A recent decision by Westchester Commercial Division Justice Gretchen Walsh demonstrates how even a non-party subpoena from an arbitrator can quickly and irrevocably lead to party status and considerable liability if you fail to respond. The case, In re Sivanesan v. YBF LLC et al., Index. No. 67996/2018, showed that parties who believe they can take a “wait and see” approach and then seek redress with a state or federal court run a huge risk in light of the astonishingly limited scope of judicial review of arbitration awards. Here’s what happened:

An Agreement Is Breached

Petitioner Janu Sivanesan was a consultant for YBF LLC, a company that sells retail cosmetics products worldwide. In 2009, she was retained by YBF to help the company regain ownership of the “YBF” trademark and related marks from a third party. The deal closed, but Sivanesan did not get paid. Under her consulting agreement, she was entitled to hourly pay and a three-percent equity interest as compensation. After unsuccessfully attempting to secure her compensation, Sivanesan commenced an arbitration through JAMS as required in the agreement. The Arbitrator was Hon. Helen E. Freedman (Ret.).

The Arbitrator found that YBF’s owners repeatedly acknowledged its debt to Sivanesan but failed to pay her. The wrinkle came in with regard to respondents TPR Holdings LLC and Visual Beauty LLC. TPR is an investor in the health, beauty, and wellness industries. During the arbitration, TPR purchased the rights to the YBF trademarks that Sivanesan had helped YBF regain; Visual Beauty is a shell company created for that transaction. When Sivanesan learned of TPR’s purchase, she argued that TPR and Visual Beauty were successors-in-interest to YBF such that they were jointly and severally liable.

The Arbitrator Issues Subpoenas

The Arbitrator issued subpoenas to TPR and Visual Beauty, and although the two entities were not parties to the arbitration, the subpoenas made clear that Sivanesan believed them to be successors-in-interest such that they should be held liable for YBF’s alleged defaults.  When neither party appeared for the arbitration or responded to the subpoenas, Sivanesan made an oral motion at the hearing to add them as parties. The motion was granted, and the Arbitrator agreed that TPR and Visual Beauty were successors-in-interest and jointly and severally liable to Sivanesan for the compensation sought.

This got the attention of TPR and Visual Beauty. After Sivanesan filed a petition in the Westchester Commercial Division seeking an order confirming the Arbitrator’s award, TPR and Visual Beauty cross-petitioned to vacate the award. They argued that their due process rights were violated because the subpoenas did not constitute notice of the prospect that they could be added as parties should they fail to respond. TPR and Visual Beauty argued that the subpoenas only indicated that noncompliance could result in a court order compelling them to attend or, at most, punishing them for contempt.

The Court’s Decision

Under the CPLR, arbitration awards may be vacated only if the award: (1) violates a strong public policy; (2) is irrational; or (3) clearly exceeds a specifically enumerated limitation on the arbitrator’s power. As to the “irrationality” prong, an award is considered rational if “any basis for the conclusion is apparent to the court.” Even a clear legal error by the arbitrator is not grounds to vacate the award if it does not meet one of the three criteria above. Clearly, very few arbitration awards are going to fail this test.

And the one in this case, like most others, did not, as Justice Walsh was unconvinced by TPR’s arguments. The Court held that the subpoenas provided TPR and Visual Beauty with notice that the Arbitrator intended to take evidence on the issue of whether the two entities were successors-in-interest and should be held liable to Sivanesan. Apprised of that fact, the implications were clear and TPR and Visual Beauty could not complain of lack of due process. While Justice Walsh appeared to agree that TPR and Visual Beauty had received adequate notice of the possibility they could be added as parties, the Court cautioned that even if it had found fault with the Arbitrator’s approach, its ability to vacate the award would be extremely limited.

Takeaway: Under both New York and federal law, courts will be extraordinarily deferential to arbitration awards, making it all the more incumbent on counsel to respond to arbitrators’ subpoenas just as if they had been received from a court of law. In short, those who believe that an arbitrator’s decision will not be the last word do so at their peril.