This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 200
Rita Cusimano, &c., et al.,
Respondents,
v.
Andrew V. Schnurr, CPA, et al.,
Appellants.
Bernard V. Strianese, et al.,
Intervenors-Appellants.
Alan Heller, for appellants Schnurr, et al. and
intervenor-appellant Bernard V. Strianese.
Patrick McCormick, for intervenor-appellant Bernadette
Strianese.
David S. Pegno, for respondents.
LIPPMAN, Chief Judge:
The issues presented by this appeal are whether the
Federal Arbitration Act (FAA) is applicable to disputes arising
under the agreements at issue and, if so, whether plaintiffs Rita
and Dominic Cusimano waived their right to arbitrate by pursuit
of this litigation. We hold that the FAA does apply, but that
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plaintiffs waived their right to arbitrate.
This appeal concerns three commercial agreements
entered into among family members regarding family-owned
entities. Each agreement was executed by New York residents1 and
each contains a provision stating that disputes will be settled
by arbitration pursuant to the rules of the American Arbitration
Association (AAA).
The first agreement at issue is the partnership
agreement relating to the Strianese Family Limited Partnership
(FLIP), which was formed by Rita's father, intervenor Bernard
Strianese, and mother, nonparty Carmella Strianese, in 1998. The
FLIP maintains its office in New York. According to the
partnership agreement, the FLIP was formed for the stated
purposes of owning, acquiring and developing real property, as
well as making other types of investments. The FLIP had owned
commercial property in Deer Park, New York, but now owns property
in Florida that it leases to a CVS drug store.
In 2010, Rita commenced a prior action in Nassau County
Supreme Court seeking judicial dissolution of the FLIP. Bernard
and Carmella intervened and successfully moved to compel
arbitration of the proceeding. The court subsequently granted
intervenors' motion to confirm the arbitration award that found
them to be majority owners, and the Appellate Division affirmed
1
Rita Cusimano represents that she has since moved to the
State of Florida.
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(Matter of Cusimano v Strianese Family Ltd. Partnership, 97 AD3d
744 [2d Dept 2012]).
The second agreement at issue is the operating
agreement of Berita Realty, LLC, which was formed by Rita and her
sister, intervenor Bernadette Strianese, in 2001. Its principal
place of business is in Port Washington, New York. Berita owns a
19% interest in an entity called Greenbriar Associates, which, in
turn, owns a Marriott hotel in Plainview, New York.
In 2010, Rita commenced a separate action in Nassau
County Supreme Court seeking judicial dissolution of Berita and
an accounting. Bernadette moved to compel arbitration and the
court stayed the proceeding, directing arbitration of all issues.
Upon Rita's appeal, the Appellate Division affirmed (Matter of
Cusimano v Berita Realty, LLC, 103 AD3d 720 [2d Dept 2013]).
Also at issue is an agreement by which Rita sold her
interest in one of the "Seaview Corporations," -- 60 Seaview --
to Bernadette. The Seaview Corporations were formed by Bernard,
Rita and Bernadette, and own two commercial buildings in Port
Washington, New York.
The instant action was commenced in August 2011 in New
York County Supreme Court, alleging fraud and malpractice against
the family's accountants (defendants Schnurr and Norman) for work
they had performed between 1991 and 2009, including allegations
that they had aided and abetted fraud and other misconduct on the
part of Bernard and Bernadette, who were not named as defendants.
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Before defendants responded to the complaint, plaintiffs moved to
disqualify defendants' counsel. Plaintiffs also sought discovery
by serving three nonparty subpoenas, which defendants moved to
quash. During oral argument on the motion to disqualify, defense
counsel maintained that the matter "belongs in arbitration."
Defendants then moved to dismiss the complaint on
several grounds, including that the claims were time-barred.
Supreme Court dismissed the complaint, but gave plaintiffs 20
days to replead certain causes of action with specificity. The
court, however, made clear that it viewed many of the claims as
falling outside the statute of limitations. Moreover, while
discussing why plaintiffs were seeking corporate documents from
the defendant accountants, the court told plaintiffs' counsel:
"it would be logical if you need documents to
go to the corporation that has the documents.
[PLAINTIFFS' COUNSEL]: We discussed that,
that was sent to arbitration.
[DEFENSE COUNSEL]: Exactly, and that's where
it belongs.
THE COURT: So go to arbitration and you get
the documents
[PLAINTIFFS' COUNSEL]: We don't believe --
THE COURT: You don't want to go to
arbitration.
[PLAINTIFFS' COUNSEL]: Correct, your Honor.
[DEFENSE COUNSEL]: So what? They have been
sent there so don't try to get it from you.
[PLAINTIFFS' COUNSEL]: Your Honor, we have
appellate rights. There certainly is no
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reason why we should go to arbitration simply
because [defense counsel] wants us to and --
THE COURT: I'm getting a nasty feeling here
that this is frivolous litigation."
On the 20th day, plaintiffs filed a demand for arbitration and a
statement of claim with AAA. The allegations were nearly
identical, except that Bernard and Bernadette were included as
respondents.
Plaintiffs then moved to dismiss the action they had
commenced in Supreme Court or, in the alternative, for a stay
pending arbitration. Defendant accountants cross-moved to
dismiss the action with prejudice or, in the alternative, to
permanently stay the claims asserted in the arbitration demand as
time-barred. Bernard and Bernadette moved to intervene and for a
permanent stay of the arbitration claims, as barred by the
statute of limitations.
Concluding that the FAA was inapplicable because the
totality of the economic activity at issue did not have an effect
on interstate commerce, Supreme Court determined that it, rather
than the arbitrator, was the appropriate forum to decide the
statute of limitations issues. The court further opined that
this was "a flagrant example of forum shopping" and that
plaintiffs had waived the right to arbitration by their "resort
to and aggressive participation in this litigation." Supreme
Court therefore granted the motion to intervene, granted the
motions and cross motion to stay the arbitration to the extent of
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staying certain claims on statute of limitations grounds and
granted the plaintiffs' motion to the extent of directing that
the parties arbitrate the remaining non-time-barred claims.
The Appellate Division, among other things, reversed
the judgment insofar as appealed from, and denied the motions and
cross motion to stay arbitration (120 AD3d 142 [1st Dept 2014]).
The Court held that the FAA applied to the agreements because
each "concern[ed] transactions that affect[ed] commerce" (120
AD3d at 148). In particular, the Court observed that the
entities were involved in commercial real estate, holding
interests in properties that were rented to an international
hotel chain and a national drug store chain. The Court rejected
the argument that plaintiffs had waived the right to arbitration,
holding that they had not engaged in "protracted litigation" and
there was no resulting prejudice to the other parties. This
Court granted defendants and intervenors leave to appeal and we
now reverse.
The FAA provides that "[a] written provision in . . . a
contract evidencing a transaction involving commerce to settle by
arbitration a controversy thereafter arising out of such contract
or transaction . . . shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract" (9 USC § 2). The United
States Supreme Court has interpreted the reach of the FAA
extremely broadly, characterizing the Act's basic purpose as
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"overcom[ing] courts' refusals to enforce agreements to
arbitrate" (Allied-Bruce Terminix Cos. v Dobson, 513 US 265, 270
[1995]). In Allied-Bruce, the Supreme Court held that the term
"involving commerce" was meant to be the functional equivalent of
"affecting commerce," which typically signals Congress's intent
to invoke the full extent of its powers under the Commerce Clause
(see 513 US at 273-274).
In particular, the Court addressed the scope of the
statutory language, "evidencing a transaction involving
commerce." The Court observed that there were conflicting
interpretations of the phrase -- whether it meant that the
parties had contemplated substantial interstate activity at the
time they had entered the agreement, or whether the transaction
at issue must have turned out, in fact, to have involved
interstate commerce (see 513 US at 277). The Court concluded
that the "commerce in fact" interpretation was more in keeping
with the statute, pointing out that the "contemplation of the
parties" test appeared contrary to congressional intent, as it
would invite litigation about what the parties had been thinking
when they executed the agreement (see 513 US at 278). "[W]e
accept the 'commerce in fact' interpretation, reading the Act's
language as insisting that the 'transaction' in fact 'involve'
interstate commerce, even if the parties did not contemplate an
interstate commerce connection" (513 US at 281).
More recently, the United States Supreme Court
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indicated that it was "perfectly clear that the FAA encompasses a
wider range of transactions than those actually 'in commerce' --
that is, 'within the flow of interstate commerce'" (Citizens Bank
v Alafabco, Inc., 539 US 52, 56 [2003]). The Court clarified
that it is not necessary for the individual transaction to have a
substantial effect on interstate commerce, so long as the type of
activity at issue has the requisite substantial effect (see 539
US at 56). "Congress's Commerce Clause power 'may be exercised
in individual cases without showing any specific effect upon
interstate commerce' if in the aggregate the economic activity in
question would represent 'a general practice . . . subject to
federal control.' Only that general practice need bear on
interstate commerce in a substantial way" (539 US at 56-57
[citations omitted]).
Defendants and intervenors maintain that the FAA does
not apply to the agreements at issue here because the agreements
themselves do not evidence transactions that affect commerce.
They assert that, to the contrary, these agreements are
intrafamily transactions executed by New York residents. In
addition, they argue that the entities are "passive" and require
"little or no active management." As a result, they contend,
there is no impact on interstate commerce.
Here, the Berita and FLIP agreements concern ownership
of and investment in commercial properties. Indeed, Berita
leases its property to an international hotel chain and the FLIP
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owns property out-of-state that it leases to a national drug
store chain. This activity, in the aggregate, plainly bears on
interstate commerce. While the question is closer as to 60
Seaview Corp., that agreement likewise concerns commercial real
estate and has the requisite substantial effect on interstate
commerce.2 Although certain courts have determined that single
residential real estate transactions are intrastate in nature
(see e.g. Saneii v Robards, 289 F Supp 2d 855, 858-859 [WD Ky
2003]), matters concerning commercial real estate have been
treated as implicating interstate commerce (see e.g. Hall Street
Associates, L.L.C. v Mattel, Inc., 552 US 576, 590 [2008]
[observing that there was no dispute that the commercial lease
involved interstate commerce]; A-1 A-lectrician, Inc. v
Commonwealth Reit., 943 F Supp 2d 1073, 1078 [D Haw 2013]).
Under these circumstances, we conclude that the FAA is applicable
to these agreements.
Although this interpretation is undeniably broad, the
Supreme Court has made it abundantly clear that the FAA's reach
is expansive. The idea that the intrafamilial nature of the
agreements has some bearing on whether the FAA is applicable
finds no support in the caselaw. Nor does the fact that these
agreements do not themselves evidence the commercial transactions
appear to be significant. The ultimate purpose of the agreements
2
Notably, according to the complaint, one of the two
Seaview Corp. buildings was sold for $4.7 million.
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was to authorize participation in the business of commercial real
estate and that is, in fact, what the entities did. In
determining whether the FAA applies, the emphasis is meant to be
on whether the particular economic activity at issue affects
interstate commerce -- and, here, it does.
Nonetheless, plaintiffs have waived their right to
arbitrate this dispute. "'[L]ike contract rights generally, a
right to arbitration may be modified, waived or abandoned.'
Accordingly, a litigant may not compel arbitration when its use
of the courts is 'clearly inconsistent with [its] later claim
that the parties were obligated to settle their differences by
arbitration'" (Stark v Molod Spitz DiSantis & Stark, P.C., 9 NY3d
59, 66 [2007] [citations omitted]). While it is true that "[n]ot
every foray into the courthouse effects a waiver of the right to
arbitrate," we are satisfied that the totality of plaintiffs'
conduct here establishes waiver (Sherrill v Grayco Bldrs., 64
NY2d 261, 273 [1985]).
Plaintiffs emphasize the federal policy preference in
favor of arbitration and observe that "any doubts concerning
whether there has been a waiver are resolved in favor of
arbitration" (Leadertex, Inc. v Morganton Dyeing & Finishing
Corp., 67 F3d 20, 25 [2d Cir 1995]). Generally, when addressing
waiver, courts should consider the amount of litigation that has
occurred, the length of time between the start of the litigation
and the arbitration request, and whether prejudice has been
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established (see Leadertex, 67 F3d at 25). The majority of
federal courts have taken the position that waiver cannot be
established in the absence of prejudice (compare Cabinetree of
Wisconsin, Inc. v Kraftmaid Cabinetry, Inc., 50 F3d 388, 390 [7th
Cir 1995] [holding that an election to proceed in court "is a
presumptive waiver of the right to arbitrate"]).
This said, the present case is strikingly similar to
Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce,
Fenner & Smith, Inc. (626 F3d 156 [2d Cir 2010]). There, the
plaintiff had initially commenced litigation but, after eleven
months and substantial motion practice, moved to compel
arbitration. Significantly, the defendants had sent a detailed
letter identifying deficiencies in the plaintiff's complaint and
had filed a motion to dismiss on the pleadings. The court
observed that there were "two types of prejudice: substantive
prejudice and prejudice due to excessive cost and time delay,"
and determined that both types had been established (626 F3d at
159).
As to substantive prejudice, the court pointed out that
granting the motion to arbitrate would allow the plaintiff to
avoid the motion to dismiss, the substance of which had been
related in the deficiency letter (see 626 F3d at 160). As to the
second type of prejudice, the court noted that it could consider
"'other surrounding circumstances' beyond the burdens and
expenses that would result from a grant of arbitration,"
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including judicial economy, and observed that the matter had been
transferred to a particular district court so that it would be
centralized with other similar cases (626 F3d at 160). Finally,
the court attached significance to the fact that the plaintiff,
who had commenced the litigation, was the party seeking
arbitration. "Although we recognize that a plaintiff's
initiation of a lawsuit does not, by itself, result in a waiver
of arbitration, we also note that by filing its lawsuit and
litigating it at length, [the plaintiff] 'acted inconsistently
with its contractual right to arbitration'" (626 F3d at 160).
Here, both types of prejudice have likewise been
established. After vigorously pursuing their litigation strategy
for approximately one year, plaintiffs moved to compel
arbitration. Even more telling, the desire for arbitration only
arose after Supreme Court made plain its view that plaintiffs'
claims were vexatious and largely time-barred. Indeed,
plaintiffs had expressly represented to Supreme Court that they
did not want to go to arbitration. Plaintiffs' behavior is
indicative of blatant forum-shopping and, under these
circumstances, prejudice has clearly been established.
Therefore, plaintiffs have waived the right to arbitration and
the issue of timeliness should be determined by the court.3
3
Despite our previous statement, in dicta, that waiver is
generally one of the issues that should be decided by the
arbitrator (see Matter of Diamond Waterproofing Sys., Inc. v 55
Liberty Owners Corp., 4 NY3d 247, 252 [2005]), courts have held
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Accordingly, the order of the Appellate Division should
be reversed, with costs, and the case remitted to that court for
further proceedings in accordance with this opinion.
* * * * * * * * * * * * * * * * *
Order reversed, with costs, and case remitted to the Appellate
Division, First Department, for further proceedings in accordance
with the opinion herein. Opinion by Chief Judge Lippman. Judges
Pigott, Rivera, Abdus-Salaam, Stein and Fahey concur.
Decided December 16, 2015
that whether a party has waived arbitration by litigation-related
conduct is an issue for the courts (see In re Pharm. Benefit
Managers Antitrust Litig. 700 F3d 109, 118 [3d Cir 2012]; Joca-
Roca Real Estate, LLC v Brennan, 772 F3d 945, 948 [1st Cir 2014];
Grigsby & Assoc., Inc. v M Sec. Inv., 664 F3d 1350, 1354 [11th
Cir 2011]; see also Radil v National Union Fire Ins. Co., 233 P3d
688, 694 [Colo 2010]; Perry Homes v Cull, 258 SW3d 580, 588 [Tex
2008]).
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