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Posted: November 9, 2016

Arbitral Award Vacated for Failure to Disclose Witness’s Criminal Plea Agreement

On October 21, 2016, Justice Ramos of the New York County Commercial Division issued a decision in Policy Administration Solution, Inc. v. QBE Holdings, Inc., 2016 NY Slip Op. 32193(U), vacating an arbitral award for failure to disclose to the arbitrator that a witness who had invoked his Fifth Amendment right not to testify already had agreed to plead guilty.

In Policy Administration Solution, James Shea, “the former Chief Financial Officer of” the respondent, “QBE,” was indicted and later agreed to plead guilty. After the trial court was informed of the plea and cancelled his criminal trial, but before he was sentenced, the, arbitrator conducted a hearing at which the respondent “called Mr. Shea as a witness.” “Mr. Shea was called to testify but repeatedly asserted his Fifth Amendment privilege.” Moreover, “[d]uring cross- examination, he refused to testify about matters related to the indictment or concerning” a co-defendant who also had agreed to plead guilty. “It is undisputed that at the hearing [the respondent] never disclosed to Arbitrator Brown or PAS that Mr. Shea had reached a plea deal with federal prosecutors on October 30, 2015, three days prior to the hearing.” (emphasis added).

The trial court vacated the award in favor of the respondent, explaining:

Courts may vacate an arbitration award pursuant to CPLR 7511(b)(1)(i), where there is fraud or misconduct in procuring the award that prejudices the rights of a party who participated in the arbitration. Furthermore, parties in an arbitration have the right to cross-examine witnesses (CPLR 7506[c]). In an arbitration, the parties and their attorneys have an affirmative duty to provide the arbitrator with facts that enable the arbitrator to make an informed decision. The facts needed to be disclosed are those, if credited, would likely produce a different result in an arbitration.

The lack of candor may constitute misconduct under CPLR 7511(b)(1)(i). . . .

Here, QBE and its attorneys’ failure to inform Arbitrator Brown and PAS of Mr. Shea’s plea agreement constitutes misconduct under CPLR 7511(b)(1)(i). Notwithstanding the fact that the formal plea had not yet been entered, the failure to introduce evidence as to Mr. Shea’s plea agreement clearly caused arbitrator Brown to limit the scope of questions he permitted PAS to ask Mr. Shea. This Court concludes that it is reasonable to assume that may have changed the result of the arbitration proceeding and clearly deprived PAS its right to examine Mr. Shea. For example, QBE maintained that at least one contract between the parties was not enforceable because Mr. Shea’s signature on the contract was not authentic. During the hearing, it was presented that Mr. Shea was under federal indictment for committing wire fraud against QBE, his former employer, which included allegations that he forged QBE contracts in order to receive payments from QBE for sham third-party vendor services. On direct and cross-examination, Mr. Shea pled his Fifth Amendment right in refusing to answer most substantive questions and Arbitrator Brown articulated the presumption of innocence. Mr. Braverman represented Mr. Shea in the criminal and QBE in the arbitration proceeding and neither the arbitrator nor PAS were informed by him of the plea agreement.

QBE and its attorneys had an affirmative duty to inform the arbitrator and PAS of Mr. Shea’s plea agreement concerning a scheme to defraud QBE, in which Mr. Shea was accused of forging signatures on contracts between QBE and third-party vendors. Mr. Shea agreed to plead guilty to committing wire fraud against QBE before the arbitration hearing, and he testified in the arbitration hearing that he did not sign one of the disputed agreements between QBE and PAS. The issue of the authenticity of Mr. Shea’s signature and purported forgery of the signature on the agreement was directly related to Arbitrator Brown’s decision on whether the disputed contract was enforceable against QBE. PAS’s cross-examination of Mr. Shea might have produced additional information that may have resulted in a different award if the scope of questions that PAS was permitted to ask by PAS were not so limited.

(Internal quotations and citations omitted).

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