In Laurence J. Rappaport v. Kenneth Pasternak (A-32-23/088645) (Decided April 1, 2025), the Supreme Court of New Jersey held that the Appellate Division erred in modifying a private arbitration award. In so ruling, the Court emphasized the deferential standard governing judicial review of arbitration awards set forth in both New Jersey Arbitration Act (NJAA) and New Jersey case law.
Facts of Rappaport v. Pasternak
The appeal arises from a dispute among members of several limited liability companies that was arbitrated pursuant to the parties’ agreement. In a series of awards, the arbitrator ruled on numerous claims and counterclaims. He awarded $4.9 million to plaintiff Laurence Rappaport on various claims, offset by an award on a claim asserted by defendant Kenneth Pasternak, for a net award of approximately $3.8 million. The arbitrator did not award Rappaport damages for the loss of future distributions of carried interest.
Following the arbitrator’s awards, Rappaport contended that the question of carried interest had not been presented to the arbitrator, and that the arbitrator had improperly ruled that he was not entitled to such distributions. After remanding for clarification that the arbitrator intended his awards to resolve the issue of carried interest, the Chancery Division confirmed the awards. Rappaport appealed, and the Appellate Division affirmed the arbitrator’s awards for Rappaport’s claims for lost income and future income based on his termination as a manager. However, the Appellate Division ruled that the parties had “specifically excluded” the question of carried interest from the arbitration, and that “Rappaport’s interest as an investor was not a claim raised in arbitration.”
Based on its reading of the record, the appellate court concluded that the arbitrator had sua sponte raised the question of carried interest in the arbitration. It rejected as “implausible” the arbitrator’s valuation of Rappaport’s aggregate claim at $4.9 million and ruled that Rappaport was entitled to carried interest going forward under the operating agreements. It modified the awards “to exclude any inclusion of Rappaport’s membership interest, including any future carried interest accruing after the conclusion of arbitration testimony” and reversed the judgment of the Chancery Division.
NJ Supreme Court’s Decision in Rappaport v. Pasternak
The New Jersey Supreme Court reversed. It disagreed with the Appellate Division’s conclusion that it was the arbitrator, not the parties, who introduced the question of carried interest in the arbitration. The Court further held that the remedy of modification under N.J.S.A. 2A:23B-24(a)(2) is not warranted in this case, and the Appellate Division’s review of the award did not conform to the deferential standard governing judicial review of arbitration awards.
As the New Jersey Supreme Court explained, the New Jersey Arbitration Act (NJAA) outlines three circumstances in which a court may modify an arbitration award, one of which applies when “the arbitrator made an award on a claim not submitted to the arbitrator and the award may be corrected without affecting the merits of the decision upon the claims submitted.” Similarly, New Jersey case law authorizes an order vacating a private sector arbitration award “only for fraud, corruption, or similar wrongdoing on the part of the arbitrators,” and permits modification of an award only when the court finds the arbitrator has made one of the “very specifically defined mistakes” identified in the NJAA.
After recognizing the limited scope of appellate review, the New Jersey Supreme Court first addressed the Appellate Division’s conclusion that when the arbitrator declined Rappaport’s request for carried interest, he ruled on a claim not presented to him. In reaching the opposite conclusion, the Court found that there was no dispute that the issue of carried interest was arbitrable. It further cited that there was no evidence in the record that the parties excluded the question of carried interest from the arbitration. Rather, Rappaport’s right to carried interest — an arbitrable issue under the parties’ arbitration agreement – was vigorously disputed by the parties at several stages of the arbitration.
The New Jersey Supreme Court next turned to the Appellate Division’s modification of the arbitration award. According to the Court, the Appellate Division’s decision failed to meet the standard for modification set forth in N.J.S.A. 2A:23B-24(a)(2), which requires that the award includes “a claim not submitted to the arbitrator and the award may be corrected without affecting the merits of the decision upon the claims submitted.”
In support, the New Jersey Supreme Court found that the appeal court’s remedy fundamentally affected the merits of the arbitrator’s decision on other claims indisputably presented to him. It also cited that the award of $4.9 million reflected the arbitrator’s assessment of the carried interest claim, as well as claims for other categories of damages.
Going forward, the New Jersey Supreme Court suggested that when parties intend to exclude from an arbitration one or more issues that fall within the scope of the arbitration agreement, they should identify those issues in writing for the arbitrator and all counsel prior to the arbitration proceeding.