Non-Party Partnership Held Liable for Arbitration Award, Seventh Circuit (Web)

Lefkovitz v. Wagner: Where plaintiff partners sued other partners, arbitration award against non-party partnership held enforceable.  Consolidation allowed at arbitrator’s discretion where parties consented to arbitrate multiple claims before the same arbitrator.
 
Non-Party Partnership Held Liable for Arbitration Award, Seventh Circuit Looks to Control over Formalities
 
            On January 18th, 2005, the Seventh Circuit upheld confirmation of an arbitral award where the plaintiffs brought suit as individuals against the other partners in a partnership alleging that the defendant partners diverted to themselves partnership income in which the plaintiff partners were entitled to share.  Lefkovitz v. Wagner, 2005 WL 89494.  The plaintiff partners sued in their individual capacities rather than on behalf of the partnership, Jarnis.  The arbitration (pursuant to a AAA arbitration clause in the Jarnis partnership agreement), was consolidated with two other arbitrations and ended with the arbitrator ordering defendant partners to reimburse the partnership more than $7 million and also ordering the partnership to pay plaintiff partners’ attorneys’ fees.
 
            The defendants argued that it was improper for the arbitrator to order the partnership, a non-party in the arbitration, to pay the $1.7 million attorneys’ fees.  However, Judge Posner, writing for the panel, noted that since the defendants controlled two-thirds of Jarnis and the plaintiffs controlled the other third, the only people harmed by the arbitrator’s award against Jarnis would be the plaintiffs, who would ultimately pay a fraction of their own attorney fee award in their capacity as partners.  The decision noted that “ordinarily the award of relief against a nonparty would be just the kind of ultra vires act by an arbitrator that would justify judicial intervention.  But not here.  The only plausible motivation for Jarnis’s arguing against its being included in the award is that the defendants, who control Jarnis, are trying to derail the arbitration because they are dissatisfied with its outcome.” Id. at *3.
 
            The other noteworthy argument at issue concerned the consolidation of the arbitration with two others.  While noting that consolidation of arbitrations is permissible only if the applicable arbitration clauses authorize it, Judge Posner reasoned “[s]ince the parties in interest were the same, and the arbitrator the same, it made perfect sense to consolidate the proceedings.  The defendants’ objection is understandable only as a tactical effort to derail an arbitration that they lost.” Id. at *6.  In a third arbitration consolidated with the first, the arbitrator, but not the parties, was the same.  However, the parties were under the control of the parties to the first arbitration, and therefore, the opinion reasoned, consolidation was not improper.
 
            The court concluded by noting its ability to enforce the arbitral award even though the last arbitration involved neither complete diversity nor a federal question.  Judge Posner found that in the consolidated proceeding the judgment on the third arbitration could be enforced at the discretion of the trial judge under supplemental jurisdiction because it involved a set-off.  “[A] setoff, unlike the usual permissible counter-claim, doesn’t require an independent basis for federal jurisdiction.”  Id. at *6.   
 
The opinion can be found at: Lefkovitz v. Wagnr, 2005 WL 89494 (7th Cir. 2005).  It is also available at: http://caselaw.lp.findlaw.com/data2/circs/7th/034171p.pdf
 
Keywords: Arbitration, Awards, Clauses