Watermill Ventures, Ltd. v. Cappello Capital Corp.
671 F. App'x 492
9th Cir.2016Background
- Watermill Ventures, Ltd. and Watermill-Toolrock Enterprises, LLC (Watermill) sued to vacate an arbitration award favoring Cappello Capital Corp. under the FAA, §§ 10(a)(1) and 10(a)(4).
- Parties had a New York-governed Settlement Agreement resolving multiple claims and reserving an “Equity Split Dispute” for binding arbitration.
- Watermill alleges Cappello secretly assigned its rights to arbitration proceeds in violation of the Settlement Agreement’s anti-assignment clause and that this breach excused Watermill from arbitrating.
- District court denied vacatur, concluding the alleged assignment was not a material breach and thus did not excuse arbitration; it also treated the anti-assignment clause as, at most, giving rise to damages only.
- On appeal, the Ninth Circuit affirmed: the assignment (even if it occurred) was not a material breach defeating the Agreement’s purpose, so FAA vacatur grounds were unavailable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Cappello’s alleged assignment breached the Settlement Agreement so materially as to excuse arbitration | The secret assignment violated the anti-assignment clause and was critical, so Watermill was excused from arbitrating | The assignment (if any) was not material and did not defeat the Agreement’s purpose; at most it gave rise to damages | Assignment was not a material breach; Watermill remained obligated to arbitrate |
| Whether an anti-assignment breach excuses arbitration because it is a personal covenant giving only damages | Anti-assignment was critical to the deal; breach would bar arbitration | Even if personal covenant, such clauses typically create only a damages remedy and do not excuse performance | Court assumed (but did not need to decide) that even if personal covenant, breach was immaterial; duty to arbitrate remained |
| Whether alleged fraud in concealing the assignment permits vacatur under FAA § 10(a)(1) | Concealment of the assignment procured the award by fraud; vacatur warranted | Concealment did not affect Watermill’s obligation to arbitrate, so § 10(a)(1) not met | No vacatur for fraud because Watermill would have had to arbitrate regardless |
| Whether the arbitrator exceeded his powers under FAA § 10(a)(4) by not addressing Watermill’s assignment defense | Arbitrator exceeded authority by deciding despite the assignment issue | Arbitrator had power because Watermill had no valid defense to arbitration | No § 10(a)(4) relief; failure to consider an unpresented argument does not warrant vacatur |
Key Cases Cited
- Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976) (defines "material breach" that defeats the contract's purpose)
- Jacob & Youngs v. Kent, 129 N.E. 889 (N.Y. 1921) (contracting party's undisclosed intention is insufficient to establish materiality)
- Pro Cardiaco Pronto Socorro Cardiologica S.A. v. Trussell, 863 F. Supp. 135 (S.D.N.Y. 1994) (anti-assignment clause treated as personal covenant giving rise to damages remedy)
- WILJEFF, LLC v. United Realty Mgmt. Corp., 82 A.D.3d 1616 (N.Y. App. Div. 2011) (addressing factual-assumption limits and legal questions after accepting pleaded facts)