11 Civ. 5865 (DLC)
APPEARANCES: For petitioner: Michael Colin Barrows Barrows & Tehrani, PLLC 361 Lexington Avenue New York, NY 10017 For respondent KCD Financial, Inc.: Francis Michael Curran McCormick & O'Brien, LLP 9 East 40th Street New York, NY 10016
OPINION AND ORDER
APPEARANCES: For petitioner:
Michael Colin Barrows
Barrows & Tehrani, PLLC
361 Lexington Avenue
New York, NY 10017 For respondent KCD Financial, Inc.:
Francis Michael Curran
McCormick & O'Brien, LLP
9 East 40th Street
New York, NY 10016 DENISE COTE, District Judge:
Petitioner Steven Mark Salzman ("Salzman") has filed this petition to vacate an arbitration award pursuant to § 10(a)(1) of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10(a)(1). Respondent KCD Financial, Inc. ("KCD") has opposed that petition and cross-moved to confirm the arbitration award pursuant to § 9 of the FAA, 9 U.S.C. § 9. For the following reasons, KCD's motion to confirm the arbitration award is granted and Salzman's petition to vacate the award is denied. BACKGROUND
KCD, a Wisconsin corporation, is a broker-dealer registered with the United States Securities and Exchange Commission and a member firm of the Financial Industry Regulatory Authority ("FINRA"). In October 2008, Kenneth R. Schueler ("Schueler"), then the CEO and president of KCD, and KCD's majority shareholder, entered into an agreement (the "Stock Purchase Agreement") to sell his KCD stock to Allied Beacon Partners, Inc. ("Allied"), a FINRA member. The Stock Purchase Agreement was contingent on FINRA approval.
In his petition to vacate, Salzman does not provide any background of the facts underlying the arbitration proceedings. Therefore, those facts are drawn from the exhibits attached to his petition and, where these are silent, from KCD's presentation of the facts, which cites to its statement of claim filed with the arbitrator ("Statement of Claim") and the arbitration hearing transcript.
After the Stock Purchase Agreement was signed, KCD appointed James Arnold Hintz ("Hintz") as president and Salzman as secretary and treasurer. Hintz testified at the arbitration that the intention of Schueler was that after KCD and Allied were merged, the combined company would then be merged with a third FINRA member, respondent Pelion Securities Corporation ("Pelion"). Hintz was an employee of Allied, and Salzman was an employee of Pelion, while they also had positions as officers of KCD.
In January 2009, Hintz and Schueler decided to "kill" the mergers of the three companies after reviewing their financials. Hintz testified that he was concerned when he saw that Pelion's financials were not as strong as he had been led to believe, and felt that Salzman and another employee were trying to overload KCD with expenses. KCD having ended the deal, the proposed merger was never submitted to FINRA, and the FINRA approval condition in the Stock Purchase Agreement was therefore never fulfilled. Salzman was fired from his position at KCD on January 4, 2009. On March 2, 2009, Hintz resigned from KCD.
On April 22, 2010, KCD initiated a FINRA arbitration against Salzman, Hintz, Allied, and Pelion, asserting in its Statement of Claim claims of breach of fiduciary duty, breach of contract, and conversion. KCD sought compensatory damages of $225,000, punitive damages, and treble damages and attorneys' fees under Wisconsin law. Hintz, Allied, and Pelion each submitted answers to the Statement of Claim. Attached to Pelion's June 2, 2010 answer was a copy of an October 1, 2008 consulting agreement (the "Consulting Agreement") between KCD and Pelion Financial Group ("Pelion Financial"). Salzman did not file an answer, instead submitting a letter motion to dismiss on June 2, 2010 seeking to be removed as a party to the arbitration because he was not an "associated person" over whom FINRA had jurisdiction.
Pelion claimed in its answer filed with the FINRA arbitral panel that Pelion Financial was its affiliate, and a non-FINRA member.
The arbitral panel deferred a decision on Salzman's motion to dismiss until the hearing on the merits that took place on April 20-21, 2011 ("the "Hearing"). Salzman did not participate in any discovery prior to the Hearing, nor did he appear at the Hearing. Among other testimony presented at the Hearing, Hintz testified that he did not know the reason for certain transfers of cash from KCD to Pelion Financial.
In the Award issued June 10, 2011, the panel denied Salzman's motion to dismiss, finding that he was an officer of a FINRA member, and therefore an "associated person" required to arbitrate this dispute. The panel also found that Salzman had been properly served with the Statement of Claim and received due notice of the Hearing.
The Award noted that KCD had brought claims of breach of fiduciary duty and breach of contract and found that Hintz, Allied, and Salzman were liable to KCD, although it did not specify under which claim or claims they were liable. The Award held Allied, Hintz, and Salzman jointly and severally liable for $11,500 in compensatory damages, plus five percent interest from the date of the Award; Allied and Salzman were found to be jointly and severally liable for $72,000 in compensatory damages, plus interest; and Salzman was found to be liable for an additional $56,258.66 in compensatory damages, plus interest. All the parties were assessed fees for the Hearing, $2,000 of which was assessed to Salzman.
KCD and Pelion reached a settlement prior to the Hearing, and KCD withdrew its claims against Pelion on August 9, 2010.
Salzman filed this petition to vacate the Award on August 22, 2011. An Order dated September 6 required that the respondents' opposition be filed by September 23, and Salzman's reply by October 7. On September 23, KCD filed its opposition and cross-motion to confirm the Award. None of the other respondents have filed an opposition to the petition, but there is also no indication on the docket for this action that these respondents have yet been served with the petition and summons. Salzman did not file a reply, and on November 3 he submitted a letter stating that he would not be filing a reply to KCD's opposition or an opposition to KCD's cross-motion to confirm. DISCUSSION
In his petition, Salzman seeks to vacate the Award, claiming both that it was procured by fraud or undue means and that it manifestly disregards controlling state law. The FAA provides a "streamlined" process for a party seeking "a judicial decree confirming an award, an order vacating it, or an order modifying or correcting it." Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008).
"Normally, confirmation of an arbitration award is a summary proceeding that merely makes what is already a final arbitration award a judgment of the court, and the court must grant the award unless the award is vacated, modified, or corrected." D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95, 110 (2d Cir. 2006) (citation omitted). A court's review of an arbitration award is "severely limited" so as not unduly to frustrate the goals of arbitration, namely to settle disputes efficiently and avoid long and expensive litigation. Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (citation omitted).
"[D]istrict courts should . . . treat a petitioner's application to confirm or vacate an arbitral award as akin to a motion for summary judgment." City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 136 (2d Cir. 2011) (citation omitted). "A party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high." D.H. Blair & Co., 462 F.3d at 110. The party moving to vacate an award bears "the heavy burden of showing that the award falls within a very narrow set of circumstances delineated by statute and case law." Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004) (citation omitted). Thus, a party seeking vacatur of an arbitrator's decision "must clear a high hurdle." Stolt-Nielson S.A. v. AnimalFeeds Int'l Corp., --- U.S. ---, ---, 130 S. Ct. 1758, 1767 (2010).
The arbitrator's rationale for an award need not be explained, and the award should be confirmed if a ground for the arbitrator's decision can be inferred from the facts of the case. Only a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.
D.H. Blair & Co., 462 F.3d at 110 (citation omitted). I. Corruption, Fraud, or Undue Means
Salzman argues that the Award was procured by fraud or undue means, alleging that KCD withheld the Consulting Agreement from the arbitral panel and that Hintz testified falsely about the Consulting Agreement and payments from KCD to Pelion Financial. Section 10(a)(1) of the FAA provides that a court may vacate an arbitration award "where the award was procured by corruption, fraud, or undue means." 9 U.S.C. § 10(a)(1). Although the Second Circuit has not yet articulated a test for vacating an award on this ground, courts in this district have found that the party challenging the award must show that "(1) [its] adversary engaged in fraudulent activity; (2) the petitioner could not, in the exercise of due diligence, have discovered the alleged fraud prior to the award; and (3) the alleged fraud materially related to an issue in the arbitration." McCarthy v. Smith Barney Inc., 58 F. Supp. 2d 288, 293 (S.D.N.Y. 1999); see In re Marketxt Holdings, Corp., 428 B.R. 579, 590 (S.D.N.Y. 2010) (citing A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 (9th Cir. 1992)). Where a party grounds its claim that an arbitration was procured by fraud on an allegation that the award was based on perjured testimony, that party "must first show that he could not have discovered it during the arbitration, else he should have invoked it as a defense at that time." Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 35 (2d Cir. 1951).
Salzman has failed to carry his significant burden of showing that the Award was procured by fraud or undue means; he does not provide any evidence with respect to either of the first two elements. With regard to KCD's alleged failure to produce the Consulting Agreement, Salzman offers no evidence that KCD acted intentionally to withhold that document. Although KCD may not have produced the Consulting Agreement along with its Statement of Claim, it was submitted to the arbitral panel by Pelion as part of its answer. As the arbitral panel already had access to this document, there can be no inference that KCD's alleged failure to produce it later in the arbitral process constitutes a deliberate suppression of evidence. Although Salzman's counsel repeatedly states that the failure of KCD to produce was a "deliberate scheme," "intentional," and in "bad faith," these are merely conclusory statements and not evidence of fraud.
Salzman's allegations about Hintz's testimony similarly fail to justify vacating the Award. First, Hintz was not Salzman's adversary in the arbitration, and was actually found liable to KCD, jointly and severally with Salzman. Therefore, Salzman cannot claim that KCD procured the Award by fraud because Hintz, KCD's adversary, provided false testimony. Second, Salzman does not provide any evidence that Hintz offered fraudulent testimony. The statements of Hintz with which Salzman takes issue are his responses to questions about payments to Pelion Financial from KCD. When asked "what would have been the reason . . . for KCD to pay Pelion [Financial]," "what those transfers [to Pelion Financial] represent," and "why [were] those transfers . . . made," Hintz responded that he had "no clue." Although in his petition, Salzman argues that Hintz did indeed know about the Consulting Agreement and the reason for some payments to Pelion Financial, he presents no evidence, documentary or testimonial, to support these assertions, and does not even argue that the particular transfers at issue in Hintz's responses are the transfers about which Hintz should have known. Without any evidence to support that Hintz was lying when questioned at the Hearing, Salzman cannot show that there was any fraud.
Hintz has not filed an opposition to the petition to vacate nor appeared in this action, but there is also nothing filed on the docket indicating that he had been served. Regardless, as discussed below, Salzman's arguments for vacatur based on his allegations that Hintz testified falsely at the arbitration are without merit. Therefore, there is no need to stay consideration of this argument until Hintz has been served and responded to Salzman's petition. --------
Moreover, Salzman does not, and cannot, show that had he exercised due diligence, he could not have discovered the alleged fraud prior to the award. Salzman does not even address in his petition how he might have proven this element. KCD alleges, the Award confirms, and Salzman does not deny that he failed to participate in the arbitration. His petition creates the inference that the Consulting Agreement had been known to him since the events underlying the dispute; had Salzman engaged in the arbitral process, he could have served a document request on KCD to introduce the Consulting Agreement or produced the document himself. Similarly, Salzman's petition fails to indicate that he became aware that Hintz's testimony was false only after the Award was issued; had he participated, he would have had the opportunity to present evidence to counter Hintz's testimony or to cross-examine Hintz. Salzman has therefore failed to present any evidence that the Award was procured by fraud or undue means, and the Award cannot therefore be vacated on that ground. II. Manifest Disregard
Salzman also argues that the arbitral panel acted in manifest disregard of Wisconsin statutory and common law on the tort of conversion when it found him liable despite evidence introduced during the arbitration incompatible with such a finding. While the future of the "manifest disregard" standard is unsettled, see Stolt-Nielson, 130 S. Ct. at 1768 n.3 (stating that the Supreme Court would "not decide whether 'manifest disregard' survives"), in this circuit, "manifest disregard" has been reconceptualized as "a judicial gloss" on the FAA's specific grounds for vacatur, and so interpreted, "remains a valid ground for vacating arbitration awards." T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 340 (2d Cir. 2010) (citation omitted).
"[A]wards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent." Id. at 339 (citation omitted). Review of awards for manifest disregard of the law "is highly deferential to the arbitrators," as "[m]ore searching review would frustrate the basic purpose of arbitration, which is to dispose of disputes quickly and avoid the expense and delay of extended court proceedings." STMicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 648 F.3d 68, 78 (2d Cir. 2011) (citation omitted). Such impropriety requires "more than error or misunderstanding with respect to the law, or an arguable difference regarding the meaning or applicability of law urged upon an arbitrator." T. Co Metals, 592 F.3d at 339 (citation omitted). An award should not be vacated "because of a simple error in law or a failure by the arbitrators to understand or apply it[,] but only when a party clearly demonstrates that the panel intentionally defied the law." STMicroelectronics, 648 F.3d at 78 (citation omitted).
Thus, an 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." T. Co Metals, 592 F.3d at 339 (citation omitted). Where, "the arbitrators do not explain the reason for their decision," it should be upheld if the court "can discern any valid ground for it." STMicroelectronics, 648 F.3d at 78. Therefore, when a party attacks an award for manifest disregard of the law on only one of several claims that was raised before the arbitrators, and the "award does not specify the claim(s) upon which it rests," the party seeking vacatur "must show manifest disregard of the law for all the claims." Id.
Salzman has failed to carry his significant burden of showing that the arbitrator acted in manifest disregard of the law. Despite the fact that KCD's Statement of Claim does assert a claim of conversion, the Award only mentions claims for breach of fiduciary duty and breach of contract. The Award does not specify upon which claims it rests, but it seems most likely that it rests on the claims it actually mentions, and not on conversion. Even if the Award rested also on a claim of conversion, Salzman has not shown a "manifest disregard" basis for vacatur because he has not shown a manifest disregard for the law of all the claims raised in the arbitration. See id.
Furthermore, Salzman's argument would fail even if he had argued that the arbitral panel manifestly disregarded the law of conversion, breach of fiduciary duty, and breach of contract. Salzman's theory of manifest disregard relies on a cashier's check from KCD made out to Allied (under its former name, Pavek Investments Inc.) as well as withdrawal slips from KCD's account, and the fact that these were signed by another KCD employee, Charles Belonge, and not by Salzman. The cashier's check and withdrawal slips, although possibly pieces of evidence that, with others, could lead to a conclusion that Salzman was not involved in the transfer of funds from KCD to Allied, is not sufficient to disprove his participation in the conversion of funds or breaches of fiduciary duties or contract. The fact that another's signature appears on those documents cannot, without more, prove a lack of involvement. Salzman's conclusory assertion in his petition that he "had nothing to do with this transaction whatsoever," does not provide support for his argument that this evidence is incompatible with a finding of liability. More importantly, even if Salzman could show that this evidence contradicted a finding of liability, Salzman still fails to explain how this shows that the Award was not merely a product of "a simple error in law or a failure by the arbitrators to understand or apply it," but rather of the panel's intentional defiance of the law, as required for vactur under a manifest disregard theory. STMicroelectronics, 648 F.3d at 78 (citation omitted). CONCLUSION
KCD's motion to confirm the arbitration award against Salzman is granted. The petition to vacate the arbitral award is denied and the Clerk of Court shall enter judgment for KCD for the sum of $139,758.66, plus interest at a rate of five percent accruing from June 10, 2011. The Clerk of Court shall close the case.
SO ORDERED: Dated: New York, New York
December 21, 2011
United States District Judge