Kelley v. Michaels, 94-5023

• Decision Date: 10 July 1995
• Docket Number: No. 94-5023,94-5023
• Citation: 59 F.3d 1050
• Parties: Fed. Sec. L. Rep. P 98,800 B.F. KELLEY, Jr., Individually and as Trustee under the Will of Ben F. Kelley, deceased; Mildred L. Kelley, Plaintiffs-Appellees, v. William B. MICHAELS, Defendant-Appellant, and PaineWebber, Inc.; Liberty Bank & Trust Company of Tulsa, N.A., in its capacity as Trustee of the Trust of Allene H. Michaels, deceased, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1050

59 F.3d 1050

Fed. Sec. L. Rep. P 98,800

B.F. KELLEY, Jr., Individually and as Trustee under the Will

of Ben F. Kelley, deceased; Mildred L. Kelley, Plaintiffs-Appellees, v. William B. MICHAELS, Defendant-Appellant, and PaineWebber, Inc.; Liberty Bank & Trust Company of Tulsa,

N.A., in its capacity as Trustee of the Trust of

Allene H. Michaels, deceased, Defendants.

No. 94-5023.

United States Court of Appeals,

Tenth Circuit.

July 10, 1995.

William W. O'Connor (Joel L. Wohlgemuth and John E. Dowdell, also of Norman & Wohlgemuth, Tulsa, OK, with him, on the briefs), for defendant-appellant.

Timothy A. Carney (James M. Sturdivant, also of Gable & Gotwals, Tulsa, OK, with him, on the brief), for plaintiffs-appellees.

Before BALDOCK and LOGAN, Circuit Judges. ^*

LOGAN, Circuit Judge.

Defendant William B. Michaels appeals from the district court's judgment confirming an arbitration award. The arbitration panel awarded plaintiffs B.F. Kelley, Jr. and Mildred Kelley, and the B.F. Kelley Trust (for which B.F. Kelley, Jr. acted as trustee) (collectively the Kelleys) $292,750.00 actual and $505,217.50 punitive damages against Michaels and $20,212.84 actual and $50,000.00 punitive damages against PaineWebber, Inc. The award also provided for a setoff in favor of Michaels based on an earlier settlement between the Kelleys and Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch) and made other monetary awards not at issue here. ¹

Michaels argues that (1) the arbitration panel exceeded its authority because the Kelleys never asked for punitive damages based on Michaels' conduct while at Merrill Lynch, (2) the punitive damages award was contrary to the parties' designation that New York law governed the resolution of any conflicts, and (3) in any event the punitive damages award was excessive and violated due process.

I

In October 1988, the Kelleys placed significant amounts of money and the corpus of a trust for which B.F. Kelley was the trustee in two accounts with Michaels, then a broker with PaineWebber. They executed Resource Management Account Agreements for each account, which included the following language:

12. This agreement and its enforcement shall be construed and governed by the laws of the State of New York.

. . . . .

15. I agree, and by carrying any account(s) for me you agree, that all controversies which may arise between you and me (including your employees, agents, affiliates, subsidiaries, and correspondents) concerning any transactions in any account(s) in my name or in which I have a beneficial interest or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration. Any arbitration shall be in accordance with the rules in effect of either the New York Stock Exchange, Inc., American Stock Exchange, Inc., National Association of Securities Dealers, Inc., or where appropriate, the Chicago Board Options Exchange or National Futures Association, as I may elect.

App. 17, 24. Michaels made investment decisions regarding these accounts and earned commissions on the transactions.

In October 1989, Michaels joined Merrill Lynch, and moved the Kelleys' accounts to Merrill Lynch. The Kelleys signed Customer Agreements with Merrill Lynch containing the following language:

11. Arbitration is final and binding on the parties.

.The parties are waiving their right to seek remedies in court, including the right to jury trial.

.Pre-arbitration discovery is generally more limited than and different from court proceedings.

.The arbitrators' award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.

.The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.

I agree that all controversies which may arise between us, including but not limited to those involving any transaction or the construction, performance, or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be conducted only before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or arbitration facility provided by any other exchange, the National Association of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance with its arbitration rules then in force.

. . . . .

12. This Agreement, with respect to all portions of the CMA Service, including interest charges on loans you may make to me, will be governed by and interpreted under the laws of the State of New York. The terms of my agreement with MLB & T, including those relating to the issuance of the Card, are governed by Federal and New Jersey law. The terms of my agreement with MLNF, including those relating to finance charges, are governed by Federal law and, except to the extent my state law explicitly applies, Utah law. The terms of my agreement with Bank One are governed by Ohio law.

Supp.App. tabs 4 and 5. Michaels continued as the broker for the Kelleys' two accounts through mid-1991.

In August 1991, while Michaels was affiliated with Merrill Lynch, the Kelleys' attorney sent him a demand letter alleging portfolio losses as a consequence of churning, unauthorized trading, and unsuitable investments, as well as unnecessary liquidating commissions when the PaineWebber accounts were closed. The Kelleys reached a confidential settlement with Merrill Lynch for $290,000; the agreement specifically excepted any claims they might have against Michaels.

The Kelleys filed a suit against Michaels in Oklahoma state court which apparently included allegations of stockbroker fraud and federal securities violations. After Michaels removed that action to federal court, the Kelleys dismissed it without prejudice, and filed a second state action omitting the federal securities allegations. When Michaels sought to compel arbitration, the Kelleys dismissed that second state court action without prejudice and filed a Statement of Claim before the National Association of Securities Dealers (NASD) (NASD Claim).

The Kelleys' NASD Claim against Michaels and PaineWebber made specific allegations against Michaels of breach of fiduciary duty, churning, making unsuitable investments, and negligence. It alleged that PaineWebber breached its fiduciary duty to the Kelleys, committed fraud and 10(b)-5 violations, allowed unsuitable investments, and failed to supervise Michaels. ² The Kelleys sought actual and punitive damages from PaineWebber and Michaels.

After five days of hearings, a three-member panel of arbitrators made the awards in favor of the Kelleys that are the subject of this appeal. The Kelleys then filed suit in federal district court pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. Secs. 1-15, to confirm the award. After the district court confirmed the arbitration award Michaels appealed.

Our standard of review in cases confirming arbitration awards is the same as for any other district court decision, "accepting findings of fact that are not 'clearly erroneous' but deciding questions of law de novo." First Options of Chicago, Inc. v. Kaplan, --- U.S. ----, ----, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995). We must consider, of course, the district court's standard of review, that it will set aside the arbitrator's decision "only in very unusual circumstances" such as fraud, corruption, or a decision in manifest disregard of the law. See id. at ----, 115 S.Ct. at 1923. As invoked here, the FAA permits vacating an arbitration award when

the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made [or]

. . . . .

awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

9 U.S.C. Secs. 10(a)(4) & 11(b). However, "[s]o long as an arbitrator draws his decision from the parties' agreements, a reviewing court is generally precluded from disturbing the award." Seymour v. Blue Cross/Blue Shield, 988 F.2d 1020, 1022 (10th Cir.1993) (citing United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 36, 108 S.Ct. 364, 369-70, 98 L.Ed.2d 286 (1987)).

II

We first address Michaels' argument that the arbitrators exceeded their authority by entering an award on a matter that was not submitted because the Kelleys failed to request punitive damages for Michaels' conduct while at Merrill Lynch. Michaels makes several arguments that address a perceived lack of symmetry in the Kelleys' NASD Claim, the arbitration award, and the district court order confirming that award. Michaels relies on the Kelleys' "Demand for Relief" ³ in their NASD Claim and argues that the allegations against him have been segregated so as to specifically not seek punitive damages for his conduct while at Merrill Lynch. Michaels also asserts that the arbitration award itself characterized the Kelleys' requested relief as not seeking punitive damages against Michaels for his Merrill Lynch activity. The arbitration panel, substantially paraphrasing the Demand for Relief, stated

Claimants requested actual damages in the amount of $30,000.00, interest as allowed by law, punitive damages, legal fees, and costs against PaineWebber and Michaels. Claimants also requested portfolio losses in the amount of $220,000.00 for damages at Merrill Lynch, and lost opportunity damages of $72,725.00.

App. 84. Michaels also points out that the district court order confirming the award concluded that "the arbitration [panel] could have interpreted the request for punitive damages to cover all alleged wrongdoing of Michaels no matter where he was employed." Id. at 5 (...