Arbitration Award Overturned as Exceeding Arbitrator’s Authority

KUDLER V. TRUFFELMAN, (No. 6093-6094-6095-600237/08, 6096, March 22, 2012)

The respondents, Truffelman, appealed a judgment which confirmed the arbitration award in favor of the petitioner, Kudler, wherein: (1) Kudler was awarded against the arbitration respondents, jointly and severally; (2) Truffelman was directed to return specified life insurance policies covering Kudler’s life to Kudler while obligating Truffelman to all outstanding loans taken out by them; (3) Kudler was awarded punitive damages; (4) Kudler was awarded attorney’s fee. The case arose out of a dispute regarding the partnership agreement the parties entered into in 1990. The agreementdictated the parties’ responsibilities in the event of a partner’s disability. The agreement also contained an arbitration clause.

Kudler became ill in 2000 and decided not return to the parties’ practice. In 2001, the parties entered into a disability retirement agreement to supplement the 1990 agreement. Under such agreements, Kudler would accept certain disbursements of funds.

The parties disputed the accounting of monies that came into their partnership. Kudler filed a demand for arbitration with the American Arbitration Association against Truffelman. The arbitrator issued an award in favor of Kudler against the arbitration defendants awarding, among other things, life insurance policies covering the life of Kudler, punitive damages, and attorney’s fees. The Supreme Court of New York confirmed the arbitration award.

The Appellate Division first held that the award of punitive damages was improper under the rule in Garrity v. Lyle Stuart, 40 N.Y.2d 354 (1976), which prohibited arbitrators from awarding punitive damages unless preempted. In addition, the court opined that the arbitrator exceeded her powers and gave an irrational construction to the provisions of the partnership agreement when she awarded Kudler the assignment of the policies taken out on his life by the partnership. The court also found such use of excessive power in the arbitrator’s order obligating Truffelman to pay any loans taken out by them on those assigned life insurance policies. As there was no clearly prevailing party, the court held that the award of attorney’s fee was unwarranted.

IMPACT – REINSURANCE: This case provides a somewhat rare example of an arbitration award being overturned based on the arbitrator exceeding her authority and making irrational decision.