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Ray v. Chafetz

United States District Court, District of Columbia

February 17, 2017

John Ray and Susan Ray, Petitioners,
v.
Marc Chafetz, Respondent.

          MEMORANDUM OPINION

          COLLEEN KOLLAR-KOTELLY, United States District Judge

         Petitioner Susan Ray and Respondent Marc Chafetz are co-partners of the now-defunct Beltway Law Group LLP (“BLG”). Petitioner John Ray, Ms. Ray's ex-husband, is not formally a partner of BLG, but shares in the firm's distributions. Shortly after Respondent joined BLG, irreconcilable differences emerged between him and Ms. Ray, and the latter filed a demand for arbitration before the American Arbitration Association (“AAA”) seeking dissolution of the firm. Mr. Ray, though not originally a party to the arbitration, was compelled by a North Carolina state court to join the proceedings. Ultimately, in a series of rulings spanning over two years, AAA arbitrators ordered BLG to dissolve, held in favor of Respondent on two counterclaims, and awarded Respondent attorney fees and costs pursuant to the fee-shifting provision in the parties' arbitration agreement and the AAA Rules.

         Pending before the Court are a variety of motions related to those arbitral awards. Petitioners have filed two petitions to vacate, one seeking to vacate the award of attorney fees and costs (“Original Petition”), and another other seeking to vacate the final award that incorporated all prior awards issued during the arbitration (“Renewed Petition”). Petitioners have also asked the Court to appoint a receiver to administer the further winding down of BLG. Respondent, for his part, has moved to confirm the final award, and in doing so, seeks post-judgment interest and attorney fees and costs associated with his counsel's efforts before this Court. Respondent also seeks sanctions pursuant to Federal Rule of Civil Procedure 11(b) against Petitioners' counsel of record, Mr. Dwight D. Murray.

         Upon consideration of the pleadings, [1] the relevant legal authorities, and the record as a whole, the Court DENIES Petitioner John Ray's [1] Petition to Vacate Arbitration A w a r d; GRANTS Petitioners' [7] Motion to Amend Caption[2]; DENIES Petitioners' [ 8 ] Motion For Expedited Appointment of Receiver and For Status Conference; DENIES Petitioners' [9] Renewed Petition to Vacate Arbitration Award and Motion to Appoint a Receiver; GRANTS Respondent's [14] Motion for Leave to File Surreply in Opposition to Renewed Petition to Vacate[3]; GRANTS Respondent's [23] Cross-Motion to Confirm Arbitration Award, except to the extent it seeks attorney fees and costs for matters before this Court, which is DENIED WITHOUT PREJUDICE; and DENIES Respondent's [26] Motion for Rule 11 Sanctions Against Dwight Murray.

         I. BACKGROUND

         Ms. Ray founded BLG in February 2012 with the assistance of her then husband, Mr. Ray. Orig. Pet. Mem. at 2. Ms. Ray, who is not an attorney, incorporated the firm in the District of Columbia because the D.C. Code permits lawyers to form partnerships with non-lawyers. Throughout the relevant period, a company owned by Ms. Ray and known as BDS Systems (“BDS”) covered the operating expenses for and provided various marketing services to BLG. Id. The business model of BDS and BLG relied on the creation of numerous websites that were intended to attract new clients for unaffiliated trial law firms, which would pay BDS a deposit for the company's marketing expenses. In addition, once a client was sourced by BDS, and referred to the trial firm, BLG would enter into a co- counsel agreement with that firm, which entitled BLG to share in the settlement or verdict that the trial firm obtained, after the trial firm recouped the amount it had deposited with BDS. Renewed Pet. Mem. at 3. According to Petitioners, by the end of 2012, “BLG had entered into a large number of co-counsel agreements and had a substantial docket of active matters pending that had significant seven-figure value.” Orig. Pet. Mem. at 3.

         At the end of 2012, after BLG's initial lawyer-partner resigned, Respondent joined BLG as his replacement and entered into an amended partnership agreement with Ms. Ray (“LLP Agreement”), which is the operative agreement before the Court. Renewed Pet. Mem. at 4. The partners' revenue shares, however, were set forth in a separate distribution agreement. Id. at 4 n.6. Petitioner John Ray, who provided marketing and business development services to BLG, see Orig. Pet. Mem. at 4, was entitled to 35% of BLG's revenue under the distribution agreement, while Respondent and Ms. Ray, the two partners, were entitled to 32.5% each. Orig. Pet., Attach. 4.

         By June 2013, irreconcilable differences emerged between Respondent and Ms.

         Ray. Orig. Pet. Mem. at 4. The specifics of those differences are not relevant to the Court's analysis of the pending motions, and they are not recounted here. Suffice it to say, in October 2013, Ms. Ray filed a demand for arbitration with the AAA seeking “dissolution . . . based on failure of duty.” Orig. Pet., Attach. 10. The demand was based on the arbitration provision in the LLP Agreement (“Arbitration Agreement”):

12.13 Resolution of Disputes. Any controversy arising out of or related to this Agreement or the breach thereof shall be settled by arbitration in the District of Columbia, in accordance with the rules of the American Arbitration Association, and judgment entered upon the award rendered may be enforced by appropriate judicial action pursuant to the District of Columbia Code of Civil Procedure. The arbitration panel shall consist of one member, which shall be a person agreed to by each partner to the dispute within 30 days following notice by one party that he desires that a matter be arbitrated. If the parties are unable within such 30 day period to agree upon an arbitrator, then the panel shall be one arbitrator selected by the District of Columbia office of the American Arbitration Association, which arbitrator shall be experienced in the area of legal partnerships and who shall be knowledgeable with respect to the subject matter area of the dispute. The losing party shall bear any fees and expenses of the arbitrator, other tribunal fees and expenses, reasonable attorney's fees of both parties, any costs of producing witnesses and any other reasonable costs or expenses incurred by him or the prevailing party or such costs shall be allocated by the arbitrator. The arbitration panel shall render a decision within 30 days following the close of presentation by the parties of their cases and any rebuttal. The parties shall agree within 30 days following selection of the arbitrator to any prehearing procedures or further procedures necessary for the arbitration to proceed, including interrogatories or other discovery; provided, in any event each Partner shall be entitled to discovery in accordance with the District of Columbia Code of Civil Procedure.

Orig. Pet., Attach. 3 at 13.

         Pursuant to the terms of the Arbitration Agreement, the parties jointly appointed Judge Richard A. Levie to arbitrate their dispute. See Orig. Pet. Mem. at 7. In December 2013, Ms. Ray amended the demand to include additional counts against Respondent for breaches of contractual and fiduciary duties. Respondent filed a counterclaim in January 2014, likewise seeking dissolution of BLG. See Orig. Pet., Attach. 14 at 1-2. Then, on March 31, 2014, Judge Levie issued an Interim Award in which he concluded that “a Liquidating Event has occurred and that dissolution is appropriate at this time, ” noting that there had been “a complete breakdown of trust and confidence between the two parties.” Orig. Pet., Attach. 12 at 2-3. Judge Levie also denied Ms. Ray's motion to appoint a receiver to administer the dissolution of BLG, holding that “any issues to be decided by any receiver insofar as they arise in the dissolution can be decided by the Arbitrator” and noting the practical reality that BLG at the time lacked any funds to pay for a receiver. Id. at 2, 5 (“Claimants failed to persuade the Arbitrator that there currently is a need to appoint a receiver to try to adjudicate matters that are more properly presented to the Arbitrator.”). To facilitate the winding down of BLG, Judge Levie ordered Respondent's counsel to establish “a trust escrow account [the “Escrow Account”] in the District of Columbia . . . for the handling of funds.” Id. at 4. Respondent's counsel was prohibited from making “disbursements from the Escrow Account without either express written consent of [Ms. Ray] to the specific disbursements (amount, payee, and time) or an order of the Arbitrator.” Id. at 6.

         In between the filing of the demand for arbitration and Judge Levie's Interim Order, two related actions were brought in North Carolina state court against BLG by Mr. Ray and BDS, respectively. Both lawsuits sought compensation for services allegedly rendered to BLG. Orig. Pet. Mem. at 7-8; Orig. Pet., Attach. 14 at 3. Because Ms. Ray held a proprietary interest in the outcome of these lawsuits that conflicted with the interests of BLG-because she owned BDS and was married to Mr. Ray-Judge Levie held that Ms. Ray was “not in a position to objectively represent the interests of BLG in these lawsuits, ” and permitted Respondent to represent BLG in the two North Carolina lawsuits. Orig. Pet., Attach. 12 at 5. Respondent then sought to the compel the arbitration of those disputes. Orig. Pet., Attach. 14 at 3.

         The Interim Award essentially resolved the primary dispute between the parties that led to the arbitration-the dissolution of BLG-and ordered that “the Partnership shall continue solely for the purpose of winding up its affairs in an orderly manner . . . .” Orig. Pet., Attach. 12 at 6. The issues that remained, and that would eventually be resolved by another arbitrator-Robert E. Margulies-related to the award of attorney fees and costs, Respondent's counterclaims, and supervision of the winding down process, as required by the Interim Award. Id. at 5-6. Accordingly, in April 2014, Respondent filed a motion for fees, costs, and sanctions, seeking a determination that he was the prevailing party and an award of attorney fees and costs under the fee shifting provision of the Arbitration Agreement against Ms. Ray, as well as sanctions under the A A A R ules against her attorneys for alleged misconduct during the course of the arbitration. Sanctions Mot., Attach. 1 at 13 (“In addition to shifting Respondent's fees and expenses onto Claimant herself, the Arbitrator has inherent authority to order that her attorneys (and their law firms) be jointly and severally liable for such amounts as a sanction for their well-documented bad-faith behavior.”). Then, in October 2014, Respondent succeeded in having the North Carolina cases referred to arbitration; amended his counterclaims shortly thereafter to add Mr. Ray to the proceedings; and moved for partial summary judgment on the counterclaims. See Orig. Pet. Opp., Attachs. 2, 4; Orig. Pet., Attach. 14 at 3.

         The resolution of these issues, however, was stymied by two events. First, also in October 2014, Judge Levie resigned without explanation, and was replaced with Arbitrator Judith Ittig in December 2014 by the AAA. Orig. Pet., Attach. 14 at 5. In February 2015, however, the A A A n o tified the parties that Arbitrator Ittig, in response to Petitioners' objections that she lacked sufficient experience “in the area of legal partnerships and . . . [knowledge of] the subject matter area of the dispute, ” as required by the Arbitration Agreement, had determined that “[l]aw firm dissolutions and mass tort law firm partnerships [were] not areas of [her] expertise.” The A A A a l s o relayed that Arbitrator Ittig had suspended the proceedings until the parties made a “deposit in the amount of $18, 000 for her anticipated compensation.” If the parties did not make the deposit, the AAA warned that “pursuant to [AAA] Rule R-57(f), [the arbitration] will be terminated.” Orig. Pet., Attach. 13 at 3. That came to pass several weeks later, in the beginning of March, when the AAA informed the parties that it had terminated the proceedings “inasmuch as the requested deposit for compensation was not received within the time required . . . .” The AAA added that it had received a credit card authorization from Respondent for his share of the arbitral fees, but that the “balance of the deposit was left outstanding.” Id. at 1.

         Several days after the arbitration was terminated, Respondent's counsel wrote to the AAA and requested that the proceedings be reopened. According to that letter, in the period between the suspension and termination of the arbitration, Respondent had requested “permission to pay the [outstanding amount] from the Escrow Account AAA ordered be establish[ed] to administer [BLG's] funds, ” but received no response from the AAA. Orig. Pet., Attach. 14 at 8. After the termination, Respondent's counsel apparently spoke with a representative of the AAA, who relayed that Arbitrator Ittig “did not believe she had jurisdiction over the Escrow Account since the matter had been terminated, and . . . AAA had determined that it was legally prevented from reversing the termination since there was no express provision for it under the [AAA] rules.” Id. at 9. Given the AAA's position, Respondent's counsel “determined that [he had] a duty to pay the [outstanding amount] so that the AAA [could] conclude the winding up of Beltway's affairs.” Respondent's counsel did so by sending the AAA a wire payment from the Escrow Account for the remainder of the deposit. Id. The letter concluded by warning that if the AAA continued to decline to reopen the arbitration, Respondent would “file an emergency motion for a temporary restraining order seeking judicial intervention.” Id. at 10.

         The following week, the AAA wrote to the parties again and reported that it had “made the administrative decision to reopen this matter for further administration.” Orig. Pet., Attach. 15 at 2. The AAA explained that the “administrative decision was made in light of Respondent Chafetz's offer to pay the outstanding deposit required, or alternative l y, a suggestion of a different method under which payment could be made.” The AAA also determined that Arbitrator Ittig would be removed and replaced pursuant to the AAA Rules without input from the parties. Id. The AAA adopted Arbitrator Ittig's estimate as the amount due from the parties to continue the arbitration, and instructed the parties that “the AAA cannot authorize the use of funds held in the escrow account that was established in accordance with Judge Levie's Interim Order.” Id. at 3. According l y, the AAA did not accept the monies wired from the Escrow Account by Respondent's counsel as payment for the arbitral fees, but rather, Respondent eventually paid Petitioners' share at his own expense. The AAA held the wired amount in trust and subsequently returned it to the Escrow Account. See Orig. Pet., Attach. 2 at 5 (“Respondent (Chafetz) made a deposit from the escrow account. After Susan Ray objected, Chafetz replaced the funds with other monies paid directly by Mr. Chafetz.”); Renewed Pet., Attach. 2 at 2 (“The [AAA] is directed to return the sum of $12, 000 to Beltway Law Group, LLP.”).

         When the arbitration reopened, the AAA appointed Arbitrator Robert E. Margulies to replace Arbitrator Ittig, and the arbitration progressed on the outstanding issues raised in Respondent's motion for summary judgment and motion for attorney fees, costs, and sanctions. See Renewed Pet. Mem. at 6. In the interim between Arbitrator Margulies's appointment and his rulings on those issues, Mr. Ray moved in July 2015 to stay proceedings to conduct additional discovery. In that motion, Mr. Ray alleged in summary fashion that he had been “denied any rights to discovery of any nature in this proceed[ing] . . . .” Renewed Pet. Opp., Attach. 1 at 3. Ultimately, Arbitrator Margulies declined to stay proceedings, and on September 24, 2015, issued an “Interim Order” on the motion for partial summary judgment that awarded $124, 098.48 in favor of Respondent for “Breach of Contract, Conversion and Good Faith and Fair Dealing . . . .” Orig. Pet. Opp., Attach. 5 at 2. Subsequently, in February 2016, Arbitrator Margulies issued an “Order on Various Outstanding Motions, ” where he, inter alia: (i) denied Petitioners' objections to the reopening of the arbitration after it was terminated for non-payment; (ii) denied awarding sanctions against Ms. Ray and her attorneys; (iii) awarded attorney fees and costs against Petitioners, jointly and severally; and (iv) denied appointing a receiver, noting that Judge Levie previously denied the same request. Orig. Pet., Attach. 2 at 1-3. Petitioners were provided ten days to object to Respondent's counsel's “fee affidavit setting forth his legal efforts . . . .” Id. at 3. Mr. Ray filed the Original Petition shortly after the issuance of the February 2016 Order.

         Then, in May 2016, Arbitrator Margulies issued a “Final Award, ” which incorporated “prior Orders and/or Awards entered into in [the arbitration]” and determined that Respondent was entitled to $506, 050.18 in attorney fees and costs, “to be paid or reimbursed, such as the case may be, against [BLG], Susan Ray and John Ray, jointly and severally . . . .” Renewed Pet., Attach. 2 at 2-3. Following the issuance of the Final Award, Petitioners jointly filed the Renewed Petition, to which the Court now turns.

         II. LEGAL STANDARD

         As the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) “has repeatedly recognized, judicial review of arbitral awards is extremely limited. Courts do not sit to hear claims of factual or legal error by an arbitrator.” Owen-Williams v. BB & T Inv. Servs., Inc., 717 F.Supp.2d 1, 9 (D.D.C. 2010) (Kollar-Kotelly, J.) (internal quotation marks and citations omitted); see also FBR Capital Markets & Co v. Hans, 985 F.Supp.2d 33, 36 (D.D.C. 2013) (“[T]he burden facing petitioners who seek judicial vacatur of arbitration awards is exceedingly high. . . . It is not enough for petitioners to show that the panel committed an error-or even a serious error.” (internal quotation marks omitted)). Pursuant to § 10(a) of the Federal Arbitration Act (“F A A ”), the Court may vacate an award on only four limited statutory bases: (1) the award was “procured by corruption, fraud, or undue means”; (2) “there was evident partiality or corruption in the arbitrators, or either of them”; (3) the arbitrators were guilty of misconduct or misbehavior “by which the rights of any party have been prejudiced”; or (4) “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)(1)-(4). Conversely, “under the terms of § 9 of the FAA, a court must confirm an arbitration award unless it is vacated, modified, or corrected . . . .” Owen-Wi l liams, 717 F.Supp.2d at 10 (internal quotation marks and alterations omitted).

         The United States Supreme Court in Hall St. Assocs., L.L.C. v. Mattel, Inc. instructed that § 10 provides “t h e FA A 's exclusive grounds for expedited vacatur . . . .” 552 U.S. 576, 584 (2008). Before Hall Street, however, the D.C. Circuit “recognized that, in addition to the four statutory grounds listed in [§ 10(a)], an arbitration award may be vacated if it is in ‘manifest disregard of the law.'” Owen-Williams, 717 F.Supp.2d at 10 n.7. Absent further decisions of the Supreme Court or the D.C. Circuit, it “remains an open question in this Circuit whether the ‘manifest disregard' standard survives Hall Street.” Id. Because the Court does not find Petitioners' contentions on this basis to be meritorious, the Court need not and does not resolve that legal question here.

         III. DISCUSSION

         A. Petitions to Vacate the Final Award

         Between the Original and Renewed Petitions, Petitioners seek vacatur of the Final Award on each of the four statuary bases recognized by the FAA, and for manifest disregard of the law. All of these challenges are addressed in turn.

         1. Vacatur Based on § 10(a)(1) - “Undue Means”

         “Federal courts consistently refuse to vacate an arbitral award under § 10(a)(1) [for undue means] unless the movant's submissions meet three cumulative conditions.” ARMA, S.R.O. v. BAE Sys. Overseas, Inc., 961 F.Supp.2d 245, 254 (D.D.C. 2013) (collecting cases). The first of those conditions is dispositive of the issues raised by Petitioners. Namely, “the party seeking vacatur must demonstrate by clear and convincing evidence that its opponent actually engaged in fraudulent conduct or used undue means during the course of the arbitration.” Id. Importantly, “[u]nder this first requirement, ordinary misconduct will not suffice; the alleged fraudulent acts must have been so prejudicial that they effectively denied the opposing party a ‘fundamentally fair hearing.'” Id. Conduct by an attorney that amounts to “mere sloppy or overzealous ...


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