BERNARD J. FRIED, J.
Petitioner Episcopal Health Services, Inc. (EHS), brings this proceeding pursuant to Article 75 of the CPLR to stay permanently a November 12, 2010 demand for arbitration, filed with the American Arbitration Association by respondent Kurron Shares of America, Inc. (Kurron). The petition is denied, and the proceeding is dismissed.
EHS, a New York not-for-profit corporation, operates several facilities that provide healthcare services in the City of New York. Kurron is a Maryland corporation with its principal place of business in New York. Kurron provides full-time executive and financial management services to healthcare organizations.
According to the petition, in November 1999, EHS entered into a contract with Kurron to provide crisis management services in connection with its imminent bankruptcy filing. Thereafter, pursuant to the terms of a January 1, 2004 management agreement (the 2004 agreement), Kurron managed the operations of EHS, providing a broad range of services, including furnishing a CEO, and key personnel. In 2008, the Board of EHS approved a renewal of the 2004 agreement, without change, for an additional three-year term (the 2008 agreement). No copy of the 2008 agreement is in the record, but the 2004 management agreement is annexed to the petition as exhibit B. EHS states that it is unable to verify the signature by EHS on the 2004 agreement, but there is no allegation that the parties did not fully perform under the terms of the 2004 agreement.
Annexed as exhibits to the petition are the crisis management agreement, the 2004 agreement, some correspondence between EHS and Kurron, and the demand for arbitration with a statement of claim. These exhibits comprise the only evidence in the record, the petition having been verified only by counsel, as "true to my own knowledge." This is not the same as being based upon personal knowledge, and therefore the factual allegations of the petition lack evidentiary value (see Steinberg v Metro Entertainment Corp., 145 A.D.2d 333, 334 [1st Dept 1988]).
By letter dated October 6, 2010 (pet., ex. C), EHS requested access to EHS's books and records, and also requested evidence that the 2004 agreement had been approved, prior to its inception, as required by the regulations of the New York State Department of Health (DOH) (see 10 NY ADC 405.3 [f]) .
By letter dated October 7, 2010 (Pet, ex. D), Kurron responded, "we understand that the [2004 agreement] was submitted to the [DOH] and that the necessary approvals were obtained" (id.). That letter further states that it was Kurron's understanding that the 2004 agreement has been renewed automatically and continues to be approved by the DOH.
On November 10, 2010, according to the petition. EHS notified Kurron that it intended to terminate the agreement because it had not been approved by DOH, and on November 15, 2010, EHS terminated Kurron's services (Pet., ¶¶ 25, 26). By letter dated November 11, 2010, Kurron filed a demand for arbitration with the American Arbitration Association (AAA).
The statement of claim annexed to the demand for arbitration charges EHS with breaching the 2004 management agreement by terminating Kurron without justification, and by soliciting Kurron's employees, in violation of section 8.4 of the management contract. Kurron seeks the fees to which it would have been entitled under the agreement until its expiration on June 26, 2011, and unspecified damages for the alleged wrongful solicitation.
The 2004 agreement contains the following arbitration clause, as pertinent: "if any disputed item under the agreement cannot be agreed upon ... the matter shall be submitted to an arbitration panel selected by the American Arbitration Association (the AAA)" (ex. B to pet., ¶ 7.2).
This special proceeding presents the threshold issue of arbitrability, and requires an allocation between the arbitration panel and the court of the several issues of arbitrability presented.
EHS argues that it has no duty to arbitrate because neither the 2004 nor the 2008 agreement became effective since neither was ever approved by the DOH. Regulations of the New York State Department of Health (DOH) applicable to initial management agreements for hospitals provide, as pertinent: "[a] governing body wishing to enter into a management contract shall submit a proposed written contract to the department, at lest 60 days prior to the intended effective date" (10 NY NYCRR 405.3 (f) (2]). The regulations provide further: "[m]anagement contracts shall be effective only with the prior written consent of the commissioner" (10 NY NYCRR 405.3 [f] [2]). With respect to the renewal of a management contract the applicable DOH regulations contain the following provision:
(6) The term of a management contract shall be limited to three years and may be renewed for additional periods not to exceed three years only when authorized by the commissioner. The commissioner shall approve an application for renewal provided that compliance with this section and the following provisions can be demonstrated:
(i) that the goals and objectives of the contract have been met within specified time frames;
(ii) that the quality of care provided by the facility during the term of the contract has been maintained or has improved; and
(iii) that the level of service to meet community needs and patient access to care and services has been maintained or improved.
(7) A contract for which an application for renewal has been submitted on a timely basis to the commissioner may be extended on an interim basis until the commissioner approves or disapproves the application for renewal [emphasis supplied]
(10 NY NYCRR 405.3 [f] [6], [7]). The petition states, upon information and belief, that neither the 2004 nor the 2008 agreement was submitted for approval to the DOH, as required. Both parties argue that it was the responsibility of the other to make the application to the DOH. EHS is the "governing body" under the regulations charged with making the application, but EHS argues that it delegated that authority to Kurron to "be responsible for the overall agreement," and to "[i]nterface with regulatory authorities" (petitioner's brief at 9-10). Petitioner also argues that the allegations of the petition that neither agreement was approved by the DOH are deemed admitted because Kurron has not served an answer. Additionally, EHS argues, alternatively, that the arbitration agreement is too narrow to encompass the claims, arguing that the language in the arbitration clause, "any disputed item under this agreement," does not encompass arbitrating either arbitrability or a claim for the termination of the agreement, because termination is not an item under the agreement Kurron correctly argues that the FAA applies because EHS is sufficiently engaged in interstate commerce ( see Eman-Henshaw v Park Plaza Hosp., 1997 WL 681184, *2 [5th Cir 1997]) (hospital held subject to FAA based on "receiving goods and services from out-of-state vendors, treating out-of-state patients, and receiving payment from out-of-state insurance carriers for services rendered" (see Diamond Waterproofing Systems, Inc. v 55 Liberty Owners Corp., 4 N.Y.3d 247, 252 [2005]). This preemption, however, "extends only to those provisions of state law that actually conflict with the FAA" (Gerling Global Reinsurance Corp. v Home Ins. Co., 302 A.D.2d 118, 125 [1st Dept 2002]). The FAA "preserves general principles of state contract law as rules of decision on whether the parties have entered into an agreement to arbitrate" (citations and internal quotation marks omitted) (Frankel v Citicorp Ins. Services, Inc., 80 A.D.3d 280, 287 [2d Dept 2010]). Kurron argues that all of these issues of arbitrability are for the arbitrators. The validity of this contention depends on whether the arbitration provision is sufficiently broad as to constitute an agreement to submit the dispute over arbitrability to the arbitrators, in accordance with the established rule that the court, in exercising its gateway function, is charged with deciding whether a dispute is arbitrable
unless the parties clearly and unmistakably provide otherwise. Where there is a broad arbitration clause and the parties' agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will leave the question of arbitrability to the arbitrators
(Zachariou v Manios, 68 A.D.3d 539, 539 [1st Dept 2009]) (interior quotation marks and citations omitted). The demarcation between the gateway issues of arbitrability that are assigned to the court and those that are for the arbitrator is not defined by a bright line rule. The United Stated Supreme Court draws a distinction, using the dichotomy applied in the Erie doctrine (see Erie Ry. Co. v Tompkins, 304 U.S. 64 [1938]), characterizing gateway issues that are "procedural" as for the arbitrator, while those described as "substantive" are for the court (see Howsam v Dean Witter Reynolds, Inc., 537 U.S. 79, 84-85 [2002]). Substantive issues include whether the arbitration clause is binding or applies to the particular type of controversy. Procedural issues include the satisfaction of conditions precedent to a duty to arbitrate, notice, waiver, estoppel, and timeliness (id.). The Second Circuit stated the procedure to be followed under the FAA for a court exercising its gateway function, as pertinent:
[t]o determine whether a particular dispute falls within the scope of an agreement's arbitration clause, a court should undertake a three-part inquiry. First, recognizing there is some range in the breadth of arbitration clauses, a court should classify the particular clause as either broad or narrow. Next, if reviewing a narrow clause, the court must determine whether the dispute is over an issue that is on its face within the purview of the clause, or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause. Where the arbitration clause is narrow, a collateral matter will generally be ruled beyond its purview. Where the arbitration clause is broad, there arises a presumption of arbitrability and arbitration of even a collateral matter will be ordered if the claim alleged implicates issues of contract construction or the parties' rights and obligations under it (internal quotation marks and citations omitted)
(Louis Dreyfus Negoce S.A. v Blystad Shipping & Trading Inc., 252 F.3d 218, 224 [2d Cir 2001] cert denied 534 U.S. 1020 [2001]). "[U]nder either Federal or New York law, to the extent that petitioner challenges the arbitration clauses themselves or their inclusion in the agreements, those challenges are for the court to determine (Matter of Teleserve Systems, Inc. (MCI Telecommunications Corp.), 230 A.D.2d 585, 592-593 [4th Dept.1997]). Also, as the Appellate Division, First Department states: "[u]nder both New York and federal law, the courts are required to treat an agreement containing an arbitration clause as if there were two separate agreements — the substantive agreement between the parties, and the agreement to arbitrate" [citations omitted] (O'Neill v Krebs Communications Corp., 16 A.D.3d 144, 145 [1st Dept 2005]; Arc Elec. & Mechanical Contractors Corp. v Invensys Bldg. Systems, Inc., 2 A.D.3d 314, 316 [1st Dept 2003]).
Applying the foregoing, the first issue is whether the arbitration clause is broad or narrow. The language of this arbitration clause does not conform to the usual expansive "any dispute" provision. Nor does it specifically incorporate the rules of the AAA; it merely requires that the panel be selected by the AAA. While the arbitration clause is not significantly narrow, neither does it "unmistakeably" indicate an intention to submit to the arbitrators all issues of arbitrability beyond the making and validity of the arbitration clause itself (see Zachariou v Manios, 68 AD3d at 539). Therefore, the analysis of the arbitration agreement, pursuant to the FAA, must be based on the finding that it is a narrow clause, requiring a determination whether the issues sought to be arbitrated are collateral to the management agreements. EHS has not submitted any evidence of the intent behind the non-conforming language of the arbitration clause. One definition of "item" is "a clause of a bill, charter or other document" (American Heritage Dictionary of the English Language, New College Edition, 1978). Because each of the issues for which arbitration is demanded relate to clauses either in or required to be in the management agreements, EHS has not demonstrated that any of the issues in the arbitration demand is either collateral to the contract, or not a disputed item under the management agreement. There is no merit to EHS's contention that termination is not a "disputed item under the agreement." The DOH regulations governing management contracts provides:
[a] facility's governing body shall, within the terms of the contract, retain the authority to discharge the managing authority and its employees from their positions at the facility with or without cause on not more than 90 days' notice. In such event, the facility shall notify the department in writing at the time the managing authority is notified
(10 NY ADC 405.3 [8]). Therefore, because termination, with or without cause, is a provision that is required by regulation to be in management contracts, it is within the purview of the arbitration clause. There can be no genuine dispute that the arbitrability of the wrongful solicitation claim, which is pursuant to a numbered clause in both agreements, is also an issue that the parties may dispute before the arbitration panel. EHS has not demonstrated that the parties did not enter into a valid agreement to arbitrate, which the court, in exercising its gateway function as set forth above (see Fiveco, Inc. v Haber, 11 N.Y.3d 140, 144 [2008]), enforces as a severed, stand-alone contract. EHS's stated inability to validate the signature for EHS on the 2004 contract is insufficient to establish its entitlement to relief on the petition, which states that EHS "agreed to enter into the [2004 agreement]" (pet. ¶ 16), and that the EHS board agreed to renew it without change for an additional three-year period (id. ¶ 22). The parties performed pursuant to the two management contracts and the crisis management agreement for almost a decade. Issues of estoppel related to arbitrability are presumptively for the arbitration panel (see Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp., 4 NY3d at 252).
Finally, the remaining issue of the validity of the contract as a whole is a gateway issue assigned to the arbitrators under the FAA. "Under Federal law, if the challenge is aimed at the making of the contract as a whole, that challenge is for the arbitrator, not the court, to determine" (Matter of Teleserve Systems, Inc. [MCI Telecommunications Corp.], 230 AD2d at 592; see also Cooper v Bruckner, 21 A.D.3d 758, 759 [1st Dept 2005]) (holding that issue of whether an agreement as a whole is unenforceable is for the arbitrators).
The issues of whether the management contracts received the required DOH approval, and the consequences of non-approval, are procedural issues of arbitrability for the arbitrator, inasmuch as these issues relate to the issue of whether the agreement as a whole is unenforceable. Accordingly, it is
ADJUDGED that the petition to stay the subject arbitration proceeding is denied in all respects, and the petition is dismissed, with costs and disbursements to respondent; and it is further
ADJUDGED that the parties shall proceed to arbitration forthwith and respondent's counsel shall serve a copy of this judgment upon the arbitral tribunal; and it is further
ADJUDGED that respondent, recover from petitioner, costs and disbursements as taxed by the Clerk, and the respondent shall have judgment therefor.
