Opinion
HUC153404.
Decided April 2, 2004.
The petitioner in the above captioned action Utica First Insurance Company (hereafter "Utica or petitioner") has moved this Court pursuant to New York CPLR Sec. 7511 seeking to vacate an arbitration award granted to respondent Republican Franklin Insurance Company as assignee of Jeffrey E. Rosen and Lisa Rosen (hereinafter "Republican or respondent").
THE UNDISPUTED FACTS
(1)The parties to this action are both Insurance Companies who are authorized to conduct business in the State of New York and who are signatories to the "Nationwide Inter-Company Arbitration and Fire and Allied Lines Arbitration Rules and Regulations" agreements.
(2)On or about May 18, 2001, the respondent Republican initiated litigation by filing a complaint with this Court on behalf of its subrogees Jeffrey E. Rose and Lisa Rosen seeking to recover for the alleged torts to personal property committed by Jocatt Construction Corporation on June 12, 2000. Thereafter, Jocatt interposed an answer and the parties initiated discovery, including serving and responding to bills of particulars and demands to produce documents.
(3)Over two years later, on September 25, 2003, Republican additionally commenced an arbitration proceeding even though its complaint was still pending before this Court.
(4)Arbitration Forums Inc. (Hereafter "The Arbitrator") sent a notice dated November 20, 2003, which was received November 25, 2003, scheduling a hearing for December 19, 2003. The notice provides that all documents must be received prior to December 15, 2003.
(5)Petitioner Utica's attorneys sent correspondence and documents to the Arbitrator dated December 11, 2003, asserting jurisdictional, statute of limitation, and merit defenses; as well as asserting that they will appear for the December 19, 2003 arbitration hearing.
(6)Utica's attorneys did appear at the December 19, 2003 hearing and the Arbitrator refused to allow Utica to dispute or defer the matter, to present evidence or to consider its documents and defenses even though they were present and requested a hearing. It should be noted that the Arbitrator's date stamp indicates it clocked Utica's Opposition papers in on December 16, 2003, three days before the hearing. The Arbitrator granted Republican a $3,500.00 award in the alleged absence of opposition.
(7)By letter dated January 16, 2004, Republican's attorneys sent its $3,500.00 Arbitration award to Utica's attorneys together with a request for Republic to sign "a stipulation of discontinuance" for the action pending in this Court; which was refused.
(8)The Arbitrator has a detailed set of agreed upon rules which will be described in the discussion component of this decision.
THE LEGAL ISSUES PRESENTED
(A)Does a plaintiff in a pending two year old NYS Court action have the right to unilaterally abandon same and commence an Arbitration proceeding?
(B)If the Arbitration process is available to Republican as against Utica; did the Arbitrator properly deny Utica a hearing and the right to raise jurisdictional, statue of limitation, and merit defenses?
THE LAW WAIVER OF RIGHT TO ARBITRATE
(A) Generally, it is a defendant who seeks an order of a Court seeking to compel arbitration via asserting same as an affirmative defense to plaintiff's Court complaint. This proceeding is unique in that it is the plaintiff who initiated the arbitration process two years after commencing an action in a Court forum. As a result of the Arbitrators' refusal to entertain Utica's jurisdictional challenge, its chosen mechanism to obtain relief is via a CPLR Sec. 7511 application to vacate an Arbitrator's Award.
The New York Court of Appeals has addressed the issue of "Waiver of Arbitration" both pre and post enactment of the New York CPLR Sec. 7511. See generally 43 N.Y.L. Rev. 609 (1999). It decided in both instances that a defendant's right to arbitrate was not absolute and could be waived depending upon the degree of prior Court participation. The test applied was factual in nature and involved a finding of an intention to waive arbitration. DeSapio v. Kohlmeyer, 362 NYS 2d 843 (1974); citing to In re Zimmerman, 236 NY 15 (1923).
While creating a subjective test for defendant's waiver, the Court of Appeals, by way of dicta, established a much more objective, definitive, rule for plaintiff's when it opined that "the party who commences an action may generally be assumed to have waived any right it may have to submit the issues to arbitration. DeSapio v. Kohlmeyer, cite supra at p. 846, citing to 8 Weinstein-Korn-Miller, NY Civ. Prac. Pars. 7503.15, 7503.16. The Court's logic, as stated on page 844 is "The Courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration".
In interpreting its predecessor statutes in the New York Arbitration Law, the Zimmerman Court established the rule that, "while the law provides for the enforcement of arbitration agreements, there is nothing in the law which prevents the parties agreeing between themselves to resort to any other method of settlement; the law does not bar the parties to the contract from coming into the Courts. . . . if they mutually choose to do. The plaintiffs made their election when they brought their action against the defendant ignoring the agreement to arbitrate.
The defendant made his election when he answered, setting up a counterclaim upon which he asked the Court to give judgment against the plaintiffs, gave notice of trial, and procured an order for the taking of a deposition in preparation for trial. These acts were clearly inconsistent with the defendant's later claim that the parties were obligated to settle their differences by arbitration.
We find nothing in the law which prevents such an abandonment, waiver, or election of remedies. In fact, if the Legislature should attempt to prevent parties from modifying their agreements to arbitrate or to subsequently agree to enter the Courts of law for the settlement of their disputes, it would be such an abridgement of the right of citizens to contract that the constitutionality of the law might well be doubted . . .
It does not mean that the agreement to arbitrate is irrevocable by the mutual agreement or consent of the parties . . ."
Republican argues in its Reply Affirmation that Rule 9 of the Arbitration Agreement, prohibits waiver of arbitration and compels it to unilaterally discontinue any litigation once it becomes aware its defendant has insurance coverage. The graverman of this argument is that when Republican starts Court actions; it does not know if the defendants have insurance coverage with companies who are bound to arbitration. This rule provides:
The Court notes that Republican did not seek to withdraw its Court action until after it obtained its Arbitration award.
Rule 9 Signatory parties must endeavor to ascertain the identity of the liability insurance carriers, self-insurers or commercial insureds with large retentions in all cases before instituting litigation on subrogation claims. Such litigation must be discontinued promptly upon ascertaining that the liability insurance carrier, self-insurer or commercial insured with large retentions is a signatory party.
Absent knowledge of the right to arbitrate at the time of commencement of the lawsuit; it can be sensibly argued that plaintiff did not make a knowing waiver. As a result, the objective "plaintiff waiver test" is inappropriate. The issue then arises "when did plaintiff obtain knowledge of arbitration eligibility", and did its continued actions and subsequent Court participation over two years indicate an intent to waiver said right under the subjective "defendant waiver test" created by the Court of Appeals. The commentaries which accompany this rule refer to "sincere efforts" to make insurance carrier identifications and prohibit "wilful concealment" or "coy" avoidance of such identifications. Unfortunately, there exists minimal evidentiary submissions in the record from which this Court may parse the applicability of Rule #9. Accordingly, the Court will follow the Zimmerman holding which allows for mutual waiver of the right to enforce arbitration, but will defer the factual determination of its applicability in lieu of deciding the ultimately dispositive issue of whether the Arbitrator's decision was in violation of CPLR Sec. 7511 (b) (iii). IMPROPER ARBITRATION AWARD
It would be logical to conclude that Republican did not move to discontinue its lawsuit prior to obtaining an Arbitration Award as it knew its Arbitration was probably barred by the statute of limitations whereas its lawsuit was timely. However, absent proof of actual or constructive notice of arbitration eligibility, a subjective test factual finding would have to be inferred from the limited facts that the parties litigated for almost 27 months prior to seeking Arbitration. While such a "waiver" inference appears justifiable, the Court would prefer to deal with the matter on the merits.
(B)Generally, Courts in this state go to great lengths not to declare a default on an appearing party who raises colorable defenses and indicates a willingness to participate in a trial of a contested matter: One of the few, "sacred cow" exceptions to this reasonable due process rule involves matter's of mutually agreed Arbitration. The State Legislature narrowly tailored this Court's ability to vacate or modify Arbitration awards when it enacted New York CPLR Sec. 7511 which provides:
(b) Grounds for vacating. 1. The award shall be vacated on the application of a party who either participated in the arbitration or was served with a notice of intention to arbitrate if the court finds the rights of that party were prejudiced by:
(I) Corruption, fraud or misconduct in procuring the award; or
(ii) partiality of an arbitrator appointed as a neutral; except where the award was by confession: or
(iii) an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made; or (Emphasis Added)
Generally, Arbitrator's Awards may not be set aside unless the award is completely irrational. De Champs v. Sweet Home Central School Dist. 551 NYS 2d 431 (4th Dept. 1990). Arbitrators are not bound by rules of substantive law or evidence. Boehme v. Traina, 621 NYS 2d 387 (2nd Dept. 1995). Even obvious errors of fact and the failure to justify awards with reasons will not allow for vacature of an Arbitration Award. Lentive v. Fundaro, 318 NYS 2d 564 (2nd Dept. 1971), aff'd 29 NY 2d 382 (1972). The logic behind allowing relaxed standards is that the parties consented to them as a mechanism to expedite resolutions. However, if consent is the underlying justification, the one principle which arbitrators must adhere to is that if the Arbitration Agreement contains rules, they must follow them. In the case at bar the pertinent rules are as follows:
Rule 2
"The Fire and Allied Lines Subrogation Arbitration Agreement shall not be construed to create any causes of action or liabilities not existing in law or equity".
As is the situation with the Nationwide Agreement, participation in this program does not extend the rights or liabilities of participating parties beyond what exists at law. Their obligations and rights are no greater in arbitration than at law.
If you have a cause of action at law or in equity, a similar cause of action is available in arbitration.
Rule 6
"Arbitration of a controversy must be deferred until all companion claims or suits not subject to arbitration have been disposed of by settlement or otherwise, except that all parties to the arbitration may agree to waive deferment. The request for such deferment must be in writing and received by the AF branch office at least two days prior to the scheduled hearing date.
Rule 7 "Deferment of a hearing under Rule 6, General, does not relieve a respondent from the obligation to file its written answer asserting therein any affirmative defense to the jurisdiction of the panel to proceed with a hearing once the subject case has been removed from a deferred status. If the jurisdiction issue is raised by the written answer, the panel will forthwith pass upon the merits of the jurisdictional question even though the hearing on the issues of liability and damages will be deferred because of pending companion claims or suits not subject to arbitration. However, for the Rule to apply, an AF administrator must receive an applicant's filing 120 days prior to the running of the Statute of Limitations and receive the respondent's answer within 60 days thereof. If the respondent's answer is not received within the stated period any affirmative defense running to the jurisdiction of the committee to proceed with a hearing is waived. However, a respondent company is not precluded from effectively raising an affirmative defense running to jurisdiction if the applicable Statute of Limitations has run prior to the existence of the coverage question." (Emphasis Added).
The Arbitrator in this proceeding has violated at least two of his own Rules. Rule #2 establishes the applicability of substantive New York and Federal law. This includes the right to assert the affirmative defense of the Statute of Limitations. Rule #7 expressly preserves the right to interpose a jurisdictional defense in all situations, if the arbitration is commenced after the Statute of Limitations has run. In this case, Utica asserts that the one year statute ran out in June of 2001. The Arbitration was commenced in November of 2003. The Arbitrator was required to entertain Utica's arguments on this issue.
Equally egregious is the Arbitrator's violation of Rule #6 which demands deferment of arbitration for pending Court actions if it is demanded at least 2 days prior to hearing. In this case, the demand was admittedly received on December 16, three days prior to the December 19, 2003 hearing. The Arbitrator's unilaterally imposed requirement of a written filing 4 days before he would allow a hearing has no contractual application.
The Arbitrator's failure to entertain Utica's request to be heard on the deferment and Statute of Limitations issues so as to establish compliance with the agreed rules is "irrational", "arbitrary" and "capricious". Such conduct vitiates the underlying consent to agree to arbitrate by an agreed set of rules, and as such the Arbitrator exceeded his power and imperfectly awarded judgment in this matter.