Confirmation / Vacation of Arbitration Awards

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)

Court Finds Arbitration Panel Did Not Exceed Powers or Manifestly Disregard the Law in Confirming Award in Dispute Over Leasing of Oil Lands

May 22, 2019 by Michael Wolgin

The case relates to an arbitration award entered in a dispute between affiliated oil exploration and marketing companies, on the one hand, and owners of land leased to the oil companies, on the other hand. The leases at issue authorized the exploration company to produce and sell any oil and natural gas found there. In exchange, the owners of the land would receive royalties calculated as a percentage of the proceeds attributable to the production from each well. The owners objected to the amount of the royalties paid by the exploration company, which were calculated based on the exploration company’s sales of the oil and gas to its affiliated marketing company, instead of based on the higher amounts for which the marketing company would sell the oil and gas downstream to third parties. The dispute went to an arbitration, which found that the owners failed to provide evidence that the oil sales between the affiliated companies were less than what would occur in an arms-length transaction. The panel found that the exploration company had legitimately transferred title to the oil and gas, and received sufficient consideration from the affiliated marketing company.

The owners petitioned the court to vacate the award, arguing that the arbitrators “exceeded their powers” and “effectively dispensed their own brand of industrial justice,” and that they “manifestly disregarded the law.” The court rejected both arguments, disagreeing that the arbitrators “ignored the central question” in dispute. According to the court, the panel found that (1) title was transferred to the marketing company; (2) the exploration company marketed the oil and gas as required; (3) the exploration company made “legally sufficient accounting entries on their books and records to evidence transfer of title and consideration paid for the oil and gas”; (4) the leases permitted the exploration company to sell to an affiliate; and (5) the owners failed to provide evidence of any defects with the sales transactions. The court found, without expressing any opinion about whether the panel was correct, that the panel “stayed well within its powers to adjudicate the dispute and executed those powers appropriately.” The court further found that the panel did not manifestly disregard the law. The court explained that the panel “was asked to interpret contracts that were arguably inconsistent both internally and with one another, and it made an informed, careful judgment about how to do so.” The court therefore granted summary judgment in favor of the oil companies and confirmed the award in its entirety.

Hale v. Chesapeake Expl., LLC, No. 4:18-cv-02217 (N.D. Ohio Apr. 25, 2019).

Court Holds That Arbitration Award Was Final and Definite and Arbitrator Did Not Manifestly Disregard the Law

May 8, 2019 by Carlton Fields

In Ballinasmalla Holdings Ltd. v. FCStone Merchant Services, LLC, petitioners Ballinasmalla Holdings Ltd. (BHL) and Corrib Oil Biofuels LLC (Corrib Oil) brought an action seeking vacatur of a final arbitration award (“Final Award”) issued in favor of the respondents for approximately $5 million. The respondents, FCStone Merchant Services LLC (FCStone) and INTL FCStone Markets LLC (INTL FCStone), counter-claimed for confirmation of the Final Award and an earlier Partial Final Award.

Corrib Oil is a company that distributes and manufactures oil and petrol products. Corrib Oil entered into a contract with FCStone to purchase soybean oil. BHL agreed to act as a guarantor for Corrib Oil on the contract. BHL also acted as a guarantor on payments owed by Corrib Oil Company Ltd. (Corrib Ltd.), who was not a party to the litigation, to INTL FCStone on swap transactions pursuant to an International Swap Dealers Association (ISDA) agreement. Both contracts had arbitration clauses. FCStone and INTL FCStone demanded arbitration after a dispute over soybean deliveries and payment on the ISDA agreement. INTL FCStone concurrently filed an action in New York state court against Corrib Ltd. seeking to collect on the debt from its ISDA agreement.

The arbitrator granted a partial award on the soybean contract dispute and dismissed the ISDA guaranty claim. FCStone and INTL FCStone asked the arbitrator to reinstate their ISDA guaranty claim and hold a hearing, and the arbitrator agreed. The arbitrator thereafter issued the Final Award, and the petitioners then filed their petition to vacate.

The court denied the petitioners’ motion to vacate the Final Award and granted the respondents’ motion to confirm. The court held that the arbitration award was final and definite. The court explained that for an arbitration award to be final and definite “the arbitrators must have decided not only the issue of liability … but also the issue of damages.” This was true here, despite the related case that was on appeal in the New York state court regarding a separate entity. The court also held that the arbitrator did not manifestly disregard the law governing stays. The court explained that a decision to stay the arbitration is a procedural matter governed under the procedural rules of the arbitration, i.e., the Commercial Rules of the AAA, and BHL did not make an argument that the arbitrator applied the wrong procedural rules or did so intentionally. Further, the court held that the petitioners did not demonstrate that the arbitrator acted in manifest disregard of the law on attorneys’ fees. There was no assertion that the arbitrator knew of a governing legal principle and refused to apply it or intentionally ignored it. Last, the court held that post-award statutory interest, costs, and fees were warranted.

Ballinasmalla Holdings Ltd. v. FCStone Merch. Servs., LLC, No. 1:18-cv-12254-PKC, 2019 WL 1569802 (S.D.N.Y. Apr. 11, 2019)