Court Finds Performance of an Accounting Within the Scope of the Arbitrator’s Authority

• Posted on: Nov 2 2022

By: Jeffrey M. Haber

It is well settled that the scope of judicial review of an arbitration proceeding is very limited. An arbitration award will be confirmed as long as the arbitrator “offer[s] even a barely colorable justification for the outcome reached”.¹ If any plausible basis exists for the arbitrator’s decision, a court will confirm the award.² 

Because of the significant degree of deference afforded to arbitration awards, vacatur will not be obtained when the bases for such relief are errors of law and fact committed by the arbitrator.³ Only where the award violates a strong public policy, is totally irrational, or exceeds a specifically enumerated limitation on the arbitrator’s power will a court vacate the decision of an arbitrator.⁴  

On November 1, 2022, the Appellate Division, First Department decided Matter of Cavanagh v. Hayes, 2022 N.Y. Slip Op. 06081 (1st Dept. Nov. 1, 2022) (here). Cavanagh involved a special proceeding brought by petitioner, pursuant to CPLR § 7511(b)(1)(iii), to vacate an arbitration award that petitioner claimed was so imperfectly executed that a final and definitive award on the subject matter was not made.

[Ed. Note: the background discussion below comes from the parties briefing on appeal.]

The dispute revolved around the ownership of F&J Realty Inc. (“F&J Realty” or the “Company”). The parties each owned fifty percent (50%) of the Company’s stock. F&J Realty’s only asset was property located in New York City.

On November 7, 2010, the parties entered into a shareholder agreement (the “Agreement”) with regard to the operation of F&J Realty. The Agreement recognized that from time-to-time, it would be necessary for the parties to make capital improvements to the Property. In Section 4 of the Agreement, the parties agreed that any contributions made would be repaid before any distributions were made to the shareholders. 

On May 26, 2020, petitioner commenced a plenary action against respondents, alleging, among other things, an improper partition of F&J Realty, and seeking an accounting of the Company. Respondents served an answer with counterclaims, alleging, among other things, that petitioner breached the Agreement by not contributing working capital to F&J Realty.

Thereafter, respondent filed a motion to compel petitioner to make working capital contributions to F&J Realty as required under the Agreement. Petitioner cross-moved to compel arbitration pursuant to the Agreement. The motion court denied petitioner’s motion and ordered the parties to arbitrate.

The demand for arbitration identified the following areas of dispute: 1) whether an accounting of F&J Realty should be awarded; 2) whether petitioner should contribute his proportionate share of the carrying costs for the Property pursuant to the Agreement; and 3) whether petitioner should contribute his proportionate share of working capital. Respondent sought $300,000.00 as reimbursement of his loans and/or contributions of working capital and/or carrying costs to F&J Realty.

Prior to the arbitration, respondent submitted, among other documents, the report of Patrick A. Wrenn CPA, and a chart he prepared detailing all deposits made to F&J Realty’s bank account during the period December 7, 2018, through September 3, 2021. Based on his review of the bank statements and deposited checks, Wrenn found that respondent had deposited a substantial sum of money into F&J Realty and that petitioner had not deposited any funds during the period in question.

The arbitrator held a hearing in September 2021, during which all proofs were submitted, and testimony was taken of the parties and respondent’s expert witness, Patrick A. Wrenn, CPA. Petitioner did not proffer an expert for testimony at the hearing, and did not offer any documents in rebuttal. 

After having considered all evidence submitted, testimony taken, and post-hearing briefs submitted, the arbitrator issued a written opinion, whereby he awarded respondent $103,272.86, which was to be paid upon the dissolution of F&J Realty. In so ruling, the arbitrator determined that respondent had made all necessary contributions to F&J Realty in order to keep it operating and that, pursuant to Section 4 of the Agreement, he was entitled to be paid back those contributions once F&J Realty dissolved. 

Petitioner sought to vacate the award, claiming that, among other things, the arbitrator exceeded his authority by disregarding the issues raised in the demand for arbitration and by basing his award on issues not that were not raised therein. The motion court confirmed the award.

The motion court held that award was not irrational, imperfect or beyond the scope of the arbitrator’s authority. The motion court found that the arbitrator did what was requested in the demand for arbitration – i.e., that he conduct an accounting by resolving the parties’ competing contentions about their net liabilities with respect to the Company. By doing so, said the motion court, the arbitrator found, based upon the evidence presented and the credibility of the parties, petitioner owed respondent $103,272.86, plus interest, with payment to be made upon dissolution of the corporation.

On appeal, the First Department affirmed.

The Court held that the motion court “properly confirmed the arbitration award”, finding that “it [was] not irrational or beyond the scope of the arbitrator’s authority”.⁵ The Court rejected petitioner’s argument that the arbitrator exceeded his authority by performing an accounting of the Company as such was necessary to satisfy the requirement in Section 4 of the Agreement that contributions were to be repaid before distributions: “Contrary to petitioner’s argument, the arbitrator conducted an accounting in resolving the parties’ dispute over their respective interest in respondent F & J Realty, Inc. (F & J Realty). Paragraph 4 of the shareholders agreement provides that contributions to F & J Realty made by either shareholder will be repaid before any distributions are made to the shareholders.”⁶ 

The Court also held that the award was not irrational as it was “[b]ased on the shareholder agreement and an assessment of the evidence presented, including the testimony of Patrick A. Wren, a Certified Public Accountant, who reviewed the bank statements, copies of checks, and tax returns of F & J Realty, from December 7, 2018 through September 3, 2021.”⁷ 

Takeaway

Vacating an arbitration award is extremely difficult. As long as the arbitrator provides “even a barely colorable justification for the outcome reached,” the award will be confirmed.⁸ The award in Cavanagh demonstrates this point. It was based upon a review of bank statements, checks, tax returns, an expert report and post-hearing briefs, as well as testimony under oath by the parties and the expert witness. The findings and the award of the arbitrator were, therefore, supported by the record and consistent with the demand for arbitration.

Footnotes

1. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 479 (2006) (quoting, Matter of Andros Cia. Maritima, S.A. (Marc Rich & Co., A.G.), 579 F.2.d 691, 704 (2d Cir. 1978)).
2. Brown & Williamson Tobacco Corp. v. Chesley, 7 A.D.3d 368, 372 (1st Dept. 2004).
3. Id.
4. Matter of McIver-Morgan, Inc. v. Dal Piaz, 108 A.D.3d 47 (1st Dept. 2013).
5. Slip Op. at *1 (citing, Elul Diamonds Co. Ltd. v. Z Kor Diamonds, Inc., 50 A.D.3d 293 (1st Dept. 2008); and McIver-Morgan, 108 A.D.3d at 55).
6. Id.
7. Id.
8. Wien, 6 N.Y.3d at 479.

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.