Decision Provides Arbitration Clause Guidance, But Questions Persist
The Appellate Division’s decision in 'Matter of Bergassi Group v. Allied World Insurance Co.' offers some straightforward, but valuable, guidance about the interplay between the FAA and CPLR Art. 75, and raises some interesting questions for further review.
Agreements to arbitrate are supposed to reduce the amount of litigation in the world. By that standard, the agreement to arbitrate between Bergassi Group LLC (Bergassi) and Allied World Insurance Company (Allied World) has been an utter failure. After Allied World served Bergassi with a demand for arbitration in September 2019, Bergassi launched a proceeding under CPLR Art. 75 to stay the arbitration. In January 2020, Supreme Court, New York County (Tanya Kennedy, J.) granted a permanent stay of arbitration. Pending appellate review of that decision, Bergassi sued Allied World and its attorneys in Westchester County, alleging that Allied World’s demand to arbitrate constituted malicious prosecution and abuse of process (Index No. 53708/2020). On April 13, 2021, the Appellate Division, First Department, reversed the permanent stay of arbitration in the New York County matter. Only time will tell if the arbitration clause that started all of this will spawn additional litigation. In any case, the Appellate Division’s decision offers some straightforward, but valuable, guidance about the interplay between the Federal Arbitration Act (FAA) and CPLR Art. 75, and raises some interesting questions for further review.
Background
According to documents filed in the Westchester action, Allied World is a New Hampshire insurance company licensed to issue surety bonds in New York. Bergassi is a New York surety bond broker that engaged in the business of soliciting surety business as an independent contractor on behalf of Allied World. Bergassi and Allied World had entered into a written agency agreement that contained an arbitration clause. Between 2013 and 2017, Allied World authorized Bergassi to issue surety bonds to a construction company operating in Manhattan. When the construction company and several of its co-owners were indicted for various crimes, the construction company defaulted on its projects and Allied World found itself on the hook for more than $15 million in losses under the surety bonds. Allied World then initiated arbitration proceedings against Bergassi in an attempt to hold Bergassi liable for its losses on the grounds that Bergassi knew of, but did not disclose to Allied World, links between the construction company and an individual who was eventually indicted for crimes related to the construction company’s activities.
After Bergassi commenced a proceeding under New York’s arbitration statute, CPLR Art. 75, for a stay of the arbitration, the court held oral argument on Jan. 15, 2020. At the hearing, the court agreed with counsel for Bergassi that the CPLR, and not the FAA, governed the dispute because the case did not present any conflict between New York and federal law. Finding the agreement to arbitrate to be ambiguous, and the claims at issue in the arbitration to be “inextricably intertwined” with those at issue in other legal actions, the court granted Bergassi’s request to permanently stay the arbitration.
First Department Decision
On April 13, the Appellate Division, First Department, unanimously reversed the stay of arbitration in Matter of Bergassi Group v. Allied World Insurance Co., Index No. 655704/19. Without doing so explicitly, the First Department rejected Judge Kennedy’s determination at oral argument that the FAA did not apply because the case did not present a conflict between state and federal law. Judge Kennedy appears to have agreed with counsel for Bergassi, who argued at the hearing that the CPLR should govern because the contract was silent as to the FAA and expressly stated that “the laws of the State of New York will be applicable.” However, the Appellate Division implicitly agreed with the argument made by counsel for Allied World at the hearing before Judge Kennedy that the parties to an arbitration agreement do not need to specifically mention the FAA in order for it to apply. Citing a New York Court of Appeals decision, which in turn cites a decision of the U.S. Supreme Court, the First Department explained that where a contract containing an arbitration clause “affects interstate commerce,” disputes concerning the clause will be subject to the FAA. Diamond Waterproofing Sys. v. 55 Liberty Owners, 4 N.Y.3d 247, 252 (N.Y. March 24, 2005) (citing Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S. Ct. 834 (1995)). The First Department reasoned that the FAA applied to the contract at issue because Bergassi and Allied World were from different states. Their business relationship, therefore, “gave rise to a finding of interstate commerce.”
Having determined that the FAA, and not the CPLR, applied to the dispute, the First Department recognized that its inquiry must be limited to the question of whether the contract contains a valid agreement to arbitrate the dispute at issue (citing Cone Mills v. August F. Nielsen Co., 90 A.D.2d 31 (1st Dept. 1982)). The court then followed the agency contract’s choice of law provision to apply New York state contract law to its interpretation of the arbitration clause. In contrast with the court below, the First Department did not find the arbitration provision to be ambiguous, but instead found that it reflected an agreement to refer any disputes concerning the validity or formation of the arbitration clause to arbitration.
Discussion
The First Department’s decision in Bergassi raises two questions that might interest the Court of Appeals, should the case end up there. First, is the fact that the corporate parties to an arbitration agreement are from different states sufficient to trigger the FAA? The First Department cited a single Southern District case for this point of law, Chartis Seguros Mex., S.A. v. HLI Rail & Rigging, 967 F. Supp. 2d 756 (S.D.N.Y. 2013). Second, does New York law recognize the theory of “inextricably intertwined” claims that Supreme Court relied on to grant a permanent stay of arbitration? The First Department did not address the “inextricably intertwined claims” issue in its short decision, perhaps because it considered the point to be moot in light of its finding that all issues concerning the “validity or formation” of the arbitration agreement were matters for the arbitrator to decide. But the question is ripe for review by the highest court in the state, as the Court of Appeals has never weighed in on the issue.
The First Department’s decision may be the end of the road for the New York County branch of the litigation tree that has grown out of the arbitration agreement between Bergassi and Allied World. Whether or not that proves to be the case, as of publication, the Westchester County branch continues to thrive.
Aaron Chase is the managing attorney at Aaron Chase LLC, a New York law firm focused on legal research and risk analysis.
Reprinted with permission from the April 15, 2021 edition of the New York Law Journal© 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
