Confirmation / Vacation of Arbitration Awards

Court Holds Prior Compliance Is Not a Ground to Refuse Confirmation of an Arbitration Award

July 11, 2019 by Carlton Fields

Tracey Schusterman and Rosa Mazzone jointly owned a financial services group. Pursuant to their agreement, they were bound to arbitrate any disputes regarding the financial services group before the Financial Industry Regulatory Authority Inc. Schusterman initiated an arbitration against Mazzone alleging that she attempted to solicit clients in violation of their agreement. The arbitration panel found that Mazzone breached the agreement and issued an award in favor of Schusterman. Schusterman then filed an action to confirm the award. Shortly thereafter, Mazzone made a payment to Schusterman in the full amount of the award and filed a motion to dismiss the petition asserting that the motion was not ripe, and the claims now moot based on her payment, along with a request for sanctions. The court confirmed the award and denied the motion to dismiss. The court explained that prior compliance “does not negate the right of the prevailing party … to seek judicial confirmation of the arbitral decision.” The court further held that sanctions were not appropriate. The court explained that Mazzone did not follow the proper procedures in filing the sanctions motion and further that Schusterman did not act with “objective unreasonableness” as she had the right under the FAA to petition to confirm an arbitration award.

Schusterman v. Mazzone, No. 1:19-cv-00212 (S.D.N.Y. June 19, 2019)

SNDY Clears the Air, Finds Arbitrators Applied UAE Law in Determining Award in Aircraft Lease Agreement Dispute

June 19, 2019 by Carlton Fields

Cessna Finance Corp. entered into contracts with Al Ghaith Holding Co. PJSC for purposes of guaranteeing aircraft lease agreements. Cessna filed a request for arbitration against Al Ghaith seeking payment under the guaranty agreements. Al Ghaith argued that the guaranty agreements were unenforceable because the vice president who signed the agreement did not have authority to do so. The arbitrators issued an award in favor of Cessna holding the guarantee agreements were valid under both Kansas and Dubai law. Cessna moved to confirm the award. The U.S. District Court for the Southern District of New York confirmed the award. The court explained that arbitration awards will only be vacated under limited circumstances, one being “manifest disregard” of the law. An award will be in “manifest disregard” of the law where: (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it; and (2) the law ignored by the arbitrators was well-defined, explicit, and clearly applicable to the case. Al Ghaith argued that the award was in violation of a UAE law. However, the court explained that the arbitrators explicitly applied UAE law in confirming the award, and Al Ghaith did not meet its heavy burden to demonstrate the arbitrators acted in “manifest disregard” of the law.

Cessna Finance Corp. v. Al Ghaith Holding Co. PJSC, No. 1:15-cv-09857 (S.D.N.Y. May 7, 2019)

Second Circuit Adopts Standard for Determining Subject-Matter Jurisdiction Over Motions to Confirm Arbitration Awards Under FAA Section 9

June 18, 2019 by Alex Silverman

The Second Circuit Court of Appeals recently held as a matter of first impression that a district court properly looked to the substance of an underlying dispute in determining whether it had subject-matter jurisdiction over a motion to confirm an arbitration award pursuant to Section 9 of the Federal Arbitration Act (FAA). The parties are members of the Bobov Hasidic Jewish community in Brooklyn. The petitioners claimed to own trademark rights in the word “Bobov” and commenced arbitration to prevent the respondents from using the mark in connection with a new Hasidic community. The parties agreed to arbitrate before a rabbinical tribunal, which issued an award in the petitioners’ favor. The petitioners sought confirmation of the award in federal district court under Section 9 of the FAA. After concluding that it had subject-matter jurisdiction over the matter, the district court confirmed the award, and the Second Circuit affirmed.

Although the Second Circuit had not previously addressed whether federal courts have subject-matter jurisdiction over motions to confirm under Section 9, it had addressed the issue in the context of a petition to vacate under Section 10. In that case, the court adopted the “look-through” approach used by the U.S. Supreme Court to determine whether a district court had subject-matter jurisdiction over a petition to compel arbitration under Section 4 of the FAA. The Supreme Court instructed district courts to “look through” the petition to the substance of the underlying controversy to assess whether it implicated federal law. The Second Circuit in the current case found no reason not to apply the same standard to a motion to confirm under Section 9. Applying that standard here, it held that because the underlying controversy raised questions of federal trademark law, the district court “unquestionably” had subject-matter jurisdiction over the matter. The court then concluded that the district court properly confirmed the arbitration award, particularly given the extreme deference that courts must afford such awards.

Landau v. Eisenberg, 922 F.3d 495 (2d Cir. 2019)

Court Finds Panel Did Not Manifestly Disregard Law When It Entered FINRA Award in Favor of Investment Firm and Advisors in Dispute over Fraud Committed by Late NFL Player’s Agent

June 13, 2019 by Michael Wolgin

The widow of a former NFL football player sued the player’s sports agent and financial adviser, alleging that the former player was defrauded by the agent in connection with the loss of the proceeds of the player’s life insurance policy. The plaintiff alleged that upon the player’s death, the insurance proceeds were paid to a trust, for which the agent acted as trustee without authorization. The funds were depleted by the agent, and the plaintiff asserted claims of breach of fiduciary duty, negligence, and fraud against the agent and the agent’s investment firm and financial advisors.

The matter went to FINRA arbitration, and the panel concluded that the investment firm and the financial advisors were not legally responsible for the harm. The plaintiff moved to vacate the award on the ground that the panel manifestly disregarded the law when it reached the conclusion that “the Investment Firm and Investment Advisors were not required to conduct any investigation into the obviously suspicious and fraudulent behavior.” The firm and advisors moved to confirm the award, arguing that the plaintiff’s motion to vacate the award was untimely beyond the three-month limitation period. They relied upon the early issuance of the award, which contained two out of three signatures of the panel. The plaintiff relied upon a later date on which the third signature on the award was issued.

The court avoided ruling on the issue of timeliness, noting that some case law did support raising grounds for vacatur as a defense to a motion to confirm, even after the limitations period has expired. Turning to whether the panel manifestly disregarded the law, the court explained that, assuming “manifest disregard” is even a valid ground for vacatur in the Fifth Circuit, the panel did not disregard the existence of a clearly governing legal principle. The panel determined that “the Trustee of the trust was the person solely responsible for the asset destruction of the trust” and that the plaintiff failed to present any breach of a fiduciary duty “under any law or regulation.” The court concluded that “the Panel considered the existence of governing law, but found that a fiduciary duty did not exist under this law. Plaintiff’s issue with the arbitration decision is not that the Panel ignored the law entirely, but that the Panel did not reach Plaintiff’s desired outcome when applying the law. Therefore, even under the ‘manifest disregard of the law’ standard, Plaintiff’s motion for vacatur fails.” The court therefore denied the motion to vacate and confirmed the award.

Warren v. Geller, No. 2:11-cv-02282 (E.D. La. May 3, 2019).

Southern District Confirms Arbitration Award Over Challenge Based on Failure of Arbitrators to Disclose Information

June 6, 2019 by Brendan Gooley

The Southern District of New York has rejected a petition to vacate an arbitration award on the basis that the arbitrators failed to disclose allegedly material information.

Michael Miller worked as a financial advisor in a UBS branch. UBS gave Miller six loans, and Miller agreed any disputes regarding the loans could be arbitrated. A dispute regarding the loans arose after Miller left his job. Miller and UBS selected arbitrators in accordance with FINRA’s rules. The arbitrators ruled in favor of UBS. Miller unsuccessfully sought to vacate their award in the Southern District.

In his effort to vacate the award, Miller claimed the arbitrators failed to disclose pertinent information during the selection process resulting in the award (1) exceeding the arbitrators’ powers; and (2) an award that was the result of partiality or corruption in violation of FINRA’s rules. Specifically, Miller claimed one arbitrator (Teveris) failed to disclose she had represented an investor before FINRA in an unrelated matter in her initial disclosure and failed to sufficiently disclose the representation in her oath. He also claimed that another arbitrator (Rolnick) failed to disclose he was a defendant in an unrelated federal lawsuit. But Miller failed to explain how such information prevented the arbitrators from being objective. The court also rejected Miller’s argument that the information was material and would have affected how he ranked the arbitrators. That was not the standard, and the usefulness of the information was irrelevant, the court explained.

Miller also argued Rolnick had a potential interest in UBS securities that he failed to fully explain after he answered “yes” to a question asking if he or an immediate family member invested in or held securities that were the subject of the arbitration. While interest in UBS was a potential problem, it was disclosed and Miller was therefore on notice of a fact potentially indicative of bias. The applicable rules did not clearly require additional disclosures, and Miller failed to object to the allegedly incomplete disclosure, thereby waiving any right to challenge it. Moreover, Miller had been expressly told that he could object to the arbitrators after he was informed about the potential conflict.

If you don’t act as soon as practical on your right to challenge arbitrators based on information you know (or should know) about them, don’t expect to be able to vacate the award later.

Miller v. UBS Fin. Servs. Inc., No. 1:18-cv-08415 (S.D.N.Y. May 6, 2019)