Matter of Curtis Lbr. Co. Inc. v American Energy Care, Inc.

[*1] Matter of Curtis Lbr. Co. Inc. v American Energy Care, Inc. 2010 NY Slip Op 50781(U) [27 Misc 3d 1217(A)] Decided on April 30, 2010 Supreme Court, Albany County Platkin, J. 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 April 30, 2010
Supreme Court, Albany County

Application of Curtis Lumber Co., Inc., Petitioner,

against

American Energy Care, Inc., Respondent.



131-10



Couch White, LLP

Attorneys for Petitioner

(Michael T. Wallender and James J. Barriere, of counsel)

540 Broadway

PO Box 22222

Albany, New York 12201

Breakell Law Firm, P.C.

Attorneys for Respondent

(Walter G. Breakell, of counsel)

10 Airline Drive, Suite 205

Albany, New York 12205

Richard M. Platkin, J.

In this special proceeding brought pursuant to CPLR article 75, petitioner Curtis Lumber Co., Inc. ("Curtis Lumber") moves to confirm in part, vacate in part and modify in part a modified arbitral award. Respondent American Energy Care, Inc. ("AEC") opposes the petition and cross-petitions to vacate the modified award and confirm the original arbitral award. For the reasons that follow, the Court concludes that the arbitrator exceeded his authority in modifying the original arbitral award and that the original award must be confirmed in its entirety.

[*2]BACKGROUND

Petitioner and respondent were parties to a contract dated April 19, 2005, whereby AEC agreed to design and install an energy efficient lighting system for Curtis Lumber (hereinafter "the Contract"). The Contract provides for the mandatory arbitration of disputes, with the prevailing party entitled to an award of reasonable attorney's fees and costs.

In July 2006, AEC filed a demand for arbitration based on claims that Curtis Lumber had breached the Contract by failing to pay certain contractual and extra-contractual monies allegedly due and owing. Curtis Lumber answered the demand and served a counter-claim against AEC, seeking monetary damages and rescission of the Contract. Both sides also requested an award of attorney's fees and costs.

The designated Arbitrator, Patrick Tomaselli, heard extensive proof from the parties over the course of 31 hearing days. More than 200 documents were received into evidence, and the hearing transcript totals more than 6,000 pages.

Following the receipt of certain post-hearing submissions, the Arbitrator issued his original arbitration award on August 26, 2009 (hereinafter "Original Award"). In a comprehensive and carefully reasoned 36-page decision, the Arbitrator determined that AEC was entitled to recover the gross sum of $111,638.74 from Curtis Lumber on its claims under the Contract, including pre-award interest and late fees, and that Curtis Lumber was entitled to a gross recovery of $58,352.95 from AEC on its counter-claims. Accordingly, the Arbitrator determined that AEC was entitled to a net recovery of $53,285.79. In addition, the Arbitrator found that AEC was the prevailing party and, therefore, was entitled to recover reasonable attorney's fees and costs, totaling an additional $262,815.38. Thus, the Original Award rendered in favor of AEC and against Curtis Lumber was for $316,101.17.

Thereafter, both sides applied to the Arbitrator for modification of the Original Award. Curtis Lumber contended that the Arbitrator erred in failing to apply "the interest on net balance rule[, which] requires mutual debts to be offset against each before any award of prejudgment interest" (Joel Howard Letter of August 31, 2009, at 3 & n 2 [emphasis in original]). Petitioner argued that the Arbitrator had found that as of the date of the parties' mutual abandonment of the Contract, AEC was owed $56,564.50 by Curtis Lumber, but that AEC owed Curtis Lumber the sum of $58,352.95 as of such date. Since offsetting the parties' respective claims would have eliminated AEC's entitlement to a net recovery, petitioner argued that the Arbitrator erred in awarding $55,074.24 in interest and late fees to AEC. Curtis Lumber further argued that since application of the "interest on net balance" rule would result in a $613.45 recovery in its favor, it should be deemed to be the prevailing party for purposes of an award of attorney's fees and costs.

AEC opposed the application for modification, arguing that the Arbitrator lacked authority to revise the award in the manner requested by Curtis Lumber. It further argued that even if the Arbitrator had properly modified his award to provide a small net recovery in favor of Curtis Lumber, AEC must still be deemed the prevailing party for purposes of a fee award. AEC cross-applied to the Arbitrator for certain modifications with respect to computation of the unpaid contract balance, but this request was denied and is not before the Court.

On December 10, 2009, the Arbitrator issued a written decision modifying the Original Award. In his Modified Award, the Arbitrator agreed with Curtis Lumber that he should have offset the respective debts of the parties before computing an award of interest and late fees. [*3]After applying the "interest on net balance rule", Curtis Lumber recovered a net award under the Contract of $613.45 from AEC. However, the Arbitrator declined to modify the portion of the Original Award that found AEC to be the prevailing party, explaining:

. . . As I noted in the original Award, because of the mixed nature of my determinations in this arbitration and the resultant relatively nominal net recovery (now even more minimal) when measured against the aggregate amounts of the parties' respective substantive claims, it was "problematical" whether either party could properly be characterized as the "prevailing party" in this arbitration so as to justify [an award of attorney's fees]. A further concern was and remains the fact that the amounts of legal fees and costs asserted by each side in fact dwarf the amount of the underlying substantive Award.

In the end, my determination to uphold the original award of attorney's fees to AEC is based upon no fewer than three separate and equally compelling considerations, each of which might independently serve as a basis for sustaining same. First, as argued by AEC, the determination of prevailing party may properly be based upon more than just the absolute amount of any recovery and properly includes consideration of such factors as the underlying factual findings and the relative evaluation of the parties' competing claims. Second, and consistent with the foregoing, it may be argued . . . that to annul the prior award of attorney's fees would be an impermissible change in the substance of the original Award. Finally, an award of attorney's fees is authorized not only by the terms of the parties' agreement . . . but also be the applicable Rules governing this arbitration. . . . .

After reducing the award of attorney's fees to AEC by Curtis Lumber's net recovery of $613.45, the Arbitrator awarded a total sum of $262,201.93 to AEC.

By this special proceeding, Curtis Lumber moves to: (1) confirm the portion of the Modified Award that established a net recovery of $613.45 in its favor; (2) vacate the portion of the Modified Award that granted attorney's fees and costs to AEC; (3) modify the portion of the Modified Award that mistakenly described AEC as the prevailing party and to instead designate Curtis Lumber as the prevailing party; and (4) remand to the Arbitrator to determine the amount of attorney's fees and costs to which Curtis Lumber is entitled as prevailing party. AEC opposes the petition and cross-moves to vacate the Modified Award and to confirm the Original Award in its entirety. Oral argument was held on March 5, 2010. This Decision, Order & Judgment follows.

ANALYSIS

Curtis Lumber first moves pursuant to CPLR 7510 for confirmation of the portion of the Modified Award establishing a net recovery of $613.45 in its favor, exclusive of attorney's fees and costs. AEC opposes this branch of the petition, arguing that the Arbitrator exceeded his authority under CPLR 7509 and 7511 (c) in modifying the net recovery set forth in the Original Award and, therefore, this portion of the Modified Award must be vacated as ultra vires pursuant to CPLR 7511 (b).

CPLR 7510 provides that "[t]he court shall confirm an award upon application of a party made within one year after its delivery to him, unless the award is vacated or modified upon a ground specified in section 7511." An arbitral award may be vacated pursuant to CPLR 7511 (b) [*4](1) (iii) where an arbitrator acts in excess of his authority. Thus, the Court must first determine whether the Arbitrator was authorized to modify the Original Award to eliminate AEC's entitlement to pre-award interest and late fees through application of the "interest on net balance rule".

Judicial review and modification of arbitral awards is highly circumscribed. A court generally "will not review an arbitrator's award based on the law and facts, and an award must be confirmed unless a challenging party establishes one of the grounds for modification or vacatur set forth in CPLR 7511. The path of analysis, proof and persuasion by which an arbitrator reaches a conclusion is beyond judicial scrutiny" (Matter of Vermilya (Distin), 157 AD2d 1030, 1031 [3d Dept 1990] [internal citations omitted]).

The same strict limits upon modification imposed upon a reviewing court under CPLR 7511 apply to an arbitrator once an award is rendered (see CPLR 7509; Matter of City of Troy (Village of Menands), 48 AD2d 733, 733-734 [3d Dept 1975]). Absent a contrary agreement of the parties, "once arbitrators have finally decided the submitted issues, they are, in common-law parlance, functus officio,' meaning that their authority over those questions is ended" (Trade & Transport, Inc. v Natural Petroleum Charterers Inc., 931 F2d 191, 195 [2d Cir 1991] [internal quotations omitted]). "The intent of CPLR 7509 is not to permit the arbitrator to re-examine the grounds of the award or to alter the decision, but to permit modification only on the limited grounds set forth in CPLR 7511 (c)" (Matter of New Paltz Cent. School Dist. (New Paltz United Teachers), 99 AD2d 907, 908 [3d Dept 1984]).

Curtis Lumber argues that the Arbitrator's modification of the Original Award to eliminate AEC's entitlement to pre-award interest and late fees, thereby resulting in a small net recovery in its favor, was proper under CPLR 7511 (c) (1), which authorizes modification of an arbitral award where "there was a miscalculation of figures . . ." (see also American Arbitration Association ["AAA"] Commercial Rule 46 [authorizing correction of "clerical, typographical or computation errors" but prohibiting arbitrator from "redetermining the merits of any claim already decided"]). In rendering the Modified Award, the Arbitrator recites that "there were clerical and computation errors in [the] original Award which should be and hereby are corrected to reflect the calculations above." However, it is AEC's contention that the Arbitrator went beyond his limited authority to correct a miscalculation of figures and instead redetermined the merits of its claim through application of a new rule of substantive law: the "interest on net balance rule".

As stated above, CPLR 7511 (c) (1) authorizes an arbitrator to modify an award to correct "a miscalculation of figures". This "provision can only be used to modify awards where there is a mathematical miscalculation of figures used in determining an award, and not where . . . the basis of the arbitrator's award is challenged" (id. at 734). Thus, a "miscalculation of figures", as such term is used in CPLR article 75, refers to "mathematical errors on the face of the . . . award" or "computational errors [that] can be clearly inferred" from the award (id.). Put another away, modification is not available where the challenge pertains to an arbitrator's judgment or discretion in applying a particular legal rule or standard to the facts as he finds them to be, but rather is limited to an error of mathematical computation made in the course of applying such a rule or standard.

The parties essentially agree that the Arbitrator erred in awarding AEC the sum of [*5]$55,074.24 in interest and late fees in the Original Award. This error arose out of the arbitrator's failure to apply the "interest on net balance rule", which requires an offsetting of the respective debts of the parties prior to the computation of interest. In Binghamton Precast & Supply v A. Servidone Inc./B. Anthony Const. Corp. (257 AD2d 731, 732 [3d Dept 1999]), the Third Department held that the failure to "have calculated interest under the interest on the net balance' rule outlined in Manshul Constr. Corp. v Dormitory Auth." constitutes an error of law, since "[t]he appropriate method by which to calculate interest is a legal argument" (id.; see also Millenium Envtl., Inc. v City of Long Beach of State of NY, 35 AD3d 408, 412 [2d Dept 2006] [modifying on the law on order of Supreme Court that, inter alia, erroneously determined that the "interest on the net balance rule" did not apply]).

Based on the foregoing, the Court concludes that the Arbitrator's failure to apply the "interest on net balance rule" constitutes a mistake of law, rather than a "miscalculation of figures" made in the course of attempting to apply the proper legal standard. There is nothing on the face of the Original Award or clearly inferable therefrom that would reveal the alleged miscalculation to one unfamiliar with the "interest on net balance rule". Rather, the error which the Arbitrator attempted to correct in his Modified Award arose from his failure to apply the correct legal standard to the facts as he found them to be. Merely because this error of law pertained to the method by which a particular element of damages is to be calculated does not transform the Arbitrator's failure to apply the correct legal standard into a "miscalculation of figures" within the meaning of CPLR 7511 (c) (1).

Indeed, under Curtis Lumber's interpretation of CPLR 7511 (c) (1), virtually any type of legal error committed by an arbitrator in the course of determining an award of money damages (or, for that matter, any other factual issue that involves numerical computation) could be couched as a "miscalculation of figures" — a conclusion at odds with the text, structure, history and purpose of CPLR article 75. Accordingly, the Court concludes that Arbitrator exceeded his limited authority to correct a mathematical miscalculation of figures and instead attempted to modify the analytical basis of the Original Award by applying a new legal standard, the "interest on net balance rule", to the facts as he found them to be (see New Paltz, supra, at 907-08; Matter of Lian (First Asset Mgt.), 273 AD2d 163 [1st Dept 2000] [where arbitral award provided for pre-judgment interest on compensatory damages but not on punitive damages, court lacked authority to modify award to provide such interest]).

To similar effect are cases interpreting the Federal Arbitration Act, which allows an arbitrator to correct an "evident material miscalculation of figures" (9 USC § 11). "These cases make clear that the provision reaches only computational errors, not legal or factual mistakes concerning the amount of damages that should be awarded" (Waddell v Holiday Isle, LLC, 2009 U.S. Dist. LEXIS 67669 [SD Alabama 2009] [collecting federal authorities]). Authorities from other states also are in accord (see e.g. Cranney v Mutual of Enumclaw Insurance Co, 175 P3d 168 [Idaho 2007] [award of prejudgment or failure to award the same is not correctable by reviewing court; an "evident miscalculation of figures under Idaho [law] must be a mathematical error in calculating the amount of an award, not a legal error in the elements or measure of damages when making the award"]).

Having determined that the Arbitrator exceeded his limited authority under CPLR 7511 (c) (1) by issuing a Modified Award that applied a new legal standard that redetermined the [*6]merits of the Original Award,[FN1] the Court must vacate the portion of the Modified Award that eliminated AEC's net recovery of $53,285.79 as against Curtis Lumber and substituted therefor a net recovery of $613.45 in favor of Curtis Lumber. In view of this conclusion, the Court concludes that the remaining portion of the Modified Award, which reaffirmed AEC's status as prevailing party notwithstanding the Arbitrator's redetermination of the award to provide a small net recovery in favor of Curtis Lumber, cannot stand in its own right. Indeed, both sides agree that this aspect of the Modified Award should be vacated, albeit for different reasons.[FN2]

The issue then becomes AEC's cross-application to confirm the Original Award, which awarded AEC a net recovery of $53,285.79 on its substantive claims and an additional

$262,815.38 in attorney's fees and costs. Pursuant to CPLR 7510, "[t]he court shall confirm an award upon application of a party . . . unless the award is vacated or modified upon a ground specified in section 7511."

For the reasons set forth above, the Court concludes that the Original Award does not suffer from a "miscalculation of figures" within the meaning of CPLR 7511 (c) (1). And Curtis Lumber does not contend that any of the other bases for modification set forth in CPLR 7511 (c) are applicable to the Original Award.[FN3]

The grounds for vacating an arbitral award are set forth in CPLR 7511 (b). An award may be vacated upon the application of a party if the arbitrator exceeded his powers (id. [b] [1] [iii]). But this provision applies "only where the arbitrator's award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator's power" (Matter of Massena Cent. School Dist. (Massena Confederated School Employees'Assn., NYSUT, AFL-CIO), 64 AD3d 859 [3d Dept 2009] [internal quotations omitted]). Thus, an [*7]arbitral award "will not be vacated even though the court concludes that [the arbitrator's] interpretation of the agreement misconstrues or disregards its plain meaning or misapplies substantive rules of law, unless it is violative of a strong public policy, or is totally irrational" (Matter of Silverman (Benmor Coats), 61 NY2d 299, 308 [1984]).

The only argument of irrationality put forward by Curtis Lumber pertains to the Arbitrator's decision to deem AEC to be the prevailing party despite the net recovery in favor of Curtis Lumber under the Modified Award. However, since the Modified Award must be vacated, this argument has been rendered academic. Moreover, while the Arbitrator erred in failing to recognize the applicability of the "interest on net balance rule", thereby awarding AEC interest and late charges despite an offsetting debt that it owed to Curtis Lumber, the Court is not persuaded that this leaves the resulting arbitral award "totally irrational".

The Arbitrator's error has not been shown to be the product of conscious disregard for controlling law or such a departure from the terms of the Contract that the Original Award, taken as a whole, is tantamount to a rewriting of the parties' agreements. Moreover, if the Court were to examine the Original Award without reference to the Modified Award, it might conclude that the decision to award interest and late fees to AEC resulted from, for example, the Arbitrator's reliance on differences in the dates upon which the respective obligations were to be paid,[FN4] the Arbitrator's judgment that the "interest on net balance rule" does not apply to the contractually authorized late fees at issue, Curtis Lumber's failure to bring the "interest on net balance rule" to the Arbitrator's attention prior to the issuance of the Original Award, or simply a determination on the part of the Arbitrator that the award of interest and late fees to AEC, despite an offsetting balance, was necessary "to do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be and making an award reflecting the spirit rather than the letter of the agreement" (Silverman, 61 NY2d at 308).[FN5] As noted above, there certainly is nothing in the Original Award to suggest a "miscalculation of figures".

Further, a contrary conclusion that leaves arbitral awards subject to vacatur upon a mere error of law would frustrate the objectives and reasonable expectations of commercial parties, who depend upon the arbitration process "to permit a relatively quick and inexpensive resolution of contractual disputes by avoiding the expense and delay of extended court proceedings" (Wilko v Swan, 346 US 427, 431-32 [1953]).

Nor has the Original Award been shown to be violative of a strong public policy. The only argument advanced by Curtis Lumber in this connection is a claim that the disproportionality between the modest net recovery under the Original or Modified Award and the large award of attorney's fees to AEC renders the counsel fee award excessively punitive. The [*8]Court rejects this contention.[FN6] First, the fee award to AEC is compensatory, not punitive. The record makes clear that the award of attorney's fees to AEC was based upon its actual litigation costs. Indeed, the Arbitrator explained in his Original Award that the award of fees was based upon actual invoices submitted by AEC attorneys, which he "reviewed line by line and item by item to ensure that only those services and costs directly related to this arbitration (or the precedent litigation) between the parties are included as recoverable costs."

Further, the magnitude of the fee award to AEC and its relationship to the "relatively nominal net recovery by AEC" was the subject of careful scrutiny by the Arbitrator and, as he explained, "is the product of the clear language of the Agreement and the fact that both parties hereto have requested — and by implication have therefore acknowledged and expected — that such an award would be made." Moreover, Curtis Lumber requested a fee award of similar magnitude from the Arbitrator. Under the circumstances, the Court does not see any violation of a strong public policy in the Original Award.

Indeed, had the Arbitrator refused to award attorney's fees to the prevailing party, despite the terms of the parties' Contract and their agreement to confer jurisdiction upon the arbitrator to render such an award, one of the parties would be left with the argument that the resulting award should be vacated on account of the arbitrator's failure to render a final award upon subject matter submitted for his resolution (see CPLR 7511 [b] [iii]). Instead, the Arbitrator exercised the jurisdiction that was conferred upon him, gave the matter considerable thought, and ruled on the issue. It therefore would be inappropriate for this Court to substitute its judgment for that of the Arbitrator, even if a contrary conclusion were possible or preferable.[FN7]

Finally, Curtis Lumber argues that the award of attorney's fees and costs to AEC should be reduced pursuant to CPLR 7513. That statute provides:

Unless otherwise provided in the agreement to arbitrate, the arbitrators' expenses and fees, together with other expenses, not including attorney's fees, incurred in the conduct of the arbitration, shall be paid as provided in the award. The court, on application, may reduce or disallow any fee or expense it finds excessive or allocate it as justice requires.

It is apparent from its plain language that CPLR 7513 has no applicability to an award of attorney's fees rendered by an arbitrator pursuant to contractual agreement. The first sentence of the cited statute provides that the arbitrator's expenses and fees, together with expenses other than attorney's fees, may be taxed by the arbitrator in the absence of a contrary agreement between the parties. The second sentence, which then goes on to give courts the authority to reduce, disallow or reallocate "any fee or expense", must be read by reference to the authority [*9]conferred by the first sentence, which expressly carves attorney's fees from its ambit.

In any event, even if the Court has the discretion to reduce or disallow the attorney's fees and costs awarded to AEC by the Arbitrator, it would decline to do so in the exercise of its discretion. While the Court shares the Arbitrator's unease regarding the magnitude of the fee award to AEC and its relationship to the "relatively nominal net recovery", which is itself the product of legal error, the clear language of the Contract provides for an award of attorney's fees and costs to the prevailing party, and both parties to the arbitration requested an award of attorney's fees, put in fee requests of substantially similar amount, and manifested through their words and conduct an expectation that such an award would be made. Moreover, there has been no showing that the fee award sought by AEC is "excessive" in relation to the services rendered by its counsel. Thus, under the facts and circumstances of this case, "justice requires" that the terms of the parties' commercial contract be enforced in accordance with its plain language and the parties' reasonable expectations.

CONCLUSION

Based on the foregoing, the Court hereby vacates the Modified Award and confirms the Original Award.

Accordingly,[FN8] it is

ORDERED that the Modified Award is vacated in its entirety; and it is further

ORDERED that the Original Award is confirmed in its entirety; and it is further

ORDERED that the petition and cross-petition are granted to the limited extent set forth herein and denied in all other respects.

This constitutes the Decision, Order & Judgment of the Court. The original of this Decision, Order & Judgment is being returned to respondent's counsel; all papers are being transmitted to the Albany County Clerk. The signing of this Decision, Order & Judgment shall not constitute entry or filing under CPLR Rule 2220. Counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.

Dated: Albany, New York

April 30, 2010

RICHARD M. PLATKIN

A.J.S.C. Footnotes

Footnote 1: Similarly, the Court concludes that the Arbitrator's modification violates AAA Commercial Rule 46, insofar as it represented an attempt to redetermine the merits of a claim previously decided and was not the correction of a "clerical, typographical or computation error[]".

Footnote 2: Curtis Lumber argues principally that since the Original Award defined prevailing party in terms of net recovery, the Arbitrator erred in reaffirming the fee award to AEC where the modification resulted in a net balance in Curtis Lumber's favor — an argument rendered academic by the Court's determination that the revised net balance calculation must be vacated. In moving to vacate the Modified Award in its entirety, AEC appears to contend that since the Arbitrator revisited prevailing party status based solely upon his invalid substantive modification, the Court should assess the propriety of AEC's prevailing party status and its entitlement to fees and costs in the context of its application to confirm the Original Award. The Court finds AEC's reasoning on this point to be more persuasive.

Footnote 3: Curtis Lumber does contend that the Modified Award misdescribes the identity of the prevailing party (see CPLR 7511 [c] [1]), but that argument is premised upon the Court upholding the validity of the net balance portion of the Modified Award. Further, it is apparent from the Modified Award that the Arbitrator's description of AEC as the prevailing party does not constitute a "mistak[e]" within the meaning of the cited statute, but rather reflects the product of the Arbitrator's reasoned judgment.

Footnote 4: For example, AEC was awarded damages based on Curtis Lumber's failure to keep current on payments during the job, whereas certain damages sustained by Curtis Lumber merely represented a credit to be provided by AEC "at the end of the job" (Original Award, p 31).

Footnote 5: To be sure, the Court is not saying that the Original Award was, in fact, grounded upon any of these rationales, only that the Original Award of interest and late fees might be sustainable upon such a rationale without resort to extrinsic evidence (see Matter of Burke (Corn) (117 AD 477 [1907]).

Footnote 6: In making this argument, Curtis Lumber relied upon the disparity between its net recovery of $614.35 under the Modified Award. In light of the foregoing, the Court instead addresses this argument in the context of the $53,285.79 net recovery to AEC under the Original Award.

Footnote 7: There is, of a course, a powerful argument, grounded in common sense and basic economics, that neither side can properly be considered to have prevailed in this litigation. After all, each side spent almost $300,000 to pursue claims that were largely rejected by the Arbitrator or cancelled out by offsetting obligations to the other side.

Footnote 8: The Court has considered the parties' remaining arguments and contentions, but finds them to be without merit or unnecessary to the disposition of this application.