Choice Inv. Mgmt. v. Atea-Brookline, LLC

• Docket Number: Civil Action 22-cv-02892-PAB-SKC
• Decision Date: 18 September 2023
• Parties: CHOICE INVESTMENT MANAGEMENT, LLC, a Colorado limited liability company, Petitioner, v. ATEA-BROOKLINE, LLC, a Delaware limited liability company, and ATEA-BROOKLINE MANAGER, LLC, a Delaware limited liability company, Respondents.
• Court: U.S. District Court — District of Colorado

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CHOICE INVESTMENT MANAGEMENT, LLC, a Colorado limited liability company, Petitioner,
v.
ATEA-BROOKLINE, LLC, a Delaware limited liability company, and ATEA-BROOKLINE MANAGER, LLC, a Delaware limited liability company, Respondents.

Civil Action No. 22-cv-02892-PAB-SKC

United States District Court, D. Colorado

September 18, 2023

ORDER

PHILIP A. BRIMMER Chief United States District Judge.

This matter comes before the Court on petitioner's Motion to Vacate Arbitration Award [Docket No. 24] and respondents' Motion to Confirm Final Arbitration Award [Docket No. 16]. The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332.

I. BACKGROUND^[1]

This action arises from a final arbitration award that was granted to respondent on November 11, 2022. Docket No. 16 at 1; Docket No. 24 at 1; Docket No. 24-2 at 5. Petitioner Choice Investment Management, LLC (“Choice”) seeks to vacate the award. Docket No. 24. Respondents Atea-Brookline, LLC (“hedge fund”) and Atea-Brookline Manager, LLC (“ABM”) seek to confirm it. Docket No. 16.

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A. The Dispute and Arbitration Process

On July 6, 2016, Choice and respondents entered into an Investment Advisory Agreement (“IAA”) under which Choice would provide investment advisory services to the hedge fund.^[2]Docket No. 16 at 2; Docket No. 24 at 3; Docket No. 24-6 at 1, ¶ 1. The IAA requires respondents to pay Choice an initial fee of $5,000, which they did upon finalizing the IAA. Docket No. 16 at 3; Docket No. 24-2 at 1; Docket No. 24-6 at 2, ¶ 8. The IAA also requires the hedge fund to pay Choice 5% of the fee it pays to ABM when it makes a distribution to investors (“Fee”). Docket No. 16 at 3; Docket No. 24 at 4; Docket No. 24-6 at 2, ¶ 8. The IAA contains the following arbitration clause:

Any claim, dispute, or controversy arising out of or relating to: (a) the Account: (b) any transaction executed by, through or with [Choice]; (c) this Agreement, or any other agreement with [Choice]; or (d) any other matter between the [hedge fund] and [Choice], shall be finally and exclusively resolved by arbitration conducted only at the Financial Industry Regulatory Authority (“FINRA") and pursuant to the arbitration procedures of FINRA then in effect (or, in the event FINRA declines the use of its arbitration forum pursuant to the Commercial Arbitration Rules of the American Arbitration Association). The arbitration panel shall consist of three individuals who each have substantial knowledge of investment advisory and management services. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. This section shall survive termination of this Agreement

Docket No. 24-6 at 4, ¶ 13. The hedge fund did not pay Choice the Fee when the hedge fund made a distribution to investors. Docket No. 16 at 4; Docket No. 24 at 4; Docket No. 25 at 5. Accordingly, Choice filed an arbitration action claiming that it had not been paid the Fee it was owed under the IAA. Docket No. 16 at 4; Docket No. 24-1 at 2. The arbitration matter was heard by David Driscoll, who was appointed as an

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arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association^[3](“AAA”). Docket No. 16 at 4; Docket No. 24-1 at 1. Respondents argued that Choice was barred from making any claim based on the IAA because it had failed to comply with Colo. Rev. Stat. §§ 11-51-403(1) and 11-51-403(2.5). Docket No. 16 at 4; Docket No. 24-1 at 2. Respondents also sought reimbursement of the initial $5,000 fee they had paid to Choice. Docket No. 16 at 4; Docket No. 24-1 at 2.

On September 9, 2022, respondents sought leave to file a dispositive motion to dismiss Choice's claims and to require Choice to reimburse the $5,000 fee. Docket No. 16 at 4; Docket No. 24-1 at 1. Choice filed a response in opposition to this request, and respondents replied. Docket No. 16 at 4; Docket No. 24-19. The arbitrator held a hearing on the request to file a dispositive motion on September 20, 2022. Docket No. 16 at 4; Docket No. 24-21. After oral argument, the arbitrator granted respondents leave to file a dispositive motion. Docket No. 16 at 4; Docket No. 24-21. The arbitrator also determined that he would hold Choice's request for leave to file a motion to compel disclosure in abeyance until the dispositive motion was resolved. Docket No. 24-21.

On September 23, 2022, respondents filed Respondents' Dispositive Motion, which they describe as “akin to a motion for summary judgment,” pursuant to Delaware state law. Docket No. 24-18 at 1, ¶ 1. The dispositive motion argues that Choice's claims should be dismissed and seeks attorneys' fees and reimbursement of the $5,000 respondents paid to Choice, plus interest. Id. at 2-7, ¶¶ 5-24. Choice filed a response,

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arguing that its claims should not be dismissed, that respondents are not entitled to reimbursement, but stating that it “agrees that [Choice] is entitled to an award of attorneys' fees and costs under Rule 49(d)(ii) [of the AAA Commercial Arbitration Rules] when it prevails at the hearing in this matter.” Docket No. 24-4 at 8. Respondents filed a reply in support of their motion on October 3, 2022. Docket No. 16 at 5.

On October 12, 2022, the arbitrator issued an interim award, finding that there were no disputed material facts. Docket No. 24-1. The arbitrator dismissed Choice's claims against respondents and found that Choice was liable to the hedge fund in the amount of $5,000 plus interest, costs, and attorney fees. Id. at 3. The arbitrator ordered respondents to submit an interest calculation and itemization of costs and attorneys' fees within ten days of the interim award, giving Choice ten days to respond. Id. On November 11, 2022, the arbitrator issued a final award consisting of the initial award of $5,000 plus $3,121.09 in interest and $36,187 in attorneys' fees. Docket No. 24-2 at 5.

B. The Arbitrator's Findings and Awards

The arbitrator found that the following material facts were not disputed:

[The hedge fund] entered into the [IAA] with [Choice] on or about July 6, 2016. The [IAA] states that Choice, a Colorado limited liability company, is an investment adviser registered with the State of Colorado. It further states that Choice is duly organized, validly existing and in good standing under the laws of the State of Colorado. At the time of these representations, July 2016, they were accurate. The [IAA], at Paragraph 12,^[4] expressly required Choice to promptly notify [the hedge fund] if any of the representations in the [IAA] ceased to be true and correct.

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At the time of the [IAA], and still today, the State of Colorado requires investment advisors to supply detailed information about its organization, including the address of its principal office and place of business to the State through the Colorado Investment Adviser Registration Depository (“IARD”).^[5]The State also requires registrants to indicate whether they maintained their books and records somewhere other than at their principal place of business.

On January 30, 2017, Choice's registration as an investment adviser in Colorado terminated. Choice transferred its principal place of business from Denver to Florida at or about that time. Thereafter, Choice did not change its registration information with the IARD to reflect the transfer and did not notify Respondents that its registration as an investment adviser in Colorado had terminated.

Docket No. 24-1 at 1-2 (footnotes added).

Based on these findings of fact, the arbitrator found that Choice violated Colo. Rev. Stat. §§ 11-51-403(1) and 11-51-403(2.5) when it failed to timely update the registration information it provided to the IARD to reflect the fact that it had moved its primary place of business to Florida. Id. at 2. The arbitrator also found that Choice was legally barred from asserting claims based on the IAA under Colo. Rev. Stat. § 11-51402(10) and that Choice was liable to the hedge fund in the amount of $5,000 pursuant to Colo. Rev. Stat. § 11-51-604.^[6]Id. at 2-3. In addition, the arbitrator found that Paragraph 12 of the IAA “required Choice to notify Respondents promptly if it ceased to be registered as an investment adviser in Colorado” and that Choice breached the contract when it “failed to do so after its registration as an investment adviser in

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Colorado terminated in January 2017.” Id. Accordingly, the arbitrator dismissed Choice's claims against respondents and found that Choice was liable to the hedge fund in the amount of $5,000 plus interest, costs, and attorney fees. Id at 3.

C. The Current Action

Choice initiated this action on November 4, 2022 by filing a petition to vacate the interim arbitration award. Docket No. 1. Choice argues that the final arbitration award is in manifest disregard of the law, that the arbitrator committed misconduct by granting respondents' dispositive motion, and that awarding respondents damages and attorneys' fees exceeded the arbitrator's power. Docket No. 24 at 9-15. Respondents filed a motion to confirm the final award on January 30, 2023. Docket No. 16. Respondents argue that there are no grounds to vacate, modify, or correct the arbitration award and that the Court should therefore confirm the award and enter judgment pursuant to Section 9 of the Federal Arbitration Act (“FAA”). Id. at 2; see 9 U.S.C. § 9.

II. LEGAL STANDARD

Under Section 9 of the FAA, confirmation of an arbitration award is a summary procedure and courts "must grant . . . an order [confirming an arbitration award] unless the award is vacated, modified, or corrected." 9 U.S.C. § 9. Section 10 of the FAA enumerates four circumstances under which a district court may vacate an arbitration award: (1) the award was procured by corruption, fraud, or undue means; (2) there was evidence that the arbitrators were partial or corrupt; (3)...