On August 2, 2024, Justice Cohen of the New York County Commercial Division issued a decision in Vaidya v. Itria Ventures LLC, 2024 NY Slip Op. 32709(U), holding that the decision of whether a contract was void because it was usurious was for the arbitrator, not the court, explaining:
As a general matter, on a motion to compel or stay arbitration, a court must determine, in the first instance 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 threshold issue of whether there is a valid agreement to arbitrate is for the court and not the arbitrator to determine. Additionally, where a contract containing an arbitration provision affects interstate commerce, disputes arising thereunder are subject to the Federal Arbitration Act.
The party seeking a stay of arbitration has the burden of showing the existence of sufficient evidentiary facts to establish a preliminary issue which would justify the stay. Thereafter, the burden shifts to the party opposing the stay to rebut the prima facie showing.
Here, it is undisputed that the FRSAs contain broad arbitration clauses. . . . Nevertheless, Petitioners argue that the FRSAs are disguised loans which charge interest in violation of New York’s usury laws, and that usury is a threshold question for the Court to decide, not the arbitrator. Petitioners rely principally upon Durst v Abrash (22 AD2d 39, 42-43 [1st Dept 1964], affd, 17 NY2d 445 [1965]) for the proposition that, as a matter of public policy, a defense of usury under New York law must be decided by the Court rather than an arbitrator.
Even assuming Durst remains good law in New York despite many years of development of the law of arbitration since 1964, it is clearly not the law in a case governed by the Federal Arbitration Act. In Buckeye Check Cashing, Inc. v Cardegna, 546 US 440 [2006], a case involving a claim of usury, the United States Supreme Court held that regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator. The decision was premised on the principles (established in Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 US 395 [1967] and Southland Corp. v Keating, 465 US 1, 104 S Ct 852, 79 L Ed 2d 1 [1984]) that an arbitration provision is severable from the remainder of the contract, and that unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. New York courts have faithfully applied these principles in cases governed by the Federal Arbitration Act.
Here, there is little question that Federal Arbitration Action applies because the FRSAs clearly affect interstate commerce. . . .
Once a dispute is covered by the FAA, it applies to all questions of validity and enforceability. Under the FAA, as noted above, courts have found that there are generally two types of challenges to the validity of arbitration agreements: those that challenge the validity of the agreement to arbitrate itself, and those that challenge the contract as a whole based on illegality, fraud, or the like. Attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause, itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court. Accordingly, since Petitioners challenge the legality of the underlying FRSAs on usury grounds, rather than the legality of the arbitration provisions themselves, the question of whether the FRSAs are void as disguised usurious loans is for the arbitrator to decide in the first instance.
(Internal quotations and citations omitted).