Pocket Chg.v.Kahunaville, Eastwood Mall

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Court of Chancery of Delaware, New Castle CountyMar 21, 2003
CA. No. 19852-NC (Del. Ch. Mar. 21, 2003)

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CA. No. 19852-NC

Submitted: January 29, 2003

Decided: March 21, 2003

Michael F. Bonkowski and Chad J. Toms, of SAUL EWING LLP, Wilmington, Delaware, Attorneys for Plaintiff.

Kathleen M. Jennings and Karen V. Sullivan, of OBERLY, JENNINGS RHODUNDA, PA., Wilmington, Delaware, Attorneys for Defendant.


MEMORANDUM OPINION


Plaintiff filed a complaint to confirm an arbitrator's breach of contract award and then filed a motion for summary judgment. Defendant Kahunaville of Eastwood Mall, Inc., having previously failed to persuade the Arbitrator of the merits of its claim, is now attempting to take yet another bite at the apple by asking this Court to vacate the Arbitrator's award in favor of a new hearing or a revision of its damages portion. Because I am unpersuaded that grounds exist for vacating or modifying the award, I grant plaintiffs motion for summary judgment and deny defendant's cross-motion for summary judgment,

I. PROCEDURAL HISTORY

On November 7, 2001, Pocket Change Kahunaville, Inc. ("Pocket Change") and Kahunaville of Eastwood Mall, Inc. ("KEM") submitted a contract dispute to arbitration. After the hearing, the Arbitrator entered an Interim Order in favor of Pocket Change on December 12, 2001, and directed KEM to provide an accounting of revenue for the time period in which Pocket Change was entitled to contract damages.

On July 23, 2002, the Arbitrator heard objections to the damages portion of the dispute. He then issued the final award on August 9, 2002, that directed KEM to pay certain contractual sums due to Pocket Change. On August 20, 2002, shortly after this final award was issued, Pocket Change filed a Complaint to Confirm Arbitration Award, and then moved for summary judgment. KEM filed its answer and a cross-motion for summary judgment seeking to vacate or modify the Arbitrator's award.

II. FACTUAL BACKGROUND

The underlying dispute arises from a contract named the Midway Agreement, entered into by plaintiff and defendant on May 15, 1998. Under the Midway Agreement, Pocket Change was to provide and maintain arcade games and equipment at KEM's theme restaurant at the Eastwood Mall in Niles, Ohio. In exchange, KEM was to share equally with Pocket Change the proceeds derived from these games and equipment, minus the cost of prizes and various supplies.

The rift between the parties began around October 31, 2000, when Pocket Change entered into an asset purchase agreement with another party. Defendant contended that this agreement, entitled the Namco Purchase Agreement (the "Namco Agreement"), evidenced a sale of all, or substantially all, of Pocket Change's assets in breach of the Midway Agreement. The Namco Agreement, however, specifically excluded from its terms any assets of Pocket Change that were located at KEM's facility.

The day after the Namco Agreement was signed, defendant KEM reduced Pocket Change's share of the revenue generated by the games from 50% to 40%. According to the record, KEM continued paying Pocket Change this reduced share from November 1, 2000 until early 2001, when KEM stopped paying Pocket Change altogether. Both parties accused the other of defaulting on the contract, and Pocket Change filed a demand for arbitration on January 17, 2001.

At the arbitration hearing in November of 2001, both parties asserted their respective breach of contract theories. Defendant KEM now alleges that it was prejudiced at this hearing because the Arbitrator did not allow it to discover the "missing linchpin" in its breach of contract theory. This theory, in essence, was that the Namco Agreement wove a complex web of side agreements that transferred, in effect, if not literally, substantially all of Pocket Change's assets to another party in violation of the Midway Agreement. KEM asserts that this linchpin — a consulting agreement — went undiscovered because Pocket Change redacted it from the Namco Agreement before disclosing the agreement to KEM. KEM does not explain why, if its entire argument was based upon side agreements to the Namco Agreement, it did not question the relevance of this particular side agreement that was clearly redacted in its entirety.

When the redacted Namco Agreement was provided to KEM, this consulting agreement was listed on its table of contents. The Namco Agreement was accompanied by a letter to KEM, indicating that if KEM disputed the redaction or believed it was entitled to further discovery, that KEM should contact Pocket Change's counsel. The letter also represented that the matters redacted were either to preserve dollar values or were related to entities wholly unrelated to the instant litigation. In addition, the Arbitrator had previously indicated that if KEM were dissatisfied with the scope of discovery, it should move for an order compelling farther production before a court of competent jurisdiction. KEM, however, failed to employ any of these options and instead used the redacted Namco Agreement throughout the arbitration hearing with no objection.

The Arbitrator entered his Interim Award in favor of Pocket Change on December 12, 2001, which was "in full settlement of all claims and counterclaims submitted to this arbitration, except for the amount determined to be due by the accounting pursuant to paragraph 3 above [allowing for a hearing to evaluate objections to the accounting]." This Interim Award indicated that KEM was to account for the period between October 29, 2000 through December 12, 2001 for 50% of its "Net Gross Revenue" as that term was defined in the Midway Agreement, minus certain credits for payments made and other costs.

Interim Award of the Arbitrator, dated Dec. 12, 2001.

KEM then moved for a new arbitration hearing and for further production of the Namco Agreement by Pocket Change. On January 10, 2002, the Arbitrator denied both requests because KEM waived its discovery objection by not asserting it at the hearing, which mooted the request for a new hearing.

After that, KEM provided an accounting to Pocket Change. The Arbitrator heard objections regarding this accounting at a hearing on July 23, 2002, Pocket Change asserted that KEM's accounting lacked credibility and requested that the Arbitrator base its final award on the "meter reading" income projection. This meter reading projection was based on the actual readings of the tokens placed in the arcade games and, as Pocket Change asserts, was the only figure not subject to manipulation by KEM. KEM objected to use of the meter reading because it was not used by the parties previously, and because it did not reflect gross revenue since the tokens do not have a constant dollar value. After listening to a full day of argument on the merits of the accounting, the Arbitrator issued a Final Award, finding for Pocket Change in the amount of $240,992.99 plus interest and costs. According to Pocket Change's reconciliation of the Award, this amount represented a figure based mainly upon the meter reading, reduced by other costs and reimbursements contained in the KEM accounting.

For example, the value of tokens is not constant because they are often sold at a discount when purchased in bulk, are given out at a greatly reduced dollar value at parties and charity events, and are often placed in machines by technicians testing the equipment.

III. ANALYSIS

A. Standard of Review

Summary judgment is appropriate for reviewing an arbitration award to determine whether to vacate or confirm the award because the complete record is before the court. Court of Chancery Rule 56 provides that summary judgment should be granted when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

Wier v Manerchia, 1997 WL 74651, at *7 (Del.Ch. 1997), aff'd without opinion, 700 A.2d 736 (Del, 1997).

Del. Ct. Ch. R. 56; see also Williams v. Geier, 671 A.2d 1368, 1375 (Del. 1996).

Delaware courts recognize a strong statutory and public policy favoring dispute resolution through arbitration. Although arbitration awards are not immune from judicial review, the Court's power to review them is narrowly circumscribed by statute. Section 5713 of the Delaware Uniform Arbitration Act (the "Act") requires the Court to confirm an arbitration award unless specific statutory grounds exist to modify or vacate the award. An arbitration award should be modified if there is an evident miscalculation of the award. It should be vacated if one of five narrow statutory exceptions exist. Three of these exceptions bear upon KEM's request for vacating the Arbitrator's order here, which are:

Wier, 1997 WL 74651, at *1.

Id. at *2, citing Malekzadeh v. Wyshock, 611 A.2d 18, 20 (Del.Ch. 1992).

(1) The order was procured by corruption, fraud or other undue means;
(3) The arbitrators exceeded their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made; and
(4) The arbitrators refused . . . to hear evidence material to the controversy, or otherwise so conducted the hearing, contrary to the provisions of § 5706, or failed to follow the procedures set forth in this chapter, so as to prejudice substantially the rights of a party, unless the party applying to vacate continued with the arbitration with notice of the defect and without objection.

Id.

A reviewing court is not to pass an independent judgment on the evidence or applicable law submitted to the arbitrator, but must uphold the award if any grounds can be inferred from the facts to support it. In this case, no basis exists for modifying or vacating the award of the Arbitrator.

B. The Arbitrator's Award Will Not Be Vacated

KEM failed to establish that sufficient grounds exist to vacate the award of the Arbitrator. I will address each of KEM's arguments in the order it has presented them.

1. The Arbitrator's Order Was Not Procured by Corruption, Fraud or Other Undue Means

An award may be vacated if it was procured by corruption, fraud, or other undue means. KEM failed to show that Pocket Change procured the Arbitrator's award through any undue means. KEM asserts that Pocket Change fraudulently procured the arbitration award in this case by producing a redacted copy of the Namco Agreement and by representing to KEM that the redacted portions did not contain material relevant to the current dispute. KEM claims that, contrary to Pocket Change's representation, certain portions of the redacted matter held the missing linchpin of its complex legal theory. With this information, KEM asserts, it could have shown that Pocket Change did in fact sell substantially all of its assets in the Namco Agreement and that it was Pocket Change, not KEM, that first breached the Midway Agreement.

Although these assertions comprise an. elegant, and possibly even plausible, legal theory, they were all presented to the Arbitrator. When KEM made a belated request for an unredacted copy of the Namco Agreement and for a new hearing, the Arbitrator flatly rejected it because KEM failed to object to the redaction at the hearing or in its post-arbitration submissions. KEM then sent a letter to the Arbitrator on January 14, 2002, requesting him to reconsider this denial, alleging that KEM previously did not object to the redacted agreement because KEM relied upon Pocket Change's representation that the redacted material was irrelevant. By denying KEM's request for a new hearing and discovery of the full Namco Agreement, and refusing to reconsider this order, the Arbitrator necessarily found that KEM's belated allegations lacked merit.

To prevail under § 5714(a)(1) of the Act, KEM must provide clear and convincing evidence that Pocket Change procured the award by fraud or undue means. This KEM is unable to do. KEM has failed to establish clear and convincing evidence to support its allegation that Pocket Change's representations were fraudulent. KEM points out that Pocket Change's letter accompanying its production of the Namco Agreement stated that "[t]he only redactions made were to preserve dollar values or other numerically defined terms or provisions and agreements between entities wholly unrelated to the instant litigation." KEM does not show how this representation was false. It simply states that the unredacted portion was relevant and necessary to establish its legal theory. Pocket Change's letter clearly indicates that portions of the Agreement were redacted if they were between entities wholly unrelated to the instant litigation. The consulting agreement at issue here was between entities wholly unrelated to the instant litigation. Neither Pocket Change nor KEM were parties to that consulting agreement and KEM has failed to dispute this critical fact. Therefore, KEM has failed to show that Pocket Change secured the arbitration award by fraud or undue means.

Letter to Mr. Lee B. Zaben, dated July 24, 2001 (emphasis added).

In essence, KEM seems to argue that Pocket Change should have volunteered the information because KEM needed it. In fact, however, it appears that KEM simply made a mistake in judgment by failing to object to the redactions when the time was ripe to do so and now seeks to undo this mistake.

2. The Arbitrator Did Not Exceed His Powers or Execute Them Imperfectly

KEM failed to show that the Arbitrator exceeded his powers or executed them imperfectly. An award may be vacated under § 5714(a)(3) only when there is strong and convincing evidence that the arbitrator clearly exceeded his authority. Because of the strong policy in favor of arbitration, the Court must presume that the arbitrator did not exceed his authority and uphold the award as long as any grounds for the award can be inferred from the facts on the record.

Wier, 1997 WL 74651. at *2.

Id.

After reviewing the record with this principle in mind, I conclude that KEM has not shown clear and convincing evidence that the facts in the record could not support the arbitration award. The record indicates that Pocket Change did not breach the Midway Agreement by entering into the Namco Agreement. The record also indicates that KEM did breach the Midway Agreement by reducing, and then ceasing, payments owed to Pocket Change under the Agreement.

KEM's sophisticated legal theory that a web of side agreements had the same effect as a sale of substantially all of Pocket Change's assets may have been a plausible theory, but it was considered and rejected by the Arbitrator on more than one occasion. The Arbitrator simply found Pocket Change's theory and supporting evidence more credible — a finding that KEM objects to but offers no convincing basis for vacating. Grounds for this finding can be inferred from the facts because the Namco Agreement specifically excluded Pocket Change's assets located at the KEM facility. By its own terms, therefore, the Namco Agreement did not sell any assets at the KEM facility. It follows that the Arbitrator could easily conclude that this Agreement did not breach the Midway Agreement between Pocket Change and KEM. Because the Midway Agreement was not breached by Pocket Change, it must have been breached by KEM when KEM reduced and ceased payment to Pocket Change under this valid and enforceable contract. The Arbitrator's findings, therefore, are adequately supported by the record. I conclude that the Arbitrator did not exceed his powers or imperfectly execute them.

Plaintiff alleges that the missing linchpin consulting agreement also contained a provision excluding the assets at the KEM facility from the agreement.

3. KEM Waived Its Right to Object to the Redacted Agreement Because It Continued the Arbitration With Notice of the Alleged Defect and Without Objection

KEM has not shown that it was substantially prejudiced at the hearing, that it did not have notice of the prejudice, or that it did not fail to object to it. KEM acknowledges its failure to object to the redaction at the hearing and in its post-hearing submissions. KEM asserts, however, that it did not have notice of the defect because Pocket Change represented that the redacted portions were irrelevant. First, it is implausible that KEM either did not know this document existed or that KEM believed it truly was irrelevant to the dispute. If that were the case, how could this be the very same document KEM now contends was the "missing linchpin" in its legal theory? Second, the Arbitrator who considered KEM's legal theory at the hearing was more qualified to determine the merits of the dispute and balance the credibility of the patties. Building on the information he had previously received in the hearing, the Arbitrator could more accurately balance this new allegation of KEM with the earlier evidence to determine whether Pocket Change's redaction of this document substantially prejudiced KEM. The Arbitrator necessarily considered this risk of prejudice to KEM and found that it, in fact, did not prejudice KEM's position. Instead, the Arbitrator pointed out that KEM had notice of the "linchpin." consulting agreement because the Namco Agreement indicated that it had been redacted in its table of contents. Further, KEM received notice from Pocket Change that this document would be redacted before it was even produced.

If KEM believed the consulting agreement was its missing linchpin, or even was relevant to the dispute, it had several options. It could have followed the instructions of the Arbitrator to take its dispute to a court of competent jurisdiction. It could have followed the instructions of Pocket Change's counsel provided in the letter accompanying the document to call counsel if it believed it was entitled to any of the redacted materials. It also could, at a bare minimum, have objected to the redactions at the hearing or in its post-hearing submissions. KEM, however, chose not to pursue any of these options. Instead, KEM waited until it received an unfavorable ruling to search elsewhere for relief. Therefore, KEM waived its ability to object to the redacted document by having notice of the redactions and failing to object to them in a timely fashion.

C. The Arbitrator's Award Will Not Be Modified

KEM also failed to establish that the Arbitrator either exceeded his powers in calculating the award, or that he simply miscalculated the damages. As outlined in Pocket Change's Reconciliation of the Arbitration Award, the final award was based upon a simple calculation that established the initial amount of damages on the meter reading projection rather than on KEM's accounting. According to the record, a vigorous debate ensued over the accuracy of KEM's accounting materials at the damages hearing. This debate extended into various written submissions and an all-day hearing. The fact that the Arbitrator chose to use the meter reading rather than KEM's assertion of its revenue simply indicates that the Arbitrator believed that KEM's accounting was not reliable. This finding does not exceed the authority of the Arbitrator.

Additionally, the resulting award was no simple miscalculation. The Arbitrator's task is to settle the substantive disputes, including disputes over damages theories. The fact that he chose to use what he perceived as the more accurate indicia of revenue (the meter readings) does not indicate that he did not calculate the damages correctly. Instead, it indicates that he assessed the relative credibility of the evidence and employed what he considered the most accurate and reliable data to determine the final award.

The award may not be a perfect representation of the monies due to Pocket Change, but the a ward reflects the best measurement available to the Arbitrator under the circumstances. Had KEM provided an accurate accounting to the Arbitrator that was persuasive, it is likely that it would have been accepted. It is only because the Arbitrator found that KEM's accounting lacked credibility; that the Arbitrator resorted to the meter reading projection. Therefore, because this measure was the best measure available under the circumstances, the Arbitrator did not exceed his powers, or miscalculate the damages, by using it.

As indicated in Section II above, the meter reading projection is not a completely accurate representation of the revenue generated by the games and equipment due to the varying dollar value of the tokens and their use to test the machines.

There is evidence in the record to suggest that KEM understated its revenues on several occasions through testimony and financial documents.

IV. CONCLUSION

For the foregoing reasons, plaintiff's motion for summary judgment is GRANTED. Defendant's motion for summary judgment is DENIED.

IT IS SO ORDERED.


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