Graceman v. Goldstein

MOTZ, Judge. An arbitrator awarded appellants, Lloyd and Leila Grace-man, $72,268.69 in their dispute against appellees, Jerry Goldstein and seven other investors (the “Buyers”), who ⁶⁶¹ purchased the stock of a women’s apparel business from the Gracemans. The Circuit Court for Montgomery County vacated the award, principally because it found that the arbitrator of the dispute between the Gracemans and the Buyers exhibited “evident partiality” in favor of the Grace-mans and, secondarily, because a “significant and substantial question” existed as to whether the arbitrator exceeded his power in determining the amount of the award. Because the conduct allegedly evidencing the arbitrator’s “partiality,” although known to the Buyers, was not objected to prior to the arbitration award, because post-award “partiality” cannot form the basis for vacation of an award, and because the arbitrator did not exceed his jurisdiction, we reverse.

(i) In 1987, the Gracemans were the sole stockholders and officers of Mademoiselle Fashions, Inc. (“MFI”), a chain of women’s ready-to-wear stores. At that time, both the business and Mr. Graceman’s health were in decline. Arrangements were made for the sale of the MFI stock to a group of investors, who intended to revitalize the corporation by paying off its old debts and “buying new merchandise and fixing up the outdated stores.” On March 2, 1987, the Gracemans signed a Letter of Intent that had been executed by the Buyers’ representative, in which the Buyers agreed to buy the stock of MFI for a purchase price of $100,000. In the Letter of Intent, which because of the haste of negotiations served as the contract between the parties, the Buyers agreed to pay the Gracemans $9,500 at closing.

In addition, the parties agreed, in paragraph 2 of the Letter of Intent, that the Buyers “will pay to Sellers [the Gracemans] the sum of $90,500.00 ... The $90,500 will be paid as follows: (a) $10,500 to be paid 90 days after closing provided that as of the date of Closing there is at least $100,000 of good and salable inventory at cost on order on a non-C.O.D. basis____ (b) $80,000 in the form of a promissory note from the Corporation payable at a 10% ⁶⁶² interest per annum____” As additional consideration for the stock transfer, the Letter of Intent provided that the Buyers would individually indemnify the Gracemans on their guaranty of a loan to MFI from Citizens Bank of Maryland. The Letter of Intent also set forth a list of “Representations and Warranties of Sellers.” The list contained numerous warranties, including stipulations that all non-vendor bills were current and no leases were in default; accounts payable to trade vendors did not exceed $355,000 as of January 31, 1987; MFI had on order, received, or approved for delivery after February 1, 1987, at least $100,000 of good and salable inventory at cost on a non-C.O.D. basis; MFI had at least $500,000 in inventory on hand at the lower of cost or market value; MFI’s balance sheet and profit and loss statement fully and accurately presented the corporation's entire financial position; and the Gracemans had “neither made nor have knowledge of any representations to or agreements with any vendors regarding payment of outstanding accounts payable.” At closing, the Buyers paid the Gracemans $9,500 and gave them a promissory note in the amount of $90,500 from MFI. Although it was apparently undisputed that at closing there was “at least $100,000 of good and salable inventory at cost on order on a non-C.O.D. basis,” the Buyers did not pay $10,500 to the Gracemans 90 days after closing as required by paragraph 2(a) of the Letter of Intent.

Indeed, after making an initial payment of $754.17 on the $90,500 promissory note, neither the Buyers nor MFI paid the Gracemans any more money under paragraphs 2(a) or 2(b) of the Letter of Intent, because the Buyers asserted that they had discovered numerous breaches of warranties by the Gracemans, upon taking over MFI. In March 1988, MFI went out of business; shortly thereafter, some of MFI’s creditors filed an involuntary bankruptcy petition against the corporation. At the time MFI failed, a portion of the Citizens Bank loan was still outstanding and the Gracemans paid it off in ⁶⁶³ March 1988, in the amount of $46,597. In September 1989, the Gracemans filed suit for indemnification in the amount of $46,597.

The Buyers responded by asserting their claims against the Gracemans and filing a demand for arbitration as provided in the Letter of Intent. The parties ultimately agreed to submit their disputes to “binding arbitration before the American Arbitration Association.” In arbitration, the Gracemans sought to recover $46,597.08 in principal amount and $15,944.05 in interest for breach of the indemnification agreement; $10,500, the amount due under paragraph 2(a) of the Letter of Intent from the Buyers ninety days after closing, and interest on that amount at 10% per annum from June 4, 1990 through December 1, 1990; $79,245.83, “the outstanding balance on paragraph 2(b) of the Letter of Intent” ($80,000 — one payment of $754.17 = $79,245.53); and further “interest at 10% per annum.” In turn, the Buyers sought to recover $1,005,702 in compensatory and punitive damages and other costs. The amount sought by the Buyers represented alleged losses due to “inventory misrepresentation”, “accounts payable misrepresentation”, unpaid bills, and “loss of investment”, minus credits to the Gracemans for the $46,597.08 debt paid by the Gracemans to the Citizens Bank and the $90,500 corporate promissory note. A series of arbitration hearings were held, usually in Rockville, Maryland.

Due to Mr. Graceman’s poor health and inability to travel, however, his testimony was taken in Florida, where he had moved. On January 28, 1991, the arbitrator awarded the Gracemans $72,268.69 and denied all of the Buyers’ claims. The arbitrator issued no findings of fact or explanation as to how this award was computed. On February 27, 1991, the Buyers filed a petition to vacate the award.

In support of their petition, the Buyers asserted that the arbitrator (1) exceeded his powers in calculating the award, because he included damages based on the promissory note of the corporation that was in bankruptcy and not a party to the proceedings; (2) misled the Buyers by ruling “that the corporate note ... was not an issue in ⁶⁶⁴ the case and then making an award based at least in part upon it after defendants did not deal with the issue in their post-hearing brief in reliance upon the arbitrator’s ruling”; and (3) “exhibited evident partiality by telling [Buyers’ counsel] during a break in the hearing how sorry he felt for Lloyd Graceman because of Graceman’s poor physical condition and how ‘very brave’ Graceman was to testify in his condition.” The petition to vacate was supported by a number of exhibits, including the affidavit of the Buyers’ counsel. In that affidavit, the Buyers’ attorney stated that the arbitrator, in a private hallway conversation, indicated sympathy for Mr. Graceman and, at the conclusion of the hearings, stated that the $90,500 note was solely “a corporate obligation” and so not “an issue in the case” and for this reason the note was not discussed by the Buyers in their post-hearing briefs. The Gracemans filed a motion to confirm the award and in opposition to the petition to vacate. The Gracemans attached to their motion an affidavit that they had secured from the arbitrator in which he denied the assertions of the Buyers’ counsel.

Specifically, the arbitrator stated that his recognition of Mr. Graceman’s poor physical condition “did not in any way cause” him to favor the Gracemans, and that he had never indicated that the corporate note was “not an issue in the case” or directed the Buyers not to discuss the corporate note in their post-hearing brief. The Buyers responded to the Gracemans’ motion, asserting, inter alia, that the fact that the Gracemans had obtained an “ex parte affidavit” from the arbitrator “demonstrate[s] conclusively the ethical blind spot of the arbitrator in this case.” On September 5, 1991, a hearing was held in the circuit court. There, the Buyers again reiterated their claims that the arbitrator wrongfully based at least part of the award on the corporate note and was unfairly biased for the Gracemans. In support of the latter claim, the Buyers asserted that, in addition to submitting an affidavit in support of the Gracemans and acknowledging sympathy for ⁶⁶⁵ Mr. Graceman’s condition, the arbitrator was seen driving with the Gracemans to or from the airport in Florida.

The circuit court issued oral findings in which it initially concluded that “there is a significant and substantial question as to whether the [arbitrator] in this case exceeded his power by awarding more than $62,541 [the total of the principal and interest on Citizen’s Bank debt].” Then, as its “major holding,” the court found that “the actions taken by the [arbitrator] in filing an affidavit, under the circumstances in this case, to support and seek to uphold the award, constitutes ... evident partiality.” The lower court found that the alleged conversations about Mr. Graceman’s health and “ride back and forth to the airport” were insufficient grounds “to cast doubt upon the award,” but found the fact that the Gracemans’ attorney apparently drafted the arbitrator’s affidavit “suggests collaboration far beyond any normal, and suggests evident partiality, as well as prejudicial misconduct.” 1 The court then ordered the award vacated. (ii) Under Maryland’s Uniform Arbitration Act, a circuit court in Maryland has no authority to vacate an arbitration award unless: (1) The award was procured by corruption, fraud, or other undue means; (2) There was evident partiality by an arbitrator appointed as a neutral, corruption in any arbitrator, or misconduct prejudicing the rights of any party; (3) The arbitrators exceeded their powers; ⁶⁶⁶ (4) The arbitrators refused to postpone the hearing upon sufficient cause being shown for the postponement, refused to hear evidence material to the controversy, or otherwise so conducted the hearing contrary to the provisions of [Md.Cts. & Jud.Proc.Code Ann.] § 3-213, as to prejudice substantially the rights of a party; or (5) There was no arbitration agreement as described in § 3-206, the issue was not adversely determined in proceedings under § 3-208, and the party did not participate in the arbitration hearing without raising the objection. Md.Cts. & Jud.Proc.Code Ann. § 3-224(b) (1989). Thus, the circumstances under which an arbitration award may be vacated are very narrow.

See Communications Equip. Workers, Inc. v. Western Elec. Co., 320 F.Supp. 1277, 1280 (D.Md.1970) (“a reviewing court cannot look to the merits of an arbitration award and a court cannot overturn the decree unless it is found that the award lacks any facts to support it or that the decree is not within the essence of the contract”). The principal basis upon which the circuit court vacated the award here is “evident partiality.” Md.Cts. & Jud.Proc.

Code Ann. § 3-224(b)(2). A finding of “ ‘evident partiality’ requires more than speculation and bald allegations of bias.” Wyndham v. Haines, 305 Md. 269, 279 , 503 A.2d 719 (1986). “The moving party must prove facts sufficient to permit an inference that there was indeed partiality by an arbitrator.” Id. Here, the Buyers base their claim of arbitrator’s bias on the arbitrator’s conduct during two different periods, i.e., after the award was ordered and during the actual arbitration proceedings. We address each in turn.

The Buyers identify post-award evidence of partiality as (a) collaboration between the Gracemans and the arbitrator on the arbitrator’s affidavit; and (b) a “courthouse meeting” between the arbitrator and the Gracemans’ counsel “immediately following the September 5th hearing, ⁶⁶⁷ even going into a private conference room behind a closed door.” The Gracemans acknowledge this conduct but maintain that it “does not show bias.” They explain that, after they learned for the first time from the affidavit of the Buyers’ counsel (attached to the Buyers’ motion to vacate) that he had a private conversation with the arbitrator in which the arbitrator had allegedly said that Mr. Graceman was “very brave,” a “very sick man” and that the arbitrator was “amazed” at Mr. Graceman’s ability to testify, they contacted the arbitrator “to find out if [the Buyers’ allegations] were true.” When the arbitrator replied that they were not and agreed to file an affidavit setting forth the arbitrator’s recollection of events, the Gracemans’ counsel “prepared an affidavit and submitted it to the arbitrator.” The arbitrator made some revisions and deletions to the draft, indicating his “unwillingness to attest to a point that favored the Gracemans and thus retaining his neutrality throughout the post-award hearings,” and the revised affidavit was then filed. When the Buyers suggested that the arbitrator’s affidavit itself indicated his bias, the Grace-mans subpoenaed the arbitrator to appear as a witness at the circuit court hearing. After it became apparent that there would be no witnesses at the hearing, counsel for the Gracemans found the arbitrator in the courthouse library and “rather than disturb library patrons” went into “a conference room where this information was imparted to the Arbitrator.” In our view, this explanation is entirely plausible. There is absolutely nothing in the record that in any way indicates this is not precisely what happened.

Although the Buyers put a more sinister gloss on these facts, even they do not offer any evidence to the contrary. The circuit court considered the Gracemans’ explanation as to how and why the affidavit came to be prepared, however, and was not satisfied with it. Specifically, the lower court rejected the Gracemans’ argument that the arbitrator’s affidavit was sanctioned by Maryland Rule 2 — 311(d): ⁶⁶⁸ I do not agree with the interpretation of the rule read by [the Gracemans’ counsel]. The rule as I read it, the rule as I interpret it, says that when evidence outside the record needs to be rebutted or offered, an affidavit is appropriate.

Nowhere does it say that the affidavit is appropriate from the arbiter [sic] who decided the case, and certainly an affidavit of this kind is not appropriate. Rule 2-311(d) provides: (d) Affidavit. — A motion or a response to a motion that is based on facts not contained in the record or papers on file in the proceeding shall be supported by affidavit and accompanied by any papers on which it is based. The language of the rule itself does not in any way suggest that it is inapplicable to a motion to confirm or vacate an arbitration award or opposition thereto, or to an arbitrator’s affidavit in support of such a motion or opposition. 2 Moreover, in Wyndham v. Haines, the Court of Appeals clearly indicated that Rule 2-311(d) is applicable in these contexts. There, the Court noted, without criticism, that a party had submitted an arbitrator’s affidavit in support of its motion to dismiss an appeal from an arbitration award and its opposition to a petition to vacate the award. 305 Md. at 271 n. 1 and 272 n. 3, 503 A.2d 719 .

Furthermore, and perhaps even more significantly, the Wyndham court held that those seeking to vacate the arbitration award on the ground of the arbitrator’s “evident partiality” had “failed to adduce the required proof” because “[t]heir petition to vacate was unsupported by affidavit despite the mandate of Md. Rule ⁶⁶⁹ 2-311(d).” 305 Md. at 279 , 503 A.2d 719 . (emphasis added.) Thus, rather than being evidence of bias, it well may be that the arbitrator’s affidavit was necessary here; that is, without it the Gracemans’ opposition (like the plaintiffs’ motion in Wyndham) would have failed for lack of the “required proof.” See also Robinson & Wells v. Warren, 669 P.2d 844, 846 (Utah 1983); Kauffman v. Haas, 118 Mich.App. 816 , 318 N.W.2d 572, 574 (1982); Annot., “Arbitrator’s Testimony — Admissibility” 80 A.L.R.3d 155 , 201-05 (1977). Even if the preparation of the post-award affidavit or the post-award “courthouse meeting” between the arbitrator and the Gracemans’ counsel did indicate arbitrator bias (which we do not believe they did), however, that would be irrelevant to a motion to vacate the arbitration award. This is so because the question to be addressed by a court in determining when an arbitration award is to be vacated for “evident partiality” is “whether the arbitration proceedings were fundamentally unfair.” Forsythe Intern., S.A., v.