Eljer Mfg., Inc. v. Kowin Development Corp.

Decision Date04 March 1994
Docket NumberNos. 93-1539,93-1607,s. 93-1539
Citation14 F.3d 1250
PartiesFed. Sec. L. Rep. P 98,087 In the Matter of the Arbitration Between: ELJER MANUFACTURING, INCORPORATED, formerly known as Household Manufacturing, Incorporated, Petitioner-Appellant, Cross-Appellee, v. KOWIN DEVELOPMENT CORPORATION, Respondent-Appellee, Cross-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Wilber H. Boies, David Bayless, Catherine Brunton Levitt, McDermott, Will & Emery, Chicago, IL, for petitioner-appellant.

Francis D. Morrissey, J. Patrick Herald, Michael A. Pollard, William M. Sneed, Baker & McKenzie, Chicago, IL, Richard Osborn (argued), George Robertie, Osborn & Associates, Los Angeles, CA, for respondent-appellee.

Before BAUER and COFFEY, Circuit Judges, and SKINNER, District Judge. *

BAUER, Circuit Judge.

Eljer Manufacturing, Inc., seeks to modify an arbitration order entered against it. The district court reduced part of the award and affirmed the remainder. 822 F.Supp. 505. Kowin Development Corp. cross-appeals, arguing that the district court's reduction of the award should be reversed and the order of the arbitrator reinstated in full. We affirm in part and modify the award in part.

I. Facts

Eljer was, during the relevant period, the parent corporation of the Simonds Division, a producer of metal files. In 1984, Simonds along with Kowin formed Kowin-Simonds, Inc. The agreement creating Kowin-Simonds provided that Kowin-Simonds would participate in a joint venture with a Chinese company to manufacture files in China. The Chinese joint venture would then agree to supply Simonds with a certain proportion of Simonds's file requirements every year for twenty years. Kowin and Simonds agreed to submit any disputes arising under the agreement to arbitration. 1

To aid the Chinese joint venture, Simonds agreed to sell its excess manufacturing equipment for a total price of $3.5 million. Kowin-Simonds bought some of this equipment with the proceeds of a $2.5 million loan from the Bank of America. Kowin and Eljer each guaranteed $1.25 million of the loan. The rest of the necessary equipment was purchased for $1 million by the Bank of China which in turn leased the equipment back to the Chinese joint venture. Pursuant to the Kowin-Simonds agreement, Simonds paid Kowin a $500,000 commission which the arbitrator determined to be in return for arranging all the financing.

In June of 1985, the Beijing Steel Files Plant agreed to be Kowin-Simonds's Chinese partner in the joint venture and operations began soon thereafter. For a variety of reasons, not relevant for purposes of our review, the venture failed miserably. As a result of the failure, Kowin-Simonds was unable to meet its obligations on the Bank of America loan and, as guarantors, Eljer and Kowin were each forced to pay the bank $1.25 million plus accrued interest.

On March 17, 1988, Kowin sued Eljer and Simonds in the United States District Court for the Central District of California. Kowin's complaint listed fraud, breach of contract, and federal securities claims, 2 and alleged that Eljer and Simonds fraudulently misrepresented and concealed facts concerning the equipment it sold and the market conditions for steel files.

Eljer moved to compel arbitration pursuant to the Kowin-Simonds agreement and the district court granted the motion. The parties proceeded to arbitration in Chicago, and on October 30, 1992, the arbitrator awarded Kowin a total of $14,844,858 in damages, $4 million in prejudgment interest and attorneys' fees. The arbitrator divided the damages into three separate awards: (1) $2,960,542; (2) $8,384,316; and (3) $3,500,000. The arbitrator neglected, however, to articulate his findings any further. Eljer filed a motion to vacate or modify the award in the United States District Court for the Northern District of Illinois.

On March 1, 1993, the district court partially affirmed the arbitrator's award. Because each award duplicated precisely the amounts requested by Kowin in the damages section of its post-hearing brief, the court was easily able to determine what injury each of the three damage awards was intended to compensate. Once it had discerned the bases for each award, the court reduced two of the three awards.

The first award of $2,960,542 represented the $2.5 million principal of the Kowin-Simonds loan plus $460,542 of accrued interest. 3 As guarantor on $1.25 million of the loan, Eljer had already paid this sum to the bank. Including this in the award would have required Eljer to make the same payment twice. The district court, therefore, reduced this award by $1.25 million.

The arbitrator's second damages award of $8,384,316 represented lost profits projected over the twenty year term of the contract plus Kowin's $250 capital contribution to the venture. The district court refused to modify this award because in its view the arbitrator did not deliberately disregard the law.

As for the third award of $3.5 million, the court concluded it represented what Kowin alleged to be Simonds's unjust enrichment from the sale of its equipment. Recognizing that $2.5 million of this, the Bank of America proceeds, was included in the first award, the court reduced the award to $1 million to avoid double recovery.

II. Standard of Review

Our scope of review of a commercial arbitration award is grudgingly narrow. Sections 10 and 11 of the Federal Arbitration Act provide statutory grounds for the modification of an arbitrator's decision. 4 In addition to the reasons set out in the statute, we will set aside an arbitrator's decision if in reaching his result, the arbitrator deliberately disregards what he knows to be the law. Health Servs. Mgmt. Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir.1992). Errors in the arbitrator's interpretation of law or findings of fact do not merit reversal under this standard. National Wrecking Co. v. International Brotherhood of Teamsters, Local 731, 990 F.2d 957 (7th Cir.1993); Moseley, Hallgarten, Estabrook, & Weeden v. Ellis, 849 F.2d 264 (7th Cir.1988). Nor does an insufficiency of evidence supporting the decision permit us to disturb the arbitrator's order. Arbitration does not provide a system of "junior varsity trial courts" offering the losing party complete and rigorous de novo review. National Wrecking, 990 F.2d at 960. It is a private system of justice offering benefits of reduced delay and expense. A restrictive standard of review is necessary to preserve these benefits and to prevent arbitration from becoming a "preliminary step to judicial resolution." E.I. DuPont de Nemours v. Grasselli Employees Indep. Ass'n, 790 F.2d 611, 614 (7th Cir.), cert. denied, 479 U.S. 853, 107 S.Ct. 186, 93 L.Ed.2d 120 (1986).

III. Kowin's Cross-Appeal

We deal first with the cross-appeal. Kowin argues that the court's reduction of the award rests on impermissible speculation as to what each of the arbitrator's three awards was attempting to redress. We disagree. Kowin confuses a narrow standard of review with a nonexistent standard of review. The basis for each of the arbitrator's awards is no mystery. As the district court noted, the figures were identical to certain amounts requested by Kowin in the damages section of its post-hearing brief. It was hardly speculative for the district court to base its analysis on Kowin's own explanation of its damages. We agree with the district court's breakdown of the awards and its subsequent review in that light.

We also agree with the district court's reduction of the first and third award. When an arbitration award orders a party to pay damages that have already been paid or which are included elsewhere in the award, a court may modify the award. Double recovery constitutes a materially unjust miscalculation which may be modified under section 11 of the Federal Arbitration Act. Transnitro, Inc. v. M/V Wave, 943 F.2d 471 (4th Cir.1991); Ellis, 849 F.2d at 272.

IV. Eljer's Appeal

Eljer attacks three aspects of the arbitrator's award. First, Eljer argues that the arbitrator's failure to explain the basis for his award requires that we remand the case to him with instructions to clarify the grounds for the award. Second, Eljer claims that the arbitrator made several miscalculations in his damage awards. Third, Eljer contends that the arbitrator's award of attorneys' fees was improper. We consider these arguments in turn.

A. Arbitrator's Failure to Explain the Award

Eljer argues that the arbitrator's failure to articulate the grounds for his award prevented "meaningful judicial review" of his claim. Eljer's concern is that the arbitrator erroneously rejected some of its defenses and by shielding his decision from scrutiny, prevented reviewing courts from exposing those errors. Eljer asks that we remand the case to the arbitrator with instructions to clarify his award.

This argument fails for two reasons. First and most fundamentally, an arbitrator is simply not required to state the reasons for his decision. Randall v. Lodge No. 1076, Int'l Ass'n of Machinists and Aerospace Workers, 648 F.2d 462, 468 (7th Cir.1981). Such a requirement would serve only to perpetuate the delay and expense which arbitration is meant to combat.

Eljer's requested remand must also be denied because errors of law alone do not constitute a sufficient basis for remanding the case. In its brief, Eljer goes to great lengths in trying to persuade us that various legal defenses it presented to the arbitrator should have prevailed. Eljer misses the point. Even if its legal defenses were dispositive, the fact that the arbitrator erroneously rejected them does not, by itself, provide grounds for a remand. The arbitrator must have deliberately disregarded what he knew to be the law. Eljer has not shown such disregard here.

B. Damage Awards

Eljer challenges the arbitrator's three awards, alleging that...

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