LGC USA Holdings Inc. v. Julius Klein Diamonds, LLC et al

Filing 36

OPINION AND ORDER; 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 reac h 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 wi th 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. (As further set forth in this Opinion and Order.) (Signed by Judge Jesse M. Furman on 2/16/2017) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------------- X
:
LGC HOLDINGS, INC.,
:
:
Petitioner,
:
:
-v:
:
JULIUS KLEIN DIAMONDS, LLC, et al.,
:
:
Respondents.
:
:
---------------------------------------------------------------------- X

02/16/2017
02/27/2017
02/28/2017

16-CV-5294 (JMF)
16-CV-5352 (JMF)
OPINION AND ORDER

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 be vacated because, among other things, the arbitrators
were partial, corrupt, and acted in manifest disregard of the parties’ agreements and the law.
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.
BACKGROUND
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

2

(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). 1 The parties’ agreements required arbitration before a panel of three
arbitrators “with substantial experience in the diamond industry,” one to be appointed by each of
the parties and the third to be appointed by the party-appointed arbitrators. (Leviev Aff. Ex. 2 ¶
8.8; Ex. 5 ¶ 11.11; Ex. 10 ¶ 11.14). LGC and the Kleins designated Israel Zahavi and Chaim
Pluczenick, respectively, as arbitrators. (Leviev Aff. Ex. 19). Zahavi and Pluczenick, in turn,
chose Jacob Bronner as the neutral arbitrator. (Id.). In September 2013, Bronner executed a
notice of appointment in which he disclosed that he had “professional or social relationships”
with Leviev and each of the other arbitrators, but otherwise indicated that he had no “other
information that may lead to a justifiable doubt as to [his] impartiality or independence or create
an appearance of partiality.” (Leviev Aff. Ex. 20). With respect to Leviev, Bronner explained as
follows: “While I do not have any social relationship or friendship with Mr. Leviev, I do see him
from time to time in my business travels and we exchange pleasantries when we see each other.”

1

Documents cited without reference to a Docket Number are currently filed under seal.
Pursuant to an Order entered contemporaneously with this Opinion and Order, the parties are to
show cause why those documents should remain under seal. Accordingly, some or all of those
documents may be docketed after this Opinion and Order is filed.

3

(Id.). With respect to the other arbitrators, he stated: “I have done business with ZAHAVI and
PLUCZENICK and will continue to do so.” (Id.). The Kleins did not ask Bronner to elaborate;
instead, they acknowledged and ratified his appointment. (Leviev Aff. Ex. 21).
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.

4

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, among other things, Respondent Malka Klein filed (and then dismissed) a
lawsuit in New York state court accusing Leviev, Zahavi, and Bronner of racketeering, fraud,
money laundering, and extortion; Bronner allegedly started receiving anonymous telephone
threats; and the Kleins made a motion before the panel for Bronner’s resignation, citing evidence
obtained from Bronner’s sister that he and Zahavi were partners in two businesses. (Leviev Aff.
Ex. 37; Ex. 22 ¶ 3.b; Ex. 39). The panel rejected the Kleins’ motion, writing that the Kleins’
actions were an “unprecedented an[d] improper attempt to interfere with the performance by a
duly appointed arbitrator.” (Leviev Aff. Ex. 22 ¶ 3). Pluczenik — the Kleins’ party-chosen
arbitrator — then resigned, alleging that he had been “shut out completely from the panel’s
decision making,” that Bronner had “betrayed [his] personal trust by concealing information”
from him, and that he no longer wanted to take part in a “biased, unfair process.” (Levine Decl.
Ex. 31). The Kleins promptly replaced him with Eytan Cohen. (Levine Decl. Ex. 32).
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

5

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

6

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).
DISCUSSION
The central dispute between the parties is whether the arbitration award should be
confirmed or vacated. Before resolving that dispute, however, the Court must address several
threshold issues raised by the Kleins: whether the Court has subject-matter jurisdiction; whether
the removed case should be remanded back to New York state court; and, if so, whether the
Court should dismiss the remaining federal case on abstention grounds. (Kleins’ Opp’n 19-26).
A. Subject-Matter Jurisdiction
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:
An agreement or award arising out of . . . a [commercial] relationship which is
entirely between citizens of the United States shall be deemed not to fall under the
Convention unless that relationship involves property located abroad, envisages
performance or enforcement abroad, or has some other reasonable relation with
one or more foreign states.
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
7

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 cities around the world, including New York, London, Dubai and Singapore.” (Leviev
Aff. Ex. 7 ¶¶ 29, 33).
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

8

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 selfgenerating 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).
B. Motion To Remand
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

9

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 (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 (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, 580 (1907), pursuant to which “the court
realigns the parties in their proper perspectives regardless of their denominations in the
pleadings,” OPNAD Fund, Inc. v. Watson, 863 F. Supp. 328, 332 (S.D. Miss. 1994). Mason City
involved a condemnation proceeding relating to a railroad’s appropriation of land. Under Iowa
law, either the landowner or the railroad could bring an action in state court to fix damages, but
regardless of who initiated suit the landowner was automatically denominated the plaintiff. See
2014 U.S. at 579. In the particular case before the Supreme Court, the landowner had initiated
the state court proceedings, but then removed the action to federal court. The question presented
was whether the landowner was nonetheless “a defendant within the meaning of the removal
statute.” Id. at 574. The Court answered in the affirmative and thus upheld the landholder’s

10

removal. “The intent of the railroad to get the land,” Justice Holmes reasoned, “is the
mainspring of the proceedings from beginning to end, and the persistence of that intent is the
condition of their effect . . . . Therefore, in a broad sense, the railroad is the plaintiff, as the
institution and continuance of the proceedings depend upon its will.” Id. at 580.
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).
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

11

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. 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 may be brought as a “special proceeding” and that,
“[n]otwithstanding the entry of judgment, all subsequent applications shall be made by motion”
in the same special proceeding). But that idiosyncratic provision is no different from the Iowa
state law at issue in Mason City and, thus, has no bearing on whether LGC is the “defendant” for
removal purposes. See 204 U.S. at 579 (“[T]he word ‘defendant’ as . . . used [in the federal
removal statute] is directed toward more important matters than the burden of proof or the right
to open and close. It is quite conceivable that a state enactment might reverse the names which,
for the purposes of removal, this court might think the proper ones to be applied.”). As the party
“opposing or resisting” the Kleins’ claim, LGC was the “defendant” who could remove the
action pursuant to Section 205. Gardner, 2007 WL 625825, at *2; see also OPNAD, 863 F.
Supp. at 334 (“Under the functional test for party status, courts are not required to look solely to
the party which initiates the claim. Rather, a court looks to which party is attempting to achieve
a particular result and which party is resisting the other party’s claims.”).
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

12

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. (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.

13

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. Aug. 29, 2002).
Here, when LGC removed the case to federal court, there had been no “trial.” Although the state
court had denied a preliminary injunction and had declined to confirm the interim award on the
ground that it was premature, the court did not make any rulings on the merits, let alone do so
with respect to the final award at issue now. That is, “no substantive issues in the instant case
were resolved,” making LGC’s removal under Section 205 timely. New Avex, 2002 WL
1998193, at *4 (finding a removal timely notwithstanding the state court’s having entered a
temporary restraining order staying arbitration and refusing to lift the stay at a preliminary
injunction hearing); cf. LaFarge Coppee v. Venezolana De Cementos, S.A.C.A., 31 F.3d 70, 72
(2d Cir. 1994) (finding removal to be untimely after the state court had granted an injunction
because the state court proceedings “resulted in an adjudication of the entirety of the claim that
the plaintiffs tendered for decision”); Pan Atl. Grp., 878 F. Supp. at 640 (finding removal to be
untimely after the state court had “adjudicate[ed] [] a significant portion of the relief [plaintiff]
sought [on the merits]”). Accordingly, the Kleins’ arguments for remand of the state-court
action must be and are rejected. 2

2

As noted, the Kleins’ arguments for Colorado River abstention are moot in light of the
denial of its motion to remand, as there are no parallel proceedings in favor of which this Court
could abstain from exercising jurisdiction. In any event, even if the Court were to remand the
state-court action, it is not clear that abstention would be appropriate. See IFC Interconsult, AG
v. Safeguard Int’l Partners, LLC., 438 F.3d 298, 306 (3d Cir. 2006) (refusing to abstain because
pre-arbitration litigation was complete and the state-court action had been “effectively
discontinued”); TapImmune, Inc. v. Gardner, No. 14-CV-6087 (GHW), 2015 WL 4111881, at *4
(S.D.N.Y. July 8, 2015) (rejecting the argument that “once a state court has ruled on a motion
related to the underlying merits of an arbitration, a federal court is precluded from hearing the
case”); HCC Aviation Ins. Grp., Inc. v. Emp’rs Reinsurance Corp., No. 3:05-CV-744M (BML),
2005 WL 1630060, at *2 (N.D. Tex. June 30, 2005) (concluding that abstention was
inappropriate where the state court had “conducted only limited proceedings . . . and ha[d] made
no more progress on the post-arbitration proceedings”).
14

C. Challenges to the Award
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.
1. The Applicable Legal Standard
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); see also Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15,
21 (2d Cir. 1997). A court in such a country — called a country of “primary jurisdiction” — is
“free to set aside or modify an award in accordance with its domestic arbitral law and its full
panoply of express and implied grounds for relief.” Yusuf, 126 F.3d at 23; see also Karaha
Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 287-88
(5th Cir. 2004). By contrast, a court in another country — called a country of “secondary
jurisdiction” — may only refuse to enforce an award, and then only on the limited grounds set

15

forth in Article V of the Convention. See Yusuf, 126 F.3d at 23; see also Karaha Bodas, 364
F.3d at 287-88. Significantly, an award is not necessarily “made” where the arbitration
“physically occurred.” Karaha Bodas, 364 F.3d at 292. Instead, it is “‘made in’ . . . the place of
the arbitration in the legal sense and the presumptive source of the applicable procedural law.”
Id.; see also Int’l Standard Elec. Corp. v. Bridas Sociedad Anonima Petrolera, Indus. Y
Commercial, 745 F. Supp. 172, 178 (S.D.N.Y. 1990) (finding the “procedural law under which
the arbitration was conducted” to be the determinant of whether an award was made “under the
law” of that country for the purposes of Article VI(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

16

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 Volt
Information Sciences, Inc. v. Board. of Trustees of Leland Stanford Junior University, 489 U.S.
468, 476 (1989), to suggest that parties may contractually agree that state arbitral law, rather than
the FAA, should apply to an arbitration. (Kleins’ Opp’n 28). That may be so, but the parties
here did not contractually agree to apply New York’s vacatur standards to their arbitration.
Instead, the agreements between the parties, unlike those at issue in the cases cited by the Kleins,
were silent as to the choice of arbitral law. Cf. Cnty. of Nassau v. Chase, 402 F. App’x 540, 541
(2d Cir. 2010) (analyzing an agreement that specified “that any appeal from an arbitration award
is to be governed exclusively by New York state law”). In similar circumstances, courts in this
District have applied the FAA. See CRC Inc. v. Computer Scis. Corp., No. 10-CV-4981 (HB),
2010 WL 4058152, at *2 (S.D.N.Y. Oct. 14, 2010); Penrod Mgmt. Grp. v. Stewart’s Mobile
Concepts, Ltd., No. 07-CV-10649 (JGK), 2008 WL 463720, at *2 (S.D.N.Y. Feb. 19, 2008).
This Court will do the same.

17

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:
(1)

where the award was procured by corruption, fraud, or undue means;

(2)

where there was evident partiality or corruption in the arbitrators, or either of
them;

(3)

where the arbitrators were guilty of misconduct in refusing to postpone the
hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; or of any other misbehavior by which the rights
of any party have been prejudiced; or

(4)

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.

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))

18

(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 & Co. v. Gottdiener, 462 F.3d 95, 110
(2d Cir. 2006)). Moreover, “[t]he 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).
Deference to the arbitrators’ interpretation of contracts is especially strong. Indeed, “as long as
the arbitrator is even arguably construing or applying the contract and acting within the scope of
his authority, a court’s conviction that the arbitrator has committed serious error in resolving the
disputed issue does not suffice to overturn his decision.” ReliaStar Life Ins. Co. of N.Y. v. EMC
Nat. Life Co., 564 F.3d 81, 86 (2d Cir. 2009) (internal quotation marks omitted); see also
Schwartz, 665 F.3d at 452 (“[I]nterpretation of the contract terms is within the province of the
arbitrator and will not be overruled simply because we disagree with that interpretation. If the
arbitrator has provided even a barely colorable justification for his or her interpretation of the
contract, the award must stand.” (internal quotation marks, alteration, and citation omitted)).
2. Evident Partiality and Corruption
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

19

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 evidentpartiality 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, and when an award adverse to him has been handed down complain of a situation of
which he had knowledge from the first.”); Ilios Shipping & Trading Corp. v. Am. Anthracite &
Bituminous Coal Corp., 148 F. Supp. 698, 700 (S.D.N.Y. 1957) (applying the waiver doctrine

20

where a party “knew before the arbitration” that the other party was associated with one of the
arbitrators and “could have inquired concerning the business relationship of [the arbitrator] to
any party interested in the arbitration”).
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

21

(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 F. App’x
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 had knowledge of the alleged irregularities”)). The Kleins’ “belated cry of ‘bias’ cannot
now form a basis for setting aside the award; its silence constituted a waiver of this objection.”
Swift Indep. Packing Co. v. Dist. Union Local One, United Food & Commercial Workers Int’l
Union, AFL-CIO, C.L.C., 575 F. Supp. 912, 916 (N.D.N.Y. 1983); see Lucent Techs., 379 F.3d
at 31 (holding that an undisclosed relationship between two arbitrators did not warrant vacatur
where the losing party “was on notice” that the arbitrators had worked together but “did not
object to that fact prior to arbitration, nor did it choose to investigate that relationship more
deeply”).

22

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.”). 3 As
for the purported agreements between Bronner and Zahavi, neither bears Bronner’s signature.
(Ruth Bronner Aff. Ex. 1-2). In short, with respect to the allegedly undisclosed relationship
between Bronner and Zahavi, the Kleins fail to meet the “high burden of demonstrating objective
facts inconsistent with impartiality.” Kolel, 729 F.3d at 105 (internal quotation marks omitted).
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
3

On top of all that, Bronner and his sister are apparently not on the best terms. (See LGC
Opp’n 14 (noting that Bronner and his sister are “embroiled in litigation,” citing In re Bronner,
No. 2012-2271, 2016 WL 258760 (N.Y. Sur. Ct. Jan. 15, 2016)).

23

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 not
enough “to warrant vacating the award.” Lucent Techs., 379 F.3d at 30 (holding that coownership of an airplane a decade before the arbitration was “too insubstantial to require
vacatur” (internal quotation marks omitted)). 4
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

4

The Kleins contend that the Court should infer bias from Bronner’s refusal to respond to
its demand, in December 2015, for a “full factual disclosure concerning his business
relationships with Zahavi.” (Kleins’ Opp’n 13, 34-35; see Levine Decl. Ex. 30). At that point,
however, the Kleins were aggressively seeking Bronner’s disqualification (and one of the Kleins
had sued him in state court), so he may have had various reasons for his refusal. In any event,
the Second Circuit has held that it is not “appropriate to vacate an award solely because an
arbitrator fails to consistently live up to his or her announced standards for disclosure, or to
conform in every instance to the parties’ respective expectations regarding disclosure. The
nondisclosure does not by itself constitute evident partiality.” Scandinavian Reins. Co., 668 F.3d
at 76-77 (footnote omitted).

24

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,
it does not follow that it should be a basis for setting aside his award. So far as
appears, the fraud was completely harmless; for there is no evidence or reason to
think that Fredenberger’s conviction (or events leading up to it) had the slightest
effect on the award that he rendered. A judge’s decisions are not voidable on the
basis of an undisclosed criminal conviction, even in a capital case, if the
conviction had no impact on the decision, and we do not see why a stricter rule
should apply in arbitration, especially since the standard due process entitlement
to an impartial tribunal is relaxed when the tribunal is an arbitral tribunal rather
than a court.
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 arbitration in comparison to adjudication.” Id. at 713.

25

Applying that approach here, the Court concludes that neither Bronner’s legal troubles
nor his failure to disclose those legal troubles warrants vacatur. 5 The Kleins argue that
Bronner’s indictment and conviction were “directly related” to the arbitration because they
pertained to his “‘substantial experience in the diamond industry,’ which was the basis of his
qualification as an arbitrator under the parties’ agreements.” (Kleins’ Opp’n 32). But that
argument is no different from the categorical materiality argument that Judge Posner found
wanting in United Transportation Union. See 284 F.3d at 712. Moreover, it rings somewhat
hollow given that the parties did not explicitly call for Bronner to disclose anything about his
criminal record in the initial notice of appointment. See, e.g., Lagstein, 607 F.3d at 646 (“If [the
party seeking vacatur] desired additional information about the arbitrators’ backgrounds, it was
free to seek that information by its own efforts.”). 6 The Kleins also assert that the criminal

5

The Kleins rely heavily on Velez Org. v. J.C. Contracting Corp., 734 N.Y.S. 2d 164
(App. Div. 2001), in which a New York court vacated an award after an arbitrator was convicted
of an unrelated felony, to argue that Bronner’s undisclosed conviction is grounds for automatic
vacatur. (Kleins’ Opp’n 31). But Velez was decided under New York law, not federal law.
Additionally, the Court provided little analysis or explanation for its holding, and there is some
reason to believe that it turned on the convicted arbitrator’s having affirmatively lied about his
conviction on a pre-arbitration questionnaire. (Geltner Decl. ¶ 3 (discussing the American
Arbitration Association questionnaire in Velez, which asked potential arbitrators whether they
had been charged or convicted of any crime)). Here, as noted, the notice of appointment did not
explicitly call on Bronner to disclose the pending charges. For these reasons, the Court declines
to follow Velez and adopts Judge Posner’s reasoning in United Transportation Union.
6

The Kleins suggest that Bronner should have disclosed the pending indictment because
the initial notice of appointment instructed him as follows: “[I]f you are aware of any other
information that may lead to a justifiable doubt as to your impartiality or independence or create
an appearance of partiality, then describe the nature of the potential conflict(s).” (Kleins’ Opp’n
10 (quoting Leviev Aff. Ex. 20)). As United Transportation Union makes clear, however,
pending criminal charges do not necessarily qualify as such “information.” The Kleins also take
issue with an affidavit that Bronner filed in New York state court in which he touted his
“reputation as an honest and decent man” in the diamond industry, but failed to disclose the
pending indictment. (Kleins’ Opp’n 10-11). Admittedly, Bronner’s affidavit was somewhat
economical with the truth, but that does not mean that it was “fraudulent,” as the Kleins assert
(id. at 10), let alone that it would justify vacatur of the panel’s arbitration award.

26

charges related to “Bronner’s concealed business partnerships” with Zahavi and Leviev because
they involved fraudulent shipments of diamonds to Brilliant Crystal. (Kleins’ Opp’n 17, 32-33).
As discussed above, however, the cognizable evidence in the record does not substantiate the
Kleins’ assertions about the nature and extent of Bronner’s ties to Zahavi, let alone to Leviev. In
short, although it would have been far better for Bronner to provide a full and timely disclosure
of his legal troubles (if only to avoid litigation of this kind), neither those troubles in themselves
nor his failure to disclose them rises to the level that would require vacatur on the grounds of
either evident partiality or corruption. As the Second Circuit has put it, “the better course is not
necessarily the only permissible one.” Scandinavian Reins. Co., 668 F.3d at 78.
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 said that adverse
rulings alone rarely evidence partiality, whether those adverse rulings are made by arbitrators, or
by judges.” Scandinavian Reins. Co., 668 F.3dat 75 (citations omitted). That is, “the fact that
one party loses at arbitration does not, without more, tend to prove that an arbitrator’s failure to
disclose some perhaps disclosable information should be interpreted as showing bias against the
losing party.” Id.; see also, e.g., Sebbag v. Shearson Lehman Bros., No. 89-CV-5477 (MJL),
1991 WL 12431, at *3 (S.D.N.Y. Jan. 8, 1991) (rejecting an argument that an award should be
vacated due to its size because “[p]etitioner ha[d] not offered adequate support for his argument
that the arbitrators were partial to the respondents”). In any event, the total award of $179
million (the $67 million that the Kleins had previously paid, plus the approximately $112 million
awarded by the panel (Klein Decl. ¶ 24)) can hardly be described “unfair[], lawless[], and
irrational[],” as the Kleins suggest, given that they were willing to agree to a buyout for $177
million in 2013. (Kleins’ Opp’n 36; Levine Decl. ¶¶ 60, 66).

27

3. The Kleins’ Remaining Arguments
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,

28

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 JKD Rights Agreement required
the various Klein family members to “promptly comply with any instructions” regarding the
buyout provisions (Leviev Aff. Ex. 2 §§ 2.2.1, 2.4), and the panel had a basis to extend those
provisions to the KLG and Sunrise agreements because, as Martin Klein acknowledged, the same
buyout valuation procedures were extended to each of the various agreements and because all the
agreements were being arbitrated together. (Leviev Reply Aff. Ex. 3, at 1728-29).
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

29

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) (“Promotora”), upon which the Kleins rely (Kleins’ Opp’n 37),

30

only confirms that conclusion. The award in Promotora, unlike the award at issue here, was
“unclear as to the parties against whom the damages [we]re awarded.” Id. at 415. Thus, the
Promotora Court was not confronted, as this Court is, with an arbitration panel’s explicit
decision to hold a non-signatory liable in an arbitration. Additionally, the Court there ultimately
found that the arbitrators had erred in imposing liability on a specific company because the
company was “clearly . . . not a signatory to the only contract underlying the dispute at issue”;
nobody representing the company had signed any pleadings or documents in the case; the
company’s liability was “never submitted, briefed, or argued to the panel”; and the company’s
lack of participation in the arbitration meant that its motion to vacate was not “a second bite at
the apple.” Id. at 415, 417, 421. That is a far cry from this case because, as discussed above, the
Kleins actively participated in the arbitration with respect to all three agreements, derived
benefits under all three agreements, and — for all intents and purposes — explicitly consented to
a decision holding them personally liable. To allow them to challenge the award because the
panel took them up on that would indeed be a second bite at the apple.
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. 1516). 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

31

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.
CONCLUSION
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.
Date: February 16, 2017
New York, New York

32