     IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE


                                                        )
Thomas J. Gilmartin and Jill Singer,                    )    C.A. No. 11356-MA
                  Plaintiffs,                           )
v.                                                      )
                                                        )
Whaley Royce, LLC,                                      )
                Defendant.                              )


                                  MASTER’S REPORT

                             Date Submitted: July 6, 2016
                             Draft Report: October 7, 2016
                             Final Report: March 28, 2017

      This case involves a real estate contract that required disputes between the

parties to be resolved by arbitration. Buyer requested arbitration after seller refused

to return buyer’s deposit when he sought to cancel the contract. Following a hearing,

the arbitrator found in favor of seller, awarding seller the deposit as liquidated

damages, plus attorney fees and costs.            Dissatisfied with the outcome of the

arbitration, buyer filed a complaint in this Court, alleging fraud and seeking to vacate

the arbitrator’s award.      Seller now has moved to dismiss the complaint as an

impermissible collateral attack on the merits of the arbitrator’s decision, among other

grounds. For the reasons that follow, I recommend that the Court dismiss buyer’s

complaint in its entirety.




                                         Page 1 of 26
                        Factual and Procedural Background1

      On October 31, 2013, Plaintiff Thomas J. Gilmartin and Defendant Whaley

Royce, LLC (“Whaley Royce” or “Seller”) entered into a contract for the purchase of

Lot 27 in a single family home community under development in Dagsboro,

Delaware.2 The contract called for a deposit of ten percent of the purchase price upon

execution, but provided a two-day due diligence period.3 If Gilmartin notified Seller

within this time period that he no longer wanted to proceed with the contract, it would

be declared null and void and Seller would refund Gilmartin’s deposit. Otherwise,

the deposit and all other monies paid to Seller would be nonrefundable in the event of

Gilmartin’s default.4

      On the same day he signed the contract, Gilmartin also executed several

addenda to the contract. The first addendum provided that “this contract is subject to

buyer receiving his Final 9/11 First responder settlement on or before 12/2/2013. If

buyer does not receive his final settlement agreement by 12/2/2013 all deposit

monies, at the buyers request, will be returned” (“Zadroga Funds Addendum”).5


1
  This factual background is based on the allegations in Plaintiffs’ Amended Verified
Complaint and the documents incorporated therein as exhibits. Docket Item “DI” 1.
2
  Amended Verified Complaint, Ex. C (“Ellis Point Purchase Agreement”).
3
  Id. at ¶¶ 3-4.
4
  Id. at ¶ 4.
5
   Amended Verified Complaint, Ex. E. See Letter dated Feb. 7, 2014, to Gilmartin
from the September 11th Victim Compensation Fund (“VCF”) explaining that under
the Zadroga Act, total funding for the VCF was capped and only some of the VCF’s
funding was available during the VCF’s first five years. Payments were to be
                                      Page 2 of 26
Another addendum acknowledged that the buyer did not have the full deposit and

required a deposit of $1,000 upon the execution of the contract, and the balance of

deposit in the amount of $63,670 by December 2, 2013 (“Deposit Schedule

Contingency Addendum”).6 A third addendum executed by Gilmartin, which was

also executed by Plaintiff Jill Singer, purported to include Singer as an additional

buyer under the terms of the contract (“Add Buyer Addendum”). 7 The Add Buyer

Addendum was not executed by Seller. On October 31 st, Singer wrote a check to

Seller in the amount of $1,000 as an initial deposit on Lot 27.8

      On November 30, 2013, Gilmartin and Singer executed another addendum

releasing “[a]ny or all contingencies for the purchase of” Lot 27 (“Revocation of

Contingencies Addendum”).9 In September 2014, a dispute arose between the parties

concerning the contract and Gilmartin sought the return of his deposit and termination

of the contract, citing the Zadroga Funds Addendum. 10       Whaley Royce refused to

return Gilmartin’s deposit and claimed the contingency had been valid only until



distributed to claimants in at least two installments and each claimant might receive a
total payment that was less than the amount of that claimant’s calculated loss. Id.,
Ex. D.
6
  Amended Verified Complaint, Ex. L.
7
  Amended Verified Complaint, Ex. F.
8
  Amended Verified Complaint, Ex. G.
9
  Amended Verified Complaint, Ex. R.
10
   Amended Verified Complaint, Ex. S & Ex. T (Letters dated September 22, 2014
and October 6, 2014 from Douglas M. Herman, Esq. to K. William Scott, Esq. re:
Ellis Point Unit 27).
                                       Page 3 of 26
December 2, 2013, after which it was waived.11       Gilmartin then sought arbitration

through the American Arbitration Association (“AAA”) in accordance with

Paragraph 37 of the contract.12

      During the arbitration process, Gilmartin was represented by counsel and

Whaley Royce was represented by a non-lawyer.13 The parties selected Christopher I.

McCabe, Esquire as their arbitrator (“Arbitrator”) from a list of five neutral

arbitrators provided by the AAA.14 Singer was not given notice of the arbitration

hearing and, although she traveled with Gilmartin to the hearing, Singer was excluded

from the proceedings by Arbitrator. On May 4, 2015, Arbitrator issued his written

award, declaring that Whaley Royce was entitled to retain all deposit monies as

liquidated damages, and be reimbursed by Gilmartin for all costs and expenses,

including reasonable attorneys’ fees incurred by Whaley Royce in the arbitration

action.15 Gilmartin was also required to pay the AAA’s administrative fees and

Arbitrator’s compensation.16




11
   Id.
12
   Amended Verified Complaint, Ex. C & Ex. Q (Letter dated January 22, 2015 from
the American Arbitration Association to Victoria Petrone, Esq. and Nick Hammonds
re: Case Number 01-14-0002-2045 Thomas Gilmartin -vs- Whaley Royce, LLC).
13
   Amended Verified Complaint, Ex. Q.
14
   Amended Verified Complaint, Ex. O & Ex. P.
15
   Amended Verified Complaint, Ex. M.
16
   Id.
                                      Page 4 of 26
      On July 31, 2015, Gilmartin and Singer filed a pro se complaint to vacate the

arbitration award.17   On October 2nd, Whaley Royce filed a motion to dismiss the

complaint.18 An attorney subsequently filed an amended complaint on March 18,

2016,19 and the parties thereafter briefed the motion to dismiss. Oral argument took

place on July 6, 2016.20

                                   The Complaint

      Five causes of action are alleged in the amended complaint. The first count is

based on fraud. Plaintiffs allege that Whaley Royce knew they could not afford to

purchase the property unless Gilmartin received his September 11 th settlement funds.

Plaintiffs further claim that Whaley Royce never intended to refund their deposit

money, as evidenced by the fact that Whaley Royce induced them to execute the

Revocation of Contingencies Addendum purporting to nullify the Zadroga Funds

Addendum. In addition, Plaintiffs allege that the arbitration award was procured by

Whaley Royce’s “improper, fraudulent and bad faith dealings with these

unsophisticated Plaintiffs and by manipulation of the Arbitration proceeding to hold

plaintiffs to standards designed for Commercial and/or Construction Industry

Professionals.”21


17
   DI 1.
18
   DI 8.
19
   DI 21.
20
   DI 32.
21
   Amended Verified Complaint, at ¶ 81.
                                      Page 5 of 26
        In their second count, Plaintiffs allege that Arbitrator was unduly and

impermissibly biased in favor of Whaley Royce because of his history of representing

construction industry professionals and entities. Although Plaintiffs had received

Arbitrator’s biography from the AAA,22 they allege that it did not accurately portray

Arbitrator’s employment experience or the nature of his professional practice.

According to Plaintiffs, his law firm’s website revealed that Arbitrator primarily

represented construction professionals and was likely concerned with drafting the sort

of “one-sided contract” used by Whaley Royce.23

        In their third count, Plaintiffs allege that Arbitrator exceeded or imperfectly

executed his powers by: (a) using the AAA Commercial Arbitration Rules rather than

the AAA Construction Industry Arbitration Rules that were required by the parties’

contract or, what would have been preferable to Plaintiffs, the AAA Consumer

Arbitration Rules that are more suited to unsophisticated consumers like themselves ;

(b) excluding Singer from the arbitration proceedings when she was a material and

necessary party to the contract and the arbitration; (c) allowing the arbitration to

proceed when Whaley Royce, a limited liability company, appeared without counsel

in violation of Delaware law; (d) failing to provide any reason or explanation for his

failure to credit the Zadroga Funds Addendum as an integral part of the contract that

could not be waived or revoked by any subsequent document; (e) failing to allow


22
     Amended Verified Complaint, Ex. P.
                                       Page 6 of 26
Singer to take part in the arbitration even though she was present and desired to take

part in the proceedings; and (f) failing to enter a default against Whaley Royce when

it appeared without legal counsel.

          In their fourth count, Plaintiffs allege that the contract impermissibly required

arbitration under the AAA Construction Industry Arbitration Rules rather than the

AAA Consumer Arbitration Rules. Finally, Plaintiffs allege in their fifth count that,

by virtue of the internally incompatible operation of the Zadroga Funds Addendum

and the Revocation of Contingencies Addendum, there could not have been a valid

arbitration agreement between the parties.

                                         The Issues

        Whaley Royce argues that Plaintiffs waived their right to challenge the contract

and arbitration clause because Gilmartin initiated and participated in the AAA

arbitration proceedings. Even if Plaintiffs’ claims have not been waived, Whaley

Royce contends that the arbitration clause is valid and enforceable because the

contract was not a standard form contract, and could have been cancelled during the

due diligence period if Gilmartin had objected to the arbitration clause. Furthermore,

the arbitration clause was not unfairly structured and the type of contract between the

parties did not meet the criteria for application of the AAA Consumer Arbitration

Rules. Whaley Royce also argues that: (a) Plaintiffs’ claim of fraud does not meet


23
     Amended Verified Complaint, at ¶ 57.
                                         Page 7 of 26
the heightened pleading standard of Court of Chancery Rule 9(b) because the

allegations lack specificity; (b) Plaintiffs fail to state a claim under 10 Del. C. §

5714(a)(2) because there is no allegation that Arbitrator had a substantial personal or

financial relationship with any party or its agent; and (c) Plaintiffs fail to state a claim

under Section 5714(a)(3) that Arbitrator exceeded his powers or imperfectly executed

them because (i) there is no allegation that the use of the AAA Commercial Rules

prejudiced Plaintiffs, (ii) Singer was not a party to the contract, was not entitled to

notice, and was properly excluded from the proceedings, and (iii) arbitration is not a

court proceeding and, therefore, Whaley Royce was not required to be represented by

counsel. Finally, Whaley Royce argues that AAA rules only require an award to be

in writing and to provide a financial breakdown of any monetary reward; there is no

requirement that an arbitrator provide an explanation or detailed opinion related to his

decision.

      Plaintiffs oppose the motion to dismiss, arguing that they have sufficiently

pleaded a claim of fraud in the inducement by Whaley Royce. First, Plaintiffs

contend that when Whaley Royce accepted Plaintiffs’ offer to purchase Lot 27,

knowing that Plaintiffs could not afford the property without the full payment of

Gilmartin’s benefits from the September 11th fund, Whaley Royce breached its duty

to negotiate and enter into contracts in good faith. Whaley Royce’s subsequent

mischaracterization of the intent of the Zadroga Funds Addendum to avoid its


                                         Page 8 of 26
consequences compounded this breach, according to Plaintiffs, because there is no

provision or language in the Zadroga Funds Addendum that rendered it contingent or

nullified if not exercised prior to December 2, 2013. Plaintiffs contend that Whaley

Royce never intended to refund their deposit because Whaley Royce proffered the

Revocation of Contingencies Addendum to Plaintiffs without clearly stating and

warning that it would rely on this document to assert the nullification of the Zadroga

Funds Addendum.        Accordingly, Plaintiffs claim they relied on the promises of

Whaley Royce to their detriment, and Whaley Royce induced them to enter a contract

that it had every reason to know they could not afford. Plaintiffs also argue that the

arbitration award was procured by Whaley Royce’s “improper, fraudulent and bad

faith dealings” with them, and Whaley Royce “manipulated the Arbitration

proceeding” to deprive Singer of an opportunity to be heard and Plaintiffs of their

deposit funds.24

        Plaintiffs also argue that they have sufficiently pleaded a cause of action for

arbitrator partiality because the AAA biography differed in material aspects from the

curriculum vitae obtained from the website of Arbitrator’s law firm. As a result,

Plaintiffs claim they were denied the benefit of their bargain because they were

unable to make an informed selection of an unbiased arbitrator. Instead, they selected

one who, by virtue of his employment and practice primarily representing


24
     Plaintiffs’ Brief in Opposition to Defendant Whaley Royce, LLC’s Motion to
                                       Page 9 of 26
construction industry professionals and entities, was unduly and impermissibly biased

in favor of Whaley Royce and against them.

      In addition, Plaintiffs argue that they have pleaded a cognizable cause of action

of overreaching by Arbitrator, who used AAA Commercial Arbitration Rules rather

than AAA Construction Industry Arbitration Rules as required by the parties’

contract, thereby depriving the parties the benefit of their bargain. Also, Arbitrator

was not authorized to overlook the law requiring a limited liability company to have

legal representation in a quasi-judicial proceeding or to exclude Singer from the

proceedings.

       Plaintiffs argue that Arbitrator was provided a complete contract that

included, among other documents, the Zadroga Funds Addendum and the Add Buyer

Addendum, yet he so imperfectly exercised his powers as to render no final and

definite award on the subject matter. This was demonstrated by the fact that Whaley

Royce’s interpretation of the Revocation of Contingencies Addendum requires a

construction of the contract that is internally incompatible, rendering the Zadroga

Funds Addendum meaningless. According to Plaintiffs, Arbitrator had sufficient

proof to support their contentions that Singer was a party to the contract and that the

Zadroga Funds Addendum demonstrated the parties understood the contract would be

nullified and deposit monies would be refunded at Gilmartin’s request if the


Dismiss Plaintiff’s Complaint pursuant to Ct. Ch. Rule 12(b)(6), at p. 20. DI 24.
                                      Page 10 of 26
September 11th settlement funds were not received by December 2, 2013.

Nevertheless, Arbitrator ignored these documents, impermissibly excluded Singer

from the hearing despite her protests, and failed to enter an award in accord with the

language and clear intent of the Zadroga Funds Addendum. Finally, Plaintiffs argue

that they have adequately pleaded and demonstrated that the AAA rules expressly

required by the contract were not followed.

                                 Standard of Review

      When considering a motion to dismiss for failure to state a claim under Rule

12(b)(6), the court must assume the truthfulness of all well-pleaded allegations and

give the plaintiff the benefit of all reasonable inferences that can be drawn from its

pleadings.25   Nevertheless, “the court need not accept inferences or factual

conclusions unsupported by specific allegations of fact,”      26
                                                                    nor must it draw

unreasonable inferences in favor of the non-moving party.27

                                      Analysis




25
   Solomon v. Pathe Communications Corp., 672 A.2d 35, 38 (Del. 1996) (citing
Grobow v. Perot, 539 A.2d 189, 187 n. 6 (Del. 1988); In re USACafes, L.P. Litig.,
600 A.2d 43, 47 (Del. Ch. 1991)).
26
   Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, 2011 WL 1348438, at
* 7 (Del. Ch. April 8, 2011) (citing Ruffalo v. Transtech Serv. P’rs Inc., 2010 WL
3307487 at *10 (Del. Ch. Aug. 23, 2010)).
27
   CSH Theatres, LLC v. Nederlander of San Francisco Assoc., 2015 WL 1839684, at
* 5 (Del. Ch. April 21, 2015) (citing Price v. E.I. DuPont de Nemours & Co., Inc., 26
A.3d 162, 166 (Del. 2011)).
                                      Page 11 of 26
      In their complaint, Plaintiffs have attacked the arbitration award on several

fronts.   First, they challenge the validity of the entire contract, claiming that it had

been fraudulently induced by Whaley Royce. Second, they challenge the validity of

the contract’s arbitration clause and, more narrowly, the clause’s requirement of

arbitration under the AAA Construction Industry Arbitration Rules.               Finally,

Plaintiffs directly attack Arbitrator’s award on the following grounds: (a)

manipulation, bad faith, and fraud in its procurement; (b) partiality of the arbitrator;

(c) Arbitrator’s overreaching and exceeding his powers by: (i) excluding Singer from

the hearing, (ii) using the AAA Commercial Arbitration Rules rather than the AAA

Construction Industry Arbitration Rules as required by the parties’ contract, (iii)

allowing Whaley Royce to appear without counsel, and (iv) failing to provide any

explanation for Arbitrator’s failure to credit the Zadroga Funds Addendum.

      Paragraph      37    of   the    contract,       which   is   captioned   “Dispute

Resolution/Arbitration,” provides:

             If any dispute, claim or controversy arises related to this Agreement, the
      Limited Builders Warranty (as defined in the attached Addendum), or other
      agreements, communications, or dealings involving Buyer, or the construction
      or condition of the Property including, but not limited to, disputes concerning
      breach of contract, express and implied warranties, personal injuries and/or
      illness, mold related claims, representations and/or omissions by Seller or its
      representatives or agents, on-site and off-site conditions and all other torts and
      statutory causes of actions (“Claims”), the Seller and Buyer agree to attempt to
      settle the dispute first through direct discussions. In the event the dispute
      cannot be resolved through direct discussions, the parties agree to settle their
      differences by binding arbitration administered by the American Arbitration
      Association under its Construction Industry Arbitration Rules, applying the

                                       Page 12 of 26
      substantive laws of the State of Delaware, and judgment on the award rendered
      by the arbitrator(s) may be entered in any court having jurisdiction thereof.
      The location of the arbitration shall be the location of the Community or any
      other location mutually agreed to by the Seller and Builder. Once a party files
      a request for arbitration with the other party and with the American Arbitration
      Association, the parties agree to commence such arbitration within sixty (60)
      days of filing of the request.
             The parties agree that the award or order rendered by the arbitrator or
      arbitrators shall be final and binding and enforceable in a court of law or
      equity. The prevailing party in any dispute arising out of or relating to this
      Agreement or its breach shall be captioned to recover from the other party
      reasonable attorney’s fees, costs and expenses incurred by the prevailing party
      in connection with such dispute resolution process. Notwithstanding any other
      provision of this Agreement to the contrary, all rights, remedies, claims or
      actions arising out of or connected with this Agreement, including any claims
      of default, breach or conduct giving rise to suspension of payment or services,
      shall be solely and conclusively resolved by the Dispute Resolution provisions
      of this Dispute Resolution Section. Any attempt to circumvent or disregard the
      dispute resolution procedure as delineated in this Agreement by either party
      shall constitute default of this Agreement. Buyer hereby waives the right to a
      proceeding in a court of law (including without limitation a trial by jury) for
      any claims or counterclaims brought pursuant to this Agreement. The
      provisions of this section shall survive the expiration or earlier termination of
      this Agreement or the settlement under this Agreement, as applicable, and shall
      not be merged or extinguished by any settlement, closing, payment of the
      Purchase Price or by execution and delivery of any deed.28

      The broad language of this arbitration clause precludes any challenge by

Gilmartin and Singer to the merits of the arbitration award.29 In his award, Arbitrator

declared that Whaley Royce was entitled to retain Gilmartin’s deposit monies as

liquidated damages.30 The only reasonable inference to be drawn from this award is


28
   Amended Verified Complaint, Ex. C at ¶ 37.
29
   See Malekzadeh v. Wyshock, 611 A.2d 18, 20 (Del. Ch. 1992) (citing James Julian,
Inc. v. Raytheon Service Co., 424 A.2d 665 (Del. Ch. 1980)).
30
   Amended Verified Complaint, Ex. M.
                                      Page 13 of 26
that Arbitrator found Gilmartin to have breached the contract. Plaintiffs’ current

attempt to invalidate the contract by claiming fraud in the inducement is a “dispute

arising out of or relating to this agreement or its breach” which must be submitted to

Arbitration.31 Plaintiffs’ fraud claim in Count I, therefore, is an “impermissible

collateral attack on the award itself,”32 and should be dismissed as waived.

      Count I also includes an allegation that Whaley Royce procured the arbitration

award by “improper, fraudulent and bad faith dealings” with Plaintiffs and

“manipulation of the Arbitration proceeding.”33 Under Delaware law, the Court shall

vacate an arbitration award that “was procured by corruption, fraud or other undue

means[.]”34 However, Rule 9(b) provides that: “[i]n all averments of fraud or

mistake, the circumstances constituting fraud of mistake shall be stated with

particularity. Malice, intent, knowledge and other condition of mind of a person may

be averred generally.”35 To satisfy Rule 9(b), a complainant must allege: “(1) the

time, place, and contents of the false representation; (2) the identity of the person



31
   See Farnsworth v. Towboat Nantucket Sound, Inc. 790 F.3d 90, 96 (1st Cir. 2015)
(challenges to the validity of an entire contract which contains an arbitration clause
are for the arbitrator to decide) (citing Rent-A-Center, W., Inc. v. Jackson, 561 U.S.
63, 70-71 (2010); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444
(2006); Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395
(1967)).
32
   Pryor v. IAC/InterActiveCorp, 2012 WL 2046827, at *6 (Del. Ch. June 7, 2012).
33
   Amended Verified Complaint, at ¶ 81.
34
   10 Del. C. § 5714(a)(1).
35
   Ct.Ch.R. 9(b).
                                      Page 14 of 26
making the representation; and (3) what the person intended to gain by making the

misrepresentations.”36

      In their complaint, Plaintiffs allege that Whaley Royce was aware Plaintiffs

were unable to purchase the home unless Gilmartin received his full September 11th

settlement award by December 2, 2013, and was advised that Gilmartin was only

going to receive ten percent of his award by December 2, 2013. Whaley Royce also

was aware that Plaintiffs would put down approximately ten percent on the purchase

price of the home.       Plaintiffs relied on Whaley Royce’s “assurances” and the

language of the contract and the Zadroga Funds Addendum, 37 and believed that upon

advising Whaley Royce that Gilmartin’s full award had not been paid by December 2,

2013, and by demanding the return of the deposit funds, the full deposit would be

returned to them. Finally, the complaint alleges that Whaley Royce never intended to

refund Plaintiffs’ deposit money because it subsequently induced Plaintiffs to execute

the Revocation of Contingencies Addendum purporting to nullify the Zadroga Funds

Addendum, and that Whaley Royce entered the contract with two unsophisticated

layperson buyers “knowing they would not refund Plaintiffs’ deposit money even




36
   CSH Theatres, LLC, 2015 WL, at * 22 (quoting Abry P’rs V, L.P. v. F & W Acq.
LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006)).
37
   Amended Verified Complaint, at ¶ 75.
                                      Page 15 of 26
upon their demand for such refund and notwithstanding the language of the Zadroga

Funds Addendum.”38

         The complaint does not identify the time, place or contents of the false

representation.         Nor does it identify the representative of the limited liability

company who gave the alleged “assurances” to Plaintiffs.              Plaintiffs cite the

Revocation of Contingencies Addendum, executed on November 30, 2013, as proof

that Whaley Royce never intended to refund their deposit money.             However, a

plaintiff “cannot ‘bootstrap’ a claim of breach of contract into a claim of fraud by

alleging that a contracting party never intended to perform its obligations.”39 Such a

claim requires a misrepresentation of present fact. Nowhere does the complaint

allege specific facts that would lead to the reasonable inference that Whaley Royce

never intended to return Plaintiffs’ deposit at the time the parties executed the

contract on October 31, 2013.

         Plaintiffs also accuse Whaley Royce of manipulating the arbitration

proceedings to hold them to standards designed for professionals in the commercial

or construction industry. Nowhere in the amended complaint do Plaintiffs allege

specific facts from which the Court could draw a reasonable inference that Whaley

Royce manipulated the arbitration proceedings in this or any manner.             To the




38
     Id. at ¶¶ 68-80.
                                           Page 16 of 26
contrary, the contract signed by the parties called for the use of AAA Construction

Industry Arbitration Rules.40

       The allegations contained in Paragraph 81 of the amended complaint are

wholly conclusory and fail to state a claim for relief. They are also an impermissible

collateral attack on the merits of the arbitration award. Therefore, I recommend that

Count I in its entirety be dismissed.

       In Count II, Plaintiffs allege that Arbitrator was not neutral, but instead was

“unduly and impermissibly biased in favor of [Whaley Royce] and against Plaintiffs”

by virtue of his employment and professional practice representing construction

industry professionals and entities.41        According to Plaintiffs, the biographical

information received from the AAA omitted Arbitrator’s work experience and

professional practice, thereby depriving Plaintiffs of the benefit of their bargain. As a

result, they allegedly received an “improperly and impermissibly biased outcome” at

arbitration.42

       An arbitration award shall be vacated if “there was evident partiality by an

arbitrator appointed as a neutral … or corruption in any of the arbitrators or



39
    CSH Theatres, LLC, 2015 WL 1839684, at *22 (quoting Narrowstep, Inc. v.
Onstream Media Corp., 2010 WL 5422405, at * 15 (Del. Ch. Dec. 22, 2010) (quoting
Iotex Commc’ns, Inc. v.Defries, 1998 WL 914265, at * 4(Del. Ch. Dec. 21, 1998)).
40
   Amended Verified Complaint, Ex. C at ¶ 37.
41
   Amended Verified Complaint, at ¶ 84.
42
   Id. at ¶ 86.
                                        Page 17 of 26
misconduct prejudicing the rights of any party[.]” 43 In order to demonstrate evident

partiality there must be proof that an arbitrator “failed to disclose a substantial

personal or financial relationship with a party, a party’s agent, or a party’s attorney

that a reasonable person would conclude was powerfully suggestive of bias.”44

Nowhere do Plaintiffs allege that Arbitrator had a personal or financial relationship

with Whaley Royce, its agent or attorney, and had failed to disclose this relationship.

As a result, Plaintiffs fail to state a claim of evident partiality under 10 Del. C. §

5714(a)(2) that would warrant vacatur of the arbitrator’s award.          Therefore, I

recommend that the Court dismiss Count II.

      In Count III, Plaintiffs seek to vacate the award under 10 Del. C. § 5714 (a) (3)

on the ground that Arbitrator overreached and exceeded his powers by using the

AAA Commercial Arbitration Rules rather than the AAA Construction Industry

Arbitration Rules required by the contract.           The document dated May 4, 2015,

constituting the Award of the Arbitrator, is attached to the amended complaint as

Exhibit M. At the head of this document are the words “American Arbitration

Association Commercial Arbitration Tribunal.”45            Underneath the caption, the

preamble to the award states:



43
   10 Del. C. § 5714(a)(2).
44
   Delaware Transit Corp. v. Amalgamated Transit Union Local 842, 34 A.3d 1064,
1072 (Del. 2011).
45
   Amended Verified Complaint, Ex. M.
                                      Page 18 of 26
                I, THE UNDERSIGNED ARBITRATOR, having been designated in
         accordance with the arbitration agreement entered into by the above-named
         Parties, and in accordance with the American Arbitration Association’s
         Expedited Procedures of the Commercial Arbitration Rules, as Amended and
         Effective October 1, 2013, and having been duly sworn, and having duly
         considered the proofs and allegations of the Parties, AWARD as follows: 46

The contract between the parties required arbitration to be administered by the AAA

under its Construction Industry Arbitration Rules. A reasonable inference to be

drawn from the above preamble is that Arbitrator deviated from the express terms of

the parties’ contract by employing another set of rules during the arbitration

proceeding. However, while Plaintiffs allege that the parties were denied the benefit

of their bargain, they fail to point to any specific rule or procedure that prejudiced

them or that prevented Arbitrator from making “a final and definite award on the

subject matter submitted.”47 Instead, Plaintiffs complain that Arbitrator should have

required the parties to proceed instead under an entirely different set of rules, i.e., the

AAA Consumer Arbitration Rules.           Therefore, I recommend that this claim be

dismissed as Plaintiffs have failed to state a claim for relief under Section 5714(a)(3).

         Plaintiffs also allege that Arbitrator overreached and exceeded his powers by

excluding Singer, a material and necessary party to the contract, from the arbitration

proceedings. However, whether Singer was a party to the contract was a question for




46
     Id.
47
     See 10 Del. C. § 5714(a)(3).
                                        Page 19 of 26
the Arbitrator to decide, given the broad language of the arbitration clause.48 Under

both the AAA Commercial Arbitration Rules and the AAA Construction Industry

Arbitration Rules, an arbitrator has the discretion to determine the attendance of any

person “other than a party or other essential person.”49 If Singer was excluded from

the arbitration proceeding despite having protested that she was a party, then the only

reasonable inference to be drawn from these allegations is that Arbitrator had

determined Singer was not a party or another essential person. Since there is no

allegation that Gilmartin objected to Singer’s exclusion or sought to postpone the

hearing after her exclusion, there is no basis to infer that Gilmartin suffered



48
   See CVD Equipment Corp. v. Development Specialists, Inc., 2015 WL 4506052, at
*2 (Del. Ch, July 23, 2015).
49
   Rule 25 of the AAA Commercial Arbitration Rules states:
       The arbitrator and the AAA shall maintain the privacy of the hearings unless
       the law provides to the contrary. Any person having a direct interest in the
       arbitration is entitled to attend hearings. The arbitrator shall otherwise have the
       power to require the exclusion of any witness, other than a party or other
       essential person, during the testimony of any other witness. It shall be
       discretionary with the arbitrator to determine the propriety of the attendance of
       any other person.
Amended Verified Complaint, Ex. J. Rule 26 of the AAA Construction Industry
Arbitration Rule states:
       The arbitrator and the AAA shall maintain the privacy of the hearings unless
       the law provides to the contrary. Any person having a direct interest in the
       arbitration is entitled to attend hearings. The arbitrator shall otherwise have the
       power to require the exclusion of any witness, other than a party or other
       essential person, during the testimony of any other witness. It shall be
       discretionary with the arbitrator to determine the propriety of the attendance of
       any person other than a party and its representative.”
Amended Verified Complaint, Ex. I.
                                       Page 20 of 26
substantial prejudice as a result.50 In other words, Plaintiffs fail to allege sufficient

grounds to vacate an award under 10 Del. C. § 5714(a)(4).51 Plaintiffs’ attack on the

Arbitrator’s decision to exclude Singer is simply another impermissible attack on the

merits of the Arbitrator’s award, and should be dismissed.

      During the arbitration proceeding, Whaley Royce was represented by a non-

attorney, and Plaintiffs accuse the Arbitrator of having exceeded his powers by

allowing the arbitration to proceed without legal counsel representing Whaley Royce.

Delaware law provides that parties have a right to be represented by an attorney

during an arbitration proceeding or hearing.52 While Plaintiffs correctly point out that

corporations and limited liability companies must be represented by an attorney in

court proceedings,53 Plaintiffs have failed to demonstrate that Delaware law requires

a limited liability company to be represented by an attorney in a private arbitration

proceeding.    Since Whaley Royce appeared and participated in the arbitration


50
   See M3 Healthcare Solutions v. Family Practice Assoc., P.A., 996 A.2d 1279, 1284
(Del. 2010).
51
   10 Del C. § 5714(4) provides for vacating an award where:
       The arbitrators refused to postpone the hearing upon sufficient cause being
       shown therefor, or refused to hear evidence material to the controversy, or
       otherwise so conducted the hearing, contrary to the provisions of § 5706 of this
       title, or failed to follow the procedures set forth in this chapter, so as to
       prejudice substantially the rights of a party, unless the party applying to vacate
       the award continued with the arbitration with notice of the defect and without
       objection[.]
52
   See 10 Del. C. § 5707.
53
   See Poore v. Fox Hollow Enterprises, 1994 WL 150872, at *2 (Del. Super. March
29, 1994).
                                       Page 21 of 26
proceeding, there was no basis for an entry of default against Whaley Royce.

Therefore, Plaintiffs have failed to state a claim for relief under Section 5714(a)(3).

      In his award, Arbitrator did not provide any reason for his decision to deny

Gilmartin’s claim and to award Whaley Royce liquidated damages in the form of the

retained deposit monies. In a conclusory fashion, Plaintiffs allege that Arbitrator’s

failure to provide an explanation for his award is proof of Arbitrator’s imperfect

execution of his powers such that a final and definite award upon the subject matter

submitted was not made. To buttress their allegations, Plaintiffs repeat their attacks

on the merits of the arbitration award.54     However, an arbitrator need not state the

grounds for his decision,55 and nothing in the arbitration clause of the contract or any

other written agreement between the parties required Arbitrator to set forth his

reasons for the award.56 Therefore, I recommend that the Court dismiss this claim

because Plaintiffs fail to state a claim for vacatur under 10 Del. C. § 5714(a)(3).


54
   In Paragraphs 93-99 of the Amended Verified Complaint, Plaintiffs reiterate these
allegations: (1) Whaley Royce’s interpretation of the Revocation of Contingencies
Addendum requires a construction of the parties’ contract that is internally
incompatible and renders the Zadroga Funds Addendum meaningless; and (2)
Arbitrator was provided a complete contract including the Zadroga Funds Addendum
and was aware that Singer was a material and necessary party to the contract;
nonetheless, Arbitrator refused to allow Singer to take part in the arbitration hearing
even though she was present and desired to take part in the proceedings.
55
   See Malekzadeh, 611 A.2d at 22 (citing Sargent v. Paine Webber, Jackson Curtis,
Inc., 674 F.Supp. 9201 (D.D.C. 1987) , reconsideration denied, 687 F.Supp. 7
(1988)).
56
   See Mansoory v. SC & A Construction, Inc., 2009 WL 2140030, at **3-5 (Del.Ch.
July 9, 2009).
                                       Page 22 of 26
      In Counts IV and V of the amended complaint, Plaintiffs focus on the

arbitration clause of the contract. In Count IV, Plaintiffs allege that the contract

should not have required arbitration under the AAA Construction Industry Arbitration

Rules because Plaintiffs were laypersons and consumers, and that the AAA

Consumer Arbitration Rules should have been used instead during the arbitration

proceedings. In Count V, Plaintiffs allege that the entire arbitration clause is invalid

“[b]y virtue of the internally incompatible operation of [Zadroga Funds Addendum]

and the Revocation of Contingencies Addendum[.]” 57 A challenge to the validity of

an arbitration clause must be raised before submitting to arbitration or during the

arbitration itself.58 Gilmartin initiated the arbitration proceedings in this case. There

is no allegation that Gilmartin ever objected to the arbitrability of his claims under the

AAA’s Construction Industry Arbitration Rules or raised any issue about the validity


57
   Amended Verified Complaint, at ¶ 114.
58
   See James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006)
(where the arbitration clause provides that arbitration will be conducted under the
rules of the AAA, that is clear evidence the parties intended to have an arbitrator
determine substantive arbitrability, i.e., a dispute over the scope of an arbitration
provision). See also Farnsworth, 790 F.3d at 96-97 (challenges to the validity of the
specific agreement to resolve the dispute through arbitration … are for the courts to
decide, “if timely and properly made.” … . “If a party fails to challenge the validity
of the arbitration clause itself, the agreement to arbitrate is enforceable and any
dispute about the validity of the contract as a whole goes to the arbitrator.”) (quoting
Rent-A-Center, 561 U.S. at 70-72)); Lewis v. Circuit City Stores, Inc., 500 F.3d 1140,
1148 - 1150 (10th Cir. 2007) (because plaintiff never objected in arbitration to the
arbitrability of his claims or raised a question as to the validity of the arbitration
agreement, he waived his opportunity to do so and is estopped from raising such
issues now).
                                       Page 23 of 26
of the arbitration clause before or during the arbitration proceeding. Plaintiffs have

waived the opportunity to question the validity of the arbitration clause, and are

estopped from raising these issues now. Therefore, I recommend that the Court

dismiss Counts IV and V as untimely.

                              Exceptions to Draft Report
      Plaintiffs have taken exception to my draft report under Court of Chancery

Rule 144. In their exception, Plaintiffs argue that my draft report has deprived Singer

of the ability to assert her claims either through arbitration or in this Court.

According to Plaintiffs, if the Arbitrator correctly determined that Singer was not a

party or other essential person, then Singer is not bound by the arbitration provision

in the contract, and has the right to proceed with her claims in this Court. If, on the

other hand, Singer is required to arbitrate her claims, then it would be inconsistent to

leave the arbitration award intact when Singer was barred from participating in the

arbitration proceeding.

      Whaley Royce opposes the exception, arguing that Singer was never a party to

the contract between Gilmartin and Whaley Royce.           The record shows that the

arbitration proceeding was initiated by Gilmartin, who was represented by counsel

during the arbitration hearing.    When Singer appeared at the hearing, she was

excluded by the Arbitrator. According to Whaley Royce, Singer had the opportunity

to assert her claims at that time, including any claim that she was also a party to the


                                       Page 24 of 26
contract, and the Arbitrator properly exercised his authority to reject Singer’s claims.

Even if Singer were a third-party beneficiary of the contract, which Whaley Royce

explicitly denies, Singer’s claims still would be subject to arbitration according to the

arbitration clause in the contract between Gilmartin and Whaley Royce. Therefore,

Whaley Royce argues that Singer does not have a separate remedy before this Court

because Singer exhausted any remedy she might have had when she appeared at the

arbitration and the Arbitrator dismissed her.

      In reply, Plaintiffs argue that Singer is being denied the guarantee of due

process. According to Plaintiffs, if the Arbitrator correctly determined that Singer

was not a party to the contract or other essential person, then Singer has the right to

proceed with her claims in this Court since she is not bound by the arbitration clause

of the contract. The draft report, according to Plaintiffs, deprives Singer of her right

to have her claims heard in this Court. Plaintiffs, therefore, propose a simple solution

to this dispute, e.g., the Court should vacate the arbitration award and direct the

selection of a new arbitrator to hold a new hearing in which Singer would be allowed

to participate and to be heard.

      Plaintiffs’ exceptions are without merit since they represent another attempt to

collaterally attack the Arbitrator’s decision. Therefore, I am adopting my draft report

as my final report, as modified herein. The parties are referred to Court of Chancery



                                       Page 25 of 26
Rule 144 for the process of taking exception to a Master’s Final Report.

                                               Respectfully,

                                               /s/ Kim E. Ayvazian

                                               Kim E. Ayvazian
                                               Master in Chancery

KEA/kekz




                                      Page 26 of 26
