Matter of N.J.R. Assoc. v. Tausend, 19 N.Y.3d 503 (2012)

When a party initiates and participates in arbitration, they cannot later seek a court order to block counterclaims from being arbitrated by raising a statute of limitations defense; the timeliness challenge must be decided by the arbitrator.

Summary

This case addresses whether a court or an arbitrator should resolve a statute of limitations challenge to counterclaims in an arbitration proceeding. Ronald Tausend formed a partnership (NJR) with his children, Nicole and Jeffrey, to purchase properties from a trust. Years later, a dispute arose, and after Nicole initiated legal action, NJR demanded arbitration. Nicole asserted counterclaims, and NJR then sought to stay arbitration of those counterclaims based on the statute of limitations. The Court of Appeals held that, because NJR initiated and participated in the arbitration, the timeliness issue must be decided by the arbitrator.

Facts

Ronald Tausend, along with his children Nicole and Jeffrey, were beneficiaries of a trust. The trust owned two New York City buildings. In 1985, Ronald formed NJR Associates, a partnership, with Nicole and Jeffrey to acquire these properties. The partnership agreement contained an arbitration clause and a New York choice of law provision. NJR purchased the properties from the trust for $1.9 million and shortly after sold the air rights for one of the buildings for $1.75 million. Later, the remaining interest in that property was sold for $10.25 million. In 2005, Ronald surrendered his interest in the trust, and the remaining principal was distributed to Nicole and Jeffrey. In 2008, Nicole’s request for information about the property sale was rejected, leading her to commence a legal proceeding.

Procedural History

Nicole initiated a CPLR article 78 proceeding to access partnership documents. NJR responded by demanding arbitration, prompting Nicole to petition for a stay of arbitration. Supreme Court denied the stay, ordering arbitration, which was affirmed by the Appellate Division. Nicole asserted counterclaims in the arbitration, leading NJR to seek a court stay of arbitration regarding the counterclaims based on the statute of limitations. Supreme Court granted NJR’s petition. The Appellate Division modified, dismissing NJR’s petition, stating CPLR 7503(b) barred the partnership from obtaining a stay because it initiated and participated in arbitration. The Court of Appeals granted leave to appeal.

Issue(s)

Whether a party who initiates and participates in arbitration can later seek a court order to stay arbitration of counterclaims based on the statute of limitations, or whether the timeliness challenge must be decided by the arbitrator.

Holding

No, because NJR initiated and participated in the arbitration, the timeliness challenge to Nicole’s counterclaims must be decided by the arbitrator.

Court’s Reasoning

The Court considered both the Federal Arbitration Act (FAA) and New York law. Under the FAA, statute of limitations defenses are presumptively reserved to the arbitrator. While New York law allows a threshold issue of timeliness to be asserted in court, a contract can adopt the New York rule if it specifies that New York law governs both the agreement and its enforcement. The partnership agreement here lacked the critical “enforcement” language to invoke the New York rule. Therefore, under the FAA, the timeliness question must be resolved by the arbitrator.

Under New York law (CPLR 7503[b]), a statute of limitations defense can be raised in state court by a party who has not participated in the arbitration. The Court found that NJR’s actions constituted participation because NJR initiated arbitration, successfully defended against Nicole’s petition to stay arbitration, received an application to compel arbitration regarding the counterclaims, and sought a court order to prevent the counterclaims from being considered. The court stated, “It is also inconsistent for NJR to assert that Nicole’s counterclaims are not arbitrable—a party cannot compel arbitration of its own causes of action, prevent its adversary from obtaining judicial relief and then ask a court to block the adversary’s counterclaims from being arbitrated by raising a statute of limitations defense”. The court determined that arbitration should proceed if there is at least one arbitrable issue. Because NJR initiated and participated in arbitration, the timeliness challenge to the counterclaims must be decided by an arbitrator.