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Saying One Thing When You Mean Another

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  • Posted on: Oct 21 2020

We have noted in prior posts that vacating an arbitration award is very difficult. See, e.g., here and here. There are a number of bases upon which a movant can seek to vacate an arbitral award. See, e.g., CPLR § 7511(b). Two such bases are the arbitrator exceeded his/her authority and the arbitrator manifestly disregarded the law.

Under CPLR § 7511 (b) (1) (iii) – vacatur on the basis that the arbitrator exceeded his/her power or so imperfectly executed it – a court will vacate an award “only where the [] award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Matter of New York City Tr. Auth. v. Transport Workers Union of Am., Local 100, AFL-CIO, 6 N.Y.3d 332, 336 (2005); accord Matter of Falzone v. New York Cent. Mut. Fire Ins. Co., 15 N.Y.3d 530, 534 (2010). 

The United States Supreme Court has made it clear that “[i]t is not enough . . . to show that the panel committed an error—or even a serious error.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671 (2010) (internal citations and quotation marks omitted). Instead, vacatur is appropriate only “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.…” Id. Thus, “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, a court’s conviction that the arbitrator has committed serious error in resolving the disputed issue does not suffice to overturn his decision.” Jock v. Sterling Jewelers Inc., 646 F.3d 113, 122 (2d Cir. 2011) (quoting ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co., 564 F.3d 81, 86 (2d Cir. 2009)).

Apart from the grounds enumerated in CPLR § 7511 (b), courts have vacated arbitral awards when an arbitrator manifestly disregards the law. Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002) (citing DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997)). See also Matter of Daesang Corp. v. NutraSweet, 167 A.D.3d 1, 15-16 (1st Dept. 2018), lv. denied, 32 N.Y.3d 915 (2019) (citing Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 480-81 (2006)). Importantly, the doctrine does not apply to the facts. Wein, 6 N.Y.3d at 483.

Application of the doctrine is limited. Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules, 867 F.2d 130, 133 (2d Cir. 1989). It is a doctrine of last resort. Duferco, 333 F.3d at 389. It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and it is more than an erroneous interpretation of the law. Id. The doctrine is “limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” Daesang, 167 A.D.3d at 15-16.

To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Zurich Am. Ins. Co. v Team Tankers A.S., 811 F.3d 584, 589 (2d Cir. 2016); Wallace v. Buttar, 378 F3d 182, 189 (2d Cir. 2004) (quoting Banco de Seguros del Estado v. Mutual Mar. Off., Inc., 344 F.3d 255, 263 (2d Cir 2003)). See also Wien, 6 N.Y.3d at 480-81 (footnotes omitted).

The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp., 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010).

In Fava v. Morgan Stanley Smith Barney, Inc., 2020 N.Y. Slip Op 33358(U) (Sup. Ct., N.Y. County Oct. 9, 2020) (here), the foregoing principles were examined by the Court.

Fava v. Morgan Stanley Smith Barney, Inc. 

Background

Fava involved an arbitration conducted before the Financial Industry Regulatory Authority (“FINRA”). 

Fava was employed by Morgan Stanley Smith Barney, Inc. (“MS” or “Morgan Stanley”) as a financial advisor from about October 2007 through October 2011. A dispute arose between the parties regarding Fava’s repayment of certain promissory notes issued by Morgan Stanley during his employment (the “Notes”). In January 2012, Morgan Stanley initiated an arbitration against Fava related to those monies. The arbitrators ruled in Morgan Stanley’s favor, awarding it approximately $450,000. 

In July 2013, the parties entered into a Settlement Agreement giving Fava about three years to pay the monies due without compromising his license, in exchange for certain promises in favor of MS, such as a non-disparagement clause and the exchange of mutual releases. The Settlement Agreement included a forum selection clause that provided for dispute resolution in the “the state and federal courts of the State of New York.” 

Fava paid approximately $120,000 under the Settlement Agreement and failed to make any other payments due. MS then commenced an arbitration before FINRA to recover the balance of the payments, claiming Fava had breached the Settlement Agreement, or alternatively, that MS was entitled to an award based on quantum meruit. Fava moved to dismiss the arbitration, relying on the forum selection clause in the Settlement Agreement. FINRA denied the motion without stating its reasoning and proceeded with a hearing. Fava fully participated in the arbitration, engaging in discovery and even moving to disqualify counsel, while consistently maintaining his objection to the arbitration throughout the proceedings. 

In the April 2020, FINRA issued an award (the “Award”). Pursuant to the Award, Fava was required to pay Morgan Stanley $449,697.00, plus interest, attorney’s fees, and filing fees.

Relying on the forum selection clause in the Settlement Agreement, Fava sought to vacate the Award, claiming that FINRA exceeded its authority when it proceeded with the arbitration over his objection. 

The Court rejected Fava’s arguments.

The Court held that although Fava claimed the arbitrators “exceeded their authority” in issuing the Award, in reality, he was “really” arguing “no valid agreement to arbitrate exist[ed].” Slip Op. at *2 (citing Barclays Capital Inc. v. Leventhal, 2017 WL 7732816, 2017 N.Y. Slip Op. 51982(U) (Sup. Ct., N.Y. County July 25, 2017)). The Court found the language of CPLR § 7511(b)(2)(ii) supportive of the foregoing, noting that vacatur is appropriate only where the party seeking vacatur “neither participated in the arbitration nor was served with a notice of intention to arbitrate” and where there was no valid agreement to arbitrate. Id. at *3. The Court held that Fava did not satisfy the foregoing statutory requirements: 

The record here establishes that Fava participated in the arbitration to the fullest extent, despite his objection to FINRA’s jurisdiction. Fava had the option under CPLR § 7503 to “apply to stay arbitration on the ground that a valid agreement was not made”, but he chose not to pursue that option. Having charted his course, Fava cannot now argue that FINRA exceeded its authority by proceeding with the hearing when no valid arbitration agreement existed.

Id.

The Court also held that because the arbitrators did not state their reasons for issuing the Award, the Court could not determine whether “(1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.” Id. at *4.  Thus, the Court rejected Fava’s application to vacate the Award on manifest disregard of the law grounds.

Takeaway

In denying the motion to vacate the Award, the Fava Court explained that the result was “compelled by both the law and equity”, even though the “result may be harsh”  and may “result in Fava’s loss of his license.” Slip Op. at *4. To the Court, the Award did “little more than compel Fava to pay the amount he agreed to pay seven years ago plus prejudgment interest.” Id. 

Aside from the foregoing, the Court also made it clear that parties seeking relief should, as the saying goes, “Say what you mean, [and] mean what you say.” 

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