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Taking its cue from the U.S. Supreme Court, an appeals court in Manhattan has asserted the broad powers of federal law over arbitrations involving commercial real estate in New York. A unanimous panel of the Appellate Division, 1st Department, last week reversed one of its previous rulings in a long-running dispute over the management of several landmark buildings in New York City, including the Empire State Building. Two years ago, the 1st Department had affirmed an arbitration award in favor of real estate magnate Leona Helmsley and Helmsley-Spear Inc., a separate company to which Helmsley had assigned the rights to many of her management contracts from her former company, Helmsley-Spear. At the time, the appeals court questioned the reasoning of the arbitration panel, but said it had limited powers of review because the arbitrators’ decision was governed by state law. Unless the award was shown to be “utterly arbitrary,” the court said, it must stand. The court also found that the Federal Arbitration Act (FAA) could not apply unless the award had a “substantial effect on interstate commerce.” Last year, though, the U.S. Supreme Court clarified the broad scope of the act in The Citizens Bank v. Alafabco, 539 US 52. After its ruling, the Court accepted the 1st Department’s decision for review and returned it to the appellate division for reconsideration. In a 15-page opinion by Justice Milton L. Williams, the 1st Department last week rescinded its first decision and ruled in favor of Wien & Malkin and its partners, which own the Empire State Building and had sought to remove the Helmsley firm from managing it. Writing in Wien & Malkin LLP v. Helmsley-Spear Inc., 2467, Justice Williams said the U.S. Supreme Court’s ruling in Alafabco “clarified the broad scope of the FAA’s application pursuant to the Commerce Clause by expressly reaffirming that the FAA applies to any transaction ‘affecting commerce,’ whether or not there is a ‘substantial effect’ on interstate commerce.” Besides changing the outcome of the case at hand, attorneys said the ruling would bring virtually all arbitration clauses involving commercial real estate under the Federal Arbitration Act rather than state law. “It’s very, very broad,” said Thomas E.L. Dewey of Dewey Pegno & Kramarsky, who represents Wien & Malkin. “It’s clear that the federal standard applies to almost all commercial transactions now.” Deborah A. Skakel of Dickstein Shapiro Morin & Oshinsky, which represents Helmsley-Spear Inc., said that even assuming the Federal Arbitration Act applied in this and other cases, the First Department had incorrectly applied the standard for reversing an arbitration award under the act. She said Helmsley-Spear Inc., would seek leave to appeal to the Court of Appeals. In dispute among the parties are numerous buildings owned by Wien & Malkin and managed by Helmsley-Spear Inc., including the Empire State, several on Broadway, the Toy Center at Fifth Avenue and 23rd Street, the Lincoln Building at 60 East 42nd Street, and the Fisk Building at 250 West 57th Street. The Toy Center, the Lincoln Building and the Fisk Building were removed from Helmsley-Spear Inc., management last year in related litigation after a vote by ownership interests. (See Wien & Malkin v. Helmsley-Spear Inc., 307 Ad2d 808). As for the Empire State Building and the Broadway properties, Wien & Malkin asked to remove Helmsley-Spear Inc., as manager for cause, arguing that they had mismanaged the properties. An arbitration panel ruled that Wien & Malkin had failed to prove its claim and declined to dismiss the management company. Manhattan Supreme Court Justice Ira Gammerman confirmed the arbitrator’s ruling, as did the 1st Department. NEW OUTCOME Last week, however, the 1st Department said a different outcome was warranted now that the Federal Arbitration Act applied to the dispute. Citing its ruling in Sawtelle v. Wadell & Reed, Inc., 304 AD2d 103, the appeals panel said the arbitration award could be vacated if the arbitrators manifestly disregarded the law. Justice Williams wrote that Helmsley and her former company, Helmsley-Spear, had improperly assigned their management contract to the successor company, Helmsley-Spear Inc., which was a new entity and not run by Helmsley. This should not have been done, the court said, without the consent of the principal, Wien & Malkin. “The arbitrators utterly disregarded this clear, applicable principle … not only by tacitly condoning, for the most part, the covert nature of the transaction . . . 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.” In fact, Justice Williams wrote, Helmsley-Spear Inc., had “different officers, directors, shareholders, management personnel, financial structure and fewer properties under management than Helmsley-Spear.” The issue of Helmsley-Spear Inc.’s termination of management of the properties was remanded to the Wien & Malkin partnership for a vote. Justices Betty Weinberg Ellerin, George D. Marlow and Luis A. Gonzalez concurred on the ruling. Wien & Malkin was also represented by Thelen Reid & Priest.

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