Emerald Aero, LLC v. Kaplan
2017 Cal. App. LEXIS 272
| Cal. Ct. App. | 2017Background
- Investors sued Kaplan and AMS II Houston Investments Management, LLC alleging breaches of fiduciary duty and fraud related to a Texas self-storage investment; complaint sought >$10M in compensatory damages but did not seek punitive damages.
- The parties’ agreement required AAA arbitration under the AAA Commercial Rules; the superior court compelled arbitration.
- Arbitration was stayed pending related criminal prosecution; after Kaplan pleaded guilty but before sentencing, the stay was lifted and a telephonic evidentiary/default "prove-up" hearing was scheduled with roughly 2–3 weeks' notice.
- Plaintiffs emailed a last‑minute arbitration brief (sent to Kaplan <24 hours before the hearing) that increased claimed compensatory damages and, for the first time, requested punitive damages (seeking a 3x multiplier and ultimately a $30M+ award); defendants did not appear at the hearing.
- The arbitrator issued a $30,835,152.57 final award without itemizing compensatory vs. punitive damages; the arbitrator later recused and AAA declined to reassign post‑award motions.
- The superior court confirmed the award; on appeal the Court of Appeal reversed as to Kaplan, holding the arbitrator exceeded authority by awarding punitive damages without adequate prior notice in violation of incorporated AAA rules and fundamental fairness; judgment as to Houston LLC remained undisturbed.
Issues
| Issue | Plaintiffs' Argument | Kaplan's Argument | Held |
|---|---|---|---|
| 1. Whether the arbitration award must be vacated because the arbitrator exceeded powers by awarding punitive damages without adequate notice | Plaintiffs: They provided notice by emailing the arbitration brief to Kaplan the day before the hearing; award is final and binding under arbitration agreement | Kaplan: He had no reasonable notice of punitive‑damages claim; late notice prevented meaningful response and prejudiced his right to a fair hearing | Held: Vacated as to Kaplan — AAA rule 6 and fairness required meaningful prior written notice before submitting a new punitive‑damages claim; <24‑hour email did not suffice, so arbitrator exceeded authority (§1286.2(a)(4)) |
| 2. Whether court may review and vacate award under §1286.2 exceptions (refusal to postpone/hearing in absence) | Plaintiffs: Arbitration procedures were proper; Kaplan never sought a stay/continuance after withdrawal of counsel; he suffered no prejudice | Kaplan: Arbitrator should have stayed/continued hearing until his criminal sentencing or been more solicitous given criminal proceedings and counsel withdrawal | Held: Not vacated under §1286.2(a)(5) — Kaplan did not request continuance after stay expired and had notice of hearing; no statutory refusal‑to‑postpone relief shown |
| 3. Whether arbitrator’s remedial choices (size/type of damages) are reviewable on merits | Plaintiffs: Remedy selection is for arbitrator; courts may not reassess punitive‑damages merits in arbitration | Kaplan: Remedies here exceeded arbitrator’s authority because they violated AAA rule notice requirements and fairness | Held: Generally remedy choices are insulated from merits review, but when remedies violate explicit arbitration‑rule notice requirements or procedures the award may be vacated; court vacated on that ground |
| 4. Whether AAA administrator’s refusal to reassign post‑award motion was improper | Plaintiffs: AAA properly handled post‑award administrative matters; arbitrator recused | Kaplan: Administrator should not have refused to reassign to an arbitrator to rule on motion to modify/vacate | Held: Administrator’s refusal to present motion to an arbitrator was improper and contributed to procedural unfairness; supports vacatur remand for new arbitration on damages |
Key Cases Cited
- Haworth v. Superior Court, 50 Cal.4th 372 (2010) (arbitration favored but limited judicial review exists for serious procedural or award defects)
- Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992) (courts generally may not review arbitrator’s merits determinations)
- Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362 (1994) (arbitrator’s remedial flexibility is broad but bounded by arbitration agreement and rules)
- Gueyffier v. Ann Summers, Ltd., 43 Cal.4th 1179 (2008) (arbitrator may award relief rationally related to submitted claims absent express limitation)
- Richey v. AutoNation, Inc., 60 Cal.4th 909 (2015) (limits on judicial reexamination of arbitration awards reaffirmed)
- Hoso Foods, Inc. v. Columbus Club, Inc., 190 Cal.App.4th 881 (2010) (arbitration procedures that undermine fairness are reviewable)
- Mave Enterprises v. Travelers Indemnity Co., 219 Cal.App.4th 1408 (2013) (prior notice of punitive damages claim relevant to arbitration challenges)
- Shahinian v. Cedars‑Sinai Medical Center, 194 Cal.App.4th 987 (2011) (arbitrator’s punitive damages awards generally not subject to constitutional review, but procedural notice matters)
- Alexander Securities, Inc. v. Mendez, 17 Cal.App.4th 1083 (1993) (arbitration award vacated where party lacked notice of punitive claim)
- Totem Marine Tug & Barge v. North American Towing, 607 F.2d 649 (5th Cir. 1979) (arbitration award vacated where arbitrator granted unrequested damages)
- Cobler v. Stanley, Barber, Southard, Brown & Associates, 217 Cal.App.3d 518 (1990) (arbitrator’s power is limited by arbitration agreement and rules)
- Royal Alliance Associates, Inc. v. Liebhaber, 2 Cal.App.5th 1092 (2016) (arbitral flexibility does not override fundamental right to a fair proceeding)