New York Appellate Court Issues Pro-Arbitration Ruling in Real Estate Fraud Case

A key New York appellate court reversed a state court in New York City and ordered arbitration to proceed on a claim that was initially brought in court and dismissed. Holding that the Federal Arbitration Act (FAA) applies to two agreements relating to real estate in New York and a third agreement relating to real estate in Florida because they “affect interstate commerce,” the court ordered that the arbitration panel — and not the court — should rule whether the claims were time-barred. Importantly, the appellate court rejected an argument that the claimants waived their right to arbitrate by initially suing in state court.

In Rita Cusimano v. Andrew Schnurr, the claimants were partners in three real estate ventures who sued their accountants in state court alleging breaches of fiduciary duty and professional negligence. The claimants alleged they lost millions of dollars because the accountants (1) helped the claimants’ business partners misappropriate distributions and assets; (2) fraudulently induced the claimants to sell interest in one entity; and (3) engaged in conduct amounting to tax fraud. The lower court dismissed the claimants’ case as time-barred and insufficiently pleaded. Then, the claimants filed a demand for arbitration for the same claims against the accountants and added claims against the claimants’ partners. The claimants asked the state court to stay the litigation in favor of arbitration, arguing that the arbitrator should decide all issues including whether the claims are time barred, and the accountants and the claimants’ business partners asked the court to bar the arbitration. The trial judge ruled against claimants on the basis that state law — not FAA — applied and that the court could decide the statute of limitations, and holding that the claimants in any event had waived the right to arbitrate by pursuing litigation.

The Appellate Division’s First Department reversed that decision and invoked federal precedent, deciding that the FAA — and not state law — applies to agreements “involving interstate commerce” such as the three partnership agreements. “Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property.” The agreements “involve interstate commerce” because one of the New York properties was run by a national chain hotel — even though the hotel chain is not involved in the litigation. Consequently, because the FAA applies, the statute of limitations issue should be decided by the arbitrator, and not the court.

On the issue of waiver, the court reiterated the strong federal pro-arbitration policy does not “lightly infer” waiver under the FAA. Simply pursuing litigation is not enough to constitute waiver of the right to arbitrate; a right to arbitrate is only waived where a party “engage[s] in protracted litigation that results in prejudice to the opposing party.” Such a high bar for waiver is not only deferential to the arbitrators, but also permits parties to initiate the early stages of litigation without foreclosing their arbitration rights. To determine whether the claimants waived the right to arbitrate, the First Department considered three factors: (a) the amount of time between the commencement of the action and the request for arbitration; (b) the amount of litigation thus far; and (c) proof of prejudice to the opposing party. The First Department decided that, although the claimants could have demanded arbitration earlier, they have not obtained any undue discovery material or engaged in aggressive litigation addressing substantive issues. Thus, they had not gained any substantial advantage, nor have Respondents suffered any prejudice.

The ruling in this case serves as yet another example of New York judiciary’s commitment to respecting arbitrators’ authority. For parties, this case underscores the wisdom of drafting agreements that contain arbitration clauses that carefully define the scope of the arbitration panel’s authority.

Parties’ Needs Come First

Parties’ interests are paramount to the success of any arbitration. At Arent Fox, we have a team of attorneys who are focused on supporting our clients’ interests in the dispute resolution arena. Our Washington, DC-based group includes Matthew J. Clark, Timothy J. Feighery, and Matthew Nolan. Our New York-based group includes seasoned practitioners Hunter T. Carter, Elliott M. Kroll, Bernice K. Leber, and Julius A. Rousseau, III. And our California-based group is led by Pierre-Richard Prosper. Whether representing foreign sovereigns, investors, or private commercial parties in cross-border or domestic disputes, our attorneys have the experience and insight needed to understand the complexities our clients face.

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