JESSE M. FURMAN, United States District Judge.
In these consolidated cases, one of which was filed here and one of which was removed here from New York state court, Petitioner LGC USA Holdings ("LGC" or "Petitioner") seeks to confirm the results of bitterly contested arbitration proceedings with its former partners in the international diamond business and related entities, Respondents Julius Klein Diamonds, LLC ("JKD"); Julius Klein Group Holdings, LLC; Julius Klein Diamonds, Inc.; Klein Tenancy; KLG Jewelry LLC ("KLG"); Sunrise Venture LLC ("Sunrise"); Martin Klein; Moishe Klein; Malka Klein; and Abraham David Klein (collectively, the "Kleins" or "Respondents"). Not surprisingly, the Kleins oppose LGC at every turn: They argue that the cases should be dismissed for lack of subject-matter jurisdiction; failing that, that the removed case should be remanded back to state court and the remaining federal case dismissed on abstention grounds; and, failing that, that the arbitration award should
The Kleins' attacks on the arbitration award are far from frivolous. They make troubling allegations about, among other things, undisclosed connections between the putatively neutral arbitrator and both LGC's chosen arbitrator and LGC itself, not to mention the neutral arbitrator's failure to disclose criminal charges that resulted in his conviction during the arbitration proceedings. If the Court were reviewing the award de novo or deciding the parties' disputes in the first instance, the Kleins' allegations might well warrant a different result. But the Court is required to give substantial deference to the arbitrators and to carefully parse whether the Kleins' attacks on the award are legitimate gripes or after-the-fact complaints of losing parties. In light of those considerations and a close review of the record, the Court concludes that the Kleins' challenges fall short: that the Court has subject-matter jurisdiction; that the state case was properly removed to this Court; and that the Kleins either waived their challenges to the neutral arbitrator or have failed to present sufficient cognizable evidence to support vacatur. Accordingly, and for the reasons stated below, the Court confirms the arbitration award and denies the Kleins' motions to dismiss, remand, and vacate.
LGC, which is incorporated in Delaware and headquartered in New York, is part of an international diamond business owned by Lev Leviev. (16-CV-5294, Docket No. 25 ("LGC Pet.") ¶ 2). Respondents are "individuals or companies affiliated with a diamond business controlled by" Respondent Martin Klein. (Id. ¶ 3). In 2002, LGC and the Kleins agreed to become "joint venture partners" in three diamond businesses: JKD, KLG, and Sunrise. (Id. ¶ 10). To simplify the process of unwinding their joint ventures if or when the need arose, the parties agreed — at least with respect to JKD — to establish a valuation each year that would serve as "the basis for determining the buyout" price; if the parties could not agree on a buyout price, they would use "the most recent valuation." (16-CV-5294, Docket No. 27 ("Leviev Aff.") Ex. 13 ¶ 1 (establishing the buyout procedures for JKD); Leviev Reply Aff. Ex. 3, at 1728-29 (Martin Klein testimony that the valuation and unwinding procedures set forth in the JKD agreement applied to all three joint ventures)). The parties further agreed, by contract, to arbitrate "[a]ny controversy or claim arising out of or relating to" the JKD and KLG agreements; through an exchange of letters in November 2013, they extended the agreement to arbitrate to include disputes concerning Sunrise as well. (Leviev Aff. ¶¶ 14, 16).
In October 2012, LGC demanded that the Kleins buy out LGC's interests in all three joint ventures, but the parties could not agree how to disentangle their interests. (Leviev Aff. ¶¶ 11, 12). Accordingly, in February 2013, LGC initiated arbitration proceedings against the Kleins. (Klein Decl. Ex. 11).
Around the same time, LGC filed a petition in New York state court seeking, among other things, preliminary injunctive relief in aid of arbitration. (Leviev Aff. Ex. 25). The state court denied the petition, holding that any request for injunctive relief should be addressed to the arbitrators. (Leviev Aff. Ex. 26). In November 2013, LGC sought preliminary relief from the arbitrators, including an interim award. (Leviev Aff. Ex. 27). On December 5, 2013, the panel issued an order granting that request in substantial part and ordering the Kleins to pay LGC approximately $102 million. (Leviev Aff. Ex. 28). The next day, however, the panel stayed its interim order so that the parties could pursue a global settlement. (Leviev Aff. Ex. 29). The stay remained in effect until November 2014, during which time the Kleins paid LGC approximately $67 million as a partial redemption of LGC's interests. (Klein Decl. ¶ 24; Leviev Aff. Ex. 30).
In December 2014, LGC returned to the same New York state court in an effort to confirm the interim award. (Leviev Aff. Ex. 31). The Kleins — represented by new counsel (who also represent them here) — opposed confirmation, arguing that the award was non-final. (Leviev Aff. Ex. 32). In addition, and more relevant for present purposes, the Kleins argued that Bronner and Zahavi should be removed from the panel on the grounds of misconduct and partiality. (Id.). More specifically, the Kleins contended that Bronner and Zahavi were improperly using their rulings to force a settlement from the Kleins and that Bronner had failed to fully disclose a prior relationship with Leviev. (Id.). In response to the motion, Bronner himself filed an affidavit in which, among other things, he defended his "good reputation" in the industry and touted his "honest[y]," "decency," "integrity," and "fairness." (Levine Decl. Ex. 23, at 5). In September 2015, the state court denied both confirmation of the interim order and the Kleins' cross-motion to disqualify the arbitrators as premature. (Leviev Aff. Ex. 36). With respect to the latter, however, the court further noted as follows: "Even if the court were to entertain the cross-motion seeking disqualification, the request would be denied because all objections were waived when [the Kleins] proceeded without objection long after [they] had knowledge of the alleged irregularities." (Id.).
In the months after the state court's denial of the Kleins' request to remove Bronner, relations between and among the parties and the arbitrators soured further. Some of the details are disputed, but,
On February 9, 2016, Bronner sent an email to the parties starting that "the business" he "conducted and continue to conduct" with Zahavi "include[s] also partnering in some businesses." (Levine Decl. Ex. 35). Days later, the arbitrators held a seven-day hearing in Israel during which they heard testimony from eight witnesses and received hundreds of exhibits. (Leviev Aff. ¶ 36). On May 17, 2016, after the hearing but before any ruling, the panel's counsel sent an email to the parties sharing that Zahavi and Cohen had just "learned" that Bronner "was convicted of some type of financial criminal activity by the courts of Belgium" — charges that apparently dated back to early 2013. (Levine Decl. Ex. 44). More specifically, Bronner and approximately 100 other defendants were convicted of tax fraud and other offenses relating to a scheme involving the use of sham transactions to nominally export diamonds from Belgium while, in fact, reselling them on the black market. (Leviev Aff. Ex. 44). In the wake of the conviction, the Kleins asked Bronner for additional disclosures regarding his conviction and requested — once again — that he resign from the panel. (Levine Decl. Ex. 51). LGC argued that the conviction should have no bearing on the panel's work. (Leviev Aff. Ex. 47). The panel ultimately agreed with LGC and continued its work. (Leviev Aff. ¶ 39).
On June 30, 2016, the arbitration panel finally issued its award. (Leviev Aff. Ex. 1). The panel found that the Kleins had breached the parties' agreements and awarded LGC approximately $112 million (on top of the $67 million that the Kleins had already paid), plus pre-judgment interest. (Id. at 3). Significantly, the panel also found "each and all of the Respondents" — including the individual Kleins, who had only been signatories to the JKD joint venture agreement, but who had participated in the arbitration proceedings for all three ventures — to be "liable jointly and severally" to LGC. (Id.) Finally, the panel awarded LGC certain declaratory and injunctive relief, including the rights to the "Leviev" trademark. (Id. at 2). That same day, the Kleins filed a motion in New York state court — pursuant to New York law, see N.Y. CPLR § 7511, as part of the same case that LGC itself had initiated in 2013 with its request for injunctive relief in aid of the arbitration — seeking to vacate the award, and LGC filed its petition to confirm the award in this Court. (LGC Pet. ¶ 6). On July 6, 2016, LGC filed a Notice of Removal and removed the state case to this Court. (16-CV-5352, Docket No. 1).
The central dispute between the parties is whether the arbitration award should be
As noted, the Kleins argue first that the Court lacks subject-matter jurisdiction altogether. Because there is no diversity of citizenship between the parties, and because a petition to compel arbitration does not independently present a federal question, see, e.g., Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, 707 F.3d 140, 142 n.4 (2d Cir. 2013), whether the Court has jurisdiction turns on the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 (the "New York Convention"), codified in the United States as Chapter 2 of the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 201-208. (LGC Pet. ¶ 6; LGC Reply 3-4).
Section 202 of the FAA provides, in relevant part, as follows:
Thus, if a party seeks to confirm an arbitration, as here, jurisdiction is proper under the New York Convention only if the legal relationship between the parties is not "entirely domestic in scope." Smith/Enron Cogeneration Ltd P'ship, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 92 (2d Cir. 1999). The Second Circuit has defined relationships that are "entirely domestic in scope" to mean those that (1) are "between two United States citizens"; (2) "involv[e] property located in the United States"; and (3) "ha[ve] no reasonable relationship with one or more foreign states." Yusuf Ahmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15, 19 (2d Cir. 1997); see also HBC Sols., Inc. v. Harris Corp., No. 13-CV-6327 (JMF), 2014 WL 3585503, at *3 (S.D.N.Y. July 18, 2014).
Applying those standards here, the Court concludes that it has subject-matter jurisdiction over the parties' disputes. Although the parties are New York citizens and the property at issue consists of membership interests in New York limited liability companies, the "relationship" between the parties plainly "involve[d] property located abroad" and "evisage[d] performance ... abroad." 9 U.S.C. § 202. Indeed, the relationship between LGC and the Kleins centers on three joint ventures in the international diamond industry. Thus, for example, a disclosure schedule attached to one of the agreements between the Kleins and LGC explicitly acknowledged that JKD buys and sells diamonds through a South African affiliate. (Leviev Aff. Ex. 6 § 4.3.4(b)). Similarly, the Trademark License Agreement covers the European Union and eighteen other countries. (Leviev Aff. Ex. 12, at 11). And during the arbitration proceedings, the Kleins alleged a breach of the Trademark License Agreement for the "Leviev" trademark through sales in London and Russia. (Leviev Aff. Ex. 16 ¶ 188-89). Even Martin Klein admitted that JKD has "factories and offices all over the globe" and that KLG owns "boutiques in several
These facts distinguish this case from the authorities cited by the Kleins. (Kleins' Opp'n 22-23 & n.15). In Jones v. Sea Tow Servs. Freeport NY Inc., 30 F.3d 360 (2d Cir. 1994), for example, the only foreign connection was the parties' agreement to arbitrate their disputes in England, which the Second Circuit held was insufficient lest arbitration clauses become "a self-generating basis for jurisdiction." Id. at 366. And each of the other cases cited by the Kleins — including Bethlehem Steel Corp. v. Songer Corp., No. 92-CV-2678 (JSM), 1992 WL 110735 (S.D.N.Y. May 11, 1992) — involved only one party's dealings with foreign third parties. See id. at *1. By contrast, the relationship between the parties here involved property around the world and envisaged performance abroad. It follows that the New York Convention applies. See Lander Co., Inc. v. MMP Invs., Inc., 107 F.3d 476, 478-82 (7th Cir. 1997) (finding jurisdiction with respect to a contract to sell products in Poland); HBC Sols., 2014 WL 3585503, at *3 (finding jurisdiction for a sale of a business division with "global operations"); Holzer v. Mondadori, No. 12-CV-5234 (NRB), 2013 WL 1104269, at *5 (S.D.N.Y. Mar. 14, 2013) (finding jurisdiction with respect to an agreement to purchase real estate in Dubai); New Avex, Inc. v. Socata Aircraft Inc., No. 02-CV-6519 (DLC), 2002 WL 1998193, at *3 (S.D.N.Y. Aug. 29, 2002) (finding jurisdiction with respect to a contract between two American corporations involving the sale of French aircraft in France); Heather Trading Corp. v. Voest-Alpine Trading U.S.A. Corp., Nos. 85-CV-823 (SWK), 85-CV-913 (SWK), 1986 WL 4542, at *2 (S.D.N.Y. April 8, 1986) (finding jurisdiction with respect to a contract to deliver crude oil in Ecuador).
The Kleins' alternative argument for why this Court should not decide the parties' disputes about the arbitration is multi-pronged. First, they attack the propriety of LGC's removal of the state court action pursuant to Title 9, United States Code, Section 205, which provides that a "defendant" — and only a "defendant" — may remove an action relating to an arbitration agreement from state court to federal court "at any time before the trial thereof." (Kleins' Opp'n 23-24). The Kleins contend that LGC's removal was improper both because LGC was the plaintiff in the state court action and because its removal was untimely. (See id.). Second, they assert that, if the state case is remanded, this Court should — pursuant to Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) — abstain from exercising jurisdiction over the remaining federal case in favor of the remanded state case. (See Kleins' Opp'n 24-26; Kleins' Reply 12 (making clear that the argument for abstention is dependent on a remand of the removed action)). The Court concludes that LGC's removal of the state case was proper and, accordingly, does not reach Respondents' argument for Colorado River abstention.
The Kleins' first attack on removal of the state case turns on whether LGC was a "defendant" in that case for purposes of Section 205. Significantly, it is well established that federal law — not state law — "determines who is plaintiff and who is defendant" for removal purposes. Chicago, R.I. & P.R. Co. v. Stude, 346 U.S. 574, 580, 74 S.Ct. 290, 98 S.Ct. 317 (1954). Moreover, as Justice Oliver Wendell Holmes made clear long ago, the relevant inquiry is a functional one, see Mason City & Ft. D.R.R. Co. v. Boynton, 204 U.S. 570,
In Minkoff v. Budget Dress Corp., 180 F.Supp. 818 (S.D.N.Y. 1960), the Court applied Justice Holmes's functional test to circumstances analogous to those presented here. There, the Joint Board of Dress and Waistmakers' Union of Greater New York (the "Union") initiated arbitration against Budget Dress Corporation ("Budget Dress"). In November 1958, Budget Dress instituted proceedings in state court to stay the arbitration. The state court denied that motion, and the case proceeded to arbitration. In August 1959, the Union returned to state court by filing a motion to confirm the arbitration, and Budget Dress then removed the action to federal court. After quoting at length from Justice Holmes's opinion in Mason City, Judge Dimock concluded that Budget Dress was the "defendant" for removal purposes even though it had first initiated the state court proceedings. "[T]he `mainspring of the proceedings,'" he opined, "is surely the Union's intent to have its complaints arbitrated and resolved in its favor, and the `institution and continuance of the proceedings depend upon its will.' The Union instituted the proceeding by filing complaints with the [arbitrator], and, were the Union to drop its demands, the case would be at an end. The Union, therefore, as the party in control of the litigation is the plaintiff in this case." Id. at 824 (quoting Mason City, 204 U.S. at 580, 27 S.Ct. 321).
For similar reasons, the Court here concludes that LGC "is the `true defendant' under the Supreme Court's functional test." In re Gardner, No. 06-CV-9154 (SSV), 2007 WL 625825, at *3 (E.D. La. Feb. 26, 2007). To be sure, LGC initiated the state-court proceedings in the first instance by filing its petition for injunctive relief in aid of arbitration and, later, seeking confirmation of the interim award. But once the arbitration commenced, there was nothing pending in state court until the Kleins filed their petition to vacate the award. At that point — that is, at the moment of removal — "continuance of the proceedings depend[ed] upon [the Kleins'] will." Mason City, 204 U.S. at 580, 27 S.Ct. 321. In other words, the Kleins were "in control of the litigation"; if it were "to drop its demands, the case would [have been] at an end." Minkoff, 180 F.Supp. at 824. Granted, under New York state law, LGC was denominated the petitioner even at that point in the proceedings. See N.Y. CPLR § 7502(a), (a)(iii) (providing that an application arising out of an arbitrable controversy
Neither Oppenheimer & Co. v. Neidhardt, 56 F.3d 352 (2d Cir. 1995), nor West v. Zurich American Insurance Co., No. CIV.A. 02-CV-546, 2002 WL 1397465 (E.D. Pa. June 26, 2002), upon which the Kleins rely (Kleins' Opp'n 23; Kleins' Reply 11), calls for a different result. In Oppenheimer, the Court did state that "for purposes of removal of arbitration questions, the plaintiff is the party who first invokes the aid of a court." Id. at 356. But that language must be read in the context of the question presented: whether one party who initiates an arbitration proceeding against another should, on the basis of that out-of-court proceeding, be treated as the plaintiff if the latter then initiates a state-court action relating to the arbitration. The Court did not have occasion to consider circumstances of the sort presented here, and its opinion should not be read to hold that the party who first invokes the aid of a court must be treated as the plaintiff at all times thereafter, as such a reading would conflict with Mason City.
The non-binding decision in West — which considered whether "the filing of a petition to vacate an arbitration award be considered an `initial pleading' [for purposes of removal] where the subject arbitration had taken place after a state court compelled arbitration," 2002 WL 1397465, at *2 — is certainly more on point, but it is unpersuasive. The West Court based its holding on a conclusion that, under Pennsylvania law, "each arbitration [is] a single, unitary proceeding," with the party first invoking a court's jurisdiction treated as the plaintiff in all subsequent proceedings. Id. at *3. In doing do, however, it ignored the Supreme Court's directive that federal law — not state law — "determines who is plaintiff and who is defendant" for removal purposes. Stude, 346 U.S. at 580, 74 S.Ct. 290. (Notably, the West Court failed to cite, let alone discuss, Mason City and its progeny.) Thus, to the extent that West would call for a different result here, the Court declines to follow it as unsound.
The Kleins' second argument for remand — that LGC's removal was untimely — requires less discussion than their first, but fares no better. As noted, under Section 205, a defendant may remove a case to federal court "at any time before the trial" of the action. The term "trial" includes "resolution of actively litigated substantive issues." Pan Atl. Grp., Inc. v. Republic Ins. Co., 878 F.Supp. 630, 641 (S.D.N.Y. 1995); accord New Avex, Inc. v. Socata Aircraft Inc., No. 02-CV-6519 (DLC), 2002 WL 1998193, at *4 (S.D.N.Y.
Thus, the Court turns to the question of whether the award should be confirmed or vacated. Naturally, LGC argues that there are no grounds to vacate the award and that it should be confirmed. (Docket No. 26 ("LGC Mem.") 12-14). By contrast, the Kleins contend that the award should be vacated on either of two grounds: (1) because the arbitrators were partial and corrupt and (2) because the panel exceeded its powers and acted in manifest disregard of the law. (Kleins' Opp'n 26-39). The Court will address each of the Kleins' arguments in turn, but first must resolve a dispute between the parties over which law to apply.
LGC contends that because the New York Convention applies, the only grounds to vacate the award are those specifically enumerated in the Convention. (LGC Mem. 12-14). The Kleins, on the other hand, insist that either the FAA or New York law should apply because the Court is authorized to vacate the award on any ground available under domestic arbitral law. (Kleins' Opp'n 27-28). On this front, the Kleins have the better of the argument.
Under the New York Convention, a party retains the right to seek vacatur of an award in the "country in which, or under the [arbitral] law of which, the award was made." Convention art. V(1)(e);
Applying those standards here, there is little question that the award was "made in" the United States and under United States (or New York) law and, accordingly, that the United States is the "primary jurisdiction." Although the parties' arbitration agreements did not specify the arbitral law to be applied or the location for the arbitration, they called for arbitration "pursuant to such rules as determined by a majority of [the] three arbitrators." (Klein Decl. Ex. 3 § 8.8; Ex. 7 § 11.14; Leviev Aff. Ex. 18). And throughout the proceedings, the arbitrators — and the parties — looked to and applied either New York or United States law. For example, when the Kleins objected to the panel's selection of Israel as "the most convenient forum" for the final hearing, the panel ruled that "[a]rbitrators are vested with broad powers under New York law." (Levine Decl. Ex. 55, at 6). Additionally, throughout the hearing itself, the parties and the arbitrators made repeated reference to New York law. (See Levine Decl. Ex. 1, at 8, 333-34, 384, 478). LGC's own counsel, for example, emphasized that "this is a proceeding that is governed by New York law and ... New York practice" and that claims with respect to Bronner's bias and corruption should be decided by a New York court. (Id. at 11, 1640). The arbitrators agreed. (See id. at 619 (Zahavi, citing "U.S. arbitration law," for his decision that the panel could not limit the length of a witness' cross-examination); Levine Decl. Ex. 55, at 6 (applying New York law to the arbitration venue decision)). Put simply, at no point did any arbitrator or party suggest that Israeli — or any other country's — arbitral law applied. Thus, notwithstanding the fact that the arbitration hearing itself was held in Israel, the parties and arbitrators firmly established the United States as the primary jurisdiction. See, e.g., Karaha Bodas, 364 F.3d at 292 ("The arbitration proceeding in this case physically occurred in Paris, but the Award was `made in' Geneva, the place of the arbitration in the legal sense and the presumptive source of the applicable procedural law.").
That does not fully resolve the question, however, as the Kleins ask the Court to apply New York law rather than the FAA on the ground that the arbitrators relied on New York arbitral law. (Kleins' Opp'n 28-29). In support of that argument, the Kleins rely principally on
Under Section 9 of the FAA, a reviewing court must confirm an arbitration award unless one of the statutory grounds for vacatur or modification is satisfied. See 9 U.S.C. § 9; see also STMicroelectronics, N.V. v. Credit Suisse Sec. (USA) LLC, 648 F.3d 68, 74 (2d Cir. 2011). Section 10 of the FAA, in turn, establishes four instances in which a court may vacate an award:
9 U.S.C. § 10(a). In addition, the Second Circuit has held that a court may vacate an award if the arbitrator "has acted in manifest disregard of the law," Porzig v. Dresdner, Kleinwort, Benson, N.A. LLC, 497 F.3d 133, 139 (2d Cir. 2007), or "where the arbitrator's award is in manifest disregard of the terms of the parties' relevant agreement," Schwartz v. Merrill Lynch & Co., Inc., 665 F.3d 444, 452 (2d Cir. 2011) (internal quotation marks and alteration omitted); see also Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 375 n.3 (2d Cir. 2016). A court may vacate on those bases, however, only in "those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent." T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir. 2010) (internal quotation marks and alterations omitted).
Significantly, "`[a]rbitration 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.'" Rich v. Spartis, 516 F.3d 75, 81 (2d Cir. 2008) (quoting Willemijn Houdstermaatschappij, BV v. Standard Microsys. Corp., 103 F.3d 9, 12 (2d Cir. 1997)) (alteration in original). Among other things, the "`party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high.'" STMicroelectronics, 648 F.3d at 74 (quoting D.H. Blair
The Kleins' first — and strongest — argument for vacatur is based on the alleged evident partiality and corruption of Bronner, the neutral arbitrator. As the Second Circuit has held, "evident partiality... will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." Scandinavian Reins. Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60, 72 (2d Cir. 2012). "Unlike a judge, who can be disqualified in any proceeding in which his impartiality might reasonably be questioned, an arbitrator is disqualified only when a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side." Id. (citation omitted). Although "proof of actual bias is not required" and "partiality can be inferred from objective facts inconsistent with impartiality," the party seeking vacatur must prove evident partiality with "something more than the mere appearance of bias." Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 104 (2d Cir. 2013) (alterations and internal quotation marks omitted). More specifically, the party seeking vacatur "bear[s] a high burden of demonstrating objective facts inconsistent with impartiality." Id. at 105 (internal quotation marks omitted).
An arbitrator's failure "to disclose a relationship or interest that is strongly suggestive of bias in favor of one of the parties" is "[a]mong the circumstances under which the evident-partiality standard is likely to be met." Scandinavian Reins., 668 F.3d at 72. At the same time, the Second Circuit has "repeatedly cautioned that [it is] not `quick to set aside the results of an arbitration because of an arbitrator's alleged failure to disclose information.'" Id. (quoting Lucent Techs. Inc. v. Tatung Co., 379 F.3d 24, 28 (2d Cir. 2004)). An undisclosed relationship does not require vacatur, for example, if it is "too insubstantial." Lucent Techs., 379 F.3d at 30. Additionally, "[w]here a party has knowledge of facts possibly indicating bias or partiality on the part of an arbitrator he cannot remain silent and later object to the award of the arbitrators on that ground. His silence constitutes a waiver of the objection." AAOT Foreign Econ. Ass'n (VO) Technostroyexport v. Int'l Dev. & Trade Servs., Inc., 139 F.3d 980, 982 (2d Cir. 1998); see also, e.g., Cook Indus., Inc. v. C. Itoh & Co. (America) Inc., 449 F.2d 106, 107-08 (2d Cir. 1971) ("Appellant cannot remain silent, raising no objection during the course of the arbitration proceeding,
In this case, the Kleins' broadest attack on Bronner's impartiality is based on his alleged failure to disclose the nature and extent of his relationships with Zahavi and Leviev. (Kleins' Opp'n 33-35). Specifically, the Kleins contend that Bronner failed to disclose that (1) he and Zahavi were partners in a "multi-million dollar diamond venture" involving an entity called Brilliant Crystal and (2) Brilliant Crystal shares were transferred to F.T.S. Worldwide Corporation ("FTS"), an entity affiliated with Leviev. (Kleins' Reply 5; Kleins' Opp'n 15-16). The biggest problem with this argument is that Bronner did disclose in his initial notice of appointment, dated September 23, 2013, that he had "done business with Zahavi" (as well as the Kleins' appointed arbitrator) and that he planned to "continue to do so." (Leviev Aff. Ex. 20). Additionally, it should have come as no surprise that Bronner might have ties to the other arbitrators or the parties, as the parties agreed that the arbitrators should have "substantial experience in the diamond industry." (Leviev Aff. Ex. 2 § 8.8). There is no prohibition on requiring such familiarity with an industry; indeed, it is "a principal attraction of arbitration." Lucent Techs., 379 F.3d at 30-31. But it "often comes at the expense of complete impartiality." Id. (internal quotation marks omitted). Indeed, "specific areas" — including, no doubt, the international diamond trade — "tend to breed tightly knit professional communities. Key members are known to one another, and in fact may work with, or for, one another, from time to time." Morelite Const. Corp. (Div. of Morelite Elec. Servs.) v. N.Y. City Dist. Council Carpenters Ben. Funds, 748 F.2d 79, 83 (2d Cir. 1984); see Transportes Coal Sea de Venezuela C.A. v. SMT Shipmanagement & Transp. Ltd., No. 05-CV-9029 (KMK), 2007 WL 62715, at *3 (S.D.N.Y. Jan. 9, 2007) ("[A]rbitrators, who are often chosen directly from the niche business communities whose disputes they are called upon to arbitrate, may have pre-existing relationships with one or both of the parties to an arbitration, or another arbitrator.").
In light of those facts and circumstances, the Kleins' attack on Bronner's disclosure misses its mark. See, e.g., NGC Network Asia, LLC v. PAC Pac. Grp. Int'l, Inc., 511 Fed.Appx. 86, 88 (2d Cir. 2013) ("Because the arbitrator properly complied with his disclosure obligations, the concern that nondisclosure might create an appearance of bias or even be evidence of bias is simply not present in this case." (alterations and internal quotation marks omitted)). And while Bronner could have been — and, no doubt, should have been — more forthcoming (revealing in the first instance, for example, that his "business" with Zahavi included partnerships), he shared at least enough to put the Kleins on inquiry notice. Yet they failed to investigate, let alone object, until after the panel had issued its interim award in LGC's favor (and the Kleins obtained new counsel). (Leviev Aff. Ex. 21; see also Leviev Aff. Ex. 36 (New York state court decision denying the Kleins' motion to disqualify Bronner and Zahavi after the interim award in part on the ground that the Kleins had waived "all objections" by "proceed[ing] without objection long after it
In any event, the Kleins do not substantiate their assertion that the undisclosed partnerships implicated Bronner in a meaningful way. In advancing this argument, the Kleins rely principally on an affidavit from Bronner's sister, Ruth Bronner, and two attachments to it that she identifies as agreements between Bronner and Zahavi "reflecting" their partnership or "apparent partnership" in certain businesses. (Kleins' Opp'n 12, 34-35; Levine Decl. Ex. 27 ("Ruth Bronner Aff."), Exs. 1-2). But Ruth Bronner does not identify a non-hearsay basis for her alleged knowledge. See Time Warner Cable of N.Y. City LLC v. Int'l Bhd. of Elec. Workers, 170 F.Supp.3d 392, 410 (E.D.N.Y. 2016) (requiring "admissible evidence" in deciding a motion to confirm an arbitral award). And, in any event, the affidavit may not be considered because it is not properly sworn and notarized and lacks any reference to whether it was made under penalty of perjury. See 28 U.S.C. § 1746; see also, e.g., D.H. Blair, 462 F.3d at 109 (stating that petitions to confirm or vacate arbitration awards are "treated as akin to [] motion[s] for summary judgment"); S.E.C. v. Simonson, No. 96-CV-9695 (MBM), 2000 WL 781084, at *2 (S.D.N.Y. June 19, 2000) (Mukasey, J.) ("[T]he court may not consider unsworn statements and unattached documents, and summary judgment therefore may not be resisted on the basis of them.").
The Kleins' contentions regarding Bronner's dealings with Leviev fall even more short. First, the Kleins learned as early as December 2013 that Bronner and Leviev might have "been actively engaged in business together" (Levine Decl. Ex. 11 ¶¶ 63-64), yet consciously decided not to press the issue for over a year — again, until after the unfavorable interim arbitral award was issued and they were represented by new counsel. (Leviev Aff. Ex. 32, at 40-41). Second, the transaction at issue — between Brilliant Crystal and FTS — took place in 2005, almost eight years before the arbitration proceedings even began. (Ruth Bronner Aff. Ex. 3). And finally, by that time, Leviev was no longer directly associated with FTS. (Leviev Reply Aff. ¶¶ 11-13 & Ex. 35). In short, the Kleins present no concrete evidence to suggest, let alone prove, that any undisclosed dealings between Bronner and Leviev were more than "indirect, general or tangential." Transportes Coal Sea de Venezuela C.A., 2007 WL 62715, at *6. That is
The Kleins are arguably on firmer ground in seeking vacatur based on Bronner's failure to disclose his indictment and conviction, if only because they raised the issue promptly after the conviction was disclosed. (Levine Decl., Exs. 46, 51). But federal courts have been unreceptive to the argument that undisclosed legal trouble of an arbitrator requires vacatur under the FAA absent a showing that the legal trouble affected the outcome of the arbitration in some demonstrable way. See, e.g., Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 646 (9th Cir. 2010); United Transp. Union v. Gateway W. Ry. Co., 284 F.3d 710, 712 (7th Cir. 2002). United Transportation Union, in which the neutral arbitrator ("a lawyer named Fredenberger") concealed that he had been convicted of a felony tax offense between the arbitration hearing and the panel's ruling, is instructive. 284 F.3d at 711. In an opinion by Judge Posner, the Seventh Circuit held that Fredenberger's conviction did not warrant vacatur under a law analogous to Section 10(a) of the FAA. See id. "Fredenberger's criminal violation of federal tax law," the Court reasoned, "was unrelated to the grievances that he was asked to arbitrate, and there is no suggestion that his violation would have inclined him in favor of (or, for that matter, against) the union." Id. at 712.
Judge Posner acknowledged that Fredenberger's "failure to disclose his criminal conviction" might have been "material in the sense that one or both parties might well have decided that they did not want to have a criminal resolve their dispute." Id. "But," he continued,
Id. (citations omitted). The Court noted that "[a] contrary rule would encourage losing parties to an arbitration to conduct a background check on the arbitrators, looking for dirt — a particularly questionable undertaking because arbitrators, unlike judges, are not subjected to background checks when appointed. It is another example of the lesser formality, and concomitant relaxation of due process norms, of
Applying that approach here, the Court concludes that neither Bronner's legal troubles nor his failure to disclose those legal troubles warrants vacatur.
Finally, the Kleins assert that the panel's final award in itself "makes Bronner's bias manifest." (Kleins' Opp'n 18). The Second Circuit, however, has "repeatedly
In the alternative, the Kleins argue that the panel exceeded its powers and acted in manifest disregard of the law when it rendered the award. See 9 U.S.C. § 10(a)(4); Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche Int'l, Ltd., 888 F.2d 260, 265 (2d Cir. 1989). An award should be vacated for manifest disregard of the law where "(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." Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004). As noted above, when a court reviews an arbitration award for manifest disregard of the law, such review "is highly deferential to the arbitrators, and relief on such a claim is therefore rare." STMicroelectronics, 648 F.3d at 78 (internal quotation marks omitted). "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." D.H. Blair & Co., 462 F.3d at 110 (internal quotation marks omitted). Significantly, "mere demonstration that an arbitration panel made the wrong call on the law does not show manifest disregard; the award should be enforced if there is a barely colorable justification for the outcome reached." Telenor Mobile Commc'ns AS v. Storm LLC, 584 F.3d 396, 407 (2d Cir. 2009) (internal quotation marks and alteration omitted).
The Kleins contend that the panel exceeded its powers and acted in manifest disregard of the law when it imposed personal liability on them individually and when it awarded $70 million with respect to KLG and Sunrise. (Kleins' Opp'n 37-39). "Where an arbitration clause is broad," however, "arbitrators have the discretion to order remedies they determine appropriate, so long as they do not exceed the power granted to them by the contract itself." Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003). In this case, the scope of the panel's authority was broad, reaching "[a]ny controversy or claim arising out of or relating to" the agreements. (Leviev Aff. Ex. 2 § 8.8; Ex. 5 § 11.11; Ex. 10 § 11.14; Ex. 18). And while the individual Kleins themselves (namely, Martin Klein, Abraham David Klein, Moishe Klein, and Malka Klein) were not signatories to the KLG and Sunrise agreements, they were signatories to the JKD agreement and allowed the arbitrators to decide all three disputes in tandem. (Leviev Aff. Ex. 2 at 17; Ex. 16 ¶ 13). Moreover, the
On top of that, the Klein family members explicitly invoked their ability to buy out LGC's interests in all three companies. (Leviev Aff. Ex. 42, at 22-23 (detailing several of these instances)). See, e.g., E.G.L. Gem Lab Ltd. v. Gem Quality Inst., Inc., No. 97-CV-7102 (LAK), 1998 WL 314767, at *3 (S.D.N.Y. June 15, 1998) ("[A] nonsignatory to an agreement containing an arbitration clause may be compelled to arbitrate with a signatory where the nonsignatory knowingly accepts benefits derived directly from the agreement."). And the Kleins "participated voluntarily and actively in the arbitration process" for all three agreements and, in doing so, waived any right to object to the imposition of personal liability. Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1103 (2d Cir. 1991); see Halley Optical Corp. v. Jagar Int'l Mktg. Corp., 752 F.Supp. 638, 639-40 (S.D.N.Y. 1990) (finding waiver where a party participated in proceedings, lest the party "participate in an arbitration, with the assurance that if it loses it may later challenge whether it had ever agreed to arbitration"). For example, the Kleins explicitly agreed to arbitrate all three disputes together after LGC's amended Statement of Claim alleged that it was "entitled to redeem its interests in JKD LLC, KLG and Sunrise" and that damages should be awarded "jointly and severally." (Leviev Aff. Ex. 15 ¶¶ 62, 75-76, 169-70; Ex. 16 ¶ 13). In the same vein, the Kleins' response pleading both listed each of the individual Kleins as respondents and acknowledged that the three disputes — including those concerning KLG and Sunrise — were within the panel's purview. (Leviev Aff. Ex. 15 ¶ 1; Ex. 16 ¶¶ 1, 13).
In fact, the Kleins waited until after the arbitration hearing was over to first object to the imposition of personal liability (or to the prospect thereof). (Leviev Aff. Ex. 43, at 22-23). It is well settled that "[f]ailing to maintain an objection to the arbitrator's jurisdiction throughout arbitration... and participating beyond disputing arbitrability, such as engaging in discovery, testifying, and submitting papers on the merits of the underlying dispute, may evidence waiver." iPayment, Inc. v. 1st Americard, Inc., No. 15-CV-1904 (AT), 2016 WL 1544736, at *4 (S.D.N.Y. Mar. 25, 2016). Compare Merrill Lynch & Co. v. Optibase, Ltd., No. 3-CV-4191 (LTS), 2003 WL 21507322, at *3 (S.D.N.Y. June 30, 2003) (finding waiver where a party "affirmatively sought adjudication of the merits of [the] claims in the arbitral forum"), with Dedon GmbH v. Janus et Cie, No. 10-CV-4541 (CM), 2010 WL 4227309, at *7 (S.D.N.Y. Oct. 19, 2010) (finding no waiver where a party contested arbitrability "[f]rom its first submission... to its last"). It follows that the panel's decision to extend liability to the Kleins individually cannot be second guessed. See, e.g., Gvozdenovic, 933 F.2d at 1103 (finding intent for a nonsignatory to arbitrate where the party made no objections to the arbitration proceeding, participated in the arbitration, and failed to seek judicial intervention to halt the arbitration).
In re Arbitration Between Promotora de Navegacion, S.A. and Sea Containers Ltd., 131 F.Supp.2d 412 (S.D.N.Y. 2000)
Nor, finally, is there a basis to disturb the award because the panel awarded LGC $70 million with respect to KLG and Sunrise. (Kleins' Opp'n 38-39). To be sure, the KLG and Sunrise agreements explicitly provided only for dissolution, not a buyout. (Klein Decl. Exs. 15-16). But fashioning a buyout — instead of a dissolution — for KLG and Sunrise was within the scope of the arbitrators' authority to decide "[a]ny controversy or claim arising out of or relating to" their agreements. (Leviev Aff. Ex. 2 § 8.8; Ex. 5 § 11.11; Ex. 10 § 11.14; Ex. 18). Indeed, when the parties submitted the KLG and Sunrise disagreements to the panel, they empowered the panel to decide how to resolve the disputes. And because Martin Klein explicitly agreed to the buyout procedure that valued all three ventures together, the panel cannot be said to have acted outside its powers by crediting his testimony and abiding by the parties' preferred separation method. (Leviev Aff. Ex. 13 ¶ 1; Leviev Reply Aff. Ex. 3, at 1728-29). In any event, the Kleins cite no authority for their claim that mandating a buyout exceeded the panel's powers, let alone that the decision was devoid of "a barely colorable justification." Kolel, 729 F.3d at 103-04.
For the reasons stated above, LGC's petition to confirm the arbitration award is GRANTED, and the Kleins' motions to remand the state case, to dismiss the federal case, and to vacate the award are DENIED. To reach that result is not to say that the conduct of the arbitrators (or the parties) in this case was exemplary. As noted above, for example, the Kleins' allegations regarding Bronner — with respect to his criminal conviction, his relationships with LGC and its appointed arbitrator, and his less-than-entirely forthcoming disclosures about it all — are troubling, and the Court might well not have reached the same conclusions if it were deciding the matter de novo or in the first instance. In light of the substantial deference owed to the arbitrators, the Kleins' own conduct throughout the arbitration proceedings, and the lack of cognizable evidence supporting vacatur, however, the award must be confirmed.
SO ORDERED.