Supreme Court, New York County, September 16, 2019

Ruta Soulios & Stratis LLP (Joseph A. Ruta of counsel) for petitioner.

Storch Amini PC (Lita Beth Wright and Ryan M. Roberts of counsel) for respondent.

Petitioner, LMP Automotive Holdings, Inc., seeks an order pursuant to CPLR 7503 (b) permanently staying the arbitration that Nardello & Co., LLC commenced against LMP before the American Arbitration Association.

At first glance, this case seemed to involve a simple enough question about whether a law firm had the authority to tie its client to an arbitration provision in a contract with a third-party vendor hired for the very situation for which the law firm was also retained. Usually, the answer would be affirmative as to the law firm's authority. However, after a close review of the record in this case, the answer the court has come to is no.

In early July of 2018, LMP hired White & Case LLP (W & C) to conduct an internal investigation into an alleged whistleblower claim (see Cohen aff at 1). After agreeing to the representation, LMP provided a $50,000 retainer to W & C for the purpose of carrying out the investigation. Pursuant to that arrangement W & C and LMP entered into a retainer agreement dated July 3, 2018. The retainer agreement provided that W & C would serve as counsel for LMP and would represent it in connection with the investigation (see NY St Cts Elec Filing [NYSCEF] Doc No. 24). The retainer agreement provided that the law firm would act "at the direction and instruction of the Independent Committee." It also contained a paragraph that provided the following billing procedure:

"In addition to the above described fees, the Company will reimburse the Firm for our costs, out of pocket and office expenses and disbursements as customarily billed by us and paid in connection with the Services. These include but are not limited to: photocopying, local messenger and intercity delivery service, computerized research, travel (including mileage, parking, airfare, lodging, meals{**65 Misc 3d at 902} and ground transportation), computer research charges, support staff overtime and word processing. In all cases and in the absence of special arrangements, fees and expenses of local or other counsel, experts, investigators, accountants, consultants and other providers of services outside the Firm will be paid by the Company and will not be the Firm's responsibility. We may make arrangements, where we believe it appropriate, to have all or any of the foregoing billed directly to the Company for payment to the person to whom those obligations for expenses are incurred. In any case, in the absence of our express written acknowledgment to the contrary, the Company shall be solely responsible for the fees and expenses of such persons." (See NYSCEF Doc No. 24 [emphasis added].)

On or about July 6, 2018, W & C retained Nardello to provide investigative services for the purpose of assisting W & C in its representation of LMP (see NYSCEF Doc No. 1). As a result, Nardello and W & C entered into an engagement letter (agreement) to "confirm [the parties'] engagement to provide certain investigative and other services to [W & C] on the terms and conditions set forth" (see NYSCEF Doc No. 25 at 3).

The agreement referred to LMP as the client. The agreement also contained an arbitration clause that provided, in part, that "[a]ny dispute under this Agreement may be submitted to binding arbitration under the Arbitration Rules of the American Arbitration Association (the 'AAA')" (see NYSCEF Doc No. 25 at 5).

Paragraph 5, entitled "Payment," provides the following:

"5. Payment

"The client is solely responsible for payment of Nardello's bills. The Firm confirms that: (i) it has been authorized by the Client to retain Nardello for this matter; (ii) that the firm has advised the client of the terms of this Agreement; and (iii) that the Client has confirmed that it will pay Nardello's bills."

Further, the agreement stated that Nardello was to provide various services and information "for the benefit of [W & C] in its advisement of [LMP]" (see NYSCEF Doc No. 25 at 3). LMP was not a signatory to the agreement between W & C and Nardello.

{**65 Misc 3d at 903}After execution, Nardello began to provide investigatory services. Nardello consistently sent reports to W & C detailing its progress in the investigation. Nardello also delivered detailed monthly invoices to W & C, not LMP. The invoices provided personnel lists, hours, descriptions and expenses related to W & C's work and the overall investigation (see NYSCEF Doc No. 13).

After receiving the invoices from W & C, LMP refused to provide payment for the services rendered. Nardello ultimately invoiced W & C for more than $150,000 worth of work in connection with the whistleblowing investigation. On or about April 5, 2019, and in light of LMP's refusal to pay, Nardello filed a demand for arbitration seeking $163,254.45 in unpaid professional fees. LMP was later served with the arbitration demand on April 8, 2019. The arbitration demand stated:

"Claimant performed investigative services under its contract with Respondent. Claimant tendered its invoice in accordance with the contract. After receiving no response or objection to the invoice, Claimant demanded payment and Respondent refused payment. Claimant brings this demand for arbitration under the aforementioned contract § 11 (c) for breach of contract, account stated, and, in the alternative, quantum meruit." (NYSCEF Doc No. 3 at 2.)

LMP objected to the arbitration and petitioned the court to stay it. On June 12, 2019, this court issued an interim order staying arbitration until it could make a final determination on the petition.

CPLR 7503, entitled "Application to compel or stay arbitration; stay of action; notice of intention to arbitrate," governs applications to compel or stay arbitration. Subdivision (b) of section 7503 specifically provides the following:

"(b) Application to stay arbitration. Subject to the provisions of subdivision (c), a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration, may apply to stay arbitration on the ground that a valid agreement was not made or has not been complied with or that the claim sought to be arbitrated is barred by limitation under subdivision (b) of section 7502."

{**65 Misc 3d at 904}Only parties who have expressly agreed to arbitrate can be compelled to do so (Matter of Brookfield Clothes v Tandler Textiles, 78 AD2d 841 [1st Dept 1980], citing Matter of Marlene Indus. Corp. [Carnac Textiles], 45 NY2d 327 [1978], and Schubtex, Inc. v Allen Snyder, Inc., 49 NY2d 1 [1979]). The burden is on the party seeking to commence with arbitration to demonstrate that the parties have agreed to arbitrate (see Gerling Global Reins. Corp. v Home Ins. Co., 302 AD2d 118 [1st Dept 2002]).

When analyzing a motion pursuant to CPLR 7503, the court must first

"determine whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement. The court's inquiry ends, however, where the requisite relationship is established between the subject matter of the dispute and the subject matter of the underlying agreement to arbitrate" (Sisters of St. John the Baptist, Providence Rest Convent v Geraghty Constructor, 67 NY2d 997, 999 [1986]).

"Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation under subdivision (b) of section 7502, the court shall direct the parties to arbitrate" (see CPLR 7503 [a]).

Even though W & C was LMP's lawyer for the purposes of the investigation, it is clear that W & C had no actual authority to tie LMP to an arbitration agreement with Nardello. The engagement letter between W & C and LMP states that W & C was to "act at the direction and instruction of the Independent Committee." While the engagement agreement does contemplate that W & C would hire investigators, the only responsibility that LMP undertook in the engagement agreement—the only agreement it actually signed—was to pay the outside investigator. Nothing authorized W & C to bind LMP to an arbitration agreement with that outside investigator.

This then begs the question whether W & C had apparent authority to bind LMP to the arbitration provision. Nardello only points to paragraph 5 in its agreement with W & C, the one that LMP did not sign, entitled "Payment" where W & C warranted that "(i) it has been authorized by the Client to retain Nardello for this matter; (ii) that the firm has advised the client of the terms of this Agreement; and (iii) that the Client has confirmed that it will pay Nardello's bills."

{**65 Misc 3d at 905}LMP, however, interposes an affidavit from William Cohen who swears that "contrary to the representation in the Nardello and W & C agreement, neither the LMP Committee nor LMP gave W & C the authority to . . . agree to subject the LMP Committee or LMP to arbitration." (NYSCEF Doc No. 18 ¶ 5.) Nardello fails to provide an affidavit from W & C to the contrary to contradict this sworn testimony. The letter is not sufficient to establish apparent authority because

"[e]ssential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Rather, the existence of 'apparent authority' depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal—not the agent" (Hallock v State of New York, 64 NY2d 224, 231 [1984] [internal quotation marks omitted]).

Matter of Jefferies & Co., Inc. v Infinity Equities I, LLC (66 AD3d 540 [1st Dept 2009]) upon which Nardello heavily relies is distinguishable. In that case the investment manager was not only authorized to choose broker dealers, but was authorized "to negotiate the terms on which purchases and sales [would] be effected." (Id. at 541 [internal quotation marks omitted].) Here, W & C was not similarly authorized, but rather was supposed to act at the direction of LMP.

Accordingly, it is ordered that petitioner's motion to stay arbitration is granted.