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LGC USA Holdings Inc. v. Julius Klein Diamonds, LLC

United States District Court, S.D. New York

February 16, 2017

LGC HOLDINGS, INC., Petitioner,
JULIUS KLEIN DIAMONDS, LLC, et al., Respondents.


          JESSE M. FURMAN, United States District Judge

         In 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 law.

         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.


         LGC, 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).

         In 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).[1] 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. 21).

         Around 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).

         In 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 irregularities.” (Id.).

         In the 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).

         On 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).

         On June 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. 1).


         The 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).

         A. Subject-Matter Jurisdiction

         As 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).

         Section 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.

         Thus, 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).

         Applying 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).

         These 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 in Ecuador).

         B. Motion To Remand

         The 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' ...

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