Narayan v. Association of Apartment Owners of Kapalua Bay Condominium

         APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CAAP-16-0000588; S.P. NO. 16-1-0043 RAN)

          Joachim P. Cox, Robert K. Fricke, and Kamala S. Haake for appellants.

          Michele-Lynn E. Luke for appellees.

          RECKTENWALD, C.J., McKENNA, POLLACK, AND WILSON, JJ., AND CIRCUIT JUDGE KUBO, IN PLACE OF NAKAYAMA, J., RECUSED

          OPINION

          McKENNA, J.

          I. Introduction

         This is the third opinion in a series of recent decisions addressing an arbitrator's statutory disclosure requirements and vacatur on the basis of evident partiality based on Hawai'i Revised Statutes ("HRS") §§ 658A-12 and -23 (Supp. 2001); see Noel Madamba Contracting LLC v. Romero, 137 Hawai'i 1, 364 P.3d 518 (2015); Nordic PCL Const., Inc. v. LPIHGC, LLC, 136 Hawai'i 29, 358 P.3d 1 (2015). Nordic and Madamba established standards for evaluating claims of evident partiality. Here, we clarify the scope of relationships that require disclosure.

         Krishna Narayan, Sherrie Narayan, Virendra Nath, Nancy Makowski, Simon Yoo, Sumiyo Sakaguchi, Stephen Xiang Pang, Faye Wu Liu, Massy Mehdipour, G. Nicholas Smith, Tristine Smith, Clifford W. Chaffee, Bradley Chaffee, Gary S. Anderson, and Ronald W. Lorenz (collectively, "Appellants"), appeal from an August 15, 2016 final judgment of the Circuit Court of the First Circuit ("circuit court"), ^[1] based upon its findings of fact, conclusions of law, and order confirming an arbitration award in favor of the Respondents, Association of Apartment Owners of Kapalua Bay Condominium, Cathy Ross, Robert Parsons, and Andrew Mitchell (collectively, the "AOAO").

         This case concerns a dispute over financial issues that arose during construction of the Kapalua Bay Condominium project (the "Project"). Appellants are a group of individual condominium owners in the Kapalua Bay Condominium. Previously, Appellants and several other condominium owners sued the Project's developers and management companies regarding financial problems that arose during construction (the "Developer Action"). See Narayan v. Ritz-Carlton Dev. Co., Inc., 135 Hawai'i 327, 350 P.3d 995 (2015) .^[2] The present matter arose from the Appellants' challenge of the AOAO's vote to convert the residential community into a hotel. The dispute was submitted to arbitration. The issues on appeal relate to the adequacy of the neutral arbitrator's disclosures in the arbitration. The circuit court concluded that the undisclosed relationships did not constitute "evident partiality" requiring vacatur. We affirm.

         II. Background

         A. Arbitration Proceedings

         1. Initial Disclosures and Pre-arbitration Motions

         The matter was originally submitted to the American Arbitration Association but, by agreement of the parties, was referred to Dispute Prevention & Resolution, Inc. ("DPR") on July 24, 2014. The parties selected the Honorable Victoria Marks (ret.) to serve as the neutral arbitrator (the "Arbitrator") on August 1, 2014.^[3] After her selection, DPR provided the parties with the following disclosures on her behalf:

I am not familiar with any of the parties.

Both Mr. Cox and Ms. Luke appeared before me when I was on the bench. ^[4]

I served as an arbitrator in a case where Mr. Cox represented one of the parties. That case was resolved before the arbitration hearing.

My husband, Robert A. Marks, is a lawyer who is Of Counsel at Price Okamoto Himeno & Lum. I do not know the identity of all of my husband's clients. Similarly, I am not aware of all the cases he is working on and what lawyers he may be working with or opposing. I do not believe that he currently has any cases with any of the lawyers in this matter. Similarly, I do not believe that he is familiar with any of the parties or their principals.

I am on the Board of the following organizations: 1) The Mediation Center of the Pacific; 2) The Hawaii Women's Legal Foundation; 3) The American Judicature Society-Hawaii Chapter; 4) United Cerebral Palsy Association of Hawaii; and 5) The Hawaii Soccer Association. The first 3 organizations are law related and lawyers from various firms in Honolulu [-] large firms to solo practitioners -sit on these boards. In addition, the board members change from year-to-year.

I am also a social golf member of MidPacific [sic] Country Club. I am not familiar with all of the members of this club.

Counsel and the parties should inform the arbitrator and each other of any additional information that a reasonable person would consider likely to affect the impartiality of the arbitrator.

I believe that I can be a fair and impartial arbitrator in this matter.

         The parties submitted their expert disclosures and reports in March and September 2015. The witness lists were submitted in October 2015.

         On September 15, 2015, one month before the arbitration hearing started, Appellants moved to exclude the AOAO's expert on condominium governance, Philip Nerney, Esq. ("Nerney"). Appellants argued, inter alia, that Nerney was providing improper and unfounded legal conclusions on liability. The Arbitrator granted this motion in part and denied it in part, and precluded Nerney from testifying regarding any party's intent and damages, but he was allowed to testify on condominium governance issues.

         2. Arbitration Hearing

         The arbitration hearing was conducted in several sessions from October 19, 2015 through November 12, 2015.

         The AOAO's expert on damages, Richard Stellmacher ("Stellmacher"), testified at the hearing. Among other things, Stellmacher testified that he originally visited the Project when an attorney for the Developer Action briefly retained him. He misidentified the attorney during his oral testimony and subsequently submitted a declaration^[5] clarifying that he "had been retained by [a]ttorney Lex Smith [("Smith")], on behalf of his clients, which included certain Marriott entities, involved in other litigation."^[6] The declaration also stated that Stellmacher "contacted Mr. Smith" to confirm that his work was terminated shortly after he visited the property and that he was not provided any work product related to the matter. Over Appellants' hearsay objection, the Arbitrator admitted the declaration into evidence.

         On January 7, 2016, the Arbitrator issued her final arbitration award in favor of the AOAO.

         3. Post-award Disclosure Demands

         On January 13, 2016, Appellants requested that DPR provide updated disclosures "pursuant to DPR Arbitration Rule 9A and HRS § 658A-12" relating to the AOAO, counsel for the AOAO, in-house counsel for the AOAO, and the AOAO's witnesses and experts. DPR responded that it would not provide a substantive response to Appellants' request as "neither the applicable DPR Arbitration Rules nor the relevant provisions of the Uniform Arbitration Statute (HRS Chapter 658A) provide for a post arbitration award disclosure process[.]" On February 3, 2016, Appellants sought additional disclosures regarding the Arbitrator's relationship with the Kobayashi Sugita & Goda ("KSG") law firm. DPR responded once again that it would not provide a post-arbitration disclosure.

         B. Circuit Court Proceedings

         1. Motion to Confirm, Motion to Vacate, and Discovery

         In the meantime, the AOAO filed a special proceeding in the circuit court to confirm the arbitration award. Before filing their memorandum in opposition, Appellants filed a Notice of Taking Deposition upon Written Questions of AOAO counsel Robert C. Ressner, Esq., and his law firm; the AOAO's in-house counsel, Peter Horovitz, Esq.; and the AOAO's expert witness, Nerney. Appellants also filed a Notice of Taking Deposition upon Written Questions of KSG, the law firm that briefly retained Stellmacher for the Developer Action but did not represent the AOAO and had no direct involvement in the arbitration proceedings.^[7]

         Appellants also moved to vacate the award on grounds of evident partiality due to the Arbitrator's refusal to provide post-award supplementary disclosures. Appellants alleged that the AOAO's position had no basis in law or the applicable bylaws, that the Arbitrator "oddly adopted [the AOAO's] unsupported interpretation of the law, " and that "the Arbitrator's findings fly in the face of the law." Appellants stated that they demanded post-award disclosures because they were "surprised" by the arbitration award, although they acknowledged they had no reason to believe that the Arbitrator may be partial to the AOAO during the course of the arbitration. Yet, Appellants argued, "the Arbitrator's disregard for the law . . . now coupled with the Arbitrator's refusal to provide appropriate disclosures, calls into question whether there are undisclosed relationships with [the AOAO], [the AOAO's] counselor or [the AOAO's] witnesses which arose during the course of the arbitration and - to a reasonable person - may have compromised the Arbitrator's neutrality." Appellants requested that the court continue the hearing given the lack of evidence and grant Appellants' Motion to Compel Production of Records from DPR ("Motion to Compel"), which had been filed earlier.

         DPR filed a memorandum in opposition to Appellants' Motion to Compel, arguing that it was both procedurally and substantively flawed. The AOAO also filed a memorandum in opposition, arguing that further disclosures by the Arbitrator should not be compelled because Appellants failed to make a prima facie showing that a ground for vacating the arbitration award exists, in accord with HRS § 658A-14(d).^[8]

         Appellants filed a reply memorandum, arguing that they had made a prima facie showing of evidence to support a motion to vacate with regard to the KSG law firm. Appellants argued that the relationship rose to the level of evident partiality because KSG had an "extensive relationship" with the Arbitrator. Appellants argued that despite KSG's lack of direct connection with the parties to the case, KSG was relevant because Stellmacher's declaration allegedly involved "hearsay testimony" by Smith of KSG.^[9] Appellants also argued that a ruling in their favor would have "had severe repercussions to KSG's client" in the Developer Action, and that "a reasonable person could infer that a defense verdict in this arbitration would help the Arbitrator to garner KSG's recommendation to serve in the Developer Action, should it be ordered to arbitration. ..." Appellants also alleged that Nerney, the AOAO's expert witness, had evaded service and had not yet responded to written deposition questions regarding a potential relationship with the Arbitrator, yet because he "is an attorney, and condominium governing documents often contain arbitration clauses, it is reasonably plausible to anticipate that Mr. Nerney had or has a professional relationship that should have been disclosed."

         Nerney was thereafter deposed upon written interrogatories. Nerney testified that the Arbitrator served as a mediator or arbitrator on two cases in which he appeared as an attorney. First, he testified that in 2013, he represented a party in a matter in which the Arbitrator was selected as an arbitrator. Second, he testified that on April 9, 2015, he represented an association of apartment owners regarding a request for a reasonable accommodation in a half-day mediation with the Arbitrator, but the matter was ultimately not resolved by mediation.

         Appellants then moved to compel the Arbitrator to respond to the deposition upon written questions pursuant to a showing of prima facie evidence. The circuit court granted Appellants' motion, and the Arbitrator was deposed upon written questions. She testified, among other things, that she found in favor of Nerney's client on a summary judgment motion in a prior arbitration, ^[10] and that Stellmacher had testified as a witness in a prior arbitration at some point in time between January 1, 2011 and July 24, 2014.

         2. Supplemental Memorandum in Support of Appellants' Motion to Vacate

         After months of discovery, Appellants submitted a supplemental memorandum in support of their Motion to Vacate. Appellants asserted that the Arbitrator had failed to comply with the disclosure requirements of HRS § 658A-12(b) by failing to disclose facts learned by the Arbitrator after accepting appointment that a reasonable person would consider likely to affect the impartiality of the Arbitrator. Appellants claimed that the following disclosures were not provided:

(1) the Arbitrator recently presided over an arbitration involving [the AOAO's] damages expert;

(2) [The AOAO's] expert on condominium governance, Philip Nerney, Esq. - on whom the Arbitrator primarily relied in rendering her award - had a mediation before the Arbitrator while the above-captioned matter was pending and a prior arbitration in which the Arbitrator found in Mr. Nerney's client's favor on a motion for summary judgment; and

(3) the law firm of a hearsay witness had an extensive relationship with the Arbitrator, including at least two mediations during the pendency of this arbitration and two referrals to the Arbitrator.

         Following the completion of briefing, the court held a hearing on the motion to confirm the arbitration award and the motion to vacate. The circuit court found in favor of the AOAO, denied the motion to vacate, and granted the motion to confirm the arbitration award. The court found that the Arbitrator complied with her duty to make a "reasonable inquiry" into possible conflicts and that none of the relationships challenged by Appellants rose to a level that would require disclosure. The court's relevant conclusions were as follows:

8. At the outset, the Arbitrator complied with her duty to make a "reasonable inquiry" upon being informed of the parties' proposed witnesses (lay and expert) in September and October, 2015, prior to commencement of the arbitration proceedings. In other words, as it pertains to Stellmacher, the KSG law firm, and Mr. Nerney, none of these "relationships" or "facts" are such "that a reasonable person would consider likely to affect [the Arbitrator's] impartiality, " necessitating their disclosure.

9. None of these "facts" or "relationships" rise to the level of "evident partiality." Compare with Madamba, where the court held that failure by the arbitrator during the pendency of the arbitration proceedings to disclose his prospective relationship with the Cades Schutte law firm (counsel for respondent Romero) where there existed a "concrete possibility" that the Cades Schutte law firm would be handling his personal retirement accounts, constituted undisclosed facts showing a "reasonable impression of partiality, " sufficient to support vacatur.

10. The facts are undisputed that as between the Arbitrator and Stellmacher, the only association or dealing was that of Stellmacher having testified as a witness in a prior arbitration, for which [the Arbitrator] served as the arbitrator at some point in time between January 1, 2011 and July 24, 2014. Moreover, as noted by the Madamba court, in adopting Justice Black's reasoning in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d. 301 (1968), it would be incumbent upon the arbitrator to disclose to the parties any dealings that might create an impression of possible bias. The association between the Arbitrator and Stellmacher was not substantive in nature. The dealings between the Arbitrator and Stellmacher do not create an impression of possible bias.

11. The facts are undisputed that as between the Arbitrator and the KSG law firm, their association occurred sometime between January 1, 2011 and January 7, 2016, as [the Arbitrator] had been selected as an arbitrator on five (5) matters in which the KSG law firm represented a party and also served as a mediator on three (3) matters in which the KSG law firm represented a party. The association between the Arbitrator and the KSG law firm was not substantive ...