Laurence J. Rappaport v. Kenneth Pasternak

• Court: Supreme Court of New Jersey
• Decided: April 1, 2025
• Docket: A-32-23
• Status: Published

Opinion

SYLLABUS

This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Court and may not summarize all portions of the opinion.

Laurence J. Rappaport v. Kenneth Pasternak (A-32-23) (088645)

Argued November 4, 2024 -- Decided April 1, 2025

PATTERSON, J., writing for a unanimous Court.

In this appeal, the Court considers whether a contested arbitration award was properly modified under N.J.S.A. 2A:23B-24(a)(2).

This 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. The Court granted certification. 257 N.J. 24 (2024).

1 HELD: The Court disagrees 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 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.

1. The New Jersey Arbitration Act (NJAA) authorizes an arbitrator to “order such remedies as the arbitrator considers just and appropriate under the circumstances of the arbitration proceeding.” N.J.S.A. 2A:23B-21(c). The statute expressly states that “[t]he fact that such a remedy could not or would not be granted by the court is not a ground for refusing to confirm an award . . . or for vacating an award.” Ibid. The NJAA lists six circumstances under which a “court shall vacate an award.” Id. at -23(a)(1) to (6). It also lists three reasons for which a “court shall modify or correct the award,” including, as relevant here, that “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.” Id. at -24(a)(2). (pp. 23-25)

2. Case law underscores the strict constraints on appellate review in a private arbitration. That standard derives from Chief Justice Wilentz’s concurring opinion in Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479 (1992). In Perini, Chief Justice Wilentz expressed the view that “[a]rbitration awards should be what they were always intended to be: final, not subject to judicial review absent fraud, corruption, or similar wrongdoing on the part of the arbitrators. . . . Whether the arbitrators commit errors of law or errors of fact should be totally irrelevant. The only questions are: were the arbitrators honest, and did they stay within the bounds of the arbitration agreement?” Id. at 519 (Wilentz, C.J., concurring). Stating that the NJAA “pronounces the correct rule,” Chief Justice Wilentz proposed a new standard: “Basically, arbitration awards may be vacated only for fraud, corruption, or similar wrongdoing on the part of the arbitrators. It can be corrected or modified only for very specifically defined mistakes as set forth in [N.J.S.A. 2A:23B-24].” Id. at 548-49. Two years later, a majority of the Court adopted Chief Justice Wilentz’s proposed test. Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349, 358-59 (1994). The limited scope of appellate review promotes the objectives of arbitration. (pp. 25-29)

3. Here, there is no dispute that the issue of carried interest was arbitrable. And upon review of the record, the Court finds no evidence in the record that the parties excluded the question of carried interest from the arbitration. The question of Rappaport’s rights under the operating agreements going forward -- including his right to future compensation -- was squarely presented to the arbitrator at the pleading stage by both sides. Rappaport’s pre-hearing motion in limine clearly placed in issue his future compensation, including his right to future carried interest. 2 During Rappaport’s direct examination before the arbitrator, Rappaport testified about the $25 million estimated value of his carried interest. That point was reiterated in his closing argument. The question of carried interest was raised again in the parties’ post-hearing written submissions. Accordingly, 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 Court respectfully disagrees with 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. (pp. 30-33)

4. Moreover, the Appellate Division’s remedy fundamentally affected the merits of the arbitrator’s decision on other claims indisputably presented to him. 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. The Court therefore does not view the Appellate Division’s decision to meet the standard for modification set forth in N.J.S.A. 2A:23B-24(a)(2). That standard has two mandatory components: 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.” (emphasis added). Here, neither factor was met and each independently warrants reversal of the Appellate Division’s judgment. As to the Appellate Division’s determination that it was “implausible” that the $4.9 million award encompassed the value of Rappaport’s future carried interest, the Court reiterates that an appellate court’s task is not to determine “[w]hether the arbitrators commit errors of law or errors of fact,” but to decide two questions that the statute prescribes: “were the arbitrators honest, and did they stay within the bounds of the arbitration agreement?” Perini, 129 N.J. at 519 (Wilentz, C.J., concurring). Here, the answer to both questions is yes. (pp. 34-35)

5. The Court suggests 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. (p. 35)

REVERSED. The Chancery Division’s judgment is REINSTATED.

CHIEF JUSTICE RABNER and JUSTICES PIERRE-LOUIS, WAINER APTER, FASCIALE, NORIEGA, and HOFFMAN join in JUSTICE PATTERSON’s opinion.

3 SUPREME COURT OF NEW JERSEY A-32 September Term 2023 088645

Laurence J. Rappaport, individually and as a member of Rapad Real Estate Management, LLC, KABR Management, LLC, KABR Management II, LLC, KABR Management III, LLC, and KABR Management IV, LLC,

Plaintiff-Respondent,

v.

Kenneth Pasternak, individually and as a member of Rapad Real Estate Management, LLC, KABR Management, LLC, KABR Management II, LLC, KABR Management III, LLC, KABR Management IV, LLC, and Adam Altman, individually and as a member of Rapad Real Estate Management, LLC, KABR Management, LLC, KABR Management II, LLC, KABR Management III, LLC, and KABR Management IV, LLC, Michael Goldstein, individually and as a member of KABR Management III, LLC, and KABR Management IV, LLC, Jude Mason, individually and as a member of KABR Management, III, LLC, and KABR Management IV, LLC, Raffi Aynilian, individually and as a member of KABR Management IV, LLC, The Sara Pasternak 2008 Irrevocable Trust, as a member of KABR Management,

1 LLC, KABR Management II, LLC, and KABR Management III, LLC, The Rachael Pasternak 2008 Irrevocable Trust, as a member of KABR Management, LLC, KABR Management II, LLC, and KABR Management III, LLC, and The Daniel Pasternak 2008 Irrevocable Trust, as a member of KABR Management, LLC, KABR Management II, LLC, KABR Management III, LLC, and KABR Management IV, LLC, and The KABR Group, LLC,

Defendants-Appellants.

Laurence J. Rappaport, individually and as a member of KABR Management, LLC, and KABR Management II, LLC,

Kenneth Pasternak, individually and as a member and manager of KABR Management, LLC, and KABR Management II, LLC, Adam Altman, individually and as a member and manager of KABR Management, LLC, and KABR Management II, LLC, The Sara Pasternak 2008 Irrevocable Trust, as a member and manager of KABR Management, 2 LLC, and KABR Management II, LLC, The Rachael Pasternak 2008 Irrevocable Trust, as a member and manager of KABR Management, LLC, and KABR Management II, LLC, and The Daniel Pasternak 2008 Irrevocable Trust, as a member and manager of KABR Management, LLC, and KABR Management II, LLC,

On certification to the Superior Court, Appellate Division.

Argued Decided November 4, 2024 April 1, 2025

Howard W. Schub argued the cause for appellants (Nelson Mullins Riley & Scarborough, and Shapiro, Croland, Reiser, Apfel & Di Iorio, attorneys; Howard W. Schub and Stuart Reiser, on the briefs).

Christopher Nucifora argued the cause for respondent (Kaufman Dolowich, attorneys; Christopher Nucifora, Erik E. Sardiña, and Edward P. Abbott, on the briefs).

Alex R. Daniel argued the cause for amicus curiae New Jersey Civil Justice Institute (The New Jersey Civil Justice Institute, attorneys; Anthony M. Anastasio, of counsel, and Alex R. Daniel, of counsel and on the brief).

Robert E. Margulies submitted a brief on behalf of amicus curiae Committee for Dispute Resolution (Schumann Hanlon Margulies, attorneys; Robert E. Margulies, on the brief).

JUSTICE PATTERSON delivered the opinion of the Court.

3 When it enacted the New Jersey Arbitration Act (NJAA), N.J.S.A.

2A:23B-1 to -36, the Legislature mandated that a court confirm a private

sector arbitration award unless that court modifies, corrects, or vacates the

award in accordance with the statute. N.J.S.A. 2A:23B-22. The NJAA

identifies 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.” Id. at -24(a).

Absent a finding that one of the three statutory grounds is present, a court may

not modify a private sector arbitration award. Id. at -22.

The Legislature’s constraints on appellate review of arbitration awards

parallel our case law, which 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. Tretina Printing, Inc. v. Fitzpatrick &

Assocs., Inc., 135 N.J. 349, 358 (1994) (quoting Perini Corp. v. Greate Bay

Hotel & Casino, Inc., 129 N.J. 479, 548-49 (1992) (Wilentz, C.J., concurring)).

Judicial review of private sector arbitration awards is thus strictly limited. See

id. at 357. 4 This 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 a defendant 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. The Appellate Division viewed the record to

demonstrate that the arbitrator, not the parties, had raised the issue of carried

interest in the arbitration. It therefore modified the award pursuant to N.J.S.A.

2A:23B-24(a)(2). The appellate court reversed the Chancery Division’s

judgment, and reinstated Rappaport’s complaint seeking a declaration that he

was entitled to future distributions of carried interest.

5 We granted defendants’ petition for certification, and now reverse the

Appellate Division’s judgment. It is undisputed that Rappaport’s claimed right

to carried interest was an arbitrable issue under the parties’ agreement; the

issue is whether the parties raised that issue before the arbitrator. We disagree

with the Appellate Division’s conclusion that it was the arbitrator, not the

parties, who introduced the question of carried interest in the arbitration.

Rappaport discussed the issue of carried interest in his direct examination, his

legal briefs, and the arbitration award he proposed to the arbitrator. At several

stages of the arbitration, defendants disputed Rappaport’s claim to carried

interest and argued that he was not entitled to future distributions. We do not

view the remedy of modification under N.J.S.A. 2A:23B-24(a)(2) to be

warranted in this case, and we do not consider the Appellate Division’s review

of the arbitration award to conform to the deferential standard governing

judicial review of arbitration awards.

Accordingly, we reverse the Appellate Division’s judgment and reinstate

the Chancery Division’s decision confirming the arbitration award.

I.

We summarize the portions of the factual record and the procedural

history that are directly relevant to the question before us: whether the

6 arbitrator decided a matter that was not submitted for arbitration when he

determined whether Rappaport was entitled to carried interest.

A.

This appeal concerns five limited liability companies collectively known

as the KABR entities. 1 Prior to the dispute that gave rise to this appeal,

Rappaport was a managing member of the KABR entities and held various

managerial titles in those entities.

The members of each KABR entity entered into an operating agreement

which set forth their rights and obligations. Each operating agreement

contained an arbitration provision stating in part that “[a]ny question, dispute,

claim, controversy, refusal to perform, or other issue of any nature

whatsoever” that “arises in connection with this Agreement shall be finally

resolved solely and exclusively” as provided in New Jersey or Delaware

Alternative Procedure for Dispute Resolution statutes, “in lieu of all judicial,

administrative, and other remedies of any nature whatsoever.”

As a managing member, Rappaport was compensated by distributions

from management and development fees paid to the companies and

1 Four of the KABR entities at issue -- KABR Management, LLC; KABR Management II, LLC; KABR Management III, LLC; and KABR Management IV, LLC -- are real estate investment funds. The fifth, Rapad Real Estate Management, LLC, provides services to the real estate investment funds. 7 distributions from investment fees paid to the investment funds, and his law

firm was paid for legal services that he provided to the companies.

One form of compensation paid to members of the KABR entities was

carried interest, sometimes called “promote interest” in the testimony before

the arbitrator. Rappaport defined carried interest as “[t]he share of any profits

produced by a partnership’s investment, paid to the general partner as

compensation for managing the investment,” so that “[t]he general partner’s

interest in the property is ‘carried’ with the property until it is liquidated.” As

defendant Adam Altman explained to the arbitrator, carried interest “is the

interest that [KABR entity members] get after the investors have been paid

back a hundred percent of their money and their preferred return.”

In 2019, each KABR entity, through resolutions adopted by members of

the entity holding two thirds of the interest in that entity, removed Rappaport

from his managerial positions. In the arbitration, defendants asserted that the

members of the KABR entities took that action as the result of various acts of

mismanagement and misconduct by Rappaport. Rappaport denied defendants’

allegations and contended that he was removed from his managerial positions

without cause. He asserted that in the wake of his removal as a manager of the

KABR entities, he was no longer paid management fees, but he continued to

8 receive distributions of carried interest pending the resolution of the parties’

dispute.

B.

1.

Rappaport, individually and as a member of the KABR entities, filed an

action in the Chancery Division, naming as defendants the members of the

KABR entities. Rappaport asserted claims for declaratory relief “to protect

Rappaport’s rights and to compel [defendants] to permit Rappaport’s

continued performance” under the KABR entities’ operating agreements;

minority member oppression under the Revised Uniform Limited Liability

Company Act (RULLCA), N.J.S.A. 42:2C-1 to -94, seeking “a remedy other

than dissolution” under N.J.S.A. 42:2C-48(a)(5) and (b); and various contract

and tort claims. He sought remedies including “[m]onetary damages in an

amount to be determined at trial,” interest, attorneys’ fees, costs and “[s]uch

other and further relief as the Court deems just and proper.”

Consistent with the operating agreements’ arbitration provisions, the

parties agreed to dismiss the complaint without prejudice and “submit the

claims in this matter as well as any other claims that could be asserted in this

matter to arbitration.” In an arbitration agreement, they memorialized their

intention to “fully and finally resolve their dispute related to the Claim and

9 Counterclaim,” as well as “related matters, including but not limited to, any

claims that could be asserted by any Party as part of the Claim or the

Counterclaim or with respect to the dissolution or disassociation of Rappaport

from, or Rappaport’s employment with” the KABR entities, by “submitting

their claims and defenses to arbitration.” The parties further agreed that

[t]he scope of the arbitration shall be confined to adjudicating the Claim, Counterclaim, and related matters, including but not limited to, Rappaport’s request for injunctive relief pursuant to his Order to Show Cause for Preliminary Injunction Pursuant to Rule 4:52 (the “Injunction Motion”), any claims that could be asserted by any Party as part of the Claim or the Counterclaim or with respect to the dissolution or disassociation of Rappaport from, or Rappaport’s employment with, the KABR Management Companies.

....

The Arbitrator shall have no power to materially alter or materially modify the terms and conditions of this Agreement in any manner that materially prejudices the rights of either Party. The Arbitrator shall decide what constitutes a material modification. The Arbitrator shall conduct the hearings in this arbitration, including, but not limited to, the introduction of documents and testimony of the Parties and the non-party witnesses, and shall provide the Parties with a written and reasoned decision, which shall constitute the arbitration award, which shall be final and binding upon the Parties, except as provided in the [NJAA].

10 The parties designated the Honorable James R. Zazzali (Ret.) as the sole

arbitrator. They agreed that the arbitrator would apply the substantive laws of

New Jersey and that the arbitration would be “governed procedurally” by the

NJAA and the Commercial Arbitration Rules and Procedures for Large,

Complex Commercial Disputes of the American Arbitration Association (AAA

Rules). AAA Rule 47(a) authorized the arbitrator to “grant any remedy or

relief that the arbitrator deems just and equitable and within the scope of the

agreement of the parties, including, but not limited to, specific performance of

a contract.”

The parties filed claims in arbitration. Rappaport restated the claims he

had asserted in the Chancery Division, including his claim for declaratory

relief, and added claims for age discrimination and indemnification. He

sought relief including “monetary damages in an amount to be determined at

trial.” Defendants countered that Rappaport was terminated for cause as a

manager because he had acted improperly and mismanaged the KABR entities.

They sought, among other remedies, “a declaration that Rappaport has

properly been or may be terminated from all of the KABR [e]ntities and is not

entitled to any further compensation,” and argued that Rappaport should only

be entitled to a redemption payment, not future profits from the entities.

11 The arbitrator conducted hearings over fourteen days. He considered the

testimony of witnesses, written evidence, certifications, and briefs addressing

numerous issues contested by the parties.

Among other claims, Rappaport contended that whether or not he were

to continue as a manager, he was entitled to receive future compensation as a

member of the KABR entities. In a pre-hearing motion, Rappaport argued that

“[r]egardless of whether they manage the KABR [e]ntities, any member is

entitled to ‘receive the profits, los[s]es and distributions from the [KABR

entities] that he would have received as a member.’” In his opening statement,

Rappaport’s counsel urged the arbitrator to allow Rappaport “immediately

back in the company to discharge his duties as a member and a manager,”

among other relief, and to award damages “including backpay [and]

distributions of the operating income.”

In his opening statement, defendants’ counsel characterized the matter as

“a business divorce” between “partners who just don’t want to be partners

anymore,” and asked that Rappaport’s remedies be limited to a return of his

capital and amounts addressed in the operating agreements.

During Rappaport’s direct examination on the first day of testimony

before the arbitrator, his counsel asked him whether a particular section of one

12 of the operating agreements set forth a schedule relating to carried interest, and

Rappaport answered that it did. Rappaport’s direct examination continued:

Q. With respect to this litigation -- or, rather, this arbitration, are you asserting any claims with respect to your carried interest?

A. I’m asserting the fact that I am entitled to that and I am fully vested in the carried interest.

Evidently referring to a portion of defendants’ counsel’s opening

statement addressing Rappaport’s claims for damages in the arbitration,

Rappaport’s counsel inquired:

Q. Do you remember [defendants’ counsel] going through some numbers about the damages that you assert in this case? Do you recall him speaking today about that?

A. Yes.

Q. Do any of those numbers address your carried interest?

A. No, they do not address the carried interest.

Q. And what do you estimate your carried interest to be?

A. Last time that it was valued, which was I think 2018, the total carried interest was somewhere in the $25 million neighborhood. I’m not a hundred percent sure. There is a document that I had at one time that Mike Dwyer at KABR worked up for me for my financial statement. 13 Q. Okay. And that $25 million estimated number, that’s above and beyond the numbers that [defendants’ counsel] was discussing earlier?

A. Yes. That was discussing only the management -- the various management companies in reference to the management-style income, not the carried interest.

In his redirect examination, Rappaport was asked whether carried

interest was encompassed in the “profits and losses” of the KABR entities, and

he testified that it was.

In his closing argument, Rappaport’s counsel enumerated the categories

of damages that Rappaport claimed. He then stated,

and also, your Honor, what -- there’s two things that have to happen, that Mr. Rappaport is clearly entitled to. His carried interest, again, and if he were to be deprived of that, that’s nearly 20 or more million dollars. And that’s going to be paid out in the future as a right, and as the other partners will have as well, and that’s clearly delineated.

In his post-hearing brief, Rappaport claimed $44,335,510 in

compensatory damages, consisting of the value of his ownership interest in the

KABR entities, and lost income; punitive damages; and attorneys’ fees. Citing

his own testimony about the value of his carried interest, Rappaport argued

that the $44,335,510 figure “does not include any ownership interest for, or the

14 value of, any carried interest to which Rappaport is entitled as a member of the

KABR [e]ntities, should he fail to continue as a member.”

The proposed arbitration award that Rappaport submitted to the

arbitrator included two proposed findings that Rappaport was entitled to

carried interest. In one proposed arbitration award, Rappaport urged the

arbitrator to grant his motions in limine; to hold that he had a vested interest in

the KABR entities’ “present and future profits, losses, and distributions”; and

to rule that he was entitled to “the ‘carried interest,’ ‘promote’ and ‘promote

interest’ (synonymous terms by the parties), which is paid by one of [the

KABR investment funds] to the corresponding [KABR entities] in the

proportional amount outlined in the . . . corresponding operating agreement for

that particular [KABR entity].” In a second proposed arbitration award,

Rappaport requested that the arbitrator declare that he was “entitled to receive

the profits, losses, and distributions of the [KABR entities] going forward at

the percentages outlined in the [KABR entities’] Operating Agreements.”

In their post-hearing brief and proposed arbitration awards, defendants

asserted that Rappaport was entitled to nothing more than the value of his

capital accounts, and that the arbitrator should not award him carried interest

or other categories of damages.

15 After the parties’ post-hearing submissions, the arbitrator issued a first

interim award. He noted that Rappaport sought $69 million in damages and

defendants sought $11 million in damages. Among other determinations, the

arbitrator ruled that the operating agreements were enforceable, defendants

lacked cause for terminating Rappaport as a manager, and defendants had

breached the implied covenant of good faith and fair dealing. The arbitrator

declined to reinstate Rappaport as a manager, however, determining that he

should not serve in any position in a KABR entity going forward due to the

“toxic” atmosphere in the KABR entities while he remained there. Among

other rulings, the arbitrator denied Rappaport’s claims for declaratory relief,

which had included a claim for a declaration that Rappaport was entitled to

future compensation under the operating agreements. The arbitrator stated that

in the exercise of his discretion, he denied “the requested $25M in carried

interest.”

The arbitrator awarded $4.9 million to Rappaport, representing, among

other categories of damages, “the claimed interest of $13,000 and ‘lost

income’ of $83,000.” The arbitrator awarded $1,048,853 to defendant

Kenneth Pasternak on Pasternak’s claim against Rappaport and calculated the

net award to be $3,851,147. Finding that amount to represent “a just result,”

16 the arbitrator urged the parties “to put these events behind them and continue

on with their professional and personal lives.”

Defendants sought modification, clarification, and correction of the

interim award, raising issues that are not the subject of this appeal. Rappaport

sought modification of the award. He argued that RULLCA barred New

Jersey courts from depriving him of the economic value of his interest as an

owner of the limited liability companies and that his right to carried interest

was unaffected by his termination, which the arbitrator had deemed to be a

termination without cause. Rappaport contended that the arbitrator’s decision

that he was not entitled to carried interest exceeded the parameters of his

authority and that the award should be modified. He stated that he was “not

looking for a number amount to be placed on the carried interest at this point,”

but “simply seeking to clarify” that the arbitrator’s interim award entitled him

“to his proportional share of the carried interest when it becomes due in

accordance with the Court’s prior ruling and the ‘enforceable’ Operating

Agreements.”

In a second interim award, the arbitrator rejected Rappaport’s claim that

he had acted beyond the scope of the arbitration in ruling on the question of

carried interest. The arbitrator confirmed that he had considered and denied

Rappaport’s “request for $25M in carried interest,” instead awarding “$13,455,

17 the total value of his capital account in KABR I through IV.” He stated that

even if he “had awarded carried interest, the amount would be de minimis.”

The arbitrator later issued a third award, addressing a question that is not the

subject of this appeal. In accordance with the three awards, defendants paid

Rappaport $3,851,147, subject to Rappaport’s reservation of rights. The

arbitrator then issued a fourth award requiring defendants to pay $190,000 in

interest, and defendants paid Rappaport that amount as well.

2.

Rappaport filed a second complaint in the Chancery Division, seeking,

among other remedies, a declaration that he was entitled to carried interest

going forward because the arbitrator did not state or hold that he was “not a

member or [wa]s dissociated as a member.” Defendants moved to confirm the

arbitration awards, contending that Rappaport was not entitled to further

compensation from the KABR entities, and cross-moved to dismiss

Rappaport’s second complaint. Rappaport then moved to confirm or in the

alternative to vacate and modify in part the arbitration award, challenging the

arbitrator’s denial of carried interest.

The Chancery Division judge remanded the matter to the arbitrator to

clarify “whether the $4.9 million award in damages was intended to represent

full, just, and complete compensation to [Rappaport] for his damages against

18 [d]efendants both as a manager and member of the KABR [e]ntities.” The

arbitrator held a hearing on remand and answered the Chancery Division

judge’s question in the affirmative. The arbitrator noted that he had stated in

his final award that “the damages amount was a ‘fair and just result’” and had

admonished the parties to put their dispute behind them.

Following the remand, the Chancery Division judge found that the

arbitrator had considered the question of carried interest in the arbitration

awards. The judge entered an order confirming the arbitration awards. In his

order, the judge found that Rappaport’s interests in the KABR entities,

“including any claimed rights to any past or future profits, carried interest,

losses or other distributions of any kind or nature whatsoever with respect to”

those entities “have been fully redeemed and cancelled by virtue of the

payments made by [d]efendants to [Rappaport] in accordance with the

Arbitration Awards.” The Chancery Division judge dismissed with prejudice

Rappaport’s second complaint.

3.

Rappaport appealed the Chancery Division’s orders in separate appeals,

and the Appellate Division consolidated the appeals.

The Appellate Division affirmed the arbitrator’s awards for Rappaport’s

claims for lost income and future income based on his termination as a

19 manager. Citing defendants’ observation that Rappaport’s removal as a

manager had nothing to do with his status as an equity owner, 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.”

As all parties have acknowledged during the proceedings before this

Court, the Appellate Division mistakenly attributed to the arbitrator the

questions about carried interest that were actually posed by Rappaport’s

counsel to Rappaport during his direct examination on the arbitration’s first

day. 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 viewed Rappaport’s $25 million estimate of the value of his

carried interest to be an attempt to “respond to the arbitrator’s question by

giving him a ballpark figure.” The appellate court ruled that no party had

presented testimony regarding Rappaport’s equity interest in the KABR

entities.

The Appellate Division viewed defendants’ contention during the

arbitration that Rappaport was not entitled to carried interest to lack support in

the operating agreements or case law. The appellate court acknowledged that

dissociation, as a remedy for minority member oppression under N.J.S.A.

20 42:2C-48(a)(5)(b) and -48(b), was within the scope of the arbitration

agreement. It asserted, however, that the arbitrator sua sponte imposed that

remedy after testimony concluded, and ruled that Rappaport’s claim for carried

interest based on his membership in the KABR entities did not accrue until

that stage of the proceeding. It rejected as “implausible” the arbitrator’s

valuation of Rappaport’s aggregate claim at $4.9 million.

The Appellate Division ruled that Rappaport was entitled to carried

interest going forward under the operating agreements, and that he did not

waive his rights as a member by failing to assert a claim for carried interest at

the arbitration. 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,” reversed the judgment

of the Chancery Division, and reinstated Rappaport’s second complaint.

4.

We granted defendants’ petition for certification. 257 N.J. 24 (2024).

We granted the motions of the New Jersey Civil Justice Institute and the

Committee for Dispute Resolution to appear as amici curiae.

II.

Defendants contend that the Appellate Division failed to apply the

deferential standard of review that Tretina mandates. They argue that the

21 question whether Rappaport was entitled to carried interest was not only

within the scope of the arbitration agreement, but was repeatedly raised by the

parties at various stages of the arbitration. They assert that the Appellate

Division’s modification of the award directly affected the merits of the award,

and that the appellate court therefore misapplied N.J.S.A. 2A:23B-24(a)(2).

Rappaport asserts that the Appellate Division properly scrutinized the

arbitrator’s decision and correctly concluded that the issue of carried interest

was beyond the scope of the arbitration. He contends that he had no notice

that his right to carried interest was at risk in the arbitration until late in the

arbitration proceeding. Rappaport argues that the Appellate Division’s

decision did not contravene Tretina because the value of his interest as a

KABR member was not an issue raised before the arbitrator.

Amicus curiae New Jersey Civil Justice Institute contends that the

Appellate Division misapplied the standard of review. It urges that we apply a

presumption that arbitrators act within their authority when the award can be

rationally derived from the arbitration agreement or the parties’ submissions.

Amicus curiae Committee for Dispute Resolution asserts that the

Appellate Division failed to apply a properly deferential standard of review in

accordance with N.J.S.A. 2A:23B-23 and -24.

22 III.

The NJAA’s primary purpose “is to advance arbitration as a desirable

alternative to litigation and to clarify arbitration procedures in light of the

developments of the law in this area.” S. Judiciary Comm. Statement to S. 514

(Dec. 9, 2002). The statute empowers an arbitrator to “conduct an arbitration

in such manner as the arbitrator considers appropriate for a fair and

expeditious disposition of the proceeding.” N.J.S.A. 2A:23B-15(a).

With respect to all remedies except punitive damages and reasonable

attorneys’ fees and expenses, which are separately addressed in N.J.S.A.

2A:23B-21(a) and (b), the NJAA authorizes an arbitrator to

order such remedies as the arbitrator considers just and appropriate under the circumstances of the arbitration proceeding. The fact that such a remedy could not or would not be granted by the court is not a ground for refusing to confirm an award pursuant to [N.J.S.A. 2A:23B-22] or for vacating an award pursuant to [N.J.S.A. 2A:23B-23].

[Id. at -21(c).]

Pursuant to N.J.S.A. 2A:23B-22, following an award, a party to the

arbitration “may file a summary action with the court for an order confirming

the award,” thus requiring the court to “issue a confirming order unless the

23 award is modified or corrected pursuant to [N.J.S.A. 2A:23B-20 or -24] or is

vacated pursuant to [N.J.S.A. 2A:23B-23].” A court shall vacate an award if

(1) the award was procured by corruption, fraud, or other undue means;

(2) the court finds evident partiality by an arbitrator; corruption by an arbitrator; or misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding;

(3) an arbitrator refused to postpone the hearing upon showing of sufficient cause for postponement, refused to consider evidence material to the controversy, or otherwise conducted the hearing contrary to [N.J.S.A. 2A:23B-15], so as to substantially prejudice the rights of a party to the arbitration proceeding;

(4) an arbitrator exceeded the arbitrator’s powers;

(5) there was no agreement to arbitrate, unless the person participated in the arbitration proceeding without raising the objection pursuant to [N.J.S.A. 2A:23B-15(c)] not later than the beginning of the arbitration hearing; or

(6) the arbitration was conducted without proper notice of the initiation of an arbitration as required in [N.J.S.A. 2A:23B-9] so as to substantially prejudice the rights of a party to the arbitration proceeding.

[Id. at -23(a).]

Upon the filing of a summary action pursuant to N.J.S.A. 2A:23B-24(a),

a court shall modify or correct the arbitration award if:

24 (1) there was an evident mathematical miscalculation or an evident mistake in the description of a person, thing, or property referred to in the award;

(2) 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; or

(3) the award is imperfect in a matter of form not affecting the merits of the decision on the claims submitted.

[Id. at -24(a).]

Our case law underscores the strict constraints on appellate review in a

private arbitration such as that at issue here. That standard derives from Chief

Justice Wilentz’s concurring opinion in Perini.

In Perini, a plurality of the Court upheld an arbitration award, applying a

standard of review for private sector arbitrations under which “an arbitrator’s

determination of a legal issue should be sustained as long as the determination

is reasonably debatable.” 129 N.J. at 493 (citing Div. of State Police v. State

Troopers Fraternal Ass’n, 91 N.J. 464, 469 (1982)).

Chief Justice Wilentz agreed with the plurality’s judgment but advocated

a substantially more deferential standard of review. Id. at 518-24 (Wilentz,

C.J., concurring). He observed that “[i]n New Jersey, instead of ending the

dispute, the arbitration award is just the beginning; in this state, arbitration is

not an alternative to litigation but rather the first step of the lawsuit.” Id. at 25 518. Acknowledging that the plurality had not only followed but refined

existing precedents, Chief Justice Wilentz nonetheless stated:

We need a new rule, one that is true to our arbitration statute. Arbitration awards should be what they were always intended to be: final, not subject to judicial review absent fraud, corruption, or similar wrongdoing on the part of the arbitrators. Parties who choose arbitration should not be put through a litigation wringer. Whether the arbitrators commit errors of law or errors of fact should be totally irrelevant. The only questions are: were the arbitrators honest, and did they stay within the bounds of the arbitration agreement?

[Id. at 519.]

Stating that the NJAA “pronounces the correct rule,” Chief Justice

Wilentz proposed a new standard:

Basically, arbitration awards may be vacated only for fraud, corruption, or similar wrongdoing on the part of the arbitrators. It can be corrected or modified only for very specifically defined mistakes as set forth in [N.J.S.A. 2A:23B-24]. If the arbitrators decide a matter not even submitted to them, that matter can be excluded from the award. For those who think the parties are entitled to a greater share of justice, and that such justice exists only in the care of the court, I would hold that the parties are free to expand the scope of judicial review by providing for such expansion in their contract; that they may, for example, specifically provide that the arbitrators shall render their decision only in conformance with New Jersey law, and that such awards may be reversed either for mere errors of New Jersey law, substantial errors, or gross errors of New Jersey law and define therein what they mean by that. I doubt if many will. And if they do, they should abandon arbitration and go directly to the law courts. 26 [Id. at 548-49.]

Two years later, a majority of the Court adopted Chief Justice Wilentz’s

proposed test. Tretina, 135 N.J. at 358-59. There, the Chancery Division had

modified the award, and the Appellate Division, applying the Perini plurality’s

rule, vacated the award. Id. at 353-54. By the time that the Court decided

Tretina, a majority of the justices had abandoned the “reasonably debatable”

standard in favor of “the standard set forth in the Chief Justice’s opinion

concurring in the judgment in Perini”; that standard therefore governed

Tretina. Id. at 357-58. “Because the record . . . contain[ed] not even a hint of

misconduct by the arbitrator, and because no statutory ground exist[ed] for

invalidating or modifying the award,” the Court upheld the arbitrator’s award

in that appeal. Id. at 358.

Accordingly, a private sector arbitration award should not be vacated

absent “fraud, corruption, or similar wrongdoing on the part of the arbitrators.”

Perini, 129 N.J. at 548-49 (Wilentz, C.J., concurring); see also Tretina, 135

N.J. at 358-59; N.J.S.A. 2A:23B-23(a); Bound Brook Bd. of Educ. v.

Ciripompa, 228 N.J. 4, 11 (2017) (noting, in the setting of a public sector

arbitration, that “[a]n arbitrator’s award is not to be cast aside lightly. It is

subject to being vacated only when it has been shown that a statutory basis

27 justifies that action.” (quoting Kearny PBA Local No. 21 v. Town of Kearny,

81 N.J. 208, 221 (1979))).

In Tretina, the Court noted that the NJAA’s modification provision then

in effect directed a court “to modify an award only if those changes will not

affect the merits of the controversy.” 135 N.J. at 360. The Court viewed the

statute’s “clear implication” to be “that the Legislature intended that courts

correct mistakes that are obvious and simple -- errors that can be fixed without

a remand and without the services of an experienced arbitrator.” Ibid. See,

e.g., Block v. Plosia, 390 N.J. Super. 543, 552-57 (App. Div. 2007) (modifying

an arbitration award by undoing the arbitrator’s trebling of damages under the

New Jersey Consumer Fraud Act given the absence of any claim under that

statute). Indeed, Chief Justice Wilentz noted in his concurring opinion in

Perini that the modification provision was “extremely limited.” Perini, 129

N.J. at 542 (Wilentz, C.J., concurring). He reached “the only tenable

conclusion from the statute itself”: “errors of fact, whether gross or ordinary,

lead to neither vacation nor modification and correction,” and that “there is no

mention whatsoever of errors of law.” Ibid.

28 Private sector arbitration awards are thus subjected to an extraordinarily

deferential standard of review. 2 An award may not be vacated or modified

simply because a court disagrees with the arbitrator’s interpretation of the law

or view of the facts; unless the statute’s specific requirements for vacating or

modifying an award are met, the award must be confirmed. N.J.S.A. 2A:23B-

22.

That limited scope of appellate review promotes the objectives of

arbitration. Absent the strict constraints on appeals from arbitration awards,

“the purpose of the arbitration contract, which is to provide an effective,

expedient, and fair resolution of disputes, would be severely undermined.”

Fawzy v. Fawzy, 199 N.J. 456, 470 (2009); see also Perini, 129 N.J. at 536-44

(Wilentz, C.J., concurring).

Applying the standard prescribed by the NJAA and our jurisprudence,

we review the Appellate Division’s decision.

2 Amicus curiae New Jersey Civil Justice Institute urges that we follow Third Circuit decisions recognizing a presumption that an arbitrator has acted within the scope of the arbitrator’s authority when the award can be rationally derived from either the parties’ arbitration agreement or submissions. That argument was raised only by amicus, not by a party, and we do not consider it. See C.R. v. M.T., 257 N.J. 126, 152 (2024); State v. J.L.G., 234 N.J. 265, 280 (2018). 29 Although the Appellate Division discussed N.J.S.A. 2A:23B-23(a)’s

standard for a judicial decision vacating an arbitration award, it did not base its

decision on that provision. Instead, the appellate court modified the award

pursuant to N.J.S.A. 2A:23B-24(a)(2), holding that the arbitrator’s ruling on

carried interest constituted “an award on a claim not submitted to the

arbitrator,” and that “the award may be corrected without affecting the merits

of the decision upon the claims submitted.”

There is no dispute that the issue of carried interest was arbitrable; it

clearly fell within the arbitration agreement’s broad parameters. Indeed, all

counsel confirmed at oral argument before this Court that the carried interest

issue was arbitrable under the terms of the parties’ arbitration agreement. The

question is whether that issue was raised before the arbitrator.

We find no basis in the record for the Appellate Division’s statement

that “all parties specifically excluded” Rappaport’s claim for carried interest

from the arbitration. To the extent that the Appellate Division relied on

defendants’ comment that Rappaport’s removal as an officer “has nothing to

do with his status as an equity owner,” that reliance is misplaced; that

observation did not concern the scope of the arbitration, but was offered in

support of defendants’ contention that Rappaport’s claim for minority

oppression should fail on the merits under New Jersey and Delaware law. We

30 find no evidence in the record that the parties excluded the question of carried

interest from the arbitration.

To the contrary, from the inception of the arbitration, the parties

disputed whether Rappaport was entitled to receive future compensation as a

member of the KABR entities. In his claim in arbitration, Rappaport sought a

judicial declaration enforcing the operating agreements and entitling him to

compensation going forward. In their statement of claims, defendants sought a

declaration that Rappaport had no right to further compensation from the

KABR entities. Thus, the question of Rappaport’s rights under the operating

agreements going forward -- including his right to future compensation -- was

squarely presented to the arbitrator at the pleading stage.

Rappaport’s pre-hearing motion in limine clearly placed in issue his

future compensation as a member of the KABR entities, including his right to

future carried interest. In that motion, Rappaport asserted his vested right to

the entities’ profits and losses. As he later confirmed in his redirect

examination before the arbitrator, carried interest is encompassed in the

“profits and losses” of the KABR entities. He therefore asserted his right to

carried interest in the arbitration.

The parties’ opening statements emphasized their stark disagreement as

to the remedies that the arbitrator should impose. Rappaport asked to be

31 reinstated to discharge his duties as a member and a manager, and he sought

damages including backpay and distributions of the KABR entities’ operating

income. Defendants asked the arbitrator not to reinstate Rappaport and sought

to limit any remedy to the return of his capital or amounts provided for in the

operating agreements.

During Rappaport’s direct examination before the arbitrator the same

day, Rappaport testified about the $25 million estimated value of his carried

interest. That point was reiterated in Rappaport’s closing argument, when his

counsel stated that Rappaport’s carried interest was worth “nearly 20 or more

million dollars.”

The question of carried interest was raised again in the parties’ post-

hearing written submissions. Rappaport asserted in his brief that his $44

million estimate for several categories of damages did not include the $25

million value of his carried interest. His proposed arbitration award expressly

reiterated that claim; it included two proposed awards of carried interest to

him. In their post-hearing written submissions, defendants opposed

Rappaport’s carried interest claims, arguing that he was entitled to no

compensation other than the value of his capital accounts.

Accordingly, Rappaport’s right to carried interest -- an arbitrable issue

under the parties’ arbitration agreement -- was vigorously disputed by the

32 parties at several stages of the arbitration. Rappaport asserted that he was

fully vested in that interest and had a right to distributions of carried interest

under the operating agreements. He asked the arbitrator to declare him to be

entitled to future distributions of carried interest. Rappaport maintained that

his carried interest was worth an estimated $25 million, an amount distinct

from and in addition to other categories of damages. Defendants argued that

the arbitrator should grant a “business divorce” that would terminate

Rappaport’s status as an investor in the KABR entities, that Rappaport had

failed to prove his contention that his carried interest was worth $25 million,

and that Rappaport should be awarded the value of his capital accounts and

nothing more.

The question is not whether Rappaport or defendants offered the more

persuasive argument on the question of carried interest; the merits of that issue

are not before us. The parties’ dispute instead centers on whether Rappaport’s

right to carried interest as a member of the KABR entities was an issue raised

in the proceedings before the arbitrator. The record clearly demonstrates that

it was. Accordingly, we respectfully disagree with 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.

33 Moreover, the Appellate Division’s remedy fundamentally affected the

merits of the arbitrator’s decision on other claims indisputably presented to

him. As the arbitrator’s second interim award confirmed, the arbitration award

of $4.9 million reflected the arbitrator’s assessment of the carried interest

claim, as well as claims for other categories of damages. And as the

arbitrator’s awards make clear -- and his advice to the parties to put their

dispute behind them confirmed -- the arbitrator intended to grant the “business

divorce” that defendants sought and to ensure that Rappaport would no longer

participate in the KABR entities. The Appellate Division’s decision undid that

resolution; it would require the parties to maintain a business relationship the

arbitrator deemed “toxic” as long as any KABR entity survives.

We therefore do not view the Appellate Division’s decision to meet the

standard for modification set forth in N.J.S.A. 2A:23B-24(a)(2). That standard

has two mandatory components: 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.” (emphasis added).

Here, neither factor was met and each independently warrants reversal of the

Appellate Division’s judgment.

We briefly address the Appellate Division’s conclusion that the

arbitrator did not properly recognize Rappaport’s interest as a transferee

34 following dissociation, and its declaration that it is “implausible to argue” that

the arbitrator’s $4.9 million award encompassed the value of Rappaport’s

future carried interest. We reiterate that an appellate court’s task is not to

determine “[w]hether the arbitrators commit errors of law or errors of fact,”

but to decide two questions that the statute prescribes: “were the arbitrators

honest, and did they stay within the bounds of the arbitration agreement?”

Perini, 129 N.J. at 519 (Wilentz, C.J., concurring); see also Tretina, 135 N.J. at

358-59; N.J.S.A. 2A:23B-22, -23(a), -24(a). Here, the answer to both

questions is yes.

We recognize that the parties have expended substantial time and

resources litigating the question whether Rappaport’s asserted right to carried

interest was presented to the arbitrator. We respectfully suggest 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.

IV.

We reverse the judgment of the Appellate Division and reinstate the

Chancery Division’s decision confirming the arbitration awards and dismissing

with prejudice Rappaport’s second complaint.

35 CHIEF JUSTICE RABNER and JUSTICES PIERRE-LOUIS, WAINER APTER, FASCIALE, NORIEGA, and HOFFMAN join in JUSTICE PATTERSON’s opinion.