Arbitration Decided By Dispositive Motion Held Not To Violate CPLR 7511(b)

• Posted on: Jun 13 2022

By: Jeffrey M. Haber

Litigation can be lengthy, costly and potentially damaging to the financial viability of a business and the financial security of an individual. Often, the parties can resolve their disputes without going to court by using alternative methods such as arbitration and mediation.  Alternative Dispute Resolution (“ADR”) is an area of law devoted to settling disputes without using the court system. ADR is often a shorter and less costly process by which businesses and individuals can confidentially resolve their disputes.

Arbitration is similar to a trial without the formalities. It is an adversarial proceeding where the parties can call witnesses and present evidence to a neutral arbitrator or panel of arbitrators. The rules of discovery and evidence are relaxed to make it a shorter and more cost-efficient process.  Typically, an attorney or retired judge, who works for a private ADR firm, conducts the proceeding. Arbitration can be binding, in which the arbitrator renders a decision that can be enforced by the courts, or non-binding, in which the arbitrator renders an advisory opinion that the parties can accept or reject.

Since arbitration is an adversarial proceeding, does the arbitrator have to hear testimony from the parties and witnesses? Can the arbitrator decide the dispute on the papers, in a summary judgment fashion? Does the failure to conduct an evidentiary hearing with witnesses negate the process such that the award issued by the arbitrator is subject to vacatur? In Xiangyang Luo v. Tessler, 2022 N.Y. Slip Op. 31684(U) (Sup. Ct., N.Y. County May 23, 2022) (here), the motion court answered the foregoing questions in the negative.

The Governing Principles of Law

The grounds for vacating are limited.¹ The reason for such a limited review is “to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation.”² 

In New York, CPLR § 7511(b) sets forth the statutory grounds for vacating an arbitration award. Under that section, a court may vacate an award if the rights of the movant were prejudiced by: (1) corruption, fraud or misconduct in procuring the award; (2) the partiality of the arbitrator; (3) the arbitrator exceeding or imperfectly executing his/her power; or (4) the arbitrator failing to follow the procedure of Article 75.

With respect to CPLR § 7511(b)(3) – that is, whether the arbitrator exceeded or imperfectly executed his/her power – an award will not be overturned unless it violates a strong public policy, is totally irrational or exceeds a specifically enumerated limitation on the arbitrator’s power.³ 

In general, the grounds for vacating an arbitration award are narrowly construed.⁴ It will be upheld even when the arbitrator makes errors of law and/or fact.⁵ As noted by the Court of Appeals, the courts are not to assume the role of overseer of the arbitration and mold an award to its sense of justice.⁶ 

An arbitration award violates strong public policy “only where [the] court can conclude, without engaging in any extended fact-finding or legal analysis, that a law prohibits the particular matters to be decided by arbitration, or where the award itself violates a well-defined constitutional, statutory, or common law of th[e] state.”⁷ Vacatur on public policy grounds is exercised sparingly⁸ in order to preserve the parties’ choice of a nonjudicial forum to the greatest extent possible.⁹

Xiangyang Luo v. Tessler

Xiangyang involved a loan agreement. Plaintiffs maintained that defendant caused Big Apple Capital Lenders, LLC (“Big Apple”), an entity in which plaintiffs were members, to violate the terms of the agreement. Plaintiffs sought repayment of two loans made to defendants, loans that were allegedly made pursuant to the EB-5 program offered by U.S. Customs and Immigration Service. Under this program, projects can secure investment from foreign investors. Plaintiffs argued that the borrowers, all entities controlled by defendant, received $6 million and that none of the principal or interest had been repaid. 

In prior motion practice, the Court found that the dispute should be decided by arbitration pursuant to the terms of the parties’ agreement. Following that arbitration, plaintiffs moved to confirm the arbitrator’s award, which awarded plaintiffs over $7 million in relation to two loans from certain defendants and found that Tessler Developments, LLC (as the guarantor) was liable “in the amount of $8 million to the extent the loan is not paid by [defendants]”. 

In issuing the award, the arbitrator concluded that the books and records of Big Apple and Big Apple Capital Management LLC had to be immediately turned over. The arbitrator also found that the contractual interest rate of 4.5% applied rather than the 1.5% rate as argued by defendants.

The arbitrator issued the award – an initial 38-page partial award, followed by a final award – after hearing oral argument on a dispositive motion. In the initial award, the arbitrator concluded that the first loan of $4 million matured on June 30, 2019, and the second loan of $2 million matured on June 30, 2021. The arbitrator also found that the Manager (defendant Big Apple Capital Management LLC) was subject to removal for the failure to act on behalf of the lender’s members, including the failure to prosecute the loan default. The final award incorporated the initial award and focused on the guaranty by Tessler Developments LLC. 

Plaintiffs moved to confirm the award. They insisted the award was rational and the result of a careful analysis of the loan documents and the facts presented. They further argued that a hearing was not required, and that the arbitrator was entitled to make a decision on the papers. They noted that the parties reached an agreement whereby plaintiffs were to seek dispositive relief, there would be oral argument on that motion and the hearing on the remaining claims would be adjourned “sine die”. 

Defendants cross-moved to vacate the award. They argued that the arbitrator exhibited manifest disregard for the law and exceeded his powers. [Ed. Note: this Blog examined manifest disregard of the law as a basis for vacatur here and here.] Defendants complained that the only thing that transpired before the arbitrator was a pre-evidentiary hearing followed by the dispositive motion. They insisted that there should have been a full evidentiary hearing to explore disputed factual issues, including whether the interest rate on the loans should be 1.5% or 4.5%. 

Finally, defendants questioned how the arbitrator could reach the conclusions he did without having witnesses and evidence presented. They claimed that the evidence presented raised factual disputes that could not be decided based on papers alone.

The Motion Court’s Decision

The Court granted the motion to confirm the award and denied the cross-motion to vacate it. The Court held that the arbitrator’s award was neither irrational nor against public policy.¹⁰ The Court rejected defendants’ argument that the absence of a formal hearing, complete with witnesses, was a bar to confirmation of the award.¹¹ 

In doing so, the Court commented on the use of dispositive motions as the means to resolve disputes in arbitration: “The Court recognizes that, ordinarily, it is preferable to conduct a hearing and hear from witnesses in an arbitration. But the failure to do so here is not a violation of defendants’ due process rights.”¹² The Court explained that the issue before the arbitrator was contract interpretation – an issue that is often decided by the courts and arbitrators “without the need for witness testimony.”¹³  

[T]his is a case about interpreting contracts for loans, loans that defendants do not deny taking out nor do they claim they paid them back. Rather the dispute appears to be about the maturity dates and the applicable interest rates. The Court is unable to find it was wholly irrational for the arbitrator to make findings, in the context of a dispositive motion, about the provisions of a contract. Such conclusions are often made by arbitrators and courts without the need for witness testimony.¹⁴

In conclusion, the Court found that the two awards issued by the arbitrator (i.e., the partial awards and final award) were “entirely rational.”¹⁵ “Defendants’ dissatisfaction with the award,” said the Court, was “not a basis … to nullify it.”¹⁶

Takeaway

Arbitrators have “great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.”¹⁷ Thus, an arbitrator may proceed “with only a summary hearing and with restricted inquiry into factual issues.”¹⁸ 

Today, the major ADR organizations include within their rules, the right to seek summary disposition of the dispute. For example, Rule 33 of the AAA Commercial Arbitration Rules (here) permits dispositive motions, but only if there is a likelihood of success on the motion: “The arbitrator may allow the filing of and make rulings upon a dispositive motion only if the arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case.” Rule 18 of the JAMS Comprehensive Rules (here) provides that the arbitrator “may” permit a party to file a motion for summary disposition, “either by agreement of all interested Parties or at the request of one Party, provided other interested Parties have reasonable notice to respond to the request.” Like the AAA Rules, “The [r]equest may be granted only if the Arbitrator determines that the requesting Party has shown that the proposed motion is likely to succeed and dispose of or narrow the issues in the case”.

Dispositive motions have a place in arbitration, despite the increased cost that they may impose upon the parties. They can avoid the time and expense of arbitrating a case where a claim is clearly barred as a matter of law, such as by res judicata or collateral estoppel, waiver, statute of limitations, or lack of standing. Dispositive motions can also narrow the issues for an evidentiary hearing, which can be a benefit in a complex proceeding with multiple claims and parties. And dispositive motions can promote settlement by clarifying and/or narrowing the issues in dispute. However, dispositive motions should not be used as a substitute for an evidentiary hearing, especially on matters that are not clearly barred as a matter of law.

As the Court in Xiangyang noted, although evidentiary hearings are preferable, arbitrators are not compelled to conduct evidentiary hearings.¹⁹ Thus, the focus of the courts is not on whether the award was issued after a full evidentiary hearing or a dispositive motion, but whether the award was issued in violation of CPLR § 7511(b). In Xiangyang, the motion court held that the award was rational and consistent with the powers arbitrators and courts are often asked to exercise when interpreting contractual provisions.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

1. Frankel v. Sardis, 76 A.D.3d 136, 139-40 (1st Dept. 2010).
2. Dirussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir.1997) (citation omitted).
3. Matter of Silverman (Benmor Coats), 61 N.Y.2d 299 (1984); Matter of Kowaleski (New York State Dept. of Correctional Servs.), 16 N.Y.3d 85, 90 (2010).
4. Frankel, 76 A.D.3d at 139-140.
5. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 479-480 (2006) (citing, Matter of Sprinzen (Nomberg), 46 N.Y.2d 623, 629 (1979)).
6. Wein & Malkin, 6 N.Y.3d at 480.
7. Matter of Reddy v. Schaffer, 123 A.D.3d 935, 937 (2d Dept. 2014).
8. Matter of Neirs-Folkes, Inc. (Drake Ins. Co. of N.Y.), 75 A.D.2d 787 (1st Dept. 1980).
9. Sprinzen, 46 N.Y.2d at 630.
10. Slip Op. at *4.
11. Id. (citing, Brooks v. BDO Seidman, LLP, 94 A.D.3d 528, 528-29 (1st Dept. 2012) (“Although the panel made a determination of the proceeding on respondent’s motion for summary judgment, this was not improper since arbitrators are not compelled to conduct hearings, and may decide a case on summary judgment”)).
12. Id. at *5.
13. Id.
14. Id. (citing, CPLR § 3213 (motion for summary judgment in lieu of complaint)). 
15. Id.
16. Id.
17. Supreme Oil Co., Inc. v. Abondolo, 568 F. Supp. 2d 401, 408 (S.D.N.Y. 2008).
18. AT & T Corp. v. Tyco Telcoms (U.S.) Inc., 255 F. Supp. 2d 294, 303 (S.D.N.Y.2003); Areca, Inc. v. Oppenheimer & Co., 960 F. Supp. 52, 55 (S.D.N.Y. 1997).