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United States District Court, S.D. New York

April 12, 2004.

NEW YORK CITY HEALTH AND HOSPITALS CORPORATION, INC., Petitioner, -against- SPECTRUM MEDICAL LEASING, Division of IFC Credit Corporation Respondent

The opinion of the court was delivered by: ROBERT CARTER, Senior District Judge


In July 2003, Petitioner New York City Health and Hospitals Corporation ("HHC") petitioned filed a Petition to Stay Arbitration pursuant to New York Civil Practice Law and Rules ("CPLR") §§ 7502(a) and 7503(b). Respondent Spectrum Medical Leasing, Division of IFC Credit Corporation, filed a Cross-Motion to Compel Arbitration opposing the petitioner's motion. The court must now determine whether this dispute is properly before the court or should it be dismissed in favor of arbitration before the American Arbitration Association as provided for in the lease at issue.


  The petitioner New York City Health and Hospitals Corporation ("HHC"), which operates the Queen's Hospital entered into a three-year requirements contract with McGaw Leasing in 1997 whereby McGaw supplied the petitioner with 80 infusion pumps. The contract was procured through a competitive bidding process in accordance with HHC'S published procurement policies and operating procedures. All HHC-run facilities are required to purchase supplies, including infusion pumps, through requirements contracts.

  With this contract still in effect, Robert Rossdale, an Associate Director at Queens Hospital ("Hospital"), signed a modified lease in 1998 that would allow the hospital to add 25 new Infusion pumps to the 80 units the hospital was already financing under the prior lease. Nicolopoulos Aff. Ex. B. The financing terms of the 1998 lease were also adjusted, and the respondent alleges the terms of the 1998 lease were more favorable to Queen's Hospital than the 1997 lease. Id. The respondent Spectrum Medical Leasing ("Spectrum") acquired the contract at a later date through a secondary assignment from Old Kent Leasing. Nicolopoulos Aff. Ex. D.

  Upon assignment of the lease to Spectrum, the HHC notified Queen's Hospital that the lease was now held by Spectrum. The Hospital claims it was never notified of the assignment. In November 2001, McGaw informed the Queens Hospital that it owed McGaw over $60,000 in back payments for the 105 infusion pumps, and on November 23, 2001, Queens Hospital issued a check to McGaw for $60,444.84, which the hospital asserts was due under the original 1997 lease. McGaw accepted the payment for Queens Hospital's outstanding obligation, however no money was paid to the respondent. Throughout this time, Queen's Hospital maintained possession of the 105 infusion pumps. Spectrum attempted to enforce the arbitration provision included in the 1998 lease whereby all disputes-including questions of arbitrability-were to be settled by a licensed arbitrator and filed papers to begin arbitration proceedings in order to recoup the money they maintain is owed to them under the 1998 lease.


 Did the 1998 Lease comport with HHC contract procurement policies?

  HHC is administered by a board of directors which is vested with the powers, inter alia, to "adopt, altar, amend or repeal by-laws or rules and regulations for the organization, management, and regulation of its affairs" and the power "to make and execute contracts." Unconsolidated Laws §§ 7385(3) and (5) Sections 7384 and 9385 establish the procedure by which HHC is authorized to make contracts. HHC argues that the contract on which the respondent bases its authority to compel arbitration violated statutorily defined procedures that regulate how contracts are formed. The HHC has adopted the Operating Procedure 110-1, which governs the procurement of supplies, services, and equipment. The three methods by which an HHC facility may acquire supplies: 1) order from the central warehouse; 2) order via a purchasing order where an order is issued directly to a vendor with whom price, shipping time, and other related details have been previously established by contract; 3) order by acquisition of bids and issuance of a purchase vendor directly to the successful vendor, in accordance with operating procedures outlined in the state regulations. OP 110-1, Ex. 4; OP 110-6, Ex. 1 of Rothschild Supp. Decl.

  OP 110-1 § 3(B)(2) requires any purchase in excess of $5,000 to be procured through competitive bidding in accordance with OP 110-6. Both OP 110-1 and 110-6 require purchases in excess of $50,000 to be procured by "formal" bidding procedures, which include public solicitation of at least three written sealed bids. Id.

  The petitioner argues that the 1998 lease was actually a sole source contract not a competitively procured contract in violation of the HHC's operating guidelines. Rossdale signed the 1998 lease without any review or approval by the HHC Office of Materials Management as required by the HHC rules for procurement, no competitive bidding process took place as required by the statutory operating procedure. See Rossdale Aff. §§ 10, 14; Levy Aff., § 12. In addition to the petitioner's allegation that the contract is void because it was improperly procured, HHC contends that Rossdale was not authorized by the HHC to enter into the 1998 lease agreement. Id.

  Notwithstanding these regulations, the Queens Hospital's use of the additional pumps provided for under the contract formed in 1998 indicates that the hospital recognized the contract as legitimate. By accepting and continuing possession of the goods the lessor, Queen's Hospital, by implication accepted the terms of the new contract. The act of taking possession cured any inadequacies in the formation and adoption of the contract. In addition, the financing of the leased goods was governed by the 1998 Lease and the hospital paid under its terms. Nicolopoulos Aff. Ex. B.

 Did the 1998 Lease constitute an enforceable contract between the parties?

  The HHC is a corporation run for the public benefit. Section 50-k of the General Municipal Laws designates the HHC as an "agency" of the city for the purposes of legal representation and indemnification. The New York Court of Appeals has reiterated this limited categorization, stating "for purposes other than representation and indemnification [HHC] is not an agency of the city." [Emphasis in the original] Brennan v. City of New York, 59 N.Y, 2d 791 (1983).

  In Cupid Diaper Service Corp. v. New York City Health & Hospitals, 381 N.Y.S.2d 996, 999, the Court of Appeals clarified the statutory language defining the HHC. The court held that the HHC is not a city agency except in the two specific context articulated in the regulations. Id. Because the petitioner is not a city agency, it can be estopped from taking certain positions.

  The facts of Cupid Diaper are as follows, the petitioner, a diaper service, entered into a written contract with Queens Hospital pursuant to a public bid award to provide diaper service to the hospital. Id at 998. Subsequent to this contract, the Associate Executive Director of the Hospital agreed to an oral modification of the risk of loss clause in the original written contract. Several months later, after the Hospital refused to recognize the oral modification, the petitioner sued to recover payments due under the revised risk of loss clause. The petitioner argued that the apparent authority of the Associate Executive Director to act as an agent on behalf of the Hospital should bind the Hospital to the modification even though the original contract contained a provision barring oral modifications. Id at 999. The court in Cupid Diaper found that an oral modification to a contract containing a written provision to the contrary, is not recognized where the respondent is a public corporation. Cupid Diaper, 381 N.Y.S. at 999. Resting their decision on the premise that public corporations require public bidding, the court held, "A public corporation cannot be bound by the acts of an employee exceeding the scope of his authority." Id.

  The instant case is analogous to Cupid Diaper in that the original contract was procured through a public bidding process, but was subsequently revised through a non-competitive process. However, the circumstances here are significantly distinguished from Cupid Diaper, because clear evidence exists here that the principal (i.e. Queens Hospital) accepted the benefits of the lease, namely possession and use of the additional 25 infusion pumps and the new financing terms, even if the revised 1998 lease was signed by an unauthorized agent. The 1998 lease was adopted through ratification.

  Further, the petitioner's argument that Rossdale's apparent authority is not relevant because the HHC is a city agency and therefore not subject to the doctrine of ratification or apparent authority is not a blanket bar on claims against the HHC. In Bender v. New York City Health and Hospitals Corp., 38 N.Y.2d 662, 668 (1976), the Court of Appeals reviewed a motion for leave to serve late notice of claim on the HHC and held that when a government agency acts "wrongfully or negligently, inducing reliance by a party who is entitled to rely and who changes his position to his detriment or prejudice, that [agency] should be estopped from asserting a right or defense which it otherwise could have raised." Id.

 If the contract is valid does the arbitration clause require the dispute to be dismissed from this court and heard instead by an authorized arbitrator?

  The agreement in dispute contains a broad arbitration clause favoring all-encompassing arbitration to the exclusion of the courts. The clause in question reads:

(f) Arbitration
Any controversy or claim arising out of, or relating to this Lease, the breach thereof, or the coverage of this arbitration provision shall be settled by arbitration which shall be in accordance with the Commercial Rules of the American Arbitration Association (`AAA') as such rules shall be in effect on the date of delivery of demand [sic] for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of a court of law. The decision of the arbitrators or a majority of them shall be in final and binding upon all parties and their respective heirs, executors, administrators, successors and assigns. [Emphasis added.]
Def. Mem. of Law at 2.

  Spectrum was assigned the lease from Old Kent Leasing Service, who had been assigned the Lease by McGaw, and therefore may enforce the arbitration clause under the terms of the contract PL Ex. 6. Assuming the contract is enforceable the arbitration clause must be interpreted in light of a Supreme Court case decided last term, Equal Employment Opportunity Commission v. Waffle House, Inc., 534 U.S. 279 (2002). In Waffle House the Court examines the Federal Arbitration Act specifically 9 U.S.C. § 3,4 and found "these provisions to "manifest a liberal federal policy favoring arbitration agreements.'" 534 U.S. at 289 citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25. The court goes on to say that "absent some ambiguity in the agreement . . .it is the language of the contract that defines the scope of disputes subject to arbitration." Id. The Waffle House decision encourages courts to resolve ambiguities in favor of arbitration but warns that interpretation of an arbitration clause should not "override the clear intent of the parties . . . simply because the policy favoring arbitration is implicated." 534 U.S. at 294. Finally the Court concludes that "arbitration under the [FAA] is a matter of consent, not coercion." Id.

  The arbitration clause contained in the 1998 Lease is extremely broad and applies to "any" controversy arising from the agreement. The parties are explicitly and unambiguously required to submit such controversies to arbitration to the exclusion of the courts. The broad policy favoring arbitration promoted in Waffle House is only triggered when, as is the case here, all parties have consented to the contract containing the provision. See id ("It goes without saying that a contract cannot bind a nonparty.") For that reason, the court determines that the contract is enforceable and that the petitioner is a party to the contract. Therefore the arbitration clause is valid and should be enforced. If the court deems that contract to be valid the case should be dismissed in favor of arbitration as dictated by the arbitration clause of the 1998 Lease agreement.


  On the basis of the above facts, the 1998 lease should be recognized as a valid contract duly assigned to the respondent, Spectrum Leasing. As a provision of a valid contract the arbitration clause must be recognized and be enforced. The case is dismissed and the dispute is removed to an arbitration proceeding before the American Arbitration Association as dictated under the 1998 lease.



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