Dawahare v. Spencer

• Decision Date: 14 September 1999
• Docket Number: No. 98-6356,PLAINTIFF-APPELLAN,DEFENDANTS-APPELLEES,V,98-6356
• Citation: 210 F.3d 666
• Parties: (6th Cir. 2000) WOODROW W. DAWAHARE,ADAM A. SPENCER; DEAN WITTER REYNOLDS, INC.; SMITH BARNEY, INC., Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 666

210 F.3d 666 (6th Cir. 2000)

WOODROW W. DAWAHARE, PLAINTIFF-APPELLANT,

V.

ADAM A. SPENCER; DEAN WITTER REYNOLDS, INC.; SMITH BARNEY, INC DEFENDANTS-APPELLEES.

No. 98-6356

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: September 14, 1999

Decided and Filed: April 27, 2000

Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 98-00027--Karl S. Forester, District Judge.

J. Robert Lyons, Jr., Glen S. Bagby, Woodward, Hobson & Fulton, Lexington, Kentucky, for Appellant.

William E. Johnson, Johnson, Judy, True & Guarnieri, Frankfort, Kentucky, for Defendant-Appelle Dean Witter Reynolds Inc.

Nancy H. Baughan, David G. Russell, Parker, Hudson Rainer & Dobbs, Atlanta, Georgia, Theodore E. Cowen, Grasch, Walters & Cowen, Lexington, Kentucky, for Appellees.

Before: Suhrheinrich, Cole, and Gibson,(*) Circuit Judges. *The Honorable John R. Gibson, Circuit Judge of the United States Court of Appeals for the Eighth Circuit, sitting by designation.

OPINION

John R. Gibson, Circuit Judge.

Woodrow Dawahare appeals from the district court's denial of his motion to vacate the arbitration award he obtained against Adam Spencer and Dean Witter Reynolds, Inc. Dawahare argues that because the damages awarded were grossly inadequate and bore no relationship to the evidence submitted, the award itself shows evident partiality. Further, he argues that the arbitrators manifestly disregarded the law of damages. We affirm the district court's confirmation of the award.

In view of the limited issues presented, many of the factual details are irrelevant to our discussion. Dawahare established a brokerage account at Shearson Lehman Brothers, Inc. after receiving a "cold call" from Spencer. Smith Barney, Inc. acquired Shearson Lehman sometime after Dawahare opened his account. In August 1994, Spencer informed Dawahare that he planned to leave Smith Barney and go to Dean Witter, and Dawahare agreed to transfer his account. Both before and after the transfer, Spencer engaged in short trading with the Dawahare account. As a result of the price increase of stocks in which Dawahare held short positions, the account declined in value by $495,322 during the last two months of 1994. After Dean Witter learned that Dawahare's son had complaints about the handling of his father's account, Spencer was fired.

Pursuant to pre-dispute arbitration agreements between the parties, Dawahare submitted the controversy to a National Association of Securities Dealers, Inc. arbitration panel in 1996. Dawahare claimed that Spencer had engaged in unsuitable and excessive trading, causing him damages in excess of $600,000. The NASD panel denied Dawahare's claims against Smith Barney, but found in his favor against Dean Witter, awarding $25,000 in compensatory damages and $24,000 in punitive damages. The arbitrators also found Spencer liable to Dawahare for $1000. In the district court, Dawahare moved to vacate the award; the court denied his motion and granted cross motions to confirm the award.

The district court had before it the transcript of the arbitration hearing. At the hearing, Dawahare presented evidence that his health was failing and that he was unable to understand the significance of the short trading strategy pursued by Spencer because of progressive dementia. His wife testified that she thought Dawahare was in over his head. The brokerage firms maintained that Dawahare was an experienced investor, that he was happy with Spencer and with his handling of the account while it was profitable, and that they were unaware of any health or memory problems Dawahare may have had.

Smith Barney's expert witness testified that Dawahare's account increased in value while it was at Smith Barney. Dawahare's expert witness testified that a conservative investment strategy, assuming a reasonable return of six percent, would have resulted in an account value of $776,603.28 in contrast to the $258,731.97 the Dean Witter account was worth at the end of January 1995. Dawahare's expert then added interest to the difference between these two figures, arriving at a total of $604,463.06 in damages. Dean Witter argued that Dawahare had authorized the activity in his account. Neither Dawahare nor Spencer testified at the arbitration hearing.

The district court rejected Dawahare's argument that the arbitration award should be vacated because of evident partiality or manifest disregard of the law and confirmed the award. We review the confirmation of an arbitration award for clear error on findings of fact and de novo on questions of law. See Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 135 (6th Cir. 1996); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 420 (6th Cir. 1995).

"It is well established that courts should play only a limited role in reviewing the decisions of arbitrators." Shelby County Health Care Corp. v. A.F.S.C.M.E., Local 1733, 967 F.2d 1091, 1094 (6th Cir. 1992). The Federal Arbitration Act presumes that arbitration awards will be confirmed. See 9 U.S.C. § 9 (1994); Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 328 (6th Cir. 1998). A court may vacate an arbitration award in the following situations: (1) where the award was procured by fraud, (2) where the arbitrators were evidently partial or corrupt, (3) where the arbitrators misbehaved so that a party's rights were prejudiced, or (4) where the arbitrators exceeded their powers or executed them so that a final, definite award was not made. See 9 U.S.C. § 10(a) (1994). In addition, a reviewing court may vacate an award where the arbitrators have manifestly disregarded the law. See Glennon, 83 F.3d at 136.

Dawahare first argues that the award should be vacated under 9 U.S.C. § 10(a) because the discrepancy between the damages awarded and the damages alleged shows evident partiality. We see no basis to sustain this argument. Only if a reasonable person would have to conclude that the arbitration panel was partial to a party will we find evident partiality. See Andersons, Inc., 166 F.3d at 328. "The alleged partiality must be direct, definite, and capable of demonstration, and 'the party asserting [it] . . . must establish specific facts that indicate improper motives on the part of the arbitrator.'" Id. at 329 (quoting Consolidation Coal Co. v. Local 1643, United Mine Workers of Am., 48 F.3d 125, 129 (4th Cir. 1995)). Because Dawahare points to nothing but the amount of the award to establish evident partiality, there is no basis to vacate the award on this ground.

Dawahare also argues that the substantial disparity between the damages awarded and the damages evidence presented establishes a manifest disregard of the law of damages. He asserts that the common law entitles him to recover all losses proximately caused by the wrongful acts of the liable parties. Our review for manifest disregard of the law does not open the door to extensive review of arbitral awards. See Jaros, 70 F.3d at 421 ("This court has emphasized that manifest disregard of the law is a very narrow standard of review.").

An arbitration decision "must fly in the face of established legal precedent" for us to find manifest disregard of the law. Id. An arbitration panel acts with manifest disregard if "(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed that legal principle." Id. Thus, to find manifest disregard a court must find two things: the relevant law must be clearly defined and the arbitrator must have consciously chosen not to apply it. See M & C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844, 851 n.3 (6th Cir. 1996) (noting that if its review of an arbitral award were based on FAA standards, there was no manifest disregard since any mistake in applying the law was inadvertent and not based on a conscious decision to ignore the law). Arbitrators are not required to explain their decisions. If they choose not to do so, it is all but impossible to determine whether they acted with manifest disregard for the law. See Jaros, 70 F.3d at 421.

Chief Judge Martin, concurring in Federated Department Stores, Inc. v. J.V.B. Industries, Inc., 894 F.2d 862 (6th Cir. 1990), recognized the problems inherent in reviewing an arbitration award for manifest disregard of the law where the arbitrators fail to state a reason for their decision. He stated that courts are forced to participate in a "judicial snipe hunt" with the parties arguing about law that may or may not have been disregarded by the arbitrators. See id. at 871. He would allow reversal when there are no reasons given for an arbitration decision and the record is insufficient to show that the arbitrators did not manifestly disregard the law. See id. No panel of this court has adopted this reasoning.

The arbitrators' decision in this case outlined the parties' contentions and discussed the claims and evidence in some detail for some three-and-a-half, single-spaced pages. The monetary award simply designated the amount of damages without detailed explanation. It is difficult to say that the arbitrators refused to heed a clearly defined legal principle. Dawahare points to nothing in the record that shows the arbitrators' awareness of the common law that he alleges to be applicable. This is not a case where one of the parties clearly stated the law and the arbitrators expressly chose not to...