Federal appellate court reverses lower court, determining that lower court did not properly evaluate a REALTOR® association's arbitration process.
Sotheby’s International Realty (“Listing Broker”) served as a listing broker for a property located in Greenwich, Connecticut. The Listing Broker placed the property into the Greenwich Multiple Listing Service (“MLS”), offering a cooperative commission to other participants who produced a buyer for the property.
Meanwhile, real estate firm The Relocation Group (“Relocation”) entered into a buyer’s representation agreement with Amy Kauffman (“Buyer”) on October 19, 2010. The agreement expired on June 30, 2011.
On August 19, 2011, the Buyer entered into a buyer’s representation agreement with the Listing Broker. A week later, the Buyer entered into an agreement to purchase the Greenwich property, directing the entire commission to the Listing Broker. Prior to closing, Relocation filed a broker’s lien on the property, claiming that it was entitled to its portion of the commission for producing a buyer for the property. The Listing Broker also filed a broker’s lien claiming the entire commission, and the commission from the buyer’s representative side of the sale was placed into escrow at the closing, as required by the state’s broker lien law.
Thereafter, the Listing Broker filed a lawsuit seeking a judicial determination over who was entitled to receive the cooperative commission from the sale of the property. Two months after the Listing Broker filed the lawsuit, Relocation filed a motion seeking to compel arbitration and stay the lawsuit, arguing that both parties’ membership in the Greenwich Association of REALTORS® (“Association”) and NAR required them to arbitrate the dispute. The trial court found that Article 17 of NAR’s Code of Ethics required the arbitration of the dispute and so stayed the lawsuit pending the arbitration.
The Association’s arbitration panel awarded half of the commission to Relocation. The Listing Broker withdrew its state court action and filed a lawsuit in federal court challenging the arbitration conducted by the Association. In an unusual opinion, the federal trial court overturned the Association’s arbitration award on the grounds that the award constituted a “manifest disregard for the law.” Relocation appealed the award.
The United States Court of Appeals reversed the decision of the trial court and reinstated the award of half the commission to Relocation. When courts review challenges to arbitration proceedings, the proceedings are entitled to judicial deference and the review is usually limited to the grounds enumerated by statute. However, courts within the Second Circuit also recognize a non-statutory ground for review if the arbitrator’s decision constitutes a manifest disregard for the law.
The court found that the trial court had improperly applied the manifest disregard law standard. Because of the great deference that courts grant to arbitration decisions, the manifest disregard of the law is only applied in limited factors that satisfy the following three factors: first, the ignored law was clear and unambiguous; second, arbitrators erred in their application of the law; and finally, the arbitrators knew of the law and its applicability to the matter before them.
The trial court had failed to apply the manifest disregard of the law test, as the trial court had even acknowledged that the law in question was not clear and so the trial court had not even satisfied the first step of the test. The trial court had also failed to apply the other two steps or failed to review all of the relevant case law that might have supported arbitrator’s decision. Because the trial court had improperly applied the test, the court reversed the trial court and ordered the trial court to enter judgment confirming the arbitration award.
Sotheby's Int'l Realty, Inc. v. Relocation Grp., LLC, No. 14-253-CV, 2015 WL 64265 (2d Cir. Jan. 6, 2015) [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].