give Southridge the [] choice of paying $4,792,596.11 (along with legal interest on that amount) in cash or far less than that 'in kind'." Rather:

we conclude that Southridge was given the option of redeeming Pine Street's interest by tendering either [cash] ... or an amount of whatever stock [Southridge] held that would equal [the balance due] (along with the corresponding amount of legal interest due on that amount.

The intent of the arbitral award was to give Southridge a choice to satisfy its obligation either "in cash" or "in kind" as long as their combined value satisfied the amount of the judgment.

A secondary, but related, issue concerned Pine Street's silence in responding to Southridge's representation that the cash and in-kind payments should be considered in full satisfaction of the judgment. Southridge's choice of wording, that the application to confirm the award was "belated" implies an argument that Pine Street had waited too long for a court ordered evaluation of the in-kind payments. However, the Court held it was not "too long" as long as a party acts within the statute of limitations. While a party "may very well claim that an award has not been satisfied before bringing suit or in its petition for confirmation ... it does not have an obligation to make the claim before seeking enforcement of the award," citing Matter of Bernstein Family Ltd., Partnership v. Sovereign Partners, L.P., 66 AD3d 1, 8 (1st Dept. 2009). A party's decision to contest the value of in-kind payments necessarily depends on factors that cannot be immediately determined, whether (for example) promissory notes are collectible or stock certificates worth their face value. The appellate division remanded the case for a hearing to determine the value of the note and stock tendered to Pine Street.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http://www.udrpcommentaries.com.

Standards for Vacating an Award for Manifest Disregard of the Law

By Gerald M. Levine

Arbitrators naturally express anxiety about vacatur of awards, but in reality it rarely happens. Awards are presumptively legitimate so long as arbitrators "manifest [no] infidelity" to their obligation to "interpret and apply" the parties' agreement. Steelworkers v. the Enterprise Wheel and Car Corp., 363 U.S. 593, 597 (1960) (arbitrators bring to bear their "informed judgment ... in order to reach a fair solution of a problem. This is especially true when it comes to formulating remedies.") In addition to the four statutory grounds for vacatur provided in the Federal Arbitration Act, 9 U.S.C. § 10(a) - "(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators . . .; (3) where the arbitrators were guilty of misconduct; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made" - there is a non-statutory, common law fifth cause, namely "manifest disregard of the law."

Courts are ambivalent about manifest disregard of the law after Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 586, 128 S.Ct. 1396 (2008). However, the Second Circuit made it clear in Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., 548 F.3d 85, 94 (2nd Cir. 2008) that it agrees with other courts that think that "'manifest disregard,' reconceptualized as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA, remains a valid ground for vacating arbitration awards." The Supreme Court in its own later decision on the same case (although reversing the judgment) stated that "[w]e do not decide whether 'manifest disregard' survives our decision in Hall Street ... as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10." 130 S.Ct. 1758, 1768 n. 3 (2010). Whatever the state of the law on this issue, the Supreme Court and the Second Circuit agree that to succeed on this ground a petitioner "bears a 'heavy burden'." T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir. 2010). An order vacating an award for "manifest disregard" may only be entered if "the arbitrator ignored or improperly applied clear and explicitly applicable law to the matter before it, leading to an erroneous outcome." Id.

The heavy burden on petitioner is most recently illustrated in Ometto and Adriano Ometto Agricola LTDA v. ASA Bioenergy Holding A.G.,12-civ-1328 (SDNY, Jan. 9, 2013, Rakoff, J.). Petitioner has filed an appeal, but given the factual circumstances (to the extent they are disclosed in the decision) and Judge Rakoff's analysis reversal appears unlikely. The standard for "manifest disregard" [he held] is "exceedingly difficult to satisfy." Misapplying an ambiguous law does not do it. To succeed, a petitioner seeking to vacate an award must "demonstrate[] that the panel intentionally defied the law," [my emphasis] citing Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors' Comm. of Bayou Group, LLC, No. 10-5049-cv, 2012 WL 2548927, at 1-2 (2d Cir. July 3, 2012) (Unpublished). The principle applies "[e]ven if a tribunal does 'not explain the reason for [its] decision' ... if [the Court] can discern any valid ground for it." Id. "Relief is rare." Id.

Whether or not there has been "manifest disregard" of applicable law - Brazilian law in Ometto - depends on what the parties have submitted to the arbitrator: "In determining an arbitrator's awareness of the law for purposes of a manifest disregard analysis, this Court must 'impute only knowledge of governing law identified by the parties to the arbitration," citing Duferco Intern. Steel Trading v. T. Klasxveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). Since Ometto "did not adequately present its legal theory to the arbitrators, [his] proposition that the arbitrators 'disregarded' that law is without merit."

Ometto presented two other claims that the arbitrator's award was in "manifest disregard of the law." The second claim related to the availability of prospective, rather than actual, damages under Brazilian law. That argument "fare[d] no better" because none of the case law submitted in support of vacatur was presented to the arbitrators. The Court held that:

As to the issue of prospective damages under Brazilian law, the majority of the tribunal, far from "disregarding" the law, responded directly to Ometto's challenges when they rebutted the dissenting arbitrator's position: "[t]he majority believes the damage occurred at closing by paying for a capacity that did not exist, not at a future time."

The third claim concerned the wording of the award. Ometto asserted that "the awards were not 'mutual, final, and definite,' 'because' the Tribunal purportedly failed to address 'a number of Ometto's key defenses." The Court found this to be "a non sequitur on its face." The arbitrators expressly stated in their 200-page decision that they had fully "considered [and resolved] all issues put before them pursuant to their terms of reference" and "[a]ny contention not specifically mentioned in our analysis has been rejected or determined to be irrelevant to our determinations."

One of the striking insights of Ometto (which I think goes to the heart of Judge Rakoff's decision and informs it) is the respondent's failure to educate the arbitrators. As a general rule, a party's silence when it is expected to speak justifies an inference that it has nothing further to add to its argument. It is stuck with the record it creates!

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association.

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