In Sheldon Stone v. Theatrical Investment Corp., No. 14 Civ. 6494 (S.D.N.Y. Dec. 2, 2014), the U.S. District Court for the Southern District of New York afforded “strong deference” to an arbitrator’s conclusions, deflecting several challenges to the award, including a challenge to the arbitrator’s authority under New York law to appoint a receiver to collect and administer future distributions.
Plaintiff, Sheldon Stone, on behalf of the Stone Family Trust (“SFT”), filed suit seeking confirmation of an arbitration award pursuant to § 9 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq. Respondents Jon Platt and Theatrical Investment Corp. (collectively, “TIC”) cross-moved to vacate the arbitration award under § 10 of the FAA.
In 2009, SFT and TIC entered into a joint venture agreement (“Agreement”) to invest in theatrical productions. The Agreement called for capital contributions from each party and set forth that the capital contributions were to be returned and any profits from the investments were to be distributed to the parties according to a formula included in the Agreement. The Agreement also provided that the parties agreed to settle any dispute before a single arbitrator in New York City and that the Agreement would be governed and construed in accordance with New York State law.
SFT claimed, among other things, that TIC received millions of dollars in capital returns and profit distributions from the investment but never paid SFT its share. SFT served a Demand for Arbitration on TIC seeking an accounting of SFT’s interest in the joint venture and full payment of SFT’s share of returned capital and proceeds.
The arbitrator conducted both a preliminary and a final hearing. Subsequently, the arbitrator issued partial awards and then a final award directing distributions to SFT. Additionally, since the producers of the shows the joint venture invested in refused to make payments directly to SFT, the arbitrator appointed a receiver to administer the future distributions.
TIC challenged the award based on the following arguments: (a) the parties to the arbitration were improper; (b) the arbitrator was biased; (c) the arbitrator violated due process by prejudging a critical issue of disputed fact; (d) the arbitrator manifestly disregarded the law and evidence in interpreting the parties’ Agreement; and (e) the arbitrator exceeded her powers by appointing a receiver.
As to the assertion that it was improper to exercise jurisdiction over Platt, President of TIC and a non-party to the Agreement, the court found that Platt waived the argument by failing to object. The court also observed that the arbitrator had more than a “barely colorable justification” for piercing the corporate veil and holding both TIC and Platt jointly and severally liable for the damages awarded. As to the contention that SFT was an improper party because it was a trust, the court found that under New York law a trust may initiate and participate in arbitration on its own behalf.
TIC argued that the arbitrator was biased because, in essence, she found for SFT on a number of issues. The court found that even assuming the arbitrator’s decisions were erroneous, TIC did not meet its burden to demonstrate partiality. The court observed that TIC’s claims of error appeared to be assertions of carelessness or honest mistake. The court further found that TIC’s claim of partiality was based on “pure speculation,” and did not “rise to the level of evidence required to show that a reasonable person would have to conclude that [the arbitrator] was partial.”
Next, TIC asserted that the arbitrator violated its fundamental due process rights by pre-judging a key merits issue. Again, the court found no evidence to support TIC’s speculation. Specifically, the fact that the arbitrator’s award aligned with her interim award was not proof that she failed to consider the post-hearing briefing or further evaluate the evidence presented before and during the final hearing.
TIC also argued that the “arbitrator blatantly disregarded the contract terms in evaluating (1) which shows were covered by the Agreement, (2) the amount of expenses TIC had incurred, and (3) whether future expenses should be deducted from TIC’s ‘priority payment.”‘ The court held that whether the arbitrator erred in accepting SFT’s arguments or calculating the legitimate expenses is not the court’s concern. The court afforded “strong deference” to the arbitrator’s conclusions and found that TIC failed to provide any evidence of misconduct.
The court, did, however, identify an error in the arbitrator’s award that contravened the Agreement as to the calculation of distributions going forward and the deduction of expenses. The court observed that the award conflicted with the plain language of the Agreement. Nonetheless, the court stated that “an error–or even a serious error” does not by itself provide a basis for vacating an arbitration award. The court found that despite the error, the arbitrator was arguably “construing or applying” the Agreement. Therefore, the court reasoned that the award drew its essence from the Agreement rather than merely “dispens[ing] [the arbitrator’s] own brand of industrial justice.”
Finally, TIC challenged the arbitrator’s appointment of a person denominated as a “receiver.” The Agreement was silent as to the arbitrator’s authority to craft remedies. Neither the FAA nor New York law address whether arbitrators may appoint receivers. In support of its argument, TIC cited several out-of-state cases that held that arbitrators were prohibited from appointing receivers. The court found these cases unpersuasive in its interpretation of New York and federal law.
The court observed that New York law and federal courts take a permissive approach to arbitration awards and vacate such awards only where “the arbitrators violated an ‘express limitation upon arbitral authority’ or ‘rewrote the contract.'” Therefore, the court held that when the applicable law does not clearly affirm or deny an arbitrator’s authority to grant a particular remedy, courts should err on the side of deference to the arbitration award.
The court granted SFT’s petition to confirm the arbitration award and denied TIC’s cross-motion to vacate the award.
A version of this post originally appeared in the March 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.