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Equitable Claim Found To Be Arbitrable Under Agreement To Arbitrate

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  • Posted on: Oct 7 2020

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”); Matter of Long Is. Power Auth. Hurricane Sandy Litig., 165 A.D.3d 1138, 1141 (2d Dept. 2018). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted); Stark v. Molod Spitz DeSantis & Stark, P.C., 9 N.Y.3d 59, 66 (2007) (internal citation omitted). For this reason, “New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” Stark, 9 N.Y.3d at 66 (internal quotation marks and citation omitted).

Since arbitration is a “creature of contract” (Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC, 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)). For this reason, “a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal and must not depend upon implication or subtlety.” Waldron v. Goddess, 61 N.Y.2d 181, 183-84 (1984); see also Matter of Trump (Refco Props., 194 A.D.2d 70, 74 (1st Dept. 1993). 

In determining whether to compel arbitration, Courts consider three threshold questions: (i) whether the parties made a valid agreement to arbitrate, (ii) whether, if such an agreement was made, it has been complied with, and (iii) whether the claim sought to be arbitrated would be barred by a limitation of time had it been asserted in a court of the State. Matter of Rockland County [Primiano Const. Co.], 51 N.Y.2d 1, 6-7 (1980). The second inquiry includes the question of whether there has been compliance with any condition precedent. Id. at 7. 

Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions. 

Today, we examine Cenni v. Cenni, 2020 N.Y. Slip Op. 33221(U) (Sup. Ct., N.Y. County Sept. 30, 2020) (here), a case in which the Court was asked to decide whether a claim for equitable relief fell within the scope of the parties’ agreement to arbitrate. As discussed below, the Court held that such claims were included within the agreement to arbitrate.

Adrian Cenni (“ACenni”) brought suit seeking a declaration that he is the managing member of the Atrium Companies, a group of limited liability companies and one corporation, each of which is governed by an Amended and Restated Operating Agreement. ACenni co-owns the Atrium Companies with Rebecca L. Cenni (“RCenni”), his former spouse.

All operating agreements contained an arbitration provision mandating arbitration of all claims “arising … with respect to” the agreements. In pertinent part, each operating agreement provided: “Any claim, controversy or dispute arising between the parties with respect to this Agreement (a ‘Dispute’), to the maximum extent allowed by applicable law, shall be submitted to and finally resolved by, binding arbitration …. Notwithstanding any other provision of this Section, any Dispute in which a party seeks equitable relief may be brought in any court having jurisdiction.”  

In 2016, the parties had a dispute concerning the enforceability of a management contract ACenni had entered into on behalf of the Atrium Companies. In a 2017 arbitration of that dispute, RCenni alleged that ACenni attempted to bind the Atrium Companies in unauthorized service agreements with his wholly owned U.S. Virgin Islands company. The arbitrator ruled in RCenni’s favor, finding that ACenni did not have the authority to enter into the subject service agreements. On March 21, 2018, the arbitrator issued a final award, holding that, among other things, ACenni lacked “authority to make or enter into any contract, agreement or other arrangement with a counterparty in which he ha[d] a direct or indirect ownership interest without the approval of [RCenni]”; ACenni was properly “removed as the Atrium Companies’ ‘President – Operations’”; and ACenni had no authority to run the Atrium Companies’ day-to-day operations. On November 15, 2018, the arbitration award was confirmed and later affirmed on appeal. Cenni v. Cenni, 180 A.D.3d 509 (1st Dept. 2020).

ACenni brought the action against RCenni and the Atrium Companies seeking, inter alia, a declaratory judgment and injunctive relief against all defendants in connection with his rights as a managing member of the Atrium Companies. 

RCenni moved to compel arbitration, arguing that the arbitration clause in the operating agreements mandated arbitration of those claims. 

In response, ACenni argued that he was primarily seeking equitable relief to establish his rights, duties, and responsibilities in the Atrium Companies. He argued that money damages would not be an adequate remedy to address those issues, his ability to obtain information about the companies, his ability to participate in the management of the companies, and his ability to vote and have a voice over company business. Therefore, argued ACenni, the clause in the arbitration agreement permitting the parties to bring a claim for equitable relief in court controlled. 

The Court agreed with RCenni, noting that “the dispute involve[d] the application of a provision of the operating agreement” and, therefore, fell within the “broad” scope of the arbitration provision. Slip Op. at *7-*8.  

The Court rejected ACenni’s argument that the last sentence of the arbitration provision – “[n]otwithstanding any other provision of this Section, any Dispute in which a party seeks equitable relief may be brought in any court having jurisdiction” – was “a carve out of, or an exception to, the arbitration clause in the Operating Agreements.” Id. at *8. Relying on the Court’s prior decision in which the same argument was asserted and rejected and Baldwin Tech. Co., Inc. v. Printers’ Serv. Inc., 2016 WL 354914, 2016 U.S. Dist. LEXIS 10086 (S.D.N.Y. Jan. 27, 2016), the Court held that the clause was not an exception or carve out to arbitration:

Here, the parties are signatories to an agreement with a broad arbitration provision, requiring the parties to submit any controversy under the operating agreement to arbitration. ACenni’s claims for the restoration of his managerial duties require an interpretation of the terms of that operating agreement. The provision permitting the parties to bring a claim for equitable relief in the courts does not undermine this mechanism under the operating agreement in any way. That provision does not prohibit the parties from arbitrating claims for equitable relief, but, instead, permits the parties to bring such claims in a court of law. It does not function as an exception.

Slip Op. at *9.

In the prior action, ACenni “offered th[e] same argument … to oppose the confirmation of the March 21, 2018 final award.” Id. at *8. In the Court’s decision confirming that award, it “found” the “argument” to be “meritless.” Id. The Court explained that “the use of the word ‘may’ in the provision [merely] provide[d] the parties with a choice ‘to pursue equitable relief in court or in arbitration; it [was] not, as [ACenni] incorrectly assert[ed], a “carve out” and it [did] not deprive the AAA of jurisdiction to arbitrate any dispute as mandated’ by the broad language of the clause.” Id. (citation to record omitted).

In Baldwin Tech., the court held that “where a contract has both a broad arbitration clause and a clause permitting the parties to seek injunctive relief before a court, courts … have construed the latter clauses as permitting the parties to seek ‘injunctive relief … in aid of arbitration, rather than … transforming arbitrable claims into nonarbitrable ones depending on the form of relief prayed.’” Baldwin Tech., 2016 WL 354914, at *4, 2016 U.S. Dist. LEXIS 10086, at *9, n. 4.  

Accordingly, the Court granted the motion to compel arbitration of the claims asserted in the complaint, concluding that such a result was consistent with the intent of the parties as reflected in their agreement to arbitrate:

It would not be consistent with the parties’ intentions as set forth in their broad agreement to arbitrate, or with the case law in New York, favoring arbitration, if this court were to deny arbitration on the ground that ACenni is seeking a directive to be restored to his managerial responsibilities. It is plain from the circumstances of this case that arbitration is the most fit and appropriate tribunal to determine what role, responsibilities and duties ACenni is entitled to under the operating agreement.

Slip Op. at *9 (citing Sutphin Retail One, LLC v. Sutphin Airtrain Realty, LLC, 143 A.D.3d 972, 974 (2d Dept. 2016) (“Therefore, the appropriate inquiry is whether the dispute is governed by the arbitration agreement and not whether the arbitrator has the authority to award the specific relief sought by the plaintiff in the complaint”)).

Takeaway

In Cenni, the parties were signatories to an agreement with a broad arbitration provision, requiring them to submit any controversy under the operating agreement to arbitration. Slip Op. at *9. Significantly, both agreed that the arbitration provision represented “a valid agreement” to arbitrate. Slip Op. at *7. As such, the issue before the Court was whether the dispute fell within the scope of that agreement. Applying traditional rules of contract interpretation (e.g., Landmark Ventures, Inc. v. H5 Tech., Inc., 152 A.D.3d 657, 658 (2d Dept. 2017); W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990)), the Court held that the dispute was arbitrable. 

Cenni is also notable for its reliance on Baldwin Tech. In Baldwin Tech., as noted, the court held that an arbitration agreement that provides the parties with the right to obtain an injunction or other equitable relief in a court of law does not transform arbitrable claims into nonarbitrable ones. Such a provision “is merely declaratory of existing legal rights.” Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1067 (2d Cir. 1972). To hold otherwise, concluded the Baldwin Tech. court, would be inimical to accepted principles of contract construction and the strong public policy in favor of arbitration. Remy Amerique, Inc. v. Touzet Distribution, S.A.R.L., 816 F. Supp. 213, 218 (S.D.N.Y. 1993); see also WMT Inv’rs, LLC v. Visionwall Corp., 2010 WL 2720607, at *4 (S.D.N.Y. June 28, 2010) (“[I]f there is a reading of the various agreements that permits the arbitration clause to govern, the Court will choose it.”).  

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