Compelling Arbitration under CPLR § 7503(a): Timing Matters
To commence a special proceeding to compel arbitration in New York, pursuant to CPLR § 7503(a), a party must be “aggrieved by the failure of another to arbitrate.”[i] In KPMG LLP v. Kirschner, Justice Barry R. Ostrager recently ruled that to be “aggrieved,” and thereby have standing, a party must be subject to litigation before filing a special proceeding to compel arbitration. According to the Court, a subsequently filed litigation or the risk of potential litigation is not sufficient to confer standing.
On August 3, 2018, KPMG LLP (“KPMG”) commenced a special proceeding under CPLR § 7503(a) to compel Marc Kirschner (the “Trustee”), in his capacity as trustee of certain litigation trusts arising from the bankruptcies of Millennium Lab Holdings, Inc. and Millennium Lab Holdings II, LLC (together, “Millennium”), to submit to arbitration in New York. KPMG argued that all claims arising out of its provision of auditing services to Millennium should be subject to arbitration pursuant to an agreement between KPMG and Millennium that included a binding arbitration provision. In addition, KPMG sought an order enjoining the Trustee from filing or pursuing any lawsuit alleging that KPMG did not satisfactorily perform its auditing services under the agreement.
The Trustee moved to dismiss the petition pursuant to CPLR §§ 3211(a)(2), (a)(3), and (a)(7) for lack of subject matter jurisdiction, lack of standing, and failure to state a cause of action.
KPMG commenced the special proceeding in anticipation of a lawsuit by the Trustee. However, it was not until August 6, 2018—three days after KPMG brought the special proceeding—that the Trustee sued KPMG in California Superior Court (the “California Action”).
Under CPLR § 7503(a), “[a] party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration[.]”[ii] Similarly, the Federal Arbitration Act (“FAA”) provides that “a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition … for an order” compelling arbitration.[iii]
KPMG argued that litigation is not a prerequisite to being “aggrieved” by a refusal to arbitrate under New York law and the FAA. In addition, KPMG argued that it had been aggrieved since at least August 6, 2018, when the Trustee filed the California Action.
Justice Ostrager explained that the Appellate Division, interpreting CPLR § 7503(a), and federal courts, interpreting the FAA, have been clear that a party has not been “aggrieved,” within the meaning of these statutes, until the opposing party “commences litigation in lieu of arbitration,” or “refuses to comply with an order of a relevant arbitral authority to arbitrate the dispute.”[iv] The Court found that even though the Trustee sued KPMG on August 6, 2018, KPMG was “not an aggrieved party at the time it commenced this special proceeding” three days prior.[v] The Court therefore dismissed the petition for lack of subject matter jurisdiction and lack of standing.
In doing so, the Court was careful to note that its dismissal was without prejudice. It rejected the Trustee’s argument that CPLR § 7503(a) required KPMG to move to compel in the California Action. As Justice Ostrager explained, “[A]n aggrieved party may seek to compel arbitration and enjoin pending proceedings in other states under CPLR § 7503(a).”[vi] The Trustee’s motion to dismiss was therefore “granted without prejudice to KPMG renewing its petition with proper standing.”[vii]
By Elizabeth C. Quirk and Muhammad U. Faridi