TA Assocs., L.P. v. Gandy

• Decision Date: 09 June 2014
• Docket Number: No. 654360/2013.,654360/2013.
• Citation: 993 N.Y.S.2d 646 (Table)
• Parties: TA ASSOCIATES, L.P., as successor to TA Associates, Inc., TA Associates X, L.P., TA Atlantic and Pacific V, L.P., TA Strategic Partners Fund II, L.P., TA Strategic Partners Fund II–A, L.P., TA Investors II, L.P., and TA Subordinated Debt Fund II L.P., Petitioners, v. James GANDY, Hary Gandy, and Trent Garmoe, Respondents.
• Court: New York Supreme Court

993 N.Y.S.2d 646 (Table)

TA ASSOCIATES, L.P., as successor to TA Associates, Inc., TA Associates X, L.P., TA Atlantic and Pacific V, L.P., TA Strategic Partners Fund II, L.P., TA Strategic Partners Fund II–A, L.P., TA Investors II, L.P., and TA Subordinated Debt Fund II L.P., Petitioners
v.
James GANDY, Hary Gandy, and Trent Garmoe, Respondents.

No. 654360/2013.

Supreme Court, New York County, New York.

June 9, 2014.

Opinion

EILEEN BRANSTEN, J.

This petition to confirm an arbitration award comes before the Court on three motions. In motion sequence 002, Petitioners TA Associates, L.P., as successor to TA Associates, Inc., TA Associates X, L.P., TA Atlantic and Pacific V, L.P., TA Strategic Partners Fund II, L.P., TA Strategic Partners Fund II–A, L.P., TA Investors II, L.P., and TA Subordinated Debt Fund II, L.P. (collectively, “TA” or “Petitioners”) seek to confirm an arbitration award. Respondent Trent Garmoe (“Respondent”) opposes and cross-moves to vacate the award and dismiss the petition. In motion sequences 005 and 006, Petitioners move to strike Exhibits 1 and 16, respectively, to the Affirmation of Todd A. Higgins, Esq. in Opposition to TA's Petition to Confirm. Respondent opposes both motions.

Respondents James Gandy and Hary Gandy (together with Respondent Garmoe, “Respondents”) have not appeared in this action. For the reasons set forth below, the petition to confirm is granted, the cross-motion to vacate is denied, and both motions to strike are denied as moot.

Background

Respondents were founders, early employees and stakeholders of Gandi Innovations Holdings LLC (“Gandi Innovations”). In September 2007, TA invested $75 million into Gandi Innovations pursuant to a Membership Purchase Agreement (“Purchase Agreement”) in exchange for a 39% equity interest (the “Transaction”). Of the $75 million investment, $25 million was a subordinated loan and $50 million was a cash payment. TA alleges that the only stockholder who should have received cash, according to the Purchase Agreement, was non-party Peter Afeiche, who received $40 million.

TA alleges that Afeiche transferred $38 million to the Respondents in a fraudulent scheme to induce TA's investment and avoid certain taxes. TA further alleges that the Respondents induced the $75 million investment by representing that only Afeiche, and not Respondents, would receive any cash from TA's investment. TA alleges that Respondents' continued ownership was an indicator of Respondents' commitment to Gandi Innovations. Garmoe contends that TA knew of the proposed cash-out of the Respondents.

TA alleges that it learned that Respondents' received $38 million as a result of the Transaction for the first time in December 2008. In January 2009, TA filed an arbitration claim under the Purchase Agreement. In May 2009, Gandi Innovations filed bankruptcy in Canada.

In August and October 2011, TA and the three Respondents participated in an arbitration before Arbitrator Joseph McLaughlin. Arbitrator McLaughlin heard testimony from nearly two dozen witnesses. Before issuing an award Arbitrator McLaughlin passed away. The parties appointed the Honorable Kathleen Roberts as Arbitrator in February 2012. Follow-up evidentiary hearings were held in December 2012, and closing arguments were heard in March 2013.

On December 4, 2013, Arbitrator Roberts issued the Modified Final Award (the “Award”). Arbitrator Roberts found that the Respondents committed fraud and breached their fiduciary duties to TA as a shareholder. The Award granted TA rescissory damages, with joint and several liability against all three Respondents, in the amount of $118,968,750, comprised of $75,000,000, plus interest, totaling $116,568,750, as well as $2,400,000 in arbitration costs. The Award also granted TA damages for breach of fiduciary duty, in the amount of $38 million, against the three Respondents individually: (i) $26,500,000, plus interest, for a total of $40,399,250, assessed individually against James Gandy; (ii) $9,500,000, plus interest, for a total of $14,482,750, assessed individually against Hary Gandy; and (iii) $2,000,000, plus interest, for a total of $3,049,000, assessed individually against Respondent Garmoe.

Petitioners now seek confirmation of the Award. Respondent Garmoe opposes the confirmation and cross-moves to vacate. Respondents James Gandy and Hary Gandy have not appeared in this action.

I.Standard on a Petition to Confirm an Arbitration Award

The parties do not dispute that both CPLR Article 75 and the Federal Arbitration Act (“FAA”) apply to this controversy. The FAA relates to the enforcement of arbitration agreements in contracts affecting interstate commerce. See 9 U.S.C. § 2 (2012) ; Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp ., 4 NY3d 247, 252 (2005) ; Morgan Stanley DW Inc. v. Afridi, 13 AD3d 248 (1st Dep't 2004). The parties do not dispute that the transactions here affected interstate commerce. CPLR § 7510 states 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] award will not be vacated, even ... [if the arbitrator's] interpretation ... misapplies substantive rules of law, unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on [the arbitrator's] power.” Silverman v. Benmor Coats, Inc., 61 N.Y.2d 299, 308 (1984). CPLR section 7511 provides that a court shall vacate an arbitration award if the rights of a party to the arbitration were prejudiced by (i) fraud or misconduct, (ii) partiality of arbitrators, (iii) arbitrators exceeding their power, or (iv) failure to follow the procedures of CPLR Article 75.

The grounds set forth in the FAA for vacating an award are similar to those under CPLR 7511. See Wien & Malkin LLP v. Helmsley–Spear, Inc., 6 NY3d 471, 480 (2006). The FAA explicitly permits vacatur of an award due to (i) fraud or corruption, (ii) partiality of the arbitrators, (iii) misconduct by the arbitrators depriving a party of a fundamentally fair hearing, or (iv) the arbitrators exceeded their power. See 9 U.S.C. § 10(a) (2012) ; TiVo Inc. v. Goldwasser, 13–2180–CV, 2014 WL 998194, at *5 (2d Cir. Mar. 17, 2014).

“In addition, as judicial gloss on these specific grounds for vacatur [listed in the FAA] ... [the Second Circuit has] held that the court may set aside an arbitration award if it was rendered in manifest disregard of the law.” Schwartz v. Merrill Lynch & Co ., Inc., 665 F.3d 444, 451 (2d Cir.2011) (internal citation omitted). “Vacating an award for manifest disregard of the law requires a showing that the governing law alleged to have been ignored by the arbitrators was well defined, explicit, and clearly applicable, and that the arbitrator knew about the existence of a clearly governing legal principle but decided to ignore it or pay no attention to it.” TiVo, 2014 WL 998194, at *1 (internal quotations omitted). “It is established law that judicial review of arbitration awards is extremely limited, and an award will be upheld so long as there is even a barely colorable justification for the outcome.” Wien & Malkin LLP v. Helmsley—Spear, Inc., 6 NY3d 471, 479 (2006). A court should not vacate an arbitration award for the arbitrators' factual or legal errors, or substitute its own judgment for that of the arbitrators. Id. at 479–80. A party seeking to vacate an award “bears the heavy burden of showing that the award falls within a very narrow set of circumstances delineated by statute and case law.” Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir.2003).

II.TA's Petition to Confirm and Garmoe's Cross–Motion to Vacate

Garmoe advances three arguments against confirmation of the Award. First, Garmoe argues that the Arbitrator Roberts exceeded her power by awarding rescissory damages when the Purchase Agreement stated that the “Arbitrator shall not have power to award damages in excess of actually compensatory damages.” Second, Garmoe alleges that Arbitrator Roberts committed misconduct by declining to issue a subpoena to an out-of-state, non-party witness. Finally, Garmoe argues that that Arbitrator Roberts acted in manifest disregard of applicable law by awarding rescissory damages given the facts before her. The Court will consider each of these arguments in turn.

Arbitrator Did Not Exceed Her Powers

Garmoe argues that the Award should be vacated because the arbitrator went beyond the scope of her powers by awarding rescissory and disgorgement damages to TA. Garmoe argues that the Purchase Agreement limited an award to compensatory damages only, and that the Award effectively granted rescission to TA and required disgorgement of monies received by Garmoe.

Section 8.14(b) of the Purchase Agreement provides that “[t]he Arbitrator shall not have power to award damages in excess of actual compensatory damages and shall not multiply actual damages or award punitive damages or any other damages that are specifically excluded under this Agreement.” See Verified Petition Ex. 1 at 35.

Petitioners argue that the...