United States District Court, Southern District of New York
September 6, 1991
C.T. SHIPPING, LTD., PETITIONER,
DMI (U.S.A.) LTD., RESPONDENT. DMI (U.S.A.) LTD., PETITIONER, V. C.T. SHIPPING, LTD., RESPONDENT.
The opinion of the court was delivered by: Robert L. Carter, District Judge.
This case is before the court on the petition of C.T.
Shipping, Ltd. ("C.T.") to vacate an arbitration award, and the
petition of DMI (U.S.A.) Ltd. ("DMI") to confirm
the same award. The facts of this case, as summarized below,
are set out in greater detail in the arbitration panel's final
award. DMI (U.S.A.) Ltd. v. C.T. Shipping, Ltd., S.M.A. No.
2756 (Apr. 19, 1991) [hereinafter "Final Award"] (Berg,
Nichols, Arbs., Laing, Chmn.) (available on LEXIS, ADMRTY
library, USAWDS file).
The dispute arises under a New York Produce Exchange time
charter party, dated January 27, 1988, between C.T. as owner of
the M/V China Trident and DMI as charterer. See Amended
Verified Petition to Vacate, exhibit 1 (Time Charter)
[hereinafter "C/P"]. The China Trident was also the subject of
a subcharter between DMI as disponent owner and Anglo-Canadian
Shipping Company ("Anglo-Canadian") as charterer. Before the
vessel was to receive its intended cargo of lumber at Prince
Rupert, British Columbia, the Canadian Coast Guard prohibited
the further use of the vessel in Canada until the cargo gear
was repaired and recertified. Anglo-Canadian thereupon refused
to accept the vessel. The gear was not repaired in time to
satisfy the subcharter laycan. Anglo-Canadian then cancelled
the subcharter, and commenced arbitration against DMI at
London, England (the "London arbitration"). In the London
arbitration, DMI was found liable to Anglo-Canadian for roughly
$160,000 in damages.
DMI then commenced the arbitration at issue in this case (the
"New York arbitration") under the head charter, contending that
C.T. failed to provide the vessel with "machinery and equipment
in a thoroughly efficient state" and "in every way fitted for
ordinary cargo service," as required by the charter.
See C/P, lines 6, 22. Pursuant to a provision in the charter,
id. ¶ 17, lines 107-09, the dispute was heard before a panel of
three arbitrators: Jack Berg, appointed by DMI; Alexis Nichols,
appointed by C.T.; and Donald Laing, Jr., the chairman,
appointed by the other two arbitrators. To secure execution of
any eventual judgment on the arbitration award, DMI
successfully commenced attachment proceedings against C.T. in
the United States District Courts for the Eastern and Northern
Districts of California.
After hearing evidence, the panel majority, over Arbitrator
Nichols' dissent, found on April 19, 1991, that C.T. had
breached the charter. The panel awarded DMI a total of
$481,490.83, consisting of lost profits, indemnity for the
liability imposed in the London arbitration, interest on the
foregoing items, costs and legal fees of the London
arbitration, costs and legal fees of the attachment proceeding,
and costs of the New York arbitration. Final Award 21. The
award also stated that interest would continue to run at
specified rates (ranging from zero to 15% per annum for various
parts of the award) if the award was not paid within thirty
days. Id. at 24. The arbitrators' fee, which was "deemed to be
a part of [the] award," id., was fixed at $41,850.00, to be
paid equally by the parties to the arbitrators in the first
instance. Id. app. B.
Subsequently, C.T. filed a petition in this court, No. 91
Civ. 2748 (RLC), to vacate the award on various grounds
pursuant to 9 U.S.C. § 10 and N.Y. CPLR 7511. DMI filed a
petition, No. 91 Civ. 2811 (RLC), to confirm the award pursuant
to 9 U.S.C. § 9. By order of the court, the actions were
consolidated. Because of the maritime subject matter of the
case, the court has jurisdiction over the petitions under
28 U.S.C. § 1333.
I. Choice of Law
C.T. bases its petition to vacate both on a federal statute,
9 U.S.C. § 10, and on a New York statute, CPLR 7511. In
addition, much of C.T.'s argument relies on New York cases.
However, in enacting the Federal Arbitration Act, 9 U.S.C. § 1,
Congress established a national policy favoring
arbitration pertaining to maritime transactions and to
interstate and foreign commerce. Southland Corp. v. Keating,
465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984). It is
therefore clear that the federal statute, when it is
applicable, preempts state statutes purporting to create
grounds for confirming or vacating arbitration awards. See id.
at 10-16, 104 S.Ct. at 858-861; I/S Stavborg v. National Metal
Converters, Inc., 500 F.2d 424, 429-30 (2d Cir. 1974).
Accordingly, CPLR 7511 is inapplicable to this case.
Moreover, a federal court exercising its admiralty
jurisdiction will apply federal maritime law, and not state
law. See, e.g., Offshore Logistics, Inc. v. Tallentire,
477 U.S. 207, 227, 106 S.Ct. 2485, 2496, 91 L.Ed.2d 174 (1986);
Herlofson Management A/S v. Ministry of Supply, Kingdom of
Jordan, 765 F. Supp. 78, 85 n. 7 (S.D.N.Y. 1991) (Carter, J.).
All issues in this case, therefore, are governed not by New
York state law but by federal maritime law.
II. Alleged Grounds for Vacating the Arbitration Award
A. Refusal to Postpone Hearing or to Hear Evidence
C.T. challenges the arbitrators' decision on the grounds that
the arbitrators refused to grant an adjournment of the hearing
to allow C.T. to call as a witness a surveyor for Bureau
Veritas in Singapore (the "B.V. surveyor") who had certified
the China Trident's cargo gear before that vessel proceeded to
Canada. The court is authorized to vacate an arbitration award
"[w]here the arbitrators were guilty of misconduct in refusing
to postpone the hearing, upon sufficient cause shown, or in
refusing to hear evidence pertinent and material to the
controversy; or of any other misbehavior by which the rights of
any party have been prejudiced." 9 U.S.C. § 10(a)(3).
Contrary to C.T.'s interpretation, § 10(a)(3) does not
"expressly provide[ ] that arbitrators who . . . refuse an
adjournment [are] guilty of misconduct." Poles Affirmation ¶
17. Rather, the granting or denying of an adjournment falls
within the broad discretion of the arbitrators. Storey v.
Searle Blatt Ltd., 685 F. Supp. 80, 82 (S.D.N.Y. 1988) (Sweet,
J.); see also Fairchild & Co. v. Richmond F. & P.R.R.,
516 F. Supp. 1305, 1313 (D.D.C. 1981); Dan River, Inc. v. Cal-Togs,
Inc., 451 F. Supp. 497, 503-04 (S.D.N.Y. 1978) (Duffy, J.).
Section 10(a)(3) limits the court's review of the arbitrator's
refusal to adjourn the hearing to a determination of whether
the arbitrators were guilty of misconduct. Storey, supra,
685 F. Supp. at 82. The court will not interfere with an award
on these grounds as long as there exists a reasonable basis for
the arbitrators' refusal to grant a postponement. Id.; see also
Fairchild, supra, 516 F. Supp. at 1313-1314.
By C.T.'s own admission, C.T.'s counsel did not advise the
arbitration panel of its intention to call the B.V. surveyor
until the conclusion of the fourth evidentiary hearing on May
14, 1990, which was over a month after the arbitrators were
sworn in, and nearly nine months after DMI had demanded
arbitration. See Poles Affirmation ¶¶ 10, 12. On May 30, 1990,
C.T.'s counsel informed the panel chairman that the B.V.
surveyor was not immediately available to testify, and
requested an unspecified amount of additional time. Id. ¶ 13.
On June 8, 1990, the panel majority (over Nichols' dissent)
agreed to hold an additional evidentiary hearing on July 10 and
11, 1990 — nearly two months from C.T.'s initial announcement
of its intent to call the witness — with the understanding
that all remaining witnesses would be presented at that
hearing. Id. exhibit 11. C.T. produced one additional witness
at that hearing, but did not produce the B.V. surveyor.
On this basis, it is clear that C.T. has not satisfied its
burden of proving that the arbitrators were guilty of
misconduct in refusing to postpone the hearing further. The
arbitrators could reasonably have concluded that C.T. was
attempting to delay the hearings unnecessarily. They were under
no obligation to grant C.T. an indefinite postponement to allow
it to call a particular witness. The purpose of arbitration is
to provide a speedy and inexpensive determination, without the
extended delays inherent in a court proceeding. The fact that
the panel subsequently took over six months to render its
decision is not sufficient on these facts to establish that the
panel's refusal to grant an adjournment was unreasonable.
Moreover, C.T. has not indicated to this court when, if ever,
it would have been able to produce the B.V. surveyor as a
witness. Consequently, C.T. cannot say that its rights were
prejudiced by the panel's refusal to grant the requested delay.
The court therefore cannot vacate the award on this basis.
B. Accrual of Indemnity Claim
C.T. also contends that the panel majority was guilty of
"manifest disregard of the law" in finding that DMI's claim for
indemnity for the London arbitration accrued when liability was
imposed by the London arbitrators, even though DMI had not yet
paid that claim at the time of the New York arbitration.
Courts have no power to review the merits of an arbitration
award; rather, the arbitrators' findings of fact and
conclusions of law, even if erroneous, are final and binding.
See, e.g., United Steelworkers of Am. v. Enterprise Wheel & Car
Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960). For
an arbitration award to be set aside on the narrow ground of
"manifest disregard of the law," see Wilko v. Swan,
346 U.S. 427, 436-37, 74 S.Ct. 182, 187-88, 98 L.Ed. 168 (1953), the
arbitrators must have "appreciate[d] the existence of a clearly
governing legal principle but decide[d] to ignore or pay no
attention to it." Merrill Lynch, Pierce, Fenner & Smith, Inc.
v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). To support such a
finding, the arbitrators' error "must have been obvious and
readily and instantly perceived by the average person qualified
to serve as an arbitrator." Id. That is, the governing law
ignored by the arbitrators must be "well defined, explicit, and
clearly applicable." Id. at 934.
The panel majority correctly concluded that an indemnity
claim in a maritime case accrues as soon as liability is
imposed. C.T. cites a number of New York cases in support of
the proposition that an indemnity claim accrues only when
payment is made on the underlying claim or judgment, and this
may well be an accurate statement of New York state law.
However, in federal admiralty practice, as distinct from
ordinary civil practice, it has long been the rule that a
plaintiff may collect directly from the defendant's indemnitor
who is made a third-party defendant, without first collecting
from the defendant. Rule 14(c), F.R.Civ.P. In view of the
policy expressed in this long-standing rule, see The G.L. 40,
66 F.2d 764, 766 (2d Cir. 1933), it would be senseless to hold
that a claim for which indemnity is sought must be paid before
a separate action for indemnity may be instituted.
Accordingly, it has been held that a maritime claim for
indemnity accrues as soon as the indemnitee's liability is
determined. Ryan Stevedoring Co. v. United States,
175 F.2d 490, 494 (2d Cir. 1949); Hidick v. Orion Shipping & Trading
Co., 157 F. Supp. 477, 486 (S.D.N.Y. 1957) (Herlands, J.); Dell
v. American Export Lines, Inc., 142 F. Supp. 511, 514 n. 1
(S.D.N.Y. 1956) (Dimock, J.); Hidalgo Steel Co. v. Moore &
McCormack Co., 298 F. 331, 334 (S.D.N.Y. 1923) (Goddard,
J.);*fn1 see United States v. GTS Adm. Wm. Callaghan,
643 F. Supp. 1483, 1485 (S.D.N.Y. 1986) (Sweet, J.). Moreover, it
has been held that a claim for indemnity for attorneys' fees
may be brought when liability on the underlying claim is
imposed, without waiting until the fees are paid. Id.; see also
Peter Fabrics, Inc. v. S.S. Hermes, 765 F.2d 306, 317 (2d Cir.
1985) ("it is left to the court to determine the reasonable
[attorneys'] fees that the client would have paid") (emphasis
Even if C.T. were correct in stating that it had "thoroughly
distinguished" the cases cited by DMI in the arbitration
proceeding, this contention would at best support a conclusion
that the arbitrators had made an error of law, not that they
had deliberately disregarded well-established law. This court
has no power to review an arbitration award for ordinary errors
of law or fact. C.T.'s argument that the award must be vacated
on this basis is frivolous.
C. Award of Attorneys' Fees
As recognized by the arbitrators, see Final Award 20, ¶ 4,
and by both parties in this case, arbitrators lack the
authority to award counsel fees in the absence of an express
power granted to the panel. Sammi Line Co. v. Altamar
Navegacion, S.A., 605 F. Supp. 72 (S.D.N.Y. 1985) (Sand, J.)
(cited by the arbitrators); Transvenezualian [sic] Shipping Co.
v. Czarnikow-Rionda Co., 1982 A.M.C. 1458 (S.D.N.Y. 1981)
(Carter, J.); cf. Federal Commerce & Navigation Co. v.
Associated Metals & Minerals Corp., 1979 A.M.C. 1733 (S.D.N Y
1978) (Weinfeld, J.) (arbitrators may not award fees incurred
in litigation to compel arbitration). But see Todd Shipyards
Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1064 (9th Cir. 1991)
(maritime arbitrators may award attorneys' fees when the losing
party litigated in bad faith). The charter party in this case
includes the standard New York Produce Exchange arbitration
clause (with the modification that the arbitrators must be
"shipping men"), C/P ¶ 17, lines 107-09, which was held not to
authorize an award of attorneys' fees in Sammi and
The court is asked to resolve three issues: (1) whether the
arbitrators were authorized, in accordance with DMI's right to
indemnity, to award attorneys' fees incurred by DMI in
connection with the London arbitration brought by
Anglo-Canadian, (2) whether the arbitrators were authorized to
award attorneys' fees incurred by DMI in the attachment
proceedings, and (3) whether, as C.T. contends, the arbitrators
awarded attorneys' fees sub rosa in connection with the New
1. Attorneys' Fees of the London Arbitration
There is no merit to C.T.'s contention that the arbitrators
exceeded their authority in granting fees to DMI in connection
with the London arbitration. "An indemnitee may recover from
[its] indemnitor attorneys' fees and expenses incurred in
defending a claim as to which [it] is indemnified," although
the indemnitee ordinarily "may not recover fees and expenses
incurred to establish [its] right against the indemnitor."
Peter Fabrics, supra, 765 F.2d at 315-16; see also GTS Adm. Wm.
Callaghan, supra, 643 F. Supp. at 1484-85. Because the New York
arbitrators' award to DMI in connection with the London
arbitration was pursuant to a contractual right of indemnity,
see Final Award 19, ¶ 1, they properly awarded DMI its
attorneys' fees reasonably incurred in connection with the
defense of the London arbitration.
2. Attorneys' Fees of the Attachment Proceedings
The question of the arbitrators' authority to award
attorneys' fees in connection with the pre-arbitration
attachment proceedings in the federal courts appears to be a
matter of first impression.*fn2 C.T. argues, quite plausibly,
that an attachment proceeding in aid of arbitration is related
to the arbitration in much the same way as a petition to compel
arbitration is related to the arbitration. Under Federal
Commerce, supra, 1979 A.M.C. 1733, arbitrators do not have the
authority to award attorneys' fees in connection with a
petition to compel arbitration. Because the fees incurred in
with an attachment proceeding are fees incurred to establish
the same claim as the underlying litigation, they should not be
accorded any different treatment from the fees incurred in
litigating the merits of the underlying claim.
However, because the arbitrated claim is, to a substantial
extent, a claim for indemnity, this case is controlled not by
Federal Commerce, but by Marcy Lee Manufacturing Co. v. Cortley
Fabrics Co., 354 F.2d 42 (2d Cir. 1965). Normally, attorneys'
fees may not be recovered in a civil action to enforce an
indemnity claim, Peter Fabrics, supra, 765 F.2d at 315-16, even
though "`the very nature of indemnity . . . is to make the
party whole.'" Id. at 316 (quoting E.C. Ernst, Inc. v.
Manhattan Constr. Co., 551 F.2d 1026, 1037 (5th Cir.), on reh'g
in part, 559 F.2d 268 (5th Cir. 1977), cert. denied,
434 U.S. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978)). In Marcy,
however, the Second Circuit held that commercial
arbitrators*fn3 do not exceed their authority, within the
meaning of 9 U.S.C. § 10, if they fail to "respect the rule
disallowing legal expenses incurred in enforcing indemnity
claims" by awarding attorneys' fees incurred in connection with
a petition to compel arbitration. Marcy, supra, 354 F.2d at 43.
Indeed, the court noted that "avoidance of that rule, which
necessarily leads to undercompensation, might be one of the
very reasons for an agreement to substitute the arbitral for
the legal process." Id.
This rationale applies to legal fees incurred as a result of
a party's resistance to attachment in aid of an indemnity
claim, no less than to legal fees incurred as a result of a
party's refusal to submit an indemnity claim to arbitration
voluntarily. Accordingly, the court finds that the arbitrators
did not exceed their authority in awarding attorneys' fees
related to the prearbitration attachment proceeding.
3. Attorneys' Fees of the New York Arbitration
C.T. argues that the arbitrators secretly included in their
award an amount for attorney's fees incurred in the arbitration
proceeding itself, and deliberately attempted to disguise it
under the supposedly "ambiguous" term "costs of this
arbitration." It bases this contention on a single statement in
the dissenting opinion of Arbitrator Nichols, in which he
stated that the majority had granted "legal fees . . . in
connection with the London arbitration in the amount of
$57,667.35, plus legal fees of this arbitration in the amount
of $55,000.00." Final Award app. A (dissenting opinion of
Arbitrator Nichols) at 11. Thus, C.T. contends, the majority's
"attempted dissembling" is exposed. Reply Memorandum 9.
This argument is completely frivolous. The supposedly
"ambiguous" and "dissembling" portion of the majority opinion
reads as follows:
We further grant DMI a sum towards costs it
incurred in the arbitration proceeding. CT has
correctly argued that arbitrators lack the power
to award counsel fees in the absence of an express
power granted to the panel or by a stipulation of
counsel. See Sammi Line Co. v. Altamar Navegacion,
S.A., 605 F. Supp. 72 (S.D.N.Y. 1985). However, we
should emphasize that the lack of power to assess
counsel fees relates solely to counsel fees
incurred in this arbitration and not to fees
associated with the London arbitration or the
attachment proceedings. A summary of damages
awarded DMI is as follows:
6. DMI's costs and legal
fees in the London
arbitration ........................... [$] 57,667.25
7. Allowance towards
DMI's legal fees and
costs in the attachment
proceeding and costs
of this arbitration ....................... 55,000.00
Final Award 20-21. Contrary to C.T.'s contention, there is
nothing ambiguous in the panel's ruling. As any reasonable
reader would recognize, the panel explicitly held that it had
no authority to award attorney's fees incurred in the New York
arbitration itself, and thus awarded only "costs" in that
regard, as distinct from "costs and legal fees" in regard to
the London arbitration and the attachment proceeding.
Moreover, the court sees no reason to take the panel's
opinion at anything other than face value. C.T.'s hyperliteral
reading of Arbitrator Nichols' dissent is patently
unreasonable. The reference in that dissent to "legal fees of
this arbitration," viewed in its context and the context of the
majority opinion, evidently refers to the legal fees awarded in
connection with the attachment proceedings related to the
arbitration. Although Arbitrator Nichols only mentions "legal
fees" and not "costs" in connection with the New York
arbitration, he does the same in connection with the London
arbitration; in both instances, it is plainly a minor
inaccuracy on his part. If the dissenting arbitrator really
believed that the majority was dissembling in its opinion,
surely he would not have relied on a brief, inconspicuous,
passing comment to call the situation to the attention of the
parties and the court. The panel majority's "dissembling" is
nothing more than a figment of the overzealous imagination of
D. Security for Arbitrators' Fees
C.T. also contends that the arbitrators were guilty of
"misconduct" or "partiality" in demanding that the parties post
security for the arbitrators' fees in escrow prior to the
issuance of the award.*fn4
C.T. objected to the arbitrators'
demand, but ultimately paid the requested amount into escrow
C.T. relies on Sun Refining & Marketing Co. v. Statheros
Shipping Corp., 761 F. Supp. 293 (S.D.N.Y. 1991) (Mukasey, J.),
which vacated an arbitration award on the grounds of "evident
partiality" based on the allocation of the arbitrators'
fees.*fn5 In that case, the two arbitrators in the majority
had increased their own fees without notifying the dissenting
arbitrator, who had been appointed by the losing party, and
without increasing his fees. Id. at 301. Moreover, there was
additional evidence of partiality and conflict of interest on
the part of the panel chairman. See id. at 302-04.
The circumstances of the present case are not even remotely
similar to those of Sun Refining. The fees in this case were
allocated equally among the three arbitrators, see Final Award
app. B, and C.T. does not allege that the panel majority
excluded the dissenting arbitrator from participating in any of
their decisions. Thus, there is no trace of "petty
vindictiveness" against the dissenting arbitrator. Sun
Refining, supra, 761 F. Supp. at 301. There is no evidence
whatsoever of bias. All that C.T. has to complain about is the
Regardless of which party has the burden of production and
proof, and regardless of whether this issue is to be determined
by a summary judgment standard or by a preponderance of the
evidence standard, DMI has established that the challenged
practice is proper. DMI has presented credible and sufficient
affidavits from three experienced and respected maritime
arbitrators,*fn6 testifying that withholding
awards as security for fees is an accepted practice among
maritime arbitrators. See, e.g., Compagnie des Bauxites de
Guinee v. L'Union Atlantique S.A. d'Assurances, 723 F.2d 357,
363 (3d Cir. 1983) (contract to be construed by reference to
industry custom). C.T. has presented no contrary evidence
whatsoever, but has merely pointed out that the affiants, as
arbitrators, have an economic interest in continuing that
practice. It appears to the court that the practice is quite
sensible and justified. Contrary to C.T.'s suggestion, there is
no reason to believe that the arbitrators' decision was in any
way affected by C.T.'s protest of their fee arrangement. The
court finds that the arbitrators' demand for security for their
fees as a condition for releasing their award affords no basis
for vacating the award.
E. Evident Partiality
According to C.T., the arbitrators' conduct in denying C.T.
an adjournment, exceeding their power, and manifestly
disregarding the law, also establishes that they are partial to
DMI. The party seeking to vacate an award on the ground of
"evident partiality" must show that "a reasonable person would
have to conclude that an arbitrator was partial to one party to
the arbitration." Morelite Constr. Corp. v. New York City Dist.
Council Carpenters Ben. Funds, 748 F.2d 79
, 84 (2d Cir. 1984).
As the court's discussion above makes clear, the arbitrators
did not manifestly disregard the law or exceed their authority,
and their conduct in denying an adjournment was not improper.
Their decision to award attorneys' fees in connection with the
attachment was evidently due to a good-faith misunderstanding
of the scope of their authority. C.T. has failed to make a
showing of evident partiality.
F. Amount of the Arbitrators' Fees
C.T. also claims that the amount of the arbitrators' fees was
"exorbitant." Even if this were true, it would not cast doubt
on the arbitrators' impartiality as between C.T. and DMI,
because the arbitrators allocated the fees equally between the
parties. See Final Award app. B.
More generally, the court will not reach the question of
whether the arbitrators' fee was reasonable or unreasonable,
because three very necessary and interested parties — namely,
the arbitrators — have not been joined in this litigation.
Although the arbitrators stated that their fees were made part
of the award, see Final Award 24, the dispute as to the fees is
fundamentally between C.T. and the arbitrators, not between
C.T. and DMI. Indeed, it would be in DMI's interest to decrease
the arbitrators' fees, not to uphold them. Therefore, DMI lacks
standing to assert the arbitrators' claim that their fees are
Of course, because the arbitrators allocated their fees
equally between C.T. and DMI but declared both parties jointly
and severally liable for the entire amount, DMI could have a
potential claim for contribution against C.T. However, such a
claim would never accrue if the arbitrators, for example,
collected the entire fee from C.T. Thus, any contribution claim
is not ripe for adjudication.
III. Rule 11 Sanctions
A. Liability for Sanctions
DMI has moved for an imposition of sanctions against C.T. and
the attorney who signed its papers pursuant to Rule 11,
F.R.Civ.P. Rule 11 requires the court to impose sanctions
against an attorney, the attorney's client, or both, when it
appears that a pleading, motion or other paper signed by the
attorney has been interposed for any improper purpose, or when,
after reasonable inquiry, a competent attorney could not form
a reasonable belief that the pleading, motion or other paper is
well grounded in fact and is warranted by existing law or a
good faith argument for the extension, modification or reversal
of existing law. See Rule 11, F.R.Civ.P.; Eastway Constr. Corp.
v. City of New York, 762 F.2d 243
, 254 (2d Cir. 1985), cert.
denied, 484 U.S. 918
, 108 S.Ct. 269
, 98 L.Ed.2d 226 (1987);
Healey v. Chelsea Resources, Ltd., 132 F.R.D. 346, 352
(S.D.N.Y. 1990) (Carter, J.).
Some, but not all, of C.T.'s arguments in its memoranda of
law are frivolous. See Eastway Constr. Corp. v. City of New
York, 637 F. Supp. 558, 570 (E.D.N.Y. 1986) (stating that
filings must be divided into their constituent parts),
modified, 821 F.2d 121 (2d Cir.), cert. denied, 484 U.S. 918,
108 S.Ct. 269, 98 L.Ed.2d 226 (1987). Although the court has
rejected C.T.'s arguments regarding the arbitrators' award of
fees in connection with the attachment proceedings and the
arbitrators' refusal to postpone the final hearing, the court
is not persuaded that those arguments had "no chance of
success," International Shipping Co., S.A. v. Hydra Offshore,
Inc., 875 F.2d 388, 390 (2d Cir. 1989), cert. denied,
493 U.S. 1003, 110 S.Ct. 563, 107 L.Ed.2d 558, such that "after
reasonable inquiry, a competent attorney could not form a
reasonable belief that [it] is well grounded." Eastway, supra,
762 F.2d at 254. The court is also unprepared to conclude, at
this stage of the litigation, that C.T.'s challenge to the
reasonableness of the arbitrators' fees was without adequate
However, it is clear that C.T.'s fanciful and scandalous
attack on the honesty of two of the arbitrators in regard to
the award of attorneys' fees is completely frivolous and has no
reasonable factual basis whatsoever.
C.T.'s argument challenging the award of attorney's fees for
the London arbitration also violates Rule 11. Under clearly
controlling Second Circuit precedent, a right to indemnity
includes a right to recover attorneys' fees incurred in
establishing the indemnified claim. On reasonable inquiry, any
competent attorney would have realized that C.T. had no chance
under existing law of succeeding on its claim that the
arbitrators had manifestly disregarded the law in that respect,
and C.T. has not advanced any argument to extend, modify or
reverse the law as it stands. See International Shipping,
supra, 875 F.2d at 390; Healey, supra, 132 F.R.D. at 352.
Similarly, C.T.'s argument regarding accrual of the indemnity
claim is a Rule 11 violation. Even if C.T.'s statement of the
law of indemnity were correct — and it is not — C.T.'s
argument here would still be a futile attempt to subject the
arbitrators' judgment to review in this court for an error of
law. There is absolutely no reasonable basis for its argument
that the arbitrators manifestly disregarded the law.
Rule 11 sanctions are also appropriate for C.T.'s argument
regarding the propriety of the arbitrators' withholding their
decision as security for their fees. It is clear, from C.T.'s
memoranda of law, that C.T.'s attorneys either made the
argument in bad faith or failed to undertake a reasonable
investigation to determine the status of the arbitrators'
procedure. If such an investigation had found that there was a
basis for C.T.'s argument, then C.T. would have had something
other than bare denials with which to contradict the affidavits
of DMI's experts. Thus, it is apparent that C.T.'s argument
regarding the irregularity of the arrangement has no reasonable
factual basis, and is subject to Rule 11 sanctions.
B. Nature and Amount of Sanctions
The court has discretion in fashioning an appropriate penalty
for a Rule 11 violation, but the usual basis of a Rule 11
sanction is the payment of the other side's reasonable
attorneys' fees incurred as a result of the improper filing.
See Eastway Constr. Corp. v. City of New York, 821 F.2d 121
Cir. 1987). However, in this case, it would be difficult or
impossible to separate those fees incurred as a result of the
frivolous arguments from those incurred as a result of the
reasonable arguments, since they are intertwined in the same
document, namely C.T.'s memorandum of law in support of its
petition to vacate the Final Award.*fn7
The court does not
believe that DMI will be able to establish to any degree of
certainty that it incurred additional expenses because of
C.T.'s frivolous arguments,
as distinct from the non-frivolous arguments contained in the
same document. Under the circumstances, the court sees no point
in creating "time-consuming and expensive satellite litigation"
on the issue of fees. Eastway, supra, 637 F. Supp. at 564.
Therefore, the court will not assess attorneys' fees against
C.T. Although some sanction is mandatory for every Rule 11
violation, O'Malley v. New York City Transit Auth.,
896 F.2d 704, 709 (2d Cir. 1990), a reprimand of the attorney who signed
the document will sometimes suffice. See Figueroa-Ruiz v.
Alegria, 905 F.2d 545, 549 (1st Cir. 1990); Thomas v. Capital
Sec. Servs., Inc., 836 F.2d 866, 878 (5th Cir. 1988); Frantz v.
U.S. Powerlifting Fed'n, 836 F.2d 1063 (7th Cir. 1987); 5A C.
Wright & A. Miller, Federal Practice and Procedure § 1336 at
117 (2d ed. 1990). The court finds such a reprimand to be a
sufficient and appropriate sanction in this case.
Because there is no valid ground for vacating the
arbitrators' decisions, the Final Award is confirmed, without
prejudice to any claims between the parties and the arbitrators
as to the amount of the arbitrators' fees. Edward M. Cuddy,
III, the attorney who signed C.T.'s papers, is reprimanded for
failure to comply with Rule 11, F.R.Civ.P. Judgment shall be
entered forthwith for DMI and against C.T. in the amount of
$491,366.04,*fn8 with post-judgment interest at the statutory
rate, and DMI's costs of the action.
IT IS SO ORDERED.