The Appellate Division, First Department, at 27 Madison Ave. (NYLJ/Rick Kopstein)
Broadly applying the term “commerce,” a unanimous panel of the Appellate Division, First Department, on Thursday held that the Federal Arbitration Act applies to agreements governing entities that own and invest in commercial real estate.
The opinion in Rita Cusimano v. Andrew Schnurr, 652429/11, signed by Justice Rosalyn Richter (See Profile), reversed the trial court for staying arbitration of certain claims on statute of limitations grounds. The panel found that since the contracts are subject to the Federal Arbitration Act, the timeliness question was one for the arbitrator, not the court.
The decision explored the applicability of the federal statute to the dispute, the statute’s broad scope in light of U.S. Supreme Court precedent and the circumstances that would lead to waiver of arbitration through litigation.
The dispute concerns three family-owned entities that either invested in or held minority interests in entities that own commercial real estate in Florida and New York.
Rita Cusimano is part owner in these entities along with her father, Bernard Strianese, and her sister, Bernadette Strianese. Although the family members have been engaged in legal wrangling concerning ownership interests in Nassau County, the dispute here concerns Cusimano’s claims against the accountants who provided tax services.
Cusimano and her husband, Dominic, alleged that defendant CPAs Andrew Schnurr and Michael Gerard Norman colluded with the Strianeses to misappropriate assets from one entity, commit tax fraud and fraudulently induce Rita Cusimano to sell her interest in one entity to her father.
According to the complaint, the alleged misconduct arose from accounting and tax work performed between 1991 and 2009.
The Cusimanos’ September 2011 complaint brought claims for aiding and abetting fraud, accounting malpractice and breach of fiduciary duty, seeking damages in the millions of dollars.
In a July 2012 decision, Justice Charles Ramos (See Profile) of the Commercial Division in Manhattan dismissed the accounting malpractice claims as time-barred. He held that fraud and breach of fiduciary duty claims were not pleaded with specificity, but gave the plaintiffs a chance to replead those claims.
Rather than file an amended complaint, the Cusimanos filed a demand for arbitration in September 2012, one year after commencing suit, against the accountants and Strianeses on counts that mirrored the claims in litigation.
The plaintiffs moved to stay the court action pending arbitration while the CPAs cross-moved to permanently stay the arbitration, arguing the claims were time-barred. The Strianeses also moved to intervene and to stay arbitration based on the statute of limitations.
The Cusimanos argued that the agreements governing the formation of the family-owned entities are subject to the Federal Arbitration Act, a 1925 statute that provides for arbitration in transactions that contemplate interstate commerce. Thus, the plaintiffs contended that the arbitrator should decide the timeliness of claims—not the trial judge.
In a July 16, 2013 decision, Ramos disagreed, holding that the Federal Arbitration Act did not apply to the agreements due to an insufficient demonstration of interstate commerce. He pointed out, for instance, that one of the entities did not have “a direct interest” in ownership of a national hotel.
Ramos also held that Rita Cusimano waived her right to arbitration by pursuing litigation, stating that this was “a flagrant example of forum shopping—dressed up as a professed concern for judicial economy—to get a second bite at the apple in arbitration.”
In reversing, the First Department panel turned to two Supreme Court decisions—Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265, 270 (1995) and Citizens Bank v. Alafabco, 539 U.S. 52, 53 (2003)—to support a broad interpretation of the meaning of commerce.
As a threshold matter, it said the Federal Arbitration Act applies to the agreements at hand. Under Allied-Bruce, a transaction can involve commerce merely by ‘affecting commerce,” the panel said. Citizens Bank affirmed this holding, the panel stated, by elaborating that the federal law applies to transactions that merely fall “within the flow of interstate commerce.”
In the Cusimanos’ case, the panel pointed out that one rental property is leased by CVS, while another owns interest in an entity that owns Marriott Hotel.
“The proper inquiry is whether the economic activity in question represents a general practice that bears on interstate commerce in a substantial way,” Richter wrote. “This dispute not only involves substantial commercial transactions covering real properties, some of which are not in this state, but as plaintiffs note, the properties are part of national hotel and drug store chains.”
Additionally, the appellate judges said the Cusimanos’ litigation did not substantially prejudice the defendants to the point of waiving arbitration. It applied a three-prong analysis that involves time elapsed between litigation and arbitration; amount of litigation; and prejudice to the opposing party.
“A delay of one year does not, in itself, amount to protracted litigation, particularly where a delay ‘was not accompanied by substantial motion practice or discovery,’ ” Richter wrote, citing Thyssen v. Calypso Shipping, 310 F.3d 102, 105 (2d Circ. 2002).
The panel also noted that the Cusimanos’ litigation did not involve multiple motions or interlocutory appeals and that the plaintiffs “have not received any greater advantage by filing a statement of claim in an arbitration than they would have obtained had they filed an amended complaint.”
In an interview, David Pegno, of Dewey Pegno & Kramarsky, who represents the Cusimanos said, “We are very pleased with the result and look forward to addressing the Cusimanos’ claims on the merits.”
“The ruling makes clear the broad reach of the FAA and how broadly it applies to commercial disputes,” he said. “It’s hard to imagine a commercial dispute that would not be governed by the FAA under the analysis the U.S. Supreme Court has set forth.”
Counsel to Schnurr, Norman and Bernard Strianese is Alan Heller and Ella Aiken of Garvey Schubert Barer. Heller could not be reached for comment.
Representing Bernadette Strianese are Peter Terracciano and Janine Lynam of Joseph & Terracciano.