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In re 797 Broadway Group, LLC

Supreme Court, Albany County

July 5, 2017

Matter of 797 Broadway Group, LLC, Petitioner,
BCI Construction, Inc., Respondent.

          Law Offices of Daniel M. Sleasman Attorneys for Petitioner

          Couch White, LLP. Attorneys for Respondent.

          Daniel M. Sleasman, Joel M. Howard, III, of counsel.

          RICHARD M. PLATKIN, J.

         In this special proceeding brought pursuant to CPLR article 75, petitioner 797 Broadway Group, LLC ("Broadway") moves to modify and confirm, as modified, a final arbitral award. Respondent BCI Construction, Inc. ("BCI") opposes the application and cross-moves to, among other things, vacate the award.


         Broadway is a New York limited liability company that was formed for the purpose of redeveloping a building located at 797 Broadway in the City of Schenectady, Schenectady County. BCI is an Albany-based general building contractor.

         In the summer of 2006, Schenectady County issued a request for proposals ("RFP") for office space to house the Schenectady County Department of Social Services ("DSS project"). Broadway invited BCI and an architectural firm, Stracher Roth Gilmore Architects ("SRG"), to assist in developing a proposal. Among the issues considered by Broadway, BCI and SRG was the exterior wall finish. Following a meeting, a decision was made to repair and repaint the exterior stucco. BCI thereafter provided pricing for its work to Broadway, which incorporated the construction costs into a rental rate that became part of Broadway's RFP response.

         In the fall of 2007, Broadway was selected as the developer for the DSS project. Contract negotiations then ensued between Broadway and BCI, which resulted in the execution of a lump-sum construction contract in March 2008.

         Problems with the exterior of the building became apparent shortly after the completion of BCI's work. Stucco that BCI had installed began to detach and fall to the street below due to residual moisture in the brick to which the stucco was attached. When the parties could not resolve the issue of financial responsibility for the problem, Broadway unilaterally replaced the stucco shell with an exterior insulation and finish system ("EIFS"), a type of exterior cladding.

         In June 2013, Broadway demanded arbitration to recover the costs associated with repairing the exterior walls of the building. [1] The construction contract included an agreement to arbitrate any disputes in accordance with the Construction Industry Rules of the American Arbitration Association ("AAA"). The parties further agreed that the agreement to arbitrate shall be governed by the Federal Arbitration Act ("FAA") (see 9 USC 1 et seq.). The matter was submitted to a single arbitrator, John J. Phelan III ("Arbitrator"), a practicing attorney with extensive experience in construction litigation.

         On July 15, 2016, the Arbitrator rendered a Partial Final Award determining, among other things, that BCI had assumed financial responsibility for the failure of its stucco work by entering into a lump-sum contract to repair the exterior walls of the building with knowledge of the moisture in the brick substrate and its effect on stucco application. The Arbitrator did find in favor of BCI on the issue of whether Broadway's application of the EIFS cladding constituted a betterment to the project and declined to include this cost in Broadway's recoverable damages. The Arbitrator awarded Broadway a total of $472, 697.60 in compensatory damages, as well as $150, 473.24 in interest for the period from January 1, 2013 through the date of the award.

         On August 25, 2016, the Arbitrator issued a final award ("Award") that granted Broadway the sum of $134, 371.48 in attorneys' fees and other expenses, bringing the total amount of the Award to $757, 542.32. In addition, the Award directed that statutory interest shall run from the date it was issued until paid.

         Broadway commenced this special proceeding in September 2016, seeking confirmation of the Award pursuant to CPLR article 75. BCI removed the matter to the United States District Court for the Northern District of New York, where it was consolidated with a separate action filed by BCI seeking vacatur of the Award pursuant to the FAA on the ground of arbitrator bias.

         In a Memorandum-Decision and Order filed March 15, 2017, the federal District Court (Scullin, J.) granted Broadway's motion for remand based on the absence of subject-matter jurisdiction. On March 21, 2017, Broadway filed an amended petition ("Petition") seeking to modify the Award to "correctly calculate prejudgment interest from the date of [BCI's] breach of contract" and to confirm the Award as so modified (¶ 26). BCI opposes Broadway's application and cross-moves for discovery directed at the issue of the Arbitrator's alleged bias and, following the completion of such discovery, vacatur of the Award.


         A. Evident Partiality

         BCI contends that Broadway's motion to confirm the Award should be denied and the Award vacated due to the evident partiality of the Arbitrator. According to BCI, the Arbitrator's partiality is manifested by his undisclosed prior representation of a client in a 2008 lawsuit against BCI, as well as a current client's dealings with the Galesi Group, an affiliate of Broadway. BCI also cites the Arbitrator's alleged failures to adequately investigate known conflicts and to comply with the AAA's disclosure rules regarding potential conflicts. Relatedly, BCI seeks to depose the Arbitrator "to further demonstrate his evident partiality" (BCI's Mem. of Law, at 12).

         An arbitration award may be vacated upon the application of a party "where there was evident partiality... in the arbitrator[]" (9 USC § 10 [a] [2]). [2] Evident partiality "'will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration'" (Applied Indus. Materials Corp. v Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132, 137 [2d Cir 2007], quoting Morelite Construction Corp. v New York City District Council Carpenters Benefit Funds, 748 F.2d 79, 84 [2d Cir 1984]; see U.S. Elecs., Inc. v Sirius Satellite Radio, Inc., 17 N.Y.3d 912, 914 [2011] [adopting Second Circuit standard in applying the FAA's evident partiality standard]). [3] Thus, "[u]nlike a judge, who can be disqualified in any proceeding in which his [or her] impartiality might reasonably be questioned, an arbitrator is disqualified only when a reasonable person, considering all of the circumstances, would have to conclude that an arbitrator was partial to one side" (Applied Indus., 492 F.3d at 137 [internal quotation marks and citations omitted; emphasis added]). The burden of proof rests with the party asserting bias (see Andros Compania Maritima, S.A. v Marc Rich & Co., 579 F.2d 691, 700 [2d Cir 1978]).

         More recently, the Second Circuit has held that an arbitrator's failure to disclose his or her connections to the parties to an arbitration or the issues in dispute is insufficient to demonstrate evident partiality: The evident-partiality standard is, at its core, directed to the question of bias. Because it was not the purpose of Congress to authorize litigants to submit their cases and controversies to arbitrators who are biased against one litigant and favorable to another, the FAA provides for vacatur of arbitral awards whenever it is evident that an arbitrator was partial to one of the litigating parties. It follows that where an undisclosed matter is not suggestive of bias, vacatur based upon that nondisclosure cannot be warranted under an evident-partiality theory (Scandinavian Reins. Co. Ltd. v Saint Paul Fire and Mar. Ins. Co., 668 F.3d 60, 73 [2d Cir 2012] [internal quotation marks, brackets and citations omitted; emphasis added]). This is true "[e]ven where an arbitrator fails to abide by arbitral or ethical rules concerning disclosure" (id. at 77 n 22). Thus, when faced with an evident-partiality challenge premised on nondisclosure, the Court must determine "whether the facts that were not disclosed suggest a material conflict of interest" (id. at 77; see Positive Software, 476 F.3d at 286 ["significant compromising relationship"]).

         In claiming evident partiality, BCI first relies on the Arbitrator's undisclosed prior representation of an adverse party in a 2008 lawsuit. In the AAA Notice of Appointment dated August 1, 2013, the Arbitrator answered "no" to a question asking whether he had "represented any person against any party to the arbitration." In fact, the Arbitrator's law firm had represented a client in a 2008 lawsuit against BCI (Columbia Lodge, LLC, v University Development, LLC and BCI Construction Inc, Albany County, Index No. 4027-08), and BCI submits proof that the Arbitrator personally was involved in the litigation matter. BCI therefore contends that the Arbitrator's "failure to disclose... his prior litigation history on behalf of a client against... BCI was improper and constitutes grounds to set aside the arbitration award" (Ans. ¶ 38).

         As an initial matter, the Arbitrator's alleged failure "to abide by arbitral or ethical rules concerning disclosure... does not, in itself, entitle [BCI] to vacatur" of the Award (Scandinavian, 668 F.3d at 77 n 22 [emphasis added]). As explained in Scandinavian, the proper inquiry is whether the undisclosed facts are strongly suggestive of a material conflict of interest ...

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