Opinion
No. C-02-1543-SC
October 7, 2002
ORDER CONFIRMING ARBITRATION AWARD
I. INTRODUCTION
On February 13, 2002, an arbitrator resolved a dispute between Plaintiffs Kanematsu Co. and Kanematsu USA Inc. ("Kanematsu") and the defendant investor group ("MARCorp") by denying Kanematsu's claims and awarding MARCorp four million dollars in damages on its cross-claim. Now before this court are Kanematsu's motion to vacate or, in the alternative, reduce the arbitrator's judgment and MARCorp's motions for confirmation and for modification to allow recovery of pre- and postjudgment interest. For the following reasons, this Court confirms the arbitration award and awards only post-arbitration award, pre-judgment interest to MARCorp.
II. BACKGROUND
The dispute in this case centers around investments in Sutmyn America/Sutmyn Storage Company ("Sutmyn"), a financially troubled high technology company. Sutmyn was deeply indebted to Kanematsu. According to MARCorp, that debt became an obstacle to obtaining further investment. In 2000, MARCorp entered into negotiations with Kanematsu, seeking to purchase Sutmyn's debt at a reduced cost. MARCorp hoped that by purchasing Kanematsu's debt it would allow Sutmyn to obtain additional investment and thus survive. While negotiations were ongoing, MARCorp lent millions of dollars to Sutmyn. MARCorp claimed that it made these loans in reliance upon assurances from Kanematsu that the debt would be transferred and that MARCorp's loans would enjoy priority. The negotiations collapsed, however, and Sutmyn, according to MARCorp, now is all but defunct. MARCorp asserts that Sutmyn's demise is in large part due to the obstacle posed by its debt to Kanematsu, and in particular to Kanematsu's refusal to subordinate that debt to later loans.
Following the collapse of negotiations, Kanematsu initiated arbitration proceedings against MARCorp, alleging that MARCorp had breached its obligation to purchase Kanematsu's debt. MARCorp counterclaimed, alleging promissory estoppel. It claimed that Kanematsu's false representations had induced it to invest substantial sums in Sutmyn, and that due to its reliance upon Kanematsu's representations those sums had been lost.
After a lengthy proceeding, the arbitrator denied Kanematsu's claims. He found, however, for MARCorp on its estoppel claim. He concluded that MARCorp had specifically and repeatedly communicated to Kanematsu its assumption that MARCorp's loans would receive priority over Kanematsu'd debt, and that Kanematsu had been silent in response to those communications, despite "overwhelming" evidence that Kanematsu must have known that MARCorp was relying upon those assumptions. Award of Arbitrator, Kanematsu v. MARCorp, February 12, 2002, at 7. He also found that MARCorp would not have made those loans had its mistaken assumptions been corrected. Accordingly, the arbitrator awarded $4,000,000 — the sum MARCorp had lent to Sutmyn prior to the collapse of negotiations — in damages to MARCorp. He characterized this claim as "the classic situation of Equitable Estoppel." Id.
Kanematsu then moved for modification of the award, arguing that Sutmyn had already repaid $1,000,000 to MARCorp and that the damages should be accordingly reduced. MARCorp moved for costs and for prejudgment interest. The Arbitrator awarded costs to MARCorp but rejected the other claims. He found that no evidence had been offered to show that the $1,000,000 payment was made to MARCorp and not to an independent entity to which Sutmyn had separate debts, concluded that any finding that the payment was to MARCorp would be based on "sheer speculation," and noted that the issue had already been thoroughly addressed in the original proceeding. Award of Arbitrator on Post Award Motions, Kanematsu v. MARCorp, May 10, 2002, at 3.
In rejecting MARCorp's claim for pre-judgment interest, the arbitrator noted that MARCorp had raised no such claim in the original proceeding. Since pre-judgment interest is an element of damages, the arbitrator concluded that MARCorp's claim was asking him to reconsider the merits, which Arbitration Rule R-48 forbade him to do. Nevertheless, the arbitrator did state that "had the Arbitrator felt empowered to award pre-judgment interest, such an award would have been entirely justified in the circumstances of this case in the amount of $578,027.40 through April 11, 2002 and therafter at a rate of $716.12 per day until entry of judgment." Id. at 4.
Following this decision, Kanematsu moved for this Court to vacate or reduce the award, and MARCorp moved for this Court to confirm the award but to modify it to allow pre-judgment interest in the amount calculated by the arbitrator. If this Court would not award the pre-judgment calculated by the arbitrator, MARCorp requested it to award pre-judgment interest out of its own power, or to award interest for the period following the arbitration award but prior to this Court's entry of judgment.
III. LEGAL STANDARD
A. Reviewing Arbitration Decisions
Courts review arbitration decisions using an extremely deferential standard. An arbitrator's decision may be modified only if it is "completely irrational," manifests disregard of the law, or exceeds the power of the arbitrator. 9 U.S.C. § 10-11; French v. Merrill Lynch, Pierce, Fenner Smith, Inc., 784 F.2d 902, 906 (9th Cir. 1986); Todd Shipyards Corp. v. Cunard Line Ltd., 753 F. Supp. 1463, 1466 (N.D. Cal. 1989). The court is not to retry the facts or even reverse cases based on misinterpretations of law; reversal instead is appropriate only in those extreme cases where there is simply no rational basis for the arbitrator's decision, where the decision was reached in blatant disregard of applicable law, or where the arbitrator reached an issue that his agreement did not empower him to address. Todd Shipyards, 753 F. Supp. at 1466 ("This stringent standard was necessary in order to ensure that disputes were disposed of quickly and to save the expense and delay of protracted court proceedings. . . A party moving for vacatur bears the burden of showing that the arbitrator chose to ignore what he or she knew to be the law or did not have a rational basis for determining the award." (citations omitted)); Matteson v. Ryder Systems, Inc., 99 F.3d 108, 112-113 (3d Cir. 1996)
"This Court has diversity, not federal question, jurisdiction in this case. Order Granting in Part and Denying in Part Defendants' Motion for a More Definite Statement and to Strike, No. C-02-1543-SC (N.D. Cal. 2002). Therefore, except where those rules are preempted by the Federal Arbitration Act, this court applies state law to this case.
IV. DISCUSSION
A. Confirming or Vacating the Award
Kanematsu argues that the arbitrator's decision was completely irrational, manifested disregard for the law, and exceeded the arbitrator's authority. MARCorp counters that the decision was quite rational, came at least reasonably close to correctly applying the law, and was well within the arbitrator's powers. Applying the deferential standard of review required for arbitration cases, this Court concludes that the arbitrator's decision was rational and within the scope of his powers, and that his errors of law do not rise to the level of manifest disregard.
1. Completely Irrational
Kanematsu asserts that the arbitrator's decision is completely irrational for four different reasons. Each of these arguments might have provided some ground for disputing the award, but none is sufficient to establish that it is completely irrational.
First, Kanematsu notes that the arbitrator based his conclusion on a finding that Kanematsu falsely implied that it would subordinate its debt. Kanematsu argues that this implication actually wasn't false — that in fact it did subordinate its debt, and thus the alleged deception never happened. In addition, Kanematsu urges that the May 1, 2000 Letter Agreement between the parties expressly provided for subordination of the debt, and that therefore there was no possibility that MARCorp could have been misled.
Both of these assertions are the subject of vigorous factual dispute, however. MARCorp argues that various lending mechanisms in the Letter Agreement effectively undid any subordination of Kanematsu's debt that did occur. In addition, the Arbitrator specifically cited to "overwhelming" evidence, primarily from e-mail correspondence, that MARCorp was in fact misled regarding Kanematsu's intentions. Award of Arbitrator at 7. Whether this Court would resolve these factual disputes in the same manner as did the arbitrator is irrelevant; the existence of some factual basis for the arbitrator's decision is sufficient to establish that it was not completely irrational.
Second, Kanematsu asserts that the award is completely irrational because Kanematsu never received the $4,000,000 MARCorp lent to Sutmyn. This argument misses the point of MARCorp's claim. MARCorp asked, as is appropriate in a promissory estoppel case, for damages that would undo the cost of its reliance, and it incurred those costs regardless of whether Kanematsu received a benefit. See Rest.2d of Contracts § 90, cmt. d. MARCorp argued, and the arbitrator agreed, that the cost of its reliance was $4,000,000; the arbitrator had no need to determine how much of that money eventually went to Kanematsu. Kanematsu basically asks this court to invalidate an award on an estoppel claim because the arbitrator did not use an unjust enrichment measure of damages. The law simply establishes no such requirement, and the measure of damages did not make the award irrational.
Third, Kanematsu argues that the award is completely irrational because Kanematsu never made any offer to pay or otherwise indemnify MARCorp for its advances to Sutmyn. Kanematsu suggests that the only appropriate measure of damages is the promise itself, and that the only remedy is to require enforcement of the promise — here, subordination of the debt. This, however, is nonsensical. Enforcing the promise now, when Sutmyn may be unable to obtain any future investors or repay any debt, is simply not the same as enforcing the promise two years ago; Kanematsu's rule of damages would preclude the possibility of an effective remedy. The measure of damages selected by the arbitrator was not only rational but also appropriate. See id. (noting that enforcement of the promise is not the sole available remedy for a promissory estoppel claim)
Finally, Kanematsu argues that the award is completely irrational because it holds Kanematsu liable on a theory of equitable, not promissory, estoppel. This is also the basis of Kanematsu's argument that the award manifests disregard for the law, and is discussed in the following section.
In its memorandum in opposition to MARCorp's motion to confirm, Kanematsu also asserted that the award also was irrational because it was undisputed that MARCorp had in fact already received $1,000,000 in repayment from Sutmyn. This assertion is specious; as the arbitrator noted, whether MARCorp actually received this repayment was in fact subject to dispute, and the arbitrator resolved this dispute by concluding that it would be "sheer speculation" to conclude that MARCorp and not one of its subsidiaries received payment. Award of Arbitrator on Post Award Motions at 3.
2. Manifest Disregard for the Law
MARCorp brought a claim for promissory estoppel. The arbitrator, however, purported to apply the doctrine of equitable estoppel in his decision. The doctrine of equitable estoppel is normally used as an evidentiary defense, preventing a party from asserting the truth of something it previously denied, and not as an offensive cause of action.Green v. Travelers Indemnity Co., 185 Cal.App.3d 544, 555 (1986); California Evidence Code § 623. Since the arbitrator here did use the doctrine offensively, Kanematsu argues that his decision is based on manifest disregard of the law. Mere errors of law are not, however, a sufficient basis for invalidating an arbitrator's award. The disregard of the law must rise to a higher level, evincing blatant or willful disregard for legal standards. Todd Shipyards, 735 F. Supp. at 1466. The arbitrator's holding does not meet that standard.
The decision does appear to be based upon a mistake. Promissory estoppel and equitable estoppel are separate doctrines with different elements and applications. Equitable estoppel is used primarily as a shield and promissory estoppel as a sword. Additionally, a core element of any promissory estoppel claim is a clear and unambiguous promise; equitable estoppel claims require merely a material misrepresentation.See Rest.2d of Contracts § 90; Lange v. TIG Ins. Co., 68 Cal.App.4th 1179, 1185 (1998); cf. Hair v. California, 2 Cal.App.4th 321, 328 (1991). Here, the arbitrator searched for the elements of an equitable estoppel claim, made no explicit finding that Kanematsu made a clear promise to MARCorp, and allowed the doctrine to be used offensively.
Nevertheless, the two doctrines are not so far apart that this error rises to the level of manifest disregard for the law. First, as MARCorp notes, there is California precedent for awarding damages on an equitable estoppel cause of action. Warner v. North Orange County Community College Dist., 99 Cal.App.3d 617, 627 (1979) (allowing "a cause of action for damages on the theory of equitable estoppel"). This case may be an outlier, but it alone suggests that the arbitrator's decision might have some rational basis in the law. Second, the elements of promissory and equitable estoppel, though not the same, are quite similar, with the need for a clear promise providing the only substantial difference. Cf. Rest.2d of Contracts § 90; Hair, 2 Cal.App.4th at 328. Thus the arbitrator's muddling of doctrines, while possibly legal error, does not indicate that the arbitrator elected to blatantly ignore or otherwise disregard the law. In addition, the arbitrator's analysis may have made the relatively minor error of giving the wrong legal name to the right legal analysis. The arbitrator noted that Kanematsu must have known the meaning that MARCorp attached to its silence and did nothing to correct those misconceptions, even while MARCorp continued to act in ways that benefited Kanematsu. Although the arbitrator never actually stated that this conduct amounted to a promise, and thus never described this conclusion in terms specific to promissory estoppel, his findings do suggest a conclusion that Kanematsu' s silence eventually amounted to an unequivocal signal that it would subordinate its debt. Thus, his findings are roughly consistent with a finding of promissory estoppel. Given the deferential standard of review accorded to arbitration decisions, this rough concordance with applicable law is sufficient, and the decision was not based on manifest disregard for the law.
3. In Excess of the Arbitrator's Powers
An arbitrator's decision may be overturned if the arbitrator exceeded his powers, either by deciding issues not before him or going beyond the scope of the arbitration agreement, in reaching that decision. 9 U.S.C § 10(d); Eljer Mfg., Inc. v. Kowin Development Corp., 14 F.3d 1253, 1256 (7th Cir. 1994); Matteson, 99 F.3d at 112-113. Kanematsu argues that in basing his decision upon Kanematsu's failure to subordinate its debt the arbitrator decided an issue not before him. This argument, however, is based on an excessively narrow reading of MARCorp's counterclaim.
In its counterclaim, MARCorp alleged that Kanematsu induced MARCorp to increase its investments in Sutmyn but then failed to follow through on negotiating in good faith to transfer the debt. It then alleged that "on other occasions, Counter-respondent again induced MARCorp to provide additional financial support to Sutmyn in reliance on assurances which Counter-Respondent subsequently reneged." Response to Demand for Arbitration and Counterclaim at 3. The counterclaim does not specify that these additional assurances involved subordination of debt, and Kanematsu's argument turns on this omission. MARCorp's subsequent submissions, however, beginning with its opening arbitration brief, clarified that a promise of subordination was at the core of its claim.E.g. Reply Appendix in Support of Defendant Marcorp Investors' Motion to Confirm Arbitration Award ("Reply Appendix") Exhibits CC, EE, GG. Accordingly, Kanematsu's argument that this issue was not before the arbitrator and could not be the basis for his decision is groundless.
B. Prejudgment Interest
1. Modifying the Arbitrator's Decision
MARCorp requests that this Court modify the arbitrator's decision to allow recovery of prejudgment interest. This decision, like any other made by the arbitrator, must receive substantial deference, and here this Court will not disturb it.
The arbitrator's decision with respect to prejudgment interest is slightly contradictory. On one hand, he unequivocally concluded that the procedural moment for requesting such interest had passed, and that it was not within his power to award it. On the other hand, he stated that such an award was merited under the facts of the case, and went to the effort of specifically calculating what the award would be. The arbitrator appears to have acted like a district court anticipating appellate review, making potentially unnecessary findings of fact to avoid the need for remand should his decisions of law be reversed on appeal.
This Court does not perform de novo review of an arbitrator's legal conclusions, however. The arbitrator's decision that awarding prejudgment interest was outside his power will only be reversed if it was completely irrational or manifested disregard for the law, and in this case it did neither. Thus, his calculations of the amount that would have been appropriate were unnecessary.
The arbitrator based his refusal to award prejudgment interest on his conclusion that prejudgment interest was an element of damages, that damages went to the merits of the case, and that the merits of the case had already been decided and could not be reviewed. This conclusion was grounded in legal precedent and appears entirely rational; for the arbitrator to refuse to consider an additional request for damages after he has already made his award seems entirely reasonable. See North Oakland Medical Center v. Rogers, 65 Cal.App.4th 824, 830 (1998) ("It is well established that prejudgment interest is not a cost, but an element of damages. . . "); ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10th Cir. 1995) ("courts are not to instruct the arbitrator as to the correct computation of damages. A court may modify or correct the award only if it is "imperfect in matter of form not affecting the merits of the controversy.' The court will not disturb the arbitrator's award on these grounds." (citations omitted)
MARCorp cites California precedent establishing that, in a court case, an award of prejudgment interest may be made any time before the entry of judgment or before the time for requesting a new trial has expired.See,e.g., North Oakland Medical Center, 65 Cal.App.4th at 828; Britz, Inc. v. Alfa-Laval Foods Dairy Co., 34 Cal.App.4th 1085, 1106 (1995). MARCorp cites no case extending these principles to arbitration, however, let alone any precedent clarifying what the analogous deadlines would be. With no clear legal guidance regarding the appropriate time period for filing a claim for pre-award interest in an arbitration case, the arbitrator did not manifestly disregard the law in determining that MARCorp had raised its claim too late.
MARCorp also argues that this Court should order prejudgment interest under 9 U.S.C. § 11, which states that a court may modify an arbitrator's award "where the award is imperfect in a form not affecting the merits of the controversy. The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties." This section is clearly inapplicable. MARCorp suggests that the arbitrator's calculation of the interest amount implies an intent to award such intent. His express conclusion that such an award was outside his powers, however, conveys an express intent not to award interest, and this Court will not elevate an implied intent above an express contrary conclusion. More importantly, the arbitrator concluded that the revision requested by MARCorp did affect the merits of the controversy, and it is not within this Court's discretion to tinker with an arbitrator's reasoned conclusion on the merits of a case. ARW Exploration Corp., 45 F.3d at 1463.
2. Awarding Pre-Judgment, Pre-Award Interest through this Court's Power
Citing no precedent indicating that this has ever been done, MARCorp requests that this court award pre-arbitration award, prejudgment interest out of its own power even if it is unwilling to modify the arbitrator's decision. In other words, MARCorp argues that this Court should award exactly the same interest that the arbitrator refused to grant. This request is a fairly blatant attempt to have a court perform an end run around the arbitration process, substituting its own decision for that of the arbitrator. Courts have no such power.
C. Post-award, Pre-judgment Interest
In the alternative, MARCorp requests that this court award interest from the date of the arbitration award until the date of this judgment. This request is well grounded in the caselaw. See California Civil Code § 3287(a); Pierotti v. Torian, 96 Cal.Rptr.2d 553, 560 (Cal App. 2000); Alfa-Laval Foods Dairy Co., 34 Cal.App.4th at 1106. If the award is of a certain sum, as this award is, the prevailing party is entitled to 7% interest from the date of the award until the entry of judgment. In re Consolidated Pretrial Proceeding in Air West Securities Litigation, 436 F. Supp. 1281, 1286 (N.D. Cal. 1977). Accordingly, MARCorp is entitled to 7% interest from the date of the arbitration award.
V. CONCLUSION
For the foregoing reasons, this Court grants MARCorp's motions to affirm the arbitrator's award and to grant postarbitration award, prejudgment interest, and denies all other motions.
IT IS SO ORDERED.