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All Things Arbitration – CPLR §§ 7503(b), 7510 and 7511

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  • Posted on: Dec 28 2020

Arbitration is a preferred means of dispute resolution. In fact, arbitration is the policy under the Federal Arbitration Act (“FAA”) and the Civil Practice Law and Rules (“CPLR”). For this reason, (1) when parties to a contract have clearly and unambiguously agreed to arbitrate their disputes, the courts will enforce that agreement, as they would any other agreement, to give effect to the parties’ intention; (2) the courts will not substitute their judgment for that of the arbitrator(s); and (3) the courts will confirm an arbitration award, unless a movant can demonstrate that one of the grounds for vacatur set forth in the FAA or CPLR exist – a task that is often difficult to do. 

Today, we examine two cases arising under Article 75 of the CPLR involving the foregoing principles. The first action, Matter of Gibson, Dunn & Crutcher LLP v. Johnson, N.Y. 2020 Slip Op. 34212(U) (Sup. Ct., N.Y. County Dec. 17, 2020) (here), involved a petition to confirm an arbitration award, pursuant to CPLR §§ 7510 and 7514. The second action, Euro Pac. Capital, Inc. v. Fat Brands, Inc., 2020 N.Y. Slip Op. 34217(U) (Sup. Ct., N.Y. County Dec. 16, 2020) (here), involved a motion to stay arbitration under CPLR §7503(b). 

Matter of Gibson, Dunn & Crutcher LLP v. Johnson

Gibson Dunn sought an order, pursuant to CPLR §§ 7510 and 7514, to (1) confirm an award that was issued in December 2019 following an arbitration between the parties (the “Award”), and (2) enter a money judgment in Gibson Dunn’s favor against respondent, Sarah Johnson, based on the Award. In the Award, the Arbitrator held that Gibson Dunn was entitled to quantum meruit damages against Johnson in the amount of $1,873,886.24 for attorney’s fees, plus prejudgment interest based on legal services that Gibson Dunn had rendered to Johnson when she was a client. Johnson opposed the petition and moved for an order, pursuant to CPLR § 7511, dismissing the petition and vacating the Award or, in the alternative, substantially reducing the amount awarded. 

The Court found that Gibson Dunn had presented everything necessary to support the relief sought – i.e., an order confirming the Award. In addition, the Court held that the Award was “thorough and extremely well-reasoned” sufficient “to support [the Arbitrator’s] conclusion that Gibson Dunn [was] entitled to quantum meruit damages against Ms. Johnson in the amount of $1,873,886.24 for attorney’s fees plus prejudgment interest based on legal services rendered.” Slip Op. at *2.

“[N]evertheless”, said the Court, Johnson sought “to vacate the Award pursuant to CPLR 7511(b)(1)(iii), claiming that the Arbitrator ‘exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  Id. (citation omitted). Johnson argued that, “in awarding Gibson [Dunn] fees on a theory of quantum meruit, the Arbitrator violated strong New York public policy standing for the proposition that attorneys should not profit from their misconduct, especially a breach of fiduciary duty to their own clients.” Id. (internal quotation marks omitted).

In essence, Johnson argued that because she learned after she discharged Gibson Dunn that the firm allegedly engaged in misconduct, Gibson Dunn was not entitled to the fees it sought because public policy prohibits a lawyer from profiting from their own misconduct:

Ms. Johnson’s counsel begins by correctly noting that the law provides that an attorney discharged for “cause” based on misconduct or improprieties is not entitled to fees. However, counsel then acknowledges that Ms. Johnson did not discharge Gibson Dunn for cause. Rather, Ms. Johnson learned only after the attorney-client relationship had ended that, allegedly, “Gibson [Dunn had] engaged in misconduct that would have justified Ms. Johnson discharging [the firm] for cause.” The purported improprieties included alleged misrepresentations about the quality of the associates working on Ms. Johnson’s case and “write-downs” or fee reductions allegedly undisclosed to hide low quality work. Counsel contends the Arbitrator wrongly ignored “indisputable proof” of improprieties, as evidenced by the Arbitrator’s statement, disguised as a credibility determination, that he was “not persuaded that the relevant and credible evidence in the record plausibly establishes that Mr. Snyder [from Gibson Dunn had] ‘lied or knowingly misled’ Ms. Johnson” in connection with these issues. Counsel then points to the Arbitrator’s statement that he had not found any case law supporting the claim that a fee reduction may constitute an impropriety. Counsel attacks this statement, arguing that Gibson Dunn “cannot escape the consequences of its conduct simply because the Arbitration presented an issue of first impression.”

Id. (citation to record omitted).

The Court held that Johnson’s “argument [was] strained.” Id. at *3. The Court found that the public policy ground for vacating the arbitration award did not present an “explicit conflict” with settled law or strong and well-defined policy considerations. Id. at *4 (citing Matter of City of Oswego (Oswego City Firefighters Ass’n, Local 2707), 21 N.Y.3d 880, 882 (2013). The Court explained that “[n]ot only did Ms. Johnson withdraw her claim of malpractice, but the Arbitrator reviewed and entirely rejected on the merits Ms. Johnson’s claim of ‘misconduct,’ finding instead, after a thorough analysis of the evidence, that Gibson Dunn had performed its work with ‘utmost good faith’ and that a ‘very substantial amount of work’ in a ‘complex and challenging’ litigation had been provided on Ms. Johnson’s behalf.” Id. (citation to Award omitted). 

The Court further explained that the Arbitrator “conclusively and directly rejected Ms. Johnson’s claim that Gibson Dunn’s efforts to reduce Ms. Johnson’s bills while the litigation was pending somehow constituted ‘unethical conduct,’ concluding the argument was ‘wholly without merit.’” Id. (citation to Award omitted). 

As a result, the Court denied Johnson’s motion to vacate the Award.

The Court also declined to reduce the amount of the fees awarded by the Arbitrator. Johnson argued that a $1 million reduction constituted “reasonable compensation” within the meaning of In re Freeman’s Estate, 34 N.Y.2d 1, 9 (1974), and its progeny. Under Freeman’s Estate, in considering the reasonableness of a fee, the courts are to consider the following factors: (1) the time and labor required; (2) the difficulty of the questions involved, and the skill required to handle the problems presented; (3) the lawyer’s experience, ability and reputation; (4) the amount involved and benefit resulting to the client from the services; (5) the customary fee charged by the Bar for similar services; (6) the contingency or certainty of compensation; (7) the results obtained; and (8) the responsibility involved. The Court rejected Johnson’s contention that Gibson Dunn’s fees should have been reduced under Freeman’s Estate. Id. at *4.

“In sum,” said the Court, “Gibson Dunn ha[d] established its right to confirmation of the Final Award, and the motion by Ms. Johnson to vacate the Award or substantially reduce the amount of the Award is without merit.” Id. at *5. Accordingly, the Court confirmed the Award and denied the motion to vacate, concluding that it had “‘no legal basis to ‘substitute its legal conclusions or factual findings for that of the arbitrat[or]’ based either on Ms. Johnson’s allegations of misconduct or the amounts the Arbitrator concluded were appropriately billed for the substantial work performed by Gibson Dunn, even if the Arbitrator had made an error of law, which he did not.” Id. at *4-*5 (citing Matter of Falzone (New York Cent. Mut. Fire Ins. Co.), 15 N.Y.3d 530, 534–35 (2010).

Euro Pac. Capital, Inc. v. Fat Brands, Inc.

Petitioners moved for an order, pursuant to CPLR § 7503(b), to stay the arbitration commenced by respondent against the petitioners before the Financial Industry Regulatory Authority, Inc. (“FINRA”) (the “FINRA Arbitration”). Petitioners based their motion on an agreement that required all disputes between the parties to be heard “only in the state or federal courts located in the City of New York, State of New York.”

On April 24, 2018, FAT Brands Inc. (“FAT Brands”), its affiliates, and Alliance Global Partners (“AGP”, together with Fat Brands, the “AGP Agreement Parties”) entered into a debt private placement agreement pursuant to which AGP agreed to serve as “the co-placement agent and investment banker working with Dalmore Group, LLC (“Dalmore”) in regard to an Investment Banking/Advisory Agreement executed on April 1, 2018 (the “Services”) for [FAT Brands], on a best effort basis, in connection with the offer and placement (the “Offering”) by [FAT Brands] of up $100 million of debt securities, private notes, loans or working capital financing of [FAT Brands] (collectively, the “Securities”).” 

The AGP Agreement contained a jurisdiction and governing law provision, pursuant to which “[a]ny disputes that [arose] under [the] Agreement, even after the termination of [the] Agreement, [would] be heard only in the state or federal courts located in the City of New York, State of New York.” 

Unlike the AGP Agreement, the Investment Banking/Advisory Agreement (or the “Dalmore Agreement”) between FAT Brands and Dalmore, a FINRA registered broker dealer (FAT Brands and Dalmore, collectively, the “Dalmore Agreement Parties”), which predated the AGP Agreement, contained an arbitration provision.

On or about October 16, 2020, FAT Brands filed a statement of claim before FINRA against petitioners Adam Kinzer and AGP. In pursuing arbitration against AGP and Kinzer, FAT Brands claimed that the AGP Agreement was modified by two emails: (1) dated August 8, 2018, and (2) dated December 8, 2018. Neither email contained a modification of the provision of the ADP Agreement with respect to the parties’ agreement to litigate disputes arising under the Agreement. 

Nevertheless, FAT Brands argued that because the Dalmore Agreement Parties agreed to arbitrate, the AGP Agreement Parties also agreed to arbitrate, even though the AGP Agreement expressly provided to the contrary. FAT Brands also argued that FINRA Rule 12200 – which provides for arbitration of disputes between FINRA members and its customers, at the customer’s request, arising in connection with the members’ business activities, unless the customer is a broker or dealer – required arbitration of the parties’ dispute. The Court rejected both arguments.

The Court found that the AGP Agreement did not provide for arbitration. Slip Op. at *6. Rather, the AGP Agreement “plainly provide[d] for New York state or federal courts as the exclusive forum for any disputes under that agreement, including ‘even after termination of [that] Agreement.’” Id. The Court also found that even if it were to credit respondent’s argument that the Dalmore Agreement controlled, which it did not because nothing in the August and December emails addressed arbitration in any way, arbitration would still be inappropriate for AGP and Kinzer as both were “indisputably not signatories to the Dalmore Agreement and, therefore, [could not] be bound to its terms.” Id. 

The Court further found respondent’s “reliance on FINRA Rule 12200” to be “unavailing.” Id. “[A]rbitration pursuant to FINRA Rule 12220 is not mandatory where there is a written agreement between the parties that provides to the contrary,” said the Court. Id. (citing New York Bay Capital, LLC v. Cobalt Holdings, Inc., 456 F. Supp. 3d 564 (S.D.N.Y. 2020), citing Golden, Sachs & Co. v. Golden Empire Schools Financing Auth., 764 F.3d 210 (2d Cir. 2014)). Rather, concluded the Court, “where there is an unambiguous forum selection clause such as the one in the AGP Agreement here, the ‘forum-selection clause displaces the agreement to arbitrate in FINRA Rule 12200.’” Id. (quoting New York Bay Capital, 456 F. Supp. 3d at 571).

Accordingly, the Court granted the motion to stay the arbitration.

Takeaway

Under CPLR § 7511(b)(1)(iii), an arbitration award will not be confirmed when the arbitrator exceeded his or her authority under the arbitration agreement. Thus, the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. The same is true with regard to arbitration mandated by statute. Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator. 

In addition, an award will be vacated when the decision is irrational or is violative of a public policy. In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law. 

We have examined cases in which a party resisting confirmation of an arbitral award claimed the arbitrator(s) exceeded their authority or the award was violative of public policy. As we have noted in many posts, it is very difficult to vacate an award on those grounds (as it is on the other grounds for vacatur set forth in the FAA and Article 75 of the CPLR). Gibson Dunn is another example of a respondent failing to convince a court that the arbitrator exceeded their authority.

We have also examined cases in which a party, who was not a signatory to an arbitration agreement, sought to litigate his/her rights in court rather than in an arbitral forum (e.g., here). Under CPLR § 7503(b), such non-signatories were entitled to a stay of arbitration because there was no valid agreement to arbitrate. CPLR § 7503(b). After all, because arbitration is a “creature of contract” (Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC, 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, as in Euro Pac. Capital, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)). 

Euro Pac. Capital is also notable for its holding that a forum selection clause requiring any actions, disputes and proceedings to be brought in court supersedes an earlier agreement to arbitrate, even if that agreement is found in FINRA Rule 12200. FINRA Rule 12200 is a contract and must be interpreted in accordance with principles of contract interpretation. As such, where an agreement supersedes an earlier agreement to arbitrate, such as Rule 12200, the later agreement must be enforced according to its terms so long as it is clear and unambiguous on its face. In Euro Pac. Capital, the Court found such clarity – that is, the clear language of the forum-selection clause demonstrated that the parties intended to resolve their disputes through litigation, rather than FINRA arbitration.

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