Collateral Estoppel, Finality of Arbitration and Newly Discovered Evidence

• Posted on: Jun 14 2023

By: Jeffrey M. Haber

The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue.¹ Collateral estoppel is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.”² The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in [the] prior action or proceeding.”³

The collateral estoppel doctrine applies to prior arbitration proceedings,⁴ as well as prior determinations by state appellate and federal courts.⁵ 

In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes collateral estoppel as bases for dismissal.⁶ It is also an affirmative defense under the CPLR.⁷ 

In Republic of Kazakhstan v. Chapman, 2023 N.Y. Slip Op. 03211 (1st Dept. June 13, 2023) (here), the Appellate Division, First Department consider the foregoing principles.

The Republic of Kazakhstan arose in the aftermath of an arbitration award by the Swedish Chamber of Commerce in December 2013, under the Energy Charter Treaty, rendered against plaintiff in favor of nonparties Anatolie Stati, Gabriel Stati, Ascom Group, S.A., and Terra Raf Trans Trading Ltd. (together, the “Statis”), plaintiff’s efforts to annul that award in Sweden, the efforts of the Statis to enforce the award in several jurisdictions, and plaintiff’s efforts to defeat enforcement.⁸ 

Plaintiff alleged that the arbitration was the result of fraud during the underlying transaction — the construction of a liquefied petroleum gas plant — and that the award itself was procured by fraud on the tribunal. Plaintiff also alleged that the Statis committed numerous other acts of fraud, which were not addressed in the arbitration award. Defendants were not alleged to have participated in any of these frauds.

Defendants or their predecessors-in-interest held notes issued by a subsidiary company owned by the Statis in Kazakhstan, under which the Statis defaulted on interest payments, and they agreed to a separate agreement while the arbitration was pending to share proceeds from the arbitration in lieu of receiving the principal and interest due on the notes. Plaintiff alleged that defendants did so with knowledge of the Statis’ fraud. Plaintiff further alleged that, following the initial award, defendants funded the Statis’ litigation and assisted them with their litigation strategy. Plaintiff contended that this litigation assistance facilitated the Statis’ fraud. Plaintiff also alleged that defendants communicated with the Statis about government and media relations, that they made false statements to the public through a website and press releases, and that they made or threatened to make false statements to the U.S. Government.

Plaintiff commenced the action, seeking relief for defendants’ alleged conspiracy in, and aiding and abetting of, the Statis’ various fraudulent schemes. In particular, plaintiff alleged claims of aiding and abetting fraud, conspiracy to commit fraud, and unlawful means conspiracy under English law.

Defendants moved to dismiss. The motion court granted the motion, holding, inter alia, that (1) the action was “predicated on an impermissible collateral attack of a confirmed arbitration award,” and (2) the aiding and abetting claim could not stand because “there can be no action for aiding and abetting fraud without an underlying fraud.” 

[Eds. Note: Parties to an arbitration cannot collaterally attack an arbitration award. A direct attack on an arbitral award occurs through a motion to vacate.⁹ By contrast, a collateral attack occurs when a party challenges an arbitral award through some bases other than the vacatur provisions of the FAA or the CPLR.¹⁰ For example, a claim that fraud permeated the arbitration is a collateral attack on an arbitral award,¹¹ as is an attempt to vacate an award through a plenary action.¹² 

In determining whether a challenge to an award is collateral, courts look at the “relationship between the alleged wrongdoing, purported harm, and arbitration award.”¹³ In other words, the courts look at whether the claims would undermine the validity of the underlying arbitral proceedings or frustrate the enforcement of the resulting award.] 

The First Department affirmed.

The Court held that the action was barred by the collateral estoppel doctrine.¹⁴ The Court noted that “Plaintiff ha[d] litigated the fraud alleged herein before Swedish arbitrators, the Swedish (Svea) Court of Appeal, and the District Court for the District of Columbia, which enforced the arbitral award under the Federal Arbitration Act.”¹⁵ As such, plaintiff had a full and fair opportunity to litigate the issue.¹⁶ 

The Court rejected plaintiff’s argument that there was new evidence related to the fraud – the “same fraud claim plaintiff has been pursuing for over a decade, including allegations that the Statis diverted funds, inflated construction costs, used funds that should have been sequestered as collateral, and paid their companies inflated prices for drilling services.”¹⁷

In so holding, the Court explained that “well-settled” rules concerning “new” evidence and arbitral awards “cannot undermine the preclusive effect of the earlier decisions.”¹⁸ 

There is a well-settled rule prohibiting challenges to arbitral awards on the basis of newly discovered evidence … Without such a rule, the arbitration award would be the beginning rather than the end of the controversy and the protracted litigation which arbitration is meant to avoid would be invited.¹⁹ 

The Court also held that “[e]ven if collateral estoppel did not apply to all of plaintiff’s claims, those claims would still warrant dismissal for failure to state a cause of action” under CPLR § 3211(a)(7). “The aiding and abetting fraud and conspiracy to commit fraud claims,” said the Court, “fail[] since the complaint does not include detailed allegations of an underlying fraud.”²⁰ The Court explained that, in particular, the allegations in the complaint did not “support justifiable reliance on the Statis’ misrepresentations of fact or omissions …, as they ‘were undertaken in the course of adversarial proceedings and were fully controverted’ by plaintiff’s own proffered evidence.”²¹ The Court also noted that plaintiff failed to allege that it suffered damages by reason of defendants’ misrepresentations to parties other than arbitrator tribunals or courts.²²

The Court further held that the conspiracy to commit fraud and the aiding and abetting fraud claims failed because the allegations of an agreement among the conspirators and the knowledge of the aider and abettor were conclusory.²³ 

Finally, the Court found that the claim under English law alleging unlawful means conspiracy conflicted with New York law, in that it allowed for a conspiracy claim without the commission of an underlying tort.²⁴ “As the conflict pertains to a conduct-regulating rule, the law of the place where the tort occurs will generally apply because that jurisdiction will almost always have the greatest interest in regulating conduct within its borders.”²⁵ 

[Eds. Note: Under New York law, the court must first determine whether there exists an “actual conflict” between New York and the law of the other jurisdiction.²⁶ An actual conflict exists if the laws in each jurisdiction “provide different substantive rules … that are relevant to the issue at hand and have a significant possible effect on the outcome of the trial.”²⁷ If an “actual conflict” exists, the court must apply the law of the jurisdiction with the greatest interest in the resolution of the dispute.²⁸ If no conflict exists, however, the court applies the law of the forum state.²⁹] 

“Here,” said the Court, “the vast conspiracy alleged concerning unlawful means did not occur in England, save for the Statis’ proceeding seeking to enforce the arbitration award there and defendants’ funding of an appeal in that proceeding.”³⁰ Moreover, said the Court, “insofar as the claim applies, the complaint [did] not identify an unlawful act in England that defendants agreed to commit.”³¹

Footnotes

1. E.g., Parker v. Blauvelt Volunteer Fire Co., 93 N.Y.2d 343, 349 (1999).
2. Buechel v. Bain, 97 N.Y.2d 295, 303 (2001).
3. Ryan v. New York Tel. Co., 62 N.Y.2d 494, 501 (1984).
4. Mahler v. Campagna, 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl., 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys., 138 A.D.2d 575, 577 (2d Dept. 1988).
5. Milone v. City University of New York, 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v. Broome County, 180 A.D.3d 1213 (3d Dept. 2020).
6. See CPLR § 3211(a)(5).
7. See CPLR § 3018(b).
8. See Stati v. Republic of Kazakhstan, 302 F. Supp. 3d 187, 191-193 (D.DC. 2018), aff’d, 773 F. App’x 627 (2d Cir. 2019), cert. denied, 140 S.Ct 381 (2019); see also Republic of Kazakhstan v. Stati, 380 F. Supp 3d 55, 59-65 (D.DC 2019), aff’d, 801 F. App’x 780 (D.C. Cir. 2020).
9. See CPLR § 7511; 9 U.S.C. §§ 9, 10.
10. See, e.g., Kramer-Wilson Co. v. Nat’l Gen. Mgmt. Corp., 213 A.D.3d 557, 558 (1st Dept. 2023); Monterey Sportswear Corp. v. Charma Mills, Inc., 43 A.D.2d 523, 523 (1st Dept. 1973); Oppenheimer & Co. Inc. v. Pitch, 129 A.D.3d 621, 622 (1st Dept. 2015); Pena v. Off. of the Comm’r of Baseball, 125 A.D.3d 461, 461 (1st Dept. 2015); Rutter v. Julien J. Studley, Inc., 244 A.D.2d 239, 239 (1st Dept. 1997).
11. E.g., Clarke-St. John v. City of New York, 164 A.D.3d 743, 745 (2d Dept. 2018).
12. See, e.g., Abrams v. Macy Park Constr. Co., 282 A.D. 922, 923 (1st Dept. 1953) (arbitration award “may not be attacked in a plenary action” because it “is a final determination as to the matters embraced in it, unless it is vacated” under the statute).
13. Tex. Brine Co., L.L.C. v. Am. Arb. Ass’n, Inc., 955 F.3d 482, 488 (5th Cir. 2020).
14. Slip Op. at *1.
15. Id.
16. Id.; See also Parker, 93 N.Y.2d at 349.
17. Id. at *1-*2.
18. Id. at *2.
19. Id. (citations and quotation marks omitted).
20. Id. (citing, CPLR § 3016(b); Habberstad v. Revere Sec. LLC, 183 A.D.3d 532, 533 (1st Dept. 2020); Kovkov v. Law Firm of Dayrel Sewell, PLLC, 182 A.D.3d 418, 419 (1st Dept. 2020)).
21. Id. (citing, Sammy v. Haupel, 170 A.D.3d 1224, 1226-1227 (2d Dept. 2019); Shaffer v. Gilberg, 125 A.D.3d 632, 635 (2d Dept. 2015) (the plaintiff “always maintained that he knew” promissory notes were fake); Zappin v. Comfort, 2022 WL 6241248, at *15 (S.D.N.Y. 2022) (“In the context of an adversarial proceeding, Plaintiff is hard-pressed to assert reliance on claims that he constantly disputed.”)).
22. Id.
23. Id. at *2-*3.
24. Id. at *3 (citations omitted).
25. Id. (citations and internal quotation marks omitted).
26. TBA Glob., LLC v. Proscenium Events, LLC, 114 A.D.3d 571, 572 (1st Dept. 2014).
27. Id. (quoting, Elmaliach v. Bank of China Ltd., 110 A.D.3d 192, 200 (1st Dept. 2013)).
28. Elmaliach, 110 A.D.3d at 201.
29. TBA Glob., 114 A.D.3d at 572.
30. Slip Op. at *3.
31. Id.

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.