United States District Court, Southern District of New York
September 26, 1990
COOK CHOCOLATE COMPANY, A DIVISION OF WORLD'S FINEST CHOCOLATE, INC., PLAINTIFF,
SALOMON INC., PHILIPP BROTHERS, INC., PHILIPP BROTHERS TRADING CORPORATION, PHILIPP BROTHERS COMMODITIES CORP., COCOA MERCHANTS LTD., DANIEL F. TULIG, MARK GLOWATZ, AND ESTHER GREENFIELD, DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Plaintiff Cook Chocolate Company ("Cook") has moved under
Sections 10(b) and 10(c) of the Federal Arbitration Act
("FAA"), 9 U.S.C. § 10(b), 10(c), to vacate an arbitration
award entered in favor of defendants Salomon Inc. ("Salomon"),
Phillip Brothers, Inc. ("PBI"), Phillip Brothers Trading
Corporation ("PBTC"), Phillip Brothers Commodity Corporation
("PBCC"), Cocoa Merchants, Limited ("CML") (collectively,
"Phibro") and Daniel F. Tulig ("Tulig"), Mark Glowatz
("Glowatz") and Esther Greenfield ("Greenfield") (collectively,
"the individual defendants"). The defendants have cross-moved
under Section 9 of the FAA, 9 U.S.C. § 9, for an order
confirming the award, and also for sanctions against Cook's
attorneys under Rule 11 of the Federal Rules of Civil
Procedure. Because there are insufficient grounds to vacate the
award under § 10, Cook's motion is denied, and the defendants'
cross-motions to confirm the award are granted. The motion for
sanctions under Rule 11 is denied.
Cook is a division of World's Finest Chocolate, Inc.
("World's Finest"), a maker of chocolate and confectioneries.
Cook purchases the ingredients, such as cocoa and sugar, for
World's Finest's use in its production. Salomon is a holding
incorporated in Delaware, headquartered in New York. PBI is a
commodities trading firm which is a wholly-owned subsidiary of
Salomon. PBI owns both PBTC, a member of the New York Coffee,
Sugar, and Cocoa Exchange ("NYCSCE"), and PBCC, a licensed
Futures Commission Merchant and also a member of the NYCSCE.
Both PBCC and PBTC trade cocoa futures on the NYCSCE.
Greenfield, Glowatz, and Tulig are former employees of PBI, all
of whom worked at its cocoa trading desk.
Cook originally filed its complaint on August 4, 1987
charging Phibro and the individual defendants with violations
of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 6b(A)-(D),
and the Racketeer Influenced and Corrupt Organizations Act
("RICO"), 18 U.S.C. § 1962, and asserting several common law
cause of action, in connection with Cook's purchase of physical
cocoa through Phibro. On March 22, 1988, the defendants' motion
to stay the litigation pending arbitration before the Cocoa
Merchants' Association of America, Inc. ("CMAA") was granted.
During the course of the arbitration, Cook returned to this
court seeking an order directing the defendants to comply with
its subpoenas for production of documents and also an order
disqualifying Tulig's counsel for a conflict of interest. On
October 27, 1988, this court denied Cook's motion, stating that
"Cook will be able to challenge the arbitrators' award after
the process is complete. . . ." October 27, 1988 Slip op. at 2,
1988 WL 120464. The time for that challenge has now arrived.
The arbitration panel consisted of three individuals who were
in the business of trading cocoa and cocoa futures: John Bell
("Bell"), the chairman of the panel, the manager of the New
York Cocoa Department for Woodhouse Drake & Carey (Trading)
Inc., an international commodity trading firm; James Jenkins
("Jenkins"), a senior physical cocoa trader at Gill & Duffus,
Inc. and vice president of Gill & Duffus Futures, Inc., both
part of an international commodity trading firm; and Jack Ward
("Ward"), president of Baretto Peat, Inc., the United States
branch of one of the world's largest processors of cocoa beans
and producers of cocoa products. The hearings before the panel
entailed nine days of testimony stretched out over more than
four months, and generated a transcript of over 2000 pages.
Following the close of the hearings, on March 22, 1989, the
panel announced an award dismissing all of Cook's claims
against the defendants, awarding costs and attorneys' fees to
all of the defendants ($392,459.28), and assessing the CMAA's
expenses for the arbitration against Cook ($121,017.04). The
award also provided for Cook to reimburse the CMAA for any
expenses incurred in confirming or collecting the award.
On June 22, 1989, Cook moved to vacate the award under
9 U.S.C. § 10.*fn1 The defendants cross-moved for confirmation
of the award under 9 U.S.C. § 9,*fn2 and sought sanctions
against Cook's attorneys for filing
the motion to vacate. After the motion had been fully briefed
and argued by both sides, on November 21, 1989, Cook filed a
second motion seeking to overturn the award under Rule 60(b) of
the Federal Rules of Civil Procedure,*fn3 or in the
alternative to supplement its earlier motion to vacate. The
motion was briefed again and argued on February 16, 1990. After
further submissions by the parties, the motion was considered
fully submitted on June 21, 1990.
Cook initially advanced five grounds for overturning the
(1) The panel refused to disclose the
relationships between the arbitrators and any of
(2) The panel refused to enforce Cook's subpoenas
to Phibro for the production of documents, thereby
denying Cook access to the evidence necessary to
prove its case.
(3) The arbitrators interfered with Cook's
presentation of evidence by questioning Cook's
witnesses and by altering the order in which
Cook's witnesses testified.
(4) The panel refused to apply the Commodity
Exchange Act ("CEA") and the Racketeer Influenced
and Corrupt Organizations Act ("RICO") to Phibro's
(5) The arbitration was tainted by the conflict of
interest of Tulig's counsel and by the
"[in]ability" of the attorney representing the
panel "to render competent advice."
Plaintiff's Memorandum of Law in Support of Motion to Vacate
Arbitration Award (hereinafter "Cook 6/22/89 Mem.") at 23-36.
In its November 21 motion, Cook essentially repeated many of
the same arguments, but sought to bolster its claim by
reference to additional documents which had by then come to
Cook's attention as the result of other litigation involving
the Phibro defendants and counsel for Cook. Cook asserted that
these documents proved conclusively that the testimony given by
the individual defendants in the arbitration had been
perjurious, that Phibro's counsel had misled the arbitrators,
and that the panel itself had behaved in a fraudulent manner.
Plaintiff's Memorandum of Law in Support of Motion Pursuant to
Rule 60(b) of the Federal Rules of Civil Procedure (hereinafter
"Cook 11/21/89 Mem.") at 19-40.
Unfortunately for Cook, their own arguments merely succeed in
demonstrating that none of the evidence can be said to prove
anything conclusively. As a result, there are simply no grounds
for vacating the arbitrators' award.
A. Cook's Rule 60(b) Motion
The first matter to be discussed is whether Cook's November
motion was properly made under Rule 60(b). As Phibro points
out, the Federal Rules apply primarily to proceedings in the
federal district courts, not those before arbitration panels.
Fed.R.Civ.P. 1. Under Rule 81(a)(3), the rules are extended to
cover arbitration proceedings "only to the extent that matters
of procedure are not provided for in" the Federal Arbitration
Act, 9 U.S.C. Because a motion to vacate an award falls within
the scope of "matters of procedure," and because 9 U.S.C. § 9
explicitly provides for this relief, Rule 60(b) is unavailable
to Cook in contesting the arbitrators' decision.
Therefore, Cook's November motion under Rule 60(b) is denied,
and all papers relating to that motion have been treated as
supplemental submissions on the motion and cross-motions under
§§ 9 & 10.
B. Cook's Motion to Vacate the Panel's Award
Under § 10, there are four possible grounds for vacating an
arbitration award. Briefly stated, these grounds are: fraud or
corruption in the proceeding, bias of the arbitrators, the
arbitrators' refusal to consider relevant evidence or other
misbehavior, and failure of the arbitrators to execute their
powers properly. 9 U.S.C. § 10(a)-(d), supra, n. 1. In
addition, the award must be overturned if the arbitrators acted
in "manifest disregard" of the applicable law. Wilko v. Swan,
346 U.S. 427, 436-37, 74 S.Ct. 182, 187, 98 L.Ed. 168 (1953).
Although Cook does not clearly explain how each of its claims
relates to these grounds, it appears to assert that all four
grounds are met in this case.*fn4
As even Cook concedes, a party seeking to overturn an
arbitration award is under a heavy burden to prove that the
standards for such relief have been met. Office of Supply,
Republic of Korea v. New York Navigation Co., 469 F.2d 377, 379
(2d Cir. 1972); Saxis Steamship Co. v. Multifacts International
Traders, Inc., 375 F.2d 577, 581-82 (2d Cir. 1967). "An award
will be vacated only on one of the grounds specified in section
10 of the Arbitration Act, or if the conduct of the arbitrators
constituted a `manifest disregard' of applicable law." Sidarma
Societa Italiana di Armamento Spa, Venice v. Holt Marine
Industries, Inc., 515 F. Supp. 1302, 1306 (S.D.N.Y.), aff'd
without op., 681 F.2d 802 (2d Cir. 1981). Therefore, it is
necessary to consider each of these grounds to determine
whether all of Cook's claims satisfy any of them.
1. Fraud, Corruption, or Undue Means
Cook asserts that Phibro's counsel repeatedly misrepresented
facts to the panel, with the effect of precluding Cook from
pursuing vital lines of inquiry and preventing Cook from
gaining access to relevant evidence. Review of the record of
the arbitration reveals that at least some of the alleged
"misrepresentations" were not assertions of a testimonial
nature, but rather legal arguments regarding the relevance of
certain evidence or the proper inferences to be drawn from the
evidence. With regard to all of the statements, Cook's
disagreement and its citations of evidence which supports that
disagreement is simply insufficient to do more than to
establish that a reasonable person could have seen things
Cook's way. The fact that there is an argument against the
truth of any of the statements does not establish that the
arbitration award was the result of fraud.
In addition, Cook's assertion of the alleged conflict of
interest of Tulig's counsel and the alleged incompetence of the
counsel for the panel can be considered as a claim for relief
because of the "corruption" of the proceedings.*fn5 However,
not only does Cook fail to support either of the allegations,
it presents no evidence of how either of these factors
prejudiced the proceedings. The fact that Tulig's lawyer's firm
had at one time been counsel to the CMAA itself does not, in
and of itself, suggest a reason for the proceedings to have
Furthermore, Cook's accusations of incompetence and
dishonesty against the panel's attorney were raised during the
proceedings. After independent consideration of the same
evidence presented by Cook in the present motion, the
arbitrators confirmed their confidence in their counsel's
ability and integrity. Tr. at 1057-58. Cook cannot satisfy its
burden of showing how its allegations against the panel's
counsel justify vacating the award through its conclusory
assertion that the attorney's
prior actions had "an obvious impact . . . on the appearance of
his ability to render appropriate legal advice to the panel"
(Cook 6/29/89 Mem. at 19), nor has it demonstrated why such an
impact on the appearance of the attorney's ability rises to the
level which requires reversal of the award. Cf. International
Produce, Inc. v. A/S Rosshavet, 638 F.2d 548 (2d Cir.) (party
seeking to establish evident partiality of arbitrators must
show more than an "appearance of bias"), cert. denied,
451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389 (1981)
2. Partiality of the Arbitrators
Most of Cook's arguments appear to be directed at the
arbitrators themselves. Cook claims that the record as a whole
indicates such partiality in favor of the defendants that the
only explanation is that the panel was biased against Cook from
the start. Upon closer examination, Cook's claims fall into
three general categories:
(1) The panel's rulings against Cook;
(2) The panel's interference in Cook's
presentation of its case; and
(3) The arbitrators' personal behavior, including
animosity toward Cook's counsel and witnesses and
partiality toward defendants' counsel and
The panel's rulings against cook include its decision not to
allow Cook discovery of all of the materials sought, based on
the panel's determination of the materials' relevance, its
alleged failure to apply the CEA and RICO, and its ultimate
decision against Cook. However, there is simply insufficient
evidence to establish even that the panel's rulings were
incorrect, let alone that they stemmed from a venal motive.
See, e.g., Bell Aerospace Co. v. Local 516, UAW, 500 F.2d 921
923 (2d Cir. 1974) (repeated rulings in favor of one party to
arbitration insufficient to establish partiality); cf. Catz
American Co. v. Pearl Grange Fruit Exchange, Inc., 292 F. Supp. 549,
552 (S.D.N.Y. 1968) (party challenging arbitrators'
partiality must demonstrate "something more than `mere error in
the law or failure on the part of the arbitrators to understand
or apply the law'") (quoting San Martine Compania de
Navegation, S.A. v. Saquenay Terminals, Ltd., 293 F.2d 796 (9th
A decision as to whether evidence is relevant is heavily
rooted in the facts, hence even if this court disagreed with
the panel's rulings it would be inappropriate to substitute its
own conclusion for that of the arbitrators. See Saxis Steamship
Co., supra, 375 F.2d at 582. Where the party challenging the
arbitrators' rulings has failed to even demonstrate the error
in those rulings, it cannot be said that the rulings establish
partiality of the panel. Hunt v. Mobil Oil Corp., 654 F. Supp. 1487,
1512 (S.D.N.Y. 1987).
Regarding Cook's claims that the panel refused to apply the
CEA and RICO to the dispute, the record simply does not support
such a finding. Cook's citations to the record indicate that
the panel was not interested in having the statutes read into
the transcript or placed in evidence, not that the arbitrators
saw no relevance in their requirements. The arbitrators'
repeated efforts to "limit" Cook's proof do not clearly
indicate that they were uninterested in possible CEA violations
by Phibro with respect to its transactions with Cook, but can
just as easily be interpreted as a lack of interest in Phibro's
conduct with respect to other accounts.
As for the allegations that the arbitrators' interfered with
Cook's presentation of its case, both by directing a change in
the order of witnesses and by questioning the witnesses
directly, the panel's actions were well within the limits of
its discretion. Cook asserts that in Hunt, supra, 654 F. Supp.
at 1511, Judge Weinfeld "implicitly recognized" "[t]hat the
order of proof is a cognizable component of procedural due
process" (Cook 6/21/89 Mem. at 31). In fact, despite Cook's
hopeful characterization, the Hunt case clearly supports the
arbitrators' actions in this case: "The order of proof clearly
was within [the arbitrators'] discretion. . . . Further, and
more importantly, there is no showing that the Hunts were
prevented, by reason of [the reordering,] from offering any
probative and relevant evidence, oral or documentary, in
support of their claims. . . ."
654 F. Supp. at 1511. See also Catz American, supra, 292 F. Supp.
Indeed, it appears that Cook's desired order of presentation
is precisely the element which led to many of the problems,
including those which prompted the arbitrators to interrogate
the witnesses themselves. Cook's decision to build its case on
the testimony of the three individual defendants prior to
calling its own representatives placed it in a very difficult
position. The witnesses' inability to remember the details of
the transactions at issue, the panel's confusion over what
Cook's theory of the case was, and the continuous conflict with
the numerous defense counsel all contributed to a record which
is unclear and unfocussed. Cook's counsel does not seem to have
helped matters with his attitude toward the panel — Cook
admits that he may have "given as good as he got" (Cook 6/21/89
Mem. at 20) — when the arbitrators attempted to investigate
how Cook sought to prove its damages.
In light of this general confusion, and considering that the
arbitrators were experienced in the cocoa trade — more so than
were any of the lawyers — their attempts to elicit those facts
which they considered relevant to the dispute simply cannot be
condemned as an impermissible abuse of their discretion. An
arbitration proceeding is expected to be both less formal and
more expedient than a formal hearing in court. As the Second
Circuit has noted,
A judge is not wholly at the mercy of counsel, and
would be remiss if he did not participate in
questioning to speed proceedings and eliminate
irrelevancies. A fortiori an arbitrator should also
act affirmatively to satisfy and expedite the
proceedings before [the arbitrator], since among
the virtues of arbitration which presumably moved
the parties to agree upon it are speed and
Ballantine Books, Inc. v. Capital Distributing Co.,
302 F.2d 17
, 21 (2d Cir. 1962). Again, Cook has not carried its burden
of showing that the panel's actions were even improper, let
alone a reasonable basis for accusations of bias.
Finally, Cook relies on the numerous clashes between its
counsel and the arbitrators to prove that the panel was not
impartial. Indeed, it appears that many of those involved in
the proceedings — the defendants, defendants' counsel, the
arbitrators and their counsel — were personally offended by
the behavior of Cook's attorney. Unfortunately, the transcript
does not reveal where or when the mutual dislike first
arose.*fn7 Nevertheless, it appears to be true that Cook's
counsel "gave as good as he got," and perhaps even better.
Under such circumstances, in a proceeding overseen not by
professional judges, who are trained to preserve a neutral
appearance, but by ordinary businessman, the disputes between
the panel and counsel for Cook do not confirm bias such as
would warrant vacating the award.
One possible basis for the panel's attitude toward Cook's
counsel is it awareness of the genesis of the dispute between
Cook and Phibro. Philip Freeman ("Freeman"), Cook's main
witness and damages expert, who was expected to contradict and
impeach the testimony given by the individual witnesses and to
explain how Phibro's behavior had caused Cook to suffer $20
million in damages, was a former employee of Phibro. After he
resigned from Phibro, where his salary was $51,000 per year, he
sought to enter into a contract with Phibro, under which he
would be paid $2.5 million. In this attempt he was represented
by the same firm which represented Cook in this dispute.
Freeman admitted that, after Phibro had rejected his offer, he
had begun to help former Phibro customers to sue Phibro. Tr. at
1326. Freeman also revealed
that he had been retained by Cook under an agreement which
would have paid him 15% of any award Cook received — a
potential pay-off of $9 million, if Cook could recover treble
its alleged $20 million under the RICO allegations. Tr. at
1326-28.*fn8 Particularly in light of the arbitrators'
experience in the cocoa market, they might well have been
suspicious of the motive of both Cook's counsel and Freeman.
Moreover, any hard feelings by the panel appear to have been
directed more at Cook's attorney than at any of its own
representatives. While Cook claims that the panel's bias
against it is demonstrated by the general mistreatment of
Cook's witnesses, careful review of the record belies this
allegation. When the panel directed Cook to bring on its own
first witness, Edmund Opler ("Opler"), Cook's former president
and CEO, it requested that Opler appear on December 5, the next
scheduled hearing date. When Opler appeared on December 6, one
day late, Cook asserts that "the panel berated both counsel and
the witness" because of Opler's failure to appear as scheduled.
Cook 6/22/89 Mem. at 13. The transcript, however, indicates
that the panel criticized Cook's counsel for failing to notify
the panel that Opler would be unavailable, and for not seeking
to reschedule the witness' appearance, but never attempted to
place the blame on Opler. Tr. at 647-52. At a subsequent
hearing, when the panel directed that Cook's counsel choose
either complete the examination of Opler at the December 13
session or else make him available for the January sessions,
counsel refused to do either, insisting that "[w]e will make
that decision for those four days when we feel ready." Tr at
949-50. The panel did not, as Cook claims, "indicate it would
receive no further testimony from" Opler, it merely directed
that if further testimony was necessary, then Opler should be
available for January sessions.
Cook also asserts, as further evidence of the partiality of
the arbitrators, that
the panel insist[ed] that Philip Freeman produce
a particular and lengthy damage computation,
tailored to their specifications, in a period
which included the Christmas and New Year's
holidays, despite the fact that the next scheduled
hearing date was some two weeks after the deadline
for its production.
Cook 6/22/89 Mem. at 20. Again, the transcript indicates that,
while the panel did insist on the deadline over the objection
of Cook's counsel, the date was originally suggested by
Freeman, who never indicated that he considered the assignment
to be the least bit onerous. Tr. at 1024.
The final attack on the panel's partiality is based on the
arbitrators' alleged failure to disclose their past
relationships with the defendants or to allow Cook's attorney
to cover this area with the defendant witnesses. While it may
be true that full disclosure in this area would have been
preferable, the arbitrator's actions fall short of what is
typically required to make out of claim of bias. Cook has not
claimed that it lacked the opportunity at the outset of the
arbitration to investigate any connections between the parties
and the panel members. None of the three arbitrators was
challenged by any of the participants. At some point after the
proceeding had begun, the participants and the panel began to
suspect that Cook's lawyer was attempting to fashion a record
support an eventual claim of bias in the event that the award
went against Cook. See, e.g., Tr. at 492-99. Under the
circumstances, the panel was justified in not allowing Cook's
attorney to delve into these matters during examination of the
3. Misconduct of arbitrators; refusal to hear relevant
For substantially the same reasons as those discussed above,
the arbitrators' conduct of the proceedings was not "the most
egregious error" required by Hunt, supra, 654 F. Supp. at 1511,
to justify overturning the award under § 10(c).
4. Imperfect execution of the arbitrators' powers
None of Cook's arguments state a claim under § 10(d).
5. Manifest disregard of the law
As the Second Circuit has stated,
"Manifest disregard of the law" by arbitrators is
a judicially-created ground, which introduced by
the Supreme Court in Wilko v. Swan, 346 U.S. 427,
436-37, 74 S.Ct. 182, 187-88, 98 L.Ed. 168 (1953).
. . . Although the bounds of this ground have never
been defined, it clearly means more than error or
misunderstanding with respect to the law. The error
must have been obvious and capable of being readily
and instantly perceived by the average person
qualified to serve as an arbitrator. Moreover, the
term "disregard" implies that the arbitrator
appreciates the existence of a clearly-governing
legal principle but decides to ignore or pay no
attention to it. . . . The governing law alleged to
have been ignored by the arbitrators must be well
defined, explicit, and clearly applicable.
Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Bobker,
808 F.2d 930
, 933-34 (2d Cir. 1986). Cook has not met this
standard. Once it is determined, as it has been here, that the
arbitrators were not partial to the defendants or biased
against Cook, Cook's arguments lose much of their weight.
Furthermore, under the circumstances of the present case, there
is nothing about the CEA or RICO which is "well defined,
explicit, and clearly applicable." Id.
Nor is there any facet of Freeman's alleged damages
calculation which is even persuasive, let alone "obvious" or
"clearly applicable." Briefly stated, Freeman claimed that
despite the fact that Opler, who was informed of the prices on
the cocoa futures market daily (Tr. 679), had agreed upon the
price of each and every one of the transactions in dispute (Tr.
676, 686), Cook had somehow suffered $20 million in damages.
The weakness of his theory and the panel's ultimate rejection
of it are more than amply supported by the record. Thus, the
strict limitation placed on review of an arbitration award by
Bobker prevents the reversal of the panel's decision.
C. The Cross-Motions For Confirmation of the Award.
"Absent a statutory basis for modification or vacatur, the
district court's task [is] to confirm the arbitrator's final
award as mandated by section 9. . . ." Ottley v. Schwartzberg,
819 F.2d 373, 376 (2d Cir. 1987). As all of Cook's arguments
for reversal have been disposed of, the award as ordered by the
panel must be confirmed.
D. Phibro's Motion for Rule 11 Sanctions.
Although all of Cook's arguments have been rejected because
of insufficient evidence, it is not "patently clear that [the]
claim ha[d] absolutely no chance of success under the existing
precedents," thus that Rule 11 sanctions are not warranted.
Eastway Construction Corp. v. City of New York, 762 F.2d 243,
254 (2d Cir. 1985).
Although Cook is correct in asserting that it was not
required to appeal the arbitration award under the CMAA rules
prior to filing a motion to vacate the decision, it appears
that most of its arguments presented here would have been
better suited to such a forum. Cook acknowledges that the
burden it bears is a heavy one; unfortunately it has not borne
that burden well. For the foregoing reasons, Cook's motion to
vacate the award of the arbitrators is denied, the defendants'
cross-motions to confirm the award are granted, and the
defendants' motions for Rule 11 sanctions are denied.
It is so ordered.