MATTER OF HOUSEHOLD MFG. AND KOWIN DEV. CORP.
| Decision Date | 01 March 1993 |
| Docket Number | No. 92 C 7250.,92 C 7250. |
| Citation | 822 F. Supp. 505 |
| Parties | In the Matter of the Arbitration Between HOUSEHOLD MANUFACTURING, INC., and KOWIN DEVELOPMENT CORP. |
| Court | U.S. District Court — Northern District of Illinois |
David B. Bayless, Wilber H. Boies, Catherine A. Brunton, McDermott, Will & Emery, P.C., Chicago, IL, for plaintiff.
J. Patrick Herald, William Michael Sneed, Baker & McKenzie, Chicago, IL, for defendant.
In March 1988, Kowin Development Corporation (Kowin) sued Household Manufacturing, Inc. (Household), now called Eljer Manufacturing, Inc.1 (Eljer), in a United States District Court in California, alleging fraud and breach of contract in relation to the formation and operation of the joint venture between Kowin-Simonds and the Beijing Steel Files Plant of Beijing, China (the Chinese joint venture). Household invoked an arbitration clause in a contract between Kowin and Household. In December 1989, the California district court stayed the action and ordered arbitration. The arbitration hearing was conducted in June 1992, before Joseph Kostner (Kostner). On October 30, 1992, Kostner issued an award in favor of Kowin. Before us now is Household's motion to vacate or modify the arbitration award as permitted in the Federal Arbitration Act, 9 U.S.C. §§ 10-11, and Kowin's motion to confirm the award. 9 U.S.C. § 9. For the reasons stated below, the arbitration award is modified in part and confirmed in part.
Our review in this case is confined to determining whether or not the arbitration award should be confirmed. The arbitrator's findings of fact and conclusions with respect to liability have not been challenged and are presumed to be true. Many of the facts are therefore irrelevant and we include here only those that concern the damages award and those that have a direct bearing on our decision.
In 1984, Simonds Cutting Tools, N.A. (Simonds), a division of Household, entered into an agreement with Kowin to form a new corporation, Kowin-Simonds, Inc. (Kowin-Simonds). In turn, Kowin-Simonds entered into a joint venture with the Beijing Steel Files Plant of Beijing, China.
In November 1985, Kowin-Simonds obtained a loan of $2.5 million from the Bank of America, (the Kowin-Simonds loan). The Kowin-Simonds loan took the form of two separate notes, each in the amount of $1.25 million. Kowin guaranteed one note (Note A) and Household guaranteed the other note (Note B). The Bank of China also agreed to pay $1 million for certain manufacturing equipment which the Bank of China would lease to the Chinese joint venture.
Simonds received $3.5 million (the $2.5 million Kowin-Simonds loan and $1 million from the Bank of China) for its equipment. Specified equipment was transferred to the Bank of China in return for its $1 million payment, and the bank leased this equipment to the Chinese joint venture. Kowin-Simonds purchased the balance of the equipment from Simonds and contributed the equipment to the Chinese joint venture.
The Chinese joint venture failed to make a profit. After the Kowin-Simonds loan became due Kowin and Household each paid off the principal and interest on their respective notes.
On March 17, 1992, Kowin sued Household and Simonds in the United States District Court for the Central District of California, alleging fraud and breach of contract claims related to the formation and operation of the Chinese joint venture. On December 27, 1989, the district court stayed the lawsuit and ordered arbitration to proceed.2
Kostner conducted the arbitration hearing during the week of June 22, 1992. On October 30, 1992, Kostner issued his award. The arbitration award did not identify the cause (or causes) of action upon which Kostner found liability against Household and in favor of Kowin. However, there were three separate award amounts (numbered 1-3). The award in part reads as follows:
(emphasis in original). In addition, the arbitrator awarded Kowin attorneys fees.
Judicial review of an arbitration award is extremely narrow. Flender Corporation v. Techna-Quip Co., 953 F.2d 273, 278 (7th Cir.1992); Moseley, Hallgarten, Estabrook & Weeden v. Ellis, 849 F.2d 264, 267 (7th Cir. 1988). The Seventh Circuit has held that the exclusive grounds for vacating or modifying an arbitration award are specified by sections 10 and 11 of the Federal Arbitration Act (the Act). Chameleon Dental Products, Inc. v. Jackson, 925 F.2d 223, 226 (7th Cir.1991). The relevant portions of sections 10 and 11 of the Act read as follows:
9 U.S.C. § 10.
9 U.S.C. § 11.
Until recently the Seventh Circuit has not applied the "manifest disregard of the law" grounds for attacking an arbitration award. Chameleon Dental, 925 F.2d at 226. However, in Health Services Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir.1992), the court recognized that an arbitration award could be vacated for manifest disregard of the law in limited circumstances where it was shown that there was "something beyond and different than mere error in law or failure on the part of the arbitrator to understand and apply the law; it must be demonstrated that the majority of the arbitrators deliberately disregarded what they knew to be the law in order to reach the result they did." Therefore, the Health Services court narrowly applied the manifest disregard of the law standard for vacating an arbitrator's award — limiting it to those cases where the arbitrator had deliberately disregarded the law.
While the parties go into great detail explaining and discussing the ramifications of Health Services, it is not necessary for us to further consider that case. Health Services did not stretch the existing precedent very far and, in this case, Household relies primarily on statutory grounds in support of its motion to vacate the arbitrator's award. Therefore, the award may be overturned where the arbitrator deliberately disregarded the law, where there was an evident material miscalculation of figures, where the arbitrator exceeded his or her powers, or as otherwise stated in sections 10 and 11 of the Act.
Kowin maintains that the arbitrator's award is a "lump sum" award divided into distinct elements in order to assign different interest periods to the various elements. Kowin argues, therefore, that as a matter of law the award is not subject to challenge and is immune from judicial review. Kowin disputes Household's segregation of the award into first, second, and third damage awards. It argues that such a division is pure speculation since it is impossible to determine what the three damage amounts represent or how the arbitrator came up with those three numbers.
We disagree. The award does not provide a lump sum damage amount, but clearly states three damage amounts that match to the penny the proposed damages set out by Kowin in its post-hearing brief. The damage awards are distinct from each other on the face of the arbitrator's decision, and we can ascertain the specific types of damages to which the amounts correspond by referring to Kowin's post-hearing brief. We therefore review the damage awards individually, in accordance with the standards set forth above in section I.
The first award of $2,960,542 represents the entire principal amount of the Kowin-Simonds loan ($2,500,000) plus interest ($460,542). (Household appdx. at 53). It is undisputed that Household, as guarantor, paid the full principal ($1,250,000) and interest on Note B when the Chinese joint venture failed.4 This represents half of the $2,500,000 principal balance of the Kowin-Simonds loan. That damage award therefore includes an amount of $1,250,000 that was already paid by Household. Household cannot be required to pay the same amount twice. The first damage award involves an evident and material miscalculation of figures since it includes an amount that Household already paid. The award must therefore be reduced from $2,960,542 to $1,710,542. This adjusted award reflects the principal amount of Note A ($1,250,000) plus the interest on that note ($460,542).
The second award of $8,384,316 represents Kowin's share of future lost profits of the Chinese joint venture over...
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Eljer Mfg., Inc. v. Kowin Development Corp.
...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 ar......