Wait. This Is Arbitration? I Thought It Was Mediation.

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Early in the movie, My Cousin Vinny, Joe Pesci's character, Vincent Gambini, tells the judge that he has significant experience trying cases in New York. The judge does some research and learns that there is no record of anyone named Vincent Gambini trying any cases in New York. Gambini then does what one should never do, he lies to the judge. He tells the judge that he tried cases under the name Jerry Gallo. Gambini thinks this is a brilliant move because Jerry Gallo is a notable New York lawyer who Gambini has read about in the papers. Unfortunately for Gambini, however, he never read the articles about Jerry Gallo's death. Naturally, the judge finds out that Jerry Gallo is dead, and confronts Gambini, which leads to the following exchange:

I imagine this may have been similar to what the defendant in Marano v. The Hills Highlands Master Association, Inc. said when it received an unfavorable arbitration award. "Did you say binding arbitration? No. We were participating in non-binding mediation. Not arbitration." Things worked out for Vincent Gambini in the movie, they did not work out so well for defendant in Marano. 

In Marano, plaintiffs owned a unit in a condominium development. The relationship between unit owners, like plaintiffs, and the association was governed by the association's bylaws, which "arguably include[d] an arbitration provision." So, after a dispute developed between plaintiffs and the condominium association over a "flooding condition" in their backyard, plaintiffs' attorney wrote to the association's attorney to demand arbitration. He received no response, so he wrote again and stated that unless the association's attorney confirmed that he was "in the process of arranging for the arbitration proceeding," plaintiffs would sue to compel arbitration. The association's attorney responded by disputing some of the claims in plaintiffs' letter but agreeing to participate in "ADR" (alternative dispute resolution). Several weeks later, plaintiffs' attorney again wrote to the association's attorney asking for confirmation that the parties would proceed to an "arbitration hearing," with a hearing officer who would serve "as an arbitrator." In response, the association's counsel contacted a retired judge to determine his availability and willingness to serve as "the arbitrator."

Up to this point, it appears clear that the parties were discussing arbitration, not mediation. What happened next created the confusion that sent the case down the path that would eventually land it before the Appellate Division.  

Continue reading “Wait. This Is Arbitration? I Thought It Was Mediation.”

Appellate Division: Arbitration Agreement in Non-Profit’s Bylaws Enforceable

by:  Peter J. Gallagher (@pjsgallagher)

Contract(pd)
The enforceability of arbitration provisions is a hot topic in New Jersey right now. Several recent cases suggest that these provisions may be less readily enforceable than previously thought, or at least that courts are taking a closer look at them than they may have in the past. The author of an article in the NJ Law Journal even questioned whether New Jersey courts were "anti-arbitration." With this in mind, the Appellate Division's  unpublished opinion in Matahen v. Sehwail, in which it enforced an arbitration provision contained in the bylaws of a New Jersey mosque, is noteworthy.

In Matahen, plaintiffs and defendants were members of the general assembly in the mosque. The general assembly was comprised of all "active members" of the mosque, which was defined as "those who attend prayers regularly, participate 'actively' in mosque 'activities,' abide by the bylaws, pay dues, and practice Islam daily." The general assembly was the highest authority in the mosque, but the Board of Trustees, "which represent[ed] the general assembly," was the highest "policy-making authority" in the mosque. 

In the complaint, plaintiffs alleged that certain defendants used the mosque's credit cards for personal expenses, conspired to keep a former employee on the mosque's health insurance plan after he stopped working for the mosque, and used the mosque's funds to pay for one of defendant's children's school tuition. Rather than filing a responsive pleading, defendants moved to compel arbitration, under a provision in the mosque's bylaws, which provided:

The board shall create an Islamic Arbitration Committee of 3-5 members in case of disagreement among board members or general assembly members of matters related to the center, such committee shall consist of a Lawyer, an Imam, and Community Leaders. All disputes arising hereunder shall be resolved by arbitration by the aforementioned committee pursuant to policies and procedures established by such committee from time-to-time. All parties involved shall approve of the members of the Arbitration Committee. Decisions of the committee shall be binding on all parties and may be entered in a court of competent jurisdiction.

(emphasis added). The trial court denied the motion, holding that the claims alleging misuse of corporate funds "address those types of concerns that are standard in a corporation type dispute," and therefore "clearly belong in a court to be adjudicated." Defendants appealed.

The Appellate Division reversed, primarily because of the "utmost latitude" given to non-profits in the "regulation and management of intracorporate affairs." The Appellate Division noted that "a non-profit organization's private law is generally binding on those who wish to remain members," and "only the most abusive and obnoxious by-law provision could properly invite a court's intrusion into what is essentially a business thicket." The arbitration agreement in Matahen did not rise to this level.

Reading the arbitration provision in the bylaws as a whole, the Appellate Division had little difficulty holding that the Board and general assembly intended that all disputes pertaining to the mosque be handled through arbitration. Because the claims asserted in the complaint "concerned mosque affairs," the Appellate Division held that they fell within this provision notwithstanding that, as the trial court held, they may have also been justiciable in court.

Among other things, plaintiffs argued that the provision was unenforceable because it was not contained in a contract, but merely in the mosque's bylaws, to which, plaintiffs claimed, they were not parties. The Appellate Division disagreed, holding that, as a matter of law, "by-laws of a voluntary association become a part of the contract entered into by a member who joins the association."

The Appellate Division also rejected plaintiffs' argument that the arbitration provision was unenforceable because it failed to "advise those subject to [it] that they [ ] waived their right to maintain an action in court." While the Appellate Division acknowledged that the provision did not reference waiver, this shortcoming did not render it unenforceable. The Board and the general assembly shared the authority to amend the bylaws, but never saw fit to amend them to include any reference to waiver. Therefore, the Appellate Division held that it was "incongruous for plaintiffs to complain the arbitration clause [was] defective and unenforceable when they were part of the two intra-corporate bodies responsible for its contents." The Appellate Division further held:

Plaintiffs' position is far different from parties to the typical contract, where generally each party seeks to advance its own interests and not those of the other. There was no "adverse" party here who sought to induce plaintiffs to enter into a contract containing an arbitration clause that failed to contain the subject waiver, hoping to gain an advantage. Plaintiffs merely find themselves facing a bylaw they either composed or ratified by failing to amend its contents.

Accordingly, the arbitration provision was enforceable notwithstanding the lack of any reference to waiver of the right to sue in court.

Ultimately, the Appellate Division's holding in Matahen is noteworthy, not because it signals a shift in the recent scrutiny of contractual arbitration provisions in general, but because it suggests that courts may be more likely to enforce such provisions in specific situations involving the governance of non-profit organizations.