Kaminsky v Segura

[*1] Kaminsky v Segura 2004 NY Slip Op 50963(U) Decided on July 6, 2004 Supreme Court, New York County Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 6, 2004
Supreme Court, New York County

EDWARD A. KAMINSKY and JAMES AGATE, Petitioner,

against

SPENCER SEGURA, Respondent.



119675/03

Herman Cahn, J.

Petitioners Edward A. Kaminsky and James Agate seek to vacate the damages portion of an arbitration award, dated August 28, 2003 on the ground that the arbitrators committed misconduct by failing to admit material and pertinent evidence on the issue of damages, CPLR 7511(b)(i). The Award was rendered by a panel of arbitrators of the National Association of Securities Dealers ("NASD") in the matter entitled Kaminsky and Agate v Spencer Trask Securities, Inc. a/k/a Spencer Trask Ventures and Spencer Segura (NASD-DR No. 00-05628).[FN1]

Respondent Spencer Segura contends that the Award was proper, and cross-moves to confirm the Award, and to direct the Clerk of the Court to enter judgment thereon, CPLR 7510.

For the reasons set forth herein, the Award is confirmed.

BACKGROUND

Kaminsky and Agate commenced two separate actions against Segura and Spencer Trask Securities, Inc. in this court.[FN2] Kaminsky, in his complaint, dated November 9, 1999, alleged that he entered into an oral agreement with Segura, wherein Kaminsky agreed to buy five percent of Segura's alleged $2 million interest in an entity known as NextLevel Communications, L.P. ("NextLevel") for $100,000. The complaint further alleged that Segura breached the contract on October 18, 1999. Kaminsky, sought damages of $5 million. On February 17, 2000, Agate filed a parallel complaint, alleging that he too had an oral agreement to purchase five percent of Segura's alleged $2 million interest.

In early 2000, defendants moved to dismiss the complaint in the Kaminsky Action. By decision and order, filed July 21, 2000, the motion was denied. [*2]

Thereafter, the parties consented to jointly arbitrate Kaminsky's and Agate's claims before the NASD. In January 2001, petitioners filed their Statements of Claim, each seeking $17 million in compensatory damages and $5 million in punitive damages.

Brief Synopsis of Facts

The underlying claims concern an investment in a company called NextLevel. At the time of the formation of the alleged contract, NextLevel was a private company. A public offering of its shares was planned. Petitioners believed that, pursuant to their oral agreements with Segura, they would be able to participate in the anticipated profits which technology stock IPOs were generating at that time. Nevertheless, just weeks before the public offering, on October 18, 1999, Segura allegedly informed Kaminsky (and sometime thereafter, Agate) that there was no contract to purchase five percent of his interest, and that petitioners would not be entitled to take part in the IPO. Petitioners treated this as a breach of contract.

NextLevel's public offering occurred on November 10, 1999. An October 1999 prospectus estimated its pre-IPO value at $10 to $12 per share, but its stock prices skyrocketed after the IPO. NextLevel's stock price opened at $59 on its first day of trading, November 10, 1999, and rose as high as $202 within months thereafter.

Prior to the IPO, Segura was a minority member of KK Manager LLC (a predecessor of Spencer Trask Ventures) which was the operating general partner of NextLevel, a limited partnership. Pursuant to KK Manager's operating agreement, Segura's NextLevel securities were subject to a lock-up agreement that prohibited him, until after May 9, 2000, from selling any of his stock or warrants without the approval of Credit Suisse First Boston ("CSFB"), one of the underwriters of the IPO. Segura and some of his colleagues in fact received such approval from CSFB, and went on to effectuate various hedge transactions prior to the expiration of the lock-up. On May 10, 2000, the day after the lock-up expired, NextLevel shares closed at $65 per share.

The Arbitration Proceeding

Although the parties were in fundamental disagreement over whether a binding contract was formed in the first instance, they also took very different positions on the measure and calculation of petitioners' damages in the event a contract was determined to have been formed. The latter issue - pertaining to calculation of damages - is at the heart of the current dispute.

At the arbitration (and now), petitioners took the position that their damages should not be measured based on the value of their interest in NextLevel at the time of Segura's breach, which occurred prior to the issuance of the IPO, but, rather, should be based on certain alternative dates after the issuance of the IPO, when the value of NextLevel stock increased significantly. Petitioners further maintained that they would not have been hampered by the lock-up provision restricting the sale of NextLevel stock until May 9, 2000, because, like Segura and his colleagues, they would have sought and obtained permission to be released from this restriction. Petitioners argued that the Panel should award damages utilizing the opening price at which the NextLevel shares traded after the public offering because this was the best reflection of the fair market value of the company just before the IPO ($59 per share), or, alternatively, the price at which petitioners contend they would have locked-in their profits utilizing various hedging techniques ($124 per share). [*3]

During their case-in-chief, petitioners called Robert Connor of Thornapple Associates as an expert witness. According to petitioners, Conner's testimony covered the topic of hedging (including a description of hedging, different methods investors use to hedge, and the methods that would have been available to petitioners to hedge their NextLevel stock had Segura not breached their agreements), and the calculation of petitioners' damages (which Conners calculated based on two alternate prices - $59 per share price of NextLevel stock on May 10, 2000, the day the lock-up agreement governing the stock expired, arriving at roughly $10 million damages for each petitioner, or $124 per share price at which petitioners alleged they would have hedged their securities had Segura not breached their agreements, arriving at roughly $20 million damages for each petitioner).

Respondents, in turn, called Shad Stastney, the former head of the equity derivatives desk at CSFB, as their expert. Like Conner, Stastney discussed the concept of hedging. Stastney concluded that the various hedging methods would not be viable or possible for petitioners, due to, among other reasons, the lock-up restrictions, and the lack of a public market for the NextLevel options. Stastney also gave testimony on the damages issue, pressing respondents' position that, if an agreement was found to have been formed, petitioners' recovery should be calculated based on the value of the NextLevel stock at the time of the breach, which Stastney opined was between $10 and $12 per share, consistent with the share value stated in a "red herring" prospectus prepared in mid-to-late October 1999 in anticipation of the upcoming November 10th IPO.

Petitioners sought to call a rebuttal expert witness, David Krein, to give rebuttal testimony in response to Stastney's testimony. The Panel refused, explaining "[w]e feel that you have had your opportunity when you had your case in chief, and you had your opportunity on cross-examination of Mr. Stastney, and we feel it would be inappropriate at this time to allow you rebuttal."

In all, the Panel heard 24 days of testimony from 11 witnesses, beginning in March 2002 and lasting for 15 months until July 2003. The Panel found against Segura on liability, and awarded each petitioner $294,000 in compensatory damages, and $50,000 in punitive damages.[FN3] Although the Award provides no explanation of how the arbitrators arrived [*4]at the $294,000 sum, or what that sum represented, the testimony and evidence suggest that the Award was based on the value of each petitioner's alleged interest at the time of the breach. In this regard, the parties generally agree that a date-of-breach calculation, yields approximately $294,000, based on the value of petitioners' respective interests in NextLevel at the time of the breach (approximately $500,000), less their basis of $100,000 each, less discounts to the value of pre-IPO stock.

In this proceeding, petitioners contend that the arbitrators, by refusing to allow petitioners to call a witness to give rebuttal testimony, engaged in misconduct by refusing to hear pertinent and material evidence. In this regard, petitioners claim that there was no way for them to anticipate the substance of the testimony given by respondents' expert witness, which came as a surprise, and, accordingly, petitioners were entitled to call a rebuttal expert witness to refute Stastney's allegedly new, surprising, unanticipated and even sometimes false, testimony.

DISCUSSION

A court may vacate an arbitration award only upon very limited grounds. As explained by the First Department: Judicial authority to vacate an arbitration award is limited. Unless the arbitration agreement provides otherwise, an arbitrator is not bound by principles of substantive law or by rules of evidence but "may do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be" and his award will not be vacated "unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on his power" (Matter of Silverman [Benmor Coats], 61 NY2d 299, 308). A court is bound by an arbitrator's factual findings, interpretation of the contract and judgment concerning remedies, and "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" (Matter of New York State Correctional Officers & Police Benevolent Assn. v State of New York, 94 NY2d 321, 326). Even where an arbitrator makes errors of law or fact, a court may not undertake to conform the award "to [its] sense of justice" (id.). An arbitrator's award will be confirmed "if any plausible basis exists for the award" (Graniteville Co. v First Natl. Trading Co., 179 AD2d 467, 469, lv denied 79 NY2d 759, citing Matter of Silverman, supra).

One seeking to vacate an arbitration award must show that it has been prejudiced by corruption, fraud, misconduct, partiality or an abuse of power by the arbitrator. (See CPLR §7511[b]).

Arbitrators need only receive evidence that is pertinent and material. An arbitrator's determination of what is pertinent and material will be set aside only if it deprives a party of a fundamentally fair hearing (DaSilva v First Union Securities, Inc., 249 F Supp 2d 286, 290 [Dist Ct SD NY 2003]). To establish that an arbitrator engaged in misconduct, the petitioner bears the heavy burden of showing with clear and convincing proof that the proposed evidence was indeed pertinent and material (Matter of Solartechnik, Ges., M.B.H (Besicorp Group, Inc.), 227 AD2d 94 [3d Dept 1997], revd on other grds 91 NY2D 482 [1998]; Matter of Wiener Furniture Co., Inc. (Kingston City Schools Consolidated), 90 AD2d 875 [3d Dept 1982] [the [*5]burden of proving that the arbitrators' denial of the request constituted misconduct rests with the party attacking the award and must be met by clear and convincing proof]; Matter of Reale [ B. Healy N.Y. Corp.], 54 AD2d 1039, 1040 [3d Dept 1976]).

Here, the hearings spanned nearly one and one-half years, affording petitioners ample opportunity to prepare and present their cases, including their position on the calculation of their damages.

With respect to a refusal to allow rebuttal evidence, it is particularly difficult to establish misconduct - - or that the excluded evidence is pertinent and material - - because a party does not have a right to relitigate issues that could have been covered in its case-in-chief (Republic of Croatia v Trustee of the Marquess of Northampton 1987 Settlement, 203 AD2d 167, 169 [1st Dept 1994] [there is no merit to claim that the court erred in refusing to permit a certain rebuttal witness because the party should have called that witness during its case-in-chief] citing Rosseland v Hosp. of Albert Einstein College of Medicine, 158 AD2d 409 [1st Dept 1990] ["the trial court did not abuse its discretion in denying plaintiff's application to introduce rebuttal testimony on issues which were either brought out in the course of plaintiff's direct case or should have been established as part of plaintiff's direct case"]). Nor can a party use rebuttal evidence or testimony to fix problems that were exposed during its direct case regarding subjects covered by its first expert witness, or only to bolster its own case (see, Kapinos v Alvarado, 143 AD2d 332, 333 [2d Dept 1988]; Matter of Wiener Furniture Co., Inc. [Kingston City Schools Consolidated], supra). In Wiener, although respondent urged that the evidence it offered was "highly probative" and "critical" to its case, and the trial court agreed, the Third Department found that it "merely tended to bolster testimony presented by respondent at the hearings" (Id. 90 AD2d at 875-876). Therefore, the Third Department concluded that, under the circumstances presented, "it cannot be said that the arbitrators' actions amounted to misconduct" (Id. at 876).

Petitioners acknowledge that arbitrators are typically accorded broad discretion in determining the admissibility of evidence. They also state that they are not questioning whether the Panel correctly applied the law in determining petitioners' damages. Rather, petitioners claim that vacatur is necessary because the Panel's actions in refusing to allow Klein's testimony amounted to misconduct, insofar as the ruling prevented petitioners from presenting pertinent and material evidence necessary to refute respondents' expert's false and unanticipated testimony.

The two arguments that petitioners allegedly needed to rebut concerned the valuation of NextLevel prior to the IPO and the ability to monetize an interest in NextLevel after the IPO. However, these subjects were already raised during petitioners' case-in-chief. Segura disclosed throughout the pendency of the case and the arbitration, his position that damages must be calculated based on the date of the breach, and not after the IPO.[FN4] Regardless of whether [*6]petitioners decided to respond to this during their direct case, they were on notice that Segura's position was that damages assessed against him must be given a date-of-breach valuation. Apparently, petitioners chose not to address this on their case-in-chief, and instead gambled on the Panel adopting their post-breach damage analysis. Under these circumstances, petitioners can hardly claim surprise. So too, the issues that petitioners claim Krein would have covered regarding damages and monetizing a NextLevel interest after the public offering were all covered at length during petitioners' case-in-chief, including, among other things, the possibility of utilizing hedging transactions, and permissible structures therefor. As such, none of the proposed testimony can be considered proper for rebuttal.

Further, petitioners have not shown that the proposed rebuttal expert would have offered evidence that was pertinent and material to rebut issues newly raised during Segura's case. Rather, it appears that the rebuttal witness was intended to bolster testimony and issues that had already been raised during petitioners' case-in-chief. An arbitrator's decision, under these circumstances, disallowing the proposed rebuttal testimony does not amount to arbitral misconduct (Matter of Wiener Furniture Co., Inc. [Kingston City Schools Consolidated], supra). Additionally, if the proposed rebuttal evidence is being offered simply to challenge the credibility of another witness, such evidence is considered merely collateral, and not pertinent and material (Smith v Suffolk Co. Police Dept., 202 AD2d 678, 679 [2d Dept 1994]). Lastly, to the extent that the arbitrators indicated that they would allow petitioners to call a rebuttal fact witness, they never stated that they would permit a rebuttal expert witness.

Petitioners had a full and fair opportunity to present their case during the 24 hearing dates in the arbitration. They have not adequately demonstrated that the arbitrators' actions constituted misconduct under CPLR 7511(b). While petitioners were obviously unhappy with the amount of damages they were awarded, this is hardly a basis for vacating an award, or for refusing to confirm it (Azrielant v Azrielant, supra).

CONCLUSION

It is ORDERED that the petition to vacate the damages portion of the Award rendered in favor of petitioners and against respondent is denied; and it is further

ORDERED that the cross motion by respondent to confirm the Award is granted and the Award is confirmed; and it is further

ORDERED that the award shall be reduced to a judgment of this court; and it is further

ORDERED that the clerk shall enter a separate judgment in favor of Edward A. Kaminsky against the Respondent, in the amount allowed by the arbitrators in their decision, [*7]together with interest from September 18, 2003, and the costs and disbursements of this proceeding; and it is further

ORDERED that the clerk shall enter judgment accordingly.

The foregoing constitutes the decision and order of the court.

Dated: July 6, 2004

ENTER:

_________/s/_____________

J.S.C. Footnotes

Footnote 1: In seeking partial vacatur, petitioners do not challenge those aspects of the Award which; (a) dismiss petitioners' claim against Spenser Trask; and (b) establish liability by Segura.

Footnote 2: The actions are captioned Edward A. Kaminsky v Spencer Trask Securities, Inc. and Spencer Segura, Index No. 605098/99, and James Agate v Spencer Trask Securities, Inc. and Spencer Segura, Index No. 600759/00.

Footnote 3:The Award states, in relevant part: After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows: 1. Segura is solely liable for and shall pay to Claimant Kaminsky the sum of $294,000 as compensatory damages. 2. Segura is solely liable for and shall pay to Claimant Agate the sum of $294,000 as compensatory damages. 3. Segura is solely liable for and shall pay to Claimant Kaminsky the sum of $50,000 as punitive damages. 4. Segura is solely liable for and shall pay to Claimant Agate the sum of $50,000 as punitive damages. 5. Any and all relief not specifically addressed herein, is denied.

Footnote 4: While it is not the court's role to review the underlying arbitrator's application of law or fact, it is noted that, generally, in breach of contract cases, damages are to be calculated at the time of breach; however, in certain limited circumstances, the pertinent measuring period may be extended (see, Klein v 5B Technologies Corp., NYLJ July 19, 2001 at 18, col 2 [Sup Ct NY Co 2001]; see also, Pollen v Aware, Inc., 762 NE2d 900 [Mass App Ct, 2002]). As the court explained in Klein v 5B Technologies Corp.: The general rule relating to damages for breach of contract are that such damages are measured by the "loss sustained or gain prevented at the time and place of breach," Simon v Electrospace Corp., 28 NY2d 136 (1971). However in certain limited circumstances, where a rigid application of this rule would lead to an inequitable result or deny plaintiff of the benefit of the bargain, the pertinent measuring period may be extended to a "reasonable period of time" after the time of breach, Riskin v Natl. Computer Analysts Inc., 308 NYS2d 985 (Sup Ct NY Co 1970), modified and affd, 37 AD2d 952 (1st Dept 1971).