Opinion
600404/2004.
Decided October 6, 2004.
Ira G. Greenberg, Esq. Edwards Angell LLP, New York, NY, for Plaintiff.
Donald Zakarin, Esq., Pryor Cashman Sherman Flynn, New York, NY, for Defendant.
Plaintiff, BDO Seidman, LLP (BDO), commenced this action against defendant, Mark E. Bloom, a former partner of BDO, to collect on a defaulted promissory note made by defendant and payable to plaintiff. In his answer, defendant asserted counterclaims against plaintiff regarding his alleged wrongful termination as a partner. As a result, plaintiff moved, pursuant to Article 75 of the CPLR, to stay the counterclaims and compel their arbitration, claiming that they involve issues which must be submitted to arbitration in accordance with provision 14.8 of a partnership agreement entered into by the parties on July 11, 2001 ("the Partnership Agreement"). As discussed below, plaintiff's motion is granted and arbitration is ordered for defendant's counterclaims.
Defendant joined BDO, a national accounting firm, as a partner and on July 11, 2001, executed the Partnership Agreement which contains, the following arbitration provision:
14.8Any controversy or dispute relating to this agreement or to the Partnership and its affairs shall be resolved and disposed of in accordance with this section, except that any accounting provided for in this agreement, to be conclusive, shall not be subject to this procedure, but shall be conclusive upon the Partners and the Partners agree and accept to be bound by any such accounting. Any dispute or controversy shall be considered and decided by an arbitration panel consisting of two (2) members of the Board of Directors (other than the Chairman and Chief Executive Partner) selected by the Board of Directors and three (3) Partners from the Partnership's practice offices who are not members of the Board of Directors. The members of the arbitration panel shall be mutually agreed to by the Board of Directors and the parties to the controversy or dispute, provided that no member of the panel shall be from an office in which any complaining Partner was located at the time of the filing of the complaint, nor be otherwise involved in the controversy or dispute. The arbitration panel shall be selected as soon as possible after notice to the Partnership by any Partner that such a controversy or dispute exists. The conduct of the arbitration shall be in accordance with such procedures as the Board of Directors adopts and communicates to the Partners. The vote of a majority of the arbitration panel shall determine the resolution and disposition of any such dispute or controversy. The determination of such arbitration panel shall be conclusive and binding on all the Partners, and shall not be subject to further determination in any type of proceeding within or without the Partnership.
On the same date, he also executed a "Supplemental Agreement" that incorporated the arbitration provision of the Partnership Agreement. The Supplemental Agreement, inter alia, detailed Bloom's compensation and by its terms expired two years from the date of execution. It was then amended in August of 2002, to renew automatically every two years for a new two year period.
Thereafter, defendant borrowed $750,000 from BDO, as evidenced by a promissory note dated February 21, 2003. No payments have been made and on or about June 30, 2003, the note went into default and this action ensued.
Defendant asserts counterclaims against BDO, seeking to recover monies allegedly owed pursuant to his employment with BDO. The counterclaims allege, inter alia, that on or about October 28, 2003, defendant was notified that he should resign from the firm. They further allege that on November 14, 2003, during the first two year term of the Amended Supplemental Agreement, defendant's employment was wrongfully terminated. The counterclaims demand payment of monies owed to defendant under the Partnership and the Supplemental Agreements.
It is undisputed that the action to collect on the defaulted promissory note was properly initiated in this court, since the note contains a choice of law and forum clause that designates New York as the proper forum for the collection action. Plaintiff contends however, that the counterclaims may not be considered in the current action since they are required to be arbitrated pursuant to the arbitration provision. Defendant argues that the arbitration provision in the Partnership Agreement does not apply to him since he is a former partner; and that the provision is unconscionable and unenforceable, due to the prescribed composition of the arbitration panel. Therefore, defendant submits that this action should proceed, and that all of the claims, defenses and counterclaims should be resolved judicially. In light of defendant's contentions, I must initially decide whether the arbitration provision applies to a former partner; if so, then I will consider the validity and enforceability to the arbitration provision.
The Agreement To Arbitrate Applies To Former Partners
Defendant initially argues that the arbitration provision does not include disputes between former partners and the partnership. To buttress this contention he makes textual arguments that the arbitration provision is only applicable to current partners; but a reading of the partnership agreement reveals otherwise. It is a well-established rule of contract construction, that a written agreement, that is complete, clear and unambiguous on its face, must be enforced according to the plain meaning of its terms and a court is obliged to interpret a contract so as to give meaning to all of its terms. ( E.g. Excel Graphics Technologies, Inc. v. CFG/AGSCB 75 Ninth Ave., L.L.C., 1 AD3d 65 [1st Dept., 2003]). When construing a contract, it must be read as a whole to ascertain the parties' purpose and intent, and a practical interpretation should be given to the language employed so that the parties' reasonable expectations are realized. In passing on defendant's arguments grounded in contractual interpretation, I am mindful of these principles.
To support the argument that the term "partner" in the arbitration agreement refers only to current partners and not former partners, defendant analyzes several sections in the Partnership Agreement that refer directly to "former" partners, and concludes, that in order for a section to apply to a former partner, it must explicitly refer to a "former" partner. However, as explained below, while those sections do create certain explicit obligations with respect to former partners, they do not extinguish the obligation of defendant to arbitrate disputes. Put another way, this is analogous to a situation where the agreement to arbitrate the dispute expires, yet the dispute remains arbitrable. ( E.g. Primex Intern. Corp. v. Wal-Mart Stores, Inc., 89 NY2d 594, 598-99). As an analysis of the Partnership Agreement demonstrates, the inclusion of the words "former partner" in some of its sections does not relieve a former partner from the requirement to arbitrate disputes as required by the Partnership Agreement.
Defendant has analyzed various sections in Article XIV of the Partnership Agreement (in which 14.8 — the arbitration provision — is contained) and which is entitled "Dealings Among Partners": Section 14.1(a) provides: "For purposes of this agreement only, the term `Partner' shall include all those persons to whom units have been allocated . . ." Defendant contends that since former partners have no units, they are therefore excluded from the definition of "partner." However, since "have been" is grammatically in the past tense, it is clear that both current partners and former partners "have been allocated" units. Thus, it is evident that the term partner includes, in this context, a former partner.
Defendant also points to sections 14.4, 14.5 and 14.7, which use the term "former" partner. These sections, deal with topics which are particularly relevant to former partners, and may arise in the context of former partners, and the inclusion of the term former partner underscores that a former partner is subject to the provision. For instance, 14.5 prevents a partner at, prior to, or within two years after termination from the partnership, from taking: business, employees, files, business records, or the like, away from the partnership. Since this can occur after a partner has left the partnership, 14.5 provides that the term partner includes "former" partner. Likewise, 14.7 discusses events in which a former partner agrees to assist the partnership post-termination, which can only pertain to a former partner, and 14.4 requires partners, as well as former partners to follow recognized ethical standards. Analyzed textually, it is again evident that the use of the term "former" partner does not limit the application of the agreement to former partners only to those contexts.
Moreover, the first sentence of section 14.8 requires that: " [a]ny controversy or dispute relating to this agreement or to the Partnership and its affairs shall be resolved and disposed of in accordance with this section." (emphasis added). The sentence itself excepts only accountings (which is not relevant here). Thus, 14.8 is not limited to present partners, but includes any controversy "relating to this agreement." Undisputedly, the defendant was a party to the Partnership Agreement and he was referred to as a "Partner." His rights and obligations under the Partnership Agreement are determined by reference to such agreement concerning all matters which arose during the time the agreement was in effect. In other words, since the subject matter of defendant's counterclaims relate to partnership matters which took place during the time he was a "partner," and during the term of the Partnership Agreement, the dispute is within the scope of the arbitration provision, and it remains arbitrable. ( See e.g., Avalon Intern. Trading Corp. v. GST Receivables Management Corp., 220 AD2d 248 [1st Dept., 1995]; Matter of Montgomery-Otsego-Schoharie Solid Waste Management Authority (Bonded Insulation Co. Inc.), 215 AD2d 995 [3rd Dept., 1995]; Allen v. Grand Island Cent. School Dist., 56 AD2d 131 [4th Dept.,1977]). Finally, the arbitration clause was incorporated into the Supplemental Agreement (that states that it governs in case of any inconsistency between it and the Partnership Agreement), and nowhere in the Supplemental Agreement does the term "former" partner appear. This confirms the correctness of my conclusion that a former partner is required to arbitrate controversies or disputes relating to the Partnership Agreement, which would include a claim for wrongful termination.
Board Actions Are Subject To Arbitration
Defendant also argues that disputes that involve Board action are not subject to the arbitration agreement. This argument is based on an interpretation of the following sentence: "The members of the arbitration panel shall be mutually agreed to by the Board of Directors and the parties to the controversy or dispute." Defendant contends that since it states that the Board and the parties shall agree upon the composition of the arbitration panel, a distinction is made between the Board of Directors and the parties, which suggests that this provision does not contemplate arbitration in the event that the Board's action gave rise to the dispute. Here, since the Board acted to terminate the defendant, it is argued that any dispute arising from such action is not subject to the arbitration provision. This contention ignores that the language gives the Board a say in the composition of the panel even when it is not involved in the controversy. It does not act as a limitation on the applicability of 14.8 which applies to "[a]ny controversy or dispute relating to this agreement." Had the drafters wanted to limit the broad language of the provision, it would have been done directly (just as the limitation regarding accountings was specifically limited).
Finally, defendant contends that the arbitration provision itself requires the preclusion of members of the Board of Directors from participating in the arbitration panel, since it provides that the members of the panel must not have been involved in the controversy or dispute, and here it was the Board's action that caused his termination. Defendant concludes that, because it is impossible to form a panel that consists of two Board Members not involved in the dispute, the dispute cannot be arbitrated. However, because the members of the Board change periodically, it is possible to have two Board Members on the panel who were not involved in the termination. Indeed, the composition of BDO's Board has, in fact, changed since defendant's termination. Moreover, BDO stated that it is prepared to waive the requirement that two members of the Board be on the arbitration panel in the event that it is impossible to have two Board Members available who were not involved in the dispute. Thus, the requirement in 14.8 that the panel members may not be involved in the dispute or controversy, does not bar this claim from proceeding to arbitration. Defendant's additional textually based arguments that this dispute is not subject to the BDO arbitration provision, have been considered, and are not persuasive. Because I conclude that defendant's counterclaims are subject to the arbitration provision, I turn to the validity and enforceability of the arbitration provision.
Arbitration Provision Not Invalid
It is urged that the arbitration provision is invalid and unenforceable because the provisions are unconscionable as well as illusory, due to the prescribed composition of the arbitration panel, and that this dispute should be judicially resolved. Plaintiff, on the other hand, contends that the agreement to arbitrate is enforceable, the counterclaims must be stayed pending arbitration. The enforceability of the BDO arbitration provision has been the subject of much litigation in various jurisdictions applying New York law, and in most of those cases, including a New York case on the subject, courts have upheld the provision.
To contest a contract on the grounds that it is unconscionable, it must generally be shown that the contract was both procedurally and substantively unconscionable when made. ( See e.g. Brower v. Gateway 2000, Inc., 246 AD2d 246, 254 [1st Dept., 1998]). Here the events surrounding the formation of the Partnership Agreement, do not render it procedurally unconscionable. Nonetheless, defendant's claim that the contract is substantively unconscionable is considered, since there are times that "the substantive element alone may be sufficient to render the terms of the provision at issue unenforceable." Id. at 254.
The BDO arbitration provision at issue herein, or a similar one, was upheld in: Sowan v. BDO Seidman, LLP, No. DV99-2676-B (Tex. Dist. Ct., 1999); Waite v. BDO Seidman, No. 01-4009-C (Mass.Super.Ct., 2002); Jehle v. BDO Seidman, LLP, No. 012-10118 (Mo. Cir. Ct., 2002); Brown v. BDO Seidman, File No. 919343-NO (Mich Cir. Ct. 1992); Pioso v. Abernathy, L.C. No. 90-CV-002739 (Wis.Ct.App.), cert. denied, 464 NW2d 425 (Wis., 1990); Hottle v. BDO Seidman LLP, 268 Conn. 694 [2004]). Two New York cases have considered the BDO provision: Selznick v. BDO Seidman, Index No. 507/95 (Sup.Ct., Westchester County, 1995) found the arbitration provision to be valid; and Romer v. BDO Seidman, Index No. 1995-7807 (Sup.Ct., Erie County, 1996) found the arbitration provision to be invalid. The BDO provision was invalidated in: BDO Seidman v. Miller, 949 SW2d 858 (Tex.App. 1997); Buhrer v. BDO Seidman, LLP, 2003 WL 22049503 (Mass Super. Ct., 2003).
Defendant contends that there are essentially two reasons that the arbitration provision is invalid and unenforceable. First, because the panel is to be comprised exclusively of partners and Board members, the provision allows one of the parties to the dispute to adjudicate its own cause. Second, even if the panel is not considered to be the party itself, the partners and Board Members selected are so identified with BDO, that they must be disqualified, at the outset, from participating in the arbitration. Each of these contentions are dealt with in turn.
(a) The Arbitration Panel Is Not The Party To The Dispute.
Defendant contends that the BDO arbitration provision is invalid and unenforceable because it requires that the panel be comprised exclusively of partners and Board Members of BDO, resulting in a situation where one of the parties to the dispute adjudicates its own cause. However, it is clear that defendant's dispute regarding his counterclaims is with BDO — the partnership, and therefore BDO is the actual party to the dispute, not the partners who are selected to serve as arbitrators. This was also the conclusion reached recently by the Connecticut Supreme Court, applying New York law, in a well reasoned opinion. ( Hottle v. BDO Seidman LLP, 268 Conn. 694).
Hottle noted that while it may be true that "each individual partner is a party to the Partnership Agreement, it is clear that . . . the [defendant] is asserting claims against the partnership and not against the partners in their individual capacities." ( Id. at 714). Examining the BDO Partnership Agreement, the Court determined that "none of the directors or other partners, acting individually, can take any action to assert the partnership's rights under that agreement." It further noted that for the partnership to act requires the involvement of at least seven members of the Board. Therefore, the two members of the Board who would be included in the arbitration panel would not be reviewing their own action, because they do not have the power to act for the partnership. Finally, partners who are not members of the Board of Directors, cannot act on behalf of the partnership under the Partnership Agreement. The Court concluded that "because the arbitration panel will consist of individual partners who cannot, by themselves, exercise the partnership's rights under the partnership agreement, those arbitrators do not share the same legal identity as the partnership for the purposes of the partnership agreement." Therefore, each individual partner, and member of the Board who is eligible to serve on the arbitration panel cannot be considered a "party" to the action and will not be adjudicating their own action with regard to defendant's counterclaims, since the five members of the panel acting as individuals, or in unison, do not have the ability to act for the partnership in the manner the defendant complains of that gives rise to his counterclaims. Thus, the BDO arbitration provision does not present a situation where one party to the dispute is also named arbitrator of the dispute.
The only members of the Board of Directors who could exercise the partnership's rights are the Chairman and Chief Executive Partner, and they are precluded by the arbitration clause from serving on the arbitration panel.
(b) The Arbitration Panel's Relationship To BDO Does Not Invalidate The Provision
Defendant also contends that the BDO arbitration provision is invalid and unenforceable since the arbitration panel prescribed is so identified with BDO that it is considered illusory and unconscionable, and must be disqualified, at the outset, from participating in the arbitration. Defendant argues that the terms of the agreement are unconscionable because they unreasonably favor one party by allowing the arbitration panel to consist entirely of individuals who are partial to BDO and are the real parties in interest. Defendant also argues that the arbitration agreement is illusory because it allows partners and Board Members of BDO to rule on its own cause, and therefore there is no contractual detriment to BDO.
14.8 calls for arbitration, a well established form of alternative dispute resolution (ADR), in which the parties submit their disputes to the individual(s) designated to decide such disputes in a binding determination. Defendant contests the validity of the provision alleging that it selects individuals who are too identified with BDO. Defendant contends that all potential members of the arbitration panel have a financial interest in siding against defendant, and would fear Board action if they issued an award adverse to the partnership. Consequently, so the argument runs, they are partial to BDO and may not participate in the arbitration proceedings.
Defendant claims that the total amount sought against BDO in his answer and counterclaims is in excess of $2 million, and this amount would potentially need to be satisfied by the other BDO partners in the sum of approximately $10,000 per partner.
It has become axiomatic that courts universally look to enforce arbitration agreements, that public policy favors and encourages arbitration, as well as the various other forms of non-judicial dispute resolution, and that "the law [will] interfere as little as possible with the freedom of consenting parties to achieve that objective". ( E.g., Siegel v. Lewis, 40 NY2d 687, 689, reh den, 41 NY2d 901). "Central to that freedom is the recognized right of the parties . . . to name those who are to be the arbitrators . . . [and] [t]he parties' reasons for the selection of particular arbitrators may in fact be the very ones which would have disqualified Judges or jurors." ( Id. at 689). Moreover, Siegel observed that "strange as it may seem to those steeped in the proscriptions of legal and judicial ethics, a fully known relationship between an arbitrator and a party . . . will not in and of itself disqualify the designee." ( Id. at 690). Applying these principles to the facts, Siegel upheld selection of a party's attorney, and his accountant as arbitrators, even though the attorney drafted the agreement for the party, and the named accountant was also designated as the escrowee under the agreement.
More recently, the Court has applied the standard enunciated in Siegel to uphold a contractual alternative dispute resolution provision that authorized one party's employee (the Superintendent of the New York City Transit Authority) to make binding, final and conclusive decisions, even though the employee was personally involved in the events that gave rise to the dispute. ( Westinghouse Elec. Corp. v. New York City Transit Authority, 82 NY2d 47 [NY 1993]; See also Yonkers Contracting Co. v. Port Authority Trans-Hudson Corp., 87 NY2d 927). The First Department has relied upon the Westinghouse decision in recent cases and upheld ADR provisions, which have vested authority to decide disputes in individuals who were the employees of one of the disputants. ( See e.g., Laquila Const., Inc. v. New York City Transit Authority, 282 AD2d 331, 332 [1st Dept., 2001]; Skanska Tunneling, Inc. v. City of New York, 247 AD2d 344 [1st Dept.] appeal dismissed, 92 NY2d 844). Although the ADR process reviewed in Westinghouse and its progeny was not arbitration, nevertheless, they required the mandatory submission of disputes for a binding and final resolution.
Defendant contends that Westinghouse and the related cases are distinguishable since the Partnership Agreement provides that "[t]he determination of such arbitration panel shall be conclusive and binding on all the Partners, and shall not be subject to further determination in any type of proceeding within or without the Partnership." However, plaintiff brought this motion to compel arbitration pursuant to CPLR article 75 which sets forth New York's statutory scheme for arbitration, and thus, implicated the entire rubric of article 75, including the availability of judicial review of an award, as provided by article 75. Moreover, Rule 37 of BDO's Arbitration Rules, which were made a part of the Arbitration Provision, expressly contemplates judicial review. While judicial review under article 75 may be narrower than under article 78, the BDO arbitration provision does not violate the public policy discussed in Westinghouse, since there is available "some form of judicial review." ( Yonkers Contracting Co., Inc. v. Port Authority Trans-Hudson Corp., 87 NY2d 927, 930). Indeed, this is the very scope of judicial review traditionally afforded to arbitration.
In Yonkers, the Court of Appeals, applied the principles of Westinghouse to uphold an ADR clause that vested the sole authority for resolution in the Chief Engineer of one of the disputants, even though no standard for judicial review was explicitly provided. The Court held that it did not need to address whether the standard of review for the ADR provision in question was as provided in article 75, or some other standard. Rather, the Court held that it was sufficient that there was "some form of judicial review." Moreover, the First Department has expressly held that "dispute resolution procedures" that vests authority in a party's employee does not violate public policy when there is "as here, some independent review mechanism sufficient to satisfy minimum review standards such as those under CPLR articles 75 or 78" ( Skanska Tunneling, Inc. v. City of New York, 247 AD2d 344 [1st Dept.] appeal dismissed, 92 NY2d 844 [NY, 1998]) (emphasis added).
The Court of Appeals has noted that "[a]s a general proposition, parties to an arbitration contract are completely free to agree upon the identity of the arbitrators, and New York courts have therefore regularly refused to disqualify arbitrators on grounds of conflict of interest or partiality even in cases where the contract expressly designates a single arbitrator employed by one of the parties." ( Yonkers at 929, internal citations omitted). Here, the fact that it will not be the employees of BDO who are selected as the arbitrators, but the partners of BDO, does not require a different result. The arbitration provision safeguards the arbitration proceeding by requiring the panel to consist primarily of non-Board Members and that no member can be from the same office as the complaining partner, nor be otherwise involved in the controversy or dispute. Additionally, since every partner of BDO may be compelled in the future to arbitrate a dispute before such a panel, this dramatically illustrates that there is certainly a reasonable expectation that the arbitration will not be unfair.
Notwithstanding Siegel, Westinghouse and similar cases, defendant contends that Cross Brown Co. v. Nelson, ( 4 AD2d 501), decided by the First department in 1957, controls. There an arbitration clause that allowed the Board of Directors of one of the disputants to arbitrate a dispute between itself and an employee was held invalid. Citing the "well recognized principle of `natural justice' that a man may not be a judge in his own cause," it was held that the board of directors of the corporate party to the contract could not serve as arbitrators, since "no party to a contract, or someone so identified with the party as to be in fact, even though not in name, the party, can be designated as an arbitrator to decide disputes under it." ( Id. at 503). The Court "brush[ed] aside any metaphysical subtleties about corporate personality" and viewed the clause as allowing one party to arbitrate its own cause. Since the Board of Directors had complete control of the corporation which it represents, the Board was treated as the equivalent of the corporate disputant.
Defendant relies heavily upon Cross Brown and contends that all potential members of the arbitration panel must be disqualified since they are partial to one side, have financial interests in siding against defendant in the event of an arbitration hearing, and would fear board action if they sided against the partnership. However, these arguments do not render the arbitration clause invalid, since these factors were known at the time the arbitration provision was entered into, and subsequent decisions of the Court of Appeals and the First Department have upheld ADR provisions where similar factors were present. Cross Brown has never been overruled, however, its holding that "someone so identified with the party as to be in fact, even though not in name, the party" may not serve as an arbitrator is of questionable viability. Indeed, in a recent case, the First Department described Cross Brown as "the then controlling precedent." ( Laquila Const., Inc. v. New York City Transit Authority, 282 AD2d 331, 332 [1st Dept., 2001] [emphasis added]). While the principle of Cross Brown may still apply where the arbitrator(s) selected to hear the dispute also has control over a party disputant, the majority voice on the BDO arbitration panel is delegated to non-Board member partners, from offices outside the area of the dispute. In Cross Brown, the Board of Directors not only represented the corporation, it controlled it, and therefore the Board could not arbitrate a dispute where it had control over one of the disputants. Such control is lacking in the instant case, where only two Board Members are called to serve on the arbitration panel together with three non-Board partners, and the five members that compose the panel acting as individuals, or in unison, do not have the ability to control the partnership outside of the arbitration proceeding.
Based on the forgoing, I conclude that the arbitration provision is valid and enforceable. Consequently, defendant must arbitrate his counterclaims.
Counterclaims Not Inextricably Intertwined
Finally, defendant, citing Brennan v. A.G. Becker, Inc., 127 AD2d 951 (3rd Dept., 1987) and other similar cases, contends that the counterclaims regarding the Partnership Agreement are "inextricably intertwined" with the underlying action to collect on the promissory note, and should therefore be resolved in the same forum. The argument is that separate proceedings will waste judicial resources and may result in inconsistent findings. However, unlike the cases cited by defendant, the counterclaims asserted are not inextricably intertwined with the action to collect on the defaulted note. That action is separate and distinct from issues concerning the employment agreements and an adjudication on the note does not require consideration of the Partnership Agreement which is the basis for defendant's counterclaims. Thus, there will be neither a waste of judicial resources nor the possibility of inconsistent results, and the counterclaims must be arbitrated. However, the action on the note will proceed in this court.
Accordingly, it is:
ORDERED that plaintiff's motion to stay this action's counterclaims and compel arbitration for those claims is granted; and it is further
ORDERED that this action will proceed with regards to all other matters; and it is further
ORDERED that the parties are directed to proceed with arbitration on the counterclaims forthwith.