Agreements to arbitrate are supposed to reduce the amount of litigation in the world. By that standard, the agreement to arbitrate between Bergassi Group LLC (Bergassi) and Allied World Insurance Company (Allied World) has been an utter failure. After Allied World served Bergassi with a demand for arbitration in September 2019, Bergassi launched a proceeding under CPLR Art. 75 to stay the arbitration. In January 2020, Supreme Court, New York County (Tanya Kennedy, J.) granted a permanent stay of arbitration. Pending appellate review of that decision, Bergassi sued Allied World and its attorneys in Westchester County, alleging that Allied World's demand to arbitrate constituted malicious prosecution and abuse of process (Index No. 53708/2020). On April 13, 2021, the Appellate Division, First Department, reversed the permanent stay of arbitration in the New York County matter. Only time will tell if the arbitration clause that started all of this will spawn additional litigation. In any case, the Appellate Division's decision offers some straightforward, but valuable, guidance about the interplay between the Federal Arbitration Act (FAA) and CPLR Art. 75, and raises some interesting questions for further review.

Background

According to documents filed in the Westchester action, Allied World is a New Hampshire insurance company licensed to issue surety bonds in New York. Bergassi is a New York surety bond broker that engaged in the business of soliciting surety business as an independent contractor on behalf of Allied World. Bergassi and Allied World had entered into a written agency agreement that contained an arbitration clause. Between 2013 and 2017, Allied World authorized Bergassi to issue surety bonds to a construction company operating in Manhattan. When the construction company and several of its co-owners were indicted for various crimes, the construction company defaulted on its projects and Allied World found itself on the hook for more than $15 million in losses under the surety bonds. Allied World then initiated arbitration proceedings against Bergassi in an attempt to hold Bergassi liable for its losses on the grounds that Bergassi knew of, but did not disclose to Allied World, links between the construction company and an individual who was eventually indicted for crimes related to the construction company's activities.

After Bergassi commenced a proceeding under New York's arbitration statute, CPLR Art. 75, for a stay of the arbitration, the court held oral argument on Jan. 15, 2020. At the hearing, the court agreed with counsel for Allied World that the CPLR, and not the FAA, governed the dispute because the case did not present any conflict between New York and federal law. Finding the agreement to arbitrate to be ambiguous, and the claims at issue in the arbitration to be "inextricably intertwined" with those at issue in other legal actions, the court granted Allied World's request to permanently stay the arbitration.