Wiederhorn v J. Ezra Merkin
Decided on September 18, 2012
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Mazzarelli, J.P., Catterson, Moskowitz, Renwick, Abdus-Salaam, JJ.
Judgment, Supreme Court, New York County (Richard B. Lowe, III, J.), entered February 9, 2011, awarding petitioner $1,758,744.01 as against respondent J. Ezra Merkin, and bringing up for review an order, same court and Justice, entered August 17, 2010, which, inter alia, granted the petition to confirm an arbitral award, denied respondents' cross petition to vacate the award as against Merkin and to confirm it as to respondent Gabriel Capital Corporation (Gabriel), and granted petitioner's motion to dismiss respondents' counterclaim, unanimously modified, on the law, to the extent of confirming the award as to Gabriel, and otherwise affirmed, without costs.
The following facts are undisputed: Petitioner invested in nonparty Ascot Partners, L.P. (Ascot), a fund operated by respondent J. Ezra Merkin, who allegedly failed to disclose that the fund's monies were funneled to Bernard Madoff to invest. On March 18, 2003, petitioner subscribed for a $500,000 limited partnership interest in Ascot, on behalf of his individual retirement account (IRA). In the subscription agreement, petitioner represented that he was a "qualified purchaser." In order to reach the required $5 million in investments, petitioner included his house and office as real estate held for investment purposes. In 2004, petitioner invested an additional $962,040 in Ascot on behalf of his IRA. Merkin, Ascot's general partner, forwarded the funds to nonparty Bernard Madoff. In 2008, petitioner learned that the funds he had invested were misappropriated during Madoff's perpetration of a "Ponzi" scheme.
Pursuant to the Ascot limited partnership agreement's arbitration clause, petitioner commenced an arbitration against Merkin, Gabriel, and Ascot *fn1 on December 19, 2008. Gabriel provided "accounting and back-office" services to Ascot, and Merkin is Gabriel's sole shareholder. The arbitration clause requires that any dispute arising out of the agreement or breach of the agreement will be submitted to arbitration in New York.
At arbitration, petitioner asserted claims for violation of the New Jersey Uniform Securities Law (NJSA §§ 49:3-51, 49:3-71), breach of fiduciary duty, common-law fraud and deceit, and gross negligence. Following seven days of evidentiary hearings before a three-person panel, a two-to-one majority found in petitioner's favor on his claims for breach of fiduciary duty and violation of the New Jersey Securities Act as against Merkin, and ordered him to pay petitioner restitution in the amount of $1,462,040, plus interest. The arbitral panel dismissed all claims against Gabriel.
Petitioner brought a special proceeding to confirm the arbitral award. Merkin and Gabriel answered jointly, cross-petitioned to vacate the award against Merkin and confirm the award to the extent it dismissed all claims against Gabriel, and counterclaimed for indemnification.
Respondents contended that the arbitral panel found that petitioner misrepresented his status as a qualified purchaser in the subscription agreement. They further argued that pursuant to the indemnification clause in the parties' subscription agreement, they are entitled to recover $1,010,542 in attorneys' fees and $583,092 for expert witnesses, consultants, arbitrators, and transcripts. The indemnification clause of the subscription agreement states in pertinent part: "The Investor [petitioner and/or his IRA] agrees to indemnify and hold harmless ... [Ascot's] General Partner [respondent Merkin] ... [and his] affiliate ... against any and all loss, liability, claim, damage and expense whatsoever (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) arising out of or based upon (i) any false representation or warranty made by the Investor ... in this Subscription Agreement ... or (ii) any action for securities law violations instituted by the Investor which is finally resolved by judgment against the Investor." Respondents also contended that uncontradicted evidence established that petitioner was aware that Madoff had been delegated investment responsibility for substantially all of Ascot Partners' assets prior to petitioner's first investment in Ascot.
The court issued a decision and order dated August 6, 2010, granting petitioner's motion to confirm the award, and denying respondents' cross petition and counterclaim. The court then issued a judgment for petitioner dated January 28, 2011 ordering recovery of $1,758,744 from J. Ezra Merkin. The judgment, however, did not reflect the dismissal of petitioner's claims against Gabriel.
On appeal, respondents Merkin and Gabriel argue that the court erred when it confirmed the award against Merkin but not in favor of Gabriel, and denied Gabriel's counterclaim for indemnification. Respondents argue, inter alia, that a confirmation of the award in favor of Gabriel constitutes a "judgment against the investor," entitling Gabriel to recover attorneys fees and other expenses under the terms of the indemnification clause.
For the reasons set forth below, we modify to confirm the entire award and amend the judgment accordingly, but affirm denial of respondents' counterclaim. Gabriel and Merkin, having charted their course in presenting and reaping the benefits of a joint defense, should not now be considered separately for the purposes of indemnification. Petitioner prevailed in the arbitration against the joint representation of Merkin and Gabriel. Thus, even though the judgment is modified in Gabriel's favor, neither respondent may recover the cost of their joint defense.
As a threshold matter, we note that an arbitration award will not be overturned unless it is violative of a strong public policy, is totally irrational, or exceeds a specifically enumerated limitation on the arbitral panel's power (Matter of Silverman [Benmor Coats], 61 NY2d 299, 308 ...