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Johnson v. Lajat International Investments, Inc.

United States District Court, S.D. New York
Dec 1, 2004
No. 04 Civ. 5897 (SAS) (S.D.N.Y. Dec. 1, 2004)

Opinion

No. 04 Civ. 5897 (SAS).

December 1, 2004

James B. Kobak, Jr., Esq., Hughes Hubbard Reed LLP, New York, New York, for Plaintiff.

David B. Gordon, Esq., Schoeman, Updike Kaufman, LLP, New York, New York, for Defendant.


OPINION AND ORDER


I. INTRODUCTION

Charles S. Johnson, Jr. ("Johnson") moves, pursuant to section 9 of the Federal Arbitration Act ("FAA"), to confirm an arbitration award (the "Award") dated July 9, 2004. Lajat International Investments, Inc. ("Lajat") opposes the motion and cross moves to vacate or modify the Award. For the reasons set forth below, Johnson's motion to confirm the Award is granted.

The basis for jurisdiction is 28 U.S.C. § 1332. Johnson is a Connecticut resident and Lajat is a corporation organized under the laws of the State of Nevada, with its principal office in the State of Texas. The amount in controversy, exclusive of interest and costs, exceeds $75,000. See Application to Confirm Arbitration Award ("App.") ¶¶ 1-3.

II. FACTS

On March 26, 2001, Johnson and Lajat executed an Investment and Cooperation Agreement ("ICA") and a Put and Call Agreement ("PCA"). The ICA provided that on March 26, 2001, the parties would enter into a stock purchase agreement, pursuant to which Lajat would receive fifteen percent of the issued and outstanding shares of C.S. Brooks, Inc. ("CSB") (the "CSB Stock"). Prior to that date, Johnson owned one hundred percent of the CSB Stock. In exchange, Lajat agreed to pay $3 million cash to Johnson at the closing and give Johnson two promissory notes, each in the amount of $1.75 million. The first note, payable on March 26, 2002, was subject to the condition that no Event of Default, as defined in the following paragraph, had occurred. The second note, payable on March 26, 2003, was subject to the same condition, plus another condition that Johnson had effected a forty-percent spin-off of CSB's wholly-owned owned subsidiary, CSB Home Fashions, Inc. ("Home Fashions").

See Investment and Cooperation Agreement By and Among Lajat International, Inc. and Charles S. Johnson, Jr., Ex. C to Affidavit of David B. Gordon, Attorney for Lajat ("Gordon Aff."); Put and Call Agreement, Ex. D to Gordon Aff.

See ICA § 3.1.

See id. § A.

See id. § 3.1.

See id. § 3.1(b).

See id. ¶ 3.1(c). On September 1, 1999, Home Fashions was given a license to use the marks "Donna Karan New York" and "DKNY" for its bedding and bath products (the "DKNY License"). See License Agreement Between Donna Karan Studio and CSB Home Fashions, Inc. (the "DKNY License Agreement"), Ex. G to Gordon Aff. Lajat's primary incentive for entering into the agreements with Johnson was to acquire an interest in the potentially lucrative DKNY License. However, the DKNY License Agreement and a pre-existing agreement between CSB and its primary financial lender (the "Existing Credit Agreement") restricted Lajat from directly acquiring an interest in Home Fashions. Accordingly, the ICA provided that Lajat would initially purchase the CSB Stock and then exchange it for a forty percent share of Home Fashions once Johnson had effected a modification to the Existing Credit Agreement. See 3/8/04 Transcript of Arbitration Proceedings ("3/8/04 Tr."), Ex. A to Gordon Aff., at 6; ICA §§ 1.1.1, 1.1.2.

Section 3.4 of the ICA and section 1 of the PCA defined an "Event of Default" as the occurrence of one of two events: (A) "the Bank's refusal to grant extension of the maturity date under CSB's Credit Agreements, `under the same or better terms to CSB,'" or (B) "notification by DKNY of its intent to terminate the DKNY License Agreement." If either Event of Default occurred, Lajat had the right to exercise a "Put Option," requiring Johnson to repurchase the CSB Stock for $3,000,000, plus interest, and to cancel the promissory notes.

Respondent's Memorandum of Law in Support of Cross-Motion to Vacate or Modify Arbitral Awards and in Opposition to Motion to Confirm Arbitral Awards ("Res. Mem.") at 4 (citations omitted and defined terms altered) (citing ICA § 3.4; PCA § 1).

Id.

Section 8.1 of the ICA provided:

Dispute Resolution and Governing Law. Any controversy arising out of or relating to this Agreement, including any claim for damages, shall be settled by arbitration in New York City, United States of America, in accordance with the rules then obtaining of the American Arbitration Association before a panel of three arbitrators. The parties consent to the jurisdiction of the Supreme Court of the State of New York or the United States District Court for the Southern District of New York, for all purposes in connection with arbitration, including the entry of judgment on any award. The prevailing party shall be entitled to recovery of its reasonable legal fees and expenses.

On March 26, 2002, the date the first promissory note became due, Lajat's attorney, Hector Delgado, sent a letter to Johnson and his attorney, James Gidden, stating that CSB had failed, in violation of an ICA covenant, to provide Lajat with financial information concerning the Existing Credit Agreement or the DKNY License Agreement, and as a result, Lajat had been unable to "adequately evaluate its investment in [CSB], and to determine whether or not to exercise its various options under the [ICA] and [PCA]." Because of this "material breach," Lajat announced its intent to exercise the Put Option and demanded that Johnson repurchase its $3 million in stock.

3/26/02 Letter From Hector Delgado to Charles Johnson, Jr., Ex. E to Gordon Aff.

Id.

In response to the March 26, 2002 letter, CSB provided Lajat with copies of amendments that had been made to the Existing Credit Agreement. However, on May 30, 2002, Delgado sent a letter to Gidden, stating that because the terms and conditions of the amended credit agreement did not constitute "same or better" terms than those contained in the original agreement, "an Event of Default existed," and Lajat had "rightfully exercised its Put."

5/30/02 Letter From Hector Delgado to James Giddens, Ex. F to Gordon Aff.

On December 19, 2002, Lajat filed a demand for arbitration claiming breach of contract and seeking a declaration that Johnson be required to honor its Put Option. Lajat alleged that an Event of Default had occurred when the bank refused to grant an extension of the maturity date under the Existing Credit Agreement, "`under the same or better terms to CSB.'" In response to the demand, Johnson denied Lajat's claims and filed counterclaims and third-party claims (on behalf of CSB) for breach of contract, seeking $3.5 million in actual damages and $11 million in consequential damages. Lajat subsequently filed an amended demand, claiming that documents supplied by CSB during arbitration discovery revealed that DKNY had terminated its license agreement with CSB, allegedly constituting yet another Event of Default. In response, Johnson again denied that any Event of Default had occurred, and restated his counterclaims.

See Lajat International Investment, Inc.'s Demand For Arbitration, Ex. K to Gordon Aff.

Id. ¶ 2.8 (quoting PCA § 1).

See Respondent's Answer and Affirmative Defenses to Claimant's Demand for Arbitration, Counterclaims and Third Party Claims, Ex. L to Gordon Aff.

See Lajat International, Inc.'s First Amended Statement of Claim and Demand for Arbitration, Ex. A to Affidavit of Alex G. Patchen, Attorney for Johnson ("Patchen Aff."), in Support of Petitioner Charles S. Johnson, Jr.'s Memorandum of Law in Opposition to Lajat's Cross-Motion to Vacate or Modify Arbitral Awards and in Reply to Lajat's Opposition to Johnson's Motion to Confirm Arbitral Awards ("Pet. Mem."), ¶ 2.13.

See Respondent's First Amended Answer and Affirmative Defenses to Claimant's First Amended Demand for Arbitration, First Amended Counterclaims and First Amended Third Party Claims, Ex. B to Patchen Aff.

The arbitration occurred in New York from March 8 to 11, 2004. On May 19, 2004, the panel entered an interim award, which denied Lajat's claim with prejudice and awarded Johnson $3.5 million plus interest. The panel entered a final award on July 9, 2004, which incorporated the interim award, and further ordered Lajat to pay Johnson's legal fees and expenses, compensation and expenses of the arbitrators and the administrative fees and expenses of the American Arbitration Association. In total, the Award against Lajat exceeded $5.1 million. The panel never set forth any findings of fact or conclusions of law.

See Res. Mem. at 8.

See Interim Award of Arbitrators, Ex. M to Gordon Aff.

See Final Award of Arbitrators, Ex. N to Gordon Aff.

See Res. Mem. at 8.

See id.

On July 29, 2004, Johnson filed this Motion pursuant to sections 9 and 13 of Title 9 of the United States Code, for an order confirming the Award. Lajaf opposed the motion and cross-moved to vacate or modify the Award, arguing that the decision of the arbitrators exhibits a "`manifest disregard of the law.'"

See Application to Confirm Arbitration Awards.

Res. Mem. at 9 (quoting Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002)).

III. LEGAL STANDARD

The confirmation of an arbitration award is a summary proceeding that converts a final arbitration award into a judgment of the court. "Arbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." "A court is required to confirm the award unless a basis for modification or vacatur exists." The FAA lists specific instances where an award may be vacated. In addition, the Second Circuit has recognized that a court may vacate an arbitration award that was rendered in "`manifest disregard of the law.'" However, "review for manifest error is severely limited." To find manifest disregard, a court must find 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."

See Yusef Ahmed Algahanim Sons v. Toys "R" Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997) (citing Florasynth, Inc. v. Pickholz, 750 F.2d 171, 176 (2d Cir. 1984)).

Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (quotation marks omitted). See also Ono Pharm. Co., Ltd. v. Cortech, Inc., No. 03 Civ. 5840, 2003 WL 22481379, at *2 (S.D.N.Y. Nov. 3, 2003).

Insurance Co. of North America v. Ssangyong Eng'g Const. Co., No. 02 Civ. 1484, 2002 WL 377538, at *4 (S.D.N.Y. Mar. 11, 2002).

The statutory grounds for vacatur listed in the FAA are: (1) the award was procured by corruption, fraud or undue means; (2) the arbitrators exceeded their powers or "so imperfectly executed [their powers] that a mutual, final, and definite award upon the . . . matter submitted was not made;" (3) the arbitrator was guilty of "misconduct in . . . refusing to hear evidence pertinent and material to the controversy;" (4) the arbitrators exhibited "evident partiality" or "corruption;" or (5) the arbitrators were guilty of "misconduct in refusing to postpone the hearing, upon sufficient cause shown," or guilty of "any other misbehavior" that prejudiced the rights of any party. Ono, 2003 WL 22481379, at *2 n. 24; 9 U.S.C. § 10(a). Lajat does not argue that any of these provisions apply.

Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004) (quoting DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997)).

Id. (quoting Gov't of India v. Cargill Inc., 867 F.2d 130, 133 (2d Cir. 1989)). In Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003), the court noted that "since 1960 we have vacated some part or all of an arbitral award for manifest disregard in . . . four out of at least 48 cases where we applied the standard."

Wallace, 378 F.3d at 189 (quoting Greenberg v. Bear, Stearns Co., 220 F.3d 22, 28 (2d Cir. 2000)).

"A federal court cannot vacate an arbitral award merely because it is convinced that the arbitration panel made the wrong call on the law. On the contrary, the award `should be enforced, despite a court's disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.'" In deciding whether to confirm an arbitration award, the court "should not conduct an independent review of the factual record" to check if facts support the panel's conclusion. Rather, "[t]o the extent that a federal court may look upon the evidentiary record of an arbitration proceeding at all, it may do so only for the purpose of discerning whether a colorable basis exists for the panel's award so as to assure that the award cannot be said to be the result of the panel's manifest disregard of the law."

Id. at 190 (emphasis in original) (quoting Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 260 (2d Cir. 2003)).

Id.

IV. DISCUSSION

The basis for Lajat's assertion that the panel manifestly disregarded the law apparently arises out of two questions posed by one of the arbitrators after each side had given its closing argument. Arbitrator Lamm asked the parties to address in post-trial briefs the following issues:

See Res. Mem. at 12-13.

Under New York law, what is the obligation, if there is one, and your position may be that there isn't, in terms of good faith performance of an agreement? Is there an obligation to perform in good faith and what does it mean? Secondly, the best efforts provision that is in the contract, what is the scope of that under New York law? What does one have to do to comply with that, if it means anything?

3/11/04 Transcript of Arbitration Proceedings ("3/11/04 Tr."), Ex. A to Gordon Aff., at 800.

3/11/04 Transcript of Arbitration Proceedings ("3/11/04 Tr."), Ex. A to Gordon Aff., at 800.

Lajat argues that Lamm's questions show that the panel had "[i]mplicitly recogniz[ed] that an Event of Default had occurred," but had determined, in manifest disregard of the law, that either the implied covenant of good faith and fair dealing limited Lajat's contractual right to exercise the Put Option or New York law implied a right to cure an event of default.

Res. Mem. at 12-13. See also id. at 13-17; Respondent's Reply Memorandum of Law in Support of Cross-Motion to Vacate or Modify Arbitral Awards at 3 ("There is only one conceivable, logical explanation for the Panel's actions at the end of the arbitration: they had concluded that there was an Event of Default and sought argument regarding whether Lajat was entitled to enforce its rights if it had breached the implied covenant of good faith.").

Lajat's argument is without merit. First, Lajat's conjecture as to what the arbitrators thought is unavailing. The panel did not provide any findings of fact or conclusions of law. Thus, it is impossible to know why the panel ruled in favor of Johnson and against Lajat. Merely asking the parties to brief the issues of "best efforts" and "good faith and fair dealing" does not support the conclusion that the arbitrators had found an event of default.

Lajat asserts that "the subject of concern to the arbitrators was whether the implied covenant of good faith and fair dealing could modify a contract's express terms, such as by implying a right to cure an Event of Default when a contract (i.e., the Put Option) expresses no such right." In fact, the arbitrator never specified the "subject of concern" of his questions, but he surely never asked how the implied covenant of good faith and fair dealing would affect Lajat's right to exercise its Put Option. Rather, he asked about the scope of those theories without asking how they might apply to curing an event of default. Moreover, even if this was the arbitrator's subject of concern, neither party argued in its brief that an implied covenant of good faith and fair dealing under New York law allows a party to cure an event of default. It is highly unlikely that the panel based its decision on an argument that neither party espoused.

Res. Mem. at 13 (emphasis added).

See Pet. Mem. at 8.

Second, and perhaps most importantly, Lajat asserts that it is irrefutable that an Event of Default had occurred. However, the arbitration focused almost entirely on deciding whether this was in fact the case. Johnson argued throughout the arbitration, and continues to argue, that there was no Event of Default. Thus, as long as the panel had a basis to conclude that no Event of Default had occurred, it had a "colorable basis" for ruling against Lajat.

See Res. Mem. at 1 ("At the arbitration, Lajat demonstrated that Events of Default had occurred. The record is utterly devoid of any evidence to the contrary.").

Johnson defined this as the primary issue throughout the arbitration process. See Pet. Mem. at 5. See also, e.g., 3/11/04 Tr. at 777 ("[W]e think that your basic task as a panel at this point is to determine whether there have been events of default under the contract, under the very specific language of the contract. . . ."); id. at 786-87 ("I think for today, the issue is, did they have a right to declare an event of default.").

Wallace, 378 F.3d at 190.

Johnson provided substantial testimony and documentary evidence to support his position that no Event of Default had occurred. He maintained throughout the arbitration that DKNY had revoked the termination letter because it was issued in error, and therefore, that no Event of Default had occurred. Johnson also presented evidence that "the bank never in fact refused to grant an extension to the maturity date or changed the terms of the loan from what they were originally." Although the arbitrators provided no findings of facts or explanation for their decision, it is reasonable, based on this evidence, that they found that no Event of Default had occurred. Thus, the arbitrators surely had more than the "barely colorable justification" required to issue the Award.

See Pet. Mem. at 7. See also Respondent and Counterclaimant Charles S. Johnson, Jr.'s Post-Hearing Memorandum in Support of the Counterclaims and Defenses of Charles S. Johnson, Jr. ("Johnson Arb. Mem."), Ex. B to Gordon Aff., at 10-12; Respondent and Counterclaimant Charles S. Johnson, Jr.'s Reply to Lajat International Investments, Inc.'s Post Hearing Brief, at 2-4.

Pet. Mem. at 7. See also Johnson Arb. Mem. at 12-14.

Wallace, 378 F.3d at 190.

V. CONCLUSION

For the reasons set forth above, the Award is hereby confirmed. Judgment will be entered consistent with the Award. The Clerk of the Court is directed to prepare a judgment in accordance with this Opinion.

SO ORDERED.


Summaries of

Johnson v. Lajat International Investments, Inc.

United States District Court, S.D. New York
Dec 1, 2004
No. 04 Civ. 5897 (SAS) (S.D.N.Y. Dec. 1, 2004)
Case details for

Johnson v. Lajat International Investments, Inc.

Case Details

Full title:CHARLES S. JOHNSON, JR., Petitioner, v. LAJAT INTERNATIONAL INVESTMENTS…

Court:United States District Court, S.D. New York

Date published: Dec 1, 2004

Citations

No. 04 Civ. 5897 (SAS) (S.D.N.Y. Dec. 1, 2004)