Colony Capital, Inc. v. Flaherty

Background

Colony Capital, Inc. moved under Section 10(a) of the Federal Arbitration Act to vacate an arbitration award issued against it and in favor of James F. Flaherty III. The award required Colony to pay Flaherty $491,142. The court had jurisdiction based on the parties’ citizenship and the amount in dispute.

In 2014, Colony’s predecessor and Flaherty entered into a limited partnership agreement concerning the management and growth of healthcare-related assets. That agreement included an indemnification provision and required the parties to submit disputes arising from or relating to the agreement to the exclusive jurisdiction of New York state or federal courts. It did not contain an arbitration provision.

In 2017, Colony and Meiko Dixon, who had served as Flaherty’s executive assistant, entered into a separate agreement requiring arbitration of disputes arising from or related to Dixon’s employment. The agreement covered certain claims Dixon might bring against Colony and specified others, including Colony’s officers, directors, employees, agents, and affiliated entities.

Dixon later made allegations of sexual harassment and retaliation against Flaherty. Colony investigated the allegations and entered into a severance agreement with Dixon under which she received $100,000 and released claims against Colony, but not claims against Flaherty. Flaherty and Dixon later resolved Dixon’s claims against Flaherty. Flaherty then demanded arbitration against both Dixon and Colony, claiming that Colony was required to indemnify him for matters arising from his defense of Dixon’s claims.

Colony objected that it had not agreed to arbitrate its indemnification dispute with Flaherty and told the arbitration service that it would not participate unless a court ordered it to do so. Colony did not participate in most of the arbitration, although its counsel appeared specially at the hearing to repeat its position that there was no valid agreement to arbitrate and to request additional time. The arbitrator denied that request and proceeded without Colony’s participation.

The Arbitration Award

Flaherty initially asserted that Colony’s indemnification obligation arose under the partnership agreement. In his closing submission to the arbitrator, however, he relied on a California statute and equitable theories instead. The arbitrator awarded Flaherty $491,142 under California Corporations Code section 317(d), even though Flaherty had not cited that subsection in his submissions. That provision requires mandatory indemnification of a corporate agent only when the agent was successful on the merits in defending a qualifying proceeding.

The arbitrator also concluded that Flaherty’s claim was arbitrable under Dixon’s arbitration agreement with Colony. The arbitrator reasoned that Flaherty’s indemnification claim was closely connected to the merits of Dixon’s claims against him and that Flaherty was acting as an agent of Colony.

The Court’s Analysis

The court explained that arbitration is based on consent. A party cannot be required to arbitrate a dispute unless it agreed to do so, and the court—not the arbitrator—decides whether an agreement to arbitrate exists under ordinary contract principles.

The court found that Colony and Flaherty never agreed to arbitrate Flaherty’s indemnification claim or any other dispute between them. Their partnership agreement provided for litigation in New York courts. The Dixon-Colony arbitration agreement was a separate contract between Colony and Dixon and did not state that nonparties could bring indemnification claims against Colony in arbitration.

The court also rejected applying equitable estoppel, a doctrine that can sometimes prevent a party from refusing arbitration when the party’s relationships and conduct make refusal unfair. The court identified two relevant considerations: whether the claim was closely connected to the contract containing the arbitration clause and whether the relationships among the parties justified requiring arbitration.

First, the court found that Flaherty’s indemnification claim was not closely connected to an obligation in the Dixon-Colony arbitration agreement. The claim arose from Flaherty’s defense of Dixon’s allegations, but it did not depend on the existence or interpretation of Dixon’s arbitration agreement. The fact that Flaherty’s claim followed a dispute that may have been arbitrable under Dixon’s agreement was not enough.

Second, the relationships among Flaherty, Dixon, and Colony did not justify estoppel. Dixon was an employee asserting claims against Colony or its agents, while Flaherty was adverse to both Dixon and Colony in the indemnification dispute. Colony therefore had not treated Flaherty and Dixon as interchangeable, and Flaherty could not invoke Dixon’s arbitration agreement as though he stood in Dixon’s place.

The parties’ contracts also pointed against arbitration. Dixon’s agreement focused on disputes between Colony and Dixon and did not refer to indemnification claims brought by nonparties. Flaherty’s own partnership agreement, by contrast, required disputes relating to that agreement to be litigated in New York courts. Flaherty’s arbitration demands had expressly sought indemnification under that partnership agreement, and the court concluded that the claim fell within that agreement’s court-venue provision despite Flaherty’s later reliance on other legal theories.

Finally, the court noted that Colony had not engaged in the type of inconsistent or inequitable conduct that can support estoppel. The court concluded that Colony did not consent to Flaherty’s use of Dixon’s arbitration agreement and that the arbitrator lacked authority to issue an award resolving the dispute.

Disposition

The court granted Colony’s motion to vacate and vacated the arbitration award in its entirety under 9 U.S.C. section 10(a). Because that ruling resolved the motion, the court declined to reach Colony’s other arguments, including whether the arbitrator had authority to decide the arbitrability question under Dixon’s arbitration agreement and the rules of the arbitration service. The court directed the parties to file a joint letter addressing any remaining issues and necessary proceedings.