CIT Project Fin., L.L.C. v Credit Suisse First Boston LLC
Annotate this CaseDecided on June 17, 2004
Supreme Court, New York County
CIT PROJECT FINANCE, L.L.C.; and CIT, Plaintiffs,
against
CREDIT SUISSE FIRST BOSTON LLC (f/k/a/ Credit Suisse First Boston Corporation) and CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED, Defendants
600847/03
Bernard J. Fried, J.
Opposing motions have been made, one by plaintiffs, CIT Project Finance, L.L.C. (the "Company") and CIT Project Finance Manager, L.L.C. (the "Collateral Manager") - collectively CIT - seeking to confirm an arbitration award (sequence 03). The other, by the defendants, Credit Suisse First Boston LLC and Credit Suisse First Boston (Europe) Limited -collectively CSFB - to vacate (or disaffirm) the award (sequence 04). These motions have been made in the context of an action seeking damages because of the alleged breach of a Warehousing Agreement.
On September 8, 2003, Justice Ira Gammerman, over CIT's objection, granted CSFB's motion to stay the underlying action pending the outcome of the Arbitration. This Arbitration related solely to a disagreement concerning whether a "Collateral Manager Event" (as defined in the Agreement - essentially, the failure of the Collateral Manager to perform its obligations or failure to work towards the closing of the Transaction) had occurred. The resolution of this issue does not finally conclude the action; however, it eliminates a significant issue in this lawsuit.
This Arbitration arose as follows: on December 20, 2001, the parties entered into a Warehousing Agreement ("Agreement") relating to a $1.5 billion structured finance transaction. Under this Agreement the parties would acquire a portfolio of up to $500 million in securities, i.e,. project finance bonds (used by power companies to finance power plants and similar facilities). It was the obligation of the Collateral Manager to identify bonds for purchase by CSFB, which would then accumulate or "warehouse" them, and in turn sell notes, secured by these bonds, to sophisticated investors. Such securitization is referred to by the parties as a "Collateralized Bond Obligation" (CBO) or "Collateralized Debt Obligation (CDO). The Company agreed to invest up to $40 million . [*2]
This Agreement was to terminate not later than June 13, 2003; however, it could be terminated earlier by CSFB upon the declaration that a Collateral Manager Event (CME) occurred, as defined in the Agreement. Thereafter, on November 25 and again on December 5, 2002, CSFB gave notice that such an event had occurred.
On February 26, 2003, a breach of contract action was brought in Federal court by CIT, however, it was voluntarily dismissed on March 18, 2003, when it developed that there was lacking diversity jurisdiction. The action was then filed in this court on the same date. An answer was filed on April 28, 2003.
Meanwhile, on March 7, 2003, CSFB made a Demand For Arbitration under the Agreement, seeking a declaration that a "Collateral Manager Event" had occurred. This Demand was made under the American Arbitration Association's Commercial Arbitration Rules. In its Answer and Counterclaim, CIT consented to the requested arbitration, and sought a declaration that there has been no "Collateral Manager Event". CIT also sought further relief, "including counsel fees and costs, as the Panel deems just and proper." CIT's Answer was under the heading "American Arbitration Association International Centre for Dispute Resolution". On May 1, 2003, on letterhead "American Arbitration Association - International Centre for Dispute Resolution", the parties were advised of the appointment of the three arbitrators by Ms. Marisa C. Mathiesen, International Case Manager. Thereafter, Ms. Mathiesen scheduled a Preliminary Hearing on June 4, 2003.
CSFB sought an Order staying this action pending the outcome of the arbitration. This Order was sought pursuant to the Federal Arbitration Act ("FAA"), which CSFB asserted "governed" the arbitration "because it involves the purchase and sale of securities". This motion was opposed by CIT, contending that it was New York law, rather than the FAA which "governs'. On September 8, 2003 Justice Gammerman, determined that that the matter involved "commerce", the FAA applied, and he stayed the action pending arbitration.
The arbitration was conducted over five days during October 2003. The transcript of the proceeding is 1258 pages; CSFB called three fact witnesses and one expert witness; CIT called one fact witness and one expert witness; approximately two hundred-and-fifteen documents were received into evidence. Post-hearing submissions were filed by both sides on October 31, 2003. Included in CIT's submission was a section entitled "Legal Fees Should be Awarded Against Claimants Under Article 31 of the International Rules". Accompanying this was an Affidavit of Respondents' Legal Expenses Pursuant to Article 31[FN1] of the International Rules". This request under Article 31 led to an email from CSFB that it was "surprised by [CIT's] contention that Article 31 of the International Rules changes the usual rule concerning awards of attorneys fees...." This caused a further email from CIT stating that it had requested such fees in its [*3]Opening Statement[FN2] and further that "prior to summations, the Panel directed that any party requesting a fee award submit an affidavit of legal expenses along with its summation."
Thereafter, the Panel issued its Award on November 24, 2003, finding that "[t]he Collateral Manager fulfilled its duties and worked towards the closing of a transaction." "Therefore, we conclude that a Collateral Manager Event did not occur." Additionally, the arbitrators concluded that CSFB 'had no basis for declaring a Collateral Manager Event and therefore, in accordance with New York law and [Article] 31 of the International Dispute Resolution Procedures we award legal fees and disbursements to the Respondent (CIT) in amount which we have determined to be reasonable, $466,430.35...." These opposing motions to confirm and vacate (or disaffirm) the Award followed.
As a threshold matter, I conclude that this proceeding is governed by the FAA inasmuch as the Agreement concerns a transaction involving commerce (9 U.S.C. § 1). Although it has been argued by CIT that the choice-of-law provision in the Agreement ("This Agreement shall be governed by and construed in accordance with the laws of the State of New York...") requires New York law to govern "the issues resolved by way of arbitration", since this choice-of-law provision does not explicitly restrict the arbitrators' decision-making to New York law, it does not supersede the FAA
(Mastrobuono v. Shearson Lehman Hutton, Inc., 514 US 52 [1995]), unlike, for example, In re Eastern Minerals v. Cane Tennessee, Inc., 274 AD2d 262 (1st Dept., 2000), where New York law was made applicable to the arbitration. In any event, further analysis of this issue is unnecessary: (1) it has already been decided by Justice Gammerman that the FAA applies, to which there was no objection; and (2) CIT contends that "[b]oth the CPLR and the FAA, however, mandate precisely the same conclusion: that the Panel's Award be confirmed".
In seeking to vacate (or disaffirm) the Award, CSFB contends that the arbitrators "manifestly disregarded the evidence" in concluding that there was no collateral manager event, and that they "manifestly disregarded the law and the evidence" in making an award of legal fees and disbursements. CIT contends that the arbitrators neither disregarded the evidence nor the law and requests that the Award, in its entirety, be confirmed.
A. Finding that a Collateral Manager Event did not
occur does not constitute a Manifest Disregard of the evidence
Under the Agreement, as the Arbitrators recognized, a Collateral Manger Event can occur [*4]either "if the Collateral Manager fails to perform its duties or otherwise fails to work towards the closing of a transactions". They found that the Collateral Manager did both, and concluded that a Collateral Manager Event did not occur. This is challenged by CSFB which claims that this finding manifestly disregarded the evidence, a standard of review that does not exist in the FAA, but has been engrafted by case law, or as the First Department recently stated in Sawtelle v. Waddell & Reed, Inc., 304 AD2d 103, 108 (2003): a "judicially recognized 'nonstatutory'" ground for vacating an award under the FAA is "manifest disregard of the...evidence." This requires 'more than a ...clear error in fact finding to disturb an award" (The GMS Group, LLC v. Benderson, 326 F3d 75 [2nd Cir., 2003]), because of the strong interest in "the twin goals of arbitration, namely settling disputes efficiently and avoiding long and expensive litigation"
(Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F3d 9, 12 [2nd Cir., 1997]).
Although characterized as a "manifest disregard of the evidence" challenge to the Award, close analysis of CSFB's position demonstrates that it is actually a complaint that the arbitrator mis-interpreted the contractual provisions defining what constitutes a Collateral Manager Event. And recognizing this, it is evident that this aspect of the award must be confirmed, since it is axiomatic that a reviewing court lacks the power to "second guess an arbitrator's resolution of a contract dispute" (e.g., John T. Brady & Co. v. Form-Eze Sys., Inc., 623 F2d 261, 264 [2nd Cir., 1980]).
There was divergent evidence before the arbitrators concerning whether a Collateral Manager Event had occurred. It was contended by the CSFB that the Collateral Manager had failed to perform its duties and had failed to work towards the closing of the Transaction. According to CSFB's argument the evidence before the panel demonstrated that the Collateral Manager "did nothing to work towards a Transaction during the relevant period." Controverting this, CIT points to the extensive evidence that CSFB had stopped acquiring bonds for the Transaction before and during the relevant time frame, that CSFB began to look for a way to declare a Collateral Manager Event in order to "get out of the Warehousing Agreement as written". It is this evidence, which CIT argues supports the panel's finding that a CME "did not occur". Whether the panel was wrong in concluding that CSFB "had no basis for declaring that a Collateral Manager Event did not occur" because as CSFB argues the evidence showed that the CME had "stopped working toward closing a Transaction by the fall of 2002" or whether the panel was correct in accepting the evidence presented by CIT that its declaration "was a charade: an attempt by [CSFB] to get out of a contract which they signed, but later came to regret", was properly for the panel and not for this court. Therefore, the award must be confirmed.
B. Finding that a CIT was entitled to attorney fees
constitutes a Manifest Disregard of law or evidence
CSFB contends that the award of attorney fees was in manifest disregard of the law and the evidence. Essentially, the argument is that although this proceeding to (or disaffirm) or [*5]confirm is governed by the FAA, it is New York law concerning the availability of attorneys fees (CPLR § 7513 [attorney fees are not permissible unless provided for in the agreement to arbitrate]) which is controlling because of the parties' choice-of-law provision, i.e., "[t]his Agreement shall be governed by and construed in accordance with the laws of the State of New York..." Moreover, because the Award reads that the attorney fees are "in accordance with New York law and [Article] 31 of the International Dispute Resolution Procedures", the arbitrators must have intended to apply New York law, and in doing so, were manifestly in error, since there was no mention of attorney fees in the Agreement and New York does not permit such fees in the absence of malice, and here there was none. Additionally, CSFB refers to the AAA website, which in a section entitled "Award Preparation in International Cases" states: "Q. Can an arbitrator award attorney fees'? A. Attorney's fees may be recoverable if the parties agreement or applicable law gives the arbitrator the authority to allocate the payment of these fees."
In response, CIT argues that because this arbitration was held, at CSB's demand, which then participated without objection to it being held in accordance with the IDR Procedures, under the jurisdiction of the American Arbitration Association's International Centre for Dispute Resolution, Article 31's provision for "the reasonable costs for legal representation of a successful party" is applicable. Basically, this is a claim that, under the circumstances, CSFB consented to the arbitration of attorneys' fees and should not be permitted to now challenge their award. With regard to the website reference, CIT states that Article 31 is clear and that "[t]he panel certainly had the power to apply the plain terms of the ICDR rule itself, rather than a website excerpt, as the controlling authority." Finally, it is argued that the choice-of-law provision does not require application of New York law, however, even if the CPLR provision prohibiting the award of attorney fees absent a provision in the arbitration agreement, applies, since there has been a showing of malice, New York law sanctions the arbitral award. ( Because I am unable to conclude that there was malice here, I turn directly to the issue of whether there was a manifest disregard of law, i.e., the CPLR, in the award of attorneys' fees.[FN3])
Integral to these contentions is a dispute over whether there was manifest disregard of law on this subject by the Panel. As already noted, this is a doctrine which has been judicially created under the FAA. It 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 International Steel Trading v.T.Klaveness Shipping A/S, 333 F3d 383, 389 [2nd Cir., 2003]). To establish manifest disregard, three prongs must be shown: (1) that the law allegedly disregarded was clear and explicitly applicable; (2) that the law was improperly applied; and (3) that the arbitrators actually were aware of the law and its applicability to the matter before them." This last prong was satisfied by the post-hearing email submission of CSFB objecting to any award of attorneys' fees.
Turning to CSFB's objection that the Agreement was governed by New York law, which "follows the usual 'American Rule' that attorneys' fees may only be awarded 'when specifically provided for by statute or contract'" (citations omitted): It seems clear, that the agreement to arbitrate only the CME issue, and not all controversies, cannot be viewed as an agreement to restrict the language of the choice-of-law provision. Or, in other words, to substitute the federal rule which permits the award of attorneys' fees under the FAA. Unlike Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Adler, 234 AD2d 139 (1st Dept., 1996), in which the agreement was to arbitrate "all controversies", here the agreement pertained only to "any disagreement between the Collateral Manager and CSFB relating to the occurrence of a Collateral Manager Event". Thus, the "federal presumption in favor of arbitrability" of attorneys' fees does not trump the clear New York rule permitting attorneys' fees to be awarded only when provided for by statute or agreement (See , e.g., Asturiana de Zinc Marketing, Inc. v. La Salle Rolling Mills, Inc., 20 F. Supp. 2d 670 [S.D.NY 1998]; and PaineWebber, Inc. v. Richardson, 1995 WL 236722 [S.D.NY]). PaineWebber Inc. v. Bybyk, 81 F3d 1193 (2nd Cir.1996), which permitted a claim for attorneys' fees, notwithstanding that a New York choice-of-law provision is not inconsistent with this conclusion, since there the parties agreed "to refer all issues to arbitration". Thus, New York law, which is controlling, requires either an authorizing statute or express agreement to arbitrate attorneys' fees.
The remaining question is whether by the demand for arbitration, which took place under the auspices of the American Arbitration Association International Centre for Dispute Resolution, which rules authorize such fees, and when such fees have been explicitly requested, constitutes consent to such an award notwithstanding New York's prohibitory rule. Here the arbitration initially was sought by CSFB. It was conducted under the auspices of the ICDR, in accordance with its rules, one of which, Article 31 provides that the panel "shall fix the costs of arbitration in its award" which may include "the reasonable costs for legal representation of a successful party". Unlike the Commercial Arbitration Rules and Mediation Procedures of the AAA, which permits "an award of attorneys' fees if all parties have requested such an award or it is authorized by law or their arbitration agreement" (Rule- 43), the international rule does not require "all" parties to have requested such relief, nor does it require authorization by law or agreement, although the AAA Website does specify such a requirement. This Website reference, which adds requirements or limitations not found in the Rules themselves is not determinative . All parties to an International Arbitration should be entitled to rely upon the relevant Rules promulgated by the AAA, here "International Dispute Resolution Procedures (Including Mediation and Arbitration Rules) Amended and Effective 1 July, 2003".
In its Answer and Counter-Claim to the Demand for Arbitration, CIT sought "counsel fees and costs, as the Panel deems just and proper." There was no objection to this. Thereafter, in its Opening Statement, the request for counsel fees was reiterated. Again, there was no objection. In the parties final written submissions, the request for [CIT's] legal fees was [*6]repeated and, as referred to in footnote 114 to its submission, CIT included "an affidavit of legal expenses, as the Panel requested in the case of a fee application under Article 31". It was only after this that CSFB objected to any award of counsel fees. While the objection may have been made late in the arbitration process, it was timely asserted before the issuance of the Award. This precludes a finding of consent.
In order to avoid the conclusion that the panel disregarded clearly applicable law, CIT points to The Shaw Group, Inc. v. Triplefine International Corporation, 2003 WL 22077332 (S.D.NY, 2003), for the proposition "that an international arbitrator did not manifestly disregard the law or exceed his power under New York law by awarding attorney's fees to a prevailing party," where the court quoted, the arbitrator's conclusion that "[b]y agreeing on [international] arbitration, the parties have also agreed that the [international] Rules of Arbitration shall apply, including Article 31....This will satisfy the New York law requirement that attorney's fees shall not be awarded unless agreed between the parties". However, in Shaw, as described more fully in The Shaw Group, Inc. v. Triplefine International Corporation, 322 F3d 115 (2nd Cir., 2003), the parties had agreed to arbitrate "all disputes", which caused the Second Circuit to vacate an earlier District Court injunction (2001 WL 1246583) enjoining Shaw from seeking to recover "attorneys' fees" in the arbitration. On appeal, before the arbitration was conducted, the Circuit held that because the "broadly worded" arbitration and because it provided for arbitration under the international rules, "which assign the arbitrator initial responsibility to determine issues of arbitrability" the claim for attorneys' fees belonged before the arbitrators. This explains the ruling of the District Court, upholding the award of such fees, and renders it distinguishable from the instant case.
Here the attorneys' fees were awarded "in accordance with New York law and [Article] 31". However, absent is the substantive requirement of New York law that there be either agreement or statutory basis for attorneys' fees. Moreover, Article 31 does not provide an independent ground, without consent by the parties for such relief. Therefore, the award of attorneys' fees was in manifest disregard of clear and explicit New York law, and may not be confirmed.
Accordingly, it is hereby
ORDERED that Plaintiffs' motion to confirm the Award of the Arbitrators is granted, except as to paragraph 5 of the Award ("Legal Fees and Disbursement") as to which confirmation is denied, and Defendants's motion to vacate (or disaffirm) the Award of the Arbitrators is denied, except as to paragraph 5 of the Award ("Legal Fees and Disbursement"), which portion of the Award is vacated (or disaffirmed).
Dated:
__________________________________
J.S.C.
Footnotes
Footnote 1:Article 31 provides: "The tribunal shall fix the cost of arbitration in its award.*** Such costs may include: (d) the reasonable costs for legal representation of a successful party...."
Footnote 2: Mr. Lacy [counsel for CIT]: "Because the arbitration claim filed by them has no good faith basis, my clients request that the arbitration, under Article31, the Panel requires CSFB to pay forum fees and respondents' legal fees" (Arb. Tr., 43)
Footnote 3:The Panel's conclusion that because CSFB "had no basis for declaring a Collateral Manager Event" does not mean that it had acted maliciously and in bad faith, and I decline to read this into the Award.
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