Second Circuit Clarifies Standard for Vacating an Arbitration Award Under the Corruption Ground of FAA Section 10(a)(2).

In Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL IrrevocableTrust, 2013 WL 4609100, -- F.3d – (2d Cir. 8/30/2013), the Court affirmed the District Court’s denial of an action to vacate an arbitration award. 

The dispute concerned the ownership of a life insurance policy.  Claimant alleged that the respondents had materially breached their obligation to pay the insurance premiums and therefore claimant became the sole owner of the policy.  The parties agreed to submit their dispute to a panel of three rabbis (“the Panel”) to arbitrate the contract dispute.  Each party selected an arbitrator and they both selected the third, neutral arbitrator.  After seven or eight sessions (for more than 30 hours total) and one fact witness, the Panel issued an award in favor of the claimant. 

Respondents moved to enjoin the enforcement of the arbitration award and for vacatur of the same.  The District Court confirmed the arbitration award and denied respondents action for vacatur. 

On appeal, the Second Circuit framed the issue as follows:

Whether there was ‘abundantly clear’ evidence of corruption to vacate the arbitration award under the FAA, where (1) no records of the arbitration proceeding were kept; (2) all parties agreed that the arbitrators could reach their decision by any legal, factual or other basis; (3) an affidavit submitted to the district court alleged that the neutral arbitrator was overhead promising one of the parties a favorable ruling; (4) the affiant testified that he was threatened for making his testimony; and (5) the arbitration panel issued its ruling with only two of the three arbitrators present.

Kolel, at *4.

The Second Circuit confirmed that its standard for vacating an award under the “corruption” ground of section 10(a)(2) was the same standard as under section 10(a) for “corruption, fraud, or undue influence” – “[e]vidence of corruption must be abundantly clear in order to vacate an award.” Kolel, at *3 (emphasis added).  The evidence must be “direct and not speculative.” Kolel, at *3, 5. Denial is appropriate where “a reasonable person would not “have to” conclude that [an arbitrator] was partial to a [party], or biased against [parties challenging the award].”Kolel, at *6.

Although the Court referenced the appellate record had a substantial amount of “he-said, she-said” conflicting accounts, the Court found “only one affidavit that is from an individual without an obvious stake in the outcome of the arbitration and with firsthand knowledge of the pertinent facts or evidence.” Kolel, at *5.  That witness stated that he overhead the neutral arbitrator tell a non-party to inform the claimant that the Panel would be issuing a favorable decision to claimant.  The Court found that the appellants failed to prove with clear and convincing evidence “corruption.” Kolel, at *6.  Even accepting the assertions in the affidavit as true, the appellants “failed to suggest – let alone prove – what, if anything, [the neutral arbitrator] stood to gain or what special connection he had with [claimant] that would have given plausible reason to corrupt his decision.” Kolel, at *6.

In addition, the Second Circuit found that vacatur was not required given that the award was made after only one witness testified.  “The Panel’s decision to hear only one witness does not make the arbitration fundamentally unfair.” Kolel, at *7.  The Court explained that particularly where the issue is one of contractual interpretation, a question of law, reference to external evidence is not necessarily required. Kolel, at *7.  The Court reaffirmed its recent holding, in LJL 33rd St. Assoc., LLC v. Pitcairn Props., Inc. 2013 WL 3927615, -- F.3d --, at *8, that “[a]rbitrators have substantial discretion to admit or exclude evidence.” 

Throughout its reasoning, the Court made reference to (i) the absence of a detailed record of the proceeding and (ii) unreliable, contested facts.  When entering into the arbitration agreement and at the preliminary conference, parties should carefully evaluate whether they should incur the additional costs to better preserve a record (e.g. stenographer) of the arbitration to permit effective review by a court should that become necessary.  Also, when challenging an award, submit properly authenticated and reliable (e.g. not hearsay) affidavits to support the claims of vacatur.  At least the Kolel court appeared turned-off by the bickering on tangential issues between the parties.