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Professional Parlays Do Not Imply Partiality on Part of Panelist, Court Propounds: Family Endowment Partners, LP & Weiss v. Sutow
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*Torts and violations of other state’s statutes are causes that are not generally precluded by a choice of law provision providing for application of a specific state’s laws. **An arbitrator’s interpretation of the container agreement to include a party among those obliged to arbitrate will be honored, if at all reasonable.

Family Endowment Partners, LP & Weiss vs. Sutow, No. 2015 CV 1411-BLS1 (Mass. Super., 11/16/15).

Arguments for Vacatur

Family Endowment Partners, a registered investment adviser, and its principal, Lee P. Weiss, were held liable to their former clients, James and Jane Sutow, for $48 million, by an Arbitrator serving under the American Arbitration Association’s Consumer Arbitration Rules. AAA ID #14-20-1300-0979 (Malvern, PA, 4/14/15). In this proceeding, FEP and Mr. Weiss move to vacate, pursuant to the Massachusetts Uniform Arbitration Act, and the Sutows move to confirm.

Petitioners have two basic grounds which they advance: First, the sole Arbitrator exhibited “evident partiality” in not disclosing that he knew counsel for the Sutows, Glenn Gitomer, as a fellow professional in securities arbitration, and that the two had previous professional interactions. Secondly, the Arbitrator exceeded his powers under the arbitration and submission agreements, in that he: (a) applied Pennsylvania law when the governing law of the agreement was Massachusetts law; (b) awarded treble damages, despite a contractual restriction to the contrary; and (c) exercised jurisdiction over Lee Weiss, when he was not a named party to the agreement.

The Court Disagrees

All grounds are examined by the Court and rejected. The AAA Arbitrator, Philip Cottone, did disclose that he knew the Sutow’s counsel. He specifically mentioned three prior mediations in his initial disclosures and, later, at the start of hearings, Arbitrator Cottone stated that he had seen counsel at PIABA conferences “from time to time.” Petitioners uncovered more post-Award: Mr. Cottone attended a seminar in 2012, where Sutow’s counsel presented; and, Messrs. Cottone and Gitomer contributed separate articles to a Pennsylvania Bar publication about securities arbitration.

The Court is unimpressed, calling the charge of evident partiality “completely unsubstantiated.” Even without the disclosures, “mere professional interaction between two members of a specialized area of the bar, without more, does not begin to suggest evident partiality.” The bases for an “exceeding powers” charge are also unsubstantiated. The Arbitrator’s resort to Pennsylvania law did not violate the parties’ agreement. The choice of law provision in the agreement requires the application of Massachusetts law “only with respect to construing and enforcing the terms of the Agreement.” Yet, the broad arbitration clause embraces “any disputes [or] claim.” The findings of statutory violations under Pennsylvania law fall easily within the scope of the latter and is clearly beyond the scope of the former.

The “Limitations on Liability” section of the parties’ agreement does not specifically preclude “treble” or “punitive” damages, the Court observes. The language is aimed more at special or consequential damage awards. Any limitation on damages must be more expressly stated to be enforceable. Finally, the Court finds that Petitioner Weiss was properly joined in the arbitration, pointing to provisions in the agreement that include “Adviser Parties.” The Arbitrator was empowered to construe the contract and it was “reasonable,” the Court concludes, to interpret “the Agreement so as to include Weiss as a party to the arbitration provision.”

(ed: *One of the points the Court makes obliquely is that parties who wait until after they lose to conduct full investigations of their arbitrators risk waiver. If the post-Award investigation could have been done at the time of the arbitrator’s appointment, then it seems reasonable to assume earlier, constructive knowledge of the uncovered facts. Skimping on arbitrator due diligence until one loses presents unacceptable risks. **The Sutows initially moved to confirm in federal court in Pennsylvania, but that action was dismissed without prejudice for lack of diversity jurisdiction. See SLA 2015-40.)

(SLC Ref. No. 2015-46-01)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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