Sorghum Complaint v CCCR NYS Court.pdf

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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SORGHUM INVESTMENT HOLDINGS
LIMITED,
Petitioner,
v.
CHINA COMMERCIAL CREDIT, INC.,
Respondent.
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Index No. _________
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MEMORANDUM OF LAW IN SUPPORT OF SORGHUM INVESTMENT HOLDINGS
LIMITED’S PETITION TO VACATE ARBITRATION AWARD
Amiad M. Kushner
Aaron Foldenauer
Katherine B. Kramer
DAI & ASSOCIATES, P.C.
Times Square Plaza
1500 Broadway, 22nd Floor
New York, New York 10036
Counsel for Petitioner Sorghum Investment
Holdings Limited
FILED: NEW YORK COUNTY CLERK 10/29/2018 04:32 PM INDEX NO. 655372/2018
NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 10/29/2018
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TABLE OF CONTENTS
PRELIMINARY STATEMENT.................................................................................................. 1
BACKGROUND.......................................................................................................................... 3
A. The Proposed Reverse Merger............................................................................ 3
B. The Parties’ Agreements..................................................................................... 3
C. Sorghum Suspends the Transaction After Discovering Potential
Criminal Conduct by Jie ..................................................................................... 4
D. Sorghum Seeks to Confirm the Whereabouts of the $3.5 Million Escrow
Payment............................................................................................................... 5
E. CCCR’s Breach Notice ....................................................................................... 6
F. Sorghum Terminates the SEA in Response to CCCR’s Breach ......................... 6
G. The Dispute Resolution Provision of the SEA.................................................... 7
H. Commencement of the Arbitration ..................................................................... 7
I. The Parties’ Proposals......................................................................................... 8
J. The Lin Declaration ............................................................................................ 9
K. The Award......................................................................................................... 10
L. Bank Records Recently Provided by TD Bank Confirm that the $3.5
Million Escrow Payment Was Deposited in Mr. Lin’s Escrow Account ......... 11
LEGAL STANDARD ................................................................................................................ 12
ARGUMENT ............................................................................................................................. 13
I. THE AWARD SHOULD BE VACATED BECAUSE IT WAS BASED
UPON FALSE AND MISLEADING STATEMENTS IN THE LIN
DECLARATION .............................................................................................. 13
II. THE AWARD SHOULD BE VACATED BECAUSE THE
ARBITRATOR EXCEEDED HER AUTHORITY BY BASING HER
RULING ON A “WILLFUL BREACH” CLAIM THAT WAS NEVER
RAISED BY THE PARTIES............................................................................ 19
A. The SEA and the Parties’ Submissions Permit the Arbitrator to
Resolve Only The “Disputes” Identified by the Parties with
Reasonable Detail in Writing ................................................................ 20
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B. No “Willful Breach” Claim Was Part of the “Dispute” Submitted
to the Arbitrator..................................................................................... 21
C. The Award Should Be Vacated Because the Arbitrator Exceeded
Her Authority by Determining the Issue of “Willful Breach” .............. 22
CONCLUSION .......................................................................................................................... 25
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TABLE OF AUTHORITIES
Cases
187 Concourse Assocs. v. Fishman
399 F.3d 524 (2d Cir. 2005) .................................................................................... 23, 24, 25
A. Halcoussis Shipping Ltd. v. Golden Eagle Liberia Ltd.
No. 88-cv-4500, 1989 WL 115941 (S.D.N.Y. Sept. 27, 1989) ........................................... 14
Accessible Dev. Corp. v. Ocean House Ctr.
4 A.D.3d 217 (1st Dep’t 2004) ............................................................................................ 17
Allied-Bruce Terminix Cos., Inc. v. Dobson
513 U.S. 265 (1995)............................................................................................................. 12
Bauer v. Carty & Co., Inc.
246 Fed. Appx. 375 (6th Cir. 2007)..................................................................................... 14
Bevona v. Supervised Cleaning & Maint. Co.
160 A.D.2d 605 (1st Dep’t 1990) ........................................................................................ 17
Biotronik Mess-Und Therapiegeraete GmbH & Co. v. Medford Med. Instrument Co.
415 F. Supp. 133 (D.N.J. 1976)........................................................................................... 14
Bonar v. Dean Witter Reynolds, Inc.
835 F.2d 1378 (11th Cir. 1988) ..................................................................................... 17, 18
Brass v. Am. Film Techs.
987 F.2d 142 (2d Cir. 1993) ................................................................................................ 14
Connaughton v. Chipotle Mexican Grill, Inc.
29 N.Y.3d 137 (2017).......................................................................................................... 14
Daniel v. Penrod Drilling Co.
393 F. Supp. 1056 (E.D. La. 1975)...................................................................................... 18
DiRussa v. Dean Witter Reynolds, Inc.
121 F.3d 818 (2d Cir. 1997) ................................................................................................ 19
Ecopetrol S.A. v. Offshore Expl. & Prod. LLC
46 F. Supp. 3d 327 (S.D.N.Y. 2014) ................................................................................... 20
Fahnestock & Co., Inc. v. Waltman
935 F.2d 512 (2d Cir. 1991) .......................................................................................... 19, 22
Greenapple v. Capital One, N.A.
92 A.D.3d 548 (1st Dep’t 2012) .......................................................................................... 18
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HK. Porter Co. v. Goodyear Tire & Rubber Co.
536 F.2d 1115 (6th Cir. 1976) ............................................................................................. 18
Hughes Aircraft Co. v. Elec. & Space Technicians, Local 1553, AFL-CIO
822 F.2d 823 (9th Cir. 1987) ............................................................................................... 21
In re Colorado Energy Management, LLC v. Lea Power Partners, LLC
114 A.D.3d 561 (1st Dep’t 2014) ................................................................ 19, 20, 22, 23, 25
In re Estate of Wagner
36 Misc. 3d 1219(A) (N.Y. Surr. Ct. 2010)......................................................................... 18
In re Lightfoot
217 F.3d 914 (7th Cir. 2000) ............................................................................................... 18
In re Melun Indus., Inc.
898 F. Supp. 990 (S.D.N.Y. 1990) ...................................................................................... 19
In re Time Warner Inc. Secs. Litig.
9 F.3d 259 (2d Cir. 1993) .................................................................................................... 14
In re Ushkow
34 A.D.2d 159 (2d Dep’t 1970)........................................................................................... 18
Jock v. Sterling Jewelers Inc.
646 F.3d 113 (2d Cir. 2011) .......................................................................................... 19, 20
Junius Construction Co. v. Cohen
257 N.Y. 393 (1931)............................................................................................................ 14
Kalgren v. Cent. Mutual Ins. Company
68 A.D.2d 549 (1st Dep’t 1979) .................................................................................... 16, 17
Karppinen v. Karl Kiefer Machine Co.
187 F.2d 32 (2d Cir. 1951) .................................................................................................. 14
Matteson v. Ryder Sys. Inc.
99 F.3d 108 (3d Cir. 1996) ............................................................................................ 20, 21
Metropolitan Life Insurance Company v. Noble Lowndes International, Inc.
84 N.Y.2d 430 (1994).......................................................................................................... 24
Minn. Nurses Ass’n v. North Memorial Health Care
822 F.3d 414 (8th Cir. 2016) ............................................................................................... 20
Morgan Stanley DW Inc. v. Afridi
13 A.D.3d 248 (1st Dep’t 2004) .......................................................................................... 12
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Nat’l Cas. Co. v. First State Ins. Grp.
430 F.3d 492 (1st Cir. 2005)................................................................................................ 14
Nat’l Indem. Co. v. IRB Brasil Resseguros S.A.
164 F. Supp. 3d 457 (S.D.N.Y. 2016) ................................................................................. 14
Sci. Dev. Corp. v. Schonberger
156 A.D.2d 253 (1st Dep’t 1989) ........................................................................................ 17
Shaw Grp. Inc. v. Triplefine Int'l Corp.
322 F.3d 115 (2d Cir. 2003) ................................................................................................ 12
Stolow v. Greg Manning Auctions Inc.
258 F. Supp. 2d 236 (S.D.N.Y. 2003) ................................................................................. 14
Thule AB v. Advanced Accessory Holding Corp. 2009 WL 928307 (S.D.N.Y. Apr. 2,
2009).................................................................................................................................... 20
Trade & Transp., Inc. v. Natural Petroleum Charterers Inc.
931 F.2d 191 (2d Cir. 1991) ................................................................................................ 21
Statutes
9 U.S.C. §10(a) ............................................................................................................................ 13
9 U.S.C. §10(a)(1)........................................................................................................................ 13
9 U.S.C. §10(a)(4)........................................................................................................................ 19
9 U.S.C. §11(b)............................................................................................................................ 13
NY CPLR §7511(b)(1) .......................................................................................................... 13, 17
NY CPLR §7511(b)(1)(i)............................................................................................................. 16
NY CPLR §7511(b)(1)(iii) .......................................................................................................... 19
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Petitioner Sorghum Investment Holdings Limited (“Sorghum”) submits this
memorandum, together with the accompanying Affirmation of Amiad Kushner (“Kushner
Aff.”) and the exhibits attached thereto, and the Affirmation of Dawei Gongsun (“Gongsun
Aff.”) and the exhibit attached thereto, in support of its petition (the “Petition”) to vacate an
arbitration award (the “Award”) dated July 30, 2018 issued by the American Arbitration
Association’s International Centre for Dispute Resolution in an arbitration (the “Arbitration”)
between Sorghum and Respondent China Commercial Credit, Inc. (“CCCR”) arising out of a
Share Exchange Agreement among Sorghum and CCCR, dated August 9, 2017 (the “SEA”).
PRELIMINARY STATEMENT
This Petition arises from CCCR’s successful effort to defraud an arbitrator in a dispute
arising from a failed cross-border merger. CCCR’s attorney declarant brazenly concealed the
existence of a $3.5 million payment that is at the heart of the parties’ dispute. The Award must
be vacated because it was procured by fraud and undue means.
In 2017, CCCR (a company traded on Nasdaq) and Sorghum agreed to a “reverse
merger” transaction. In connection with the transaction, a Sorghum affiliate agreed to pay $3.5
million to Mr. Yang Jie (“Mr. Jie”), a CCCR executive who was also its largest shareholder.
Pursuant to an escrow agreement, the $3.5 million payment was required to be held in escrow
in the attorney trust account of a New York attorney, Mr. Yi Lin (“Mr. Lin”), and released to
Mr. Jie only if the transaction was consummated.
In December 2017, Sorghum terminated the transaction after discovering multiple
irregularities concerning Mr. Jie, including the fact that he was under criminal investigation in
China for a massive securities fraud, a fact which CCCR had not disclosed publicly. Moreover,
Sorghum was unable to obtain written confirmation from Mr. Lin that he was holding the $3.5
million in escrow in New York pursuant to the escrow agreement.
In January 2018, CCCR initiated an arbitration against Sorghum. The status of the $3.5
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million escrow payment was disputed in the arbitration and was critical to the arbitrator’s
decision. Sorghum contended that its affiliate had paid the $3.5 million, but never received
written confirmation of Mr. Lin’s receipt of the funds.
CCCR submitted to the arbitrator a declaration from Mr. Lin, denying that he ever
received the $3.5 million in escrow funds. Mr. Lin attached to his declaration his prior
correspondence with Sorghum’s counsel, in which Mr. Lin exclaimed:
You made a “demand” for “a return of the funds and interest”.
You provided no proof for the alleged “funds”. What “funds”?
How were the “funds” made or deposited? I expect you to
answer these questions before you make a serious demand to
another attorney for the return of unidentified “funds.”1
Based upon Mr. Lin’s declaration and the annexed correspondence, the arbitrator concluded
not only that Mr. Lin had never received the $3.5 million, but also that it was not credible that
Sorghum’s affiliate had ever made the required $3.5 million payment.
Mr. Lin’s declaration concealed the fact that he actually did receive the $3.5 million in
escrow funds in his attorney trust account. It was only in early October 2018 that Sorghum
obtained proof that Mr. Lin had, in fact, received the $3.5 million in his attorney trust account.
This information could not have been discovered before the Award was issued because the
arbitration was expedited and did not allow for discovery.
Based on the false narrative provided by CCCR’s declarant Mr. Lin, the arbitrator found
that Sorghum “willfully breached” the merger agreement. In making this decision, the
arbitrator relied heavily on Mr. Lin’s declaration. The arbitrator did not know that Mr. Lin had
in fact received and concealed the $3.5 million payment. Under the circumstances, the Award
must be vacated because it was procured by fraud and undue means. See Point I, infra.
Alternatively, the Award must be vacated because it was based upon the arbitrator’s
finding of “willful breach,” an issue that was never raised by the parties. The arbitrator
1
See Kushner Aff. Ex. S at 7.
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exceeded her authority by resolving an issue that was never submitted by the parties. See Point
II, infra.
For these reasons and as more fully explained below, the Court should vacate the
Award.
BACKGROUND
A. The Proposed Reverse Merger
In early 2017, representatives of CCCR approached Shanghai Wheat Asset
Management Co., Ltd. (“Wheat”), a financial services company based in Shanghai, People’s
Republic of China (“PRC”), to discuss a potential “reverse merger” transaction (the
“Transaction”). Wheat is a wholly-owned subsidiary of Sorghum. Affirmation of Darong
Huang (“Huang Aff.”) ¶ 1, Kushner Aff. Exhibit (“Ex.”) B.
The CCCR representatives involved in the discussions included Mr. Yang Jie, CCCR’s
Vice President of Finance and its largest shareholder. See Huang Aff. ¶
¶1-7, 15-16; Kushner
Aff. Ex. C at 72-73. Wheat was represented by Ms. Xiaoying Sun, who reported directly to
Wheat’s president and chairwoman Ms. Darong Huang. Huang Aff. ¶¶ 1, 3. Ms. Sun was
Wheat’s principal representative in the negotiation and documentation of the Transaction.
Huang Aff. ¶13.
B. The Parties’ Agreements
On or about March 21, 2017, CCCR and Mr. Jie entered into a Memorandum of
Understanding (“MOU”) concerning the Transaction with Wheat’s subsidiary, Shanghai
NoNoBank Financial Information Service Co., Ltd. (“Nonobank”). In the MOU, Nonobank
agreed to deposit $3.5 million in escrow pursuant to an escrow agreement to be agreed by the
parties, which would be paid to Mr. Jie if the Transaction was consummated. See Huang Aff.
¶
¶4-7, Kushner Aff. Ex. D at ¶1.6.
On March 24, 2017, Nonobank, Mr. Jie, and Mr. Lin (a New York attorney acting as
escrow agent), entered into an Escrow Agreement (the “Escrow Agreement”). Kushner Aff.
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Ex. E. Under the terms of the Escrow Agreement, Nonobank agreed to pay $3.5 million to Mr.
Jie after the Transaction was completed. Id. at Arts. I-V. The Escrow Agreement further
required the $3.5 million to be held in escrow in the attorney trust account of Mr. Lin (the “Lin
Escrow Account”) at TD Bank, N.A. in New York, pending the consummation of the
Transaction. Id. at Art. II, IV.
In April 2017, pursuant to the Escrow Agreement, and at the direction of Ms. Sun,
Nonobank transferred the Chinese currency equivalent of approximately $3.5 million to an
intermediary company in the PRC, which was intended to fund the escrow account. Huang
Aff. ¶9.
On or about August 9, 2017, CCCR and Sorghum entered into a Share Exchange
Agreement (the “SEA”). Under the terms of the SEA, upon consummation of the Transaction,
Sorghum would become a wholly owned subsidiary of CCCR, and Sorghum’s former
shareholders would own a majority of CCCR. Huang Aff. ¶
¶10-11. The SEA is governed by
New York law. Kushner Aff. Ex. F at § 11.5 (“This Agreement shall be governed by, construed
and enforced in accordance with the Laws of the State of New York without regard to the
conflict of laws principles thereof.”).
C. Sorghum Suspends the Transaction After Discovering Potential Criminal
Conduct by Jie
Between August 9, 2017 and December 2017, Sorghum and CCCR worked towards a
closing of the Transaction. Beginning in December 2017, Sorghum received critical (and
adverse) new information regarding Mr. Jie. Huang Aff. ¶
¶20-23.
In mid-December 2017, Chinese media began reporting that Mr. Jie was under criminal
investigation in Anhui Province, PRC for engaging in a securities fraud in which 20,000
investors suffered losses. Huang Aff. ¶
¶21-22. Sorghum also discovered that an advisory firm
which it had retained to opine on the fairness of the Transaction to Sorghum was wholly owned
by Mr. Jie, and thus had a conflict of interest, which had not previously been disclosed. Huang
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Aff. ¶20.
In light of the extraordinary new information regarding Mr. Jie, on December 19, 2017,
Sorghum initiated an investigation, suspended work on the Transaction, and terminated Ms.
Sun. Huang Aff. ¶23, Kushner Aff. Ex. G.
On December 20, 2017, CCCR’s chief financial officer, Mr. Long Yi, demanded that
Sorghum respond promptly to comments made by the Securities and Exchange Commission
(the “SEC”) on CCCR’s preliminary proxy statement for the Transaction. Huang Aff. ¶¶ 18,
25. Against the backdrop of the reported criminal investigation of Mr. Jie for securities fraud,
Sorghum became seriously concerned that CCCR’s proxy statement did not disclose the fact
that, under the Escrow Agreement, Mr. Jie was entitled to receive a $3.5 million payment from
its subsidiary, Nonobank, if the Transaction was consummated. Huang Aff. ¶
¶17, 19.2
Indeed,
Sorghum was seriously concerned about the security of the $3.5 million that it believed had
been sent (under the direction of Ms. Sun) to Mr. Lin for safekeeping in his attorney trust
account in New York, and therefore, Sorghum’s counsel commenced an investigation to ensure
the security of the $3.5 million escrow payment.
D. Sorghum Seeks to Confirm the Whereabouts of the $3.5 Million Escrow
Payment
On December 20, 2017, Ms. Dawei Gongsun, a partner at Sorghum’s outside law firm
Dai & Associates, P.C., contacted Mr. Lin by telephone to inquire about the status of the $3.5
million escrow payment. Gongsun Aff. ¶5. During that call, Mr. Lin stated that due to
restrictions in the PRC on outbound funds transfers, the escrow funds had not previously been
deposited in Lin’s escrow account in New York but were instead deposited in an account owned
by Mr. Jie in the PRC. Id. In the same call, Mr. Lin also stated that he had just been informed
by Mr. Jie that the escrow funds were being wired to Lin’s escrow account that day, i.e., on
2
While Sorghum believed that CCCR was required to disclose publicly the $3.5 million prospective payment to
Mr. Jie, the SEA does not reference the MOU, the Escrow Agreement, or the $3.5 million payment.
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December 20, 2017. Id. Shortly after the call, Ms. Gongsun sent an email to Mr. Lin
confirming what Mr. Lin told her and requesting that Mr. Lin confirm receipt of the escrow
funds. Id. ¶6, Ex. A.
On December 21, 2017, at 8:06 a.m. China Standard Time (“CST”), after learning of
Ms. Gongsun’s call with Mr. Lin, Ms. Huang informed Mr. Yi of CCCR that:
[A]ccording to Mr. Yi Lin (a CCCR counsel), funds to be
deposited into escrow with Mr. Lin, as the escrow agent, were
never deposited in the escrow account pursuant to our executed
escrow agreement until approximately 10:58 am NY time today
(12/19/2017), when the escrow agent received a text message
from Jie Yang (owner of CCCR) informing the escrow agent that
the funds were just being wired to the escrow agent’s account.
Kushner Aff. Ex. H at 2 (emphasis added). Ms. Huang further noted that the escrow
arrangement was “a significant part of the transaction” that “should have been disclosed” in
CCCR’s proxy filings but was “omitted.” Id.
E. CCCR’s Breach Notice
On December 21, 2017, CCCR sent a breach notice to Sorghum, alleging that Sorghum
breached the SEA by failing to assist CCCR in responding to SEC comments. Huang Aff. ¶27;
Kushner Aff. Ex. I. CCCR’s letter did not allege any “willful breach” of the SEA. Id. On
December 28, 2017, Sorghum responded to CCCR’s breach notice. Huang Aff. ¶ 28; Kushner
Aff. Ex. J. Sorghum requested that CCCR provide information regarding the $3.5 million
payment that, under the terms of the Escrow Agreement, was required to be deposited with Mr.
Lin in escrow and paid to Mr. Jie if the Transaction was consummated. Id. at 1-2. Sorghum
noted that Ms. Sun “was responsible for transmitting the escrow funds from Nonobank to the
Escrow Agent’s IOLA account,” and that Ms. Sun “is no longer employed by Sorghum,
Nonobank or their affiliated entities.” Id. at 1.
F. Sorghum Terminates the SEA in Response to CCCR’s Breach
On December 27, 2017, CCCR filed a Form 8-K with the SEC without any prior notice
or consultation with Sorghum. Huang Aff. ¶30; Kushner Aff. Ex. K. The Form 8-K claimed
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that Sorghum had breached the SEA. Huang Aff. ¶31; Kushner Aff. Ex. K.
On December 29, 2017, Sorghum terminated the SEA because CCCR filed the Form
8-K without prior notice to Sorghum, in violation of Section 6.12(a) of the SEA, which required
both sides to consent to any such public filings in advance. Huang Aff. ¶32; Kushner Aff. Ex.
L.
G. The Dispute Resolution Provision of the SEA
Section 11.4 of the SEA provides for arbitration of any unresolved “Dispute” that has
been identified by a party in reasonable detail via written notice to the other party. Kushner
Aff. Ex. F §11.4. Section 11.4 provides in relevant part as follows:
A party must, in the first instance, provide written notice of any
Disputes to the other parties subject to such Dispute, which
notice must provide a reasonably detailed description of the
matters subject to the Dispute . . . Any party involved in such
Dispute may submit the Dispute to the AAA . . . The arbitrator
shall decide the Dispute in accordance with the substantive law
of the state of New York . . . Each party shall submit a proposal
for resolution of the Dispute to the arbitrator within twenty (20)
days after confirmation of the appointment of the arbitrator. The
arbitrator shall have the power to order any party to do, or to
refrain from doing, anything consistent with this Agreement, the
Ancillary Documents and applicable Law, including to perform
its contractual obligation(s); provided, that the arbitrator shall be
limited to ordering pursuant to the foregoing power (and, for the
avoidance of doubt, shall order) the relevant party (or parties, as
applicable) to comply with only one or the other of the proposals.
The arbitrator’s award shall be in writing and shall include a
reasonable explanation of the arbitrator’s reason(s) for selecting
one or the other proposal [].
Id. (emphasis added).
H. Commencement of the Arbitration
On January 25, 2018, CCCR filed an arbitration demand with the American Arbitration
Association (“AAA”). Huang Aff. ¶ 37; Kushner Aff. Ex. M. CCCR alleged that Sorghum
breached the SEA and requested an award of the Termination Fee under Section 9.4 of the SEA.
Kushner Aff. Ex. M at 1-3. CCCR’s arbitration demand did not allege any “willful breach” of
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the SEA. Id.
On April 11, 2018, Sorghum submitted an Answer and Counterclaim (the “Answer”).
Huang Aff. ¶38; Kushner Aff. Ex. N. In the Answer, Sorghum denied that it breached the
SEA. Kushner Aff. Ex. N, at 1-2. Sorghum also claimed that CCCR breached the SEA and
that Sorghum was entitled to recover the Termination Fee. Id. Sorghum did not allege any
“willful breach” of the SEA. Id.
I. The Parties’ Proposals
On April 13, 2018, in accordance with the procedure defined in Section 11.4 of the SEA,
Barbara A. Mentz (the “Arbitrator”), the AAA-nominated arbitrator for the Arbitration, issued
an order requiring each party to submit a proposal for resolution of the dispute, along with
accompanying evidence and supporting materials. Kushner Aff. Ex. O ¶
¶9-11.
The parties did not have the opportunity to conduct any discovery in the arbitration
process. Kushner Aff. ¶ 21. The SEA required the Arbitration to be “streamlined and efficient”
and to be conducted in accordance with the AAA’s Expedited Procedures. Kushner Aff. Ex. F
at §11.4. The Arbitrator’s Procedural Order No. 1 did not provide for any discovery. Kushner
Aff. ¶21, Ex. O.
On June 14, 2018, the parties submitted their respective Proposals for Resolution to the
arbitrator, along with briefing and supportive affidavits. In their respective proposals, each
party requested that the Arbitrator award the “Termination Fee” that is defined in Section 9.4
of the SEA (the “Termination Fee”), which is represents out of pocket expenses incurred by
the terminating party in connection with the Transaction. Kushner Aff. Ex. F at §9.4. The
SEA provides that payment of the Termination Fee “constitutes liquidated damages with
respect to any claim for damages” under the SEA and is “the sole and exclusive remedy”
available to the terminating party. Id. (emphasis added).
In its proposal submitted to the arbitrator, CCCR’s sole claim was that it was entitled
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to the Termination Fee under Section 9.4 of the SEA, based upon Sorghum’s alleged breaches
of the SEA. See Kushner Aff. Ex. P at 6-7, 10. Significantly, CCCR’s proposal did not allege
any “willful breach” of the SEA and that issue was not briefed by either party. Id. at 1-10.
In its submissions to the arbitrator, Sorghum requested that it be awarded the
Termination Fee because it properly terminated the SEA based upon CCCR’s incurable breach
of the SEA. See Kushner Aff. Ex. Q, at 1-2. Sorghum contended that CCCR was not entitled
to the Termination Fee because, among other reasons, CCCR never terminated the SEA. See
id. at 11-12. Sorghum’s proposal also explained the serious concerns that it had regarding the
Transaction before it was terminated, including concerns about the reported criminal conduct
of Mr. Jie and regarding the security of the $3.5 million escrow payment that was intended to
be paid to Mr. Jie if the Transaction was consummated. See Huang Decl. ¶
¶20-24; Kushner
Aff., Ex. R at 1-4.
J. The Lin Declaration
Together with its proposal, CCCR submitted a declaration from Yi Lin (the “Lin
Declaration”), the New York attorney who is the designated escrow agent under the Escrow
Agreement, entitled “Yi Lin’s Declaration in Support of Claimant China Commercial Credit,
Inc.’s Proposal for Resolution and Incorporated Memorandum of Law.” In the Lin Declaration,
Mr. Lin stated:
 “I reviewed my escrow deposit record for the period of March 1,
2017 through December 1, 2017 and I found no record of any
escrow deposit from [Nonobank].”
 “Until the date of this Declaration, I have received no proof,
direct or indirect, concerning deposit of funds by [Nonobank] or
its affiliated entity.”
Yi Lin Declaration, Kushner Aff. Ex. S ¶
¶7, 9. In his Declaration, Mr. Lin referred to and
attached copies of his prior correspondence with counsel to Sorghum and Nonobank at the law
firm of Dai & Associates regarding the escrow funds. Id. at 4-27. In an April 23, 2018 letter
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to Dai & Associates, Mr. Lin refused to admit that he received the $3.5 million and continued
making false and misleading statements concerning the payment of those escrow funds:
You made a “demand” for “a return of the funds and interest”.
You provided no proof for the alleged “funds”. What “funds”?
How were the “funds” made or deposited? I expect you to
answer these questions before you make a serious demand to
another attorney for the return of unidentified “funds”.
Id. at 7. In a May 4, 2018 letter to Dai & Associates, Mr. Lin stated:
If the deposit was indeed made by [Nonobank] (within 60 days
per purported escrow agreement) in my trust account, provide
proof . . . .[U]ntil proof of the alleged fund delivery to the
undersigned, such as a wire transfer confirmation by a banking
institution, I will not be in the position to provide verification.
Id. at 26.
K. The Award
After receiving the parties’ respective proposals, the Arbitrator did not request any
additional submissions or conduct an evidentiary hearing. Kushner Aff. ¶21. On July 30,
2018, the Arbitrator signed the Award, which was emailed to the parties on July 31, 2018.
In the Award, the Arbitrator found that CCCR was not entitled to the Termination Fee,
but nevertheless ordered Sorghum to comply with CCCR’s proposal. The Arbitrator stated:
While I do not agree with [CCCR] that it is entitled to the
Termination Fee, I do agree that the amounts it seeks to recover
are appropriate under Section 9.4,3
which permits [CCCR] to
recover damages for any willful breach of any representation,
warranty, covenant or obligation under the [SEA], prior to the
termination of the [SEA].
Final Award, Kushner Aff. Ex. A ¶151 (emphasis added). The Arbitrator found that Sorghum
committed a “willful breach” of the SEA, notwithstanding that CCCR never alleged that any
willful breach occurred. Id. ¶152.
In reaching the conclusion that Sorghum “willfully breached” the SEA, the Arbitrator
3
It appears that the Arbitrator’s reference to “Section 9.4” in paragraph 151 of the Award was intended to be a
reference to Section 9.2, because Section 9.2 of the SEA (and not Section 9.4) refers to a “willful breach.”
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relied heavily on the Lin Declaration. Specifically, the Arbitrator concluded that Nonobank’s
contention that it wired $3.5 million for deposit in Mr. Lin’s escrow account was “refuted by
Mr. Lin in his declaration.” Id. ¶102 (emphasis added).
Further, based solely on the Lin Declaration, the Arbitrator did not believe Ms. Huang’s
claim that in December 2017 Mr. Lin told Nonobank that he received the escrow funds. The
Arbitrator concluded:
Based on the declaration of Mr. Lin . . . which I find credible, I
do not find it credible that Ms. Huang or anyone in her
organization or her counsel received a message from Mr. Lin that
funds had been deposited into the purported escrow account on
December 19 or on any other date.
Ex. A at ¶107 (emphasis added). Notably Mr. Lin’s account in his declaration is inconsistent
with what he said during a December 20, 2017 phone call with Dawei Gongsun, counsel to
Sorghum and Nonobank, and which Ms. Gongsun documented in a contemporaneous email
message that she sent to Mr. Lin shortly after that conversation. Gongsun Aff. ¶
¶5-6, Ex. A.
But based solely on the Lin Declaration (and Lin’s correspondence attached thereto), the
Arbitrator concluded that Mr. Lin never received the $3.5 million escrow payment in his
attorney trust account. See Ex. A ¶
¶102, 113-22. Indeed, having credited Mr. Lin’s claim that
he never received the $3.5 million payment, the Arbitrator did not accept Nonobank’s evidence
that it did, in fact, make the required $3.5 million payment. See, e.g., Ex. A ¶
¶97-98, 101, 112.
L. Bank Records Recently Provided by TD Bank Confirm that the $3.5 Million
Escrow Payment Was Deposited in Mr. Lin’s Escrow Account
On August 2, 2018, Nonobank filed a lawsuit in this Court against CCCR, Jie, and Lin
(the “Escrow Litigation”),4
seeking to recover the $3.5 million escrow payment.
In connection with discovery in the Escrow Litigation, Nonobank obtained documents
from T.D. Bank, N.A. (“TD Bank”), the bank with which Mr. Lin maintains his attorney trust
4
The lawsuit is captioned Shanghai NoNoBank Financial Information Service Co. v. China Commercial Credit,
Inc., Index No. 653834/2018 (Sup. Ct. N.Y. Cty.).
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account. The documents produced by TD Bank confirm that on December 20, 2017, $3.5
million was transferred from accounts controlled by Mr. Jie to the Lin escrow account,
precisely as Mr. Lin had indicated to Ms. Gongsun on that day. Kushner Aff. Ex. T (bank
statement produced by TD Bank showing two December 20, 2017 wire transfers into Mr. Lin’s
attorney trust account, totaling $3.5 million); id. Ex. U (TD Bank wire transfer report showing
the same two wire transfers into Mr. Lin’s attorney trust account, totaling $3.5 million); id. Ex.
V (Business Records Affidavit provided by TD Bank which authenticates the bank statements
and wire transfer reports produced by TD Bank); Gongsun Aff. ¶
¶5-6, Ex. A.
At no time did CCCR or Mr. Lin disclose to the Arbitrator that Mr. Lin had received
this $3.5 million payment; they instead concealed the fact that Nonobank’s $3.5 million escrow
payment was, in fact, sent to Mr. Lin’s escrow account on December 20, 2017, as Sorghum
and Nonobank recently discovered in the documents that TD Bank produced just weeks ago.
Kushner Aff. Exs. T-V, ¶22.
LEGAL STANDARD
The Federal Arbitration Act (“FAA”) applies to this Petition because the Arbitration
arises out of the SEA, which evidences a Transaction involving interstate and international
commerce. See Morgan Stanley DW Inc. v. Afridi, 13 A.D.3d 248, 249 (1st Dep’t 2004)
(“Judicial review of the award in this matter is governed by the Federal Arbitration Act (FAA)
(9 USC § 1 et seq.), which mandates the enforcement of written arbitration agreements
relating to transactions affecting interstate commerce.”); see also Allied-Bruce Terminix Cos.,
Inc. v. Dobson, 513 U.S. 265, 273-74 (1995); Shaw Grp. Inc. v. Triplefine Int'l Corp., 322 F.3d
115, 120 (2d Cir. 2003) (“Because this [arbitration] provision is part of a contract affecting
interstate and international commerce, it is governed by the Federal Arbitration Act.”).5
The
FAA authorizes vacatur:
5
The Arbitrator’s Procedural Order Number 1 provides that the Arbitration is governed by the FAA. Kushner
Aff., Ex. O ¶2.
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(1) where the award was procured by corruption, fraud, or undue
means; (2) where there was evident partiality or corruption in the
arbitrators, or either of them; (3) where the arbitrators were
guilty of misconduct in . . . refusing to hear evidence pertinent
and material to the controversy; or (4) where the arbitrators
exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter
submitted was not made.
9 U.S.C. §10(a). Further, “[w]here the arbitrators have awarded upon a matter not submitted
to them” in addition to matters properly before them, the FAA also gives the Court the option
to strike the ultra vires portions of an award. 9 U.S.C. §11(b).
New York law applies nearly identical standards for vacating an arbitral award. See
NY CPLR §7511(b)(1) (providing for vacatur, inter alia, where there was “corruption, fraud
or misconduct in procuring the award” or where an arbitrator “exceeded his power or so
imperfectly executed it that a final and definite award upon the subject matter submitted was
not made”).
ARGUMENT
I. THE AWARD SHOULD BE VACATED BECAUSE IT WAS BASED UPON
FALSE AND MISLEADING STATEMENTS IN THE LIN DECLARATION
Under the FAA, an award may be vacated “where the award was procured by
corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1). “A petitioner seeking to vacate an
award on the ground of fraud must adequately plead that (1) respondent engaged in fraudulent
activity; (2) even with the exercise of due diligence, petitioner could not have discovered the
fraud prior to the award issuing; and (3) the fraud materially related to an issue in the
arbitration.” Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017). “For fraud
to be material within the meaning of Section 10(a)(1) of the FAA, petitioner must demonstrate
a nexus between the alleged fraud and the decision made by the arbitrators, although petitioner
need not demonstrate that the arbitrators would have reached a different result.” Id.
Significantly, for purposes of vacating an arbitral award, fraud can arise from “an
omission of material fact” as well as from affirmative misstatements. See Biotronik Mess-Und
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Therapiegeraete GmbH & Co. v. Medford Med. Instrument Co., 415 F. Supp. 133, 138 (D.N.J.
1976). Indeed, it is well established under federal law and New York law (which governs the
SEA and the relationship among the parties) that fraud may arise not only from affirmative
misrepresentations but also material omissions as well as selective and misleading disclosures,
if such disclosures omit information necessary to make them not misleading.6
Indeed, where a party “knowingly conceal[s] evidence . . . from [an] arbitration panel,
such misrepresentation would be analogous to perjured testimony” which is a ground for
vacatur. Biotronik Mess-Und Therapiegeraete GmbH & Co., 415 F. Supp. at 138; see also
Karppinen v. Karl Kiefer Machine Co., 187 F.2d 32, 34 (2d Cir. 1951) (“[A]n arbitration award
may be set aside in a case of material perjured evidence furnished the arbitrators by a prevailing
party.”); A. Halcoussis Shipping Ltd. v. Golden Eagle Liberia Ltd., No. 88-cv-4500, 1989 WL
115941, at *3 (S.D.N.Y. Sept. 27, 1989) (“obtaining an award through perjured testimony
constitutes ‘fraud’ within the meaning of § 10(a).”).
Further, under Section 10(a)(1) of the FAA, an award may also be vacated if it was
procured by undue means. See Bauer v. Carty & Co., Inc., 246 Fed. Appx. 375, 378 (6th Cir.
2007) (“undue means” generally describes behavior that is “immoral if not illegal”); Nat’l
Indem. Co. v. IRB Brasil Resseguros S.A., 164 F. Supp. 3d 457, 484 (S.D.N.Y. 2016) (“undue
means” describes “underhanded or conniving ways of procuring an award that are similar to
corruption or fraud, but do not precisely constitute either”) (quoting Nat’l Cas. Co. v. First
State Ins. Grp., 430 F.3d 492, 499 (1st Cir. 2005)).
6
See, e.g., In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 268 (2d Cir. 1993) (under federal securities law, “a
duty to disclose arises when disclosure is necessary to make prior statements not misleading”); Brass v. Am. Film
Techs., 987 F.2d 142, 150 (2d Cir. 1993) (under New York law, a duty to speak arises where a party “has made a
partial or ambiguous statement, on the theory that once a party has undertaken to mention a relevant fact to the
other party it cannot give only half of the truth”); Stolow v. Greg Manning Auctions Inc., 258 F. Supp. 2d 236,
248 (S.D.N.Y. 2003) (duty to disclose arises “when one party makes a partial or incomplete statement that requires
clarification”); Junius Construction Co. v. Cohen, 257 N.Y. 393, 399 (1931) (seller “could not fairly stop halfway”
and “suppress the existence” of the material fact that would cut against the representations the seller made);
Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137, 142 (2017) (fraud under New York law requires a
plaintiff to show, inter alia, “a misrepresentation or a material omission of fact”).
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Here, the Lin Declaration is materially misleading because it contains selective and
incomplete disclosures regarding the whereabouts of Nonobank’s escrow funds, and omits the
fact that on December 20, 2017, the $3.5 million escrow payment was wired to Mr. Lin’s
attorney trust account by Mr. Jie. In the Lin Declaration, which CCCR submitted to the
Arbitrator, Mr. Lin represented that he had “no record of any escrow deposit from [Nonobank]”
and “received no proof, direct or indirect, concerning deposit of funds by [Nonobank] or its
affiliated entity.” In fact, in his Declaration, Mr. Lin referred to two additional letters sent to
counsel for Sorghum in which he continued to conceal his receipt of the $3.5 million escrow
payment. See, e.g., Kushner Aff. Ex. S, Lin Decl. Ex. B (containing April 23, 2018 letter in
which Mr. Lin states, “You provided no proof for the alleged ‘funds’. What ‘funds’?”). It is
clear that Mr. Lin artfully and intentionally crafted his Declaration to avoid revealing that he
had in fact received $3.5 million from Mr. Jie on December 20, 2017.
Indeed, despite the Lin Declaration’s evasive and misleading denials, on December 20,
2017, Mr. Lin himself informed Nonobank’s counsel that (a) Nonobank’s escrow funds could
not be deposited directly with Mr. Lin due to currency restrictions in the PRC, but had instead
been deposited with Mr. Jie in the PRC, and (b) Mr. Jie informed Mr. Lin that the escrow funds
had been wired to Mr. Lin’s attorney trust account on that day, i.e., on December 20, 2017.
See Gongsun Aff. ¶
¶5-6, Ex. A; Background, Section D, supra. Mr. Lin actually received the
$3.5 million on that very same day, December 20, 2017, although Sorghum did not discover
this fact until after the Arbitration. See Kushner Aff. Exs. T-U.
Far from being tangential or collateral to the issues in the Arbitration, the misleading
statements submitted by CCCR through the Lin Declaration concerning the $3.5 million escrow
payment struck at the very heart of the matter. Critical to the Arbitrator’s ruling in favor of
CCCR was her conclusion that Sorghum’s contentions regarding the existence of the Escrow
Agreement and the missing $3.5 million escrow payment were not credible. Not knowing that
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the $3.5 million in escrow funds had been paid, the Arbitrator instead credited CCCR’s and
Mr. Lin’s version of events and found that that Sorghum “willfully breached” the SEA by
suspending the Transaction without any legitimate basis. See Background, Section K, supra.
In sum, there is a clear nexus between the false and misleading Lin Declaration and the
Arbitrator’s decision. The Award must therefore be vacated.
Each of the three required elements to vacate an arbitral award based upon fraud is
satisfied. See Odeon Cap. Grp. LLC, 864 F.3d at 196. First, CCCR engaged in fraud by
submitting the false and misleading Lin Declaration, which concealed the $3.5 million payment
that was deposited by Mr. Jie in Mr. Lin’s escrow account. Second, even with the exercise of
due diligence, Sorghum could not have discovered the fraud prior to the issuance of the Award,
because no discovery was permitted in the Arbitration and, instead of revealing that the $3.5
million was paid, CCCR and Mr. Lin concealed the existence of that payment by providing
false and misleading statements in the Arbitration. See Background, Section J, supra. Third,
the fraud materially related to the Arbitrator’s decision, as discussed above. See id.
In Kalgren v. Cent. Mutual Ins. Company, the First Department (applying the CPLR
standard for vacatur based upon fraud, which is substantively identical to the FAA standard)
vacated an arbitral award on grounds that are directly relevant to the facts here: the failure to
disclose a prior payment made in connection with the proceedings. 68 A.D.2d 549 (1st Dep’t
1979). There, the claimant in the arbitral proceeding pending against an insurer had, in fact,
already received a payment from another insurer in connection with the same underlying
incident. Id. at 550. The claimant concealed the payment by the other insurer on her claim,
and the arbitrator, not knowing about the payment, awarded claimant an additional recovery
from the second insurer. The court vacated the award on grounds that this constituted
“corruption, fraud or misconduct in procuring the award.” Id. at 552-53 (citing NY CPLR §
7511(b)(1)(i)). The Court held that “[i]n their role as litigant and lawyer, [claimant and her
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attorney] not only had a ‘good faith’ obligation but an affirmative duty to inform the arbitrator
and [the opposing party] of the prior payment.” Id. The Court concluded that the “lack of
candor” on account of the party and her attorney “constitute[s] the type of misconduct that
warrants further proceedings before the arbitrator.” Id. at 553 (“Suffice it to say that the
arbitrator should have been apprised of [the payment] before he was required to make an
informed determination in this dispute.”). Id.
Significantly, New York courts have not hesitated to vacate arbitral awards under NY
CPLR §7511(b)(1) where, as here, the prevailing party misrepresented or omitted material
facts that influenced the arbitrator’s decision. See NY CPLR §7511(b)(1) (providing for
vacatur, inter alia, where there was “corruption, fraud or misconduct in procuring the award”);
Sci. Dev. Corp. v. Schonberger, 156 A.D.2d 253, 253-54 (1st Dep’t 1989) (vacating arbitral
award on grounds of fraud and misconduct where attorneys “concealed” from the arbitrator
“critical evidence” with respect to “a central issue in the arbitration”); Bevona v. Supervised
Cleaning & Maint. Co., 160 A.D.2d 605, 605-06 (1st Dep’t 1990) (finding fraud and
misconduct and affirming vacatur of arbitral award where party “had failed to disclose to the
arbitrator” key evidence where that “concealment adversely affected the net damages due”);
Accessible Dev. Corp. v. Ocean House Ctr., 4 A.D.3d 217, 217 (1st Dep’t 2004) (affirming
vacatur of arbitration decision on grounds of fraud and misconduct where party failed to
disclose grand jury indictment that “might have drastically altered the outcome of the
arbitration”).
Similarly, in Bonar v. Dean Witter Reynolds, Inc., the Eleventh Circuit Court of
Appeals concluded that newly discovered evidence of perjury warranted vacating an award.
835 F.2d 1378, 1384-86 (11th Cir. 1988). After the arbitration, the losing party discovered
that the prevailing party’s expert witness had falsified his credentials. Id. at 1381. The movant
did not know the witness would testify until the day of the hearing, and thus, could not have
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uncovered the evidence of perjury earlier. Id. The court concluded that if the witness had not
falsified his credentials, “it is extremely doubtful that he would have been permitted to testify
as an expert, and the arbitrators would have heard none of [his] testimony.” Id. at 1385.
Notably, the taint of fraud is heightened here by the fact that Mr. Lin, as an attorney,
has a duty of candor to a tribunal, including a duty not to make partial disclosures that conceal
the real facts. See In re Lightfoot, 217 F.3d 914, 917 (7th Cir. 2000) (“[F]or a lawyer to defeat
an opposing party's claims by misleading the court, whether by a misrepresentation or by a
pregnant omission [constitutes] misconduct.”) (Posner, C.J.); HK. Porter Co. v. Goodyear Tire
& Rubber Co., 536 F.2d 1115, 1119 (6th Cir. 1976) (“Since attorneys are officers of the court,
their conduct, if dishonest, would constitute fraud on the court.”); Daniel v. Penrod Drilling
Co., 393 F. Supp. 1056, 1060-61 (E.D. La. 1975) (“[E]ven if the lawyer has no duty to disclose
the whole truth, he does have a duty not to deceive the trier of fact, an obligation not to hide
the real facts behind a facade.”) (emphasis added); In re Ushkow, 34 A.D.2d 159, 161 (2d
Dep’t 1970) (noting “the lawyer’s duty of candor and fairness” and stating that “there can be
no justification for false or evasive testimony”); In re Estate of Wagner, 36 Misc. 3d 1219(A)
(N.Y. Surr. Ct. 2010) (“[the attorney] is an officer of the court, and as such owes a duty of
candor to this tribunal pursuant to his professional ethical obligations.”).
Further, Mr. Lin’s concealment of the $3.5 million payment violated his fiduciary duties
as an escrow agent under New York law. See Greenapple v. Capital One, N.A., 92 A.D.3d
548, 549 (1st Dep’t 2012) (quotation omitted) (“An escrow agent owes the parties to the
transaction a fiduciary duty, and therefore the agent, as a fiduciary, has ‘a strict obligation to
protect the rights of [the] parties’ for whom he or she acts as escrowee.”); id. at 550 (stating
that “as a trustee, an escrow agent owes his fiduciary the highest kind of loyalty”) (internal
quotations omitted).
For all of the above reasons, the Court should vacate the Award since it was procured
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through fraud and undue means.
II. THE AWARD SHOULD BE VACATED BECAUSE THE ARBITRATOR
EXCEEDED HER AUTHORITY BY BASING HER RULING ON A “WILLFUL
BREACH” CLAIM THAT WAS NEVER RAISED BY THE PARTIES
Alternatively, the Award should be vacated under Section 10(a)(4) of the FAA based
upon the arbitrator exceeding her authority. See 9 U.S.C. §10(a)(4) (authorizing a district court
to vacate an arbitral award “where the arbitrator[] exceeded [her] power.”). “[I]f arbitrators
rule on issues not presented to them by the parties, they have exceeded their authority and the
award must be vacated.” Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512, 514 (2d Cir. 1991).
An arbitrator exceeds her authority by “considering issues beyond those the parties have
submitted.” Jock v. Sterling Jewelers Inc., 646 F.3d 113, 122 (2d Cir. 2011); In re Melun
Indus., Inc., 898 F. Supp. 990, 992 (S.D.N.Y. 1990) (“[C]ourts will vacate an award where the
arbitrator has ruled on issues not presented to him by the parties.”); In re Colorado Energy
Management, LLC v. Lea Power Partners, LLC, 114 A.D.3d 561, 563-64 (1st Dep’t 2014)
(“[W]here arbitrators rule on issues not presented to them by the parties, they have exceeded
their authority and the award must be vacated”) (citing Fahnestock & Co., Inc., 935 F.2d at
515)); see also NY CPLR §7511(b)(1)(iii) (providing for vacatur under New York law where
“an arbitrator . . . or person making the award exceeded his power or so imperfectly executed
it that a final and definite award upon the subject matter submitted was not made”).
In determining whether to vacate an award under Section 10(a)(4) of the FAA, the
question is whether “the arbitrator[] had the power, based on the parties’ submissions or the
arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that
issue.” DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 824 (2d Cir. 1997) (emphasis
added). “[A]n arbitrator may exceed her authority by, first, considering issues beyond those
the parties have submitted for her consideration, or, second, reaching issues clearly prohibited
by law or by the terms of the parties’ agreement.” Jock v. Sterling Jewelers Inc., 646 F.3d 113,
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122 (2d Cir. 2011); Ecopetrol S.A. v. Offshore Expl. & Prod. LLC, 46 F. Supp. 3d 327, 341
(S.D.N.Y. 2014) (“A court’s inquiry ‘looks only to whether the arbitrator had the power, based
on the submissions or the arbitration agreement, to reach a certain issue, and does not consider
whether the arbitrator decided the issue correctly.’” (internal quotation marks omitted) (quoting
Thule AB v. Advanced Accessory Holding Corp., 2009 WL 928307, at *2 (S.D.N.Y. Apr. 2,
2009).)
The Court should vacate the Award, since the issue of willful breach was never raised
by the parties. See Matteson v. Ryder Sys. Inc., 99 F.3d 108, 112-14 (3d Cir. 1996) (vacating
arbitral award pursuant to Section 10(a)(4), concluding that “an arbitrator has the authority to
decide only the issues actually submitted” and that the arbitrator “exceeded its authority by
deciding issues not submitted to it by the [parties]”); Minn. Nurses Ass’n v. North Memorial
Health Care, 822 F.3d 414, 419 (8th Cir. 2016) (vacating arbitration decision “because his
decision exceeded the scope of the submission presented to him by the parties”); In re Colorado
Energy Management, LLC, 114 A.D.3d at 563-64 (vacating award under FAA where arbitrator
awarded damages based upon a claim that was not submitted to him and thereby exceeded his
authority).
A. The SEA and the Parties’ Submissions Permit the Arbitrator to Resolve Only
The “Disputes” Identified by the Parties with Reasonable Detail in Writing
The parties’ arbitration agreement authorizes the Arbitrator to resolve only the
“Disputes” that either party has provided written notice of, with a reasonably detailed
description, to the other party. See Kushner Aff. Ex. F § 11.4 (“A party must, in the first
instance, provide written notice of any Disputes to the other parties subject to such Dispute,
which notice must provide a reasonably detailed description of the matters subject to the
Dispute.”) (emphasis added). The arbitration agreement authorizes any party to “submit the
Dispute to the AAA,” and requires the arbitrator to “decide the Dispute in accordance with the
substantive law of the State of New York.” Id. (emphasis added). Each party is required to
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submit “a proposal for resolution of the Dispute.” Id. (emphasis added).
The SEA does not authorize the Arbitrator to decide an issue that is not identified as
being part of the Dispute, i.e., an issue that neither party identified via “written notice” with “a
reasonably detailed description.” See Kushner Aff. Ex. F §11.4; Trade & Transp., Inc. v.
Natural Petroleum Charterers Inc., 931 F.2d 191, 195 (2d Cir. 1991) (“[T]he submission by
the parties determines the scope of the arbitrators’ authority.”); Matteson v. Ryder Sys. Inc., 99
F.3d 108, 114 (3d Cir. 1996) (“It is the parties, not the arbitrator, who decide the issues
submitted.”).7
Further, the parties’ arbitration agreement requires the Arbitrator to order the “relevant
party” to “comply with only one or the other of the proposals” submitted by the parties, and to
provide a “reasonable explanation of the arbitrator’s reason(s) for selecting one or the other
proposal.” Kushner Aff. Ex. F § 11.4. The “reasonable explanation” for any such order,
however, cannot be the Arbitrator’s resolution of any issue that was not part of the “Dispute”
submitted to the Arbitrator. By definition, the Arbitrator has no authority to fashion relief
based upon resolution of a dispute that the Arbitrator lacks power to resolve. See Hughes
Aircraft Co. v. Elec. & Space Technicians, Local 1553, AFL-CIO, 822 F.2d 823, 827 (9th Cir.
1987) (“Arbitrators have broad powers to fashion appropriate remedies on submitted issues . .
. but they have no authority to decide issues not submitted by the parties.”).
B. No “Willful Breach” Claim Was Part of the “Dispute” Submitted to the
Arbitrator
Here, given that the parties never raised the issue of willful breach in their submissions,
the arbitrator never had authority to consider the willful breach issue in the first place.
On December 21, 2017, CCCR issued a written notice of breach pursuant to Section
9.1(e) of the SEA (the “Breach Notice”). Kushner Aff. Ex. I. On January 25, 2018, CCCR
7
It is notable that, in the Award, the Arbitrator quotes the “relevant part” of Section 11.4 of the SEA but omits
the language of Section 11.4 that limits the Arbitrator’s authority to the Dispute specifically identified in
reasonable detail by the parties. See Ex. A ¶31.
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initiated the Arbitration by filing a notice of arbitration with the AAA. Id. Ex. M. Neither the
Breach Notice nor the Notice of Arbitration alleged any “willful breach” by Sorghum.
Likewise, in its Proposal for Resolution, CCCR did not allege any “willful" breach by
Sorghum. Indeed, CCCR acknowledged in its Proposal that the Breach Notice “advised
Respondent of all breaches committed by Respondent,” yet none of those purported breaches
contained any claim for a purported “willful breach.” Id. Ex. P. at 7 (emphasis added). In
addition, none of Sorghum’s submissions to the Arbitrator contained any reference to a “willful
breach.” See generally Kushner Aff. Exs. P-R.
Further, CCCR’s Proposal for Resolution argued that “[p]ursuant to Section 9.4 of the
Agreement, CCCR was entitled to terminate the Agreement as a result of an incurable or
uncured breach, and receive a termination fee.” See id. at 6-7. The only relief requested by
CCCR in its Proposal was an award of “the Termination Fee” pursuant to Section 9.4 of the
SEA, based upon Sorghum’s alleged breach. Id. at 10 (emphasis added). Nowhere in CCCR’s
Proposal is any claim for “willful breach” or any citation to Section 9.2 of the SEA, which
provides for damages based upon an alleged “willful breach.” See id.; see also Ex. F §9.2. In
the Award, the Arbitrator explicitly concluded that CCCR was not entitled to the Termination
Fee, thereby rejecting CCCR’s sole proposed basis for relief. See Kushner Aff. Ex. A ¶151.
C. The Award Should Be Vacated Because the Arbitrator Exceeded Her
Authority by Determining the Issue of “Willful Breach”
The Award should be vacated because the Arbitrator determined that a “willful breach”
occurred, an issue never submitted to the Arbitrator by the parties. See, e.g., Fahnestock &
Co., Inc. v. Waltman, 935 F.2d 512, 514 (2d Cir. 1991) (“[I]f arbitrators rule on issues not
presented to them by the parties, they have exceeded their authority and the award must be
vacated.”).
The First Department’s decision in In re Colorado Energy Management, which applied
the FAA, is instructive. 114 A.D.3d at 563-64. In that case, the “arbitration demand, the pre-
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hearing motion practice and [the arbitrator’s] decision [on a motion to dismiss] ma[de] it clear
that gross negligence was the only claim by [claimant] that was presented to [the arbitrator] for
a hearing.” Id. at 564. The arbitrator’s final award concluded that claimant’s alleged damages
“for cost overruns were not the result of gross negligence,” but nevertheless awarded damages
based upon the cost overruns. Id. (emphasis added). Accordingly, the First Department found
that arbitrator “exceeded his authority . . . by awarding damages for cost overruns” and the
award of such damages was properly vacated. See id.
The decision of the United States Court of Appeals for the Second Circuit in 187
Concourse Assocs. v. Fishman is also instructive. 399 F.3d 524 (2d Cir. 2005). In that case, a
union claimed that an employee was discharged without cause in violation of a collective
bargaining agreement that prohibited discharge “without just and good cause.” Id. at 526. The
parties submitted the following two questions to an arbitrator: “Was the [employee] discharged
for just cause? If not, what shall the remedy be?” Id. In his award, the arbitrator determined
that the employee’s conduct was “incomprehensible,” “completely unacceptable in the
workplace,” and that the employer “had no option but to terminate the [employee].” Id. Having
made these findings, however, the arbitrator nevertheless ordered that the employee be
reinstated on a probationary basis. Id.
The district court vacated the arbitration award, finding that the arbitrator’s decision
amounted to a finding that the employer discharged the employee with just cause, and the
arbitrator had no authority to fashion an alternative remedy. 187 Concourse Assocs, 399 F.3d
at 526. The Second Circuit affirmed, explaining that:
Upon a finding of just cause, there was nothing further to be done.
The arbitrator had no authority, under either the [collective
bargaining agreement] or the submission, to fashion an
alternative remedy. By ordering [the employee] reinstated, the
arbitrator exceeded his authority.
Id. at 527.
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The principles articulated by the First Department and the Second Circuit apply here.
CCCR’s sole claim was that it was entitled to the “Termination Fee” as defined in Section 9.4
of the SEA. See Ex. P at 6-7 (containing CCCR’s argument that “[p]ursuant to Section 9.4 of
the [SEA], CCCR was entitled to terminate the [SEA] as a result of an incurable or uncured
breach, and receive a termination fee,” and that CCCR “is entitled to recover damages in the
amount of approximately $1,436,521.00, which reflects [CCCR’s] Termination Fee under the
Agreement.”); id. at 10 (“[CCCR] requests that it be awarded the Termination Fee in the
amount of $1,436,521.00.”).
The Arbitrator rejected CCCR’s argument and found that CCCR was not entitled to the
Termination Fee. Kushner Aff. Ex. A ¶ 151 (containing the arbitrator’s conclusion that “I do
not agree with [CCCR’s contention] that it is entitled to the Termination Fee”). Having made
that finding, “there was nothing further to be done” with respect to CCCR’s claim for the
Termination Fee. 187 Concourse Assocs, 399 F.3d at 527. The Arbitrator “had no authority,
under either the [parties’ agreement] or the submission, to fashion an alternative remedy” based
upon a claim that CCCR did not submit. See id.
But that is precisely what occurred here, in a blatant exceeding of authority. The
Arbitrator, having concluded that CCCR was not entitled to the Termination Fee based on the
sole claim that CCCR actually submitted to the Arbitrator, leaped to consider and resolve an
unsubmitted claim of “willful breach” under Section 9.2 of the SEA, an entirely new claim
sounding in tort under New York law.8
The Arbitrator then ordered Sorghum to pay CCCR
8
The leading case on “willful” misconduct in connections with contracts governed by New York law is
Metropolitan Life Insurance Company v. Noble Lowndes International, Inc., 84 N.Y.2d 430 (1994). There, the
contract provided that there would be no liability for consequential damages, with limited exceptions such as
damages caused by “willful acts.” Id. at 433. The Court of Appeals held that, when the parties carved out “willful
acts” from the contract’s limitation-of-liability provision, they intended to exclude conduct that “is tortious in
nature, i.e., wrongful conduct in which defendant willfully intends to inflict harm on plaintiff at least in part
through the means of breaching the contract with the parties.” Id. (emphasis added). Similarly, here the parties
agreed that the Termination Fee is “the sole and exclusive remedy” available to the terminating party for a breach
of the SEA. Kushner Aff. Ex. F at §9.4 (emphasis added). Section 9.2 contains a narrow carve out to this
exclusive remedy: a party remains liable for a “willful breach” of the SEA even if the Termination Fee is payable.
Id. at §9.2. Consistent with Metropolitan Life, the carve-out for “willful breach” in Section 9.2 refers to tortious
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the “Termination Fee” as a proxy for damages that (according to the Arbitrator’s own theory,
never raised by any party) were “appropriate” for that unsubmitted claim. See Ex. A ¶151
(stating that while CCCR is not entitled to the Termination Fee, “the amounts it seeks to recover
are appropriate” under the unsubmitted theory of “willful breach”) (emphasis added). The
Arbitrator had no authority to consider and resolve the unsubmitted claim of “willful breach”
and order relief based upon its resolution of that unsubmitted claim. The Award must therefore
be vacated. See 187 Concourse Assocs, 399 F.3d at 527; In re Colorado Energy Management,
LLC, 114 A.D.3d at 563-64.
CONCLUSION
For the foregoing reasons, Sorghum respectfully requests that the Court issue an order
granting the Petition and vacating the Award.
Dated: New York, NY
October 29, 2018
DAI & ASSOCIATES, P.C.
By: /s/ Amiad M. Kushner
Amiad M. Kushner
Aaron Foldenauer
Katherine B. Kramer
Times Square Plaza
1500 Broadway, 22nd Floor
New York, New York 10036
Telephone: (212) 730-8880
Email: akushner@daiassociates.com
Email: afoldenauer@daiassociates.com
Email: kkramer@daiassociates.com
Counsel for Petitioner Sorghum
Investment Holdings Limited
conduct that is intended to harm the other party. While the Arbitrator lacked power to reach the issue of “willful
breach,” it is nevertheless notable that the Arbitrator did not find that Sorghum acted wrongfully with the intent
to “inflict harm” on CCCR and that the Arbitrator’s finding of “willful breach” was not supported any citation to
New York law.
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Sorghum Complaint v CCCR NYS Court.pdf

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Sorghum Complaint v CCCR NYS Court.pdf