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Security One, L.P. v. L.G. Tara, LLC

A-3033-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

ARBITRATION — A court may review an arbitrator’s award against parties who, although holding ownership interests in the party bound to arbitrate a dispute, are not themselves parties to the arbitration agreement.

A financial investment group (created by principals of a financial concern) and a home builder formed a limited liability company in order to build and sell thirty-six single-family homes. The parties envisioned an arrangement under which the financial group would raise start-up capital for the home builder to use in building and selling the proposed residences. The operating agreement called for the financial group to be paid a percentage of the proceeds from each sale until its capital contribution had been repaid in full. Profits from subsequent sales were to be divided according to an agreed-upon schedule. The operating agreement also required that the parties submit any disputes to binding arbitration. The arbitration award was to be final, binding, non-appealable, and enforceable by judgment in any court that had jurisdiction. Disputes arose and the development was not completed as anticipated. The financial group sought removal of the manager of the company and an accounting of the company’s funds. The home builder filed an arbitration claim against the financial investment group, the financial concern that formed the group, and one of the concern’s partners for breach of contract and fiduciary duty. It sought monetary damages.

The demands were consolidated before a single arbitrator. The arbitrator ordered that the manager of the company be removed, and ordered an accounting of the company’s records. Additionally, the home builder was directed to indemnify the financial group for homeowner warranty claims covering all homes built. The arbitrator also ruled that the company was to reimburse the home builder for certain expenses and indicated that the financial group would pay the home builder for any shortfall if the company had insufficient funds to pay the builder. Upon receipt of the award, the financial group’s counsel sought clarification as to whether one partner of the financial concern was individually liable. The arbitrator responded that if the company had insufficient funds to meet its obligations after an upcoming closing, then that partner (together with the financial group and the financial concern) would be jointly and severally liable, but only up to the aggregate dollar amount set forth in the award.

The builder filed a complaint seeking to confirm and enforce the arbitration award. The financial group, the financial concern, and its partner filed a separate complaint alleging the arbitrator erred in holding that both the financial concern and the partner were liable because neither was a party to the company’s operating agreement. They sought to have the arbitration award modified or vacated. The lower court entered judgment solely against the financial group.

Two months later, the home builder again sued the financial concern and two of its partners, seeking to make them responsible for the judgment confirming the arbitration award against the financial group. The lower court entered an order and dismissed the complaint under the entire controversy doctrine.

In the appeal by the builder, the Appellate Division remanded the matter to the lower court for further proceedings. It held that the lower court: (i) gave no reasons for its conclusion that the entire controversy doctrine applied to this matter; and (ii) was bound under law to make findings of fact and conclusions of law. The Court further noted that the trial record seemed to indicate that the lower court considered the matter to be premature (as the home builder had to first begin attempts to collect on its judgment against the company). Thus, the matter could not be barred by the entire controversy doctrine.

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