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Wien & Malkin vs. Helmsley-Spear Inc. � Battle Over Right to Terminate Management Agreements � Federal Arbitration Act � Manifest Disregard of Law This case involved a dispute between plaintiffs, general partnerships that own and operate various commercial properties (buildings) and the defendant entity, the latest “incarnation” of an entity which had been the long-time managing agent (agent) for the plaintiffs’ properties. In most or all instances, Harry Helmsley (Helmsley) had found and introduced the buildings to the plaintiffs. The plaintiffs granted Helmsley’s companies the right to lease and manage the buildings. Mr. Helmsley also held partnership interests in the plaintiffs’ entities. The plaintiffs’ entities supervised and managed the operating partnerships, handled accounting, payment of mortgages and taxes, prepared tax returns and held annual partnership meetings. The Partnership Agreements (agreements) provided for the removal without cause of the agent: [I]n the event of the death of Harry B. Helmsley or his retirement from active participation in the conduct of business of Helmsley-Spear, Inc. or its successors, said change of the managing agent shall require only the approval by the written vote of parties representing at least fifty (50 percent) per cent of the ownership of the [*3] assets of the joint venture. Some of the agreements set the minimum voting requirement for removal of the agent at 60 percent of ownership. None of the agreements required a meeting or disclosures before any vote on termination or any other subject and none provided Helmsley-Spear with any role other than agent. In June 1997, the plaintiffs, concerned by the “declining fortunes” of Helmsley-Spear dating back to Mr. Helmsley’s “illness and demise and the ascendancy of his widow, Leona, who succeeded him as chair of Helmsley-Spear, commenced this lawsuit to remove Helmsley-Spear as the . . . agent of the properties.” The plaintiffs also sought to invoke the removal without cause provisions in the agreements by soliciting written consents of the partners. When Helmsley-Spear obtained a temporary restraining order enjoining Helmsley-Spear’s termination on the eve of the partnership meeting scheduled for July 15, 1997, the plaintiffs allegedly had sufficient written consents to remove Mr. Helmsley from several buildings. In September 1997, the trial court stayed the litigation pending the outcome of arbitration. Also in September 1997, unbeknown to the plaintiffs, Leona Helmsley (Mrs. Helmsley), in an effort to resolve a dispute, entered into agreements with the principals of defendant Helmsley-Spear Inc., which had formed a company called HS Acquisition Corp. a/k/a Newco. These agreements provided, inter alia, that her company Helmsley Enterprises which owned 99.9 percent of the original Helmsley-Spear, would purchase the remaining the 0.1 percent of Helmsley-Spear from defendant’s principals and, defendant’s principals would resign from Helmsley-Spear, their option to purchase Helmsley-Spear would be terminated and Mrs. Helmsley would grant them an irrevocable proxy to vote her partnership interest on “the designation of Newco as the managing agent of each of the properties for the management period and to vote against or to refuse to consent or approve any change in such designation for the duration thereof.” Shortly thereafter, defendant’s principals renamed HS Acquisition Corp., Helmsley-Spear Inc. and Helmsley-Spear assigned to Helmsley-Spear Inc. property management agreements, giving it the right to manage the buildings. Neither Helmsley-Spear’s agreements, nor the property management agreements provided for a unilateral assignment by Helmsley-Spear, nor were plaintiffs advised of the assignment. In fact, the parties to the assignment contractually agreed to “conceal the information” that Helmsley-Spear and Helmsley-Spear Inc. were two different companies, and defendants only made such disclosure pursuant to an order of the arbitration panel. In December 1997, an individual plaintiff and Mrs. Helmsley settled the individual plaintiff’s claims against her, individually. This agreement provided that Helmsley-Spear would be removed as agent at certain properties and that the individual plaintiff could pursue any claims that he had against Helmsley-Spear. Additionally, Mrs. Helmsley was to give him an irrevocable proxy for the removal and replacement of Helmsley-Spear. The latter provision, was in “direct conflict with the irrevocable proxy she gave to the principals of Helmsley-Spear, Inc.” In the arbitration, the plaintiffs’ claimed that Helmsley-Spear should be terminated as agent in all of plaintiffs’ buildings “for cause” due to mismanagement and Helmsley-Spear had been terminated “without cause” at the buildings where the vote to terminate had been taken. The arbitrators denied the plaintiffs’ claim for dismissal “for cause,” finding that the plaintiffs had failed to prove that Helmsley-Spear had mismanaged the buildings. The arbitrators had also denied the plaintiffs’ claim for dismissal “without cause,” finding that the plaintiffs had failed to provide the partners with adequate disclosure such that their consent was informed and that “no valid vote of any kind has taken place.” They also enjoined the plaintiffs, for six months, from calling a partnership meeting to remove Helmsley-Spear as agent and mandated that proxies be “complete and accurate.” The arbitrators also upheld the voting agreement between Mrs. Helmsley and Helmsley-Spear Inc. Helmsley-Spear had moved to confirm the award. The court granted the motion. Subsequently, there was additional litigation regarding the voting process as to the four “without cause” partnerships. The trial court approved new solicitation materials and voting procedures and scheduled a new vote. The vote resulted in Helmsley-Spear’s removal as agent on certain buildings. The trial court confirmed the vote and held that Helmsley-Spear should also be removed from another building because Mrs. Helmsley’s vote to retain them was inconsistent with her voting agreement with the individual plaintiff. The appellate division had affirmed. The matter now came before the appellate division as a result a U.S. Supreme Court order vacating the order of the appellate division and remanding the matter for further consideration. The appellate division held that the subject dispute should be decided pursuant to New York arbitration law, rather than the Federal Arbitration Act (FAA), since the dispute involved New York entities and termination of defendant as agent of buildings located in New York City and as such, did not have a substantial effect on interstate commerce. The Supreme Court had held that the FAA applies to any transaction “affecting commerce,” whether or not there is a “substantial effect” on interstate commerce. The plaintiffs argued that the arbitration panel had demonstrated a “manifest” disregard for the law” in determining that Helmsley-Spear Inc. is the valid successor in interest to the former Helmsley-Spear Corp. and in enjoining the plaintiffs from interfering with the voting agreement with Mrs. Helmsley and Helmsley-Spear Inc. The former determination is “alleged to violate the legal principle that personal services contracts may not be assigned, and the latter is alleged to ignore the principle that partnership affairs are the exclusive providence of the partners and a partner may not assign his proxy to non-partners.” The court explained that under the FAA, a court may vacate an arbitration award either on the grounds set forth in �10(a) of the FAA or on one of the several judicially recognized “nonstatutory” grounds, such as irrationality . . . manifest disregard of the law or evidence . . . or public policy (citations omitted) . . . “[M]anifest disregard ‘clearly means more than error or misunderstanding with respect to the law’ [citation omitted]” and “ to modify or vacate an award on this ground, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit and clearly applicable to the case” . . . . “[A] court may infer that the arbitrators manifestly disregarded the law if it finds that the error made by [them] is so obvious that it would be instantly perceived by the average person qualified to serve as an arbitrator” . . . “If there is ‘even a barely colorable justification for the outcome reached,’ the court must confirm the arbitration award.” The court found that the arbitrators had demonstrated a “manifest disregard of contract law” and the applicable agreements by ignoring the legal principles precluding the “covert, unilateral assignment of the personal services contracts” and by finding that Helmsley-Spear Inc. principals’ 1970 option to purchase Mr. Helmsleys’ interest in Helmsley-Spear survived the September 1997 agreement with Mrs. Helmsley, that the option was duly exercised, that Helmsley-Spear and its successors have a vested right to remain as agent despite any such “change in form,” and that the agreements provided that (plaintiff’s law firm) had a fiduciary duty to Helmsley-Spear. The court further found that the arbitrators had evidenced “manifest disregard by finding that Helmsley-Spear cannot be terminated as agent “due to the alleged defects in the proxy procedure.” The court explained that “the conduct of Leona Helmsley and defendant’s principals in entering into an agreement assigning Helmsley-Spear’s personal services contracts to defendant was a clear violation of the well-settled legal principle that personal services contracts, may not be assigned without the consent of the principal. The arbitrators “utterly disregarded this clear, applicable principle, which plaintiffs brought to their attention, not only by tacitly condoning, for the most part, the covert nature of the transaction, also violation of agency law principles . . . , but additionally by erroneously concluding that Helmsley-Spear Inc. was a mere ‘change of form’ or reorganization and thus the valid successor in interest to Helmsley-Spear due to the purported exercise of the contractually terminated 1970 option agreement. They ignored the facts that Helmsley-Spear Inc. had different officers, directors, shareholders, management personnel, financial structure and fewer properties under management than Helmsley-Spear.” The court further said that the arbitrators’ findings had manifestly disregarded the applicable agreements, including the 1970 option agreement and the September 1997 agreements terminating the option and providing for Mrs. Helmsley’s purchase from defendants principals the sole 0.1 percent share of Helmsley Enterprises that she did not own, thereby extinguishing any vestige of their ownership interest in Helmsley-Spear. “The panel, proceeding as if these valid agreements did not exist, used the terminated option, and the fiction that it was duly exercised, as the fulcrum of the arbitration award to endow Helmsley-Spear and its successors with a vested right to continue as managing agent, a right not provided in any of the agreements.” The court also held that the arbitrators had manifestly disregarded the applicable agreements by finding that the plaintiff law firm was bound to retain Helmsley-Spear as agent due to the defects in the proxy procedure. The court explained that the decline of the “real estate empire” was a valid concern for the plaintiff law firm in determining whether to continue using the Helmsley entities as agent. The agreements provided that such entities could be terminated “without cause,” if the requisite percentage of partnership votes were obtained and contrary to the panels’ findings, the agreements did not require any particular method of solicitation of proxies for a vote to terminate the agents and do not establish a fiduciary duty to them. Nor was there any showing that the individual plaintiff had fraudulently induced the partners to give him their proxies. The plaintiffs had also argued that the arbitrators had manifestly disregarded partnership law by upholding Mrs. Helmsley’s voting agreement with Newco/Helmsley-Spear Inc. The agreement transferred to Newco/Helmsley-Spear Inc., Mrs. Helmsley’s irrevocable proxy to vote on the “designation of Newco as the managing agent of each of the Properties for the Management Period and to vote against or refuse to consent, or approve any changes such designation for the duration thereof.” The agreement allegedly violates Partnership Law ��40(7) and 53(1), which prohibit membership in a partnership without unanimous consent of all the partners and interference in the management of partnership affairs by the assignee of a partner’s interest, respectively. The court found that Mrs. Helmsley “did not transfer a partnership interest here, but merely made an agreement to vote for the retention of Newco as managing agent, a vote she was entitled to cast with or without the agreement.” Additionally, since the court held that the arbitrators erred in finding the proxies solicitation process defective, such issue was rendered academic, since it validates the results of the partnership votes which had already been taken, which favored termination of Helmsley-Spear Inc. and allows similar partnership votes to go forward. Accordingly, the court held that the trial court’s decision to confirm the arbitration award should be reversed, that part of the award which declared that Helmsley-Spear Inc. was the valid successor in interest to the former Helmsley-Spear Corp. was vacated, Helmsley-Spear Inc. was to be declared a new entity, the assignment of the property management agreements was declared to be invalid, the matter of Helmsley-Spear Inc.’s termination was remanded for a vote and the issue of whether Mrs. Helmsley was obligated to vote to terminate Helmsley-Spear Inc. was declared to be academic. Comment: This case involves a rare instance of an arbitration award being set aside based on a manifest disregard of law. The court had originally believed that it could not overturn the arbitration award under New York State Law. The court subsequently concluded that it could vacate the arbitration award under the Federal Arbitration Act standard. Interestingly, the FAA was enacted to encourage greater respect and deference for arbitration awards. Historically, there had been less respect and deference for arbitration awards in many state courts. Here, the court held that the federal manifest disregard of the law doctrine vested the court with latitude that was greater than that permitted under the traditional New York State standards which required confirmation of an arbitration award unless it “violates a strong public policy, is totally irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” The court essentially concluded that the arbitrators had simply disregarded several well-established principles of law without any perceptive basis. This case is also interesting because of the covert effort to conceal from ownership the fact that ownership of the managing agent had changed. As a general rule, personal services contracts may not be assigned without the consent of the principal. When negotiating management agreements, parties should carefully focus on the provisions relating to termination. An owner does not want to be saddled with a management company that the owner has lost confidence in or that the owner believes is engaged in wrongful conduct. Management companies on the other hand, make an investment in gearing up to manage buildings and believe that they are entitled to a reasonable termination fee if they are terminated without cause. These issues are usually negotiable. The parties will consider the length of the agreement and the level of compensation. Parties will also consider whether there are several competent management firms competing for the business or is there only one competent firm in a local market place. Wien & Malkin LLP v. Helmsley-Spear Inc., Index No. 04-07357, App. Div., 1st Dept., decided Oct. 14, 2004, Weinberg Ellerin, J.P.; Williams, Marlow, Gonzalez, JJ. Decision by Williams, J. All concur. Department of Transportation Approval for Ramp Closure at Lincoln West Project Voided � Respondents Failed to Consider Environmental Effects � State Environmental Quality Review Act (SEQRA) The petitioners brought the subject Art. 78 petition seeking a judgment nullifying and vacating the approval granted by the respondent, New York City Department of Transportation (DOT), permitting the closure of the 72nd exit ramp of the Joe DiMaggio Highway (also known as the West Side Highway) and implementing the West End Avenue Improvement Plan, and seeking an injunction prohibiting any further construction, demolition or other work that would result in the closure of the 72nd Street exit ramp (exit) until the City has complied with the New York State Environmental Quality Review Act (SEQRA) and the New York City Environmental Quality Review Procedures (CEQR). Prior to Oct. 11, 1992, the developer had purchased 74 contiguous acres on the west side of Manhattan, running from West 59th St. up to West 72nd Street along the Hudson River. The developer proposed to develop a mixed-development project known as the Riverside South Development (RSD). The proposal contemplated residential apartments, office space, a studio complex for film and television production and a 21.5-acre waterfront park. The developer also proposed constructing a new, two-way north-south extension of Riverside Drive, which would run through the development and connect the development on the northern end to West 70th, West 71st and West 72nd streets. The connection to West 72nd Street would necessitate the closure of the exit from the West Side Highway. Thus, motorists seeking to exit at 72nd Street would be redirected to either the 59th Street or the 79th Street exit. It was undisputed that the closure of the exit “would result in increased traffic on West End Avenue; therefore, [the developer] proposed that the existing traffic/parking pattern on West End Avenue between 79th Street and 72nd Street be altered, by eliminating all parking on both sides of the street, and creating a six-lane thoroughfare, with three lanes in each direction.” The project generated significant protest and litigation. The petitioners cited traffic, safety, noise and air pollution issues. The court explained: the “heart” of SEQRA is the . . . (EIS) . . . . “The threshold at which the requirement that an EIS be prepared is triggered is relatively low; it need only be demonstrated that the action may have a significant effect on the environment.” . . . . As the City concedes the necessity of an EIS, which it claims was satisfied by the 1992 EIS, such issue is not in dispute. The Court of Appeals had explained that: “Procedurally, once an agency determines that an EIS is required, it must prepare or cause to be prepared a Draft EIS (DEIS) . . . [which] must then be filed with the Commissioner of Environmental Conservation and copies must be made available to interested persons on request . . . . If the agency determines that there is sufficient interest and that it would aid decision-making or provide an efficient forum for public comment, the agency should hold a public hearing on notice . . . . Whether or not a hearing is held, an agency must provide for a comment period on the DEIS of at least 30 days . . . . Unless the agency withdraws the proposed action or determines that it will not have a significant effect on the environment, the agency must prepare a FEIS 45 days after the close of any hearing or 60 days after the filing of the DEIS, whichever occurs later . . . , with filing and distribution in the same manner as a DEIS . . . , and at least 10 days for public consideration . . . . Finally, before approving an action that has been the subject of a FEIS, an agency must consider the FEIS, make written findings that the requirements of SEQRA have been met, and prepare a written statement of the facts and conclusions relied on in the FEIS or comments . . . . The Environmental Conservation Law (ECL) provides, in relevant part: All agencies . . . shall prepare, or cause to be prepared . . . an environmental impact statement on any action they propose or approve which may have a significant effect on the environment. Such a statement shall include a detailed statement setting forth the following: (a) a description of the proposed action and its environmental setting; (b) the environmental impact of the proposed action including short-term and long-term effects; (c) any adverse environmental effects which cannot be avoided should the proposal be implemented; (d) alternatives to the proposed action; . . . (f) mitigation measures proposed to minimize the environmental impact. The colead agencies had made a preliminary determination that the project would have a significant effect on the environment. An EIS and a Final EIS (FEIS) had been prepared and in 1992, the New York City Department of Environmental Protection (DEP) and the Department of City Planning (DCP) had issued a Notice of Completion for the FEIS. The project was approved by the City Planning Commission, and the City Council and construction began. The project is presently under construction and the exit remains open. The petitioners claimed that the respondents had failed to consider the specific environmental effects of closing the exit and that the DOT finding’s of adequate consideration and compliance with SEQRA/CEQRA are unsupportable by the FEIS or any supplemental EIS and therefore, void. The respondents argued that the 1992 FEIS adequately analyzed all relevant areas of environmental concern, complied fully with SEQRA/CEQRA requirements, and the technical analysis requested by DOT and prepared by the developer in 2003, failed to reveal “any potential, significant, adverse impacts to traffic, air quality or noise conditions stemming from the ramp closure that were not previously disclosed in the 1992 FEIS.” The key issue was whether the 1992 FEIS met the requirements of SEQRA/CEQRA with respect to the proposed ramp closure. The court found that the 1992 FEIS contained only a few references to the planned closure of the exit. The court also found that although the FEIS had certain references to the closing of the exit, “a thorough and exhaustive review of the 1992 FEIS failed to reveal that any identification was made of areas of environmental concern that are specifically related to the 72nd Street exit ramp’s closure, let alone the requisite ‘hard look’ by the agency.” Moreover, the FEIS had specifically stated that the closure of the exit “required discretionary approval action of its own.” The court rejected the sponsor’s argument that the time had passed to raise objections with respect to alleged inadequacies of the 1992 FEIS, since the EIS “made clear that the process for the separate discretionary approval on the closure of the ramp would take place in the future.” The FEIS had stated that approval would be required in the future from the DOT. The respondents had argued that since the FEIS was drafted in 1992, there had been no additional significant changes in the projected environmental impact due to the project and the DOT’s approval of the exit closure in 2004 complied with all applicable SEQRA/CEQRA requirements as DOT, in consultation with DCP and DEP, based its review on the environmental record presented in the 1992 FEIS, as validated by the technical analyses prepared by the developer’s traffic consultant in 2003. The court believed that the respondents’ assertions were unsupported by the record. The court explained that the inadequacy of the 1992 FEIS, as it relates to the exit may not be “remedied retroactively, by the drafting of a mere technical analysis in 2003, 11 years later, which also fails to comply with the requirements of SEQRA/CEQRA.” The court also stated that one or more private meetings with a few representatives of petitioners cannot “substitute for mandated ‘public review and comment’ as respondents have ‘only allowed limited participation and scrutiny.’ “ The court further stated that the respondents may not shift the responsibility of proposing alternatives to the exit closure to petitioners. The court emphasized that the lead agencies must prepare an EIS which includes a reasonable range of alternatives, including a “no action” alternative to the proposed action. The court noted that the 1992 EIS assumed that the exit would be closed, so it did not address any “alternatives,” much less a “no action” alternative. Given the respondents’ failure to comply with SEQRA and CEQRA, the court held that the approval given to close the exit is rendered null and void. Accordingly, the court granted the petition and remanded the matter to the DOT for appropriate environmental review of the proposed closure of the exit and enjoined further work that would result in closure of the exit until such time as DOT has complied with SEQRA/CEQRA. Comment: The court had also noted that the DEIS did not include “any consideration or analysis of traffic if the ramp were left open, or consideration of other design alternatives to meet the traffic needs of the project rather than the closing of the ramp itself.” Matter of Coalition Against Lincoln West, Inc. v. Weinshall, New York Law Journal, Oct. 20, 2004, p. 25, col. 1, Sup. Ct., N.Y. Co., Ling-Cohan, J. Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.

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