SHERRY R. FALLON, Magistrate Judge.
The present action concerns breach of warranty and alleged construction defect claims arising under or related to the warranty. The matter was arbitrated before the American Arbitration Association ("AAA"), which resulted in an Arbitration Order issued on May 10, 2017. Presently before the court are cross-motions by the parties, wherein Petitioners, Jason Jones and Amanda Jones (collectively "the Joneses" or "Petitioners"), have moved to vacate, modify, or correct the arbitration award,
On March 31, 2004, Petitioners signed a Sales Agreement ("Agreement") with BPG Residential Partners IV, LLC ("Seller" or "BPG Partners")
(D.I. 1-1 A, Ex. 1 at ¶ 8) (emphasis in original) Petitioners initialed each page and signed the Agreement. (D.I. 1-1 A, Ex. 1) On September 21, 2005, Petitioners and Seller signed a "Builder Application for Home Enrollment" ("Enrollment Application") to formally apply for the warranty specified in paragraph eight of the Agreement. (D.I. 29 at 6) See also Home Buyers Warranty Corporation v. Jones, C.A. No. 15-mc-324-RGA-MPT, 2016 WL 2350103, at *2 (D. Del. May 4, 2016). The Enrollment Application states, in relevant part:
Home Buyers, C.A. No. 15-mc-324-RGA-MPT, 2016 WL 2350103, at *2 (emphasis in original). HBW then mailed Petitioners a Certificate of Warranty Coverage and a copy of the HBW Limited Warranty Booklet ("Warranty"). (D.I. 29, Ex. A; D.I. 27-1 A, Ex. 2).
On October 15, 2015, Petitioners filed a class action in the Delaware Superior Court against BPG Partners, BPGS, HBW, and NHIC.
On July 22, 2016, Petitioners commenced the arbitration proceeding before the AAA against Respondents. (D.I. 27-1E) The sole question before the arbitrator was whether the arbitration agreement was valid, i.e., whether the arbitration provision was enforceable and not unconscionable. Home Buyers, C.A. No. 15-mc-324-RGA-MPT, 2016 WL 3457006, at *2. (See also D.I. 27-1G at ¶ 9) On August 19, 2016, Respondents asserted a counterclaim for attorney's fees, arbitration costs, and interest. (D.I. 27-1F) On February 14, 2017, the arbitration evidentiary hearing was held, and Howard D. Venzie (the "arbitrator") rendered his decision on May 10, 2017 in his "Ruling and Order on Enforcement [sic] of Arbitration Agreement [sic]" (the "Arbitration Order").
On May 23, 2017, Petitioners informed the arbitrator that they were appealing the Arbitration Order. (D.I. 29, Ex. D) The arbitrator stayed all proceedings until the appeal was completed. (D.I. 29 at 10) Respondents moved to dismiss the appeal on June 6, 2017. (D.I. 29, Ex. E) On June 8, 2017, the arbitrator lifted his suspension order and directed that the Petitioners respond to the Respondents' motion to dismiss the appeal and provide a copy of their appeal. (D.I. 29, Ex. F)
On June 13, 2017, the Petitioners filed a petition in the Delaware Chancery Court seeking to vacate the Arbitration Order. (D.I. 29, Ex. C) On June 16, 2017, the Respondents removed the matter to this court. (D.I. 1) On July 12, 2017, the Petitioners moved to remand, which the court denied in a Report and Recommendation on May 29, 2018. (D.I. 6; D.I. 16) The Report and Recommendation denying remand was adopted by Judge Bataillon on August 21, 2018. (D.I. 22)
The Petitioners submitted a copy of their Delaware Chancery Court petition to the arbitrator as proof of their appeal. (D.I. 29 at 11) On July 25, 2017, the arbitrator denied the Respondents' motion to dismiss the appeal and request for judgment before suspending the proceeding, pending the resolution of the present matter before the District Court. (D.I. 29, Ex. H)
The Federal Arbitration Act ("FAA") gives courts an "extremely limited" role in reviewing arbitration awards. See Sheet Metal Workers v. Ariz. Meek & Stainless, Inc., 863 F.2d 647, 653 (9th Cir. 1988). "An application to confirm an award must be granted so long as (1) the application is brought in the court specified by the parties, if one is specified; (2) `at anytime within one year after the award is made'; and (3) the award is not `vacated, modified, or corrected as prescribed in sections 10 and 11* of the FAA." Boston Scientific Corp. v. Acacia Research Group, LLC, C.A. No. 17-1144-RGA, 2018 WL 3117549, at *2 (D. Del. June 25, 2018) (quoting 9 U.S.C. § 9). "It is irrelevant whether the courts agree with the arbitrator's application and interpretation of the agreement." Roberts & Schaefer Co. v. Local 1846, United Mine Workers of America, 812 F.2d 883, 885 (3d Cir. 1987) (quoting Arco-Polymers, Inc. v. Local 8-74, 671 F.2d 752, 755 (3d Cir. 1982)).
The Supreme Court, in Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013), articulated the heavy burden parties challenging the validity of an arbitration award must carry:
Oxford, 569 U.S. at 569 (internal citations omitted). An award is presumed "valid unless it is proven otherwise." Wall St. Assocs., L.P. v. Becker Paribas Inc., 27 F.3d 845, 848 (2d Cir. 1994). "Under the FAA, the validity of an award is subject to attack only on the grounds listed in § 10, and the policy of the FAA requires that the award be enforced unless one of those grounds is affirmatively shown to exist." Id.
The grounds for vacating an arbitration award under Section 10 are:
9 U.S.C. § 10(a).
As a preliminary matter, the Agreement provides that "[t]he decision of the arbitrator shall be final and binding and may be entered as a judgment in any State or Federal court of competent jurisdiction." (D.I. 29, Ex. A at 6) This court has previously determined that it has jurisdiction over this matter. See Home Buyers, C.A. No. 15-mc-324-RGA-MPT, 2016 WL 2350103, at *3. Respondents filed a counterclaim to confirm the Arbitration Order on July 5, 2017, within one year of the Arbitration Order.
Petitioners argue that the arbitrator violated 9 U.S.C. § 10(a)(4) by awarding relief to BPG Partners, a non-party to the arbitration. (D.I. 27 at 10-11) Petitioners argue that the arbitrator attempted to require the Joneses to submit their other claims to arbitration by requesting an amended arbitration demand, including "all claims, disputes, and controversies arising from or relating to the sale/purchase of their Home from TBG [sic] Residential Partners IV, LLC located in Christina Landing, Wilmington, Delaware or any defect(s) to or in connection with the construction thereof."
Respondents aver that, because the Petitioners only submitted the single issue of the validity of the arbitration agreement and the arbitrator determined that it was valid, the arbitrator was accordingly providing a deadline for the Petitioners to assert their substantive breach of warranty claims against Respondents. (D.I. 31 at 4-5; D.I. 29 at 18-20)
Petitioners cite Hendricks v. Feldman Law Firm LLP, C.A. No. 14-826-RGA, 2015 WL 5671741 (D. Del. Sept, 25, 2015) to support their assertion that this court has the power to vacate the Arbitration Order for awarding relief to a non-party. (D.I. 27 at 10) However, Hendricks is distinguishable. In Hendricks, the arbitrator issued an award which stated that the parties were "ordered to arrange for the payment as aforesaid from [non-party] to [plaintiff]." Hendricks, C.A. No. 14-826-RGA, 2015 WL 5671741, at *2. The court recognized that "[t]o the extent that the arbitration award vests any rights in [a non-party], or creates any obligation to [a non-party], it is in manifest disregard for the legal principle that an arbitration panel may not assert jurisdiction over non-parties to the arbitration." Id. at *4 (citing Nationwide Mut. Ins. Co. v. Home Ins. Co., 330 F.3d 843, 847 (6th Cir. 2003)). The court determined that while indirectly imposing an obligation on a non-party to the arbitration, the award nevertheless exceeded the arbitrator's authority and warranted vacating the award. Id. at *5.
Here, the arbitrator did not impose obligations upon any non-parties, nor seek to require Petitioners to submit their claims against non-parties to arbitration. Instead, the arbitrator required Petitioners to file an amended demand for arbitration so that the merits of their breach of warranty claims against Respondents could be formally asserted in arbitration. (See D.I. 27-1G at H 12) Respondents agree that the Arbitration Order was limited to Petitioners and Respondents only and, if needed, they do not object to that being expressly noted in the order via amendment. (D.I. 31 at 4-7 & n. 1) Petitioners have not cited authority supporting their claim that the arbitrator's directions to Petitioners to file an amended demand for arbitration addressing the merits of their claims against the Respondents imposes any obligation on a non-party, in violation of 9 U.S.C. § 10(a)(4). (See D.I. 27 at 10-11) The directive was given in "[f]urther administration" of the arbitration so that it could progress to the merits once the parties were past their contract interpretation dispute, finding the arbitration provision valid and enforceable. (D.I. 27-1G at ¶ 12) Petitioners have failed to carry their "heavy burden" of showing that the arbitrator "act[ed] outside the scope of his contractually delegated authority." Oxford Health, 569 U.S. at 569. Therefore, the court recommends denying Petitioners' motion on this issue,
Respondents also argue that class arbitration is precluded by the District Court's previous opinions and the Arbitration Order. (D.I. 31 at 12-15)
The Third Circuit has recognized that "the availability of class arbitration constitutes a `question of arbitrability' to be decided by the courts — and not the arbitrators — unless the parties' arbitration agreement `clearly and unmistakably' provides otherwise." Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809 F.3d 746, 748 (3d Cir. 2016) (citing Opalinski v. Robert Half Int'l Inc., 761 F.3d 326 (3d Cir. 2014)). Judge Thynge concluded that the parties agreed to the Warranty, "including the provisions to arbitrate arbitrability and prohibiting classwide arbitration." Home Buyers, C.A. No. 15-mc-324, 2016 WL 2350103, at *5. Judge Andrews, in his order adopting Judge Thynge's Report and Recommendation, clarified that it did not address Petitioners' validity objections. See Home Buyers, C.A. No. 15-mc-324, 2016 WL 3457006, at *2. Petitioners argue that Judge Andrews overruled Judge Thynge's ruling that the agreement to arbitrate arbitrability and prohibit class-wide arbitration was valid and enforceable.
Petitioners contend that the arbitrator violated the District Court's Order because he believed Petitioners' argument was precluded by the District Court's ruling. (D.I. 27 at 11-13) Petitioners claim that the arbitrator erroneously believed that he was barred from making the ruling he was directed to make. (Id. at 13) Specifically, Petitioners argue that the arbitrator improperly determined that the District Court's Order precluded their argument that there is no valid or enforceable arbitration agreement. (Id. at 13) (citing D.I. 27-1G at ¶ 7) Furthermore, Petitioners cite a footnote in the Arbitration Order, wherein the arbitrator states, "The District Court's finding that the parties through mutual assent fairly reached a binding agreement to arbitrate upon the terms set forth in the [Warranty] is binding on the parties. That conclusion shifts the analysis to a review of the fundamental fairness of the arbitration process provided for in the arbitration agreement." (D.I. 27-1G at ¶ 10 n.3) As a result, Petitioners claim, the arbitrator failed to conduct the fact intensive inquiry required for analyzing unconscionability. (D.J. 27 at 13)
However, Petitioners conflate the issues of whether an arbitration agreement has been created and whether the agreement is valid. (D.I. 31 at 7-9) Petitioners cite to paragraph seven of the Arbitration Order, which states that "Claimants' argument that there is no valid or enforceable arbitration agreement is precluded by the District Court's June 21, 2016 Order." (D.I. 27-1G at ¶ 7) However, the arbitrator ultimately determined that the "Claimants are precluded . . . from now re-litigating the `gateway' issue of the creation of a binding arbitration agreement. . . . The District Court litigation is conclusive on the `gateway' question of the existence of an arbitration agreement" (Id. at ¶ 8) (emphasis added) The arbitrator did not "willfully flout known, governing law." Paul Green School of Rock Music Franchising, LLC v. Smith, 389 F. App'x 172, 178 (3d Cir. 2010). Instead, he continued on to analyze whether the arbitration agreement was unconscionable, using the analysis in Fritz v. Nationwide Mut. Ins. Co., 1990 WL 186448 (Del. Ch. Nov. 26, 1990).
"Error in the exclusion of evidence will only support vacatur if it is `in bad faith or so gross as to amount to affirmative misconduct.'" Prospect CCMC, LLC v. CCNA/Pennsylvania Assoc. of Staff Nurses & Allied Professionals, 2019 WL 342713, at *7 (E.D. Pa. Jan. 28, 2019) (citing United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 40 (1987)); Century Indem. Co. v. Certain Underwriters at Lloyd's, London, 584 F,3d 513, 557-58 (3d Cir. 2009). The ultimate question is "whether the error deprived a party of a fair hearing." Prospect, 2019 WL 342713, at * 7 (citing Newark Stereotypers' Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 599 (3d Cir. 1968)). This has only been found in "extreme circumstances, such as where an arbitrator determined procedural and substantive issues but only allowed the opportunity to present evidence on the procedural issues." Id. (quoting Teamsters Local 312 v. Matlack, Inc., 118 F.3d 985, 996 (3d Cir. 1997)).
Petitioners believe the evidentiary hearing was fundamentally unfair because the Joneses and their witness were not permitted to testify at the arbitration hearing. (D.I. 27 at 14) Thus, Petitioners conclude, they were prejudiced, denied due process, and denied a fair hearing. (Id.)
Respondents argue that the arbitrator's decision not to hear live testimony at the arbitration evidentiary hearing was appropriate under the circumstances because Petitioners' arguments on validity of the arbitration agreement presented purely legal determinations. (D.I. 31 at 10) Respondents note that all of Petitioners' factual averments had been ruled upon by this court twice. (Id. at 11)
Even assuming, arguendo, that the evidentiary ruling was in error, Petitioners have made no allegations of bad faith or gross misconduct in the exclusion of their testimony. (Id.) See also Prospect, 2019 WL 342713, at * 7; Lourdes Medical Center of Burlington Co. v. JNESO, 2007 WL 1040961, at *8 (D.N.J. Apr. 5, 2007). Although Petitioners claim the arbitrator questioned why they were present and did not permit their testimony, Petitioners do not cite any authority or evidence that "the arbitrator's refusal to hear proffered testimony `so affect[ed] the rights of a party that it may be said that he was deprived of a fair hearing.'" Century Indent. Co., 584 F.3d at 557 (quoting Teamsters Local 312, 118 F.3d at 995). (See also D.I. 27, Ex. 2) Therefore, I recommend denying Petitioners' motion on this issue.
Petitioners aver that the arbitrator was self-interested and biased and that such bias was evident when he expressed his desire to be the arbitrator for the entire dispute pending in the Delaware Superior Court. (D.I. 27 at 14-15) Petitioners argue that the arbitrator expanded his authority, improperly created a second phase of arbitration, and attempted to exercise nonexistent jurisdiction. (Id. at 15)
"To vacate an award due to evident partiality under Section 10(a)(2), the court must find more than a mere appearance of bias." United Merchandise Wholesale Inc. v. Direct Containers Inc., 2018 WL 3601232, at *3 (D.N.J. July 26, 2018) (citing Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 251-53 (3d Cir. 2013)). "An arbitrator is evidently partial only if a reasonable person would have to conclude that she was partial to one side. . . . The conclusion of bias must be ineluctable, the favorable treatment unilateral." Freeman, 709 F.3d at 253. Courts have largely addressed 9 U.S.C. § 10(a)(2) in the context of the arbitrator's alleged conflicts of interest and bias. See Styczynski v. MarketSource, Inc., 340 F.Supp.3d 534 (E.D. Pa. Nov. 30, 2018); Nowak v. Pennsylvania Professional Soccer, LLC, 156 F.Supp.3d 641 (E.D. Pa. Jan. 11, 2016); Watts v. Morgan Stanley Smith Barney, LLC, 2014 WL 1924143 (E.D. Pa. May 13, 2014).
Here, Petitioners do not cite authority to support their assertion that an arbitrator's desire to arbitrate a dispute after determining that an arbitration clause is valid is indicative of "evident partiality." Bapu Corp. v. Choice Hotels Int'l, Inc., 371 F. App'x 306, 310 (3d Cir. 2010) (citing Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir. 1989)). (See also D.I. 27 at 14-15) Petitioners failed to present sufficient evidence "powerfully suggestive of bias," and only submit that the arbitrator's wish to arbitrate the entire matter is suggestive of bias. Id. (citing Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994)). As such, Petitioners fail to demonstrate the arbitrator's "evident partiality" necessary to vacate the award under 9 U.S.C. § 10(a)(2). See id; Lourdes, 2007 WL 1040961, at *8-10. Therefore, the court recommends denying Petitioners' motion on this issue. Petitioners have failed to establish any grounds upon which the Arbitration Order should be vacated,
In the alternative, Petitioners argue that if the court will not vacate the Arbitration Order, it should modify the award. (D.I. 27 at 15-16) Section 11 of the FAA lists the grounds for modification of an arbitration award:
9 U.S.C. § 11. "[A] court's review of an arbitration award is characterized as `severely limited.'" In re Fruehauf Trailer Corp., 414 B.R. 36 (Bankr. D. Del. 2009) (quoting Mutual Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., Ltd., 868 F.2d 52, 56 (3d Cir. 1989)). Modification of an award is appropriate "only [in] those exceedingly rare circumstances where some egregious impropriety on the part of the arbitrators is apparent, but where none of the [modification] provisions of the [FAA] apply." Id. (quoting Black Box Corp. v. Markham, 127 F. App'x 22, 25 (3d Cir. 2005)). "To meet this extremely high and deferential standard, the movant seeking . . . modification `bears the burden of proving that the arbitrators were fully aware of the existence of a clearly defined governing legal principle, but refused to apply it, in effect, ignoring it." Id. (internal citations omitted). Petitioners have not presented evidence or legal authority to meet their burden of proving that modification under Section 11 is warranted. Therefore, the court recommends denying Petitioners' motion to modify the award.
Accordingly, it is recommended that the Arbitration Order is binding upon the parties and any further warranty-related claims between the Petitioners and Respondents shall be determined through binding arbitration in accordance with the valid and enforceable arbitration provision in the home warranty as determined by the arbitrator.
For the foregoing reasons, the court recommends granting Respondents' motion to confirm the arbitration award and denying Petitioners' motion to vacate, modify, or correct the arbitration award. (C.A. No. 17-773, D.I. 11; D.I. 28)
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B), Fed. R. Civ. P. 72(b)(1), and D. Del. LR 72.1. The parties may serve and file specific written objections within fourteen (14) days after being served with a copy of this Report and Recommendation. Fed. R. Civ. P. 72(b)(2). The objection and responses to the objections are limited to ten (10) pages each. The failure of a party to object to legal conclusions may result in the loss of the right to de novo review in the District Court. See Sincavage v. Barnhart, 171 F. App'x 924, 925 n. I (3d Cir. 2006); Henderson v. Carlson, 812 F.2d 874, 878-79 (3d Cir. 1987).
The parties are directed to the court's Standing Order For Objections Filed Under Fed. R. Civ. P. 72, dated October 9, 2013, a copy of which is available on the court's website, http://www.ded.uscourts.gov.
