Madryn Asset Management, LP v. Trailmark Inc.

Background

Madryn Asset Management, LP petitioned under the Federal Arbitration Act to vacate an interim arbitration award on liability issued in favor of Trailmark Inc. The dispute arose from a 2017 advisory agreement under which Trailmark was Madryn’s exclusive placement agent for certain funds, including funds referred to as “Fund II” and “Fund III.” The agreement provided for placement fees and other compensation.

The parties expected that MHP II would follow Madryn’s first fund, MHP. Madryn nevertheless worked with another potential placement agent, concealed its preliminary work on MHP II from Trailmark, and later retained Lazard as the placement agent for MHP II. Madryn also presented Madryn Select Opportunities LP, or MSO, to Trailmark as “Fund II.”

Trailmark began arbitration, alleging that Madryn breached the implied covenant of good faith and fair dealing by improperly depriving Trailmark of fees under the agreement. Madryn asserted a counterclaim alleging that Trailmark repudiated the agreement by refusing to accept MSO as “Fund II.” The parties agreed to bifurcate, or separate, liability and damages. After a five-day evidentiary hearing, the arbitrator issued an interim award finding Madryn liable and dismissing Madryn’s counterclaim. The arbitrator reasoned that Madryn’s prior breach excused Trailmark’s later nonperformance.

Jurisdiction to Review the Interim Award

Trailmark argued that the court lacked subject matter jurisdiction because the award did not decide damages and therefore was not final. The court recognized the general rule that an arbitration award ordinarily must decide both liability and damages to be final. But it held that an exception applied because the parties expressly agreed to decide liability first and damages later.

Because the arbitrator fully decided liability as the parties had requested, the court held that the interim award was a final partial award that the court could review.

Madryn’s Challenge to the Award

Madryn argued that the arbitrator had manifestly disregarded the law. This is a narrow basis for vacating an arbitration award, requiring proof that the arbitrator knew a clearly applicable legal rule, understood that it controlled the disputed issue, and willfully refused to apply it. The court emphasized that it could not conduct a fresh review of the dispute or overturn an award merely because it disagreed with the arbitrator’s reasoning, so long as the award had at least a barely colorable justification.

The court rejected Madryn’s argument that the arbitrator improperly considered evidence outside the agreement. Under New York law, the implied covenant of good faith and fair dealing requires parties not to act in a way that destroys or injures the other party’s right to receive the agreement’s benefits. Determining whether that duty was breached can require consideration of the parties’ course of performance and course of dealing, even when the contract’s language appears clear.

The court also rejected Madryn’s argument that the arbitrator added obligations inconsistent with the agreement. The court explained that the arbitrator did not hold that Madryn was forbidden from raising MSO or that Trailmark had an independent right to reject MSO and wait for a more lucrative opportunity. Instead, the arbitrator evaluated Madryn’s insistence that Trailmark work on MSO as “Fund II” in the broader context of Madryn’s concealment of its work on MHP II and its efforts to replace Trailmark. The arbitrator found that this conduct was part of a bad-faith scheme to deny Trailmark the placement fees it reasonably expected to earn from MHP II.

The court further held that the arbitrator’s finding that Madryn had a legitimate business purpose for raising MSO did not conflict with the finding that Madryn breached the implied covenant. A legitimate purpose for raising MSO did not necessarily justify concealing work on MHP II or attempting to replace Trailmark. The court also declined to revisit the arbitrator’s factual findings.

Disposition

The court denied Madryn’s petition to vacate the interim arbitration award. The court also denied Madryn’s request for oral argument as moot. The Clerk was directed to close the motion pending at Docket Number 7, and the parties were ordered to file a joint letter by April 5, 2024, stating their views on whether the case should be terminated.