Flintlock Constr. Servs., LLC. v. Weiss

• Decision Date: 14 August 2014
• Citation: 2014 N.Y. Slip Op. 05818,122 A.D.3d 51,991 N.Y.S.2d 408
• Parties: In re FLINTLOCK CONSTRUCTION SERVICES, LLC., et al., Petitioners–Appellants, v. Gretchen WEISS, Respondent–Respondent.
• Court: New York Supreme Court — Appellate Division

122 A.D.3d 51
991 N.Y.S.2d 408
2014 N.Y. Slip Op. 05818

In re FLINTLOCK CONSTRUCTION SERVICES, LLC., et al., Petitioners–Appellants,
v.
Gretchen WEISS, Respondent–Respondent.

Supreme Court, Appellate Division, First Department, New York.

Aug. 14, 2014.

[991 N.Y.S.2d 409]

Leahey & Johnson, P.C., New York (Peter James Johnson, Jr., Joanne Filiberti and Gabriel M. Krausman of counsel), and Becker & Poliakoff LLP, New York (Helen Davis Chaitman, Lance Gotthoffer, Peter W. Smith and Valerie Sirota of counsel), for appellants.

Goodwin Procter LLP, New York (Jeffrey Alan Simes and Nathaniel J. Moore of counsel), for respondent.

ROLANDO T. ACOSTA, J.P., DIANNE T. RENWICK, RICHARD T. ANDRIAS, DAVID B. SAXE, SALLIE MANZANET–DANIELS, JJ.

MANZANET–DANIELS, J.

This appeal arises from the motion court's denial of a motion to stay arbitration of claims for punitive damages in a dispute among investors in a real estate development company. In 2011, respondent investor commenced an arbitration proceeding against petitioners real estate development companies and their principals, alleging fraud and breach of contract, and seeking punitive damages. The parties' relationship was governed by a letter agreement and the operating agreements for petitioners Flintlock Construction Services, LLC (Flintlock) and Basque Construction LLC (Basque).

The Flintlock and Basque operating agreements contain identical choice of law clauses, providing that the agreements “shall be construed and enforced in accordance with the laws of the State of New York.”

The Flintlock and Basque operating agreements contain identical arbitration provisions, which provide, in relevant part, that “[a]ny controversy or claim arising out of or relating to this Agreement or the breach or alleged breach of this Agreement, shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association which are then in effect.” Although the letter agreement does not itself contain an arbitration clause, it was executed contemporaneously with the operating agreements and describes respondent's role as a member of Flintlock and Basque.

Although petitioners did not object to the punitive damages claim in the original demand for arbitration, they challenged respondent's right to amend the demand to assert claims for fraud and intentional misrepresentation, and moved before the arbitration panel to dismiss several of the claims, including the request for punitive damages. Petitioners asserted, inter alia, that punitive damages were not available/arbitrable. The motion to dismiss the request for punitive damages was denied, on or about July 5, 2012, without prejudice to renewal at the hearing, based on a more complete record as to whether the claim affected interstate commerce, and thus, mandated application of the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. A hearing before the arbitration panel was scheduled to commence on November 5, 2012.

On or about September 12, 2012, petitioners commenced a special proceeding to “permanently enjoin” the arbitration on the ground that the arbitrators had exceeded their authority, and lacked power to award punitive damages. The motion

[991 N.Y.S.2d 410]

court denied the petition, finding that petitioners, having “actively litigated” before the arbitration panel, had “charted their own course,” and could not now assert that the arbitrators could not hear the issue of punitive damages.

Petitioners argue that the motion to stay arbitration of the claim for punitive damages was improperly denied, asserting that under New York law arbitrators “ha[ve] no power to award punitive damages, even if agreed upon by the parties” (Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 356, 386 N.Y.S.2d 831, 353 N.E.2d 793 [1976] ).

We disagree, and now affirm. The arbitration panel denied the motion to dismiss the punitive damages claim without prejudice to renewal upon a complete record. Petitioners ask us, in effect, to render an advisory opinion concerning the availability of punitive damages, which we ought not do. It remains to be determined whether, on this record, the contracts evidence a “transaction involving commerce” such that the FAA, and not state law, applies.

To the extent petitioners argue that the New York choice-of-law provision in the contracts displaces the FAA and mandates the application of the Garrity rule, we must disagree. The rules of the American Arbitration Association (AAA) specify that an arbitrator is authorized to award “any remedy which [is] just and equitable and within the scope of the agreement.” Where parties agree that the AAA rules will govern, questions concerning the scope and validity of the arbitration agreement, including issues of arbitrability, are reserved for the arbitrators ( see Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd's, 66 A.D.3d 495, 496, 888 N.Y.S.2d 458 [1st Dept.2009], affd.14 N.Y.3d 850, 901 N.Y.S.2d 133, 927 N.E.2d 553 [2010], cert. denied ––– U.S. ––––, 131 S.Ct. 463, 178 L.Ed.2d 288 [2010] ).

Under the FAA, it is for the arbitrators, and not a court, to determine the availability of punitive damages, notwithstanding the general choice-of-law provision in the contracts that they are to be construed and enforced according to New York law. The choice-of-law provision, in the absence of language expressly invoking the Garrity rule, or expressly excluding claims for punitive damages, is insufficient to remove the issue of punitive damages from the arbitrator.

Where the parties “agree to include claims for punitive damages within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration” (Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 58, 115 S.Ct. 1212, 131 L.Ed.2d 76 [1995] ). In Mastrobuono, the United States Supreme Court held that a New York choice-of-law clause providing an agreement “shall be governed by the laws of the State of New York,” did not unequivocally demonstrate an intent to preclude an award of punitive damages. The Court reasoned that best means of “harmoniz[ing]” the choice-of-law provision with the arbitration provision was to read “the laws of the State of New York” to refer to substantive principles a New York court would apply, but not to include rules limiting the authority of arbitrators: “Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither [ ] intrudes upon the other” (id. at 63–64, 115 S.Ct. 1212).

Merely stating, without further elaboration, that an agreement is to be construed and enforced in accordance with the law of New York does not suffice to invoke the Garrity rule. The Supreme Court has made clear that in order to remove the issue of punitive damages from

[991 N.Y.S.2d 411]

the arbitrators, the agreement must “unequivocal[ly] exclu[de]” the claim (id. at 60, 115 S.Ct. 1212). The agreement in this case, which provided only that it was to be “construed and enforced” in accordance with the law of New York, did not unequivocally exclude claims for punitive damages from the consideration of the arbitrators ( see e.g. Matter of Americorp Sec. v. Sager, 239 A.D.2d 115, 656 N.Y.S.2d 762 [1st Dept.1997], lv. denied90 N.Y.2d 808, 664 N.Y.S.2d 269, 686 N.E.2d 1364 [1997] [affirming arbitral award of punitive damages in the wake of Mastrobuono ]; Merrill Lynch, Pierce, Fenner & Smith v. Adler, 234 A.D.2d 139, 651 N.Y.S.2d 38 [1st Dept.1996] [same]; Mulder v. Donaldson, Lufkin & Jenrette, 224 A.D.2d 125, 648 N.Y.S.2d 535 [1st Dept.1996] [same]; Tong v. S.A.C. Capital Mgt., LLC, 16 Misc.3d 401, 835 N.Y.S.2d 881 [Sup.Ct.N.Y. County 2007], affd. as modified,52 A.D.3d 386, 860 N.Y.S.2d 84 [1st Dept.2008] [same] ). A New York choice-of-law provision does not constitute a manifestation of unequivocal intent sufficient to invoke the Garrity rule.

We cannot agree with the dissent's conclusion that the parties' choice-of-law provision evinces “unequivocally” with the requisite specificity demanded by the United States Supreme Court that the parties intended to incorporate the Garrity rule disallowing punitive damages in an arbitration. Matter of Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 793 N.Y.S.2d 831, 826 N.E.2d 802 (2005), upon whose dicta the dissent relies, involved application of the statute of limitations and does not speak to the issue sub judice.

We are aware of no instance in which the language that an agreement is to be “construed and enforced” in accordance with New York law has been held to displace Mastrobuono. Indeed, case law is to the contrary, consistent with the Supreme Court's admonition that the relevant agreement must “specifically exclude” the issue of punitive damages from the purview of the arbitrator in order to be enforceable ( see e.g. Roubik v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 181 Ill.2d 373, 375, 230 Ill.Dec. 1, 692 N.E.2d 1167, 1168 [1998] [choice of law clause providing that “agreement and its enforcement shall be governed by the laws of the State of New York,” did not preclude an arbitration panel from awarding punitive damages], cert. denied525 U.S. 961, 119 S.Ct. 402, 142 L.Ed.2d 327 [1998] ).

Petitioners' motion to stay the arbitration should be denied for the further reason that they have participated in the arbitration, precluding late resort to CPLR 7503(b). CPLR 7503(b) authorizes motions to stay arbitration by parties “who ha[ve] not participated in the arbitration.” Petitioners participated in the arbitration process for nearly eight months—selecting arbitrators, participating in preliminary proceedings—before registering an objection to the arbitrability of respondent's claim for punitive damages. Even then, petitioners chose not to move to stay the arbitration, but to make a motion to dismiss the claim, squarely...