Opinion
Index No. 616883/2022
04-04-2023
WSD ENGINEERING INC., PD AND KYM PROPERTIES, L.P., DP AND KYM PROPERTIES, L.P., CENTINEL GROUP INC., DENIS HUGH MORGAN, PAUL PUELIU, STEVE LANE, and EUGENE MALVA YOUNG, Petitioner(s), v. ALVA ADVANCE LLC, and MEDIATION AND CIVIL ARBITRATION, INC. Respondent(s).
Unpublished Opinion
PRESENT: HON. LISA A. CAIRO, J.S.C.
DECISION AND ORDER ON PETITION
LISA A. CAIRO, J. S.C.
Respondent(s). The following papers were read on this motion DOCS NUMBERED
Petition, Affidavits, Affirmations, Exhibits, Memos .............. 1-20
Opposition Papers .............. 26-27
Reply Papers.............................................................................. 28
Notice of Motion to Dismiss, Affidavits, Affirmations, Exhibits, Memos....... 29-32
Opposition Papers ............ 33
Reply Papers ................... 34
RELIEF REQUESTED
Petitioners WSD Engineering Inc., PD and Kym Properties, LP, DP and Kym Properties LP, Centinel Group Inc., Denis Hugh Morgan, Paulo Pueliu, Steven Lane, and Eugene Malva Young commenced this special proceeding pursuant to CPLR 7503 to permanently stay arbitration of claims of breach of the merchant funding agreement and guaranty between Petitioners and Respondent Alva Advance LLC before Medication and Civil Arbitration, Inc. d/b/a Rapid Resolution. In particular, movants seek an order
[P]ermantly staying the Respondents Alva Advance LLC and Mediation and Civil Arbitration, Inc. from proceeding to arbitration under the parties' contract pending a hearing and determination of the issue (1) whether the arbitration organization
designated for the arbitration was formed and intended to be a fraudulent front for the merchant cash advance industry; (2) whether the said arbitration organization does not actually conduct arbitration as is commonly understood; (3) whether the arbitration process of the arbitration organization was structured to be an infallible rubber stamp of an arbitration statement submitted by a merchant cash advance lender, like Respondent; and (4) whether the arbitration organization's rules and procedures were designed to prejudice a borrower-Respondent and take away all due process from the borrower Respondent.
Respondent Alva Advance opposes and Respondent Mediation &Civil Arbitration Inc. cross-moves to dismiss.
BACKGROUND
The merchant funding agreement executed by the Petitioners and Alva Advance contains an arbitration provision for arbitration governed by the rules of the Federal Arbitration Act and stating:
Any action or dispute relating to this Agreement or involving ALVA on one side and any Merchant or Guarantor on the other, including, but not limited to issues of arbitrability, will, at the option of any party to such action or dispute, be determined by arbitration before a single arbitrator. The arbitration will either be administered by Arbitration Services, Inc. ... or by Mediation &Civil Arbitration, Inc. under its Commercial Arbitration Rules as are in effect at that time, which rules are available at www.mcarbitation.org.
The Guaranty contains a similar arbitration provision.
In support of the petition, Petitioners assert that Mediation and Civil Arbitration is not an independent, neutral arbitration organization but rather was "formed [by the law firm of Sutton Sachs Meyer] for the sole purpose of handling arbitration demands of merchant cash advance lenders" and "granting their clients ... the full amount they sought, with every filing." In addition, Petitioners assert that rather than maintaining a panel of genuine independent arbitrators, the same two arbitrators, principals of the organization, were appointed in every case (reviewed by counsel), and the rules imposed were skewed against the merchant, giving only a few days following notice of the arbitration demand to answer and pay the arbitration fee or be held in default.
Referencing arbitrations involving a different merchant advance company, LCF, Petitioner suggests that the arbitrators of Mediation and Civil Arbitration adopt as their decision without a hearing, the arbitration statements offered by the merchant advance companies. In addition, Petitioner asserts that the arbitrators have issued restraints against the merchant's bank accounts without any recourse to the merchant. In support, the Petitioners submit an affidavit from Denis Morgan "an officer of the business Petitioner [who] handled the transaction with the Respondent [Alva Advance]."
In opposition, Respondent Alva Advance contends that the arbitration is to be adjudged under the FAA and not CPLR Article 75 and, under either analysis, there is no valid basis to stay the arbitration. Respondent contends that the parties "entered into a clear, explicit, and unequivocal agreement to arbitrate any dispute." In addition, Respondent asserts that there is no basis to disqualify as there has been no showing of bias that permeates all arbitrators of the selected arbitral forum. Finally, Respondent Alva contends that under the agreement any questions of illegality of the contract are reserved to the arbitrator.
Respondent Mediation and Civil Arbitration moves to dismiss the action as asserted against it pursuant to CPLR 3211(a)(7) on the grounds that no cause of action has been stated and no relief is sought from the arbitrators. Further, the arbitral forum asserts immunity from civil liability under the doctrine of arbitral immunity for actions taken within the scope of the arbitral process.
DISCUSSION
CPLR 7503(b) provides that "[s]ubject to the provisions of subdivision (c), a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration, may apply to stay arbitration on the ground that a valid agreement was not made or has not been complied with or that the claim sought to be arbitrated is barred by limitation under subdivision (b) of section 7502."
"The party seeking a stay of arbitration has the burden of showing the existence of sufficient evidentiary facts to establish a preliminary issue which would justify the stay" (Matter of AutoOne Ins. Co. v. Umanzor, 74 A.D.3d 1335, 1336 [2010]; see Matter of Metropolitan Prop. &Cas. Ins. Co. v. Singh, 98 A.D.3d 580, 581 [2012]). Thereafter, the burden is on the party opposing the stay to rebut the prima facie showing (see Matter of Metropolitan Prop. &Cas. Ins. Co. v. Singh, 98 A.D.3d at 581; Matter of American Inti. Ins. Co. v. Giovanielli, 72 A.D.3d 948, 949 [2010]). Where a triable issue of fact is raised, the Supreme Court, not the arbitrator, must determine it in a framed-issue hearing, and the appropriate procedure under such circumstances is to temporarily stay arbitration pending a determination of the issue (see Matter of Allstate Ins. Co. v. Aizin, 102 A.D.3d 679, 681 [2013]).(Hertz Corp. v. Holmes, 106 A.D.3d 1001, 1002-03 [2d Dept 2013]; see also Hertz Vehicles, LLC v. Monroe, 138 A.D.3d 847 [2d Dept 2016]).
At the outset, the court notes that the only relief sought by the motion is a permanent stay of the arbitration. Although Petitioners seek such permanent stay "pending a hearing and determination" of certain outlined questions, there is neither a request for declaratory relief nor an express request to disqualify the arbitrators. Nonetheless, it seems clear that disqualification is the relief that Petitioners seek. For the reasons that follow, the application is denied.
It is settled law that parties are bound to the contracts that they make absent a cognizable reason to invalidate. Here, the parties agreed to arbitration under the mandates of the Federal Arbitration Act (FAA), which provides that "a written provision in any . . . 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 or as otherwise provided in chapter 4." (9 U.S.C. § 2).
As a general matter, the FAA does not provide for pre-award removal of an arbitrator, but rather for vacature of an award issued under specific circumstances. (See Aviall, Inc. v. Ryder System, Inc., 110 F.3d 892 [2d Cir. 1997]). Section 10(a) of the FAA sets forth the circumstances under which an arbitral award may be vacated:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
Under the FAA, "[e]vident partiality may be found only where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." (Scandinavian Reinsurance Co., Ltd. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 64 [2d Cir. 2012], However, "a showing of evident partiality may not be based simply on speculation." (Id. at 72). Factors to be considered include "(1) the extent and character of the personal interest, pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding." (Id. at 75 [quoting Three S Delaware. Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520 [4th Cir. 2007]]).
Likewise, under New York law, disqualification of an arbitrator prior to award may be employed only "where 'there exists a real possibility that injustice will result.'" (Bronx-Lebanon Hosp. Center v. Signature Medical Management Group, LLC, 6 A.D.3d 261 [1st Dept 2004] [quoting Matter of Lipschutz, 304 NY 58 [1952]]; see also Grendi v. LNL Construction Mngmt. Corp., 175 A.D.2d 775 [1st Dept 1991]). While the appearance of bias may suffice as a basis for disqualification, "that bias must be clearly apparent based upon established facts, not merely supported by unproved and disputed assertions." (Bronx-Lebanon, 6 A.D.3d at 261; see also Rabinowitz v. Olewski, 100 A.D.2d 539 [2d Dept 1984] [affirming disqualification following a full evidentiary hearing on the issue of bias]).
In Pompano-Windy City Partners, Ltd. v. Bear, Sterns &Co., 698 F.Supp. 504 [SDNY 1988], the court denied an application to enjoin arbitration prospectively upon allegations that the forum would be biased against customers and in favor of the broker-dealer defendants. The court noted that the movant's allegations that the individual arbitrators would exhibit bias because of a perceived bias of the arbitral forum was "too speculative and attenuated to justify invalidation of all contemplated arbitration, or to enjoin it before it commences." (Pompano-Windy City, 698 F.Supp. at 516-517 ["Plaintiffs' argument, then, is essentially that because the forum is asserted to be biased, it will further its bias by the appointment of biased arbitrators [and] ensure arbitrator conformity to its biased views . . Additionally, the court found an injunction was not legally supportable because "[e]ven if the eventual arbitration turned out to be unfair, any resultant injury would not be 'irreparable'" as the award could be challenged later. (Id. at 519).
Here, even viewing the instant motion as one ultimately seeking disqualification of the arbitrator pursuant to CPLR 7502, 7511 or Section 10(a) of the FAA, the court finds no prearbitration hearing to be warranted. Petitioner's affiant Mr. Morgan, does not state basis for knowledge of the formation or operations of Mediation and Civil Arbitration other than "the advice and research of counsel." No evidence of a relationship between the forum and Alva Advance is alleged. In addition, the payment structure cited by the Petitioners does not suggest that only one party would bear the responsibility for payment of arbitrator time and expenses. Rather, the published structure (as presented) applies equally to both parties and does not demonstrate an intent to disadvantage merchants to the point that they would be stymied from participating in mediation. Nor do the Petitioners assert that the appointed arbitrator would have any financial interest in the outcome of arbitration. (See Dominick &Dominick, Inc. v. Investor Svcs. & Savings Corp., 1991 WL 143716 [SDNY July 22, 1991] [payment of arbitration fees by promissory note insufficient to establish partiality of arbitrators]). The allegations of general disadvantage to the merchant by virtue of the default rules utilized are insufficient to stay the arbitration. Among their multiple examples, Petitioners point to no instances where a merchant response was submitted to the demand for arbitration and the corresponding outcome of such proceeding.
Next, with respect to the motion to dismiss by Mediation and Civil Arbitration, Petitioners acknowledge that the petition seeks nothing more than a stay of arbitration and that the arbitral forum was added only in the event that the court deemed them a necessary party. The court notes recent decision in Priority Logistics, Inc. v. Alva Advance, LLC, Index. 656699/2022 [Sup. Ct. NY County March 27,2023], which determined on similar claims of "sham arbitration" that dismissal of the forum was required on the basis of arbitral immunity. However, as the court finds no stay to be warranted, the petition will be dismissed in its entirety and immunity need not be addressed.
The Priority Logistics merchant-Petitioner sought to vacate an arbitration award.
For the above, it is hereby
ORDERED, that Petitioner's application to stay arbitration before Mediation and Civil Arbitration, Inc. is denied and the petition is dismissed.
The foregoing constitutes the decision and order of this court. All applications not specifically addressed herein are denied.