THE KNABB PARTNERSHIP v. HOME INCOME EQUITY LLC

Filing 22

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GERALD A. MCHUGH ON 4/19/2017. 4/19/2017 ENTERED AND COPIES E-MAILED.(kp, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

THE KNABB PARTNERSHIP,
Petitioner,

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v.
HOME INCOME EQUITY, LLC,
Respondent.

MCHUGH, J.

CIVIL ACTION
No. 17-373

April 19, 2017
MEMORANDUM

This case arises out of a dispute between an architect, The Knabb Partnership (TKP), and
a developer, Home Income Equity, LLC (HIE). According to TKP, HIE failed to compensate it
for services rendered and made unauthorized use of its copyrighted architectural drawings. The
matter was submitted to arbitration and an award was entered in TKP’s favor. TKP now
petitions to confirm that award, while HIE moves to vacate it on the grounds that the arbitrator
demonstrated manifest disregard for the law. For the reasons set forth below, TKP’s petition will
be granted, and HIE’s motion denied.
I.

UNDERLYING FACTS
On September 26, 2008, HIE and TKP entered into an agreement whereby TKP agreed to

design an 80-unit development that HIE planned to build in Brookhaven, Pennsylvania (the
Brookhaven Project). TKP prepared architectural drawings in due course, which it copyrighted
before submitting to HIE. HIE accepted these drawings without complaint but failed to pay TKP
the agreed-upon fee. Moreover, HIE passed along TKP’s drawings to a successor architect, Brett

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Hand, and directed Hand to sign and affix his seal to drawings after removing any attribution to
TKP.
TKP sued HIE for breach of contract, for interest and penalties under Pennsylvania’s
Contractor and Subcontractor Payment Act, and for copyright infringement under the Federal
Copyright Act. Under the terms of TKP’s contract with HIE (the Agreement), “any claim,
dispute or other matter in question arising out of or related to this Agreement” was subject to
arbitration. Dkt. 1 Ex. A at 7. Accordingly, TKP filed a demand for arbitration and the parties
eventually chose Richard Lowe, Esq., a highly experienced and respected practitioner in his
field, to resolve the dispute. Lowe held evidentiary hearings on December 19 and 20, 2016,
during which both parties were represented by counsel and called witnesses. At Lowe’s request,
both parties submitted post-hearing briefs on January 6; closing arguments were held on January
9; and on January 17, the parties submitted a stipulated list of exhibits to be admitted into
evidence. On January 23, Lowe issued a Partial Final Award in TKP’s favor, ordering HIE to
pay $401,402.79. This figure included $32,319.85 attributable to “predevelopment expenses”
and $40,000 for “anticipated profits.” Dkt. 1 Ex. D at 1. Lowe also permanently enjoined HIE
from “using, relying upon, copying, preparing derivative works based upon, or otherwise
infringing upon, directly or indirectly,” the architectural drawings at issue. Id. at 2. Finally,
Lowe awarded attorneys’ fees and litigation costs to TKP as the prevailing party.
Before me now are TKP’s Petition to Confirm Partial Final Arbitration Award and for
Entry of Final Judgment, and HIE’s Response in Opposition and Counter-Motion to Vacate,
Modify, or Correct the Arbitration Award. 1

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Although HIE’s motion is labeled as a motion to vacate, modify, or correct the arbitrator’s award, the only
arguments in HIE’s brief pertain to vacatur. Following HIE’s lead, I will treat this as a motion to vacate, rather than
a motion to modify, the award.

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II.

STANDARD
Both TKP’s petition and HIE’s motion are governed by the Federal Arbitration Act,

which provides that I “must,” 9 U.S.C. § 9, confirm the award unless: (1) it “was procured by
corruption, fraud, or undue means”; (2) “there was evident corruption in the arbitrator[]”; (3) the
arbitrator was “guilty of . . . any . . . misbehavior by which the rights of any party have been
prejudiced”; or (4) the arbitrator “exceeded [his] powers or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter was not made,” § 10. In addition to
these four statutory grounds for vacating an arbitration award, some courts will also set aside an
award when an arbitrator’s actions amount to a “manifest disregard of the law.” 2 It is on this
fifth, common-law basis that HIE’s motion to vacate rests.
Unlike an ordinary legal error—which is not grounds for vacatur—manifest disregard of
the law occurs only when “it is evident from the record that the arbitrator knew the applicable
law, and yet chose to ignore it.” Popkave v. John Hancock Distribs. LLC, 768 F. Supp. 2d 785,
790 (E.D. Pa. 2011). “In determining an arbitrator’s awareness of the law, [courts] impute only
knowledge of governing law identified by the parties during arbitration.” Duferco Int’l Steel
Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). The party seeking to
vacate the award therefore “bears the burden of proving that the arbitrators were fully aware of
the existence of a clearly defined governing legal principle, but refused to apply it, in effect,
ignoring it.” Id. at 389. 3

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See Dluhos v. Strasberg, 321 F.3d 365, 369 (3d Cir. 2003) (describing the “manifest disregard of the law” standard
as “judicially created”).

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Duferco was cited with approval in Bellantuono v. ICAP Securities USA, LLC, 557 F. App’x 168, 174 (3d Cir.
2014).

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The Third Circuit first recognized manifest disregard of the law as grounds for vacating
an arbitration award over thirty years ago. 4 More recently, however, the doctrine was called into
doubt by Hall Street Associates, L.L.C. v. Mattel, Inc., where the Supreme Court held that § 10
of the Federal Arbitration Act provided the “exclusive” grounds for vacating arbitration awards.
552 U.S. 576, 584 (2008). Since Hall Street, circuit courts have split on whether manifest
disregard of the law remains a viable standard; 5 our Court of Appeals has noted the disagreement
but has not yet taken a position. See, e.g., Whitehead v. Pullman Grp., LLC, 811 F.3d 116, 120
(3d Cir. 2016) (whether the manifest disregard of the law standard survived Hall Street “is an
open question”). I will therefore assume without deciding that manifest disregard of the law
remains a viable basis for vacatur. Applying the Third Circuit’s test pre-Hall Street, I find that
HIE has not carried its heavy burden of proving that the arbitrator willfully ignored controlling
law.
III.

DISCUSSION
HIE points to five decisions by Lowe, each of which, it argues, demonstrates manifest

disregard for the law and independently justifies vacating the entire award. First, HIE claims
that Lowe’s award of $32,319.85 for predevelopment expenses contravenes an unambiguous
term of HIE’s Operating Agreement. Second, HIE claims that the portion of Lowe’s award
based on TKP’s anticipated profit violates the Agreement’s prohibition on consequential
damages. Third, HIE claims that Lowe acted arbitrarily in awarding damages for copyright
infringement because TKP never produced any evidence that its drawings contained “protectable
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See Local 863 Int’l Bhd. of Teamsters v. Jersey Coast Egg Producers, Inc., 773 F.2d 530, 533 (3d Cir. 1985) (“An
award may be set aside only in limited circumstances, for example, where the arbitrator's decision evidences
manifest disregard for the law[.]”)

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Manifest disregard of the law remains a viable basis for vacatur in the Second, Fourth, and Ninth Circuits, while
the Fifth, Eighth, and Eleventh Circuits have abandoned the doctrine, citing Hall Street. See Bellantuono, 557 F.
App’x at 173 & n.3 (summarizing cases).

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expression” and therefore never demonstrated that HIE’s (apparently conceded) plagiarism
amounted to “wrongful copying.” Dkt. 15 at 7–8. Fourth, HIE claims that Lowe erred in
awarding copyright damages for two separate infringements of the same work. And fifth, HIE
claims that Lowe lacked jurisdiction over TKP’s copyright infringement claims because those
claims fell outside the scope of the Agreement’s arbitration clause.
HIE’s third and fourth claims fail at the outset because HIE points to nothing in the
record suggesting that Lowe considered and rejected the legal arguments about copyright
infringement that it raises now. Indeed, HIE does not even allege in its supporting brief that it
raised these arguments during arbitration. Because HIE bears the burden of demonstrating that
Lowe knew of, and ignored, controlling law, this failure of proof is fatal.
According to TKP, HIE’s first, second, and fifth claims should fail for the same reason.
TKP’s argument is not without force. HIE does not clearly state that it raised its first and second
claims during arbitration, and while HIE now claims that it objected “numerous times” to
Lowe’s jurisdiction over the copyright claims, Dkt. 15 at 12, it offers no record evidence in
support of this bald assertion. On the other hand, it appears that the contract documents that
underpin HIE’s first and second claims were introduced into the record during arbitration,
affording Lowe the opportunity to review the clauses that HIE now invokes. And giving HIE
every benefit of the doubt, I will accept as true its assertion that it raised jurisdictional objections
during arbitration.
Proceeding to the merits, HIE’s first claim concerns the $32,319.85 of the award that was
based on “pre-development expenses” incurred by TKP prior to June 18, 2008, the date of HIE’s
Operating Agreement. HIE maintains that, under the terms of the Operating Agreement, it
cannot be held liable for debts incurred by its members prior to the company’s formation, except

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under certain conditions that do not apply here. By nonetheless holding HIE liable for work
performed before June 18, 2008, HIE claims that the arbitrator abrogated an unambiguous term
of its Operating Agreement in clear violation of basic contract law principles.
In rebuttal, TKP points to extensive record evidence showing that Hal Lindsey, acting in
his capacity as the sole shareholder of a company called Strategic Property Trust, agreed to pay
TKP for predevelopment services on the Brookhaven Project. 6 According to TKP, this
arrangement amounted to a deal between HIE and TKP since Lindsey is the President of HIE,
Strategic Property Trust is an 80% owner of HIE and, according to HIE’s general counsel, “you
can’t separate them” for purposes of seeking payment. Dkt. 19 Ex. B at 3 n.2. TKP also notes
that during deposition testimony and again during the arbitration hearing, Lindsey appeared to
concede that HIE owed TKP $32,319.85 for predevelopment services. 7 Finally, TKP argues that
the relevant contract in this dispute is not the Operating Agreement, but rather the Agreement
between HIE and TKP, of which § 1.5.1 expressly provides that compensation for TKP will
include “Predevelopment Expenses: to be paid in full prior to the commencement of this
Agreement.” Dkt. 1 Ex. A at 10.
Because the parties directed Lowe to prepare a short-form award without a detailed
explanation of his decision, Dkt. 19 Ex. A at 3, there is no explanation as to why Lowe awarded
TKP damages for predevelopment expenses. Nevertheless, on this record, it is clear that Lowe’s
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TKP’s evidence of its arrangement with Strategic Property Trust includes minutes from a meeting between TKP
and Strategic Property Trust in March 2005, invoices from TKP to Strategic Property Trust, and partial payment by
Strategic Property Trust to TKP.

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Lindsey’s relevant deposition testimony reads:
Q. The bottom -- the end of the first paragraph it says, quote, the balance carried, including
payments made, has been $32,319.85. Do you see that -A. I guess.
Q. -- on the second page?
A. I guess that’s what we owe them.
Dkt. 19 Ex. B at 23–24. When Lindsey was confronted with his earlier testimony during arbitration, he again stated
“I guess that’s what we owe them.” Id. at 29.

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decision is not grounds for vacatur. Whether the award was based on a theory of veil-piercing,
on Lindsey’s apparent concession during his testimony, or on the terms of the Agreement
between TKP and HIE, I cannot say that Lowe erred—let alone that he displayed a manifest
disregard for the law—in ordering HIE to pay TKP $32,319.85 for predevelopment expenses.
HIE’s second claim—that the award of $40,000 in anticipated profits constitutes an
impermissible award of consequential damages—fares no better than its first. Although § 1.3.6
of the Agreement provides that the parties “waive consequential damages for claims, disputes or
other matters . . . arising out of or relating to this Agreement,” two other sections, 1.3.8.6 and
1.3.8.7, strongly suggest that this waiver does not apply to claims for anticipated profits. Dkt. 1
Ex. A at 7. As TKP notes, § 1.3.8.6 contains a termination provision which requires HIE, upon
termination by TKP, to compensate TKP for “services performed prior to termination, together
with Reimbursable Expenses then due and all Termination Expenses.” Id. at 9. Section 1.3.8.7
then explains that “Termination Expenses” include “an amount for the Architect’s anticipated
profit on the value of the services not performed by the architect.” Id. In light of these
additional provisions, I fail to see how Lowe demonstrated manifest disregard for the law by
enforcing TKP’s contractual right to anticipated profits.
Finally, HIE claims that Lowe lacked jurisdiction over TKP’s claims for copyright
infringement, which TKP disputes. Each party cites a single case in support of its position: TKP
points to Kamakazi Music Corp. v. Robbins Music Corp., 684 F.2d 228 (2d Cir. 1982), for the
proposition that Lowe had jurisdiction to its hear copyright claims, while HIE relies on Desktop
Images, Inc. v. Ames, 929 F. Supp. 1339 (D. Colo. 1996), to argue the opposite. Central to the
decisions in both Kamakazi and Ames was the language of the respective arbitration clauses. In
upholding the arbitrator’s exercise of jurisdiction over copyright claims, the Kamakazi court

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stressed the breadth of the clause at issue, which provided that “any controversy or claim arising
out of, or relating to this agreement or the subject matter thereof, or the breach hereof shall be
settled by arbitration.” 684 F.2d at 229, 231. In reaching the contrary conclusion, the Ames
court stressed that the clause before it was narrower than the one in Kamakazi, mandating
arbitration only in “any disputes or questions arising thereunder [(apparently meaning “under the
contract”)] including the construction or application of the Agreement.” 929 F. Supp. 1339 at
1345.
The arbitration clause between TKP and HIE, while not identical to the clause in
Kamakazi or in Ames, is closer to the former than the latter. As in Kamakazi, the clause here
mandates arbitration over claims “arising out of or related to” the Agreement—a seemingly
broader scope than the clause in Ames, which was restricted to claims arising under an
agreement. Taking Kamakazi and Ames as guideposts, I cannot say that Lowe’s exercise of
jurisdiction over the copyright claims demonstrated a manifest disregard of the law. HIE’s fifth
and final claim therefore fails.
IV.

CONCLUSION
HIE has failed to demonstrate that Lowe acted with manifest disregard for the law. Its

motion will be denied and TKP’s petition will be granted. An appropriate order follows.

/s/ Gerald Austin McHugh
United States District Judge

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