NY Supreme Court, Bronx County on Waiver of a Right to Arbitrate

Last year, we reported on Morgan v. Sundance, Inc., in which the U.S. Supreme Court unanimously adopted what was then the minority position on waiver of the right to arbitrate under the Federal Arbitration Act (FAA).  That position entails no special treatment for arbitration provisions; they can be waived like any other provision without a requirement that the non-waiving party demonstrate that the it was prejudiced by reliance on the purported waiver.  

In Worbes Co. v. Sebrow, New York’s Supreme Court, Bronx County addressed the same issue not under the FAA but under New York’s CPLR § 7503(a).  The underlying facts are complicated and probably don’t matter much.  In short, Worbes is a corporation created by members of the Sebrow family.  The family members had equal shares in the corporation, whose sole asset was a property, 815 East 135 Street, Bronx, NY (below), and whose sole purpose was to own, manage and operate the property.  After some deaths, the property was split between Zvi and Debbie Sebrow.  Zvi determined that the property could no longer operate profitably, and he entered into an agreement to sell the property to a third party.  Selling the property was crucial, because the family members apparently did not have the funds to pay the taxes on the property and so it could become subject to a tax lien foreclosure.

Both parties initiated actions, going back to 2019.  Plaintiffs (Zvi and the corporation) filed their complaint in January 2022, but they now sought to compel arbitration.  The court noted that waiver of a right to arbitrate is analyzed under the same standard as any other waiver: there must be evidence of the relinquishment of a known right and/or an intent to abandon the right to arbitrate.  The initiation of an action in court generally results in a waiver of the right to arbitrate.  

The court goes through multiple factors relevant to the analysis: (1) whether the party seeking to arbitrate had sought out the judicial rather than the arbitral arena; (2) whether it sought judicial remedies, as opposed to just injunctive relief to preserve the status quo; (3) the extent the claims raised in litigation overlap with claims to resolved in arbitration; (4)  the amount of litigation that has occurred; (5) the length of time between the start of the litigation and the arbitration request and whether there was undue delay; and (6) whether prejudice has been established.  But this was not a hard case.  Plaintiffs had “significantly availed themselves of the litigation process in this action,” and had as a result waived the right to arbitration.

It was not just that plaintiffs had initiated the action, because they needed an injunction or declaratory judgment so as to clear title to the property they were trying to sell.  However, plaintiffs also brought a motion for summary judgment.  It seems that they were hoping to win on papers, and only when they were unsuccessful did they move to compel arbitration.  The court found this conduct cavalier and egregious.  Moreover, there is no indication that the issues to be arbitrated are any different from those that the parties had been litigating for some time.  Defendants showed prejudice in the form of litigation costs in excess of $136,000 as of December 31, 2022.  

So it seems that under New York law, courts can take prejudice into account but only as one of many factors to be considered in determining whether a party has voluntarily relinquished a known right to request arbitration.  Although that seems to be a difference between New York law and the FAA, it seems that a court would likely find evidence of prejudice in situations where the other factors are satisfied.  Still, there is some tension between the court’s statement that waivers of arbitration are treated like any other waivers and the consideration of prejudice as one factor in determining whether there was a waiver.