Several recent decisions by Commercial Division Justices, two of them affirmed by the First Department, have clarified the limitations and standards applied in actions brought pursuant to Article 75 of the CPLR.  Article 75 permits participants in binding arbitration, irrespective of what arbitral forum they are in, to seek assistance from New York State Supreme Court judges under certain circumstances.

First, in Morgan Keenan & Co., Inc. v. Rote, 2014 NY Slip Op 01678 (1^st Dep’t March 13, 2014), the First Department unanimously affirmed the dismissal by Justice Eileen Bransten of a petition to vacate an arbitration award.  In this case, the petitioner, which brought the petition to vacate under CPLR 7501 and CPLR 7511, lacked personal jurisdiction over the respondents.  The First Department found that the arbitration, which was conducted using the rules of the Financial Industry Regulatory Authority (“FINRA”), set the hearing location in Memphis, Tennessee.  Therefore, even though a few days of the hearing occurred in New York pursuant to a request of the arbitrators for their convenience, that limited contact with New York was insufficient to establish personal jurisdiction.  Further, the petition to vacate the arbitration did not arise out of the fact that respondents travelled to New York to accommodate the arbitrators’ request.

Next, in Matter of Colorado Energy Mgt., LLC v. Lea Power Partners, LLC, 2014 Slip Op 01253 (1^st Dep’t Feb. 20, 2014), the First Department unanimously affirmed the vacatur of an arbitration award to Lea Power Partners, LLC (“LPP”) against petitioner Colorado Energy Management, LLC (“CEM”) by Justice Charles E. Ramos.  CEM petitioned for vacatur pursuant to CPLR 7511.  In this arbitration, conducted before the American Arbitration Association (“AAA”), CEM moved to dismiss LPP’s claim for gross negligence based on nine breaches of the Engineering, Procurement and Construction (“EPC”) Agreement between them – CEM argued that absent gross negligence, LPP’s claims for damages were barred by the EPC Agreement’s terms.  The original arbitrator assigned to the dispute denied CEM’s motion to dismiss, finding that the claim for gross negligence, “if proven, could form the basis for the recovery of causally related damages nothwithstanding the limitations on liability and damages in the EPC contract.”  The original arbitrator passed away after issuing the decision and before the hearing itself took place.

The successor arbitrator ultimately found that there was no gross negligence.  However, the successor arbitrator went one step further and then found that CEM breached the EPC Agreement and therefore caused cost overruns that were awarded to LPP as damages, even though there was no claim submitted by LPP for breach of contract.  Judge Ramos vacated the award to LPP on the grounds that the successor arbitrator exceeded his authority under the Federal Arbitration Act, and the First Department affirmed, finding “[t]he arbitration demand, the pre-hearing motion practice and [the original arbitrator’s] decision make it clear that gross negligence was the only claim by LPP … therefore, [the successor arbitrator] exceeded his authority by finding that CEM breached the EPC Agreement….”

Finally, in Rice Securities, LLC v. Nevel, Index No. 651054/13, on February 26, 2014, Justice Melvin Schweitzer granted a petition brought pursuant to CPLR 7503(b) and the Federal Arbitration Act to permanently stay arbitration claims pending before FINRA with respect to a non-FINRA member firm.  Petitioner Rice Securities, LLC (“Rice”) moved to stay on the basis that the dispute being arbitrated was not subject to FINRA’s jurisdiction.  Rice argued there are actually two entities – Rice and Rice Derivative Holdings, L.P. (“RDH”) – that do business under the name of Rice Financial Products Company.  Rice is a FINRA member firm, while RDH is not.  According to Rice, the dispute articulated in Nevel’s statement of claim before FINRA, which arose out of Nevel’s work for Rice Financial Products Company, was unrelated to Rice’s business, and only related to RDH’s business.  Therefore, the claim was not arbitrable in the FINRA forum.  Respondent Nevel argued that because FINRA’s rules permitted him to “request binding arbitration to resolve disputes arising out of their actions associated with a FINRA member,” FINRA was the appropriate forum.

Judge Schweitzer found that Nevel’s dispute with Rice Financial Products Company arose out of his employment by, and partnership interest in, RDH – the non-FINRA member firm.  Rice was not a signatory to the agreement between Nevel and RDH that was being arbitrated.  Because “to bind a non-signatory to an arbitration agreement under principles of estoppel, the benefits of the agreement to the non-signatory must be direct – that is, flow directly from the agreement,” Rice’s FINRA member firm status was not sufficient to force RDH to arbitrate within the FINRA forum because Rice had no relationship to the claims Nevel was arbitrating against Rice Financial Products Company.