Opinion
05 Civ. 253 (DC).
April 12, 2005
D'AMATO LYNCH, Ronald H. Alenstein, Esq., Edward M. Roth, Esq., New York, Attorneys for Petitioner.
COHEN TAUBER SPIEVACK WAGNER LLP, Jay B. Spievack, Esq., New York, Attorneys for Respondent.
MEMORANDUM DECISION
In this diversity case, petitioner National Union Fire Insurance Co. of Pittsburgh, Pennsylvania ("National Union") seeks to confirm an arbitration award against respondent Dana Corp. ("Dana") pursuant to §§ 9 and 13 of the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 9, 13. Dana contends the award should be vacated because the arbitration panel exceeded its authority by ignoring the language of and adding a new term to the underlying insurance policy. For the reasons set forth below, the petition to confirm the award is granted and respondent's petition to vacate the award is denied. The award is confirmed.
BACKGROUND
A. The FactsThe parties' agreement to arbitrate stipulated that the underlying facts, recounted below, are not in dispute.
National Union is an insurance company organized and licensed under the laws of Pennsylvania, with its principal place of business in New York. (Verified Petition ¶ 1). Dana is an automotive components' manufacturer organized and licensed under the laws of Virginia, with its principal place of business in Ohio. (Id. ¶ 2; Award at 2).
In 1968, Dana established a company, Danaven, to manufacture products for the local Venezuelan automotive market. (Award at 2). By 1976, Dana had sold 51% of its shares in Danaven to a Venezuelan holding company. (Id. at 2-3). In or about October 2000, Danaven's board of directors learned that Danaven's executive director, Alberto Satine, had orchestrated a pattern of false financial reports and projections. (Id. at 3). Relying on Satine's misrepresentations, Danaven's board of directors had authorized an extensive, debt-based capital project in 1999. (Id.). Later circumstances caused the board of directors to approve a restructuring of Danaven's debt, and as part of that restructuring, Dana was required to provide a letter of assurance for a $70 million secured term loan facility led by Citibank. (Id.).
There is nothing in the record to suggest that Satine had engaged in any "theft" or embezzlement or unlawful taking of Danaven's assets. (Award at 9, 10).
Satine's resignation was accepted on November 13, 2000, but the revelation of errors in Danaven's financial reports and projections in October 2000 threatened the company's continued operations. (Id.). To save Danaven, Dana bought out the Venezuelan holding company's interest in Danaven, supplied additional capital, and replaced the secured term loan facility. (Id.).
Claiming substantial losses, Dana filed a claim under a CrimeGuard policy (the "policy") issued by National Union. (Id.). Under the terms of the policy, Dana was entitled to indemnification of up to $20 million for "loss of assets unless otherwise excluded by the terms and conditions." (Verified Petition Ex. A at 1). The policy period was from December 31, 1997 to December 31, 2000. (Id. at Item 4).
The policy defines "loss" as "the direct deprivation of the insured by a single act or a series of related acts resulting from dishonesty, dissolution or forgery." (Id. at 2). "Assets" are defined as "money, securities or other property for which the insured is legally liable, or which is owned or held by the insured in any capacity, whether or not the insured is legally liable therefore." (Id. at 1). "Dishonesty" is defined as "the theft by any employee of any insured acting alone or in collusion with others." (Id.). "Dissolution" is defined as "the wrongful abstraction of assets resulting from theft by any natural person other than an employee." (Id.). "Theft" is defined as the "unlawful taking, including by violence or threat of violence, of assets to the deprivation of the insured." (Id. at 2).
The policy authorized Dana to appoint an investigative specialist to examine the underlying facts and quantum of loss and issue a report detailing its findings. (Id. at 7). Dana hired Dempsey, Myers and Company, LLP to investigate and issue a report on the alleged fraud by Satine. (Award at 1). Dempsey initiated an investigation, assisted by forensic auditors Deloitte Touche and Professor Joshua Rosen. Dempsey issued a report (the "Dempsey Report") on May 28, 2003. (Id.). The Dempsey Report set forth the facts leading to the dispute and found the "total quantum of loss" to be $31,166,933. (Id. at 3-4). This "loss," however, did not consist of any funds stolen or wrongfully taken by Satine. Rather, the "quantum of loss" was Dana's share of (1) the difference in actual controllable costs versus the projected controllable costs for 2000 and 2001, which were significantly understated because of the inaccuracies in Satine's reports and (2) the increase in interest expense because additional loans were required. (Dempsey Report at 23-25).
The parties could not reach agreement on liability under the policy and eventually National Union denied coverage. (Id. at 1). As required under the policy, the parties submitted the dispute to arbitration. (Verified Petition Ex A). B. The Arbitration Proceeding and Award
Pursuant to the agreement to arbitrate, the parties submitted the dispute to arbitration before a mutually-selected panel, consisting of three former judges: Hon. John J. Gibbons, Hon. George C. Pratt, and Hon. Robert E. Tarleton (the "Arbitrators" or the "panel"). (Award at 1). Under the terms of the agreement to arbitrate, Dempsey's factual findings and quantum of loss were not disputed. (Id. at 4). The sole issue to be resolved by the Arbitrators was:
Is there coverage for Dana's claim under the policy as respects the facts and quantum of loss described in the Dempsey Report?
(Id. at 2). The agreement to arbitrate also stipulated that because the Dempsey Report was definitive as to facts and quantum of loss, the arbitration hearing would consist of oral argument, without the testimony or affidavits of witnesses. (Id.). Both parties submitted pre-arbitration briefs prior to the arbitration hearing. (Id.; Alenstein Aff. Exs. D, E). The Arbitrators heard argument on October 18, 2004, and issued a twelve-page decision and award on December 14, 2004 (the "Award"). (Award at 2, 12).
The Award found "no coverage under National Union's CrimeGuard policy . . . as respects the facts and quantum of loss described in the Dempsey Report." (Id. at 12). Specifically, the Award found:
Dana's analysis does not hold up under Dempsey's findings. In the first place, referring to Dana's claim that it lost $70 million from its guarantee of the credit facility, loaned Danaven an additional $10 million, stood to [lose] substantial tax benefits, and faced an uncertain future with two key customers, placing Dana's entire investment in Danaven in jeopardy, Dempsey concluded, "[T]hose losses have not come to fruition. Danaven, now wholly owned by Dana, continues to operate. The export credit facility was replaced with other financing. The funds invested in Danaven have not been `lost' per se, but rather deployed in what continues to be a struggling business. Accordingly, even though it is clear that Satine's actions caused Dana to make decisions and investments that would not have been made but for Satine's dishonesty we do not believe that potential losses should be part of the quantum of loss". . . . There is no finding that Dana was ever called upon to make good on the letter of assurance. On the contrary, after Dana bought full control of Danaven it simply replaced the export facility with other financing.
(Id. at 9 (quoting the Dempsey Report at 23) (emphasis in original)). The Arbitrators found it "significant" that the Dempsey Report did not find any of the excess expenses by Satine to be illegal. (Id. at 9-10). According to the Award:
The worst that could be said, based on Dempsey's findings, is that those expenses were imprudent, possibly reckless, given the underlying realities. But Dempsey "found no evidence of embezzlement, payroll fraud, or vendor fraud," and even if those crimes occurred, it was still Danaven's money, not Dana's, that would have been stolen or embezzled.
(Id. at 10 (quoting the Dempsey Report at 13)).
The Arbitrators rejected Dana's argument that the circumstances surrounding Satine's fraud qualified as "loss" under the policy, triggering coverage. (Id.). Dana argued that Satine's fraudulent conduct caused the bank to lend the $70 million, and that under the letter of assurance Dana was "legally liable" for the money. (Id.). Responding to this contention by Dana, the Award concluded that "[e]ven if Dana is correct that Satine's conduct constituted `theft' . . . obtaining the loan from Citibank is not a `theft' such as is defined in the policy." (Id. at 11). Thus, according to the Arbitrators, "Satine's conduct did not directly deprive Dana of any of its assets." (Id.).
The Award also found additional factors that favored denying coverage.
When the $70 million "went out the door," it went to Danaven, a corporation. There is no finding of "theft" of any part of that money by a "natural person" as would have been required for the necessary act of dissolution under the policy. Moreover, Dempsey made no findings that would support a conclusion that there had been "an unlawful taking . . . of assets to the deprivation of [Dana]," something necessary to establish "theft" under the policy. Nor do Dempsey's findings establish that Dana suffered any "loss" of "assets". . . . Not only was this not the type of "loss" that the policy undertook to indemnify, but Dempsey found that "those losses have not come to fruition."
(Id. at 11-12 (quoting Hearing Tr. at 35 and Dempsey Report at 23)). As the Arbitrators found no coverage under the policy, they did not address the applicability of the various exclusions under the policy. (Id. at 2).
C. The Instant Action
On January 11, 2005, National Union filed its petition to confirm the award pursuant to §§ 9 13 of the FAA. On February 22, 2005, Dana filed a cross-motion to vacate the award pursuant to §§ 10 and 12 of the FAA.
DISCUSSION
A. Applicable Law
Arbitration awards are subject to "very limited review" to avoid undermining the goals of arbitration, namely, settling disputes efficiently and avoiding lengthy and expensive litigation. Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (quotingFolkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir. 1993)). Accordingly, "the party seeking to vacate or modify an arbitration award bears the burden of proof, and the showing required of that party . . . to avoid summary affirmance of the award is high." DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459, 461 (S.D.N.Y. 1997) (citation omitted); see also Folkways Music Publishers, 989 F.2d at 111. In addition, "[t]he court's function in confirming or vacating an arbitration award is severely limited." Areca, Inc. v. Oppenheimer Co., 960 F. Supp. 52, 54 (S.D.N.Y. 1997) (quoting Amicizia Societa Navegazione v. Chilean Nitrate Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960)). This Circuit has held that an award "must be confirmed if there is even a `barely colorable justification' under the facts presented." Alberti v. Morgan Stanley, Dean Witter Discover Co., No. 97 Civ. 9385, 1998 WL 438667, at *3 (S.D.N.Y. July 31, 1998) (quoting Willemijn, 103 F.3d at 13), aff'd, 205 F.3d 1321 (2d Cir. 2000)).
There are, however, limited circumstances under which an arbitration award may be vacated. The FAA provides that an award may be vacated if, inter alia, "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). The FAA's authorization to vacate under § 10(a)(4) is "consistently accorded the narrowest of readings . . . especially where that language has been invoked in the context of arbitrators' alleged failure to correctly decide a question which all concede to have been properly submitted in the first instance." Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 220 (2d Cir. 2002) (quoting In re Andros, 579 F.2d 691, 703 (2d Cir. 1978)). The "scope of authority of arbitrators generally depends on the intention of the parties to an arbitration, and is determined by the agreement or submission."Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987) (quotation omitted).
B. Application
Respondent asserts that the "[A]rbitrators exceeded their authority," a claim under § 10(a)(4) of the FAA. (See Resp't Mem. at 8, 11). It does not allege that the panel "manifestly disregarded the law" or that the Award should be vacated under other provisions of § 10(a). See, e.g., Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202-03 (2d Cir. 1998), cert. denied, 526 U.S. 1034 (1999). Respondent's claim is rejected because (1) it is an improper attempt to reargue the merits of the issue presented to the Arbitrators, and (2) even assuming the Court were to reach the merits, the Arbitrators' interpretation of the policy was correct.
First, respondent does not assert that the Arbitrators decided an issue that was not before them, but quarrels instead with the Arbitrators' interpretation of the policy. Dana claims that the award should be vacated because the Arbitrators modified the language of the policy by giving "no meaning to the phrase `property for which the insured is legally liable'" and by adding a "new term to the policy limiting coverage to loss resulting directly from the covered event." (Resp't Mem. at 9, 10). This argument is an improper attempt by Dana to relitigate the merits of the arbitration. An inquiry under § 10(a)(4) asks "whether the Arbitrators had the power, based on the . . . arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue." Westerbeke, 304 F.3d at 220 (quoting DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 824 (2d Cir. 1997)); see also Blue Bell, Inc. v. Western Glove Works Ltd., 816 F. Supp. 236, 240 (S.D.N.Y. 1993).
Respondent asks this Court to apply the facts found by the Dempsey Report to the policy, the exact question posed to the Arbitrators. The Second Circuit addressed similar circumstances in In re Andros, 579 F.2d at 703, and pointed "disappointed parties" in arbitration proceedings to United Steelworkers v. Enterprise Wheel Car Corp.:
Justice Douglas's opinion concludes with a clear warning to all disappointed parties to arbitral proceedings who may be tempted to relitigate the merits in federal court: the question of interpretation of the . . . agreement is a question for the arbitrator. It is the arbitrator's construction which was bargained for; and so far as the arbitrator's decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.363 U.S. 593, 599 (1960). Similarly, here it is the Arbitrators' construction of the policy, not this Court's, that the parties bargained for in their agreement to arbitrate. The Court's "severely limited" function under § 10(a)(4) is to ensure that the Arbitrators properly reached the issue presented to them. This is not genuinely disputed, and in any event, the Court concludes that the Award properly answers the question presented.See Westerbeke, 304 F.3d at 220; Areca, 960 F. Supp. at 54. Therefore, the Arbitrators did not exceed or imperfectly execute their powers.
Second, even if the Court were to reexamine the merits of the underlying arbitration, the Court would reach the same conclusion as the Arbitrators. The policy covered "loss of assets" on the part of Dana due to (i) "theft" by an employee of Dana, or (ii) the "wrongful abstraction of assets" resulting from "theft" by any person other than a Dana employee, or (iii) forgery. "Theft" is defined as the "unlawful taking" of assets. Here, there was no theft or wrongful abstraction of assets or forgery. Rather, Dana's "loss" resulted from the fact it had to expend additional monies on its investment in Danaven, an affiliated company. As the Arbitrators found, the policy did not cover this kind of loss.
In the arbitration, Dana took the position that the letter of assurance was an "asset" under the policy. During oral argument and in its Award, the panel was justifiably skeptical of this unique position, which Dana had to take to show a "loss of assets" to prevail on its claim of coverage. Understandably, the Arbitrators did not accept Dana's contention. During one exchange, Dana's counsel attempted to explain its position:
Judge Gibbons: Well, why was the letter of assurance an asset, rather than a liability?
Mr. Thacker: [T]he letter of assurance may be a liability, but under this policy, it is an asset. The money that is the subject of the loan is an asset of Dana's because Dana is liable for it under the clear language of the agreement . . .
Judge Gibbons: That's a disconnect for me because Dana is liable for it.
Mr. Thacker: It[']s counterintuitive, I agree.
(Hearing Tr. at 25).
There is some arguable support for Dana's position, but it is not persuasive. The policy defines assets, inter alia, as "property for which the insured is legally liable." (Verified Petition Ex. A at 1). By issuing a letter of assurance to guarantee the secured term loan facility, Dana could have been "legally liable" for the $70 loan. As the Arbitrators concluded, however, the Dempsey Report found that the losses asserted by Dana had "not come to fruition" and were only "potential losses." (Dempsey Report at 23). Hence, according to the panel, although "the value of Dana's investment in Danaven may have been diminished because its costs were higher than they would otherwise have been, Satine's conduct did not directly deprive Dana of any of its assets." (Award at 11).
Thus, while Dana attempted to distinguish the "losses" described in the Dempsey Report from the "loss of assets" for which it was seeking coverage, the panel ultimately rejected this position. The panel concluded that "Satine's conduct did not directly deprive Dana of any of its assets." (Award at 11). This conclusion is supported by the Dempsey Report and by the applicable law submitted by both parties to the panel and to this Court.
Dana argues that the Arbitrators exceeded their authority, but its real objection is to the panel's legal reasoning in interpreting the policy. "Section 10(a)(4) does not permit vacatur for legal errors." Westerbeke, 304 F.3d at 220.
Therefore, as the parties properly submitted the question of whether coverage existed for Dana's claim under the policy, and the Arbitrators properly found no coverage in any event, the Award cannot be vacated under § 10(a)(4). In addition, even if the Court were to consider the merits of the underlying claim, the Arbitrators' analysis was supported by the record and by the underlying facts. The Award is confirmed.
CONCLUSION
For the reasons set forth above, Dana's corss-motion to vacate the Award is denied and National Union's petition to confirm the Award is granted. The Award is confirmed, with costs. The Clerk of the Court shall enter judgment accordingly.SO ORDERED.