Opinion ID: 774991
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: 2 The matter submitted to arbitration involved a dispute among Pike, Freeman, and other individuals and entities involved in a project to manufacture, distribute, and market an abortion-inducing drug in the United States (the Project). The patent for the drug in the United States is owned by a non-profit organization, The Population Council, which retained private entrepreneurs to carry out the Project. 3 Pike was initially the individual selected to be in charge of the Project. Given the Project's potentially controversial nature, Pike set up a complicated corporate structure to shield from publicity the entities playing key roles in the Project. As a result, those who invested in the Project did so by purchasing limited partnership interests in respondent Danco Investors Group, also known as Neogen Holdings, L.P. (the Partnership). The Partnership's general partner was respondent N.D. Management, Inc. (N.D. Management).
4 For reasons not relevant here, The Population Council eventually decided that Pike should extricate himself from any position of control within the Project. In connection therewith, Pike, individually and on behalf of N.D. Management, the Partnership, and affiliated entities, hired appellant Brian M. Freeman's company, Brian M. Freeman Enterprises, Inc. (BMF Enterprises), to be the agent in negotiating and selling Pike's controlling interest in the various entities involved in the Project. Pike's retention of BMF Enterprises was documented in an engagement contract dated November 3, 1996 (the Engagement).
5 In January 1997, Pike entered into an agreement to sell 75% of his 100% interest in N.D. Management to respondent MedApproach, L.P. and other Participating Investors (the January Agreement). In return for the sale and for fulfilling other obligations, Pike was to receive certain payments. Freeman, in addition to his role as the principal of BMF Enterprises, was listed in the January Agreement as one of the Participating Investors in the Project. The January Agreement also provided that, with respect to Pike's remaining interests, such as his remaining 25% interest in N.D. Management, Pike was to provide Freeman and two other individuals an exclusive and irrevocable proxy and power of attorney... for all rights with respect to voting of stock or partnership interests in N.D. Management, Inc., [and] Neogen Industries, Inc., which shall also include all control, management and financial functions of each of the Pike Entities and the Project. 1 Freeman signed the January Agreement. 6 The January Agreement contained the following arbitration clause: Any disputes hereunder shall be resolved by: binding arbitration by American Arbitration Association in New York City on an expedited basis. 7 The January Agreement was amended on February 5, 1997. Although the definition of Participating Investors was not changed, paragraph 10 of the amendment purported to exclude Freeman to a significant extent from the arrangements set up in the January Agreement, while leaving him responsible for certain specific obligations, including his duties as a proxy holder and holder of a power of attorney and his duty as a Participating Investor to make up any shortfall in investments received for the Project. 8 The January Agreement, amended on February 5, was again amended on or about February 12, 1997 (collectively, the Agreement). The February 12 amendment provided in relevant part that certain payments to Pike under the Agreement were to be given instead to BMF Enterprises to satisfy certain of Pike's obligations to BMF Enterprises under the Engagement. The February 12 amendment added, however, that the remaining sections of the Engagement, remain in full force and effect.
9 After a dispute subsequently arose as to whether Pike had performed his obligations under the Agreement and whether he was entitled to receive the payments promised to him thereunder, Pike sent a demand for arbitration on September 21, 1998, alleging the respondents' breach of the Agreement. Freeman was one of the named respondents and was described as an individual. Respondents filed an answer dated November 5, 1998, asserting as the Twenty-Second Affirmative Defense: As to all claims... Freeman... [is] not properly before this tribunal for arbitration in that there are no agreements conferring such jurisdiction. Respondents, including Freeman, then participated in the selection of arbitrators and, eventually, in discovery. In February 1999, following a preliminary hearing, the arbitrators issued an order indicating that the parties had agreed that no explanatory supporting opinion would be provided when the arbitrators issued their ruling. 10 On March 1, 1999, Pike filed a Written Specification of Affirmative Claims, which provided a summary of the breaches of the Agreement alleged by Pike: 11 Mr. Pike agreed to relinquish control and approximately 75% of his financial stake in the Project in return for $3,500,000 and an agreement by respondents to indemnify Mr. Pike for expenses incurred in connection with his role in the Project. Also, respondents promised Mr. Pike a position as a consultant for five years, with appropriate support and an annual salary of $300,000. Finally and most importantly, respondents assured Mr. Pike that they would protect the Project and the investors by purchasing any limited partner interests tendered in connection with a rescission offer they would make, and that they would contribute additional financing of $14,000,000. 12 Respondents have failed to fulfill any of these obligations.... 13 The indemnification that Pike sought for expenses in connection with his role in the Project consisted of attorneys' fees and costs Pike incurred in obtaining dismissals or stays of lawsuits brought against him by certain respondents in late 1997 and 1998 - lawsuits Pike claimed should have been arbitrated. In addition, Pike sought [a]n award of all costs in this arbitration proceeding, including attorneys' fees. 14 In a motion dated the same day, Freeman and co-respondents Jeffrey L. Rush and Bio-Pharm Investment, Inc. moved to dismiss the arbitration for lack of jurisdiction. The supporting memorandum of law stated that by virtue of Paragraph 10 of the February 5 amendment to the January Agreement, Freeman [and the other movants] are not parties to any contract on which the instant Arbitration is based and thus have not consented to participate in this Arbitration. In opposition, Pike argued that Freeman and the other movants had waived their right to move to dismiss under New York State law by failing timely to object to the demand for arbitration. Freeman and the other movants subsequently filed a supplemental memorandum of law dated March 12, 1999, arguing that their objection was not waived, and that even if, under relevant state law, judicial review of arbitrability had been waived by failing to object sooner: 15 [Movants] have not waived the right to adjudication of this issue before the arbitrators. The arbitration clause in the January 21, 1997, Agreement provides that [a]ny disputes hereunder shall be resolved by: binding arbitration by American Arbitration Association in New York City on an expedited basis. Whether the operative provisions of the Agreement, including the arbitration clause thereof, apply to Movants is a dispute hereunder to be resolved in this arbitration. First Options of Chicago v. Kaplan, 115 S. Ct. 1920, 1923-24 (1995); PaineWebber, Inc. v. Bybyk, 81 F.3d 1193, 1198-1200 (2d Cir. 1996). As the Court stated in Nationwide General Ins. Co. v. Investors Ins. Co. of America, 37 N.Y.2d 91, 96, 371 N.Y.S.2d 463, 467 (1975), [p]enetrating definitive analysis of the scope of the agreement must be left to the arbitrators whenever the parties have broadly agreed that any dispute involving the interpretation and meaning of the agreement should be submitted to arbitration. 16 (Emphasis added.) The movants concluded by stating that they 17 were not required to and are not precluded from raising this issue in the arbitration. Movants timely and specifically asserted the defense of non-arbitrability in their Answer (Twenty-Second Affirmative Defense) and have not waived this issue by appearing before the arbitrators on a motion to dismiss. 18 On March 16, 1999, the arbitrators denied the motion to dismiss without prejudice to these respondents' right to seek to prove, at the hearing, should that be deemed by them to be desirable, that they have no liability for any sums that might be awarded at the conclusion of this arbitration proceeding. 19 In May 1999, an eleven-day evidentiary hearing was held, during which Freeman testified. In his opening statement, Pike's counsel asserted that 20 we're asking in particular that Mr. Freeman - his portion of all of this personally and that the award that is entered should - for any obligation of even the limited partnership, we contend is a direct personal obligation of Mr. Freeman as a general partner. You'll say to me, but he's a limited partner, why would he be a general partner. We put in our brief and explained the HA Law (phonetic) where a limited partner undertakes to manage the business, decide when the general partner can resign and quit, etcetera, that they become at all a general partner and we'll show you buckets of correspondence and just countless acts, documents signed by Mr. Freeman in his own name, on behalf of the limited partnership. 21 Subsequently, Pike filed a post-hearing brief dated June 10, 1999. In that brief, Pike again asserted that any money for which the Partnership was to be found liable should, in the event the Partnership was unable to pay it, be the responsibility of its general partners, whom Pike identified as MedApproach, Bio-Pharm, and Freeman. While MedApproach was identified as the express general partner, Pike also claimed that Freeman was liable as a general partner because he was a limited partner who took part in the control of the business of the partnership. According to Pike, a limited partner who exercises such control becomes personally liable as a general partner under California and New York partnership law. 2 22 Respondents filed an opposing brief on June 17, 1999. They claimed that (1) Freeman was not actually a limited partner, but was only a trustee of a limited partner, and, in any event, (2) the provisions of partnership law relied upon by Pike had been superseded and now required the party suing to have a reasonable belief that a limited partner exercising control of a partnership was actually a general partner. Respondents argued that, although the evidence of Freeman's control of the partnership offered at the hearing was undisputed, Pike could not have had such a reasonable belief because Pike, not Freeman, had been the one who sold his interest in the general partnership to MedApproach, and thus knew how the entities were structured - at least as of February 1997. 23 In an award dated July 15, 1999 (the Award), the arbitrators found in favor of Pike. Of particular concern to Freeman was the portion of the Award that indemnified Pike for several hundred thousand dollars in attorney's fees and costs, payment of which was ordered to be the 24 responsibility, jointly and severally, of N.D. Management, Inc., Danco Laboratories, Inc., Danco Pharmaceuticals, Inc., Neogen Holdings, L.P. aka Danco Holdings, L.P. and Danco Investors Group, L.P. aka Neogen Investors, L.P. By his actions as proved during this proceeding, it is determined that Respondent Brian M. Freeman is a general partner of Danco Investors Group, L.P. 25 MedApproach, Freeman, and Rush were thus ordered to provide sufficient funds to the Partnership by September 10, 1999, to allow it to make the required payments, [t]he proportion of such funds to be provided respectively by MedApproach, Freeman and Rush... in the ratio of 50:25:25, unless otherwise agreed among them. 3 26 In addition, the Award ordered Freeman and the other respondents to pay a total of $70,000 for dilatory and bad faith conduct in this arbitration, including but not limited to the promulgation of frivolous claims, the failure to comply with procedural orders, and the late production of required documents. The Award also ordered that MedApproach and the individual respondents Rush and Freeman were jointly and severally responsible for paying $700,000 in consulting fees to Pike as required by the Agreement. 27 Following the issuance of the Award, Pike commenced a proceeding to confirm it in New York state court, which was removed by defendant Neogen Holdings, L.P. to federal court on the basis of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. §§ 201-205. 4 Freeman then filed (1) a motion to vacate the Award; (2) a counterclaim against Pike seeking indemnification for payment of the Award under the terms of the Engagement; and (3) cross-claims against the other respondents seeking indemnification under the Agreement. 28 At argument before the district court, Pike's attorney again argued that 29 the simple fact, which was proved at the arbitration, and which we have submitted the evidence [of] in our papers, is that Freeman was functioning as a general partner of this operation. He was the moving force. He negotiated everything. He had his finger on all of the financials. He was writing all the letters. There is a huge litany of things that he admitted during the arbitration that he was doing. And as a matter of fact, he was functioning as and chargeable as a general partner. Whether he has any rights as a general partner, frankly, we could care less. But he certainly has the responsibilities and the liabilities. 30 On June 30, 2000, in an oral decision, Judge Casey confirmed the award in its entirety. The district court also dismissed with prejudice Freeman's counterclaim against Pike for indemnification and Freeman's cross-claims against the other respondents for indemnification on the ground that Freeman had waived them by failing to assert them in the arbitration. Judgment was entered on August 18, 2000, and this appeal followed.