Apex Plumbing Supply v. US Supply Company ( 1998 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
APEX PLUMBING SUPPLY,
INCORPORATED; HAROLD FALCHICK,
Plaintiffs-Appellees,
v. No. 97-1368
U.S. SUPPLY COMPANY,
INCORPORATED,
Defendant-Appellant.
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Alexander Williams, Jr., District Judge.
(CA-96-3362-AW)
Argued: December 1, 1997
Decided: April 22, 1998
Before WILKINSON, Chief Judge, JONES,
United States District Judge for the Western District of Virginia,
sitting by designation, and MICHAEL,
Senior United States District Judge for the
Western District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed by published opinion. Senior Judge Michael wrote the opin-
ion, in which Chief Judge Wilkinson and Judge Jones joined.
_________________________________________________________________
COUNSEL
ARGUED: C. George Milner, C. GEORGE MILNER, P.C., Philadel-
phia, Pennsylvania, for Appellant. Philip Scott Friedman, IFSHIN &
FRIEDMAN, Washington, D.C., for Appellees. ON BRIEF: Gary S.
Marx, David Kantrow, MARX & FRAME, Washington, D.C., for
Appellees.
_________________________________________________________________
OPINION
MICHAEL, Senior District Judge:
In this case we consider appeals from the district court's confirma-
tion of an arbitration award. Here, we decide whether, in an action
seeking enforcement of such an award, the Federal Arbitration Act
confers permissive or mandatory venue on Federal courts in and for
the district in which the award was made. As well, we decide
whether, in this case, the district court erred in confirming the award.
For the reasons stated herein, we affirm the district court.
I. FACTUAL AND PROCEDURAL BACKGROUND
In December 1994, appellant U.S. Supply ("U.S.") and appellee
Apex Plumbing Supply ("Apex") entered into a Management Agree-
ment ("Agreement"). In the Agreement, Apex, a Maryland corpora-
tion, gave U.S., a Pennsylvania corporation, the right to manage Apex
for a renewable, one-year period, as well as an option to purchase
Apex after six months. The Agreement stated that a purchase price
would be determined using a specific formula in which, inter alia,
inventory would be valued based on how recently it was acquired (i.e.
the more recent the acquisition, the higher the relative value), and that
in any case inventory more than a year old would be given no value.
Joint Appendix ("JA") at 334. In addition, the Agreement required the
parties to submit any dispute to arbitration by the American Arbitra-
tion Association of Philadelphia, Pennsylvania, and to enter any
award made by the arbitrator "in the Court of General Jurisdiction as
a judgement of such court." JA at 338.
In its management role, U.S., per the Agreement, underwrote
Apex's expenses. As a result, in January 1995, Apex gave a security
interest in inventory, receivables, fixtures, leasehold rights, and equip-
ment to U.S. JA at 287. Harold Falchick, president of Apex, guaran-
teed Apex's debt to U.S. JA at 344-45.
2
Near the end of its first year managing Apex, U.S. exercised the
option to buy Apex. Prior to this time, however, Apex had become
dissatisfied with U.S.'s performance of its duties under the Agree-
ment, and a dispute arose as to how the purchase price should be
determined. As a result of the disagreement, U.S. filed for arbitration.
After receiving testimony and other evidence at a hearing, an arbi-
trator made an award of $179,284 to Apex. The arbitrator based this
award on the following calculations: first, the arbitrator credited to
Apex $9,000, the amount received by U.S. from an auction of Apex
inventory, as well as $45,725 in accounts receivable collected by
Apex, for a total of $54,725. Then, the arbitrator valued Apex's
inventory on April 24, 1996 (the last day Apex was in business) at
$258,446, and gave an additional credit of $25,219 to Apex for trade
fixtures, goodwill, unpaid rent, and unpaid salaries, for a total of
$283,665. The arbitrator finally took this figure and subtracted from
it the amount owed by Apex to U.S. ($104,381) to reach the $179,284
owed by U.S. to Apex.
U.S. filed a petition to vacate the award in the Court of Common
Pleas of Montgomery County, Pennsylvania. Apex removed the
action to the United States District Court for the Eastern District of
Pennsylvania. Apex then filed a petition to modify or confirm the
award in the United States District Court for the District of Maryland.
U.S. filed a motion objecting to venue in Maryland, but that motion
was denied. The Maryland district court confirmed the arbitrator's
award. The Pennsylvania district court then dismissed all proceedings
without prejudice. This appeal followed.
II. DISCUSSION
U.S. challenges one major aspect of the arbitrator's ultimate award.
At the arbitration hearing, U.S. had claimed that the value of Apex's
inventory on April 24, 1996 was $52,199 and Apex, using a "com-
puter run" from 1995, had claimed that the value, instead, was
$408,821.71. According to U.S., the arbitrator's calculation of inven-
tory was higher substantially than its figure because the arbitrator
failed to deduct the value of all inventory over one year old. In addi-
tion, U.S. raises the threshold issue of whether venue in the U.S. Dis-
trict Court for the District of Maryland was proper to begin with such
3
that the confirmation action even could be heard. We address the
issues in reverse order.
A. Venue under the Federal Arbitration Act
Section nine of the Federal Arbitration Act ("FAA"), the statute's
venue provision, states, in pertinent part:
If the parties in their agreement have agreed that a judgment
of the court shall be entered upon the award made pursuant
to the arbitration, and shall specify the court, then . . . any
party to the arbitration may apply to the court so specified
for an order confirming the award, and thereupon the court
must grant such an order unless the award is vacated, modi-
fied, or corrected as prescribed in sections 10 and 11 of this
title. If no court is specified in the agreement of the parties,
then such application may be made to the United States
court in and for the district within which such award was
made . . . .
9 U.S.C. § 9 (emphasis added).
The appellant contends now, as it did below, that the Maryland dis-
trict court lacked proper venue to hear the appellees' confirmation
petition. Rather, it argues, the U.S. District Court for the Eastern Dis-
trict of Pennsylvania should have been the exclusive Federal forum
under the FAA because section nine mandates that a party bring any
confirmation action in the district court in the district where the arbi-
tration occurred. Because, again, Philadelphia served as the situs of
the arbitration, exclusive venue would vest in a Pennsylvania district
court under U.S.'s reading of section nine. Apex, on the other hand,
insists that the statute means what it says--that a party "may" not
only choose to confirm an award in the local U.S. district court, but
in any other district court that has subject matter and personal juris-
diction. In any district court meeting the jurisdictional requirements,
venue is permissive under section nine, Apex concludes. The court
below read the statute as Apex does and concluded that the FAA's
venue provision conferred upon it permissive, not mandatory, venue.1
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1 We review this conclusion as to venue, like legal conclusions gener-
ally, de novo. United States v. Newsom, 9 F.3d 337, 338 (4th Cir. 1993).
4
Apex Plumbing Supply, Inc., et al. v. U.S. Supply Co., Inc., Civil No.
AW-96-3362, Memorandum Opinion at 3-6 (D.Md. January 14,
1997) ("Mem. Op."). JA at 863-66.
To begin our analysis, we agree fully with the finding of the district
court that, looking at the Agreement, ". . . it is undisputed that no par-
ticular court was specified where confirmation of the award could be
sought." Mem. Op. at 3. JA at 863. The Agreement's choice of law
provision did specify that Pennsylvania law would apply to certain
arbitration matters,2 but it in no way designated any one court as the
exclusive forum in which a party could confirm an arbitration deci-
sion. Thus, because the parties themselves agreed to no particular
forum, we address now whether the FAA confers permissive or man-
datory venue on district courts to hear confirmation petitions when it
states, "If no court is specified in the agreement of the parties, then
such application may be made to the United States court in and for
the district within which such award was made." 9 U.S.C. § 9.
The issue is one of first impression in this circuit. While the cir-
cuits currently are split on the question (i.e. , whether, in the absence
of an agreement by the parties, a confirmation action must be brought
in the district in which the arbitration award was rendered or merely
can be brought there), a majority of the circuits interpret section
nine's venue provision as permissive. See, e.g., Smiga v. Dean Witter
Reynolds, Inc., 766 F.2d 698 (2d Cir. 1985), cert. denied, 475 U.S.
1067 (1986) (permissive); In Re VMS Securities Litigation, 21 F.3d
139 (7th Cir. 1994) (permissive); but see Sunshine Beauty Supplies,
Inc. v. United States District Court for the Central District of
California, 872 F.2d 310, 312 (9th Cir. 1989) (mandatory). Addition-
ally, two district courts within this circuit, excluding the court in the
decision below, have had occasion to interpret section nine; both have
held that it confers permissive, rather than mandatory, venue on dis-
trict courts with the requisite subject matter and personal jurisdiction.
U.S. for Kirchdorfer v. Aegis/Zublin Joint Venture , 869 F. Supp. 387
(E.D.Va. 1994) (holding that section nine does not limit confirmation
_________________________________________________________________
2 Paragraph nine of the Agreement states, more fully, "The conduct of
the arbitration proceedings shall include the right to discovery in accor-
dance with the rules and principles set forth in the Pennsylvania Rules
of Civil Procedure." JA at 338.
5
of an award to the district court in the district of arbitration and con-
firmed a New York arbitration over whose parties the court had per-
sonal jurisdiction); Amalgamated Clothing and Textile Workers
Union v. Federation of Union Reps., 664 F. Supp. 995 (S.D.W.Va.
1987) (venue under section nine is permissive rather than exclusive).
Because there exists no binding precedent in this circuit, we look,
first, to persuasive authority from our sister circuits. The Seventh Cir-
cuit undertook a particularly thorough examination of the question in
In Re VMS Securities Litigation, supra. There, the court held that the
venue provision of the FAA indeed is permissive. 21 F.3d at 145. The
court looked to the express language of section nine and reasoned that
". . . in other statutes which restrict venue with so-called `special
venue provisions', Congress has usually employed more explicit lan-
guage than that used in the FAA." Id. at 144. Noting that "`[o]rdinary
canons of statutory construction suggest that Congress would have
used stronger language . . . if the intention was to restrict the power
of the federal court in Arbitration Act cases[,]'" the court then cited
several statutes with mandatory venue provisions. Id. (quoting Smiga,
supra, 766 F.2d at 707). First, the Miller Act, 40 U.S.C. § 270b(b),
states with respect to venue, "Every suit instituted under this section
shall be brought . . . in the United States District Court for any district
in which the contract was to be performed and executed and not else-
where . . . ." Id. at n.3. Similarly, the Clean Air Act, 42 U.S.C.
§ 7604(c)(1), declares, "Any action . . . may be brought only in the
judicial district in which such sources are located." Id. Comparing the
venue language of the several statutes, we join the conclusion of the
Seventh Circuit that ". . . it is apparent that the FAA is not as explicit
as the statutes which unequivocally restrict venue." Id.
Next, we look to a prior case in which, as Apex correctly notes,3
we held that the word "may" in section nine of the FAA is permissive,
rather than mandatory, with respect to the time limit for the confirma-
tion of an arbitration award. Sverdrup v. WHC Constructors, Inc., 989
F.2d 148, 156 (4th Cir. 1993). We held that in providing that at any
time within one year after an arbitration award, any party thereto
"may" petition court for a confirmation order, section nine was a per-
missive provision. Id. We reasoned that"[t]he word `may' in a statute
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3 Appellee's Brief at 15-16.
6
normally confers a discretionary power, not a mandatory power,
unless the legislative intent, as evidenced by the legislative history,
evidences a contrary purpose." Id. at 151 (citing Dalton v. United
States, 816 F.2d 971, 973 (4th Cir. 1987) (citing United Hospital Cen-
ter, Inc. v. Richardson, 757 F.2d 1445, 1453 (4th Cir. 1985)). Look-
ing behind that language to determine Congressional intent, we next
found that ". . . Congress understood the plain meaning of `may' to
be permissive. Section 9 of the FAA states that any party `may apply'
for a confirmation order but the court `must grant' the order absent
a modification or vacation under §§ 10 or 11." Id. (quoting 9 U.S.C.
§ 9).
Looking to section nine's venue provision, here, too, Congress
could not have understood the plain meaning of "may" to be anything
other than permissive. Had Congress intended to restrict venue under
section nine to "the United States court in and for the district within
which such award was made," it simply would have stated that the
parties "must," not "may," bring a confirmation action there. Again,
section nine's drafters knew well the distinction between the two
verbs; they chose "must" to communicate the compulsory command
elsewhere in section nine that ". . . the court must grant such an order
unless the award is vacated, modified, or corrected . . . ." 9 U.S.C. § 9.
For all of these reasons, we hold that section nine of the FAA con-
fers permissive, rather than mandatory, venue upon district courts in
and for the district in which an arbitration award was made. In the
case below, because the Maryland district court possessed subject
matter and personal jurisdiction over the parties' confirmation peti-
tion, venue was lodged properly in that court.
B. Valuation of Inventory Over One Year Old
U.S. maintains here, as its accountants did at the arbitration hear-
ing, that the arbitrator included inventory over one year old in its val-
uation of Apex's entire inventory. As U.S. points out, such an action,
if true, would be in contravention of the clear terms of sale laid out
in the "Option to Purchase" section of the Agreement. See JA at 334.
U.S. claims that, because the arbitrator went outside of the manage-
ment agreement in making his calculations, the arbitration award
should have been vacated or modified below.
7
Apex does not dispute the allegation that the arbitrator included
dated inventory in his valuation. Instead, Apex argues that U.S.
should not be able to challenge the arbitrator's calculation methodol-
ogy this late in the proceedings. Citing United Food and Commercial
Workers v. Marval Poultry, 876 F.2d 346, 351 (4th Cir. 1989), Apex
states that "where the challenge to an award does not go to the arbitra-
tor's fundamental power but instead involves the merit of an arbitra-
tion award, the challenge must be considered presumptively
unjustified." Appellee's Brief at 21.
Apex is correct in an important respect. Review of an arbitrator's
award is severely circumscribed. Indeed, the scope of review of an
arbitrator's valuation decision is among the narrowest known at law4
because to allow full scrutiny of such awards would frustrate the pur-
pose of having arbitration at all--the quick resolution of disputes and
the avoidance of the expense and delay associated with litigation. Jih
v. Long & Foster Real Estate, Inc., 800 F. Supp. 312, 317 (D.Md.
1992). Federal courts may vacate an arbitration award only upon a
showing of one of the grounds listed in the Federal Arbitration Act,
or if the arbitrator acted in manifest disregard of law. In re A.H. Rob-
ins Co., Inc., 197 B.R. 513, 516 (E.D.Va. 1994). 5
The FAA provides, in pertinent part, that:
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4 Courts of Appeals are precluded from engaging in de novo review of
a confirmation of an arbitration award. Parsons & Whittemore v. Yeargin
Const. Co., Inc., 744 F.2d 1482, 1484 (11th Cir. 1984).
5 This narrow standard of review is necessary to preserve the benefits
of arbitration, to wit, reduced delay and expense, and to prevent arbitra-
tion from becoming a preliminary step to judicial resolution. Eljer Mfg.,
Inc. v. Kowin Development Corp., 14 F.3d 1250 (7th Cir.), cert. denied,
___ U.S. ___, 114 S. Ct. 2675 (1994). Moreover, Courts of Appeals do
not review the reasoning of arbitrators in determining whether their work
draws its essence from the contract, but look only to the result reached;
the single question is whether the award, however arrived at, is rationally
inferable from the contract. Anderman/Smith Operating Co. v. Tennessee
Gas Pipeline Co., 918 F.2d 1215 (5th Cir. 1990), cert. denied, 501 U.S.
1206 (1991). An arbitration award will not be set aside unless it is irratio-
nal or evidences manifest disregard for law. Upshur Coal Corp. v. United
Mine Workers of America, Dist. 31, 933 F.2d 225, 229 (4th Cir. 1991).
8
(a) In any of the following cases the United States court
in and for the district wherein the award was made may
make an order vacating the award upon the application of
any party to the arbitration--
...
(4) Where the arbitrators exceeded their powers, or
so imperfectly executed them that a mutual, final,
and definite award upon the subject matter submit-
ted was not made.
...
9 U.S.C. § 10(a). Section 11 of the FAA similarly allows modification
of an arbitrator's award only in limited instances including, as U.S.
argues here, "[w]here there was an evident miscalculation of figures
or an evident material mistake in the description of any person, thing,
or property referred to in the award." 9 U.S.C.§ 11(a).
The appellant argues that both such errors werw present maintain-
ing that the arbitrator (1) exceeded his powers by valuing inventory
that is expressly to be valueless in the Agreement and, thereby, (2)
performed an evident miscalculation of the inventory figures as part
of the total award. This argument, however, is not supported by courts
in this or other circuits which have held that "as a matter of law" nei-
ther misinterpretation of a contract nor an error of law "constitutes a
ground on which an award can be vacated." Farkas v. Receivable
Financing Corp., 806 F. Supp. 84, 87 (E.D.Va. 1992) (citations omit-
ted). Indeed, "a conclusion reached by the [arbitrator], even if ques-
tionable . . . does not constitute exceeding [his] power." Kirchdorfer,
supra, 869 F. Supp. at 392.
U.S., not unexpectedly, counters that here more than a mere "mis-
interpretation" of the contract has transpired because the arbitrator's
valuation decision irrationally disregarded an unambiguous provision
of the Agreement. Even if we were to accept the premise of U.S.'s
assertion, however, no precedent supports vacation on this ground;
indeed, U.S. cites none. To the contrary, authority interpreting the
9
FAA has held that merely because an arbitrator's decision is not
based on an agreement's express terms does not mean that it is not
properly derived from the agreement; neither misapplication of princi-
ples of contractual interpretation nor erroneous interpretation of the
agreement in question constitutes grounds for vacating an award. See,
e.g., Harry Hoffman Printing, Inc. v. Graphic Communications
Intern. Union, Local 261, 950 F.2d 95 (2d Cir. 1991). Far from acting
"irrationally," the entire record indicates that the arbitrator relied on,
among other evidence, the expert testimony of a certified public
accountant on the question of inventory valuation. JA at 606, 805,
889.
Again, U.S. also urges that the arbitrator's award be modified pur-
suant to 9 U.S.C. § 11(a) because the award owed to an evident mis-
calculation of the inventory figures. As to this proposed remedy,
courts have held generally that even a mistake of fact or misinterpre-
tation of law by an arbitrator provides insufficient grounds for the
modification of an award. See Amicizia Societa Navegazione v. Chil-
ean Nitrate and Iodine Sales Corp., 274 F.2d 805 (2d Cir. 1960). As
the district court stated on this point:
[C]ourts have construed literally the language of Section 11,
relating to miscalculation of figures or misdescription of
property as a ground for modification of an arbitration
award. . . . Where no mathematical error appears on the face
of the award . . . an arbitration award will not be altered.
Apex Plumbing Supply, Inc., et al. v. U.S. Supply Co., Civil No. AW-
96-3362, Memorandum Opinion at 5 (D.Md. February 24, 1997) (cit-
ing Hough v. Merrill Lynch, Pierce, Fenner & Smith, 757 F. Supp.
283, 288 (S.D.N.Y. 1991)). JA at 905. Here, because even if the
claimed miscalculation of the inventory's value constituted a "mate-
rial mistake," the miscalculation was not "evident" because it did not
appear on the face of the arbitration award. Hough, 757 F. Supp. at
288. Thus, as the district court correctly determined, U.S. did not
meet its burden under section eleven in order to modify the award.
Accordingly, we hold that because the appellant failed to qualify
under any ground listed in either section ten or eleven of the FAA
10
allowing the vacation or modification of an arbitration award, the dis-
trict court properly confirmed that award.
III.
For the foregoing reasons, the district court's confirmation of the
arbitrator's award in this case hereby is
AFFIRMED.
11