The petition numbered 001 and the motion numbered 002 are consolidated for joint disposition.

In the petition, petitioner Netsmart Technologies, Inc. ("Netsmart") seeks an order confirming the Memorandum Decision and Final Award dated March 3, 2008 (the "Final Award") of the American Arbitration Association (the "AAA").Respondent Edward D. Bright cross-petitions for an order partially vacating the Award, disqualifying the presiding arbitrator, and remanding this proceeding back to the AAA and directing it to appoint a new arbitrator. In motion number 002, Netsmart moves for leave to pay the amount of the Final Award into court and obtain a discharge. For the reasons set forth below, the petition for confirmation is denied, the cross-petition is granted to the extent that the Final Award is vacated and a rehearing and determination of certain issues is ordered, and the motion to for leave to pay the award into court is denied.

Background: Claims and Proceedings The arbitration arises from a Consulting Agreement dated as of January 1, 2001 (the "Agreement"), between Netsmart and Bright, under which Netsmart engaged its former senior executive officer, Bright, to provide consulting services for a one-year and nine-month "Consulting Term," followed by a five-year "Subsequent Consulting Term." The Agreement includes a "change of control" or "severance provision" of particular relevance here, which provides as follows:

In the event that, following a change of control [as defined in the Agreement], [Bright] is either dismissed other than for cause, or terminates this Agreement and his consulting relationship for any reason, or his engagement is terminated as a result of a Disability [as defined in the Agreement], [Netsmart] shall pay [Bright] severance pay in an amount equal to (A) twelve [*2]months' Cash Compensation [as defined in the Agreement] plus (B) the applicable number of months' Cash Compensation, all of which shall be paid to [Bright] on the date of the termination of his employment or consulting relationship. The applicable number of months shall be the greater of (x) thirty (30) or (y) one and one-half (1.5) multiplied by the number of full or partial years during which [Bright] served as an officer or director of or consultant to [Netsmart], with service as an officer of [Netsmart's subsidiary ] CSM and its predecessor being counted as service as an officer of Netsmart; provided, that in no event shall the applicable number of months exceed thirty six (36).

In April 2007, Netsmart merged with another company, NT Acquisition Corp., in connection with Netsmart's acquisition by two private equity companies. This acquisition will be referred to as the "Merger". Thereafter, Bright claimed in a letter to Netsmart dated May 4, 2007 that he was exercising his alleged contractual right to terminate the Agreement as of that day. In addition, Bright claimed, the Merger had triggered the Severance Provision, under which Netsmart was obligated to pay him $ 396,000.

Netsmart refused Bright's request for severance pay in a letter dated May 24, 2007 on the ground that Bright lacked the power to unilaterally terminate the Agreement.^[FN1] Moreover, Netsmart claimed, it had recently discovered that Bright had engaged in misconduct that constituted grounds for Netsmart to terminate him "for cause."According to Netsmart, Bright had deceived the company into overpaying him: for a certain period of time ^[FN2], Bright allegedly had been collecting long-term disability payments from Netsmart's carrier while Netsmart was still paying Bright his full compensation under the Agreement. As a result of this "double dipping," Netsmart concluded in its letter, Bright was being terminated for cause and "[n]o further payments shall be due him under the [Agreement.]"

In June 2007, Bright demanded arbitration of his claim for severance before the AAA. Netsmart asserted counterclaims for (1) fraud/breach of fiduciary duty and (2) breach of the Agreement in connection with the "double dipping" allegations outlined above.

In July 2007, the AAA appointed as Arbitrator Joseph W. Muccia, Esq., a partner in the New York City offices of Thelen Reid Brown Raysman & Steiner LLP ("Thelen Reid"). Muccia convened the parties for a preliminary hearing on August 28, 2007. In his written Report of Preliminary Hearing of the same date, Muccia issued the following rulings including the [*3]following "Preliminary Order":

By agreement of the parties and Order of the Arbitrator . . .

The parties agree and will record in a written and signed stipulation to be submitted for receipt by the [AAA] Case Administrator on or before September 4, 2007, their agreement that (a) the [Agreement] which is at issue in this arbitration and the subject of [Bright's] claim is unambiguous in all respects bearing on the claim alleged by [Bright], (b) the Arbitrator should decide [Bright's] claim (not including its request for punitive damages) as a matter of law based upon the Arbitrator's construction of the language of the [Agreement] without need for any discovery or evidentiary hearing, and (c) the right if any to an exchange of documents, other discovery or evidentiary hearing with respect to [Bright's] claim (not including the claim for punitive damages) is waived. The parties further agree and will record in the above-described stipulation to be submitted for receipt by the Case Administrator on or before September 4, 2007 their agreement that the "change of control" referred to in [the Severance Provision] did in fact occur, and that their motions for judgment with respect to [Bright's] claim should be deemed and resolved as motions for judgment on the pleadings (emphasis supplied).^[FN3]

Bright and Netsmart entered into a Stipulation dated September 4, 2007 (the "Stipulation") in which, among other things, they agreed to the terms of the Preliminary Order.

After briefing and oral argument on the parties' motions for judgment on the pleadings, Muccia issued an Order and Partial Final Award of Arbitration dated September 25, 2007 (the "Partial Award"). In relevant part, the Arbitrator denied Netsmart's motion to dismiss Bright's claim, and granted Bright's motion for judgment "to the extent that it is held that the language of the parties' Agreement . . . entitled [Bright]" to terminate the Agreement and receive "the severance pay specified in the Agreement. . . ." However, the Arbitrator ruled, "there shall be no Award this time of [s]everance [p]ay to [Bright] because his entitlement to such [s]everance [p]ay may be vitiated or the amount of such entitlement may be reduced in the event [Netsmart] can establish at the final hearings certain of the matters it has alleged in this case."

On December 11, 2007, just before the start of the evidentiary hearing on Netsmart's counterclaims, the company withdrew the claim for fraud/breach of fiduciary duty, leaving its breach of contract claim. After a two-day hearing on December 11 and 12 (the "Hearing"), Muccia directed the parties to submit briefs and scheduled final post-hearing oral argument for February 13, 2008.

Arbitrator's Disclosure On February 7, 2008, a Case Manager for the AAA, Laverne Williams, mailed the parties a letter which she described as containing "a disclosure . . . [v]ia telephonic communication on February 4, 2008 and electronic communication of [sic] from Arbitrator Muccia . . . as relates to Mr. Timothy Donovan, Vice President of [Netsmart]" (the "Disclosure Letter"). The Disclosure Letter attaches copies of the following email [*4]communications ^[FN4]:

(1) On February 1, Donovan contacted one of Muccia's law partners, Ben Delancy, who worked in the Thelen Reid offices in Washington, D.C. Donovan stated that "I keep introducing new clients to you," and then referenced a matter he identified as "Ohio 401(k)" and asked Delancy if he "or someone on [his] team" [was] available to look at this."

(2) On February 4, Delancy responded to Donovan that "[a]s it turns out, we will not be able to advise the company on this matter. One of our NY partners [i.e., Muccia] is a neutral arbitrator in a case involving Netsmart, and it would disqualify him if we were able to advise the company on this 401(k) plan issue."

(3) On February 5, Delancy emailed Muccia about Donovan's request and briefed him about the extent of his professional relationship with Donovan. Delancy stated that he had performed legal work for subsidiaries of NEC Corp., and first met Donovan more than ten years ago while he was working as an in-house counsel for a NEC Corp. subsidiary. Two years ago, Delancy had represented a company in Boston for which Donovan served as General Counsel. Delancy further informed Muccia that after a "conflict check" revealed his "role as arbitrator," Delancy had declined Donovan's offer. Delancy appended his February 4 email to Donovan.

(4) Later on February 5, Muccia sent a message to Williams which states:

As requested in you[sic] vmail this afternoon, attached below is an email from . . . Delancy . . . regarding the background of the recent contact he received from an attorney in house at Netsmart Technologies. I have not had any contact with this person or with Netsmart Technologies.

(5) On February 6, Williams emailed Muccia and asked him, "[f]or the purposes of disclosure," to "compose a brief summary . . . of your knowledge, association, relationship (or lack of) with Mr. Donovan."

(6) A few minutes later, Muccia responded to Williams that he did not know Donovan and to his knowledge had "never met, communicated with or done any business with Mr. Donovan."

In the February 7 Disclosure Letter, the AAA directed the parties to advise the AAA of "any objections to the appointment of . . . Arbitrator Muccia" on or before February 11, 2008. I f either party objected, the AAA continued, the other party could respond within five business days. Thereafter the AAA would "make a determination regarding the [A]rbitrator's continued service . . . ." Bright did not object to Muccia's participation until February 19.

Subsequent Proceedings and Award On February 13, the parties appeared and proceeded with the scheduled closing argument before Arbitrator Muccia. On February 19, Bright for the first time objected by letter to Muccia's continued participation in the arbitration and requested that the AAA disqualify him for "partiality or lack of independence." Bright argued that, although Delancy had rejected Netsmart's offer to engage him, Delancy had "tainted" Muccia by telling him about Netsmart's offer. Bright also claimed that Muccia's disclosure was [*5]inadequate because it was incomplete. According to Bright, the contents of the Disclosure Letter and its attached emails implicitly showed that the Arbitrator must have communicated with the AAA and Delancy at least three times on February 5, 2008, yet Muccia had only disclosed one email and had not divulged the content of the other communications.After Netsmart had responded by letter, the AAA issued a determination on March 4, 2008 that "[a]fter careful consideration of the parties' contentions, relative to Arbitrator Muccia's disclosure, this will confirm his appointment as arbitrator."

By that time, Muccia had already issued the Final Award (on March 3). In relevant part, the Arbitrator found for Netsmart on its counterclaim for Bright's breach of contract and fixed its damages and prejudgment interest at $ 114,172.

The Arbitrator also made the following findings and award in connection with Bright's claim for severance pay:

For his claim under [the Severance Provision], the parties agree that Bright is entitled to monthly Cash Compensation of $8,250 for 12 months plus 30 months and one additional month for each year or partial year [Bright] worked for [Netsmart], if any, in excess of 30 years, up to a limit of six additional months. [Bright] contends but failed to submit any admissible or persuasive evidence that he worked for [Netsmart] prior to 1996 with the meaning of [the Severance Provision]. Accordingly, before set off, [the Severance Provision] provides [Bright] is entitled to 42 x $8,250 or $346,500, plus prejudgment interest of 9% per year from May 4, 2007. (emphasis supplied)

Muccia further determined that neither party was entitled to attorneys' fees in connection with their cross-motions on Bright's claim, because "neither party took any position or made any argument relating to that claim which was thoroughly without merit on its face." In connection with Netsmart's counterclaim, the Arbitrator found that Bright's defenses were "frivolous," but on the other hand found that "it was obstreperous and unreasonable for [Netsmart] not to withdraw its fraud/breach of fiduciary duty claim until the morning of the first day of hearings." Under those circumstances, the Arbitrator concluded, neither side would be awarded attorneys' fees in connection with the counterclaim.

Petition and cross-petition Netsmart now petitions for an order confirming the Award, and Bright cross-petitions for an order vacating the Award "in part."^[FN5] Bright contends that the AAA should have disqualified Muccia as the Arbitrator for the reasons stated in his February 19 letter. He also contends that Muccia exceeded his authority by making findings of fact about the period of Bright's employment by Netsmart, and then applying those findings to award Bright severance pay that was about $ 50,000 less than he sought. Next, Bright claims that Netsmart's counterclaim should have been dismissed "as a matter of law." Finally, Bright claims that, after the counterclaims are dismissed, a new arbitrator should reconsider Bright's rejected claim for attorney's fees. [*6]

Alleged partiality of the Arbitrator Bright's claim that Muccia's alleged "partiality" invalidates the Award lacks merit.The threshold issue here is whether, as Netsmart claims, Bright waived his right to challenge to Muccia's impartiality by waiting until February 19, 2008 to raise his concerns, given that disclosure was made on February 7, the Disclosure Letter directed the parties to object on or before February 11, and closing arguments for the proceeding were held on February 13.

Bright's attorney offers some excuse for his delay: in his letter of February 19, he states that he was on vacation from February 1 through February 9, and did not return to his office and learn of the Disclosure Letter until February 11. He states that he considered objecting to Muccia serving as the Arbitrator, but decided not to object and proceed with the final oral argument because he was mindful of "the expenditure of over $200,000 for attorneys fees and expenses by my client."

Given that Bright's attorney objected in writing before the Award was issued, the proceeding was all but complete when the disclosure was made, and Netsmart has not made any showing that it was prejudiced by the brief delay, Bright has not waived his right to challenge Muccia's impartiality. See Ossman v. Ossman, 166 AD2d 896, 896-97 (4th Dept. 1990) (when the complaining party first learned of grounds for disqualifying the arbitrator after the arbitration had already commenced, but before the award had been issued, the right to object had not been waived, and the complaining party could both object before the award was issued and later move to vacate the award).

However, Bright fails to meet the burden of showing that the Award should be vacated because of the Arbitrator's bias. A claim that an arbitrator is biased must be established by clear and convincing proof. See 645 First Ave. Manhattan Co. v. Kalisch-Jarcho, Inc., 220 AD2d 517, 518 (2d Dept. 1995). The complaining party must do more than merely raise an inference of partiality. Rose v. J.J. Lowrey & Co., 181 AD2d 418, 419 (1st Dept. 1992). While arbitrators have the duty "to disclose any relationship which raises even a suggestion of possible bias," Weinrott v. Carp, 32 NY2d 190, 201 (1972), they have fulfilled that duty by "follow[ing] reasonable judgment in disclosing potentially disqualifying facts," J.P. Stevens & Co. v. Rytex Corp., 34 NY2d 123, 129 (1974).

In the attachment to the Disclosure Letter, Muccia disclosed that (1) Donovan had contacted one of his law partners, Delancy, about working on a matter that bore no relation to the subject of the arbitration, (2) Delancy turned down the offer on the ground that it would disqualify Muccia as the Arbitrator, (3) Delancy had a professional relationship with Donovan and had last performed work connected with Donovan two years before, (4) Muccia disclosed the this information to the AAA soon after learning of it, and (5) Muccia had never had any relationship of any sort with Donovan or Netsmart. By imparting this information, Muccia fulfilled his duty to disclose "any relationship which raises even a suggestion of possible bias." However, the connection between Muccia and Netsmart via a third party is so attenuated that it does not remotely constitute convincing evidence of bias. Bright infers that there must have been undisclosed communications between Muccia and Delancy, but makes no showing that they could be significant or that Muccia was obligated to disclose them.

Extent of the Arbitrator's Authority —Pursuant to CPLR §§ 7511(b)(iii) & (d), the Award is vacated and a redetermination is directed as to the amount of damages that Bright is [*7]due under his claim for Severance Pay. The method by which the Arbitrator determined those damages exceeded his authority.In his Preliminary Order, the Arbitrator specified that he would determine Bright's claim "as a matter of law" by construing the Agreement "without need for any discovery or evidentiary hearing," and the parties assented to this method in the Stipulation. However, the Arbitrator necessarily made findings of fact, based on evidence adduced at the Hearing, in order to determine that Bright's "applicable number of months" of service to Netsmart under the Severance Provision was thirty, instead of the figure of thirty-six that Bright claimed. In fact, the Arbitrator specified in the Final Award that he was reducing Bright's claim for damages because he "failed to submit any admissible or persuasive evidence" that he had worked for Netsmart before 1996. As a result, the Arbitrator reduced Bright's claim by about $ 50,000.

It is difficult to see how the Arbitrator could have determined the amount of Bright's severance pay purely as a matter of contract interpretation, since the calculation under the Severance Provision calls for a figure that can vary from thirty to thirty-six, depending on the length of Bright's service. The Preliminary Order and Stipulation may well be unworkable and require modification before any further proceedings. However, since that order was in place during the proceedings to date, Bright cannot be penalized for failing to submit evidence for his claim. Accordingly, the Final Award must be vacated. The award as to Netsmart's counterclaim is held in abeyance until Bright's claim is determined.

Counterclaims; Claim for Attorneys' Fees Bright's claim that the counterclaim should be dismissed as a matter of law is untenable. A party seeking to vacate an arbitrator's award for errors of law must show that the award is "totally irrational." Hacket v. Milbank, Tweed, Hadley & McCloy 86 NY2d 146, 154-55 (1995). Here, the Arbitrator's holdings with respect to the counterclaim were entirely reasonable and shall not be disturbed. Likewise, the Arbitrator's ruling that Bright is not entitled to attorneys' fees is also upheld.

Payment into Court Finally, Netsmart's motion for leave to pay the "final arbitration award" into court and obtain a discharge is denied, since the Final Award is vacated and the arbitration is remanded for further proceedings.

ORDERED, ADJUDGED, AND DECREED that the petition by petitioner Netsmart Technologies, Inc. for confirmation of the Memorandum Decision and Final Award dated March 3, 2008 (the "Final Award") of the American Arbitration Association, a copy of which is annexed hereto, is denied, and it is further

ORDERED, ADJUDGED, AND DECREED, that the cross-petition of respondent Edward D. Bright for partial vacatur and other reliefs is granted to the extent that it is

ORDERED, ADJUDGED, AND DECREED that judgment is entered vacating and setting aside the Final Award, and it is further

ORDERED, ADJUDGED, AND DECREED that, pursuant to the directives set forth above, the controversy between petitioner and respondent as to the amount of damages for respondent's claim shall be heard before the same arbitrator.

Dated:May 19, 2008

Helen E. Freedman, J.S.C. [*8]

Appearances

Attorneys for Plaintiff

O'Melveny & Myers LLP

Times Square Tower

7 Times Square

New York, New York 10036

Att.: William J. Sushon, Esq. and Judd Grossman, Esq.

(212) 326-2000

Attorneys for Defendant

Leventritt Lewittes & Bender

600 Old Country Road, Suite 241

Garden city, New York 11530

Att: Sidney Bender, Esq.

(516) 357-3634