United States District Court, S.D. New York
OPINION AND ORDER
M. FURMAN, United States District Judge
these consolidated cases, one of which was filed here and one
of which was removed here from New York state court,
Petitioner LGC USA Holdings (“LGC” or
“Petitioner”) seeks to confirm the results of
bitterly contested arbitration proceedings with its former
partners in the international diamond business and related
entities, Respondents Julius Klein Diamonds, LLC
(“JKD”); Julius Klein Group Holdings, LLC; Julius
Klein Diamonds, Inc.; Klein Tenancy; KLG Jewelry LLC
(“KLG”); Sunrise Venture LLC
(“Sunrise”); Martin Klein; Moishe Klein; Malka
Klein; and Abraham David Klein (collectively, the
“Kleins” or “Respondents”). Not
surprisingly, the Kleins oppose LGC at every turn: They argue
that the cases should be dismissed for lack of subject-matter
jurisdiction; failing that, that the removed case should be
remanded back to state court and the remaining federal case
dismissed on abstention grounds; and, failing that, that the
arbitration award should be vacated because, among other
things, the arbitrators were partial, corrupt, and acted in
manifest disregard of the parties' agreements and the
Kleins' attacks on the arbitration award are far from
frivolous. They make troubling allegations about, among other
things, undisclosed connections between the putatively
neutral arbitrator and both LGC's chosen arbitrator and
LGC itself, not to mention the neutral arbitrator's
failure to disclose criminal charges that resulted in his
conviction during the arbitration proceedings. If the Court
were reviewing the award de novo or deciding the
parties' disputes in the first instance, the Kleins'
allegations might well warrant a different result. But the
Court is required to give substantial deference to the
arbitrators and to carefully parse whether the Kleins'
attacks on the award are legitimate gripes or after-the-fact
complaints of losing parties. In light of those
considerations and a close review of the record, the Court
concludes that the Kleins' challenges fall short: that
the Court has subject-matter jurisdiction; that the state
case was properly removed to this Court; and that the Kleins
either waived their challenges to the neutral arbitrator or
have failed to present sufficient cognizable evidence to
support vacatur. Accordingly, and for the reasons stated
below, the Court confirms the arbitration award and denies
the Kleins' motions to dismiss, remand, and vacate.
which is incorporated in Delaware and headquartered in New
York, is part of an international diamond business owned by
Lev Leviev. (16-CV-5294, Docket No. 25 (“LGC
Pet.”) ¶ 2). Respondents are “individuals or
companies affiliated with a diamond business controlled
by” Respondent Martin Klein. (Id. ¶ 3).
In 2002, LGC and the Kleins agreed to become “joint
venture partners” in three diamond businesses: JKD,
KLG, and Sunrise. (Id. ¶ 10). To simplify the
process of unwinding their joint ventures if or when the need
arose, the parties agreed - at least with respect to JKD - to
establish a valuation each year that would serve as
“the basis for determining the buyout” price; if
the parties could not agree on a buyout price, they would use
“the most recent valuation.” (16-CV-5294, Docket
No. 27 (“Leviev Aff.”) Ex. 13 ¶ 1
(establishing the buyout procedures for JKD); Leviev Reply
Aff. Ex. 3, at 1728-29 (Martin Klein testimony that the
valuation and unwinding procedures set forth in the JKD
agreement applied to all three joint ventures)). The parties
further agreed, by contract, to arbitrate “[a]ny
controversy or claim arising out of or relating to” the
JKD and KLG agreements; through an exchange of letters in
November 2013, they extended the agreement to arbitrate to
include disputes concerning Sunrise as well. (Leviev Aff.
¶¶ 14, 16).
October 2012, LGC demanded that the Kleins buy out LGC's
interests in all three joint ventures, but the parties could
not agree how to disentangle their interests. (Leviev Aff.
¶¶ 11, 12). Accordingly, in February 2013, LGC
initiated arbitration proceedings against the Kleins. (Klein
Decl. Ex. 11). The parties' agreements required
arbitration before a panel of three arbitrators “with
substantial experience in the diamond industry, ” one
to be appointed by each of the parties and the third to be
appointed by the party-appointed arbitrators. (Leviev Aff.
Ex. 2 ¶ 8.8; Ex. 5 ¶ 11.11; Ex. 10 ¶ 11.14).
LGC and the Kleins designated Israel Zahavi and Chaim
Pluczenick, respectively, as arbitrators. (Leviev Aff. Ex.
19). Zahavi and Pluczenick, in turn, chose Jacob Bronner as
the neutral arbitrator. (Id.). In September 2013,
Bronner executed a notice of appointment in which he
disclosed that he had “professional or social
relationships” with Leviev and each of the other
arbitrators, but otherwise indicated that he had no
“other information that may lead to a justifiable doubt
as to [his] impartiality or independence or create an
appearance of partiality.” (Leviev Aff. Ex. 20). With
respect to Leviev, Bronner explained as follows: “While
I do not have any social relationship or friendship with Mr.
Leviev, I do see him from time to time in my business travels
and we exchange pleasantries when we see each other.”
(Id.). With respect to the other arbitrators, he
stated: “I have done business with ZAHAVI and
PLUCZENICK and will continue to do so.” (Id.).
The Kleins did not ask Bronner to elaborate; instead, they
acknowledged and ratified his appointment. (Leviev Aff. Ex.
the same time, LGC filed a petition in New York state court
seeking, among other things, preliminary injunctive relief in
aid of arbitration. (Leviev Aff. Ex. 25). The state court
denied the petition, holding that any request for injunctive
relief should be addressed to the arbitrators. (Leviev Aff.
Ex. 26). In November 2013, LGC sought preliminary relief from
the arbitrators, including an interim award. (Leviev Aff. Ex.
27). On December 5, 2013, the panel issued an order granting
that request in substantial part and ordering the Kleins to
pay LGC approximately $102 million. (Leviev Aff. Ex. 28). The
next day, however, the panel stayed its interim order so that
the parties could pursue a global settlement. (Leviev Aff.
Ex. 29). The stay remained in effect until November 2014,
during which time the Kleins paid LGC approximately $67
million as a partial redemption of LGC's interests.
(Klein Decl. ¶ 24; Leviev Aff. Ex. 30).
December 2014, LGC returned to the same New York state court
in an effort to confirm the interim award. (Leviev Aff. Ex.
31). The Kleins - represented by new counsel (who also
represent them here) - opposed confirmation, arguing that the
award was non-final. (Leviev Aff. Ex. 32). In addition, and
more relevant for present purposes, the Kleins argued that
Bronner and Zahavi should be removed from the panel on the
grounds of misconduct and partiality. (Id.). More
specifically, the Kleins contended that Bronner and Zahavi
were improperly using their rulings to force a settlement
from the Kleins and that Bronner had failed to fully disclose
a prior relationship with Leviev. (Id.). In response
to the motion, Bronner himself filed an affidavit in which,
among other things, he defended his “good
reputation” in the industry and touted his
“honest[y], ” “decency, ”
“integrity, ” and “fairness.” (Levine
Decl. Ex. 23, at 5). In September 2015, the state court
denied both confirmation of the interim order and the
Kleins' cross-motion to disqualify the arbitrators as
premature. (Leviev Aff. Ex. 36). With respect to the latter,
however, the court further noted as follows: “Even if
the court were to entertain the cross-motion seeking
disqualification, the request would be denied because all
objections were waived when [the Kleins] proceeded without
objection long after [they] had knowledge of the alleged
months after the state court's denial of the Kleins'
request to remove Bronner, relations between and among the
parties and the arbitrators soured further. Some of the
details are disputed, but, among other things, Respondent
Malka Klein filed (and then dismissed) a lawsuit in New York
state court accusing Leviev, Zahavi, and Bronner of
racketeering, fraud, money laundering, and extortion; Bronner
allegedly started receiving anonymous telephone threats; and
the Kleins made a motion before the panel for Bronner's
resignation, citing evidence obtained from Bronner's
sister that he and Zahavi were partners in two businesses.
(Leviev Aff. Ex. 37; Ex. 22 ¶ 3.b; Ex. 39). The panel
rejected the Kleins' motion, writing that the Kleins'
actions were an “unprecedented an[d] improper attempt
to interfere with the performance by a duly appointed
arbitrator.” (Leviev Aff. Ex. 22 ¶ 3). Pluczenik -
the Kleins' party-chosen arbitrator - then resigned,
alleging that he had been “shut out completely from the
panel's decision making, ” that Bronner had
“betrayed [his] personal trust by concealing
information” from him, and that he no longer wanted to
take part in a “biased, unfair process.” (Levine
Decl. Ex. 31). The Kleins promptly replaced him with Eytan
Cohen. (Levine Decl. Ex. 32).
February 9, 2016, Bronner sent an email to the parties
starting that “the business” he “conducted
and continue to conduct” with Zahavi “include[s]
also partnering in some businesses.” (Levine Decl. Ex.
35). Days later, the arbitrators held a seven-day hearing in
Israel during which they heard testimony from eight witnesses
and received hundreds of exhibits. (Leviev Aff. ¶ 36).
On May 17, 2016, after the hearing but before any ruling, the
panel's counsel sent an email to the parties sharing that
Zahavi and Cohen had just “learned” that Bronner
“was convicted of some type of financial criminal
activity by the courts of Belgium” - charges that
apparently dated back to early 2013. (Levine Decl. Ex. 44).
More specifically, Bronner and approximately 100 other
defendants were convicted of tax fraud and other offenses
relating to a scheme involving the use of sham transactions
to nominally export diamonds from Belgium while, in fact,
reselling them on the black market. (Leviev Aff. Ex. 44). In
the wake of the conviction, the Kleins asked Bronner for
additional disclosures regarding his conviction and requested
- once again - that he resign from the panel. (Levine Decl.
Ex. 51). LGC argued that the conviction should have no
bearing on the panel's work. (Leviev Aff. Ex. 47). The
panel ultimately agreed with LGC and continued its work.
(Leviev Aff. ¶ 39).
30, 2016, the arbitration panel finally issued its award.
(Leviev Aff. Ex. 1). The panel found that the Kleins had
breached the parties' agreements and awarded LGC
approximately $112 million (on top of the $67 million that
the Kleins had already paid), plus pre-judgment interest.
(Id. at 3). Significantly, the panel also found
“each and all of the Respondents” - including the
individual Kleins, who had only been signatories to the JKD
joint venture agreement, but who had participated in the
arbitration proceedings for all three ventures - to be
“liable jointly and severally” to LGC.
(Id.) Finally, the panel awarded LGC certain
declaratory and injunctive relief, including the rights to
the “Leviev” trademark. (Id. at 2). That
same day, the Kleins filed a motion in New York state court -
pursuant to New York law, see N.Y. CPLR § 7511,
as part of the same case that LGC itself had initiated in
2013 with its request for injunctive relief in aid of the
arbitration - seeking to vacate the award, and LGC filed its
petition to confirm the award in this Court. (LGC Pet. ¶
6). On July 6, 2016, LGC filed a Notice of Removal and
removed the state case to this Court. (16-CV-5352, Docket No.
central dispute between the parties is whether the
arbitration award should be confirmed or vacated. Before
resolving that dispute, however, the Court must address
several threshold issues raised by the Kleins: whether the
Court has subject-matter jurisdiction; whether the removed
case should be remanded back to New York state court; and, if
so, whether the Court should dismiss the remaining federal
case on abstention grounds. (Kleins' Opp'n 19-26).
noted, the Kleins argue first that the Court lacks
subject-matter jurisdiction altogether. Because there is no
diversity of citizenship between the parties, and because a
petition to compel arbitration does not independently present
a federal question, see, e.g., Bakoss v. Certain
Underwriters at Lloyds of London Issuing Certificate No.
0510135, 707 F.3d 140, 142 n.4 (2d Cir. 2013), whether
the Court has jurisdiction turns on the United Nations
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S.
38 (the “New York Convention”), codified in the
United States as Chapter 2 of the Federal Arbitration Act
(“FAA”), 9 U.S.C. §§ 201-208. (LGC Pet.
¶ 6; LGC Reply 3-4).
202 of the FAA provides, in relevant part, as follows:
An agreement or award arising out of . . . a [commercial]
relationship which is entirely between citizens of the United
States shall be deemed not to fall under the Convention
unless that relationship involves property located abroad,
envisages performance or enforcement abroad, or has some
other reasonable relation with one or more foreign states.
if a party seeks to confirm an arbitration, as here,
jurisdiction is proper under the New York Convention only if
the legal relationship between the parties is not
“entirely domestic in scope.” Smith/Enron
Cogeneration Ltd P'ship, Inc. v. Smith Cogeneration
Int'l, Inc., 198 F.3d 88, 92 (2d Cir. 1999). The
Second Circuit has defined relationships that are
“entirely domestic in scope” to mean those that
(1) are “between two United States citizens”; (2)
“involv[e] property located in the United
States”; and (3) “ha[ve] no reasonable
relationship with one or more foreign states.”
Yusuf Ahmed Alghanim & Sons v. Toys “R”
Us, Inc., 126 F.3d 15, 19 (2d Cir. 1997); see also
HBC Sols., Inc. v. Harris Corp., No. 13-CV-6327 (JMF),
2014 WL 3585503, at *3 (S.D.N.Y. July 18, 2014).
those standards here, the Court concludes that it has
subject-matter jurisdiction over the parties' disputes.
Although the parties are New York citizens and the property
at issue consists of membership interests in New York limited
liability companies, the “relationship” between
the parties plainly “involve[d] property located
abroad” and “evisage[d] performance . . .
abroad.” 9 U.S.C. § 202. Indeed, the relationship
between LGC and the Kleins centers on three joint ventures in
the international diamond industry. Thus, for example, a
disclosure schedule attached to one of the agreements between
the Kleins and LGC explicitly acknowledged that JKD buys and
sells diamonds through a South African affiliate. (Leviev
Aff. Ex. 6 § 4.3.4(b)). Similarly, the Trademark License
Agreement covers the European Union and eighteen other
countries. (Leviev Aff. Ex. 12, at 11). And during the
arbitration proceedings, the Kleins alleged a breach of the
Trademark License Agreement for the “Leviev”
trademark through sales in London and Russia. (Leviev Aff.
Ex. 16 ¶ 188-89). Even Martin Klein admitted that JKD
has “factories and offices all over the globe”
and that KLG owns “boutiques in several cities around
the world, including New York, London, Dubai and
Singapore.” (Leviev Aff. Ex. 7 ¶¶ 29, 33).
facts distinguish this case from the authorities cited by the
Kleins. (Kleins' Opp'n 22-23 & n.15). In
Jones v. Sea Tow Servs. Freeport NY Inc., 30 F.3d
360 (2d Cir. 1994), for example, the only foreign connection
was the parties' agreement to arbitrate their disputes in
England, which the Second Circuit held was insufficient lest
arbitration clauses become “a self-generating basis for
jurisdiction.” Id. at 366. And each of the
other cases cited by the Kleins - including Bethlehem
Steel Corp. v. Songer Corp., No. 92-CV-2678 (JSM), 1992
WL 110735 (S.D.N.Y. May 11, 1992) - involved only one
party's dealings with foreign third parties. See
Id. at *1. By contrast, the relationship between the
parties here involved property around the world and envisaged
performance abroad. It follows that the New York Convention
applies. See Lander Co., Inc. v. MMP Invs., Inc.,
107 F.3d 476, 478-82 (7th Cir. 1997) (finding jurisdiction
with respect to a contract to sell products in Poland);
HBC Sols., 2014 WL 3585503, at *3 (finding
jurisdiction for a sale of a business division with
“global operations”); Holzer v.
Mondadori, No. 12-CV-5234 (NRB), 2013 WL 1104269, at *5
(S.D.N.Y. Mar. 14, 2013) (finding jurisdiction with respect
to an agreement to purchase real estate in Dubai); New
Avex, Inc. v. Socata Aircraft Inc., No. 02-CV-6519
(DLC), 2002 WL 1998193, at *3 (S.D.N.Y. Aug. 29, 2002)
(finding jurisdiction with respect to a contract between two
American corporations involving the sale of French aircraft
in France); Heather Trading Corp. v. Voest-Alpine Trading
U.S.A. Corp., Nos. 85-CV-823 (SWK), 85-CV-913 (SWK),
1986 WL 4542, at *2 (S.D.N.Y. April 8, 1986) (finding
jurisdiction with respect to a contract to deliver crude oil
Motion To Remand
Kleins' alternative argument for why this Court should
not decide the parties' disputes about the arbitration is
multi-pronged. First, they attack the propriety of LGC's
removal of the state court action pursuant to Title 9, United
States Code, Section 205, which provides that a
“defendant” - and only a “defendant”
- may remove an action relating to an arbitration agreement
from state court to federal court “at any time before
the trial thereof.” (Kleins' Opp'n 23-24). The
Kleins contend that LGC's removal was improper both
because LGC was the plaintiff in the state court action and
because its removal was untimely. (See id.). Second,
they assert that, if the state case is remanded, this Court
should - pursuant to Colorado River Water Conservation
District v. United States,424 U.S. 800 (1976) - abstain
from exercising jurisdiction over the remaining federal case
in favor of the remanded state case. (See
Kleins' Opp'n 24-26; Kleins' ...