LiveWire Ergogenics, Inc. v. JS Barkats PLLC

Background

LiveWire Ergogenics, Inc. retained JS Barkats PLLC to provide legal services involving securities reporting, corporate governance, and financing. The firm helped arrange a $30,000 loan from American E Group LLC, an entity whose members included JS Barkats’s managing member, Sanny Joseph Barkats, and his wife. The loan required repayment with 20% annual interest and the issuance of $50,000 in LiveWire stock. A federal court later found the loan criminally usurious and unenforceable.

JS Barkats began arbitration to collect legal fees it claimed were owed under the retainer agreement. The LiveWire parties counterclaimed for constructive fraud, breach of fiduciary duty, breach of the implied promise of good faith and fair dealing, and legal malpractice. After a four-day hearing, the arbitrator found that the LiveWire parties proved legal malpractice and breach of fiduciary duty. The arbitrator concluded that preparing the criminally usurious loan documents, in which Barkats and his wife had a financial interest, was wrongful conduct that defeated JS Barkats’s claim for payment.

Arbitration Award

The arbitrator awarded the LiveWire parties $330,434.02 in consequential damages for legal services, costs, and expenses connected with the federal litigation and arbitration; $6,000 in disgorgement of payment JS Barkats received in connection with the loan; and $16,005 in American Arbitration Association fees. The award included $254,977.83 for the federal litigation and $133,768.08 for the arbitration, after a 15% reduction to the legal invoices. JS Barkats was ordered to pay by April 24, 2022.

Confirmation of the Award

Under Section 9 of the Federal Arbitration Act, a court generally must confirm an arbitration award unless it is vacated, modified, or corrected under the statute. Vacatur means setting aside an award, and the available grounds are limited. Review is highly deferential and does not permit a court to reconsider whether the arbitrator reached the best legal conclusion.

JS Barkats argued that the arbitrator exceeded his authority by awarding fees for federal litigation in which JS Barkats was not a party, because New York law generally follows the rule that each side pays its own legal fees, and because the award conflicted with the Second Circuit’s later refusal to impose sanctions in a related appeal. The court rejected these arguments. It held that the retainer agreement’s arbitration clause covered “any dispute,” which was broad enough to include attorneys’ fees. The court also held that the Federal Arbitration Act allowed the arbitrator to award fees within that broad grant of authority.

The court further concluded that the federal litigation fees could be treated as damages caused by JS Barkats’s alleged malpractice, rather than as an improper shifting of fees from one party to another. It also held that the arbitration fees were supported by the arbitrator’s determination that JS Barkats had acted in bad faith. The later refusal by the Second Circuit to impose sanctions did not prevent recovery of damages tied to the alleged malpractice because those damages were separate from sanctions based on the allegedly frivolous appeal.

Additional Damages and Fees

The LiveWire parties asked the court to add costs incurred after January 31, 2022, including costs related to the appeal, the confirmation proceeding, and a state court challenge to the award. The court concluded that the retainer agreement required disputes about additional arbitration-related damages to be resolved in arbitration, not in the confirmation proceeding.

The court also declined to award fees and costs incurred in seeking confirmation. Although it found JS Barkats’s opposition unpersuasive, it found that the LiveWire parties had not shown that the opposition was filed in bad faith.

Disposition

The court granted the motion to confirm the arbitration award and directed the clerk to close the motion. It did not add the requested post-arbitration damages or award fees for the confirmation proceeding.