Opinion
No. 99 Civ. 3056 (CBM).
October 24, 2000.
MEMORANDUM OPINION
Petitioner, Robert Proto, moves this court to partially vacate an arbitration award of the Arbitrators of the American Stock Exchange to the extent that he was denied affirmative relief. Respondents have submitted a counterclaim moving to confirm the arbitrators' award. In the arbitration, commenced on June 11, 1997, Petitioner brought claims against his former partners, Dennis Joseph Goin ("Goin") and Patricia Ann Moschella ("Moschella"), and Goin's companies, Goin Co., Inc. ("Goin, Inc."), Goin Co., LLC ("Goin, LLC"), Goinmyway, LLC ("Goinmyway") and MGM, LLC ("MGM"), for breach of fiduciary duties, breach of contract, conversion and unjust enrichment. Petitioner sought dissolution of the companies, $1,000,000 in compensatory damages, punitive damages, and attorneys' fees and costs. Respondents counterclaimed for defamation, negligence, breach of good faith, and breach of contract. In a unanimous decision issued on January 14, 1999, the arbitration panel dismissed all of petitioner's claims and respondents' counterclaims. For the reasons discussed below, this court DENIES petitioner's motion to partially vacate the arbitration award and GRANTS respondents' motion to confirm the arbitration award.
I. JURISDICTION
Petitioner brings this petition under section 10 of the Federal Arbitration Act ("FAA") which states in part that "the United States court in and for the district wherein the award was made may make an order vacating [an arbitration] award." 9 U.S.C. § 10. It must be remembered that the provisions of the FAA do not confer jurisdiction on the federal courts. Rather, "[t]here must be an independent basis of jurisdiction before a district court may entertain petitions under the Act." Harry Hoffman Printing. Inc. v. Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611 (2d Cir. 1990). In this case, the independent basis conferring jurisdiction upon this court is diversity of citizenship. 28 U.S.C. § 1332.
II. BACKGROUND
Proto was a partner in respondent companies, Coin, LLC and Goinmyway. Respondents terminated Proto's employment and membership in the companies based on its determination that Proto held a net deficit in his two partnership accounts with the companies. The key issue to be decided by the arbitration panel was whether the parties had agreed to a combined, net calculation of a partner's account holdings for the purposes of evaluating a partner's interest in the two Coin companies. Proto claimed that the companies' operating agreements do not provide for a combined, net calculation, and that respondents violated the agreements in efforts to "squeeze" him out of the partnership.
As of 1996, Proto was working as a specialist and partner at Coin, Inc. In early August 1996, Goin informed all of the specialists at Coin, Inc. that he planned to convert Goin Inc. into two limited liability companies ("LLCs") known as Goin Co., LLC and Goinmyway, LLC. The operating agreements for both LLC's were dated and signed by members as of August 26, 1996. Both LLC's had the same members with the same respective membership interests: MGM, an entity controlled by the LLC's, had 55%, Coin, Inc. had 20%, Proto had 15%, and Moschella had 10%. In order to become a member of the LLC's, Proto was required to make an initial capital contribution of $750,000 for a 15% interest in Coin, LLC and $150,000 for a 15% interest in Goinmyway. The relevant section of the operating agreements provides:
In the event of failure of a Member to maintain Initial Capital, there shall be a recalculation of the respective Membership Interests whenever a Member's capital falls below 50% of that Member's Initial Capital. Such recalculation shall take place at the end of the month in which Member's capital falls below 50% of Initial Capital. If any Member fails to make a capital contribution when required, the Company may, in addition to the other rights and remedies the Company may have under the Act or applicable law, take such enforcement action (including, the commencement and prosecution of arbitration proceedings) against such Member as the Manager considers appropriate.
Pl.'s Ex. I, Coin, LLC Operating Agreement § 3.5, Goinmyway Operating Agreement § 4.5.
Despite this written agreement, the parties orally agreed that Proto would only be required to submit a portion of his initial contribution up front, and that the remaining portion would be taken from his profits. In April 1997, Proto's capital balance at Goin, LLC was negative $390,596; his capital balance at Goinmyway was positive $292,058.70, leaving a combined negative balance of approximately $98,000. On May 1, 1997, Goin informed Proto that his membership interest was recalculated from 15% to 0% based on his negative balance, and that he was no longer a partner or employee of the LLCs.
Proto claims that Goin had never before indicated that the membership interest would be recalculated based on the combined balance of a partners' capital accounts. Proto alleges that his membership interest in the two LLCs was to be calculated separately and asserts that a "no net deficit" rule had never been established.
Respondents claim that Goin had informed Proto of the "no net deficit" rule at the August 1996 meeting of all prospective partners. Respondents argue that the two LLCs were separate in name only, for accounting purposes, and that for all other purposes, the two companies were treated as one.
III. ANALYSIS
The parties agree that review of this arbitration award is governed by section 10 of the FAA. Among the listed grounds, the FAA provides for vacatur if "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). In addition, a judicially-created standard, which has its origins in Wilko v. Swan, 346 U.S. 427, 436-37 (1953), allows for vacatur where the arbitrators acted in "manifest disregard" of the law. See. e.g., Halligan v. Piper Jaffray. Inc., 148 F.3d 197 (2d Cir. 1998), cert. denied, 119 S.Ct. 1286 (1999). To modify or vacate an award based on "manifest disregard," the court must find 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." Halligan, 148 F.3d at 202. The court notes that the grounds for vacating an arbitration award are extremely narrow and are to be applied restrictively. See Willemijn Houdstermaatschappij v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997).
"Section 10 of the FAA provides, in part, that an arbitration award may be vacated where:
(1) . . . the award was procured by corruption, fraud or undue means[,]
(2) . . . there was evident partiality or corruption in the arbitrators . . . [,]
(3) . . . the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced [;or]
(4) . . . the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.9 U.S.C. § 10(a).
Petitioner argues that the panel acted both with manifest disregard for the law and in excess of their powers in: (1) failing to find that his expulsion as a partner of the two LLCs was improper and (2) failing to find that the "no net deficit" rule was a breach of the operating agreements.
Proto contends that his expulsion from the Goin LLCs was improper because the operating agreements did not include a provision authorizing the expulsion of partners, and that absent such a provision, the partnership must be dissolved in order to expel a partner. Furthermore, Proto argues that the "no net deficit" justification for his expulsion is invalid because that rule is not specifically mentioned in the operating agreements and is therefore parol evidence that the arbitrators should not have considered in light of the agreements' merger clause. Thus, Proto argues that the panel's decision disregarded partnership law and the law governing merger clauses and the parol evidence rule.
Petitioner's reliance on partnership law is misplaced. The applicable law is New York limited liability company law, which provides as follows: "Unless otherwise provided in the operating agreement, the . . . expulsion . . . of any member . . . shall not cause the limited liability company to be dissolved . . ." N.Y. LIM. LAB. Co. LAW § 701(b) (McKinney 2000).
Essentially, Proto's argument is that the panel's award violated general contract law. However, this court cannot vacate an arbitration award on this ground. The interpretation of a contract is within the arbitrators' discretion to decide, and the issue of the accuracy of the arbitrators' interpretation is not open to judicial review. See I/S Stavborg v. Nat'l Metal Converters. Inc., 500 F.2d 424, 431-32 (2d Cir. 1974) ("`[T]he misapplication . . . of . . . rules of contract interpretation does not rise to the stature of a `manifest disregard' of law.'" (quoting Judge Clark in Amicizia Societa Navegazione v. Chilean Nitrate Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960), cert. denied, 363 U.S. 843 (1960))); Concourse Beauty School. Inc. v. Polakov, 685 F. Supp. 1311, 1317 (S.D.N.Y. 1987) ("An award may not be vacated under section 10 of the grounds that the arbitrator failed to interpret correctly the law applicable to the issues in dispute or misinterpreted the underlying contract."). Thus, even if this court disagrees with the panel's interpretation, the arbitrators' finding that the operating agreements allowed respondents to net Proto's two accounts and to thereby reduce Proto's interest in the LLCs to 0% does not evince a manifest disregard for the law. Furthermore, both parties agree that it was within the power of the arbitration panel to consider whether the agreement between the parties encompassed the "no net deficit" rule. This being the case, the panel clearly was not acting in excess of its powers. This court, therefore, DENIES petitioner's motion to partially vacate the arbitration award and GRANTS respondents' motion to confirm the award.
Respondents have moved this court to confirm the arbitration award under 9 U.S.C. § 9. Section 9 of the FAA provides that the district court must grant a petition to confirm an arbitration award if it properly is brought within one year of the date of the award, unless one of the statutory bases for vacating or modifying the award is established.