Opinion
No. 03 Civ. 0209 (RWS)
March 18, 2003
Attorneys for Petitioners, JOEL S. FORMAN, ESQ., TERRY EDER-KAUFMAN, ESQ., CURTIS, MALLET-PREVOST, COLT MOSLE, New York, N.Y.
Attorneys for Respondent, MICHAEL H. SMITH, ESQ., SPITZER FELDMAN, New York, N.Y.
OPINION
Petitioners Weiss, Peck Greer, LLC ("WPG") and Roger J. Weiss ("Weiss") have moved pursuant to Section 10 of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the "FAA"), to vacate the $159,965 arbitration award rendered by an arbitration panel of the National Association of Securities Dealers ("NASD") in October 2002 to Respondent Susan Robinson ("Robinson"). Robinson has cross-moved to confirm the award, to direct entry of judgment in the amount of $159,965 plus post-judgment interest and for an award of attorneys' fees for the cost of opposing the motion to vacate.
For the following reasons, the award is confirmed, and Robinson shall receive post-judgment interest in the amount of nine percent from the time of the award to the time of payment. She shall not receive attorney's fees.
Facts
After the death of her husband in June 1996, Robinson sought advice from her husband's long-time friend, Weiss, for how best to invest $500,000. The petitioners assert that Robinson informed Weiss that she did not need to generate income from the investment to meet expenses, that her net worth was in excess of $2 million and that she was seeking an investment for long-term capital growth. Robinson had no prior business relationship with Weiss.
Weiss suggested several investments to Robinson, including municipal bonds, equity securities and managed funds. One of the recommended funds was the WPG-Schainuck Fund, L.P. (the "Fund"). WPG, a co-general partner of the Fund along with a WPG principal, James Schainuck ("Schainuck"), at the time had approximately $15 billion of assets under management.
On January 13, 1997, at Robinson's request, Weiss mailed to her the Fund's Confidential Memorandum, Subscription and Investment Representation Agreement, Investor Suitability Questionnaire and Limited Partnership Agreement. In a cover letter dated January 13, 1997, Weiss stated, "I want to emphasize to you that while I believe the investment is extremely attractive I do not want you to make it unless you feel comfortable with it. I am available to answer any questions that you may have."
About two weeks later, Robinson subscribed to the Fund. She executed the Fund's Subscription and Investment Representation Agreement, Investor Suitability Questionnaire and Limited Partnership Agreement and forwarded the executed documents to the Fund with her check dated February 1, 1997, for $500,000. As part of the executed subscription documents, Robinson represented and agreed that she had read and understood the fund Confidential Memorandum and Limited Partnership Agreement; that she understood and evaluated the risks set forth in the Confidential Memorandum; that she determined the investment was suitable; that she had the financial ability to bear the complete loss of the investment; that she had adequate means to provide her current needs; and that she had no need for liquidity. By executing the Subscription and Investment Representation Agreement, Robinson also represented that she "relied solely . . . on the information contained in the Memorandum and Limited Partnership Agreement," and that "[n]o representations or warranties relating to the Partnership have been made to [her] by the Partnership or the General Partners or any partner, officer, employee, agent or affiliate of any of them" (including petitioner Weiss) and that "there are no representations . . . except as stated or referred to" in the subscription agreement, Limited Partnership Agreement and the Investor Suitability Questionnaire. The Confidential Memorandum also stated that "NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATION, OR GIVE ANY INFORMATION WITH RESPECT TO THE INTERESTS, EXCEPT THE INFORMATION CONTAINED HEREIN."
The petitioners have referred to specific representations made to Robinson. The Confidential Memorandum on its first page stated:
PARTNERSHIP INTERESTS . . . ARE SUITABLE ONLY FOR SOPHISTICATED INVESTORS FOR WHOM AN INVESTMENT IN THE PARTNERSHIP DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND WHO FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISKS INVOLVED IN THE PARTNERSHIP'S SPECIALIZED INVESTMENT PROGRAM ( See "Certain Risk Factors").
It also stated:
THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVES OF THE PARTNERSHIP WILL BE ACHIEVED OR THAT THE HISTORICAL INVESTMENT PERFORMANCE OF THE ACCOUNTS IS INDICATIVE OF THE INVESTMENT PERFORMANCE WHICH WILL BE ACHIEVED BY THE PARTNERSHIP IN THE FUTURE. IN FACT, THE PRACTICES OF SHORT SELLING, LEVERAGE AND LTD DIVERSIFICATION CAN, IN CERTAIN CIRCUMSTANCES, MAXIMIZE THE ADVERSE IMPACT TO WHICH THE PARTNERSHIP'S INVESTMENT PORTFOLIO MAY BE SUBJECT. (SEE "CERTAIN RISK FACTORS.")
Among the "Certain Risk Factors" referred to were the following disclosures:
The Partnership is a recently-formed entity and has a limited operating history upon which investors can evaluate the likely performance of the Partnership.
The Partnership's investment program is speculative and presents a risk of substantial loss.
An investment in the Partnership provides limited liquidity since the Interests are not freely transferable and generally Partners may withdraw their capital only on the 12-month anniversary of their admission and at the end of each fiscal year thereafter.
All securities investments present a risk of loss of capital.
A significant portion of the Partnership's portfolio is generally concentrated in a small number of investment positions at any one time and, on an occasional basis, may be concentrated in a single investment, and to the extent the Partnership uses leverage or engages in short sales or uncovered options transactions, the risk of erroneous investment analysis will be maximized.
No guarantee or representation is made that the Partnership's program will be successful.
The allocation of 20% of the Partnership's net capital appreciation to the General Partners may create an incentive for the General Partners to cause the Partnership to make investments that are riskier or more speculative than would be the case if this special allocation were not made.
The Limited Partnership Agreement provides that an investor may withdraw from the Fund only on the twelve-month anniversary of the date of admission to the Fund and thereafter on December 31 of any year, in each case upon sixty days' written notice to the general partners (WPG and Schainuck) stating the amount to be withdrawn. Withdrawal under any other circumstances requires the consent, which is entirely discretionary, of the general partners.
In 1998, after her investment had declined in value, Robinson asked to withdraw from the hedge fund earlier than she was entitled to do so. The general partners of the fund requested that she execute a release, and she agreed. She signed the General Release on October 8, 1998, which released WPG's "heirs, executors administrators, successors and assigns from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialities, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever." Robinson later received a check from the fund for $340,035, representing a loss of $159,965 from her original investment.
There was some conflict among the parties as to when Robinson first requested to be released. Robinson claims she first requested to withdraw from the Fund in January 1998, at which time the value of her investment exceeded $580,000.
Robinson commenced arbitration in August 2001, claiming that the hedge fund investment had not been suitable for her, that the petitioners wrongfully refused Robinson's January 1998 request to withdraw from the WPG Fund, and that the General Release obtained in October 1998 was wrongfully obtained.
On May 23, 2002, petitioners filed a motion with the arbitrators to dismiss the statement of claim on the grounds that the claims were barred by (1) the General Release; (2) Robinson's ratification of the General Release by her failure to act soon after entering into it; and (3) a subscription agreement that extinguished any claim against Weiss. After briefing and oral argument, on July 15, 2002, the arbitrators denied the motion without opinion.
On October 22, 2002, the arbitrators awarded Robinson the amount she sought, finding the petitioners jointly and severally liable for $159,965, but denying an award for punitive damages and all other requests for relief. The arbitrators did not explain the basis of this decision except to state that they had considered "the pleadings, the testimony and evidence presented at the hearing." Award at 2.
The petitioners filed the instant petition on January 10, 2003. Robinson filed a cross-petition on January 30, 2003. Oral argument was heard on February 5, 2003, and the motions were considered fully submitted at that time.
Discussion I. Standard of Review
Review of arbitration awards is generally governed by the FAA. Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 201 (2d Cir. 1998). "In addition, relying on an observation by the Supreme Court in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 98 L.Ed. 168 (1953), overruled on other grounds in Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989), this court also has recognized that an arbitration award may be vacated if it is in `manifest disregard of the law.'" Id. (citing Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche Int'l, Ltd., 888 F.2d 260, 265 (2d Cir. 1989); Merrill Lynch, Pierce, Fenner Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986)). Manifest disregard "clearly means more than error or misunderstanding with respect to the law." Halligan, 148 F.3d at 202 (quoting Bobker, 808 F.2d at 933).
Review of arbitration awards for manifest disregard is "severely limited." Greenberg v. Bear Stearns Co., 220 F.3d 22, 28 (2d Cir. 2000) (citation omitted). In order to vacate an award on these grounds, a reviewing court must find both 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. Id. (citing Dirussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997)).
Where, as here, arbitrators decline to provide a full explanation for their decision, the court, nevertheless, must confirm the award "if a ground for the arbitrators' decision can be inferred from the facts of the case[,] . . . even if the ground for their decision is based on an error of fact or an error of law." Willemijn Houdstermaatschappii, BV v. Standard Microsystems Corp., 103 F.3d 9, 13 (2d Cir. 1997). On the other hand, "where a reviewing court is inclined to hold that an arbitration panel manifestly disregarded the law, the failure of the arbitrators to explain the award can be taken into account." Halligan, 148 F.3d at 204. The party seeking vacatur bears the burden of proving manifest disregard. Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 208 (2d Cir. 2002). II. The Award Against WPG and Weiss Is Confirmed
The petitioners have suggested that the arbitrators' findings were subject to enhanced scrutiny because the arbitration was compulsory under NASD rules. They do not cite to any case law where such enhanced scrutiny was applied when arbitration was compelled by the NASD rules and instead cite only cases that involve contractual agreements to arbitrate. E.g., Matter of Motor Vehicle Accident Indemnification Corp. v. Aetna Cas. Surety Co., 89 N.Y.2d 214, 223, 652 N.Y.S.2d 584, 589 (1996) ("[A]n award in a compulsory arbitration proceeding must have evidentiary support and cannot be arbitrary and capricious."). The Respondents, however, have cited a number of cases involving mandatory arbitration under NASD rules where the normal standard of review as discussed above was applied. E.g., Kruse v. Sands Bros. Co., 226 F. Supp.2d 484 (S.D.N.Y. 2002); Green v. Progressive Asset Mgmt. Inc., 2000 WL 1229755 (S.D.N.Y. Aug. 29, 2000).
The petitioners raise three separate issues to suggest that the arbitration award was in manifest disregard of the law: (1) the General Release should have precluded liability; (2) that the arbitrators ignored the existence of the prospectus; and (3) that the arbitrators should not have found that the investment was unsuitable. Because of the conclusions reached below, it is unnecessary to reach points (2) and (3).
A. The General Release
With regard to the General Release, the petitioners argue that the General Release is a valid contract, that Robinson did not enter it under duress and that, in any case, she would be precluded from raising the issue of duress because of the two-year lag between entering the General Release and pursuing the underlying arbitration.
Before even addressing these matters, it should be noted that, by its very terms, the General Release refers only to WPG as the releasee. Nor does Weiss appear to fit into any of the entities that are also covered by the General Release due to their relationship with the releasee, WPG. As a result, it was not in manifest disregard of the law for the arbitrators to conclude that Robinson was not barred by the General Release from pursuing her claims against Weiss. Therefore the following discussion is applicable only to the claims against WPG.
1. Releases Are Enforceable Contracts
A release is recognized as a contract under New York law. E.g., Booth v. 3669 Delaware, Inc., 92 N.Y.2d 934, 935, 680 N.Y.S.2d 899, 900 (1998) ("Where, as here, the language of a release is clear and unambiguous, the signing of a release is a `jural act' binding on the parties."); Mangini v. McClurg, 24 N.Y.2d 556, 563, 301 N.Y.S.2d 508, 513 (1969) ([a release] "is a jural act of high significance without which the settlement of disputes would be rendered all but impossible"); Thailer v. LaRocca, 174 A.D.2d 731, 733, 571 N.Y.S.2d 569, 571 (2d Dep't 1991) ("The general rule is that a valid release which is clear and unambiguous on its face and which is knowingly and voluntarily entered into will be enforced as a private agreement between parties."). See also 2 Broadway LLC v. Credit Suisse First Boston Mortgage Capital LLC, No. 00 Civ. 5773, 2001 U.S. Dist. LEXIS 4875, at *17 (S.D.N.Y. April 23, 2001) ("It is well established under New York law that a valid release . . . will be enforced as a private agreement between parties."). As a result, the claims against WPG could stand only if the arbitrators were able to find some reason why the contract should be voided.
The parties agreed that New York law governed the investment.
2. It Would Be in Manifest Disregard of the Law for the Panel To Have Considered the General Release Void Due to Duress
Before the panel, Robinson claimed in part that the release was invalid as extorted from her, or obtained under duress.
Under New York law, a release, the execution of which is induced by duress, is voidable. VKK Corp. v. Nat'l Football League, 244 F.3d 114, 122 (2d Cir. 2001) ("[T]he courts will not enforce an agreement in which one party has unjustly taken advantage of the economic necessities of another and thereby threatened to do an unlawful injury.") (quotation and citation omitted). However, "the person claiming duress must act promptly to repudiate the contract or release or he will be deemed to have waived his right to do so." Id. (quoting DiRose v. PK Mgmt. Corp., 691 F.2d 628, 633-34 (2d Cir. 1982)). If the repudiating party does not promptly repudiate the contract or release, she will be deemed to have waived ratified it. Id. ("A party may ratify a contract or release entered into under duress by `intentionally accepting benefits under the contract,' by `remaining silent or acquiescing in the contract for a period of time after he has the opportunity to avoid it,' or by `acting upon it, performing under it, or affirmatively acknowledging it.'") (quoting In re Boston Shipyard Corp., 886 F.2d 451, 455 (1st Cir. 1989)).
Delays as short as six months have been held to constitute forfeiture of the claim. Id. (citing DiRose, 691 F.2d at 634 (collecting cases in which delays ranging from six months to two years)). As the Second Circuit explained:
The requirement that the party claiming duress disclaim the contract or release about which he is complaining promptly or be held to have forfeited his right to do so protects the stability and reliability of such agreements by denying the weaker party the "heads I win, tails you lose" option of waiting to see how the arrangement works out and then deciding whether to seek to undo it. Under this rule, shortly after the execution of a contract or release, the rights and duties under it become free of the doubt engendered by possible assertions of duress.
VKK, 244 F.3d at 123. The arbitrators were presented with this well-defined, explicit and clearly applicable law.
There is no dispute that Robinson entered the release in October 1998, and that she did not contact WPG about the potential invalidity of the release until almost two years later. Waiting two years to contest the validity of a release for reasons of duress clearly constitute ratification under New York law, and thus to find otherwise would be in manifest disregard of the law.
3. The Arbitrators Would Not Be Acting in Manifest Disregard of the Law to Conclude that the General Release Was Not Effective Against the Breach of Fiduciary Duty Claims
The General Release does not totally eviscerate Robinson's claims against WPG, however. At the arbitration, Robinson also argued that New York law does not sanction the use of releases in order to avoid a breach of fiduciary duty cause of action, relying on Murphy v. Gutfreund, 583 F. Supp. 957, 971 (S.D.N.Y. 1984). See also Zackiva Communications Corp. v. Horowitz, 826 F. Supp. 86, 90-91 (S.D.N.Y. 1993) ("[A] general release will not insulate a defendant from allegations of breach of fiduciary duty, where defendants have not fully disclosed alleged wrongdoing or conflict of interest."); Fredericks v. Goldschmidt, 1991 WL 18159, at *8 (S.D.N.Y. Feb. 5, 1991) ("New York law does not sanction use of releases in order to avoid a breach of fiduciary duty cause of action.") (quoting Murphy, 583 F. Supp. at 971).
In the arbitration award, breach of fiduciary duty is listed as one of the causes of action. Award, at 1.
Although WPG has questioned the correctness of applying those precedents to this situation, particularly given Robinson's apparent knowledge of the actions complained of at the time she signed the release, the arbitrators' potential conclusion that the General Release was ineffective against breach of fiduciary claims would not be in manifest disregard of the law. Thus, if Robinson's fiduciary duty cause of action is viable, WPG's motion to vacate must fail.
Under New York law, the required elements for a breach of fiduciary duty are (1) the existence of a fiduciary relationship between the parties and (2) breach of the fiduciary duty. Cramer v. Devon Group, Inc., 774 F. Supp. 176, 184 (S.D.N.Y. 1991). With regard to WPG, the petitioners do not appear to contest that WPG owed a fiduciary duty to Robinson, but rather argue that there was no breach of that duty.
Robinson alleges that the Partnership wrongfully refused her request in January 1998 to remove her investment from the Fund. Evidence showed that she, through her own and the actions of another investment advisor, contacted Weiss twice in January 1998 to get out of the investment. There is no evidence that WPG responded to this request. Indeed, according to Robinson, she had to make another request in the fall of 1998, at which time WPG finally permitted Robinson to withdraw her substantially reduced investment, after conditioning that withdrawal upon the signing of a General Release. While it is not clear that Weiss passed on the request to the General Partners, the petitioners have failed to present any clearly applicable and controlling case law that was presented to the arbitrators and that would mandate a finding that the nine-month lag in responding to Robinson's request was not a breach of fiduciary duty. WPG had the right to deny Robinson's request to withdraw her investment; it did not have the right to ignore the request.
WPG argues that there was no breach because it was acting pursuant to its contractual rights in requiring Robinson to obtain their special consent. E.g., Cooper Dev. Co. v. Friedman, 92 Civ. 7572, 1994 U.S. Dist. LEXIS 1814, at *13 (S.D.N.Y. Feb. 22, 1994) (finding no breach where partner did what he was authorized to do under partnership agreement); Greenwich Global LLC v. Clairvoyant Capital LLC, 2002 Conn. Super. LEXIS 2834, at *13 (Conn.Super.Ct. Aug. 22, 2002) (general partner acting in good faith reliance on provisions in partnership agreement is shielded from liability for breach of fiduciary duty premised on those actions); Shilkoff, Inc. v. 995 Third Ave. Corp., 750 N.Y.S.2d 53, 54 (1st Dep't 2002) (dismissing breach of fiduciary claim as redundant of contract claim as it was predicated on same allegations). WPG misconstrues Robinson's breach of fiduciary duty claim. As discussed above, Robinson's claim is grounded not so much in the fact that WPG made her obtain the General Partners' permission to withdraw her funds in October 1998, as was the General Partners' contractual right, but that her earlier request to obtain that special permission was either discarded by a limited partner or ignored by the General Partners.
As a result, the arbitrators' finding that WPG breached its fiduciary duty was not in manifest disregard of the law. Because a finding that WPG was liable for breach of fiduciary duty is sufficient to justify the award, there is no need to address WPG's arguments with regard to the other causes of action alleged. Therefore, the award is confirmed as against WPG.
B. Weiss's Liability
The petitioners allege that the arbitrators could not have found Weiss liable because he was not a general partner of the Fund and was not Robinson's broker or advisor and because such liability was barred by the prospectus, the subscription agreement and the limited partnership agreement.
The above documents contain merger clauses, asserting that Robinson should rely solely on information contained in the documents and that no representations or warranties had been made other than those in the documents. It is not clear that the arbitrators' conclusions relied on any ignorance of these documents. Instead, the claim for breach of fiduciary duty, as discussed above, appears to be viable and unhindered by any of the documents cited by the petitioners.
As discussed above, the required elements for a breach of fiduciary duty are (1) the existence of a fiduciary relationship between the parties and (2) breach of the fiduciary duty. Cramer, 774 F. Supp. at 184. The petitioners argue here that Weiss owed no fiduciary duty to Robinson. However, unusual circumstances, such as a situation where one party assumes control and responsibility for another, can create a fiduciary duty. Mfrs. Hanover Trust Co. v. Yanakas, 7 F.3d 310, 318 (2d Cir. 1993). According to Robinson, she went to Weiss after the death of her husband because her husband had recommended Weiss, his long-time friend, for that purpose. Indeed, Robinson has included in her papers a very considerate letter written by Weiss to Robinson after her husband' s death revealing some degree of familiarity with both of the Robinsons. On Weiss's advice, Robinson entered into this investment of which he was a limited partner and over which he had some degree of authority. Further, she went to Weiss when she wanted to extract her investment from the Fund. While the former events may not necessarily have created a fiduciary relationship, it would not have been a manifest disregard of the law for the arbitrators to conclude that Robinson's request to Weiss to leave the Fund — in light of the past relationship and in the absence of any denial by Weiss of his ability to perform as she asked — created a fiduciary duty that he breached when, according to Robinson, he either failed to pass on her request to the General Partners or failed to inform her of the General Partners' denial of that request.
As a result, the fiduciary duty created by Robinson's request to Weiss was not barred by the documents referred to above and therefore is sufficient to justify the award against Weiss. In light of this conclusion, there is no need to determine whether a grounding of liability on the other causes of actions would have been in manifest disregard of the law. The award as against Weiss is confirmed.
Conclusion
In light of the foregoing facts, the petitioners' motion to vacate is denied, and Robinson's motion to confirm is granted. Post-judgment interest at nine percent shall be awarded to Robinson. Her request for attorney's fees is denied.