IN RE: the Proceeding by Eugene SHALIK and James DeVita

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Surrogate's Court, Nassau County, New York.

IN RE: the Proceeding by Eugene SHALIK and James DeVita, as preliminary co-executors of the Estate of Pearl B. Kalikow, Deceased.  To disqualify Dennis A. Konner from serving as arbitrator in respect of certain claims brought forth by Edward M. Kalikow and Laurie Platt in a Demand and Notice of Intention to Arbitrate dated September 24, 2008.

Decided: February 04, 2009

Meltzer Lippe Goldstein & Breitstone, Mineola, for Respondents, Edward M. Kalikow and Laurie Platt. Attorney General of the State of New York, New York, for Ultimate Charitable Charities Bureau Beneficiaries. Holland & Knight LLP, New York, for Co-Executor, Eugene Shalik. Morris Downing & Sherred, LLP, Newton, NJ, for Co-Executor, James DeVita. Duane Morris LLP, New York, for Respondent, Dennis A. Konner.

The court has before it a petition and supplemental order to show cause dated November 19, 2008, wherein Eugene Shalik and James DeVita, the preliminary co-executors of the Estate of Pearl B. Kalikow, deceased (hereafter “Petitioners”), seek an order disqualifying Dennis A. Konner (“Konner”) from serving as arbitrator with respect to a notice of arbitration dated September 24, 2008 (the “Current Arbitration Demand”).   The petition is opposed by the decedent's children, Edward M. Kalikow (“Kalikow”) and Laurie Platt (“Platt”, Kalikow and Platt will be sometimes referred to collectively as “Respondents”).   The order to show cause contains a temporary restraining order staying Respondents from taking any steps in connection with the arbitration on the Current Arbitration Demand pending determination of the disqualification motion.   The stated ground for the requested disqualification is that the arbitrator is to be called as a material witness with respect to the facts and circumstances surrounding the subject matter of the arbitration “whose testimony will be vital to Petitioners' defense of the claims set forth in Respondents Arbitration Demand.”   For the reasons hereinafter set forth, Petitioners' motion is denied without prejudice to any claims of arbitrator misconduct that Petitioners might assert when the arbitration is complete and an award presented to the court for confirmation or vacatur.   The temporary restraining order is also vacated.

PRIOR PROCEEDINGS

In June of 2006, Respondents served their first demand to arbitrate on Petitioners and Petitioner Shalik moved for a stay of arbitration.   Petitioners thereupon moved to disqualify Konner based, inter alia, on his personal and professional relationship with Kalikow and entities controlled by Kalikow and such motion was granted by decision dated December 13, 2006 (Decision No. 904).1  Respondents moved to renew and reargue and by decision dated March 20, 2007 (Decision No. 116),2 the motion to renew was denied and the motion to reargue granted with the effect that Petitioners' first motion to disqualify Konner was denied.   An order to that effect was entered on March 29, 2007.   Petitioners appealed from the order of March 29, 2006 and such order was affirmed (Matter of Kalikow, 58 A.D.3d 849, 872 N.Y.S.2d 508 [2d Dept. 2009] ).

By decision dated October 13, 2006 (Decision No. 632),3 the court ruled that the dispute was subject to arbitration.   A decree to that effect was entered on November 22, 2006 and Petitioner Shalik appealed from such decree and it was affirmed (Matter of Kalikow, 58 A.D.3d 846, 872 N.Y.S.2d 511 [2d Dept. 2009] ).

By notice of motion dated April 30, 2007 and amended notice of motion dated May 8, 2007, Petitioners again moved to disqualify Konner.   Following an evidentiary hearing on June 26, 2007, this second disqualification motion was denied by decision dated November 9, 2007 (Decision No. 773) and order dated January 3, 2008.   Petitioners have appealed from the order of January 3, 2008 and this order was affirmed (Matter of Kalikow, 58 A.D.3d 849, 872 N.Y.S.2d 508 [2d Dept. 2009] ).

Konner conducted a hearing with respect to the first arbitration demand on April 9, 2008 and issued a decision/award dated April 29, 2008.   Respondents moved to confirm the award and Petitioners cross-moved to vacate.   This court confirmed the award by decision dated September 26, 2008 (Decision No. 429) and order dated October 10, 2008.

Meanwhile, on February 28, 2007, Petitioners commenced an action in Supreme Court against Hewlett Associates L.P. (“Hewlett”),4 Kalikow and Platt (the “Hewlett Action”).   That action was transferred to this court by stipulation of the parties effective May 9, 2007.   Prior to the transfer, Respondents and Hewlett had moved to stay the Hewlett Action and compel arbitration of the dispute.   By decision dated March 27, 2008 (Decision No. 65) and order dated May 12, 2008, this court granted Respondents' motion to stay the lawsuit and compel arbitration.

Petitioners have communicated their intention to appeal from the orders of May 12, 2008 and October 10, 2008.

CURRENT MOTION

As previously noted the current motion seeks to disqualify Konner from serving as arbitrator because, according to Petitioners, his “testimony will be vital to Petitioners' defense of the claims set forth in Respondents Arbitration Demand.”   More specifically, Petitioners contend that Konner's testimony is critical with respect to two issues.   The first is a demand for “ [a] declaration that Hewlett Associates did not terminate and instead continued as a partnership under the terms of its limited partnership agreement and under applicable New York law ․ after the deaths of Sidney Kalikow and Pearl Kalikow and that Edward Kalikow is the sole general partner of Hewlett Associates as of this date.”   The second is a request for a declaration that Hewlett and/or Respondents do not owe decedent's estate in excess of $9,573,125 plus interest representing previously undistributed cash from Hewlett.

Konner and Respondents filed answers to the petition together with affidavits from Konner and Kalikow asserting, inter alia, that Konner did not have any personal knowledge of relevant and material facts and an affirmation by counsel Thomas J. McGowan.   Respondents' answer lists four denominated affirmative defenses 5 and a counterclaim seeking sanctions on the basis that the petition is frivolous.

Andrew M. Cuomo, the New York State Attorney General, has filed a notice of appearance but has not taken a position with respect to the petition.

 The petition was originally returnable on December 3, 2008 and adjourned on consent until January 7, 2009.   On that date the matter was set down for an evidentiary hearing and oral argument for January 16, 2009.   All parties were invited to submit written memoranda in support of their respective positions.   Both Petitioners and Respondents have submitted memoranda.   At the hearing, Petitioners, with the Court's permission, made an offer of proof as to the testimony anticipated from Konner.   Such testimony related solely to Konner's role in drafting the Hewlett Limited Partnership Agreement and amendments thereto and the related intent of the parties.   The offer of proof did not address the second issue concerning Hewlett's purported debt to the Estate of Pearl Kalikow.   Prior to hearing counsel the Surrogate advised the parties that contrary to the dicta in the Court's Decision No. 429 (September 26, 2008) wherein it was stated:  “A person who is a material witness in a proceeding cannot serve as an arbitrator in that proceeding (see Fritz v. Fritz, 186 A.D.2d 625, 588 N.Y.S.2d 415 [2d Dept. 1992] ),” on further review, the holding in Fritz v. Fritz does not support a per se disqualification where the arbitrator has personal knowledge of facts relevant and material to the proceeding.

DISCUSSION

While the legal principles controlling the situation where a contract providing for arbitration names one or more specific individuals as arbitrator may be counter-intuitive, they are the law of the state.6  “The spirit of the arbitration law being the fuller effectuation of contractual rights, the method for selecting arbitrators and the composition of the arbitral tribunal has been left to the contract of the parties” (Lipschutz v. Gutwirth, 304 N.Y. 58, 61-62, 106 N.E.2d 8 [1952] ).  “In furtherance of the laudable purposes served by permitting consenting parties to submit controversies to arbitration, the law has adopted a policy of noninterference, with few exceptions, in the mode of dispute resolution” (Matter of Sprinzen [Nomberg], 46 N.Y.2d 623, 629, 415 N.Y.S.2d 974, 389 N.E.2d 456 [1979] ).  “In the absence of a real possibility that injustice will result, the courts of this State will not rewrite the contract for the parties ․” (Matter of Siegel [Lewis], 40 N.Y.2d 687, 691, 389 N.Y.S.2d 800, 358 N.E.2d 484 [1976], quoting from Lipschutz v. Gutwirth, 304 N.Y. 58, 64, 106 N.E.2d 8 [1952] ).

Notwithstanding its recognition of these principles, the Court of Appeals has also concluded that “an award which is violative of public policy will not be permitted to stand” (Matter of Sprinzen [Nomberg], 46 N.Y.2d at 630, 415 N.Y.S.2d 974, 389 N.E.2d 456),7 and an arbitrator may be removed “[u]on a showing that there is reason to believe [he] is incapable of discharging his duties in an impartial manner ․” (Lipschutz v. Gutwirth, 304 N.Y. 58, 65, 106 N.E.2d 8 (1952) [decided under Article 84 of the Civil Practice Act] ).8

The restrictions on arbitrator action and conduct are found either in the contract of the parties or CPLR Article 75.   A brief review of the relevant portions of Article 75 is accordingly in order.

CPLR 7501 expressly forbids judicial review of the parties' disputes stating, inter alia:  “In determining any matter arising under this Article, the court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute.” 9  Protracted judicial litigation with respect to the matter is to be discouraged lest legislative policy and the parties' initial intentions be frustrated (Nationwide General Insurance Co. v. Investors Insurance Co. of America, 37 N.Y.2d 91, 95-96, 371 N.Y.S.2d 463, 332 N.E.2d 333 [1975] ).   Courts are to be guided by the fundamental principle that the resolution of disputes by arbitration is grounded in agreement of the parties (County of Sullivan v. Edward L. Nezelek, Inc., 42 N.Y.2d 123, 128, 397 N.Y.S.2d 371, 366 N.E.2d 72 [1977] ).  CPLR 7506(a) requires an oath from the arbitrator “to hear and decide the controversy faithfully and fairly ․” and the courts have found that the arbitrator's oath fixes the criteria for the performance of his duties.10  “[I]f the arbitrators, in the actual exercise of their office, prove to have been unfair or unfaithful to their obligations, their award is not impervious to judicial action ․” (Matter of Siegel [Lewis], 40 N.Y.2d 687, 691, 389 N.Y.S.2d 800, 358 N.E.2d 484 [1976] ).  “If that oath be violated and an award procured by fraud or corruption or if an award is tainted by partiality or interest of an arbitrator, it will be vacated” (Lipschutz v. Gutwirth, 304 N.Y. 58, 64-65, 106 N.E.2d 8 [1952] ).

 A determination as to whether the oath has in fact been violated must await the arbitrator's decision.   In the context of the current proceeding, this Court's duty is to determine whether it is impossible for the arbitrator “to hear and decide the controversy faithfully and fairly ․” because he is a potential material witness.   Paraphrasing the rule enunciated in Lipschutz, Petitioners' obligation was to present evidence showing that there is reason to believe that Konner is incapable of discharging his duties in an impartial manner by reason of his being a potential material witness.   Proving such a negative is no mean task particularly when the Court is under an obligation to enforce the express terms of the arbitration agreement.11  Here, this burden has not been met.   This Court concludes that Petitioners have not demonstrated by clear and convincing evidence, or otherwise, that Konner is incapable of discharging his duties in an impartial manner.

CPLR 7506[c] provides, inter alia, that:  “The parties are entitled to be heard, to present evidence and to cross-examine witnesses.”   These are the minimal guarantees of due process enunciated by the Legislature and constitute the public policy of the State.   There is no specific prohibition against the arbitrator testifying, though any such testimony must be subject to cross-examination.12

 CPLR 7511(b) sets forth the four narrow grounds upon which an arbitration award may be vacated.   These four grounds are 1) corruption, fraud, or misconduct in procuring the award;

2) partiality of an arbitrator appointed as a neutral;  3) that an arbitrator or agency making the award exceeded his power or so imperfectly executed it that a final definite award was not made;  and 4) procedural defects, unless the party failed to notice the defect and failed to object to same

(Matra Building Corp. v. Alan Kucker, 2 A.D.3d 732, 733-734, 770 N.Y.S.2d 367 [2d Dept. 2003] ).   An arbitration award cannot be vacated even if the Court concludes that the arbitrators interpretation of an agreement misconstrues or disregards its plain meaning or misapplies substantive law unless the award is violative of a strong public policy, is totally irrational, or exceeds enumerated limitations of the arbitrators powers (Id., 2 A.D.3d at 734, 770 N.Y.S.2d 367).

 A failure to establish a statutory ground for vacatur under CPLR 7511 will require confirmation of the award (Matter of Granite Worsted Mills [Cowen ], 25 N.Y.2d 451, 454, 306 N.Y.S.2d 934, 255 N.E.2d 168 [1969] ).   In New York there is a strong public policy favoring arbitration.   Consequently an award is not subject to vacatur “unless the court concludes that it is totally irrational or violative of a strong public policy” and thus in excess of the arbitrator's powers (Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146, 154-155, 630 N.Y.S.2d 274, 654 N.E.2d 95 [1995] ).

Here, consideration of possible misconduct is premature.   This court concurs with the reasoning set forth in Franks v. Penn-Uranium Corp., 4 A.D.2d 39, 40, 162 N.Y.S.2d 685 [1st Dept. 1957], rearg. denied 3 A.D.2d 1005, 165 N.Y.S.2d 434 [1st Dept. 1957], that the relief available for arbitrator misconduct in the course of arbitration proceedings is not disqualification and removal of the arbitrator, but an order vacating the award after completion of the proceedings, whereupon the court may clearly see whether a party's rights were prejudiced by such misconduct.   The paramount policy is to give effect to the terms of the contract providing for arbitration which in the subject proceeding, identifies a particular individual to serve as arbitrator and interpret the agreement.13

ARBITRATOR TESTIMONY

Few decisions have specifically addressed arbitrator testimony.   In Meehan v. Nassau Community College, 243 A.D.2d 12, 18, 676 N.Y.S.2d 178 [2d Dept. 1998], in a tri-partite arbitration, a party designated arbitrator with personal knowledge of facts was permitted to reveal his knowledge to the other arbitrators and testify to such facts during the hearing.   The Court specifically held that “[g]iven that a party-designated arbitrator may in fact be “partial,” [his] participation in the arbitration proceedings in the dual capacity of arbitrator and witness may serve as a basis for vacatur only if his behavior in this regard can be properly categorized as constituting “corruption, fraud, or misconduct” (CPLR 7511[b][1][I] ).”  (Id., 243 A.D.2d at 18, 676 N.Y.S.2d 178) The Court continued:  “It is established that an arbitrator's having personal knowledge of the subject of controversy does not constitute misconduct in and of itself [citations omitted]” (Id., 243 A.D.2d at 18, 676 N.Y.S.2d 178).   Central to the analysis used by the Meehan court was the principle that “an arbitrator's award may be vacated only on the grounds specified in the statute * * * and that, if the moving party cannot establish one of the statutory grounds, the award must be confirmed ․” (Id., 243 A.D.2d at 17, 676 N.Y.S.2d 178).   Testimony by the party designated arbitrator is not a stated statutory ground for vacating an award.

It has also been held that an arbitrator's personal knowledge of facts relating to the controversy does not provide a ground upon which to remove the designee so long as the relationship has been fully disclosed to the opposing party (Matter of Siegel [Lewis], 40 N.Y.2d 687, 389 N.Y.S.2d 800, 358 N.E.2d 484 [1976];  State Wide Ins. Co. v. Klein, 106 A.D.2d 390, 482 N.Y.S.2d 307 [2d Dept. 1984] ).   Indeed, it has been noted by the Courts that arbitrators are often selected based upon their personal knowledge or a relationship with the parties that is likely to provide them with personal knowledge of the controversy.   Thus, for example, in Matter of Siegel [Lewis], 40 N.Y.2d 687, 389 N.Y.S.2d 800, 358 N.E.2d 484 [1976], the named arbitrators were the business's attorney and accountant.   It is thus apparent that personal knowledge does not on its own disqualify an arbitrator.

In Fritz v. Fritz, 186 A.D.2d 625, 588 N.Y.S.2d 415 [2d Dept. 1992], the Court addressed an arbitration where the arbitrator had personal knowledge and did not testify.   The critical holding in Fritz v. Fritz was that “[t]he arbitrator violated his duty by resorting to evidence that was not presented at the hearing, and by using personal knowledge of the disputed marital asset.” 14  This was a plain violation of the due process requirements set forth in CPLR 7506[c], as the Fritz arbitrator denied the husband the opportunity to cross examine and/or rebut evidence that was not presented but considered by the arbitrator.   Assuming that the arbitrator has personal knowledge respecting facts that are material and relevant to the subject matter of the arbitration, so long as he testifies or advises the parties thereof and these facts are subject to cross examination and/or rebuttal there is no apparent violation of CPLR 7506[c] (see Meehan v. Nassau Community College, 243 A.D.2d 12, 676 N.Y.S.2d 178 [2d Dept. 1998] ).   Moreover, if the arbitrator has such knowledge and does not testify and his ultimate determination is based upon and supported by the evidence presented at the hearing, to the extent that the outcome is not totally irrational or violative of public policy (Spear, Leeds & Kellogg v. Bullseye Securities, Inc., 291 A.D.2d 255, 738 N.Y.S.2d 27 [1st Dept. 2002], Thompson v. SLT Ready Mix, 245 A.D.2d 911, 912, 666 N.Y.S.2d 798 [3d Dept. 1997] ), the failure to testify will probably not constitute misconduct requiring vacatur of the award.   In any event, such a determination must await the conclusion of the arbitration proceeding so the court can review the arbitrator's conduct in the entirety.

MATERIALITY

 Petitioners acknowledge that the intent of the parties to the Hewlett Limited Partnership Agreement and amendments is only relevant if the agreements are ambiguous.   While Petitioners argue that the agreement is in fact ambiguous, it is not for the court to make such a determination (CPLR 7501).   Courts are bound by an arbitrator's interpretation of a contract (TC Contracting, Inc. v. 72-02 Northern Blvd. Realty Corp., 39 A.D.3d 762, 833 N.Y.S.2d 622 [2d Dept. 2007] ).  “Indeed, an arbitrator's interpretation of the parties contract is impervious to judicial challenge ․” (Maross Constr. v. Central N.Y. Regional Transp. Auth., 66 N.Y.2d 341, 346, 497 N.Y.S.2d 321, 488 N.E.2d 67 [1985] ).   Absent a conclusion by the arbitrator that the agreements are ambiguous, there is no need for the testimony that Petitioners seek to obtain from the arbitrator, i.e., such proposed testimony is neither relevant nor material.   The Court further notes that an arbitrator is not bound by the substantive law or the rules of evidence (Silverman v. Benmor Coats, Inc., 61 N.Y.2d 299, 308, 473 N.Y.S.2d 774, 461 N.E.2d 1261 [1984] ).   Thus the question of materiality must await the arbitrator's ruling on the ambiguity question and in that respect, the petition is dismissed as premature.

CONCLUSION

This court views the issue presented as whether the ability of Konner to act fairly and impartially is completely nullified by his personal knowledge and his potential role as a material witness.   While the dual role of witness and adjudicator may be unacceptable in the trial context, it is not prohibited in the setting of a private arbitration where the arbitrator was pre-selected by the parties with full knowledge of his relationship to the parties and the subject matter of the agreement.   Such knowledge and its role in the arbitration will only be grounds for disqualification if it meets the standards of CPLR 7511 for vacating an award.   Inasmuch as the petition is denied because there is no per se rule disqualifying an arbitrator who may be a witness and the petition is accordingly premature, the court will not address the other issues raised by Respondents in opposition at this time.   The court does not find that the petition is frivolous and Respondents' counterclaim for sanctions is accordingly dismissed.   As noted above, the temporary restraining order is vacated.

Settle decree.

FOOTNOTES

1.   Matter of Kalikow, 14 Misc.3d 1203(A), 2006 WL 3681149 [Sur. Ct., Nassau County 2006]

2.   In re Shalik, 15 Misc.3d 1106(A), 2007 WL 841005 [Sur. Ct., Nassau County 2007]

3.   In re Shalik, 13 Misc.3d 1222(A), 2006 WL 2944658 [Sur. Ct., Nassau County 2006]

4.   The decedent, Kalikow and Platt were the partners in Hewlett at the time of decedent's death.

5.   The defenses are:  (1) bar of collateral estoppel and/or res judicata;  (2) failure to establish that Konner is a material witness;  (3) the assertion that Shalik is a witness on the debt of Hewlett to the Estate;  and (4) the petition is barred as untimely.   The Court does not view items (2) and (3) as affirmative defenses and will not address items (1) and (4) due its denial of the petition on other grounds.

6.   This court noted this when it granted reargument and reversed its earlier order disqualifying Konner.   See Decision No. 116, dated March 20, 2007.   In its January 27, 2009 affirmance of that order, the Appellate Division confirmed this court's reading of Matter of Siegel [Lewis], 40 N.Y.2d 687, 389 N.Y.S.2d 800, 358 N.E.2d 484 [1976] (see Matter of Kalikow, 58 A.D.3d 849, 872 N.Y.S.2d 508 [2d Dept. 2009] ).

7.   Such public policy is usually exhibited in a statute or decisional law and, “courts must be able to examine an arbitration agreement or an award on its face, without engaging in extended fact finding or legal analysis, and conclude that public policy precludes its enforcement.”  Id., 46 N.Y.2d at 631, 415 N.Y.S.2d 974, 389 N.E.2d 456.

8.   CPLR 7511(b)(1)(ii) states that “partiality of an arbitrator appointed as a neutral ․” is a ground for vacating an award, apparently acknowledging that a non-neutral need not be impartial (see, Meehan v. Nassau Community College, 243 A.D.2d 12, 676 N.Y.S.2d 178 [2d Dept. 1998], discussed infra ).   Though the Commentators state that this provision is addressed to tri-partite arbitration, it appears to also apply where the arbitration contract designates an arbitrator by name as such arbitrator is not “appointed as a neutral”.

9.   “An arbitrator's paramount responsibility is to reach an equitable result, and the courts will not assume the role of overseers to mold the award to conform to their sense of justice.”  Matter of Sprinzen [Nomberg], 46 N.Y.2d 623, 629, 415 N.Y.S.2d 974, 389 N.E.2d 456 [1979].

10.   The making of such oath may be waived (Institute of International Education v. Permanent Mission of Spain to the United Nations, 118 A.D.2d 433, 435-36, 499 N.Y.S.2d 718 (1st Dept.), appeal denied 68 N.Y.2d 608, 506 N.Y.S.2d 1032, 498 N.E.2d 434 [1986] ) (the arbitrator's failure to take an oath is waivable if the parties proceed without raising an objection).

11.   Were the burden any lighter it would be a clear invitation for a party to phrase a request for arbitration so as to encompass areas within the personal knowledge of the named arbitrator as a basis for disqualification and identify the arbitrator as a material witness.

12.   Thus, for example, in Nestel v. Nestel, 38 A.D.2d 942, 331 N.Y.S.2d 241 [2d Dept. 1972], an award was vacated where the arbitrators took the testimony of minor children in camera, denying the right of cross examination.

13.   The arbitration provision, Article 21 of Certificate of Amendment of Hewlett Associates, a Limited Partnership, dated January 3, 1980, states, inter alia, that:  “Any controversy or claim arising out of or relating to this Agreement or to the interpretation, breach or enforcement thereof shall be submitted to DENNIS A. KONNER, ESQ ․”

14.   The Fritz Court's further conclusion that “under the circumstances of this case, the familial relationship provides such strong evidence of partiality that the arbitrator should have disqualified himself ․” (Id., 186 A.D.2d at 626, 588 N.Y.S.2d 415) is more in the nature of a value judgment and admonition than the holding in the case.   Thus while this Court should and will consider evidence of the arbitrator's relationship to the parties and the issue in controversy on the question of “partiality”, absent the issuance of an award clearly demonstrating such partiality, evidence of partiality is unlikely to require disqualification at this point in the process.

JOHN B. RIORDAN, J.