Hagshama Manhattan 10 Gold, LLC v. StrulovitzZ

Background

The petitioners entered identical joint-venture agreements with the respondents on June 22, 2015, to acquire and redevelop property at 940 First Avenue in New York. The petitioners collectively invested $5,000,000. The agreements allowed an investor, under specified conditions, to require the promoter or joint venture to buy out the investor’s interest and return the investment with either a 12% cumulative annualized return or an internal rate of return specified in the agreements.

By September 2015, the required financing or permits had not been obtained, and the tenant-related conditions also had not been satisfied. The parties later pursued revised development plans. In 2017, a housing agency issued an order favoring the remaining rent-stabilized tenant, and efforts to persuade the tenant to leave were unsuccessful. On December 13, 2017, the petitioners demanded the return of their investment and a contractual return. The respondents refused.

The petitioners began arbitration in 2018. They initially sought their capital investment plus a 30.5% internal rate of return, but during the evidentiary hearings they withdrew the internal-rate-of-return request and sought the 12% cumulative annualized return instead. The respondents argued that the petitioners had waited too long, had lost or given up their contractual rights, and were barred from recovery because of their conduct concerning the revised plans and a possible sale of the property.

Arbitration awards

The arbitrator, Neal M. Eiseman, first denied both sides’ requests for a ruling before the evidentiary hearing, finding factual issues concerning equitable estoppel. After four days of testimony, he issued a Partial Final Award on March 4, 2020. He declared the petitioners the prevailing parties and awarded them $5,000,000 plus the 12% cumulative annualized return. He rejected the respondents’ arguments that the petitioners had waived their rights, waited an unreasonable amount of time, or should be prevented from recovering under equitable estoppel.

The arbitrator also concluded that the agreements offered two alternatives for recovery and that the petitioners could elect the 12% return rather than the higher internal rate of return. He rejected the argument that the 12% provision was an unenforceable penalty clause. On June 1, 2020, he issued a Final Award requiring the respondents to pay $8,020,307.22, consisting of $5,000,000 in damages, $2,859,371 in the 12% return through May 1, 2020, $111,576.89 in attorneys’ fees, and $49,359.33 in arbitration-related fees and expenses. The award also provided for continued accrual of a 12% cumulative annualized return on $7,859,371 until full payment.

Court’s review

The court explained that review of an arbitration award is highly limited. Under the Federal Arbitration Act, a court may vacate an award in specified circumstances, including corruption or fraud, arbitrator partiality, serious procedural misconduct, or an arbitrator’s exceeding of authority. The court also discussed the separate standard for “manifest disregard of the law,” which requires a clearly applicable legal rule that the arbitrator knew but deliberately ignored.

The respondents argued that the arbitrator exceeded his authority by failing to issue a reasoned award. The court rejected that argument, finding that the arbitrator substantively addressed the respondents’ arguments about delay, the revised development plans, and the possible sale to Namdar Realty Group. The court also rejected the argument that the arbitrator decided a claim the petitioners had withdrawn. It found that the petitioners had withdrawn their request for the higher internal rate of return, not necessarily their claim under the tenant-related provision, and that the arbitrator reasonably concluded the petitioners could elect the 12% recovery.

The court also rejected the three manifest-disregard arguments. It found that the respondents had not identified clearly applicable law requiring the petitioners to demand repayment within a particular period. It found no showing that the arbitrator ignored controlling law concerning a penalty clause, particularly because the arbitrator addressed the 12% provision and the respondents cited no law prohibiting its use. Finally, the court found no basis to require the petitioners to give up their project interests in advance because the respondents had not shown that the arbitrator ignored any applicable legal rule requiring such a result.

Disposition

Judge Andrew L. Carter, Jr. denied the respondents’ motion to vacate the Arbitration Award and confirmed the Arbitration Award. The Clerk was directed to enter judgment for Hagshama Manhattan 10 Gold, LLC, Hagshama Manhattan 10 Platinum, LLC, and Co Fund 1, LLC, jointly and severally, against Cheskel Strulovitz, 940 First Avenue, LLC, and First Avenue Realty Holdings, L.P., jointly and severally, for $8,020,307.22. The court also directed the Clerk to terminate the motion and close the matter.