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Overturning An Arbitral Award Is Not Easy

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  • Posted on: Feb 3 2017

Arbitration is an alternative dispute resolution mechanism that enables parties to resolve disputes without going to court. 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.  An attorney or retired judge, who works for a private ADR firm, conducts the proceeding.  Often, the parties select the arbitrator or panel of arbitrators. 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.

In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable. Westinghouse v. New York City Tr. Auth., 82 N.Y.2d 47, 54 (1993) (“Considerable authority thus supports the validity and enforceability of alternative dispute resolution mechanisms.”). Like many jurisdictions, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” Id.

Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. Tullett Prebon v. BGC Fin., 111 A.D.3d 480, 482 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”). In fact, judicial review of arbitration awards is severely limited in New York. Id.  As this Blog previously noted, setting aside arbitral awards are difficult.

Grounds for The Review of Arbitral Awards

Upon receiving a motion to confirm an arbitration award, New York courts must confirm the award unless the movant satisfies one of the statutory reasons for modification or vacatur provided by New York Civil Practice Law and Rules Section 7511. See CPLR 7510; see also Bernstein Family Ltd. P’ship v. Sovereign Partners, 66 A.D.3d 1, 7-8 (1st Dept. 2009) (confirmation is mandatory in the absence of grounds for vacatur). The grounds for modification or vacatur under CPLR 7511 are limited.  These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR. CPLR 7511(b)(1)(i)-(iv).  Only when the record demonstrates one of the foregoing will a New York court vacate or modify an award under the CPLR. (This Blog previously wrote about the importance of a record in the context of vacating an award, here and here.)

Corruption, Fraud, Or Misconduct in Procuring the Award:

Under CPLR 7511(b)(1)(i), an arbitral award may be vacated or modified when the movant can demonstrate “corruption, fraud, or misconduct in procuring the award.” The party challenging an award on these grounds must establish through clear and convincing evidence that the fraud or corruption was material to the proceeding such that the challenging party could not have discovered the fraud or corruption through the exercise of diligence. See, e.g., Matter of Klikocki (New York Dept. of Corr., Mount McGregor), 216 A.D.2d 808, 809 (3d Dept. 1995).

Vacatur is also warranted under CPLR 7511(b)(1)(i) where, for example, the arbitrator or parties engage in misconduct. For example, vacatur is appropriate when the arbitrator refuses to hear material evidence (Goldfinger v. Lisker, 68 N.Y.2d 225, 231 (1986) (“Arbitrators must afford the parties the opportunity to present evidence”)) or conducts an ex parte communication with a party that was substantial and material to the arbitrator’s decision. Id. at 227.

Partiality of the Arbitrator:

CPLR 7511(b)(1)(ii) permits vacatur or modification when the arbitrator was bias or maintained an undisclosed personal relationship to one of the parties, resulting in a prejudiced decision. J.P. Stevens & Co. v. Rytex, 34 N.Y.2d 123, 129-130 (1974) (“all arbitrators before entering upon their duties should make known any relationship direct or indirect that they have with any party to the arbitration, and disclose all facts known to them which might indicate any interest or create a presumption of bias”). The mere inference of impartiality, however, is insufficient to warrant interference with the arbitrator’s award; the evidence must be stronger; it must be clear and convincing. Matter of Provenzano, 28 A.D.2d 528 (1st Dept. 1967), aff’d, J.D.H. Rest. Inc. v. New York State Liquor Auth., 21 N.Y.2d 846 (1968).

The Arbitrator Exceeded His Power or Imperfectly Executed It:

Under CPLR 7511(b)(1)(iii), a movant can vacate or modify an arbitral award when the arbitrator exceeded his or her authority under the arbitration agreement. To succeed under CPLR 7511(b)(1)(iii), the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. New York City Tr. Auth. v. Transport Workers’ Union of Am. Local 100, AFL-CIO, 6 N.Y.3d 332 (2005). The same is true with regard to arbitration mandated by statute.  Vacatur will be warranted where the arbitrator fails to follow the standards and requirements of the subject statute. Forest River, Inc. v. Stewart, 34 A.D.3d 474, 474 (2d Dept. 2006). 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. Rochester City Sch. Dist. v. Rochester Teachers Ass’n, 41 N.Y.2d 578, 583 (1977).

In addition to exceeding one’s authority, an award will be vacated when the decision is irrational or is violative of a public policy. See Board of Education of the Dover Union Free Sch. Dist. v. Dover-Wingdale Teachers Ass’n, 61 N.Y.2d 913 (1984); Matter of City of Johnstown, 99 N.Y.2d 273, 278 (2002). In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law. Stated differently, “a court must stay arbitration where it can conclude…that the granting of any relief would violate public policy.” Matter of New York City Tr. Auth., 6 N.Y.3d at 284 (“where a court examines an arbitration agreement or an award on its face and concludes that the granting of any relief would violate public policy without extensive fact-finding or legal analysis, courts may then intervene and stay arbitration”).

Failure to Follow the Procedures of Article 75:

Finally, vacatur or modification is permitted under CPLR 7511(b)(1)(iv) when the arbitrator fails to follow the procedures set forth by Article 75 of the CPLR. Article 75 affords the parties due process rights, such as: the right to be heard, the right to cross-examine witnesses, and the right to present evidence. Article 75 of the CPLR does not bind an arbitrator to the rules of evidence because arbitrators are not bound by substantive rules of law. There must be some clear, egregious, and evident prejudice to the arbitration participant in vacating under CPLR 7511(b)(iv). Mere errors of law or fact do not suffice. Kalyanaram v. New York Inst. of Tech., 79 A.D.3d 418, 419-420 (1st Dept. 2010) (“Challenges to the sufficiency or adequacy of the evidence to support an award are not grounds for vacating the award.”).

Error of Law by Arbitrator Insufficient Basis to Vacate Award: Matter of Yarmak v. Pension Financial Services Inc.

On January 24, 2017, the Appellate Division, First Department issued a decision in Matter of Yarmak v. Penson Financial Services Inc., 2017 NY Slip Op. 00433, in which the Court held that mere errors of law are insufficient grounds to vacate an arbitral award.

Background Facts:

The petitioner, Sarah J. Yarmak (“Yarmak”), then a customer of ChoiceTrade, a securities brokerage firm, claimed that ChoiceTrade and the respondent, Penson Financial Services, Inc. (“Penson”), an independent execution, clearing, settlement and technology firm, engaged in a number of activities that caused her financial harm, including: unauthorized withdrawals from her brokerage account; churning; failure to provide the best execution price, failure to supervise, and the failure to disclose material information.

On October 28, 2011, six years after the events that gave rise to the dispute, Yarmak initiated an arbitration against ChoiceTrade, Penson, and others. Pension filed motions to dismiss on February 14 and 15, 2012. Following extensive briefing and oral argument on the motions, the arbitration panel unanimously granted the motions. Yarmak filed a motion for reconsideration, and the Panel reversed itself with respect to ChoiceTrade (finding that Yarmak’s claims against ChoiceTrade were not barred by the statute of limitations), but the Panel “decided to uphold the Dismissal of Claims against Penson Financial Services, a Texas entity . . . based on a Texas Statute of Limitations.”

On January 11, 2013, while the dismissal motions were pending, Penson filed for bankruptcy protection and, in accordance with that filing, all claims against Penson were automatically stayed. The Panel did not know about the bankruptcy filing or the automatic stay at the time it issued its February 1, 2013 order or when it issued its March 28, 2013 order. Later, when the Panel learned about Penson’s bankruptcy filing, it withdrew its ruling dismissing Penson.

Yarmak continued the arbitration to final hearing against the other respondents (including ChoiceTrade). Following four days of evidentiary hearings in August 2013, and another three in March 2014, the panel issued a final order dismissing the claims against all remaining respondents on the merits. It also granted ChoiceTrade’s counterclaim against Yarmak for $348,885.62 plus costs and attorneys’ fees.

On December 11, 2014, upon Penson’s application, the United States Bankruptcy Court issued an order retroactively annulling the automatic stay, thereby deeming effective all FINRA orders, including the Panel’s February 1, 2013 order dismissing Penson, and its March 28, 2013 order reaffirming the dismissal of Penson on statute of limitations grounds.

On January 2, 2015, Yarmak filed another motion for reconsideration with the FINRA panel and finally, on February 27, 2015, “[a]fter considering the pleadings, the testimony and evidence presented at the hearing, and post-hearing submissions,” the panel denied Yarmak’s claims in their entirety and reaffirmed Penson’s dismissal from the case.

On May 27, 2015, Yarmak filed a petition to vacate the arbitration Award.  In her petition, Yarmak argued that vacatur was appropriate because the panel: exceeded its authority by ruling on the statute of limitations issue before the conclusion of her case in chief; exceeded its authority by applying the Texas statute of limitations as opposed to the FINRA limitations period; and failed to provide a sufficient explanation for its decision. The Supreme Court, New York County rejected each of her arguments.

First, the court found that panel properly considered the statute of limitations as a basis for dismissal at the outset of the arbitration under FINRA rules. In doing so, the court noted that FINRA’s rules only discourage rulings on motions to dismiss before the conclusion of the petitioner’s case in chief, they do not prohibit a panel from considering a motion to dismiss. Second, the court found that the panel properly applied the shorter statute of limitations set forth under Texas law, noting that the abbreviated period was contractually agreed upon by the parties. “As arbitration is entirely a creature of contract law,” said the court, “the panel was free to consider … a shortened limitations period such as the one provided under Texas law pursuant to respondent’s Customer Agreement.”

Finally, the court rejected the argument that the panel failed to provide a sufficient explanation for its decision. “[A] review of the award,” said the court, “demonstrates that the reasons provided were sufficient in that the panel explained it was applying the Texas three year statute of limitations to the claims against respondent, a Texas entity, and the six year statute of limitations to the claims against ChoiceTrade.”  The Court concluded that “[t]he fact that petitioner is not satisfied with [the panel’s] explanation or would like more detail is not a basis to vacate the award.”

Not surprisingly, Yarmak appealed.

The Appeal:

In a unanimous decision, the First Department tersely affirmed the Supreme Court’s decision. Applying the legal principles discussed above, the Court held:

Even if the arbitrators’ dismissal of petitioner’s claims prior to the completion of her case in chief violated Financial Industry Regulatory Authority (FINRA) Manual rule 12504, which provides that dismissals at such an early juncture are “discouraged,” the arbitrators were entitled to interpret the rule (FINRA Manual rule 12409). In any event, any error in interpretation is a mere error of law that does not provide a basis for vacatur (see Wien & Malkin LLP v Helmsley-Spear, Inc., 6 NY3d 471, 479 [2006], cert dismissed 548 US 940 [2006]). The same holds true with respect to the arbitrators’ application of the Texas statute of limitations pursuant to the choice of law clause in the parties’ agreement.

Takeaway:

Yarmak exemplifies the deferential treatment given to arbitrators under New York law and the narrow grounds under which vacatur or modification is permitted under CPLR 7511.  As the title of this article says, overturning an arbitral award is not easy.

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