Opinion
8:18-CV-15
2019-09-30
PROSPECT FUNDING HOLDINGS (NY), LLC, Plaintiff and Counter-Defendant, v. RONALD J. PALAGI, P.C., L.L.C., and Che Stubblefield, Defendants and Counterclaimants.
Adam W. Barney, Cline, Williams Law Firm-Omaha, Omaha, NE, for Plaintiff and Counter-Defendant. John K. Green, Pickens, Daubman Law Firm, Ronald J. Palagi, Palagi Law Office, Omaha, NE, for Defendants and Counterclaimants.
Adam W. Barney, Cline, Williams Law Firm-Omaha, Omaha, NE, for Plaintiff and Counter-Defendant.
John K. Green, Pickens, Daubman Law Firm, Ronald J. Palagi, Palagi Law Office, Omaha, NE, for Defendants and Counterclaimants.
MEMORANDUM AND ORDER
John M. Gerrard, Chief United States District Judge
The plaintiff, Prospect Funding Holdings (NY), LLC, seeks confirmation of two arbitration awards pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., and have moved for summary judgment to that effect. Filing 64. The defendants, Ronald J. Palagi, P.C., L.L.C. ("RJP") and Che Stubblefield, have asked to vacate the awards, and have filed cross-motions for summary judgment. Filing 64; filing 69; filing 78.
As explained below, the Court finds that RJP and Stubblefield weren't provided with adequate notice of either the commandment of arbitration proceedings or the arbitration awards. So, the Court concludes that the arbitration awards aren't enforceable. The Court will deny Prospect Funding's motion for summary judgment and grant the defendants' motions. BACKGROUND
Stubblefield was represented by RJP in a lawsuit in Douglas County District Court. On January 27, 2016, Stubblefield and Prospect Funding entered into a "Sale and Repurchase Agreement" pursuant to which Prospect Funding agreed to purchase a share of Stubblefield's claims in the state court case. Filing 2-2; filing 79 at 3. The Agreement provided for an initial payment to Stubblefield of $5,000, in exchange for which Prospect Funding received a share of Stubblefield's claim in the amount of $23,120. Filing 2-2 at 1. The Agreement also provided for up to seven monthly "additional purchases" in which Stubblefield would receive another $3,000 each month in exchange for an additional $12,036 share of Stubblefield's claims. Filing 2-2 at 1. The Agreement provided that the "maximum amount of Additional Prospect Ownership Amount will be $84,252 with a total purchase price of $24,780." Filing 2-2 at 1 (emphasis omitted). Accordingly, if all the additional purchases had been made, Stubblefield would have received $26,000 in exchange for a $107,372 interest in his claims. Filing 2-2 at 13.
Pursuant to NECivR 56.1, a party moving for summary judgment must include in its brief a statement of material facts about which the movant contends there is no dispute, and the party opposing summary judgment must include in its brief a concise response to that statement of facts, noting any disagreement. Properly referenced material facts in the movant's statement are considered admitted unless controverted in the opposing party's response. Rule 56.1(b)(1).
The Agreement provided that if Stubblefield received nothing on his claims in state court, then he would owe Prospect Funding nothing. Filing 2-2 at 1. If he recovered on his claims, he would receive nothing until Prospect Funding had received its ownership amount, but his obligation to pay Prospect Funding was limited to amounts he recovered. Filing 2-2 at 1, 4. The Agreement provided, however, that if Stubblefield did not comply with the Agreement or attempted to avoid paying Prospect Funding, he would be liable for liquidated damages of twice the amount of Prospect Funding's ownership amount in his claims, regardless of the outcome of the underlying case. Filing 2-2 at 1, 5.
And the Agreement contained an arbitration clause. Filing 2-2 at 1, 6-7; filing 79 at 3. Specifically, the Agreement provided in relevant part that "the Federal Arbitration Act (‘FAA’) applies to this agreement and arbitration provision" and that the parties agreed that "the FAA's provisions—not state law—govern all questions of whether a dispute is subject to arbitration." Filing 2-2 at 7 (emphasis omitted); filing 79 at 3. Stubblefield and Prospect Funding further agreed that
any dispute or disagreement between these parties arising under this agreement or otherwise of any nature whatsoever including, but not limited to, those sounding in constitutional, statutory, or common law theories as to the performance of any obligations, the satisfaction of any rights, and/or the enforceability hereof, shall be resolved through demand by any party and/or interested party to arbitrate the dispute in New York in and under the laws of’ the State of New York and [they] shall submit the same to a neutral arbitration association for resolution pursuant to its single arbitrator, expedited rules.
Filing 2-2 at 7 (emphasis omitted); see filing 79 at 3.
Stubblefield also signed an "Irrevocable Letter of Direction," addressed to Palagi, directing Palagi to pay Prospect Funding from any settlement proceeds. Filing 2-2 at 9; filing 79 at 4. Palagi signed the "Attorney Acknowledgement" at the end of the letter, acknowledging the arbitration clause and agreeing to honor the letter. Filing 2-2 at 10; filing 79 at 4.
For the sake of clarity, to distinguish between Ronald J. Palagi and his eponymous law firm, the Court has referred to the firm as "RJP" and Palagi himself by name.
Prospect Funding asserts that Stubblefield received a settlement in the state court litigation and refused to pay Prospect Funding. Filing 2-1 at 2. Palagi told Prospect Funding he didn't believe the Agreement was enforceable. Filing 79 at 4. So, Prospect Funding initiated separate arbitration claims against Stubblefield and RJP with Arbitration Resolution Services, Inc. (ARS). Filing 2-3; filing 2-4; filing 79 at 4. ARS sent emails about the pending arbitration to Palagi and Stubblefield at email addresses that had been provided to Prospect Funding. Filing 79 at 4-5; filing 80-3; filing 80-4. Palagi and Stubblefield both aver, however, that they received no notice of the arbitration proceeding. Filing 80-1 at 56, 71.
On April 25, an arbitration award against RJP in the amount of $190,672 was entered by an arbitrator. Filing 2-5; filing 79 at 5. No one appeared on RJP's behalf. Filing 2-5. The award explained:
The arbitrator finds a valid contract in the Sale and Repurchase Agreement between Prospect Funding Holdings LLC and Che Stubblefield including an Irrevocable Letter of Direction acknowledged by Attorney Ronald J. Palagi dated January 27, 2016. Arbitrator finds jurisdiction over this matter as set forth in said documents and as agreed to by the parties. The plaintiff has purchased an interest in the case settlement proceeds in the sum of $95,336.00. There is a breach of said contract in that Attorney Palagi has failed to advise the Plaintiff of the status of said case and failed in the attorney's fiduciary duty to pay the Plaintiff from said settlement proceeds as set forth in the Agreement. Attorrney [sic] Palagi has admitted failure to pay and has failed to respond to said complaint. Therefore, the Arbitrator finds for the Plaintiff, Prospect Funding Holdings, LLC the full contract amount of $95,336.00 plus liquidated damages of twice the amount as set forth in the contract for a judgement of $190,672.00 plus costs and expenses.
Filing 2-5. A similar award as to Stubblefield was entered on August 8. Filing 2-7; filing 79 at 5. ARS sent the awards to Palagi and Stubblefield at the same email addresses it had been using. Filing 2-6; filing 2-7; filing 79 at 5.
Prospect Funding filed the present petition to confirm the arbitration awards on January 12, 2018. Filing 1. The defendants answered on February 20. The answer contained a cross-petition to vacate the arbitration awards, and was accompanied by an affidavit denying that notice of the arbitration proceeding had been given. Filing 11 at 3-4; filing 11-1 at 1; see 9 U.S.C. § 12. The Court ordered limited discovery. Filing 32. These cross-motions for summary judgment followed. Filing 64; filing 69; filing 78.
STANDARD OF REVIEW
Summary judgment is proper if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). The movant bears the initial responsibility of informing the Court of the basis for the motion, and must identify those portions of the record which the movant believes demonstrate the absence of a genuine issue of material fact. Torgerson v. City of Rochester , 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc). If the movant does so, the nonmovant must respond by submitting evidentiary materials that set out specific facts showing that there is a genuine issue for trial. Id.
On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts. Id. Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the evidence are jury functions, not those of a judge. Id. But the nonmovant must do more than simply show that there is some metaphysical doubt as to the material facts. Id. In order to show that disputed facts are material, the party opposing summary judgment must cite to the relevant substantive law in identifying facts that might affect the outcome of the suit. Quinn v. St. Louis Cty. , 653 F.3d 745, 751 (8th Cir. 2011). The mere existence of a scintilla of evidence in support of the nonmovant's position will be insufficient; there must be evidence on which the jury could conceivably find for the nonmovant. Barber v. C1 Truck Driver Training, LLC , 656 F.3d 782, 791-92 (8th Cir. 2011). Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Torgerson , 643 F.3d at 1042.
DISCUSSION
The FAA establishes a liberal federal policy favoring arbitration agreements. Epic Sys. v. Lewis , ––– U.S. ––––, 138 S. Ct. 1612, 1621, 200 L.Ed.2d 889 (2018). So, the Court is required to rigorously enforce arbitration agreements according to their terms. Id. The Court must accord an extraordinary level of deference to the underlying awards. SBC Advanced Sols., Inc. v. Commc'n Workers of Am., Dist. 6 , 794 F.3d 1020, 1027 (8th Cir. 2015). Courts have no authority to reconsider the merits of an arbitration award, even when the parties allege the award rests on factual errors or a misinterpretation of the underlying contract. Med. Shoppe Int'l v. Turner Invs., Inc. , 614 F.3d 485, 488 (8th Cir. 2010). The Court must confirm the award even if it is convinced that the arbitrator committed serious error, so long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his or her authority. See id. ; see also SBC Advanced Sols. , 794 F.3d at 1027.
REGISTRATION TO TRANSACT BUSINESS IN NEBRASKA
The defendants proffer several arguments against confirmation of the arbitration awards, primarily that they didn't get notice of the arbitration proceeding. But they also present what they say is a jurisdictional issue: they contend that Prospect Funding can't maintain suit because it's not registered to do business in Nebraska. Filing 65 at 5; filing 70 at 9. And Neb. Rev. Stat. § 21-162 provides that "[a] foreign limited liability company transacting business in this state may not maintain an action or proceeding in this state unless it has a certificate of authority to transact business in this state."
But that argument is easily disposed of, for two reasons. First, as Prospect Funding points out, the defendants haven't presented any evidence in support of their argument. Filing 79 at 13; see filing 32 at 16-17. So, the Court has no evidence that Prospect Funding is actually transacting business in Nebraska, beyond the transactions at issue. See Neb. Rev. Stat. § 21-157. Second, the Nebraska Supreme Court's construction of a substantially identical statute relating to corporate registration establishes that in these transactions, Prospect Funding was, for purposes of the registration requirement, "transacting business in interstate commerce" rather than in Nebraska. RM Campbell Indus., Inc. v. Midwest Renewable Energy, LLC , 294 Neb. 326, 886 N.W.2d 240, 251 (2016) ; see § 21-157(10).
NOTICE OF ARBITRATION PROCEEDING
The defendants argue they weren't given proper notice of the arbitrations. As a general matter, "[w]ithout question due notice should be given to the parties, of the time and place for hearing the cause, and if the award was made without such notice, it ought, upon the plainest principles of justice, to be set aside." Lutz v. Linthicum , 33 U.S. 165, 178-79, 8 Pet. 165, 8 L.Ed. 904 (1834). All parties in an arbitration are entitled to notice and an opportunity to be heard. 21st Fin. Servs. v. Manchester Fin. Bank , 747 F.3d 331, 337 (5th Cir. 2014). And, while Prospect Funding has presented evidence ARS sent emails notifying the defendants of the arbitration, "the record is devoid of evidence to contract the [defendants'] sworn assertions that they never received notice of the arbitration proceedings" until after the awards were issued. See Choice Hotels Int'l v. SM Prop. Mgmt. , 519 F.3d 200, 208 (4th Cir. 2008).
Instead of actual notice of the arbitrations, Prospect Funding relies on the constructive notice it insists was given. See filing 79 at 7-12. But the Court isn't persuaded that constructive notice is sufficient if it wasn't delivered in the manner provided by the arbitration clause—and here, it wasn't. A technical defect in the form of notice might be excusable where actual notice was received. See 21st Fin. Servs. , 747 F.3d at 336-37. Similarly, constructive notice might be enough if it was served in the manner prescribed by the arbitration agreement. See Gingiss Int'l v. Bormet , 58 F.3d 328, 332 (7th Cir. 1995) ; Ebbe v. Concorde Inv. Servs. , 392 F.Supp.3d 228, 241-42 (D. Mass. 2019) ; Int'l Union of Bricklayers & Allied Craftworkers v. Middleton Constr., Inc. , No. 99-CV-433, 2000 WL 34228199, at *4 (W.D. Wis. Sept. 20, 2000). But a party invoking an agreement to arbitrate can't replace the notice required by the agreement with constructive notice delivered by some other means.
Specifically, as noted above, the Agreement in this case provided for arbitration "in New York in and under the laws of the State of New York." Filing 2-2 at 7. The Agreement did not otherwise specify the form of notice to be given upon invoking the arbitration clause, or specify another set of rules to be followed. That leaves the Court looking to New York law, which required the arbitrator to "appoint a time and place for the hearing and notify the parties in writing personally or by registered or certified mail not less than eight days before the hearing." N.Y. C.P.L.R. 7506(b). And under New York law, failure to provide that notice renders any subsequent award void and unenforceable. See 21 Lizensk Corp. v. Spillman , 14 A.D.3d 617, 787 N.Y.S.2d 890 (2005) ; Matter of Eagle Ins. , 202 A.D.2d 273, 608 N.Y.S.2d 655 (1994) ; MBNA Am. Bank, NA v. Straub , 12 Misc.3d 963, 815 N.Y.S.2d 450, 457 (Civ. Ct. 2006).
The Agreement did provide for submission to "a neutral arbitration association for resolution pursuant to its single arbitrator, expedited rules." Filing 2-2 at 7. But reference to an unspecified arbitration association could not issue a blank check to superimpose another set of rules over the rules specified in the Agreement. Nor does Prospect Funding rely on ARS rules. See filing 79 at 7-12, 20 n.7.
That's also consistent with the general provision of the Agreement that "[a]ll notices and communications given or made pursuant to" the Agreement "shall be in writing" to be "delivered personally or sent by registered or certified mail (postage prepaid, return receipt requested) or delivered by reputable overnight courier[.]" Filing 2-2 at 6.
At least, absent proof of actual notice. See Shamah v. Schweiger , 21 F. Supp. 2d 208, 214-15 (E.D.N.Y. 1998).
The FAA requires courts to rigorously enforce arbitration agreements according to the terms—but that includes enforcing "the rules under which that arbitration will be conducted." Epic Sys. , 138 S. Ct. at 1621. And by agreeing to arbitrate under New York law, the parties incorporated New York's procedural rules into their agreement. See Domnarski v. UBS Fin. Servs. , 919 F. Supp. 2d 183, 186 (D. Mass. 2013) ; see also Webster v. A.T. Kearney, Inc. , 507 F.3d 568, 572-73 (7th Cir. 2007). The Court can't find that notice of the arbitration proceeding was provided when the applicable rule wasn't followed and there is no evidence of actual notice.
NOTICE OF ARBITRATION AWARDS
Prospect Funding also argues that the defendants' challenge to notice of the arbitration proceeding was waived by their failure to serve a motion to vacate the awards within 3 months of the award. Filing 79 at 19-20. Specifically, under the FAA, "[n]otice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered." § 12. A party who fails to comply with the statutory precondition of a timely motion to vacate forfeits the right to judicial review of the award. Piccolo v. Dain, Kalman & Quail, Inc. , 641 F.2d 598, 600 (8th Cir. 1981). The Court, in fact, lacks jurisdiction to modify or vacate the award in that situation. See id. ; see also RGA Reinsurance Co. v. Ulico Cas. Co. , 355 F.3d 1136, 1139 (8th Cir. 2004).
Here, the defendants did not seek to vacate the awards until filing their answer in this case—within 3 months of being served with Prospect Funding's complaint, but well beyond 3 months of the awards themselves. The question is when the 3-month clock started—that is, when the awards were "filed or delivered" within the meaning of § 12.
"Surprisingly, few decisions have directly addressed what it means for an award to be ‘delivered.’ " Webster , 507 F.3d at 572. But, in the absence of a specific arbitration rule to the contrary, courts have concluded that "delivery" for purposes of § 12 refers to actual receipt of the award. See Sargent v. Paine Webber Jackson & Curtis, Inc. , 882 F.2d 529, 531 (D.C. Cir. 1989) ; Russ v. United Servs. Auto. Ass'n , No. 18-CV-4222, 2019 WL 3083015, at *6 (D. Ariz. Jul. 15, 2019) ; Silicon Power Corp. v. Gen. Elec. Zenith Controls, Inc. , No. 08-CV-4331, 2009 WL 1971390, at *5 (E.D. Pa. July 7, 2009) ; ABNL (Andy Boyo Nigeria) Ltd. v. Baker Hughes Process Sys. , No. 4:04-CV-4662, 2005 WL 8164068, at *7 (S.D. Tex. May 16, 2005) ; Nordahl Dev. Corp. v. Saloman Smith Barney , 309 F. Supp. 2d 1257, 1269 (D. Or. 2004) ; Possehl, Inc. v. Shanghai Hia Zing Shipping , No. 00-CV-5157, 2001 WL 214234, at *3 (S.D.N.Y. Mar. 1, 2001) ; cf. Pfannensteil v. Merrill Lynch, Pierce, Fenner & Smith , 477 F.3d 1155, 1158 (10th Cir. 2007) ; Real Color Displays, Inc. v. Universal Applied Techs. Corp. , 165 F.3d 19 (4th Cir. 1998).
That understanding of § 12 is hard to reconcile with a reliance on constructive notice. Instead, Prospect Funding relies on Webster for the proposition that ARS "delivered" the arbitration awards when its emails were sent. Filing 79 at 20. But Webster hurts Prospect Funding far more than it helps, because Webster stands for the proposition that "delivery" can mean something other than receipt when the rules for the arbitration provide another definition. 507 F.3d at 572-73 ; see Tallakoy, LP v. Black Fire Energy , 680 F. App'x 441, 444 (6th Cir. 2017) ; Salus Capital Partners v. Moser , 289 F. Supp. 3d 468, 476 (S.D.N.Y. 2018) ; Domnarski , 919 F. Supp. 2d at 186. And for substantially the same reasons the Court has already explained, that leads the Court back to New York law, which provides that an arbitration award "shall be in writing, signed and affirmed by the arbitrator[,]" who "shall deliver a copy of the award to each party in the manner provided in the agreement, or, if no provision is so made, personally or by registered or certified mail, return receipt requested. " N.Y. C.P.L.R. § 7507 (emphasis supplied).
As noted above, to the extent the Agreement provides a method of notice, it's effectively the same: personal service; registered or certified mail, return receipt requested; or reputable overnight courier. Filing 2-2 at 6. So, the rules for arbitration expressly incorporated into the Agreement required delivery by personal service or registered or certified mail. That was only accomplished, on the record before the Court, when Prospect Funding served process in this case on January 30, 2018. Filing 9; filing 10; see Tallakoy , 680 F. App'x at 446. The defendants' February 20 cross-petition to vacate was timely. Filing 11.
As already noted, to the extent that ARS's own rules might have provided for service by email—and there's no evidence of that before the Court, aside from some broken hyperlinks in a footnote in Prospect Funding's brief—Prospect Funding has expressly disclaimed any reliance on ARS rules. Filing 79 at 20 n.7.
CONCLUSION
The Court concludes, on the record before it, that the defendants were not provided with required notice of the arbitrations, and they timely sought to vacate the awards. "Courts have not settled on how to treat claims of inadequate notice of an arbitration in a proceeding to vacate an award under the FAA," Ebbe , 392 F.Supp.3d at 236, and an arbitration award may be vacated only for the reasons enumerated in the FAA, Med. Shoppe , 614 F.3d at 489.
But an arbitration award may be vacated where the arbitrators were guilty of "misconduct," that is, "misbehavior by which the rights of any party have been prejudiced." § 10(a)(3). That requires a showing that the party seeking to vacate the award was deprived of a fair hearing, Brown v. Brown-Thill , 762 F.3d 814, 820 (8th Cir. 2014), and that the arbitrator's conduct influenced the outcome of the arbitration, Delta Mine Holding Co. v. AFC Coal Props. , 280 F.3d 815, 822 (8th Cir. 2001).
The Court's finding that the arbitrator failed to provide notice of the proceedings as required by New York law and the Agreement itself meets that standard. Cf. Choice Hotels , 519 F.3d at 210 ; cf. also Amalgamated Cotton Garment & Allied Indus. Fund v. J.B.C. Co. of Madera , 608 F. Supp. 158, 164-65 (W.D. Pa. 1984). Accordingly,
IT IS ORDERED:
1. Stubblefield's motion for summary judgment (filing 64) is granted.
2. RJP's motion for summary judgment (filing 69) is granted.
3. Prospect Funding's motion for summary judgment (filing 78) is denied.
4. The arbitration awards are vacated.
5. A separate judgment will be entered.