KRISHNA NARAYAN; SHERRIE NARAYAN; VIRENDRA NATH; NANCY MAKOWSKI; SIMON YOO; SUMIYO SAKAGUCHI; STEPHEN XIANG PANG; FAYE WU LIU; MASSY MEHDIPOUR, individually and as Trustee for Massy Mehdipour Trust dated June 21, 2006; G. NICHOLAS SMITH; TRISTINE SMITH; CLIFFORD W. CHAFFEE; BRADLEY CHAFFEE, individually and as Trustee of the Charles V. Chaffee BRC Stock Trust dated 12/1/99 and The Clifford W. Chaffee BRC Stock Trust dated 1/4/98; GARY S. ANDERSON; RONALD W. LORENZ and RENEE Y. LORENZ, Plaintiffs-Appellants,
v.
ASSOCIATION OF APARTMENT OWNERS OF KAPALUA BAY CONDOMINIUM; CATHY ROSS; ROBERT PARSONS; and ANDREW MITCHELL, Defendants-Appellees.
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 ...