Marine Club Manager, Inc. v. RB Commercial Mortgage LLC ( 2024 )

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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 23-1841
MARINE CLUB MANAGER, INC.; EBRM RESURRECTION LLC; ERIC
BLUMENFELD,
Petitioners - Appellants,
v.
RB COMMERCIAL MORTGAGE LLC,
Respondent - Appellee.
Appeal from the United States District Court for the Western District of North Carolina, at
Charlotte. Max O. Cogburn, District Judge. (3:22-cv-00609-MOC-DCK)
Submitted: March 1, 2024 Decided: August 1, 2024
Before DIAZ, Chief Judge, QUATTLEBAUM, Circuit Judge, and TRAXLER, Senior
Circuit Judge.
Affirmed by unpublished per curiam opinion.
ON BRIEF: Neil A. Riemann, PARRY LAW PLLC, Chapel Hill, North Carolina;
Benjamin A. Garber, Melissa A. Anderson, BRAVERMAN KASKEY GARBER P.C.,
Philadelphia, Pennsylvania, for Appellants. Gerald J. Stubenhofer, Jr., Cameron J. Comer,
MCGUIREWOODS LLP, Pittsburgh, Pennsylvania, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Eric Blumenfeld and his related companies, Marine Club Manager, Inc. and EBRM
Resurrection, LLC (“Appellants”), appeal from an order of the district court confirming an
arbitration award in favor of RB Commercial Mortgage, LLC, in a case arising under the
court’s diversity jurisdiction. 1 We affirm.
I.
Appellant Eric Blumenfeld, a real estate developer, owns an old commercial
building in Philadelphia that he converted into an apartment complex called Marine Club
Apartments (the “Property”). In 2014, Blumenfeld recapitalized the Property, obtaining a
$25 million mortgage from Cantor Commercial Real Estate Lending (the “Mortgage
Lender”) and receiving a $3.35 million preferred equity investment from RB Commercial
Mortgage (the “Capital Investor”), a limited liability company located in North Carolina.
As part of this recapitalization, Blumenfeld created Marine Club Associates, LLC (the
“Company”) to own the Property and Marine Club Manager, Inc., to serve as manager of
1
As we recently recognized in our SmartSky decision, pursuant to the Supreme
Court’s decision in Badgerow v. Walters, 596 U.S. 1 (2022), a federal court “faced with an
application to enforce or vacate an arbitration award under Sections 9 or 10 of the Federal
Arbitration Act, 9 U.S.C. §§ 1, et seq. (the “FAA”), must have a basis for subject matter
jurisdiction independent from the FAA and apparent on the face of the application.”
SmartSky Networks, LLC v. DAG Wireless, LTD., 93 F.4th 175, 178 (4th Cir. 2024). “If
[the face of the application] shows that the contending parties are citizens of different States
(with over $75,000 in dispute), then [28 U.S.C.] § 1332(a) gives the court diversity
jurisdiction.” Badgerow v. Walters, 596 U.S. at 9. As the applications to confirm and vacate
the arbitrator’s award in this case make clear that the diversity jurisdiction statute’s
requirements are satisfied, we have jurisdiction over this appeal.
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the Property. The Property is the Company’s only asset. Blumenfeld owns 92% of the
Company; Capital Investor holds the remaining 8%.
The rights and duties of the parties are set out in a contract (the “Operating
Agreement”) executed by Blumenfeld, Marine Club Manager, and Capital Investor. Under
the Operating Agreement, Blumenfeld and his companies are generally in charge of the
management and operation of the Property, but the consent of Capital Investor is required
for certain specified actions.
As for the rights of the parties, the Operating Agreement stipulates that Capital
Investor is entitled to a return of at least 150% of its capital investment, plus 12.5% interest,
to be paid over 10 years through monthly Minimum Distribution payments of
approximately $35,000. The Operating Agreement calls the full amount that Capital
Investor is entitled to receive the “Required Redemption Amount.” Once Capital Investor
receives the Required Redemption Amount, its equity interest in the Property is
“redeemed,” at which point Capital Investor “shall have no further rights, obligations or
duties pursuant to this Agreement or otherwise with respect to the Company.” J.A. 65.
At Blumenfeld’s request, Capital Investor agreed to accept a smaller stake in the
Company in exchange for additional rights for itself and certain restrictions on
Blumenfeld’s control over the Company. These rights and restrictions are spelled out in
the Operating Agreement in sections addressing “Changeover Events” and “Full Recourse
Events.” Changeover Events, which allow Capital Investor to take over operational control
of the Company while still remaining part of the venture, include the failure to make a
Minimum Distribution to Capital Investor and the declaration by Mortgage Lender of an
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event of default under the mortgage. Full Recourse Events, which allow Capital Investor
to force a full redemption of its investment and thus extricate itself from the venture,
include interference with Capital Investor’s exercise of its rights after a Changeover Event
and a breach of the restrictions in the Operating Agreement on the transfer of interest in
the Property or the Company.
In the fall of 2019, the Company started having difficulties meeting its financial
obligations. The November 2019 mortgage payment was short, and the Company remained
a month behind in payments until July 2020, when it stopped making payments entirely.
Although the Operating Agreement required the Company to pay the mortgage before
paying Capital Investor its Minimum Distributions, the Company nonetheless paid the
Minimum Distributions from December 2019 through March 2020. Capital Investor knew
the Company was behind on the mortgage when it received the distributions.
Once the effects of the COVID shutdowns started to be felt, Blumenfeld asked
Capital Investor about a forbearance of the Minimum Distributions, an action that would
require amendments to the Operating Agreement and the approval of Mortgage Lender.
Capital Investor informally agreed to a suspension of the Minimum Distribution payments
while the details were worked out and the agreement of Mortgage Lender was sought.
Mortgage Lender had previously learned that the Company had paid the Minimum
Distributions even though the mortgage was not current, so it refused to consent to the
proposed changes to the Operating Agreement. The Company did not resume distribution
payments to Capital Investor after the forbearance deal fell apart.
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As noted above, the Company quit making mortgage payments entirely in July
2020. On September 15, 2020, Mortgage Lender declared an Event of Default because of
non-payment and triggered a “cash management event” under the mortgage documents.
This cash management event—which the parties refer to as a “cash trap”—required the
Company to deposit all rent payments in a specified bank account to which Mortgage
Lender had access. Blumenfeld did not comply and instead directed that the rent payments
instead be deposited in an account that Mortgage Lender could not access. The last deposit
of rents into the account specified by Mortgage Lender was made on October 6, 2020.
Mortgage Lender initiated foreclosure proceedings in April 2021.
In October 2020, Capital Investor determined that the Company’s failure to make
the Minimum Distributions constituted a Changeover Event that triggered its right to take
over operation of the Property. Capital Investor sought Blumenfeld’s contractually required
cooperation in replacing the management company and requested his signature on a
Changeover Resolution that would enable the replacement of the management team.
Blumenfeld did not take any steps to cooperate and did not sign the resolution.
On November 17, 2020, Capital Investor initiated an arbitration proceeding against
Appellants seeking a declaration that Changeover Events and Full Recourse Events had
occurred. Appellants filed a counterclaim alleging that Capital Investor had materially
breached the Operating Agreement. Shortly before the arbitration hearing, Blumenfeld
offered approximately $3 million of non-Property proceeds to voluntarily redeem Capital
Investor’s interest in the Property. Capital Investor rejected the offer, contending the
amount offered was less than the Required Redemption Amount.
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After a hearing, the arbitrator issued a partial award that found in favor of Capital
Investor on the liability question and rejected Appellants’ counterclaim, but held open the
issue of attorney’s fees. The arbitrator concluded that multiple Changeover Events had
occurred and that Capital Investor was therefore entitled to exercise the remedies set out in
the Operating Agreement, including a takeover of the operation of the Property. The
arbitrator also determined that two Full Recourse Events had occurred.
Because a Full Recourse Event had occurred, the Company was required to pay
Capital Investor the Required Redemption Amount. The arbitrator concluded that the
unpaid portion of the initial investment was $3,347,000, and that Capital Investor was
entitled to interest at a rate of 19.5%--the original 12.5% preferred return rate plus the
additional 7% preferred return rate provided for by the Operating Agreement if a
Changeover Event occurs. As of July 5, 2022, the total interest owed was $1.95 million,
for a total Required Redemption Amount of $5.3 million. Interest continues to accrue at
the 19.5% rate.
After the arbitrator issued the partial award, Blumenfeld’s attorney offered to wire
Capital Investor the full amount awarded by the arbitrator. Capital Investor declined,
arguing that because of the priority of payments spelled out in the Operating Agreement,
the mortgage must be satisfied before the Required Redemption Amount can be paid.
Blumenfeld put the full amount of the award in his attorney’s trust account and then filed
a petition seeking clarification from the arbitrator as to whether Blumenfeld could use non-
Property proceeds to redeem Capital Investor’s interest without first satisfying the
mortgage.
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The arbitrator issued a clarification of the award explaining that because a Full
Recourse Event had occurred, Blumenfeld was liable to Capital Investor for the Required
Redemption Amount. However, the arbitrator determined that Blumenfeld could not then
redeem Capital Investor’s interest because section 7.2 of the Operating Agreement
precludes distributions to Capital Investor from the Property proceeds ahead of debt service
on the mortgage loan. In addition, section 13.2 of the Operating Agreement subordinates
any debt Blumenfeld owes to Capital Investor as long as Mortgage Lender has a “claim”
against Blumenfeld as guarantor of the mortgage. Because the mortgage was in default and
the subject of a foreclosure proceeding, the arbitrator concluded that Mortgage Lender had
a claim against Blumenfeld and that Blumenfeld was obliged to satisfy the mortgage before
paying Capital Investor.
The arbitrator subsequently issued a final award that incorporated the partial award
and the clarification award. The final award also gave Capital Investor, as the prevailing
party, $1.8 million in attorney’s fees and costs. After the arbitration appeals panel affirmed
the award, Capital Investor filed a motion in federal district court seeking to confirm the
award, and Appellants filed a counterpetition seeking to vacate the award. The district court
granted Capital Investor’s petition and confirmed the award. This appeal followed.
II.
The Federal Arbitration Act authorizes a court to vacate an arbitration award only
in limited situations:
(1) where the award was procured by corruption, fraud, or undue means; (2)
where there was evident partiality or corruption in the arbitrators, or either
of them; (3) where the arbitrators were guilty of misconduct in refusing to
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postpone the hearing, upon sufficient cause shown, or in refusing to hear
evidence pertinent and material to the controversy; or of any other
misbehavior by which the rights of any party have been prejudiced; or (4)
where the arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the subject matter submitted
was not made.
9 U.S.C. § 10(a). In addition to these statutory grounds, this court has recognized that,
“either as an independent ground for review or as a judicial gloss on the narrow enumerated
grounds for vacatur set forth in § 10(a), a district court may vacate an arbitral award that
rests upon a manifest disregard of the law.” Warfield v. Icon Advisers, Inc., 26 F.4th 666,
669 (4th Cir. 2022) (cleaned up). To show a manifest disregard of the law, the petitioner
must demonstrate that “the applicable legal principle is clearly defined and not subject to
reasonable debate,” and that “the arbitrator refused to heed that legal principle.” Wachovia
Secs., LLC v. Brand, 671 F.3d 472, 483 (4th Cir. 2012) (cleaned up).
III.
Appellants raise multiple challenges to the arbitration award. As to Capital
Investor’s claims against them, Appellants contend that the arbitrator erred by concluding
that although Blumenfeld is obligated to pay the Required Redemption Amount to Capital
Investor, redemption cannot occur until the mortgage is satisfied. They also challenge the
arbitrator’s determination that Changeover Events and Full Recourse Events had occurred,
and the award of attorneys’ fees. Appellants also contend that the arbitrator improperly
rejected the counterclaims they asserted against Capital Investor.
A.
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The Operating Agreement provides that, “for so long as [Blumenfeld] is a
guarantor” under the mortgage, Blumenfeld’s obligation to pay the redemption amount
upon the happening of a Full Recourse Event is “subordinated to any claim of the
[Mortgage] Lender against [Blumenfeld] under the Senior Mortgage Loan Documents.”
J.A. 67. Appellants contend that because Mortgage Lender has not sued Blumenfeld
individually, there is no “claim” against Blumenfeld as is required to trigger the
subordination provisions, and that, in any event, the subordination provisions apply only if
proceeds derived from the Property are used to redeem Capital Investor’s interest. Viewing
their position as compelled by the language of the Operating Agreement, Appellants insist
that the arbitrator’s refusal to enforce the contracts in accordance with their unambiguous
terms requires us to vacate the award. 2
It is settled law, however, “neither misinterpretation of a contract nor an error of law
constitutes a ground on which an award can be vacated.” Apex Plumbing Supply, Inc. v.
U.S. Supply Co., 142 F.3d 188, 193–94 (4th Cir. 1998) (cleaned up).
Because the parties bargained for the arbitrator’s construction of their
agreement, an arbitral decision even arguably construing or applying the
contract must stand, regardless of a court’s view of its (de)merits. Only if the
arbitrator acts outside the scope of his contractually delegated authority—
issuing an award that simply reflects his own notions of economic justice
rather than drawing its essence from the contract—may a court overturn his
determination. So the sole question for us is whether the arbitrator (even
2
Appellants also contend that the arbitrator exceeded her authority by addressing
the question of when the redemption can occur without a hearing or an opportunity for
discovery. Because it was Appellants themselves who asked the arbitrator to resolve the
redemption-timing question, this argument is manifestly without merit.
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arguably) interpreted the parties’ contract, not whether [s]he got its meaning
right or wrong.
Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013) (cleaned up).
Contrary to Appellants’ assertion, the arbitrator did not go rogue when addressing
the redemption question. As noted, the Operating Agreement subordinates Capital
Investor’s redemption rights to Mortgage Lender’s rights and claims under the mortgage
loan documents as long as Blumenfeld is a guarantor of the loan. Moreover, in a
“Recognition Agreement” executed by Capital Investor and Mortgage Lender, Capital
Investor confirmed that all of its rights to distribution under the Operating Agreement are
“subordinate and junior to all of [Mortgage Lender’s] rights to payment” under the
Mortgage documents. J.A. 238. The Recognition Agreement also provides that once a
“cash trap” has been put in place, no payment “shall be made by [the mortgagors] with
respect to the Preferred Equity Interest” until the mortgage has been satisfied, J.A. 241,
and Capital Investor “shall not accept (or otherwise be entitled to retain)” any payment
from a guarantor if Mortgage Lender has provided notification that it has an outstanding
claim against the guarantor, J.A. 242.
The arbitrator looked to these provisions when concluding that Mortgage Lender
had a claim against Blumenfeld even though it had not yet sued Blumenfeld individually
and that Blumenfeld therefore could not redeem Capital Investor until the mortgage was
satisfied. While Appellants disagree with this analysis, “claim” is not defined in the
Operating Agreement, and the arbitrator’s analysis is a reasonable reading and
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reconciliation of the relevant contractual provisions. Because the arbitrator’s decision drew
its essence from the contract, we are not permitted to overturn it.
B.
Appellants also challenge the arbitrator’s determination that Changeover Events and
Full Recourse Events had occurred.
The arbitrator concluded that four Changeover Events had occurred—the failure to
make the required Minimum Distributions; the claim of an Event of Default under the
mortgage loan; the Company’s failure to deposit rent proceeds in the account required by
Mortgage Lender; and the failure to properly escrow tenants’ security deposits, as required
by state law. The arbitrator also determined that two Full Recourse Events had occurred—
a 2018 pledge by Blumenfeld of a portion of his interest in the Company without Capital
Investor’s consent, and Blumenfeld’s interference with Capital Investor’s attempts to
install new management after the Changeover Events.
Appellants contend that the arbitrator was wrong on every point and argue that,
under a proper reading of the Operating Agreement, no Changeover Event or Full Recourse
Event occurred. These arguments, with their focus on the arbitrator’s “incorrect” reading
of the contract, again ignore our standard of review. In any event, however, Appellants
cannot even show error in the arbitrator’s reading of the contract.
The Operating Agreement provides that a Changeover Event occurs upon “[t]he
claim by [] Mortgage Lender of the occurrence of an Event of Default under the Senior
Mortgage, together with [Mortgage Lender’s] commencement of remedial action as a result
of such claimed default.” J.A. 57. Mortgage Lender declared an event of default and put
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the cash-trap protocols into place on September 15, 2020, but it did not commence
foreclosure proceedings until April 2021. The arbitrator determined that the
implementation of the cash trap amounted to remedial action and that a Changeover Event
therefore occurred on September 15.
Appellants contend that only a foreclosure proceeding can be viewed as remedial
action under the Operating Agreement, which means that no Changeover Event had
occurred at the time that Blumenfeld refused to cooperate with Capital Investor’s efforts to
take over management of the Property. The Operating Agreement, however, does not
define “remedial action,” and Appellants point to no case law limiting that phrase to the
commencement of formal legal proceedings.
Moreover, the cash-trap protocols, which offered a quick means of ensuring
payment without having to involve a court, can reasonably be understood as a contractual
remedy available to Mortgage Lender. See Black’s Law Dictionary (11th Ed. 2019)
(defining “remedy” as “[t]he means of enforcing a right or preventing or redressing a
wrong; legal or equitable relief,” and as a “right by which an aggrieved party may seek
relief without resort to a tribunal”). Under these circumstances, we see no error in the
arbitrator’s determination that Mortgage Lender took “remedial action” when it
implemented the cash trap.
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Because a Changeover Event occurred, Blumenfeld was obligated to cooperate with
Capital Investor’s efforts to take over management of the Property. 3 Under the Operating
Agreement, failure to cooperate amounts to a Full Recourse Event. See J.A. 67 (defining
Full Recourse Event to include Blumenfeld’s “[i]nterference with Capital [Investor’s]
exercise of its rights or remedies arising as a result of the occurrence of a Changeover
Event.”). Blumenfeld did not cooperate with Capital Investor, and the arbitrator concluded
that his failure to cooperate constituted a Full Recourse Event. While Appellants challenge
that finding, their argument is that Blumenfeld was not then obligated to cooperate because
no Changeover Event had occurred when his cooperation was sought. As we have just
explained, however, a Changeover Event had occurred, and the arbitrator therefore
properly treated Blumenfeld’s failure to cooperate as a Full Recourse Event under the
Operating Agreement. 4 Appellants have thus failed to establish any error by the arbitrator,
much less the kind of error necessary to set aside an arbitration award.
C.
Appellants also challenge the award of attorney’s fees. The Operating Agreement
provides that “[t]he prevailing party in any arbitration proceeding shall be entitled to an
3
The Operating Agreement gives Capital Investor the right to take over the
operation of the Property upon the happening of a single Changeover Event. It is therefore
unnecessary for us to consider Appellants’ challenges to the other Changeover Events
found by the arbitrator.
4
Because the failure to cooperate is a Full Recourse Event, we need not
consider Appellants’ claim that Blumenfeld’s 2018 pledge of his interest in the Company
did not qualify as a Full Recourse Event.
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award of all reasonable out-of-pocket costs and expenses (including attorneys’ and
arbitrators’ fees) related to the entire arbitration proceeding (including review if
applicable).” J.A. 72. Appellants contend that because Capital Investor’s parent company
paid the legal bills, Capital Investor was not itself out-of-pocket for the fees, and the
arbitrator effectively re-wrote the Operating Agreement in order to award fees.
This argument, like every other argument made by Appellants in this appeal, reflects
a misunderstanding of our standard of review. As we have explained, an arbitrator acts in
manifest disregard of the law if she is “aware of the law, understood it correctly, found it
applicable to the case before [her], and yet chose to ignore it in propounding [her]
decision.” Long John Silver’s Restaurants, Inc. v. Cole, 514 F.3d 345, 349 (4th Cir. 2008)
(internal quotation marks omitted). Because Appellants cannot point to a case holding that
a subsidiary’s expenses that are paid for by the parent corporation do not qualify as out-of-
pocket expenses of the subsidiary--or that the arbitrator ignored such a case when presented
with one—their challenge to the fee award fails.
Appellants fare no better with their argument that the fee award was improper
because the arbitrator failed to consider the factors for assessing the reasonableness of fees
set out in Delaware’s Rules of Professional Conduct. While Delaware courts apply those
factors when awarding fees, Appellants point to no case from Delaware requiring
arbitrators to consider those factors when awarding fees in an arbitration proceeding.
Moreover, even if the factors are applicable in arbitration proceedings, Appellants cannot
establish that the arbitrator refused to apply them. The parties addressed the factors in their
submissions to the arbitrator, and there is nothing in the arbitration award indicating that
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the arbitrator declined to consider them, as would be required to show the arbitrator acted
in manifest disregard of the law.
D.
Finally, we address Appellants’ challenge to the arbitrator’s rejection of their claims
against Capital Investor.
In their arbitration counterpetition, Appellants asserted material breaches of the
Operating Agreement by Capital Investor. They contended that Capital Investor should not
have kept the Minimum Distribution payments it received from December 2019 through
March 2020, when it knew the Company was behind on the mortgage, and should have
instead transferred the funds to Mortgage Lender to bring the account current. According
to Appellants, Capital Investor’s retention of those funds was the “direct cause” of the
Company’s default on the mortgage. Brief of Appellants at 37. Appellants also claimed
that Capital Investor breached its duty of confidentiality by sharing disparaging,
confidential information about the Company with the mortgage loan servicer.
The arbitrator rejected both claims. The arbitrator found that Appellants failed to
prove a causal connection between Capital Investor’s communications with the loan
servicer and Mortgage Lender’s declaration of an event of default. The arbitrator likewise
found that Appellants failed to prove that Capital Investor’s retention of the Minimum
Distribution payments made in December 2019 through March 2020 caused the Company
to default on the mortgage. The arbitrator noted that the last payment to Capital Investor
was made in March 2020, but Mortgage Lender did not trigger the cash trap or declare an
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event of default until September 2020. In those months after March—when the Company
was not paying Capital Investor—the Company still failed to bring the mortgage current.
While Appellants disagree with the arbitrator’s findings and analysis, “courts do not
sit to hear claims of factual or legal error by an arbitrator as an appellate court does in
reviewing decisions of lower courts. Instead, courts generally defer to an arbitrator’s
findings and reasoning.” Advantage Veterans Servs. of Walterboro, LLC v. United Steel,
Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int’l, Loc. 7898,
70 F.4th 751, 756 (4th Cir. 2023) (cleaned up). Appellants’ challenges to these rulings
provide no basis for vacating the arbitration award.
IV.
Accordingly, for the foregoing reasons, we hereby affirm the district court’s order
confirming the arbitration award. 5
AFFIRMED
5
In its brief, Capital Investor asks for an award of attorneys’ fees incurred in
defending against what it views as a frivolous appeal. Given the well-settled standard of
review and the weakness of the Appellants’ arguments, we agree with Capital Investor that
this appeal was frivolous. We direct Capital Investor to file within 15 days of this decision
a motion detailing the fees and expenses incurred in connection with this appeal. The
Appellants may file a response within 15 days thereafter. See Fed. R. App. P. 38 (“If a
court of appeals determines that an appeal is frivolous, it may, after a separately filed
motion or notice from the court and reasonable opportunity to respond, award just damages
and single or double costs to the appellee.”).
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