Cardinale et al v. 267 Sixth Street LLC et al

Filing 85

OPINION & ORDER #104801 re: 76 CROSS MOTION to Confirm Arbitration. filed by 363 Developers LLC, 267 Sixth Street LLC, Isaac Katan, Ronald Fatato, Noreast Development Corp, 71 FIRST MOTION to Vacate Arbitration Award or modify same . filed by Ponzio 363 4th Avenue Associates, LLC, Cardinale 363 4th Avenue Associates, LLC, Nick Ponzio, Vito F. Cardinale. For the foregoing reasons, Petitioners' motion to vacate or modify the Award is denied, and Respondents' motion to confirm the Award is granted. (Signed by Judge John F. Keenan on 9/26/2014) (djc) Modified on 9/26/2014 (ca).

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: Sept. 26, 2014

UNITED STATES DISTRICT COURT
UNITED STATES DISTRICT YORK
SOUTHERN DISTRICT OF NEWCOURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
-----------------------------------------------------------x
VITO F. CARDINALE, NICK PONZIO,
:
In re FANNIE 4TH AVENUE
:
08 Civ. 7831 (PAC)
CARDINALE 363MAE 2008 SECURITIES
:
LITIGATION
:
09 MD 2013 (PAC)
ASSOCIATES, LLC, and PONZIO 363
:
4TH AVENUE ASSOCIATES, LLC,
:
:
individually and as members of
:
:
OPINION & ORDER
267-----------------------------------------------------------x
SIXTH STREET LLC,
:
No. 13 Civ. 4845 (JFK)
:
Petitioners, :
OPINION & ORDER
:
-against:
HONORABLE PAUL A. CROTTY, United States District Judge:
:
267 SIXTH STREET LLC, 363
:
DEVELOPERS LLC, NOREAST
:
BACKGROUND1
DEVELOPMENT CORP., ISAAC KATAN
:
a/k/a ITZHAK KATAN, RONALD FATATO, : in home financing which was fueled, among
The early years of this decade saw a boom
DOMINICK J. TONACCHIO, SCOTT
:
ROTHSTEIN, D&S MANAGEMENT and lax credit conditions. New lending instruments, such as
:
other things, by low interest rates
INVESTMENT, LLC, D&D MANAGEMENT
:
ANDsubprime mortgagesLLC, credit risk loans) and :
INVESTMENT, (high T & L
Alt-A mortgages (low-documentation loans)
INVESTORS CORP., TONA DEVELOPMENT :
ANDkept the boom going. LLC, D&S played a role too; they took on unmanageable risks on the
CONSTRUCTION Borrowers
:
DEVELOPERS GROUP, LLC, and
:
JOHN DOE #1that the market would continue to rise and that refinancing options would always be
TO JOHN DOE #10,
:
assumption
:
Respondents. :
available in the future. Lending discipline was lacking in the system. Mortgage originators did
:
-----------------------------------X
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
APPEARANCES
originators sold their loans into the secondary mortgage market, often as securitized packages
For Petitioners:
known as mortgage-backedBONFIGLIO
RICHARD S. securities (“MBSs”). MBS markets grew almost exponentially.
ForBut then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Respondents:
MILLER LAW OFFICES, PLLC
and home prices began to fall. H. light of the changing housing market, banks modified their
By: Jeffrey In Miller
Scott J. Farrell
lending practices and became unwilling to refinance home mortgages without refinancing.
SPATA & ASSOCIATES P.C.
By: Vincent F. Spata
JOHN F. KEENAN, United States District Judge:
1

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

Before the Court are cross-motions to vacate, modify, or

confirm the arbitration award of Martin S. Tackel (“Arbitrator”)
1
1

dated February 5, 2013 (“Arbitration Award” or “Award”).
Petitioners Vito F. Cardinale; Nick Ponzio; Cardinale 363 4th
Avenue Associates, LLC; and Ponzio 363 4th Avenue Associates,
LLC (collectively, “Petitioners”) have moved to vacate or modify
the Arbitration Award.

Respondents 267 Sixth Street LLC; 363

Developers LLC; Noreast Development Corp; Isaac Katan a/k/a
Itzhak Katan; and Ronaldo Fatato (collectively, “267 Sixth
Street Respondents”); and Domenick Tonacchio; D&S Management and
Investment, LLC; D&D Management and Investment, LLC; T&L
Investors Corp.; Tona Development and Construction, LLC; and D&S
Developers Group, LLC (collectively, “Tonacchio Respondents”)
oppose that motion and cross-move to confirm the Award.

For the

reasons that follow, the Court grants Respondents’ motion to
confirm the Award and denies Petitioners’ motion to vacate or
modify the Award.
I. Background
A. The Parties and Their Operating Agreement
Petitioners Cardinale and Ponzio entered into an Operating
Agreement with Respondent Katan, in his capacity as president of
Respondent Noreast Development Corp., on February 13, 2008 to
form Respondent 267 Sixth Street LLC. (Arb. Record 221–49.)

On

February 20, 2008, Cardinale formed Petitioner Cardinale 363 4th
Avenue Associates, LLC, and Ponzio formed Petitioner Ponzio 363
4th Avenue Associates, LLC. (Arb. Record 330–40.)
2

On September

15, 2008, Respondent 363 Developers LLC replaced Noreast
Development Corp. as a member. (Arb. Record 525–29.)

On

December 1, 2008, Respondents Fatato, Tonacchio, and Rothstein
were admitted as members of 267 Sixth Street LLC. (Arb. Record
559–62.)

Tonacchio managed Respondent D&S Developers Group,

LLC. (Arb. Record 583–90.)
There are several provisions of the Operating Agreement
that touch upon distribution of assets, which are relevant to
the Arbitration Award.
provides:

Section 15 of the Operating Agreement

“The Company’s profits and losses shall be allocated

to the Members as provided in Schedule C hereto.”

In turn,

section 1.1 of Schedule C defines “Capital Account” as “the
account established and maintained for the Member on the books
of the Company in compliance with Treasury Regulation §§ 1.7041(b)(2)(iv) and 1.704.2, as amended.”

It goes on to say that

section 1.1 “shall be interpreted and applied in a manner
consistent with such Treasury Regulations.”

Section 16 of the

Operating Agreement sets forth:
Distributions shall be made to the Members at the
times and in the aggregate amounts determined by
the Manager, to the extent permitted by the Loan
Documents as long as any Obligation remains
outstanding. Notwithstanding any provision to the
contrary contained in this Agreement, the Company
shall not be required to make a distribution to the
Members on account of its interest in the Company
if such distribution would violate the Act or any
other applicable law or any Basic Document.

3

Section 24(d) states:
In the event of dissolution, the Company shall
conduct only such activities as are necessary to
wind up its affairs (including the sale of the
assets of the Company in an orderly manner), and
the assets of the Company shall be applied in the
manner, and in the order of priority, set forth in
Section 704 of the [N.Y. Limited Liability Company
Law].
There is no arbitration clause in the Operating Agreement.
B. Prior Litigation and the Arbitration Award
The Arbitration Award here arises out of an earlier action
before Judge Jack B. Weinstein in the Eastern District of New
York (“Eastern District Action”).

There, Petitioners alleged,

inter alia, that the 267 Sixth Street Respondents and the
Tonacchio Respondents breached the Operating Agreement and
committed securities fraud and RICO violations.

To resolve the

Eastern District Action, all parties entered into a Settlement
Stipulation, which provided for the creation of a “Disputed
Fund” upon the closing of a contract for sale of the premises at
267 Sixth Street in Brooklyn. (Arb. Record 1177–89.)

Pursuant

to the Settlement Stipulation, once the contract for sale became
firm, Petitioners were to dismiss the Eastern District Action
with prejudice and the parties agreed to an interim distribution
of the net proceeds from the sale.

The parties would then

arbitrate (1) Petitioners’ breach of the Operating Agreement
claims; (2) any counter or cross-claims; (3) the distribution of

4

the Disputed Fund; and (4) re-allocation of the interim
distributions.

The parties’ recovery was limited to the amount

of the Disputed Fund. (Arb. Record 1185.)

The Settlement

Stipulation also contained provisions for the Eastern District
of New York to retain jurisdiction in the event that (a) the
purchaser (a third party) canceled the contract of sale; or (b)
there was a breach of the Settlement Stipulation. (Arb. Record
1186.) Judge Weinstein “so ordered” the Settlement Stipulation
and terminated the case.
During the arbitration, the parties disagreed about how the
proceeds of the sale should be distributed.

Respondents and

their expert argued that the proceeds should be distributed in
proportion to the ownership percentages of each member in accord
with New York law. (Arb. Record 58; 1637–39; 2066–70; 2095–97.)
Both sides stipulated to the membership interests and capital
contributions made by the parties. (Arb. Record 1963–64.)
Petitioners originally argued in their statement of claim
that distributions should be made on the “first-in, first-out
basis . . . required by the provisions of the Operating
Agreement and the New York Limited Liability Company Law which
governs same.” (Arb. Record 34.)

Petitioners’ expert later took

the position that Schedule C of the Operating Agreement
“requires adjustment of members capital accounts in conformity
with the provisions of Treasury Regulation §§ 1.704-1(b)(2)(iv)

5

and 1.704-2 as amended, the former of which require certain
allocations of gain and loss to have ‘substantial economic
effect’ which, in accounting parlance, would require adjustments
to the capital accounts of the existing members to reflect their
fair market value at the time of admission of new members.”
(Arb. Record 1715.)

Petitioners’ expert also set forth several

distribution scenarios.
hypotheses.

The scenarios provided two broad

The first hypothesis assumes that 26 C.F.R. §

1.704-1(b)(2)(iv) applies. (Arb. Record 1723–28.)

The second is

a straight application of N.Y. Limited Liability Law § 704.
(Arb. Record 1728–38.)

Both hypotheses have what Petitioners

term best case, worst case, and intermediary scenarios.
Although Petitioners’ statement of claim did not mention
either Schedule C or the Treasury Regulations, Petitioners’
post-hearing brief adopted their expert’s argument. (Arb. Record
2030–38.)

Petitioners took the position that distribution

should be determined by “regular cannons of construction to the
provisions, if any, of the Operating Agreement, under the
applicable provisions of the [New York Limited Liability Company
Law]” as modified by the Treasury Regulations that Schedule C of
the Operating Agreement “expressly incorporates.”(Arb. Record
2030–31.)

Although there were several amendments to the

Operating Agreement, Petitioners maintained that “none of the
amendments altered Schedule C.” (Arb. Record 2031.)

6

Additionally, Petitioners noted their experts’ distribution
scenarios.

They also argued that “the Arbitrator, sitting as

the arbiter of law, is free to adopt [their expert’s] approach,
as being both equitable and in conformity with the applicable
statutes, as there is clearly no binding decisional law
precisely on point.” (Arb. Rec. 2035–36.)
The Arbitrator issued his Award on February 5, 2013.

As

relevant here, he found that Petitioners failed to establish a
breach of the Operating Agreement and had not demonstrated that
the Disputed Fund should be distributed in a way “other than pro
rata in proportion to the members’ respective actual
contributions to the capital of the company” as set forth in the
parties’ stipulation regarding membership interests and capital
contributions. (Arb. Record 2112.)

He then found that

Respondents had shown that a pro rata distribution was
appropriate. (Id.)

Although such a distribution would have

required further disgorgement, the Arbitrator capped the
distribution at the amount of the Disputed Fund, as required by
the Settlement Stipulation. (Arb. Record 2113.)
After the Arbitrator rendered his Award, Petitioners timely
moved for vacatur or modification of the Award in the Eastern
District, before Judge Weinstein.

The 267 Sixth Street

Respondents opposed Petitioners’ motion and cross-moved to
confirm the Award.

The Tonacchio Respondents opposed the motion

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to vacate or modify for the same reasons as the 267 Sixth Street
Respondents, but did not cross-move for confirmation of the
Award.

Judge Weinstein transferred the action to this Court

after he determined that the petition to vacate was brought in
the wrong venue under § 10 of the Federal Arbitration Act
(“FAA”).
Upon this Court’s request, the parties rebriefed their
motions.

Petitioners’ underlying claim is that the Award should

be vacated or modified because the Arbitrator incorrectly
applied the parties’ original Operating Agreement, which
Petitioners allege incorporated Treasury Regulations §§ 1.7041(b)(2)(iv) and 1.704-2, which the Arbitrator ignored.
Petitioners’ moving papers assert that the failure to apply the
Treasury Regulations caused the Arbitrator to improperly
allocate $464,866.55 to the Respondents that should have gone to
the Petitioners.

Respondents argue that Petitioners fall short

of the high bar set to vacate an arbitration award, and that
confirmation of the Award is instead appropriate.1

1

Although the Tonacchio Respondents did not refile their motion, they did
file an Affirmation in Opposition to Petitioners’ Motion and in Support of
Cross Motion, where they incorporate the 267 Sixth Street Respondents’
arguments opposing vacatur or modification and in support of confirmation of
the Award. (ECF No. 70.)

8

II. Discussion
Petitioners claim federal question jurisdiction under 26
U.S.C. § 704, which is part of the Internal Revenue Code and
sets forth how to determine a partner’s distributive share. See
§ 704.

The Court has subject matter jurisdiction because the

main thrust of Petitioner’s argument for vacatur is that the
Arbitrator manifestly disregarded certain Treasury Regulations
and the Internal Revenue Code. See Greenberg v. Bear, Stearns &
Co., 220 F.3d 22, 27 (2d Cir. 2000) (holding that subject matter
jurisdiction is present where “petitioner complains principally
and in good faith that the award was rendered in manifest
disregard of federal law”).

This Court maintains jurisdiction

even if it later concludes that the Arbitrator did not
manifestly disregard federal law. See id. at 29.
Both parties ask the Court to apply New York law in its
review of the Award since the Settlement Stipulation providing
for arbitration does not affect interstate commerce. (Pl. Mem.
9; Def. Mem. 19.)

However, Judge Weinstein’s order transferring

the case to the Southern District was made pursuant to 9 U.S.C.
§ 10, indicating that the FAA may apply.

In the interest of

completeness, and because it does not affect the outcome, the
Court will examine all the potential grounds for vacatur raised
by Petitioners, including those under the FAA.

Since

Petitioners’ chief argument for vacatur is the Arbitrator’s

9

alleged manifest disregard of federal law, the Court turns to
that argument first.
A. Vacatur
1. Manifest Disregard of Federal Law
The crux of Plaintffs’ argument is that the Arbitrator
manifestly disregarded federal law by ignoring certain Treasury
Regulations referenced in the Operating Agreement.

Although the

Supreme Court’s decision in Hall Street Assocs., L.L.C. v.
Mattel, Inc., 552 U.S. 576, 584 (2008), cast some doubt on the
continued viability of the “manifest disregard of the law”
standard, the Second Circuit continues to recognize it as an
appropriate ground for vacatur. See Schwartz v. Merrill Lynch &
Co., 665 F.3d 444, 451 (2d Cir. 2011); see also TiVo Inc. v.
Goldwasser, 560 F. App’x 15, 17–18 (2d Cir. 2014).

However, the

party seeking vacatur bears a “heavy buren.” GMS Grp., LLC v.
Benderson, 326 F.3d 75, 81 (2d Cir. 2003).

Indeed, review for

manifest disregard of the law is “severely limited.” Wallace v.
Buttar, 378 F.3d 182, 189 (2d Cir. 2004).

Vacatur under this

standard requires “more than error or misunderstanding with
respect to the law.” T.Co Metals, LLC v. Dempsey Pipe & Supply,
Inc., 592 F.3d 329, 339 (2d Cir. 2010) (internal quotation marks
omitted).

Rather, there are three prongs that must be

established:

(1) the law allegedly disregarded must have been

clear and “explicitly applicable”; and the arbitrator must have

10

(2) “improperly applied” the law, “leading to an erroneous
outcome” with (3) subjective knowledge of the law and its
applicability. Id.

Even if a court disagrees with an award on

the merits, the court should reject vacatur “if there is a
barely colorable justification for the outcome reached.” Id.
Petitioners’ cannot carry their burden to show that the
Treasury Regulations were “explicitly applicable.”

Petitioners

do not contend that the Treasury Regulations have independent
effect outside the confines of the parties’ Operating Agreement.
Rather, as recognized by Petitioners, the Treasury Regulations
only arguably apply because they were “adopted by the parties in
their Operating Agreement.” (Reply 2.)

Indeed, Petitioners

frame their arguments around the idea that the Arbitrator
“utterly ignored a provision embedded by the Parties in their
Operating Agreement.” (Reply 1.)

They claim that the Arbitrator

could not rely solely on N.Y. Limited Liability Company Law
because, by its own terms, the law only applies “[i]f the
operating agreement does not so provide.” (Reply 4.)

Thus,

according to Petitioners, it is the Operating Agreement, not the
Treasury Regulations themselves, that provides for distribution
according to the Treasury Regulations.

The Treasury Regulations

are not “explicitly applicable” because, as Petitioners appear
to recognize, their applicability hinges on the Arbitrator’s
interpretation of the Operating Agreement.

11

Petitioners also

implicitly conceded this point during arbitration when they
argued the continued applicability of Schedule C despite several
amendments to the Operating Agreement. (Arb. Record 2031.)

Of

course, if the Treasury Regulations had any independent effect,
amendments of the Operating Agreement would not matter.
Since the Arbitrator’s interpretation of the Operating
Agreement was a predicate determination to the applicability of
the Treasury Regulations, it cannot be said that the Arbitrator
manifestly disregarded the Treasury Regulations. See T.Co
Metals, 592 F.3d at 339 (“With respect to contract
interpretation, [the “manifest disregard of the law” standard]
essentially bars review of whether an arbitrator misconstrued a
contract.”); see also Duferco Int’l Steel Trading v. T.
Klaveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003) (“An
arbitrator obviously cannot be said to disregard a law that is
unclear or not clearly applicable.”)

For similar reasons, it

cannot be said that the Arbitrator improperly applied the
Treasury Regulations or that he had subjective knowledge of
their applicability.

The regulations could only be “improperly

applied” if they were applicable in the first place, which
required the Arbitrator to first interpret the Operating
Agreement.

Moreover, Petitioners cannot show subjective

knowledge because they argued during the arbitration that the
Arbitrator was “free to adopt [their expert’s] approach, as

12

being both equitable and in conformity with the applicable
statutes, as there is clearly no binding decisional law
precisely on point.” (Arb. Record 2035–36 (emphasis added).)
Therefore, the “manifest disregard of law” is not an appropriate
basis for vacatur.
2. Arbitrator Exceeding His Power
In addition to their argument that the Arbitrator
manifestly disregarded federal law, Petitioners also argue that
the Arbitrator exceeded his power within the meaning of N.Y.
C.P.L.R. § 7511(b)(1)(iii).

New York has a “long and strong

public policy favoring arbitration.” Stark v. Molod Spitz
DeSantis & Stark, P.C., 9 N.Y.3d 59, 66 (2007) (internal
quotation marks omitted).

This is especially so when, as here,

the arbitration arises out of a settlement agreement. See State
v. Philip Morris Inc., 8 N.Y.3d 574, 581 (2007) (noting that the
arbitration clause was contained in settlement agreement and
that “it is the nature of a settlement to eliminate
unpredictable litigation”).
Nevertheless, section 7511(b)(1)(iii) allows for vacatur of
an arbitration award where a party is prejudiced by an
arbitrator who “exceeded his power or so imperfectly executed it
that a final and definite award upon the subject matter
submitted was not made.” N.Y. C.P.L.R. § 7511(b)(1)(iii).
arbitrator exceeds his power within the meaning of §

13

An

7511(b)(1)(iii) when:

“(1) the arbitrator has exceeded a

specifically enumerated limitation on his authority; (2) the
decision is totally irrational; or (3) the award violates a
strong public policy.” Advanced Aerofoil Techs., AG v. Todaro,
No. 13 Civ. 7181, 2014 WL 1512118, at *4 (S.D.N.Y. Apr. 16,
2014); see also In re N.Y.C. Transit Auth. v. Transp. Workers’
Union of Am., Local 100, 6 N.Y.3d 332, 336 (2005).
Although not clear from Petitioners’ moving papers,
Petitioner also appears to argue that the Arbitrator exceeded
his power under the FAA.

The analogous FAA provision permits

vacatur “where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made.” § 10.
However, the FAA does not provide for vacatur just because an
award is irrational or violates a strong public policy. See
Porzig v. Dresdner, Kleinwort, Benson, N. Am. LLC, 497 F.3d 133,
139 (2d Cir. 2007).
a. Exceed Specifically Enumerated Limitation on Authority
Petitioners argue that vacatur is appropriate because the
Arbitrator exceeded his authority by disregarding the
application of the Treasury Regulations as they pertained to the
distribution of the Disputed Fund thereby “re-writing the
agreement between the parties.”

First, Petitioners take issue

with the fact that the Award does not reference Schedule C of

14

the Operating Agreement or the Treasury Regulations incorporated
therein, opting instead to allocate the proceeds pro rata based
on each member’s capital contributions.

Second, as the flipside

of this argument, Petitioners also assert that the Arbitrator
was obligated to apply the Treasury Regulations as to give the
partnership transactions “substantial economic effect” because
the Arbitrator found that “membership, actual and proposed
capital contributions and commitments, loans, and membership
interest percentages in the Company varied and shifted.” (Mem.
14.)

Although not framed this way by Petitioners, it appears as

though their argument is that the Arbitrator exceeded a
specifically enumerated limitation on his authority.
“It is well established that an arbitrator has broad
discretion to determine a dispute and fix a remedy and that any
contractual limitation on that discretion must be contained,
either explicitly or incorporated by reference, in the
arbitration clause itself.” Comm’cn Workers of Am., Local 1170
v. Town of Greece, 926 N.Y.S.2d 232, 234 (4th Dep’t 2011)
(alteration and internal quotation marks omitted); see also Bd.
of Educ. v. Dover-Wingdale Teachers’ Ass’n, 61 N.Y.2d 913, 915
(1984).

New York law affords broad deference to an arbitrator’s

award and will not disturb it “even if the arbitrator misapplied
the substantive law in the area of the contract.” In re N.Y.C.
Transit Auth., 6 N.Y.3d at 336.

A court’s review is “even more

15

restricted when the arbitrator’s interpretation of the agreement
resolves the question submitted, and not merely one aspect of
the dispute.” Rochester City Sch. Dist. v. Rochester Teachers
Ass’n, 41 N.Y.2d 578, 582 (1977); accord In re Monroe Cnty., 670
N.Y.S.2d 276, 277 (4th Dep’t 1998).
There are at least two problems with Petitioners’ argument.
First, the Operating Agreement did not contain an arbitration
clause, and the parties agreed in their Settlement Stipulation
“to determine the disposition of the Disputed Funds by
arbitrating” Petitioners’ breach of the Operating Agreement
claims as well as any counter- or cross-claims raised by
Respondents. (Arb. Record 1185.)

Notably, this broad

arbitration clause does not confine disbursement of the funds to
the terms of the Operating Agreement or the Treasury
Regulations.

Indeed, the Treasury Regulations are not mentioned

in the Settlement Stipulation at all, and the Operating
Agreement is only referenced obliquely in that the “breach of
operating agreement claims” would be settled by arbitration.
(Arb. Record 1185.)

Thus, the Arbitrator did not exceed his

authority because there was no explicit limitation placed on him
by the Settlement Stipulation.
Second, Petitioners have likely waived this argument
because they never previously challenged the Arbitrator’s
authority to decide distributions in the manner that he did. See

16

Silverman v. Benmor Coats, Inc., 61 N.Y.2d 299, 309 (1984)
(“Generally the contention that a claim proposed to be submitted
to arbitration is in excess of the arbitrator’s power is waived
unless raised by an application for a stay.”); Allstate Ins. Co.
v. N.Y. Petroleum Ass’n Comp. Trust, 961 N.Y.S.2d 218, 219 (2d
Dep’t 2013).

Rather than challenge his authority, Petitioners

explicitly acknowledged that the Arbitrator “must still
determine the terms under which the distribution of the net
proceeds of liquidation of the [company] will be made; and, by
the effect of the stipulations between the parties, in what
amounts.

This is a matter of construction, determined by the

Arbitrator sitting as the arbiter of law.” (Arb. Rec. 2030.)
Petitioners and their expert even provided different
disbursement scenarios in the event that the Arbitrator found
that the Treasury Regulations did not apply.

Thus, not only did

Petitioners fail to challenge the Arbitrator’s authority, they
expressly recognized his authority to fashion the Award in the
manner that he did.

Therefore, the Court finds that the

Arbitrator did not exceed a specifically enumerated limitation
on his power within the meaning of N.Y. C.P.L.R. § 7511.

To the

extent that Petitioners claim that the Arbitrator exceeded his
authority within the meaning of the § 10(a)(4) of the FAA, that
argument is rejected for the same reasons discussed above. See
Seed Holdings, Inc. v. Jiffy Int’l AS, --- F. Supp. 2d ----,

17

2014 WL 1141717, at *10 n.8 (S.D.N.Y. 2014) (noting that, when a
party argues that the arbitrator exceeded the scope of his
authority, N.Y. C.P.L.R. § 7511(b)(1)(iii) and FAA § 10(a)(4)
are “identical” in substance).
b. Totally Irrational
Petitioners next argue that the Arbitrator exceeded his
power by crafting a totally irrational award.

They claim that

the Award is irrational because it is inequitable and
essentially rewrote the parties’ Operating Agreement by
disregarding Schedule C.

According to Petitioners, the

Arbitrator made findings that required him to apply the Treasury
Regulations incorporated in Schedule C.
“An award is irrational if there is no proof whatever to
justify the award or the award gave a completely irrational
construction to the provisions in dispute and, in effect, made a
new contract for the parties.” In re Rockland Cnty. Bd. of Coop.
Educ. Servs. v. BOCES Staff Ass’n, 308 A.D.2d 452, 453 (2d Dep’t
2003) (citations and internal quotation marks omitted).
is nothing irrational about this Arbitration Award.

There

While

Petitioners disagree with the Arbitrator’s interpretation of the
Operating Agreement, his interpretation was not the sort that
was categorically barred by the Operating Agreement such that it
made a new contract for the parties. See In re Professional,
Clerical, Technical, Emps. Ass’n, 959 N.Y.S.2d 310, 312 (4th

18

Dep’t 2013) (“The mere fact that a different construction could
have been accorded the provisions concerned and a different
conclusion reached does not mean that the arbitrator so misread
those provisions as to empower a court to set aside the award.”
(alteration and internal quotation marks omitted)).

As

Petitioners acknowledged in their post-hearing brief, there were
several provisions of the Operating Agreement that arguably
concerned distributions.

One of those provisions, section 16,

specifically dealt with distributions and did not mention
Schedule C or the Treasury Regulations, instead referring
generally to the N.Y. Limited Liability Company Law.

Another

provision, section 24(d), concerned dissolution and provided for
the company’s assets to be applied in accordance with N.Y.
Limited Liability Company Law § 704.

The provision

incorporating Schedule C, Section 15, dealt only with allocation
of profits and losses.
Whether or not it was the right interpretation, it was
nonetheless reasonable for the Arbitrator to focus on, for
example, section 24(d) of the Operating Agreement.

Both sides

agreed that N.Y. Limited Liability Law § 704, which deals with
distribution of assets upon dissolution, applied.

Section 704

is expressly incorporated in section 24(d) of the Operating
Agreement and provides, by reference to section 504 of the N.Y.
Limited Liability Law, that “distributions shall be allocated on

19

the basis of the value . . . of the contributions of each
member.” § 704; see also § 504.

Although Petitioners argued

that the Arbitrator needed to also take into account the
Treasury Regulations, which were only referenced in the
provision dealing with profits and losses, it was not
unreasonable for the Arbitrator to conclude, especially given
his broad distribution authority under the Settlement
Stipulation, that the Operating Agreement did not require
adjustments according to the Treasury Regulations when making
distributions according to section 24(d). See Shenendehowa Cent.
Sch. Dist. Bd. of Educ. v. Civil Serv. Emps. Ass’n, Inc., 934
N.Y.S.2d 540, 541 (3d Dep’t 2011) (“Where an agreement is
reasonably susceptible of the construction given it by the
arbitrator, a court may not vacate the award.” (alteration and
internal quotation marks omitted)); see also Fitzgerald v.
Fahnestock & Co., 850 N.Y.S.2d 452, 454 (1st Dep’t 2008) (“An
arbitrator may do justice as he sees it, applying his own sense
of law and equity to the facts as he finds them to be and making
an award reflecting the spirit rather than the letter of the
agreement.” (internal quotation marks omitted)).

Petitioners’

argument fairs no better under the FAA because the Second
Circuit does not allow vacatur of an award simply because it is
“irrational.” See Porzig, 497 F.3d at 139.

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c. Violates Strong Public Policy.
Finally, Petitioners assert that the Award violates two
strong public polices:

compliance with tax laws and enforcement

of contracts as written.

The public policy exception is

“extremely narrow.” N.Y. Racing Ass’n, Inc. v. Local Union No.
3, 74 A.D.3d 975, 975 (2d Dep’t 2010).

It only applies when

“public policy considerations, embodied in statute or decisional
law, prohibit, in an absolute sense, particular matters being
decided or certain relief being granted by an arbitrator.” City
Sch. Dist. v. McGraham, 17 N.Y.3d 917, 919 (2011) (internal
quotation marks omitted).

Such a violation must be evident on

the face of the award without “extended factfinding or legal
analysis.” In re N.Y.C. Transit Auth. v. Transp. Workers’ Union
of Am., Local 100, 99 N.Y.2d 1, 7 (2002) (internal quotation
marks omitted).
At the outset, it is worth noting that Petitioners do not
cite a single New York case that suggests either compliance with
tax laws and enforcement of contracts as written are public
policies that New York recognizes as trumping the finality of an
arbitration award.

Enforcement of contracts as written cannot

be a strong public policy because New York courts uphold
arbitration awards that arguably misconstrue contract
provisions. See In re United Fed’n of Teachers, Local 2 v. Bd.
of Educ., 1 N.Y.3d 72, 82–83 (2003); Rochester City Sch. Dist.,

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41 N.Y.2d at 582 (“[C]ourts may not set aside an award because
they feel that the arbitrator’s interpretation disregards the
apparent, or even the plain, meaning of the words or resulted
from a misapplication of settled legal principles.”).

This

Court need not address whether New York would recognize
compliance with tax laws as a strong public policy because, as
discussed earlier, the Treasury Regulations were incorporated by
reference and do not independently require the distribution that
Petitioners seek.

The Court notes, however, that during the

arbitration Petitioners and their expert recognized the
possibility that the Arbitrator might find that the Operating
Agreement did not require the Treasury Regulation adjustments
they sought.

Petitioners and their expert even set forth how

proposed distributions should be made solely under New York law,
without accounting for the Treasury Regulations.

Thus,

Petitioners recognized, as the Court does now, that the Treasury
Regulations themselves did not absolutely prohibit the
distributions provided by the Arbitrator.
The Second Circuit does not recognize violation of a strong
public policy as a ground for vacatur under the FAA. See Porzig,
497 F.3d at 139.

Since Petitioners have failed to satisfy the

high burden for vacating the Arbitration Award, the Court denies
Petitioners motion to vacate.

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B. Modification
In the alternative, Petitioners seek modification of the
Award based on a “miscalculation of figures.”

Under N.Y.

C.P.L.R. § 7511(c), a court “shall” modify an award that
contains a “miscalculation of figures.”

Under the FAA, a court

“may” modify an award containing an “evident material
miscalculation of figures.” 9 U.S.C. § 11(a).

Review under § 11

is “generally limited to patently obvious mistakes on the face
of the award.” Fellus v. Sterne, Agee & Leach, Inc., 783 F.
Supp. 2d 612, 619 (S.D.N.Y. 2011).

The same is true under N.Y.

C.P.L.R. § 7511(c). Hough v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 757 F. Supp. 283, 287–89 (S.D.N.Y. 1991); see also
Avamer Assocs., L.P. v. 57 Assocs., L.P., 890 N.Y.S.2d 2, 3 (1st
Dep’t 2009) (citing Hough with approval).
The Court discerns no miscalculation of figures, material
or otherwise.

Petitioners do not point to a clear mathematical

or clerical error of the sort warranting modification. Cf.
Laurin Tankers Am., Inc. v. Stolt Tankers, Inc., 36 F. Supp. 2d
645, 651 (S.D.N.Y. 1999) (remanding an award to arbitrators for
modification pursuant to FAA § 11(a) where arbitrators
acknowledged “computational error”).

Instead, Petitioners argue

that adjustments should have been made in accordance with the
Treasury Regulations, which, of course, assumes that the
Treasury Regulations apply.

Thus, this modification argument is

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essentially the same as Petitioners’ already-rejected arguments
for vacatur.

As such, Petitioners are actually seeking

modification on substantive grounds, which is not an appropriate
basis for modification under either the federal or state
statutes. See Fellus, 783 F. Supp. 2d at 619 (“Section 11(a)
does not permit modification where the award is not the result
of some careless or obvious mathematical mistake, but rather the
disposition of a substantive dispute that lays at the heart of
the arbitration.” (internal quotation marks omitted)); In re
Ververs & Schueller Co., 593 N.Y.S.2d 701, 701–02 (4th Dep’t
1993) (“Respondents, however, were challenging the figures the
arbitrator chose to use in the exercise of his judgment, not his
computation.

Thus, respondents were not entitled to

modification pursuant to CPLR 7511(c)(1).”)

The Court therefore

denies Petitioners’ motion for modification of the Arbitration
Award.
C. Confirmation
Under both the FAA and the N.Y. C.P.L.R., a court must
confirm an award upon timely motion unless it is vacated,
modified, or corrected. See Hall Street, 552 U.S. at 582 (FAA);
Blumenkopf v. Proskauer Rose LLP, 943 N.Y.S.2d 885, 886 (1st
Dep’t 2012) (N.Y. C.P.L.R.).

Having rejected Petitioners’

arguments concerning vacatur and modification, the Court grants
Respondents motion to confirm the Arbitration Award.

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III. Conclusion
For the foregoing reasons, Petitioners' motion to vacate or
modify the Award is denied, and Respondents' motion to confirm
the Award is granted.
SO ORDERED.

Dated:

New York, New York
September1J), 2014

w~J*~

U ----------------------JOHN F. KEENAN
United States District Judge

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