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A New Jersey federal district court vacated a borrower’s arbitration award based upon manifest disregard of the law, because the arbitrator knew of applicable Bankruptcy Code principles, and yet refused to apply bankruptcy law or ignored it altogether even though the law was applicable to the case.
In Homecomings Financial Network v. Kotyk, No. 07-cv-1414, 2007 WL 2417357 (D. N.J. Aug. 24, 2007), Kotyk entered into a loan agreement with Homecomings, and the loan was secured by Kotyk’s real property. The loan contract contained an arbitration agreement calling for arbitration should any dispute arise.
Kotyk defaulted on his loan payments and Homecomings filed a foreclosure proceeding. Kotyk failed to respond to the foreclosure and judgment was entered in favor of Homecomings.
Before the property could be sold, Kotyk filed for bankruptcy. After Kotyk’s bankruptcy proceedings, Kotyk requested a payoff statement from Homecomings and then he paid the amount stated in the payoff letter.
Thereafter, Kotyk claimed that he overpaid and filed a complaint in court seeking to recover the amount he overpaid and other fees. Homecomings’ motion to dismiss Kotyk’s claim and compel arbitration pursuant to the arbitration agreement in the loan contract was granted.
In arbitration, Kotyk and Homecomings disagreed over the manner in which the payoff amount was calculated. The arbitrator found in favor of Kotyk.
Homecomings moved to vacate the award based upon manifest disregard of the law. Specifically, Homecomings argued that the Bankruptcy Code governed the loan between Homecomings and Kotyk, and that arbitrator could not have applied the Bankruptcy Code and issued an award in favor of Kotyk.
The Court agreed with Homecomings’ argument. The arbitrator appeared to have calculated the debt according to the foreclosure judgment rather than according to the terms of the loan contract.
The Court noted that if the arbitrator had applied the proper law and determined the calculations pursuant to the terms of the underlying loan agreement, the arbitrator would have concluded in Homecomings’ favor. During arbitration, Homecomings made the law known to the arbitrator, but the arbitrator either ignored the law or refused to apply it in making his decision.
Since the arbitrator did not issue a reasoned award, the Court did not have anything to suggest that arbitrator applied the proper law, even if incorrectly. The Court noted that this was a rare example of an extreme case where an arbitrator exhibited a manifest disregard for the law that was discernable from the summary arbitration award.
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