Appendix — Jarnis United Properties Co. v. Lefkovitz

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APPENDIX A

IN THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Sigmund Lefkovitz, et al., Plaintiffs-Appellees,

Cross-Appellants,

V.

Nathan Wagner, et al., Defendants-Appellants,

and

Jarnis United Properties Co., Proposed Intervenor-

Appellant,

and

Grippo & Elden, et al., Cross-Appellees,

and

29-31 Associates, Appellant.

Nos. 03-4171, 03-4173, 03-4175, 03-4194.

Argued Nov. 10, 2004.

Decided Jan. 18, 2005.

2a

Before POSNER, WOOD, and EVANS, Circuit

Judges.

POSNER, Circuit Judge.

Before us is a multifaceted challenge to the confirma-

tion of an arbitration award. We omit many details in the

interest of simplicity. In 1990, six individuals who had

been working together for many years in the real estate

business created a partnership that they called “Jarnis.”

Each took an equal share in the partnership, although each

one-sixth share was divided in turn among the active

member of the partnership, members of his family, and

trusts for the benefit of the family members. The partners

(by which we mean, unless otherwise indicated, the active

members) later had a falling out. Four of them ganged up

against the other two, the Lefkovitzes, who in 1997, joined

by their family trusts, brought this suit against their four

oppressors plus four companies controlled by the latter.

The suit charges that the defendants, in violation of RICO,

the Jarnis partnership agreement, and fiduciary obligations

arising from the partnership, diverte.| to themselves part-

nership income in which the plaintiffs as co-partners were

entitled to share. The defendants had done this, the plain-

tiffs alleged, by paying themselves inflated compensation

for services that they had rendered or purported to have

rendered to the partnership.

Although Jarnis was not a party to the suit, the suit

might seem to be really a derivative suit on the partner-

ship’s behalf, charging that the defendants looted it.

“When a corporation is injured by a wrongful act but the

board of directors refuses to seek legal relief, a shareholder

can sue the wrongdoer on behalf of the corporation. Such

a suit is known as a derivative suit, and is an asset of the

corporation.” Kennedy v. Venrock Associates, 348 F.3d

584, 589 (7th Cir. 2003). Although most derivative suits

3a

are brought on behalf of corporations, a derivative suit can

be brought on behalf of a partnership or other unincorpo-

rated firm. Fed. R. Civ. P. 23.1. No party has sought to

have this case litigated as a derivative suit; but if individ-

ual partners sue to enforce rights belonging to a noncon-

senting third party, namely the partnership, the court must

dismiss the suit. See F; ieldturf, Inc. v. Southwest Recrea-

tional Industries, Inc., 357 F.3d 1266, 1268 (Fed. Cir.

2004); Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d

1304, 1309 (Fed. Cir. 2003); Enzo APA & Son, Inc. v.

Geapag A.G., 134 F.3d 1090, 1093-94 (Fed. Cir. 1998).

One cannot sue, other than in a representative capacity, to

enforce a right that belongs to someone else. Cf People

Organized for Welfare & Employment Rights (P.O.W_E.R. )

v. Thompson, 727 F.2d 167, 173 (7th Cir. 1984). Thus—to

bring the point closer to home—shareholders cannot main-

tain a RICO suit for injury to their corporation. Sears y.

Likens, 912 F.2d 889, 892 (7th Cir. 1990); Mid-State Fer-

tilizer Co. vy. Exchange National Bank, 877 F.2d

1333,1335-37 (7th Cir. 1989); In re Sunrise Securities

Litigation, 916 F.2d 874, 887-88 (3d Cir. 1990).

But it is the law of the jurisdiction under which a part-

nership is organized that determines who has a legally en-

forceable right to sue to prevent or correct an improper

diversion of partnership income. Kamen y. Kemper Fi-

nancial Services, Inc., 500 U.S. 90 (1991); In re Abbott

Laboratories Derivative Shareholders Litigation, 325 F.3d

795, 803-04 (7th Cir. 2003). Jarnis is a Florida general

partnership, and under Florida law the partners in a general

partnership owe fiduciary obligations to each other. Fla.

Stat. Ann. § 620.8404; see id, § 620.8405; Hallock v.

Holiday Isle Resort & Marina, Inc., 885 So.2d 459, 462-63

(Fla. App. 2004); Lundstrom Realty Advisors, Inc. v.

Schickedanz Bros.-Riviera Lid., 856 So.2d 1117, 1121-22

(Fla. App. 2003). (This is the general rule, not anything

4a

peculiar to Florida. See, e.g., Meinhard v. Salmon, 249

N.Y. 458, 164 N.E. 545, 546 (1928) (Cardozo, J.); ARTRA

Group, Inc. v. Salomon Bros. Holding Co., 288 Ill. App.

3d 467, 223 Ill. Dec. 819, 680 N.E.2d 769, 772 (1997);

McSweeney v. Buti, 263 Ill. App. 3d 955, 201 Ill. Dec. 831,

637 N.E.2d 420, 424 (1994).) So the plaintiffs were not

required to file this as a derivative, or any kind of repre-

sentative, suit. The plaintiffs could sue, and are suing, on

their own behalf rather than on behalf of the partnership.

This point is fogged up by the fact that, as we shall see,

Jarnis received an award from the arbitrator. This has no

practical significance; the award was no different from

awarding two-thirds of the amount of it to the defendants

(and entities controlled by them to which they had trans-

ferred fractions of their shares) and the other third to the

plaintiffs. Similarly, although the corporation or other en-

tity on whose behalf a suit is brought, being the owner of

the claim sued upon, normally is an indispensable party,

Koster v. (American) Lumbermens Mutual Casualty Co.,

330 U.S. 518, 523 n.2 (1947); Bagdon v. Bridge-

stone/Firestone, Inc., 916 F.2d 379, 382 (7th Cir. 1990);

Fogade v. ENB Revocable Trust, 263 F.3d 1274, 1289

(11th Cir. 2001), this observation is inapplicable to a suit

such as the present one in which the partner (or share-

holder) is allowed to sue in an individual rather than repre-

sentative capacity. The next step, which however we

declined to take in Frank v. Hadesman & Frank, Inc., 83

F.3d 158, 161-62 (7th Cir. 1996), would be to allow a de-

rivative suit to be brought instead as an individual suit

whenever the corporation (the usual entity on behalf of

which a derivative suit is brought) is closely held, at least

where, as in this case (were Jarnis a corporation), all the

shareholders are before the court, so that there are no

merely represented shareholders.

Sa

But by virtue of the principles of partnership law, the

plaintiffs in this case had and exercised an option to sue as

individuals rather than on behalf of the partnership. The

analogy is to a suit by a minority shareholder against the

majority shareholder, claiming that the latter has violated

the fiduciary duty that such a shareholder, especially in a

closely held corporation, owes to minority shareholders.

Kennedy v. Venrock Associates, supra, 348 F.3d at 589;

Strougo v. Bassini, 282 F.3d 162, 173 (2d Cir. 2002); see

also United States v. Byrum, 408 U.S. 125, 137-38 (1972);

Lawton v. Nyman, 327 F.3d 30, 40-41 (1st Cir. 2003);

Hollis v. Hill, 232 F.3d 460, 468 (5th Cir. 2000); but see

Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196,

1200 (10th Cir. 2004),

So we can proceed to the merits of the appeal. The de-

fendants demanded arbitration pursuant to the arbitration

clause in the Jarnis partnership agreement. The plaintiffs

resisted on the ground that some of the entities that they

had joined as defendants along with the four active mem-

bers of Jarnis that they were suing had not signed arbitra-

tion agreements. But the four assured the court that they

controlled those entities, together with Jarnis itself, be-

cause they controlled two-thirds of the voting power in the

partnership. They owned less than two-thirds, but that was

only because they had transferred some of their partnership

interests to relatives and family trusts; and both the rela-

tives and the trusts were under their thumb.

The court ordered arbitration. That was in 1998. The

proceedings before the arbitrator—which swelled when the

arbitration was consolidated with two other arbitrations

between the parties—were protracted, but finally ended in

2003 with an award that among other things ordered the

defendants to repay Jarnis more than $7 million and or-

dered Jarnis to reimburse the plaintiffs for $1.8 million in

6a

attorneys’ fees. The district court confirmed the award in

its entirety, and the flurry of appeals here consolidated for

decision followed.

One of the appeals is by Jarnis itself, from the district

court’s refusal to allow it to intervene in the confirmation

proceeding on the ground that it should have sought inter-

vention earlier. The civil rules authorize the grant of in-

tervention only “upon timely application” for it. Fed. R.

Civ. P. 24; NAACP v. New York, 413 U.S. 345, 365-66

(1973). The aim is “to prevent a tardy intervenor from de-

railing a lawsuit within sight of the terminal;” and so “as

soon as a prospective intervenor knows or has reason to

know that his interests might be adversely affected by the

outcome of the litigation he must move promptly to inter-

vene.” United States v. South Bend Community School

Corp., 710 F.2d 394, 396 (7th Cir. 1983); see also Reid L.

v. Illinois State Board of Education, 289 F.3d 1009, 1017-

18 (7th Cir. 2002); Sokaogon Chippewa Community v.

Babbitt, 214 F.3d 941, 949 (7th Cir. 2000). Jarnis argues

that since it was not a party to the proceedings before the

arbitrator it had no reason to intervene until the arbitrator

unexpectedly ordered it to pay the plaintiffs’ attorneys’

fees. And it is certainly unusual—so unusual as to be un-

foreseeable—for a nonparty to a litigation to be treated as

Jarnis was, namely as a defendant (with respect to the at-

torneys’ fees). It was not until the arbitrator made the

award against Jarnis that it had a ground for intervention—

unless it wanted more than the $7 million that it was

awarded, but it did not.

This discussion may seem to be leading ineluctably to

the conclusion that Jarnis was entitled to intervene in the

district court; more fundamentally, and without need to

invoke Rule 24, because someone against whom a judg-

ment is entered is entitled to the rights of a party. Mo-

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7a

torola Credit Corp. v. Uzan, 388 F.3d 39, 61-62 (2d Cir.

2004); Alemite Mfg. Corp. v. Staff, 42 F.2d 832, 832-33

(2d Cir. 1930) (L. Hand, J.); cf. Devlin v. Scardelletti, 536

U.S. 1, 7-8 (2002); In re Bridgestone/Firestone, Inc., Tires

Products Liability Litigation, 333 F.3d 763, 768 (7th Cir.

2003); Cordoza v. Pacific States Steel Corp., 320 F.3d

989, 995-96 (9th Cir. 2003). And ordinarily the award of

relief against a nonparty would be just the kind of ultra

vires act by an arbitrator that would justify judicial inter-

vention. 9 U.S.C. § 10(a)(4); BEM I, L.L.C. v. Anthro-

pologie, Inc., 301 F.3d 548, 554-55 (7th Cir. 2002);

Lindland v. U.S. Wrestling Ass’n, Inc., 227 F.3d 1000,

1003 (7th Cir. 2000); Katz v. Feinberg, 290 F.3d 95, 97-98

(2d Cir. 2002); Coady v. Ashcraft & Gerel, 223 F.3d 1, 9

(1st Cir. 2000). But not here. The only plausible motiva-

tion for Jarnis’s arguing against its being included in the

award is that the defendants, who control Jarnis, are trying

to derail the arbitration because they are dissatisfied with

its outcome. Cf. Dighello v. Busconi, 673 F. Supp. 85, 88-

89 (D. Conn. 1987). As we noted earlier, a judgment that

Jarnis pay the plaintiffs $1.8 million has exactly the same

consequence as a judgment that the defendants pay them

$1.2 million (two-thirds of $1.8 million), because the de-

fendants and their dependents own two-thirds of Jarnis.

Jarnis (which is to say the defendants, the puppeteers)

argues that the defendants cannot adequately represent its

interests because, not owning 100 percent of it, they have

an incentive to shift costs from their shoulders to Jarnis.

Indeed so. But then it is the minority owners, namely the

plaintiffs, who shouid be arguing against the award’s hav-

ing been directed against Jarnis rather than the defendants,

who have managed to offload one-third of the award onto

the plaintiffs—who are not complaining. The issue of the

attorneys’ fee award is therefore moot.

8a

The defendants argue that the arbitrator engaged in ex

parte communications and also exhibited bias in favor of

the plaintiffs, and either type of behavior could be a basis

for refusing to confirm an arbitrator’s award. 9 U.S.C.

§ 10(a)(2)-(3); Sphere Drake Ins. Ltd. v. All American Life

Ins. Co., 307 F.3d 617, 619-20 (7th Cir. 2002); Dow Corn-

ing Corp. v. Safety Nat’l Casualty Corp., 335 F.3d 742,

749-52 (8th Cir. 2003). But not in the circumstances of

this case. :

One of the issues in the arbitration was whether the de-

fendants had caused Jarnis to overpay them for their ser-

vices—the motive being, as should be evident from our

previous discussion, that one-third of the overpayment

would be borne by the plaintiffs. The arbitrator hired an

accounting firm to provide neutral expert evidence to assist

him in analyzing that issue. The defendants complain that

the arbitrator met with the firm in their absence. He did,

though it is unclear whether he discussed the overpayment

issue in those meetings. If he did discuss it, still there is

no indication that the discussion had any effect on his rul-

ings.

The issue of bias arises from a hearing at which the ar-

bitrator complained that his fee was in arrears. The plain-

tiffs’ lawyer clucked his tongue sympathetically and said

that the arbitrator “shouldn’t have to deal” with the issue

of fees. The defendants’ lawyer was silent—because he

was planning to challenge the arbitrator’s fee, and did so a

few days later. Under the rules of the American Arbitra-

tion Association, which governed this arbitration, fees and

fee protests are lodged with the Association, which after

resolving any protest remits the fees to the arbitrator. He

is not supposed to learn of the protests. If he wants to

complain about a party’s failure to pay his fee, he is sup-

posed to complain to the Association rather than raise the

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9a

_ Matter with the parties. The defendants argue that by say-

ing what he did the plaintiffs’ lawyer violated the rule and

signaled the arbitrator that the defendarits were responsible

for the delay in the payment of his fee. Cf. Sullivan v.

Conway, 157 F.3d 109, 1095-96 (7th Cir. 1998).

The argument is highly conjectural, but there is a little

more. The defendants refused to pay their full share of the

arbitrator’s fee, and the arbitrator learned of this at some

point—we know because his final award required the de-

fendants to reimburse the plaintiffs for the amount they

had paid in excess of their share of the fee. The defen-

dants speculate that when the arbitrator learned that they

had challenged his fee, he became furious and resolved to

retaliate against the defendants in his award. This is an-

other stretch. It is not as if the arbitrator were denied his

fee. He got every penny that he thought himself entitled

to, and merely learned that the defendants had wanted him

to get less. It is difficult to see how this is different from

any other case in which a litigant challenges a judge’s rul-

ing. It would be different if the challenger succeeded in

taking money out of the judge’s, or in this case the arbitra-

tor’s, pocket. But the challenge failed, thus costing the

arbitrator nothing. Liteky v. United States, 510 U.S. 540,

555-56 (1994); Brokaw v. Mercer County, 235 F.3d 1000,

1025-26 (7th Cir. 2000); Hepperle v. Johnston, 590 F.2d

609, 613-14 (5th Cir. 1979). Anyway the defendants can’t

be heard to complain about their own strategy. If the arbi-

trator’s knowledge that his fee is being challenged pre-

cludes enforcement of his award, then anyone who sees

that the case is going badly can scuttle the arbitration just

by disputing the arbitrator’s fee.

Both allegations of impropriety bespeak a lack of un-

derstanding of how arbitration differs from adjudication.

Arbitrators are not professional judges; often they are not

10a

lawyers at all, though this one was. Parties that opt for ar-

bitration trade the formalities of the judicial process for the

expertise and expedition associated with arbitration, a less

formal process of dispute resolution by an umpire who is

neither a generalist judge nor a juror but instead brings to

the assignment knowledge of the commercial setting in

which the dispute arose. Sphere Drake Ins. Ltd. v. All

American Life Ins. Co., supra, 307 F.3d at 620; Merit Ins.

Co. v. Leatherby Ins. Co., 714 F.2d 673, 679-80 (7th Cir.

1983); ANR Coal Co., Inc. v. Cogentrix of North Carolina,

Inc., 173 F.3d 493, 500 (4th Cir. 1999); Commonwealth

Coatings Corp. v. Continental Casualty Co., 393 U.S. 145,

150-51 (1968) (concurring opinion). Stricter rules cabin

the generalist because he is more apt to be led astray by the

lawyers and witnesses in a matter in which his only

knowledge comes from them. When disputants repose

their trust in a specific individual rather than having to take

the luck of the draw, it is right that they should have to

take the bad with the good unless the individual runs com-

pletely off the rails. The improprieties here, if improprie-

ties they were, were harmless in the setting of a voluntary

arbitration.

The only other issue presented by the defendants that

we need to discuss is the arbitrator’s consolidating separate

arbitration proceedings without the defendants’ express

consent. Selection of the decision maker by or with the

consent of the parties is the cornerstone of the arbitral

process. The fact that a party has consented to arbitrate

one dispute before Arbitrator Smith and an unrelated dis-

pute, albeit with the same antagonist, before Arbitrator

Jones doesn’t mean that he’s agreeable to having Jones

arbitrate the first dispute or Smith the second. Hence the

rule that consolidation of arbitrations is permissible only if

the applicable arbitration clause or clauses authorize it.

Connecticut General Life Ins. Co. v. Sun Life Assurance

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Co., 210 F.3d 771, 773-74 (7th Cir. 2000); Champ v.

Siegel Trading Co., 55 F.3d 269, 274-75 (7th Cir. 1995);

Hartford Accident & Indemnity Co. v. Swiss Reinsurance

America Corp., 246 F.3d 219, 229-30 (2d Cir. 2001).

But that is in general, and this case is special. The suit

was filed in 1997 and the following year the defendants

began an arbitration proceeding against the plaintiffs to

resolve a dispute over one of the Jarnis investments. It

was in that proceeding that the arbitrator to whom we have

been referring throughout this opinion (a Chicago lawyer

named Robert Grossman) was selected, with the agreement

of the defendants. When in the present suit the district

judge—at the defendants’ request—ordered arbitration, the

plaintiffs filed the claim on which their suit was based as a

counterclaim in the first arbitration proceeding, the one the

defendants had initiated, and the arbitrator accepted the

filing. The defendants contend that this was improper be-

cause there were different parties in the two arbitration

proceedings and the issues were different as well.

The difference in parties has no significance, since the

additional parties to the counterclaim were under common

control with the parties to the original claim. The defen-

dants point out that some of these parties are trusts and that

trustees have a fiduciary duty to their beneficiaries. But

trustees can consent to join forces with others in a litiga-

tion and delegate control to one or more of those others,

who may have a larger stake or better counsel. In effect

the trustee as principal hires an agent, and there is no doubt

that like other principals a trustee can delegate authority to

agents. Illinois Conference of Teamsters & Employers

Welfare Fund v. Mrowicki, 44 F.3d 451, 463 (7th Cir.

1994). Ifa trustee is careless or disloyal in delegating, the

beneficiaries may have a grievance against him, but parties

that represent to the court that they have been authorized to

12a

control the entire litigation, as the defendants did here,

cannot later repudiate their representation in an effort to

obtain a favorable judgment; that would be a fraud on the

court. Cf. Jankowski Lee & Associates v. Cisneros, 91

F.3d 891, 896 n.2 (7th Cir. 1996); Davenport Recycling

Associates v. Commissioner, 220 F.3d 1255, 1261-62 (11th

Cir. 2000).

The issues in the two arbitrations, as far as we can

judge, weren’t different, but if they were, we can’t see why

that should matter when the defendants consented to have

Grossman preside in both arbitrations. Since the parties in

interest were the same, and the arbitrator the same, it made

perfect sense to consolidate the proceedings. The defen-

dants’ objection is understandable only as a tactical effort

to derail an arbitration that they lost.

The third arbitration, instituted in 1998 by an entity

controlled by the defendants (29-31 Associates), sought

overdue rent from a partnership controlled by the plain-

tiffs. The issues presented by this claim did not overlap

those presented by the other claims. Nor were the parties

the same. But they were all under the control of the parties

to the other arbitrations and to this lawsuit, and once again

the defendants consented to have Grossman arbitrate.

Nevertheless, there was neither complete diversity nor a

federal question; and an arbitration award cannot be en-

forced in federal court unless the dispute giving rise to the

award would have been within the court’s jurisdiction to

resolve had the dispute given rise to a lawsuit rather than

to an arbitration. Moses H. Cone Memorial Hospital v.

Mercury Construction Corp., 460 U.S. 1, 25 n.32 (1983).

But there is a wrinkle. The arbitrator awarded several

million dollars to the claimant in this third arbitration—

which meant, in effect, to the defendants, who control the

claimant—and having done so he then imposed a lien on

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13a

that award to secure payment to the plaintiffs of the

amount that he had awarded them in the other consolidated

proceedings. So if, as argued in William A. Fletcher,

““Common Nucleus of Operative Fact’ and Defensive Set-

Off: Beyond the Gibbs Test,” 74 Ind. LJ. 171, 172-78

(1998); see also United States for Use and Benefit of

D'Agostino Excavators, Inc. v. Heyward-Robinson Co.,

430 F.2d 1077, 1081 n.1 (2d Cir. 1970); 6 Charles Alan

Wright, ArthurR. Miller & Mary Kay Kane, Federal

Practice and Procedure § 1422 (2004 supp.); 3 James

Wm. Moore, Moore’s Federal Practice-Civil § 13.31 (3d

ed., 2004 supp.), a setoff, unlike the usual permissive

counter-claim, doesn’t require an independent basis for

federal jurisdiction, jurisdiction over the third arbitration is

secure.

Our view is that jurisdiction in such a case is possible

but not automatic, because the jurisdictional issue is gov-

erned by 28 U.S.C. § 1367. That statute defines the sup-

plemental jurisdiction of the federal courts, which is to say

their jurisdiction over matters related to matters over

which federal jurisdiction is explicitly conferred. Channell

v. Citicorp Nat’l Services, Inc., 89 F.3d 379, 384-86 (7th

Cir. 1996); Jones v. Ford Motor Credit Co., 358 F.3d 205,

212-14 (2d Cir. 2004). The statute makes the exercise of

supplemental jurisdiction discretionary with the district

court. So if this arbitration were instead a proceeding be-

fore the district court, it would be up to the judge, subject

only to light appellate review, to determine whether to al-

low the setoff to be litigated before him. It seems to us—

we cannot find a case on the point—that where the matter

is before an arbitrator, the discretion should be his to exer-

cise, with due regard for the principle that the scope of the

arbitrator’s authority is defined by the arbitration clause

itself. The discretion was exercised here in favor of allow-

14a

ing the setoff to be included in the consolidated arbitra-

tions.

The defendants raise other objections to the arbitration

award. But though phrased as challenges to the arbitra-

tor’s authority, they are really objections to the merits of

the arbitrator’s rulings and thus fall outside the limited

scope of judicial review of arbitration.

The plaintiffs, joined by their lawyers, have cross-

appealed from the district judge’s denial of sanctions. We

have nothing to add to her discussion of the issue. The de-

fendants’ arguments, while highly technical and, in part for

that reason, unpersuasive, are not frivolous.

29-31 Associates, the claimant in the third arbitration,

has appealed from the ruling that the arbitrator had juris-

diction over it. It was not a party in the district court and

has not moved for intervention, so it is not a party in this

court either. Its appeal is dismissed.

The district court’s judgment confirming the award and

denying sanctions is

AFFIRMED.

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APPENDIX B

IN THE UNITED STATES DISTRICT COURT FOR

THE NORTHERN DISTRICT OF ILLINOIS.

EASTERN DIVISION

Sigmund Lefkovitz, et al., Plaintiffs,

v.

Nathan Wagner, et al., Defendants

No. 97 C 7555.

Nov. 12, 2003.

MEMORANDUM OPINION AND ORDER

BUCKLO, District Judge.

Plaintiffs Sigmund Lefkovitz, various family members,

and various family trusts seek confirmation of an arbitra-

tion award. Defendants Nathan Wagner, Wagner Associ-

ates, Robert U. Goldman, Ltd., Jay Felner, Albert

Schwartzberg, NCIS Corp., and New Century Services,

Inc., move to confirm and vacate portions of the arbitra-

tor’s award of March 5, 2003, claiming that the arbitrator

l6a

engaged in misconduct and exceeded his authority.’ I con-

firm the award in its entirety.

1.

The procedural and factual history of this case is quite

complex, requiring a brief overview of the interrelation-

ships of the involved parties. Six principals jointly devel-

oped, owned, and leased a variety of properties,

predominantly nursing homes, through an agreement

known as the Jarnis Partnership Agreement (“Agree-

ment”).? These principals are Sigmund Lefkovitz, Irving

Lefkovitz, Nathan Wagner, Robert U. Goldman, Jay Fel-

ner, and Albert Schwartzberg. The ownership and man-

agement structure of these properties involves a number of

levels. Each piece of property is owned by a realty entity,

which then leases the property to a management entity.

29-31 Associates (“29-31 Assoc.”) is one of 29 such realty

entities, which leased its property to the New Rochelle

Nursing Home Partnership (“NRNH”), which in turn man-

aged the New Rochelle Nursing Home. NRNH had three

partners, Sigmund and Irving Lefkovitz and Mr.

Schwartzberg. The realty entity is owned by one of 24

separate Florida limited partnerships, in this instance 29-31

Associates LP (“29-31 LP”). The Florida limited partner-

ships are owned by Jarnis United Properties Co. (“Jarnis”),

which owns the limited partnership interests, and by five

' In September, 2003, six years after commencement of this ac-

tion, various entities and individuals moved to intervene pursuant

to Fed. R. Civ. P. 24. The various proposed intervenors are appar-

ently controlled by the individual defendants in this case, as indi-

cated in various admissions in pleadings in the case. The motions

are denied as untimely.

? A number of family members of the principals, as well as trusts,

were also party to the agreement.

17a

Nevada corporations, which owns the general partnership

interests. Jarnis and the Nevada corporations are owned

by the six principals, in roughly equal portions.

Three separate but related proceedings were consoli-

dated before one arbitrator. The first proceeding (“Pro-

ceeding 1”) was a lawsuit filed by Albert Schwartzberg

against NRNH and two of its partners, Sigmund and Irving

Lefkovitz in the Circuit Court of Cook County. Mr.

Schwartzberg alleged violations of the NRNH partnership

agreement by the Lefkovitzes, as well as breach of their

fiduciary duties. In April 1998, the parties agreed to arbi-

tration of these disputes, selecting Robert Grossman as the

arbitrator.

In October 1997, the Lefkovitzes, along with numerous

other related plaintiffs, filed a lawsuit (“Proceeding 3”) in

this court alleging a breach of the Agreement and of fidu-

ciary duty, as well as violations of RICO. The defendants

to this action included Mr. Wagner, Wagner Associates,

Robert U. Goldman, Ltd., Mr. Felner, Mr. Schwartzberg,

NCIS Corp., and New Century Services, Inc. Pursuant to

the Jarnis Agreement, this court ordered Proceeding 3 to

arbitration on June 3, 1998, and in August 2000, dismissed

the case with leave to reinstate after arbitration. After con-

sultation with Mr. Grossman and the American Arbitration

Association (“AAA”), the plaintiffs filed their claim as a

counterclaim to Proceeding 1.

Finally, in March 1998, 29-31 Assoc. filed a lawsuit

(“Proceeding 2”) against NRNH and the Lefkovitzes in the

Circuit Court of Cook County, alleging that defendants

owed back rent, unpaid charges, and taxes for the leased

property. The parties agreed to submit this dispute to arbi-

tration before Mr. Grossman in February 1999. On March

5, 2003, after arbitration proceedings lasting nearly 60

months, Mr. Grossman entered a final award on these

18a

claims, awarding damages against each side on various

claims.

I.

As a preliminary matter, defendants raise the issue of

this court’s jurisdiction to review the arbitration award.

The Federal Arbitration Act (“FAA”) does not create sub-

ject matter jurisdiction for federal courts to review an

award. International Insur. Co. v. Caja Nacional De

Ahorro Y Seguro, 293 F.3d 392, 395 (7th Cir. 2002). In-

dependent jurisdictional grounds must exist before I can

review the award. We Care Hair Dev., Inc. v. Engen, 180

F.3d 838, 841 (7th Cir. 1999). As the claim that underlies

Proceeding 3 involved a federal question and was origi-

nally filed in this court, I have continuing jurisdiction to

review the award as it relates to that proceeding. See, e.g.,

IDS Life Ins. Co. v. Royal Alliance Assoc., Inc., 266 F.3d

645, 653 (7th Cir. 2003) (stating that the district court had

jurisdiction to confirm an arbitration award when the claim

was originally filed in that court). Defendants argue, how-

ever, that I do not have jurisdiction to review the award as

it relates to Proceeding 2, and that I only have jurisdiction

over review of Proceeding | if I consider it as a separate

action.?

Plaintiffs argue that I have jurisdiction over both Pro-

ceeding 1 and Proceeding 2 through the supplemental ju-

risdiction provisions of 28 U.S.C. § 1367. That section

> Defendants also state that Mr. Schwartzberg consents to have

the Proceeding | portion of the award reviewed before this court

even if diversity jurisdiction does not exist, and that he in fact

would prefer such review. However, parties cannot create subject

matter jurisdiction through their consent. See, e.g., Bates v. John-

son, 901 F.2d 1424, 1428 (7th Cir. 1990) (“parties may not stipu-

late to judicial power”).

19a

provides that when a federal court has original jurisdiction

over a claim, it may exercise jurisdiction over “all other

claims that are so related ... that they form part of the

same case or controversy under Article III of the United

States Constitution.” 28 U.S.C. § 1367(a). As I have ju-

risdiction over Proceeding 3, I may exercise jurisdiction

over Proceedings 1 and 2 if they are part of the same case

or controversy. “A loose factual connection between the

claims is generally sufficient.” Ammerman v. Sween, 54

F.3d 423, 424 (7th Cir. 1995); see also Baltimore and

Ohio v. Wisconsin Central, Ltd., No. 93-C3519, 1997 WL

51460, at *9 (N.D. Ill. Feb. 3, 1997) (Hart, J.).

Defendants object to this court’s review of the portion

of the award headed Proceeding 2, claiming that the parties

in that proceeding are not parties to the original action,

Proceeding 3. However, those parties, NRNH and 29-31

Assoc., voluntarily submitted their dispute before Mr.

Grossman. The issues in the dispute are related to the is-

sues in Proceedings 1 and 3. The case before this court is

review of one arbitration award, resulting from hearings

before one arbitrator. While the award does provide head-

ings from the three proceedings that were consolidated, it

also intertwines the awards under those headings.* While

some of the claims underlying the award involve nomi-

nally different parties, the parties include the six principals

and the partnerships they formed (Jarnis, NRNH, 29-31

Assoc., etc.). This arbitration award is sufficiently one

“case or controversy” to grant this court jurisdiction for

review.

* For example, after making awards under the heading Proceeding

2 and making provision for payment out of the assets of NRNH,

the arbitrator placed a lien on those assets to secure payment of the

judgment under Proceeding 3.

20a

Hl.

The FAA “establishes ‘a federal policy favoring arbi-

tration’.” Moseley, Hallgarten, Estabrook & Weeden, Inc.

v. Ellis, 849 F.2d 264, 267 (7th Cir. 1988) (citing Shear-

son/American Express, Inc. v. McMahon, 483 U.S. 1056

(1987)). Review of arbitration awards is extremely narrow

to “prevent arbitration from becoming merely an added

preliminary step to judicial resolution rather than a true

alternative.” Jd. Section 10 of the FAA provides the lim-

ited grounds for review of an arbitration award, stating that

an award may be vacated:

(a) Where the award was procured by corruption,

fraud, or undue means. (b) Where there was evident

partiality or corruption in the arbitrators, or either of

them. (c) Where the arbitrators were guilty of miscon-

duct in refusing to postpone the hearing, upon suffi-

cient 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. (d) Where the arbitrators ex-

ceeded their powers, or so imperfectly executed them

that a mutual, final, and definite award upun the sub-

ject matter submitted was not made. (e) Where an

award is vacated and the time within which the agree-

ment required the award to be made has not expired the

court may, in its discretion, direct a rehearing by the

arbitrators.

9 U.S.C. § 10. Defendants challenge the award on the

grounds contained in (c) and (d).

A.

Defendants first allege that Mr. Grossman’s conversa-

tion with the parties about compensation due to the AAA,

along with a comment by plaintiffs’ counsel, constituted

ne ee

2la

misconduct. In a status hearing on August 26, 2002, Mr.

Grossman notified the parties that fees were past due for

the arbitration and needed to be paid. He further stated

that the amounts were due by September 3, and that if the

fees were not paid, proceedings would be suspended and

only the award pertaining to a party who did pay would be

entered. Mr. Grossman indicated that he did not want to

have to deal with the issue of fees again. Plaintiffs’ coun-

sel assured him that he should not have to. Defendants al-

lege that this statement about fees from Mr. Grossman

violated AAA Rule 50 and constituted misconduct on his

part. AAA Rule 50 states that “[a]ny arrangement for the

_ compensation of a neutral arbitrator shall be made through

the AAA and not directly between the parties and the arbi-

trator.” Mr. Grossman’s actions in dealing directly with

the parties about compensation arguably violated this rule.

See, e.g., In re Catalyst Waste-to-Energy Corp., 164

A.D.2d 817, 820, 560 N.Y.S.2d 22 (N.Y. App. Div. 1990);

In re I. Jerry Fischer, 106 A.D.2d 314, 316, 482 N.Y.S.2d

761 (N.Y. App. Div. 1984).

Even on a clear showing of misconduct, however, the

party seeking to vacate an arbitrator’s order must show

that it was deprived of a fair hearing. See, eg, M&A

Electric Power Coop. v. Local Union No. 702, IBEW, 773

F. Supp. 1259, 1262 (E.D. Mo. 1991). Defendants allege

that Mr. Grossman’s discussion of compensation with the

parties was misconduct that prejudiced their position and

prevented them from receiving a fair hearing. Conclusory

statements about prejudice are not sufficient. Defendants

fail to show that Mr. Grossman even knew of their alleged

dispute about fees, let alone that the knowledge affected

his final award. On the contrary, all payment of fees was

handled through AAA and, when defendants refused to

pay the invoice, plaintiffs advanced the total amount to

AAA. Plaintiffs’ attorney’s statement was not sufficient to

22a

alert Mr. Grossman as to any dispute over his compensa-

tion.

Defendants also allege that Mr. Grossman’s hiring of

BDO Seidman (“Seidman”) as an “arbitration consultant”

constituted ex parte communications that warrant vacation

of the award. Ex parte acts by the arbitrator have been

held to constitute misconduct. See, e.g., Hahn v. A.G.

Becker Paribas, Inc., 164 Ill. App. 3d 660, 115 Ill. Dec.

693, 518 N.E.2d 218, 224 (1987) (collecting cases). Arbi-

trators may not base their awards on independent investi-

gations. In re Avraham, No. 91-C1238, 1991 WL 177633,

at *3 (S.D.N.Y. Sept. 4, 1991). Mr. Grossman’s consulta-

tion with Seidman regarding key issues in this arbitration

could potentially support vacation of this award.

Defendants are unable to show, however, that their po-

sition was prejudiced by any communication between Mr.

Grossman and Seidman. After the alleged communication

took place, Mr. Grossman reopened the hearing to allow

defendants to present additional testimony on the issue of

executive level compensation. Further, after the alleged ex

parte communication and the additional testimony from

defendants, Mr. Grossman raised the level of compensa-

tion to be granted defendants for the years 1996, 1997,

1998, and 1999. Defendants are unable to show that they

were prevented from having a fair hearing by these com-

munications.

B.

Defendants state that consolidating the various actions

into one arbitration proceeding exceeded Mr. Grossman’s

authority and warrants vacation of this award. 9 U.S.C. §

10(d). Courts, and by extension arbitrators, cannot con-

solidate arbitration proceedings without the consent of the

parties. See, e.g., Connecticut General Life Ins. Co. v. Sun

-_

23a

Life Assurance Co., 210 F.3d 771, 774 (7th Cir. 2000).

Consolidated arbitration proceedings are favored, how-

ever, for reasons of judicial economy and consistency. Jd.

at 774, 776. Here, Proceedings 1 and 2 were willingly

submitted to the arbitrator, but defendants argue that Pro-

ceeding 3 was consolidated without their consent. How-

ever, Proceeding 3 was never a separate arbitration, but

rather a counterclaim to Proceeding 1.°

Defendants also claim that Mr. Grossman exceeded his

authority by issuing an award affecting non-parties, spe-

cifically Jarnis. However, the Agreement that forms the

basis for this arbitration is broad, providing for resolution

of “any dispute or controversy arising under, out of or in

connection with or in relation to this Agreement.” Defen-

dants admit that the agreement to arbitrate covers nonsig-

natories as well as signatories, such as affiliates, agents, or

intended beneficiaries. See Defendants’ Memorandum, at

6 (Jan. 12, 1998). As defined in the Agreement, the non-

parties defendants complain about all fall into one of these

categories. Further, defendants may not raise the rights of

third parties, especially where, as here, those parties could

have intervened in the underlying arbitration.° See, e.g.,

Bruscianelli v. Triemstra, No. 99-C6446, 2000 WL

1100439, at *4 (N.D. Ill. Aug. 4, 2000) (Nordberg, J.).

Finally, Mr. Grossman found that this dispute was essen-

tially “among the same six families who, with minor fi-

nancial interests of third parties, own and control the assets

* After a hearing, Mr. Grossman and the AAA decided that the

claims by plaintiffs would best be handled by filing them as a

counterclaim to Proceeding 1.

° As the arbitration proceedings lasted over 60 months, and the

third parties are all owned at least in part by defendants, those par-

ties clearly had notice of the ongoing arbitration and its potential

ramifications.

24a

which are the subject of this arbitration.” See March 6,

2003 Opinion of Arbitrator Grossman, at 1. “Neither er-

rors in the arbitrator’s interpretation of law or findings of

fact ... justify reversal of the arbitrator’s award.” Bargen-

quast v. Nakano Foods, Inc., 243 F. Supp. 2d 772, 774

(N.D. Ill. 2002) (Bucklo, J.).’

Defendants allege that Mr. Grossman exceeded his au-

thority by deciding issues not submitted to him. The scope

of arbitration is determined by the arbitration agreement

and the issues submitted by the parties. See, e.g., Amer.

Postal Workers Union v. Runyon, 185 F.3d 832, 835 (7th

Cir. 1999). The arbitration agreement in this case is very

broad. See Defendants’ Motion, at 8 (Jan. 12, 1998). “The

arbitrator’s interpretation of the scope of the issue [pre-

sented to him] must be upheld so long as it is rationally

derived from the parties’ submission.” Amer. Postal

Workers Union, 185 F.3d at 835. Defendants object to

four issues resolved by Mr. Grossman: the preparation of

financial statements; the rate of compensation for services

rendered by partners; the validity of 2001 and 2002 Jarnis

Amendments; and the time period over which the fees paid

would be examined. These issues are rationally derived

from the submitted issues, which relate to breach of fiduci-

ary duties and misappropriation of funds.*

’ Defendants rely on Fiat v. Ministry of Fin. and Planning, No.

88-C6639, 1989 WL 122891 (S.D.N.Y. Oct. 12, 1989). This reli-

ance is misplaced. The present case is closer to Dighello v. Bus-

coni, 673 F. Supp. 85 (D. Conn. 1987) (cited within Fiat). The

parties and non-parties are significantly intertwined and are cov-

ered by the arbitration agreement, unlike the entities in Fiat.

* Defendants’ objection to Mr. Grossman’s ruling on the validity

of the 2001 and 2002 Jarnis Amendments is strained, as defendants

introduced those amendments into the proceedings in an attempt to

PELE IES 27S —

et

25a

Defendants next allege that Mr. Grossman applied his

own personal views, rather than the contract terms, in

making the award. The arbitrator’s award must be based

on a clear disregard of the contract language before this

court can vacate that award. Anheuser-Busch, Inc. v. Beer

et al., Local Union No. 744, 280 F.3d 1133, 1137 (7th Cir.

2002) (“the fact that a court is convinced [the arbitrator]

committed serious error does not suffice to overturn his

decision”). Defendants claim that the award regarding

compensation for services provided demonstrates that the

arbitrator disregarded the contract language. However, the

contract at issue, the Agreement, contains two sections

dealing with compensation to partners for services pro-

vided. Defendants and plaintiffs submitted different inter-

pretations for computing that compensation, demonstrating

that the contract was not unambiguous on this issue. Even

if Mr. Grossman looked outside of the contract in his in-

terpretation efforts, that does not clearly show a disregard

for the contract language, as the contract itself is not clear

about the relationship between the two sections. An-

heuser-Busch, 280 F.3d at 1139 (noting that looking be-

yond the contract itself is appropriate when interpreting

ambiguous terms).

Defendants allege that the award must be vacated be-

cause Mr. Grossman delegated his duties to Seidman by

hiring them as “arbitration consultants.” It is true that ar-

bitrators may not delegate their duties. See, e.g., 3 I.

MacNeil, et al, FEDERAL ARBITRATION LAW §

37.2.1 (1999). However, there is no indication that Mr.

Grossman did not decide the issues before him, or that

Seidman did so instead.

limit Mr. Grossman’s authority in an arbitration that had begun

years earlier.

26a

Defendants argue that the award, at least with respect

to the portion under the heading Proceeding 2, paragraph

D, must be vacated because placing a lien on the award

under this heading exceeded the arbitrator’s authority. Af-

ter holding NRNH liable to 29-31 Assoc. for various

amounts, the arbitrator placed a lien on those assets pend-

ing payment of the judgment under the heading Proceeding

3. Defendants argue that this lien is counter to a Stipula-

tion entered into by the parties on June 26, 2000, and

therefore must be vacated. However, nothing in the Stipu-

lation states that a lien may not be placed on the amounts

awarded. Nor does the lien change anything in the portion

of the Stipulation that the parties agreed would not be

changed. One award was issued, for one arbitration. Mr.

Grossman was within his authority as an arbitrator to place

the lien on one portion of the award to ensure a complete

remedy for all parties. See, e.g., United Electrical Radio

& Machine Workers of Am. v. Honeywell, Inc., 522 F.3d

1221, 1226 (7th Cir. 1975) (stating the need for flexibility

when formulating remedies in arbitration).

Defendants further argue that the portion of the award

under Proceeding 2 that holds the Lefkovitzes not person-

ally and individually liable must be vacated. Defendants

argue that Mr. Grossman misapplied New York law and

misinterpreted the contract, finding that the Lefkovitzes

were still covered by the terms of the lease with 29-31

Assoc. However, this court may not vacate an award

based on the arbitrator’s interpretation of law. Eljer Mfg.,

Inc. v. Kowin Development Corp., 14 F.3d 1250, 1254 (7th

Cir. 1994).

Finally, defendants seek to vacate the portion of the

award, under the heading Proceeding 1, that awards puni-

tive damages against Mr. Schwartzberg and orders pay-

ment of those damages to various 501(c)(3) charitable

bch GOt eel

Dey

ba aah

27a

organizations. Defendants argue that Mr. Schwartzberg

had no notice of the potential for an award of punitive

damages, and was thereby deprived of a fair hearing. In

Mr. Grossman’s November 1999 rulings, he found that

Mr. Schwartzberg’s actions did not rise to a level warrant-

ing damages, but specifically reversed the issue of punitive

damages for a later phase of the proceedings. Mr.

Grossman was also acting within his authority when he

ordered that the punitive damages assessed against both

the Lefkovitzes and Mr. Schwartzberg be paid to charities.

IV.

Defendants have presented no valid reason for this

court to vacate the award. The arbitrator neither engaged

in misconduct warranting vacation nor exceeded his au-

thority. I therefore confirm the award, issued on March 5,

2003, in its entirety.

Respondents.

28a

APPENDIX C

IN ARBITRATION BEFORE THE AMERICAN

ARBITRATION ASSOCIATION

CHICAGO, ILLINOIS

ALBERT SCHWARTZ- )

BERG, )

)

Claimant, )

) No. 51-180-00202 98

IRVING LEFKOVITZ and ) (Proceeding 1)

SIGMUND LEFKOVITZ )

)

Respondents. _)

)

29-31 ASSOCIATES, )

)

Claimant, )

) (Consolidated —

NEW ROCHELLE ) Proceeding 2)

NURSING HOME, )

IRVING LEFKOVITZ, and __)

SIGMUND LEFKOVITZ, )

)

Respondents. _)

)

SIGMUND LEFKOVITZ, )

et al., )

)

Claimants, )

) (Consolidated —

NATHAN WAGNER, etal. ) Proceeding 3)

)

)

)

tevin Nella a ETT

29a

FINAL AWARD ON ALL DISPUTES

OTHER THAN CIVIL CONTEMPT

I, THE UNDERSIGNED ARBITRATOR, having been

designated in accordance with the arbitration agreement

entered into between the parties in the Jarnis Agreement,

section 13.11, dated December 20, 1990, the New Ro-

chelle Partnership Agreement, section 15, dated September

4, 1968, and the agreement of the parties, and having been

duly sworn and having duly heard the proofs and allega-

tions of the parties in these consolidated proceedings,

hereby AWARD as follows:

* * * * *

F. The Lefkovitz Family Interests are entitled to judg-

ment jointly and severally against Nathan Wagner, Robert

Goldman, Albert Schwartzberg, Jay Felner and Jarnis, as

follows:

Sigmund Lefkovitz $451,768

Arlene Lefkovitz $97,718

Glenn Paul Lefkovitz $2,832

Irving Lefkovitz $876,627

June Lefkovitz $135,955

Sigmund Lefkovitz Family

Trust for the Family of

Shelly A. Loyd, u/a/d/ July

31, 1973, Gayle R. Dough-

erty, Trustee $24,075

30a

Sigmund Lefkovitz Family

Trust for the Family of

Glenn Paul Lefkovitz, u/a/d/

July 31, 1973, Nina Mann,

Trustee

Sigmund Lefkovitz Family

Trust for the Family of

Nina Mann, u/a/d/ July 31,

1973, Shelly Loyd, Trustee

Sigmund Lefkovitz Family

Trust for the Family of

Gayle R. Dougherty, u/a/d/

July 31, 1973, Glenn Paul

Lefkovitz, Trustee

Sigmund Lefkovitz Family

Trust for the Family of

Donna Jean Neshek, u/a/d/

July 31, 1973, Shelley Loyd,

Trustee

Lefkovitz 1987 Family Trust,

Glenn Lefkovitz, Gayle

Dougherty and Donna Ne-

shek Trustees

Irving D. Lefkovitz Halsted

No. 2 Trust, u/a/d/ February

12, 1974, Sigmund Lefkovitz,

Trustee

$21,243

$25,491

$24,075

$21,243

$552,318

$26,908

T oe eanaies NOM. Dal. Te

3la

Irving D. Lefkovitz Halsted

No. 3 Trust, u/a/d/ February

12, 1974, Sigmund Lefkovitz,

Trustee $26,908

Irving D. Lefkovitz Halsted

No. 4 Trust, u/a/d/ February

12, 1974, Sigmund Lefkovitz,

Trustee $26,908

Irving D. Lefkovitz Halsted

No. 5 Trust, u/a/d/ February

12, 1974, Sigmund Lefkovitz,

Trustee $26,908

Lefkovitz Numbered Family

Trust #7, Sigmund Lefkovitz,

Trustee $2,832

The judgment amounts set forth in this paragraph consti-

tute the Lefkovitz family interest’s allocate distributable

share of the restitution amounts identified in paragraphs B

and C.

Any amounts distributed to the Lefkovitz family interests

pursuant to paragraph D, above, shall be credited against

the respective judgment amount, and any recoveries by

any of the Lefkovitz family interests on the judgments

shall be credited toward the respective distributions pay-

able to them from Jarnis under paragraph D, above. In ad-

dition, any recoveries on the judgments paid from or

recovered against the personal assets of Messrs. Wagner,

Goldman, Schwartzberg or Felner shall be credited toward

the restitution payable to Jarnis under paragraphs B and C

above. However, no payments or distributions by Jarnis in

32a

full or partial satisfaction of these judgments, and no re-

coveries from the assets of Jarnis, whether by way of levy,

execution or otherwise, shall in any way impair or offset

Jarnis’ right to full restitution under paragraphs B and C

above. Enforcement of the money judgments arising from

the confirmation of this Award shall be stayed for 30 days

from the date of said confirmation to give Phase 3 Re-

spondents the opportunity to comply with paragraphs B, C,

D, F and G.

G. For the reasons set forth in the April 19, 2002 and

December 2, 2002 rulings of the Arbitrator, Jarnis is or-

dered to reimburse Claimants for approved legal fees and

costs incurred in Proceeding 3, which total $1,857,186.20.

H. The Arbitrator specifically finds that Respondents

failed to comply with the terms of the Jarnis Agreement

regarding financial reporting and disclosure, and, specifi-

cally, that Respondents in their capacities as controlling

partners failed to comply with the requirements of Para-

graph 7.05(b) of the Jarnis Agreement, relating to disclo-

sures regarding the payment of fees and _ other

compensation to Partners and their affiliates.

Accordingly, I hereby appoint the accounting firm of BDO

Seidman LLP to perform annual audits of Jarnis and its

related entities and create audited financial statements for

each of those entities for the years 1996 through 1999.

These audits shall include review and verification of any

materials called for in the Jarnis Agreement and the Flor-

ida Limited Partnership Agreements and the information

called for in any reports to be generated under those

agreements. Copies of the audit reports shall be provided

to all Jarnis interest holders. BDO Seidman’s reasonable

fees and expenses shall be borne by Jarnis, as shall the rea-

sonable fees and expenses of any successor firm. In the

event that BDO Seidman is unable or unwilling to com-

33a

plete the engagement, the parties shall either agree on an-

other accounting firm, or such firm may be selected by the

Court under its power to enforce this Award.

* * * * *

Dated: March 5, 2003

/s/__Robert M. Grossman

Robert M. Grossman, Arbitrator