Fairchild Corp. v. Alcoa, Inc.

• Decision Date: 17 September 2007
• Docket Number: No. 07 Civ. 6185.,07 Civ. 6185.
• Citation: 510 F.Supp.2d 280
• Parties: The FAIRCHILD CORPORATION, Plaintiff, v. ALCOA, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

Page 280

510 F.Supp.2d 280

The FAIRCHILD CORPORATION, Plaintiff, v. ALCOA, INC., Defendant.

No. 07 Civ. 6185.

United States District Court, S.D. New York.

September 17, 2007.

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Adam Nelson Zurofsky, Andrew Gordon Ross Madar, Cahill Gordon & Reindel LLP, New York, NY, Tammy Lynn Roy, Cahill Gordon Et Ano., New York, NY, for Plaintiff.

Evan R. Chesler, Cravath, Swaine & Moore LLP, New York, NY, for Defendant.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

Petitioner The Fairchild Corporation ("Fairchild") brought this action seeking to vacate, or to reduce by certain tax offsets, an award granted to respondent Alcoa Inc. ("Alcoa") in an arbitration proceeding. Alcoa cross-moves to confirm the award in its entirety. For the reasons discussed below, Fairchild's petition is DENIED and Alcoa's cross-petition is GRANTED.

I. BACKGROUND

The parties' dispute arose from an acquisition agreement (the "Agreement") entered into in December 2002 under which Fairchild sold its aerospace fastener business to Alcoa for a purchase price in an amount of approximately $657 million. The Agreement provided that Fairchild would indemnify Alcoa for certain environmental liabilities which, as defined, entailed expenses exceeding an account reserve of $8.45 million for this purpose and were associated with remediation work required to cure non-compliance with environmental and health and safety laws. To fund such indemnification payments, the parties agreed to maintain an escrow account of $25 million drawn from the purchase price. The Agreement included an arbitration clause providing a procedure governed by the Federal Arbitration Act to resolve disputes regarding the validity or amount of any claim for indemnification.

Pursuant to the Agreement, Alcoa submitted to Fairchild, over the period from the closing date in December 2002 through December 2006, more than 200 claims seeking indemnification in a total amount of $16,385,493.92 for costs Alcoa asserted it incurred in connection with qualifying corrective work performed at various facilities it acquired from Fairchild. Fairchild rejected all of Alcoa's claims, contending that: (1) Alcoa had failed to provide adequate documentation that it had actually incurred the expenditures; (2) the claims were not covered by the Agreement or not explicitly ordered by regulatory authorities; (3) Fairchild had not been given adequate notice of the corrective work; and (4) Fairchild was entitled to offsets for certain tax benefits Alcoa would receive in respect of operating losses Fairchild had incurred in connection with portions of the claims in question.

Failing mediation of their disagreements over Alcoa's claims, in July 2005 the parties proceeded to binding arbitration under the Agreement. Eventually, from a list provided by the International Institute for Conflict Prevention and Resolution, they agreed upon an arbitrator James F. Stapleton (the "Arbitrator"), a former judge of the Connecticut Superior Court.

Alcoa asserts that although it raised objections, as unduly burdensome, to a request by Fairchild that each and every receipt and invoice associated with Alcoa's claims for indemnification be identified individually, Alcoa produced at the hearing, through a live witness who testified about the material, a summary chart itemizing its claims under several categories and the amounts of corresponding expenditures. Alcoa also points to specific documentation that it had already submitted to Fairchild supporting its actual costs. At the close of discovery in December 2006, Alcoa moved for partial summary judgment, which the Arbitrator denied, having found some ambiguities in the relevant provisions of the Agreement as well as other issues of material fact in dispute. The Arbitrator then conducted a hearing over several days during January, February and March 2007, followed by post-hearing briefings.

In the course of these post-hearing proceedings, Fairchild argued that Alcoa had not sufficiently proved the actual costs of $16.3 million for which it sought indemnification. In response, Alcoa pointed to evidence on the record that it contends amply supported its claim. But it then offered to provide to the Arbitrator a copy of the 14 volumes of invoices and receipts documenting its expenditures, materials Alcoa states it had supplied to Fairchild during the course of discovery. Fairchild objected to Alcoa's offer and the Arbitrator declined to accept the additional material at that point.

The Arbitrator rendered his ruling in an Arbitration Decision and Award (the "Award") issued on June 21, 2007. The Award rejected Fairchild's position in all material respects. Specifically, the Arbitrator concluded that, with some exceptions, Alcoa's claims for indemnification, including those involving corrective work not required by regulators, was sufficiently supported by the language of the Agreement and related evidence as necessary and reasonable and performed at reasonable cost, and that Fairchild's allegations of Alcoa's violations of the notice provision of the Agreement were unwarranted. Of the total of $16,385,463.92 that Alcoa had claimed, the Award granted Alcoa damages amounting to $12,455,585.88. That sum reflected deductions of $3,303,643.48 for work the Arbitrator found was not indemnifiable because it was either not necessary or commercially reasonable, or not performed at a reasonable cost. The Award also included credits of $264,106.92 in respect of certain tax benefits Alcoa had received, and an additional $926,565.13 it potentially would receive in this regard.

In full settlement of all claims and counter-claims submitted in the arbitration, and denying all those not expressly granted, the Arbitrator ordered that Alcoa be paid, within 30 days of the Award, the $8.45 million in the reserve account and the balance of $4,005,585.88 from the escrow account.

Claiming that it was due additional tax benefit credits under another provision of the Agreement, Fairchild blocked the release of "funds by the escrow agent and wrote to Alcoa proposing further mediation and arbitration proceedings pertaining to this issue. Fairchild subsequently filed the instant petition to vacate the Award.

II. DISCUSSION

A. LEGAL FRAMEWORK AND STANDARD OF REVIEW

When Congress adopted the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 1 et seq., in 1924, it responded to concerns over the complexity, duration, delays and costs of litigation in federal courts, with the attendant adverse effects that unduly prolonged judicial proceedings engendered for litigants, the courts, and society in general. See H.R.Rep. No. 68-96, at 2 (1924). In addressing these concerns, the FAA recognized the value of arbitration properly conducted as a means by which parties could "settle their disputes expeditiously and economically." See Hearing on S. 4213 and S. 4214 Before a Subcomm. of the S. Comm. on the Judiciary, 67th Cong. 2 (1923). The statute contemplated an alternative to litigation that would be simpler, faster and less costly for all concerned. As envisioned, this system of dispute resolution would be liberated from many of the onerous demands and constraints associated with legal proceedings in court. See id.; see also S.Rep. No. 68-536, at 3 (1924) (noting that avoiding delays in litigation and "[t]he settlement of disputes by arbitration appeals to big business and little business alike, to corporate interests as well as to individuals."); Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (acknowledging that the FAA "reflects a legislative recognition of the `desirability of arbitration as an alternative to the complications of litigation.'") (quoting Wilko v. Swan, 346 U.S. 427, 431, 74 S.Ct. 182, 98 L.Ed. 168 (1953)).

This recognition of the immense public and private benefits of arbitration is reflected in judicial doctrine. Since the inception of the FAA an extensive body of law has developed reaffirming the strong federal policy that favors honoring arbitration agreements and ensuring that the presumed efficiency values of expeditiousness, economy and simplicity in reaching the merits and resolving disputes are safeguarded in arbitration proceedings. See Folkways Music Publishers, Inc. v. Weiss, 989 F.2d 108, 111 (2d Cir.1993) ("Arbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."). To these ends, federal courts underscore that arbitration is not intended to incorporate all the procedural rules and niceties that govern legal combat in judicial proceedings. See Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir.1997) (noting that arbitration "`need not follow all the niceties observed by the federal courts") (quoting Bell Aerospace Co. Div. of Textron v. Local 516, 500 F.2d 921, 923 (2d Cir.1974)).

The same judicial attitude imbues the substantial latitude and extensive deference accorded on judicial review to determinations of arbitrators. See Pike v. Freeman, 266 F.3d 78, 86 (2d Cir.2001) ("Federal court review of an arbitral award is highly deferential...."); Tempo Shain, 120 F.3d at 19 (Arbitrators' awards "are generally accorded great deference under the FAA," and judicial review of arbitration rulings is "narrowly limited."); see also United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 98 L.Ed.2d 286 (1987) ("[A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision.").

Consistent with this generally broad application of the FAA, courts have elaborated a body of specific rules designed to capture the essence of the statute's policy and have rigorously...