Stonington Capital Advisors, LLC v. Southfield Capital LLC

Background

Stonington Capital Advisors, LLC and Stonington Drive Securities LLC, together called Stonington, petitioned under the Federal Arbitration Act to partially vacate and partially confirm an arbitration award involving Southfield Capital, LLC. Stonington Capital worked as a placement agent, and Stonington Securities was a registered broker-dealer. Under a 2014 Placement Agent Agreement, Southfield engaged Stonington as the exclusive placement agent for Southfield’s private equity fund.

The agreement required Southfield to pay Stonington a fee based on investments in the fund and re-up fees for investments in a successor fund by investors who had invested in the original fund. It also gave Stonington the right to act as placement agent for a successor fund if the original fund received at least $125 million in investments. The agreement permitted termination at any time and listed provisions that would survive termination; that list included the provision concerning re-up fees but did not include the successor-fund placement-agent provision.

The original fund exceeded $125 million in aggregate investments in June 2017. Southfield terminated the agreement in December 2017. In 2019, Southfield notified Stonington that it intended to form a successor fund, and Stonington notified Southfield that it intended to exercise the placement-agent right. Southfield then initiated arbitration, arguing that termination relieved it of the obligations to pay re-up fees and use Stonington as the successor fund’s placement agent.

Arbitration Award and Arguments

The arbitrator found that Stonington was entitled to re-up fees under Section 3(iv) of the agreement but was not entitled to become the successor fund’s placement agent under Section 6. The arbitrator concluded that the agreement had been properly terminated under Section 13, that the re-up-fee obligation expressly survived termination, and that the Section 6 placement-agent right did not.

Stonington asked the court to vacate the portion rejecting its Section 6 claim and to confirm the portion recognizing its right to re-up fees. It argued that the Section 6 right vested when the original fund exceeded $125 million and that the arbitrator’s treatment of Sections 3(iv) and 6 was contradictory. Southfield cross-moved to confirm the entire award.

Court’s Analysis

The Federal Arbitration Act provides for limited judicial review of arbitration awards. A court generally confirms an award if it can identify any ground for the arbitrator’s decision. To vacate an award based on “manifest disregard of the law,” a party must show that the award contradicts an express and unambiguous contract term or departs so far from the agreement that it cannot fairly be derived from it.

The court held that the arbitrator’s interpretation was reasonably based on the agreement. Section 13 allowed termination at any time and specifically identified provisions that survived termination, but Section 6 was not on that list. The court concluded that raising $125 million was necessary but not sufficient to trigger the Section 6 right. The right also depended on the agreement remaining in effect and Southfield actually establishing a successor fund. Because Southfield terminated the agreement before establishing the successor fund, the Section 6 right did not accrue and ended with the agreement.

The court also held that the arbitrator’s treatment of Sections 3(iv) and 6 was not inconsistent because Section 3 expressly survived termination while Section 6 did not. The court rejected Stonington’s reliance on authorities concerning the word “shall,” vested rights, and rights surviving contract termination because those authorities did not override the agreement’s express termination provisions.

Disposition

The court denied Stonington’s motion to vacate in part, granted Stonington’s motion to confirm in part, and confirmed the arbitration award in its entirety. The court also denied Stonington’s request for attorney’s fees and expenses, finding that Stonington had not shown a breach triggering the agreement’s indemnification provision. Southfield’s motion to confirm was granted, and the case was closed.