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LLC v. Pitcairn Properties Inc.

United States Court of Appeals, Second Circuit

July 31, 2013

LJL 33RD STREET ASSOCIATES, LLC, Plaintiff-Cross-Defendant-Appellant,
v.
PITCAIRN PROPERTIES INC., Defendant-Cross-Claimant-Appellee. PITCAIRN PROPERTIES INC., Plaintiff-Appellant,
v.
LJL 33RD STREET ASSOCIATES, LLC, Defendant-Appellee.

Argued: December 13, 2012

LJL 33rd Street Associates, LLC appeals from an order of the United States District Court for the Southern District of New York (Rakoff, J.) reviewing an arbitration award. The district court vacated the arbitrator's determination of fair market value based on the court's conclusion that the arbitrator violated the Federal Arbitration Act, 9 U.S.C. §10(a)(3), by excluding certain evidence offered by Pitcairn Properties, Inc., but upheld the arbitrator's refusal of LJL's demand for a determination of the Purchase Price. The Court of Appeals (Leval, J.) concludes that the arbitrator acted within its discretion in excluding the evidence, and in declining to determine the Purchase Price.

In a separate action, Pitcairn appeals from an order of the United States District Court for the Southern District of New York (Rakoff, J.) dismissing its claims against LJL for breach of fiduciary duties and breach of the implied covenant of good faith and fair dealing. The Court of Appeals (Leval, J.) concludes that Pitcairn's claims were properly dismissed.

For LJL 33rd Street Associates, LLC: THEODORE S. STEINGUT, New York, NY.

For Pitcairn Properties, Inc.: GLENN A. WEINER (Brian R. Fitzgerland, on the brief), Klehr Harrison Harvey Branzburg LLP, Philadelphia, PA.

Before: LEVAL, POOLER, LIVINGSTON Circuit Judges.

LEVAL, Circuit Judge

LJL 33rd Street Associates, LLC ("LJL") and Pitcairn Properties Inc. ("Pitcairn"), adversaries in two related litigations in the United States District Court for the Southern District of New York (Rakoff, J.), each appeal from district court rulings. The controversy between LJL and Pitcairn arises out of LJL's exercise of its contractual option to purchase Pitcairn's ownership stake in a jointly owned high-rise luxury residential building in New York City, after which the parties pursued an arbitration to determine the value of the property. The arbitrator determined that the Stated Value (essentially the fair market value) of the building was $56.5 million, but refused to make a determination of the Purchase Price to be paid by LJL (Stated Value minus certain specified deductions for liabilities, etc.). The district court vacated the arbitrator's determination of the Stated Value, based on its conclusion that the arbitrator committed misconduct in violation of the Federal Arbitration Act, 9 U.S.C. § 10(a)(3), in excluding certain hearsay evidence offered by Pitcairn. The district court upheld the arbitrator's refusal to determine the Purchase Price. LJL appeals from both rulings.

In a separate action, Pitcairn appeals from the court's dismissal of Pitcairn's claims that LJL breached its fiduciary duties and the covenant of good faith and fair dealing in its exercise of the purchase option and in alleged subsequent interference with Pitcairn's efforts to ascertain the market value of Pitcairn's ownership stake in the building.

In LJL's appeal, we agree with its contention that the arbitrator's exclusion of Pitcairn's hearsay exhibits was within the arbitrator's authorized discretion. We therefore vacate the district court's order overturning the arbitrator's determination of the Stated Value. We agree with the district court's conclusion that the arbitrator acted in accordance with the terms of the arbitration agreement in refusing to determine the Purchase Price. We therefore remand with instructions to confirm the arbitration award in its entirety. In Pitcairn's appeal, we find no error in the district court's dismissal of Pitcairn's claims for breach of fiduciary duties and breach of the covenant of good faith and fair dealing. We therefore affirm that judgment.

BACKGROUND

A. The Property and the Operating Agreement

LJL and Pitcairn are the sole equity owners of a limited liability company known as 35-39 West 33rd Street Associates, LLC (the "Company"), whose sole asset is a luxury high-rise apartment complex at 35-39 West 33rd Street in Manhattan (the "Property"). Pitcairn is a wholly owned subsidiary of Pitcairn Properties Holdings, Inc. ("Pitcairn Holdings") and owns 49.99% of the Company. Pitcairn is an owner, developer, and manager of real estate assets, and manages the Property. LJL is a New Jersey limited liability company, owned by Les Lustbader and his children, Jared and Lauren Lustbader, that owns 50.01% of the Company.

LJL and Pitcairn have an elaborate and specific Operating Agreement governing aspects of their shared ownership of the Company; the agreement provides an arbitration clause of limited scope. The sections of the Operating Agreement of particular pertinence to this appeal are Sections 8.8, 6.12(c), and 11.19. The agreement specifies two terms of significance: Stated Value and Purchase Price, which are defined in Section 6.12 to mean grosso modo fair market value and fair market value minus liabilities.

Section 8.8 gives LJL the option, if Salah A. Mekkawy ceases to be employed by Pitcairn, to purchase Pitcairn's interest "pursuant to the terms, conditions and procedures set forth in Section 6.12(c)." It goes on to add that the Stated Value shall be determined by agreement between Pitcairn and LJL, but "[i]f Pitcairn and LJL are unable to agree upon the Stated Value . . ., then either party may elect that such dispute be determined by Expedited Arbitration pursuant to Section 11.19, whereupon the arbitrator shall select an independent, third party . . . appraiser who shall determine the Stated Value."

Section 6.12(c) explains how the Purchase Price (the price to be paid by LJL for Pitcairn's interest) is to be derived from Stated Value. (The full text of Sections 8.8 and 6.12(c), insofar as pertinent, are set out in the margin.)[1]

Section 11.19 states that arbitrated disputes will be resolved by "the Expedited Arbitration procedures of the American Arbitration Association" with certain modifications, including that each party "shall be entitled to present evidence and witnesses to support its position and to cross-examine witnesses presented by the other." It specifies,

Any provision of this Agreement which specifically provides that a dispute will be resolved by the Expedited Arbitration provided in this Section 11.19 shall be resolved by the Expedited Arbitration Procedures of the American Arbitration Association. . . . In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the ...

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