1 No. 10
Wien & Malkin LLP, &c., et al.,
Respondents,
v.
Helmsley-Spear, Inc.,
Appellant.

2006 NY Int. 21

February 21, 2006

This opinion is uncorrected and subject to revision before publication in the New York Reports.

Howard Graff, for appellant.
Thomas E.L. Dewey, for respondents. G. B. SMITH, J.: In this appeal we review the Appellate Division's vacatur of an arbitration award after a remand from the Supreme Court of the United States with an instruction to reconsider in light of Citizens Bank v Alafabco, Inc. (539 US 52 [2003]). Since arbitral judgments are owed substantial deference and there was no showing that the Arbitration Panel manifestly disregarded the law, the award should be reinstated. The order of the Appellate Division should, therefore, be reversed. In 1997, Wien & Malkin LLP ("Wien & Malkin") attempted to oust Helmsley-Spear, Inc., ("Helmsley-Spear") as managing agent of eleven New York City properties.[1] Wien & Malkin served as the representative and designee of ownership interests in these buildings, provided legal services such as drafting leases and performed administrative tasks. Helmsley-Spear was owned by Irving Schneider and Alvin Schwartz, both former executives in the former Helmsley-Spear Corporation.[2] The partnerships began as a result of the late Harry Helmsley's efforts to find valuable properties and offer opportunities to others, like the late Lawrence A. Wien, to syndicate interests in the properties to passive investors. In 1997, Peter Malkin, the current chairman of Wien & Malkin and son-in-law of the late Lawrence A. Wien, sent a request to the partners in 200 Fifth Avenue Associates, Fisk Building Associates, and Lincoln Building Associates asking that they authorize him to terminate Helmsley-Spear without cause and retain a new managing agent. In August 1997, three of the Partnerships voted to remove Helmsley-Spear without cause by votes of 60% or more.[3] Helmsley-Spear obtained a stay and on September 8, 1997, Supreme Court granted Helmsley-Spear's motion to compel arbitration.
Later in September 1997, Leona Helmsley entered into a series of agreements with Irving Schneider and Alvin Schwartz, who owned one-tenth percent (.1%) of Helmsley-Spear.[4] Both Schneider and Schwartz held an option to purchase all of Helmsley-Spear's share from Helmsley Enterprises.[5] Schneider and Schwartz formed a new corporation called "HS Acquisition Corp." or "Newco" which purchased substantially all of the assets of the original Helmsley-Spear and renamed itself "Helmsley-Spear, Inc." Newco possessed the right to manage the eleven properties. Leona Helmsley granted the new corporation her irrevocable proxy to vote in favor of Helmsley-Spear's retention as managing agent of the properties, as long as Messrs. Schneider and Schwartz remained as managers of Helmsley-Spear.
During arbitration, Wien & Malkin and Peter Malkin (collectively, Wien & Malkin) sought termination of Helmsley- Spear as managing agent on both "for cause" and "without cause" grounds.[6] The matters were consolidated by the New York City office of the American Arbitration Association under its Commercial Arbitration Rules, and the Panel was comprised of three distinguished arbitrators.[7] The proceedings began in June 1998. Evidentiary hearings occurred between April 1999 and June 2000, during which the parties offered approximately 1000 exhibits each. Over 50 witnesses testified during more than sixty days of hearings.
On March 30, 2001, the Arbitration Panel issued a 134- page decision that denied Wien & Malkin's request to remove Helmsley-Spear as managing agent for cause and without cause. Helmsley-Spear was declared the legal and valid successor in interest to the former Helmsley-Spear Corporation and to have validly exercised the Option Agreement of 1970; Wien & Malkin was enjoined from contesting the validity or in any way interfering with the Voting Agreement between Leona Helmsley and Helmsley- Spear; and Wien & Malkin was enjoined from calling or holding a partnership meeting for the purpose of removing Helmsley-Spear as managing agent unless it followed an outlined 11-step procedure.
Helmsley-Spear then moved to confirm the award while Wien & Malkin moved to vacate it, claiming that there were many areas in which the decision was "legally in error." Supreme Court disagreed and confirmed the award on July 23, 2001. The Appellate Division concluded that since the dispute involved buildings within New York City and did not have a substantial effect on interstate commerce, the Federal Arbitration Act did not apply. It unanimously affirmed the confirmation under CPLR 7511 stating: "[T]he award must stand unless shown to be utterly arbitrary or violative of public policy (citations omitted). We are not empowered to vacate an award merely for errors of law or fact committed by the arbitrators. . . we conclude that the arbitration Panel's findings [] were not so arbitrary as to warrant vacatur" (300 2 32, 33). The United States Supreme Court granted certiorari and, on October 6, 2003, vacated the Appellate Division's judgment and remanded the matter for further consideration in light of the Court's holding in Citizens Bank v Alafabco, Inc. 539 US 52 [2003][8] ( Wien & Malkin LLP v Helmsley-Spear, Inc., 540 US 801 [2003]).
Upon remand, Wien & Malkin argued that the FAA was applicable to this matter, the award should be vacated because the Panel incorrectly recognized the new Helmsley-Spear as a valid successor, and the Voting Agreement between Leona Helmsley and Messrs. Schwartz and Schneider was unenforceable. The Appellate Division reversed Supreme Court's order and vacated the challenged portion of the arbitration award (12 AD3d 65 [2004]). The court reasoned that under the FAA, the issue was whether the award exhibited a "manifest disregard for the law" such that vacatur was warranted ( citing Spear, Leeds & Kellogg v Bullseye Sec., 291 AD2d 255, 256 [1st Dept 2002]; Halligan v Piper Jaffray, Inc., 148 F3d 197, 204 [2nd Cir 1998], cert denied 526 US 1034 [1999]). The Appellate Division relied on its own jurisprudence in Sawtelle v Waddell & Reed, Inc. (304 2 103, 108 [2003]), and held that the Arbitration Panel committed clear legal error and manifestly disregarded both contract law and the applicable agreements. It reasoned that the "conduct of Leona Helmsley and defendant's principals in entering an agreement assigning Helmsley-Spear's personal services contracts to defendant was a clear violation of the well-settled legal principle that personal services contracts . . . may not be assigned without the consent of the principal" (12 AD3d at 71 [citations omitted]). It determined that the new Helmsley-Spear was not a mere "change in form" and that the Panel "ignored the facts that Helmsley-Spear, Inc. had different officers, directors, shareholders, management personnel, financial structure and fewer properties under management than Helmsley-Spear" ( id. at 72). The court also found that the arbitrators manifestly disregarded the applicable agreements by finding that Wien & Malkin was bound to retain Helmsley-Spear as managing agent due to defects in the proxy voting procedure. The court reasoned that: "Contrary to the findings of the arbitration panel, the partnership agreements did not provide for a particular method of solicitation of proxies for a vote to terminate the managing agents and did not establish a fiduciary duty to them. Nor was there any showing that Peter Malkin fraudulently induced the partners to give him their proxies" ( id.). Finally, the court concluded that the arbitrators did not err by upholding Leona Helmsley's voting agreement with the new Helmsley-Spear but noted that this issue was academic in light of its conclusions that the arbitrators erred in finding the proxy solicitation process defective.
The Appellate Division granted Helmsley-Spear leave to appeal to this Court, and certified the following question: "Was the order of this Court, which reversed the judgment of Supreme Court, properly made?" For the reasons that follow, we conclude that it was not.
It is well settled that judicial review of arbitration awards is extremely limited ( see United Paperworkers Intl. Union AFL-CIO v Misco, Inc., 484 US 29 [1987]). An arbitration award must be upheld when the arbitrator "offer[s] even a barely colorable justification for the outcome reached" ( Andros Compania Maritima, S.A. v Marc Rich & Co, 579 F2d 691, 704 [2d Cir 1978]). Indeed, we have stated time and again that an arbitrator's award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice ( see In re Sprinzen (Nomberg), , 46 NY2d 623, 629 [1929]; NY State Corr. Officers & Police Benevolent Assn. v State, , 94 NY2d 321, 326 [1999], stating, "[a] court cannot examine the merits of an arbitration award and substitute its judgment for that of the arbitrator simply because it believes its interpretation would be the better one").
The FAA permits vacatur of an arbitration award on four grounds which all involve fraud, corruption or misconduct on the part of arbitrators, grounds which are inapplicable to the present matter.[9] In addition to these four grounds, an award may be vacated under Federal law if it exhibits a "manifest disregard of law" ( Duferco Intl. Steel Trading v T Klaveness Shipping A/S, 333 F3d 383, 388 [2d Cir 2003]; Goldman v Architectural Iron Co., 306 F3d 1214, 1216 [2d Cir 2002] quoting DiRussa v Dean Witter Reynolds, Inc., 121 F3d 818, 821 [2d Cir 1997]).[10] But manifest disregard of law is a "severely limited doctrine" ( Government of India v Cargill Inc., 867 F2d 130 [2d Cir 1989]). It is a doctrine of last resort limited to the rare occurrences of apparent "egregious impropriety" on the part of the arbitrators, "where none of the provisions of the FAA apply" ( Duferco, 333 F3d at 389). The doctrine of manifest disregard, therefore, "gives extreme deference to arbitrators" ( DiRussa, 121 F3d at 821).[11] The Second Circuit has also indicated that the doctrine requires "more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law" ( Duferco, 333 F3d at 389). We agree with that premise. To modify or vacate an award on the ground of manifest disregard of the law, a court must find "both that (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 F3d 182 [2d Cir 2004] citing Banco de Seguros del Estado v Mutual Marine Office, Inc., 344 F3d 255, 263 [2d Cir 2003]).
The Appellate Division considered three issues when it reviewed the 2001 Panel award. Specifically, the court considered whether the Panel manifestly disregarded the law when it (1) concluded that Helmsley-Spear was a valid successor in interest to the former Helmsley-Spear by virtue of the 1997 agreements; (2) annulled the purported proxy vote taken by Peter Malkin to terminate Helmsley-Spear without cause at three of the buildings; and (3) upheld the Voting Agreement between Leona Helmsley and Messrs. Schneider and Schwartz. We address each issue in turn.
First, the Appellate Division found that the arbitrators manifestly disregarded the law in concluding that the new Helmsley-Spear should be the managing agent for the eleven properties. The arbitrators found that the new Helmsley-Spear was the valid successor in interest to the former Helmsley-Spear because it deemed Messrs. Schneider and Schwartz to have exercised the 1970 Option Agreement in 1997. The Appellate Division, however, found that Messrs. Schneider and Schwartz did not exercise the 1970 Option Agreement, and that under the 1997 transactions, the new Helmsley-Spear was not a successor, but an assignee. Thus, the Appellate Division reasoned, the assignment of the eleven management contracts to the new Helmsley-Spear was invalid because those eleven contracts were contracts for personal services, which may not be assigned absent the principal's consent.
The Appellate Division is correct that personal services contracts generally may not be assigned absent the principal's consent ( see 9 Corbin, Contracts § 865 [Interim ed]; Farnsworth, Contracts § 11.4, § 11.10 [3d ed]).[13] Unlike the Appellate Division, however, we do not believe that this rule is clearly applicable to the facts of this case.
In relevant part, the Panel determined: "The parties to the 1997 transaction cast it as a purchase of the assets of the existing Helmsley-Spear corporation rather than a purchase of its stock. We are persuaded this change was merely one of form, done for tax reasons having to do with certain 'parked' properties that are unrelated to the issues of this case. [Wien & Malkin has] not persuaded us that the change of form had any other consequence to the parties, to the partnerships or to Wien & Malkin." The Appellate Division stated that the Panel "erroneously conclud[ed] that Helmsley-Spear[] was a mere 'change of form'" and "ignored the facts that Helmsley-Spear[] had different officers, directors, shareholders, management personnel, financial structure and fewer properties under management than (the former) Helmsley-Spear" (12 Ad3d at 72). Manifest disregard of the facts is not a permissible ground for vacatur of an award ( Wallace v Buttar, 378 F3d at 193; Westerbeke, 304 F3d 200, 213 citing ConnTech Dev. Co v Univ. of Conn. Educ. Props., Inc., 102 F3d 677, 687 [2d Cir 1996], "holding that an erroneous factual determination is not a ground for vacating an arbitration award").
Whether the 1970 Option Agreement was exercised was a factual determination by the Panel and its findings should remain undisturbed. In United Paperworkers Intl. Union v Misco, Inc., the Supreme Court stated: "[W]here it is contemplated that the arbitrator will determine remedies for contract violations that he finds, courts have no authority to disagree with his honest judgment in that respect. If the courts were free to intervene on these grounds, the speedy resolution of grievances by private mechanisms would be greatly undermined. . . . But as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision" >(484 US 29, 38 [1987][emphasis added]; see also Dowleyne v N.Y. City Transit Auth., (3 NY3d 633 [2004] [reversing the Appellate Division's vacatur of an arbitration award "because it improperly substituted its factual finding for that of a majority of the arbitration panel"]).
The Arbitration Panel did not manifestly disregard the law when it concluded that Helmsley-Spear remained the valid managing agent after the 1997 transaction. There were several underlying contracts between Helmsley-Spear, Wien & Malkin, and their previous incarnations that would understandably lead the Panel to conclude that the parties contemplated an ongoing contractual relationship with successors of Helmsley-Spear.[14] In addition, Wien & Malkin specifically contemplated that Messrs. Schneider & Schwartz would one day control Helmsley-Spear because the firm drafted the 1970 option. The 1997 acquisition agreement stated, "[t]he parties acknowledge and agree that they have entered into this Agreement in implementation of the exercise of the option granted in 1970 by Harry B. Helmsley to Schneider and Schwartz to acquire the balance of the outstanding shares of [Helmsley-Spear] upon his death." While the Appellate Division indicated that the Panel "ignored" the fact that the new Helmsley-Spear's characteristics differed from the former Helmsley-Spear, the Panel found that the change in the company's form was merely a "technical matter" and that Wien & Malkin failed to prove that "the change in form had any other consequence to the parties." In this regard, the Appellate Division improperly disturbed the Panel's finding that the change in form was not consequential (see Wallace, 378 F3d at 193); Westerbeke, 304 F3d at 213 ["Under the manifest disregard standard, the governing law must clearly apply to the facts of the case, as those facts have been determined by the arbitrator"] [emphasis in the original]).
Accordingly, even if the property management agreements constituted unassignable personal service contracts, the Arbitration Panel did not manifestly disregard the law because its conclusion, that Helmsley-Spear remained the managing agent as the valid successor in interest to the former Helmsley-Spear, was more than "barely colorable" ( Wallace, 378 F3d at 190). Even if the law of assignment of personal services contracts was clearly applicable, there was no showing that the arbitrators knew they were disregarding the law by naming Helmsley-Spear a valid successor in interest. The Appellate Division did not address the other half of the manifest disregard standard: that "the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether" ( Wallace, 378 F3d at 189). "Explicit rejection of governing law provides the strongest evidentiary basis for a finding that the arbitrator acted with the requisite intent" ( Westerbeke, 304 F3d at 217 [2002]). There is no explicit evidence in the record that any of the arbitrators believed that contractual assignment law applied. Nor is there any deliberateness or willfulness exhibited within the award that shows the arbitrators' intent to flout the law. The arbitrators' reasoning - that the Option Agreement was exercised - does not "strain credulity" ( id.). Therefore, the Panel's conclusion regarding the 1997 transaction between Leona Helmsley and Messrs. Schneider and Schwartz was not a manifest disregard of law. Thus, the Appellate Division erred in vacating that portion of the award.
Next, the Appellate Division held that the Arbitration Panel manifestly disregarded the law by voiding the purported proxy vote conducted by Peter Malkin to terminate Helmsley- Spear's services without cause at three of the partnerships. As the Appellate Division explained: “Contrary to the findings of the arbitration panel, the partnership agreements did not provide for a particular method of solicitation of proxies for a vote to terminate the managing agents and did not establish a fiduciary duty to them. Nor was there any showing that Peter Malkin fraudulently induced the partners to give him their proxies” (12 AD3d at 72). In Westerbeke, the Second Circuit stated that vacatur on the basis of manifest disregard of a contract is appropriate only where "the arbitral award contradicts an express and unambiguous term of the contract or if the award so far departs from the terms of the agreement that it is not even arguably derived from the contract" (304 F3d at 222). Here, the arbitral award does not contradict any express and unambiguous terms of the contracts. The partnership agreements provided that the partners could terminate Helmsley-Spear without cause "by the written vote of parties representing at least [50% or 60%] of the ownership of the assets of the joint venture." In annulling the proxy vote, the Arbitration Panel found that Malkin's solicitation of the proxies "was not preceded or accompanied by any disclosure at all" and that he failed to obtain "an informed vote of the general partners." It was within the Panel's discretion to conclude that certain procedures needed to be put in place to ensure an informed vote. The Panel, therefore, did not manifestly disregard the law in annulling the proxy votes.
The final issue is whether the Voting Agreement between Leona Helmsley and Messrs. Schneider and Schwartz was valid. The Appellate Division reasoned that the Voting Agreement did not transfer Leona Helmsley's partnership interest, "but merely made an agreement to vote for the retention of Newco as managing agent, a vote she was entitled to cast with or without the agreement" (12 AD3d at 73). Ultimately, the Appellate Division termed this issue "academic." Wien & Malkin argues that the transfer of a partner's management rights to a non-partner is unlawful because it interferes with administration of the partnership (citing Rapoport v 55 Perry Co., 50 AD2d 54,57 [1st Dept 1975]). Wien & Malkin posits that the clearly applicable laws are Partnership Law §§ 40(7) and 53(1). While it is clear that the affairs of partners should be managed by partners, Leona Helmsley's agreement involved "a vote she was entitled to cast" in whatever manner she chose. Therefore, we agree with the lower court's reasoning that the arbitrators did not manifestly disregard the law by concluding Mrs. Helmsley's actions did not violate state Partnership law. The Panel reasoned that there was no claim that Helmsley-Spear sought to become a partner, only that a partner agreed to vote on a specific limited issue, and that invalidating the Voting Agreement would undermine the Option Agreement, which "further[ed] the interests of the partnership and continuity of its business." This analysis shows no evidence of the Panel's intent to disregard the law. Therefore, its award on this matter will also stand. Accordingly, the order of the Appellate Division should be reversed, with costs, and the judgment of Supreme Court, New York County, reinstated. The certified question should not be answered upon the ground that it is unnecessary.