Giving the Devil the Benefit of Civil Procedure, for Safety’s Sake...

Emerald Aero, LLC v. Kaplan, No. D070579M (D4d1 as modified on rehearing, Mar. 21, 2017)

I’m a little skeptical of the benefits of arbitration. The lack of formal procedure, in particular, makes me a bit queasy. But this case shows that some things are too much, even for arbitration.

A defendant involved in an AAA arbitration over an investment dispute got criminally convicted for being a fraudster. The day before a telephonic arbitration hearing—of which it isn’t clear defendant had notice—plaintiffs modified their arbitration demand to substantially increase the demand and add a request for punitive damages. Defendant—whose lawyer had withdrawn, or at least was trying to withdraw—then failed to appear. The arbitrator ruled in favor of plaintiff, essentially as a default, entering an award thirty times the original demand, including about $20 million in punis.

After securing new counsel, Defendant filed a motion to set aside the award, arguing lack of notice. But the arbitrator recused himself and the AAA refused to further consider the motion to set aside, claiming it was an issue for the court. The court rejected defendant’s motion to vacate and granted plaintiff’s motion to confirm, setting up this appeal.

The Court of Appeal finds that, although arbitration rulings can only be vacated on narrow grounds, those grounds were satisfied here. Section 1286.2(a)(4) of the Code of Civil Procedure permits vacation of an arbitral award when the “arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” This rule is narrowly construed, lest it be read to create review of arbitration awards based on errors of law. But one place it does apply is when the award violates specific restrictions in the arbitral body’s own rules. 

The AAA rules applicable here required written notice to change claims or damages demands. Regardless of how those rules are interpreted, giving an opposing party only twenty-four hours’ notice of a thirty-fold increase in a damages demand is not reasonable notice, especially when the defendant was essentially pro se at the time.

Moreover the arbitration had other indica of manifest unfairness, including substantial questions as to whether defendant actually received notice of key events, the AAA’s refusal to appoint a new arbitrator to hear defendant’s motion to vacate, and the “extraordinarily large amount of the damages.” Under the circumstances, the trial court erred in refusing to vacate the award.

Two more interesting procedural issues to note. On their petition for rehearing, plaintiffs argued that defendant had waived any right to appeal the trail court order confirming the award. While it is possible to do that, the waiver needs to be more specific than just an ordinary waiver of judicial remedies that applies to any arbitration agreement. The parties need to actually waive the right to the limited judicial review provided under the arbitration statues themselves. The court adds a few pages to the opinion to explain this.

And in a footnote the court notes that on an appeal of a motion to vacate, the record consists only of the superior court record in connection with the motion to vacate. It does not include the entire record before the arbitrator. 

Reversed.