Davis v. Prudential Securities, Inc.

• Decision Date: 31 July 1995
• Docket Number: 93-4653,Nos. 93-4585,s. 93-4585
• Citation: 59 F.3d 1186
• Parties: Fed. Sec. L. Rep. P 98,842 Richard A. DAVIS, Plaintiff-Appellee, v. PRUDENTIAL SECURITIES, INC. f/k/a Prudential-Bache Securities, Incorporated, Defendant-Appellant. Richard A. DAVIS, Plaintiff-Appellant, v. PRUDENTIAL SECURITIES, INC., f/k/a Prudential-Bache Securities, Incorporated, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1186

59 F.3d 1186

Fed. Sec. L. Rep. P 98,842

Richard A. DAVIS, Plaintiff-Appellee, v. PRUDENTIAL SECURITIES, INC. f/k/a Prudential-Bache

Securities, Incorporated, Defendant-Appellant.

Richard A. DAVIS, Plaintiff-Appellant, v. PRUDENTIAL SECURITIES, INC., f/k/a Prudential-Bache

Securities, Incorporated, Defendant-Appellee.

Nos. 93-4585, 93-4653.

United States Court of Appeals Eleventh Circuit.

July 31, 1995.

Brian D. Elias, Christopher L. Kurzner, Fowler, White, Burnett, Hurley, Banick & Strickroot, Miami, FL, Thomas J. Kavaler, Cahill Gordon & Reindel, New York City, for appellant in No. 93-4585 and appellee in No. 93-4653.

Keith E. Hope, Michael A. Hanzman, Hanzman & Criden, P.A., Miami, FL, for appellee in No. 93-4585 and appellant in No. 93-4653.

Appeals from the United States District Court for the Southern District of Florida.

Before BIRCH and DUBINA, Circuit Judges, and JOHNSON, Senior Circuit Judge.

DUBINA, Circuit Judge:

Appellant Prudential Securities, Inc. ("PSI") appeals the district court's judgment confirming an award of punitive damages made by an arbitration panel to Appellee Richard A. Davis ("Davis"). PSI contends that the arbitrators lacked the authority to award punitive damages and that the confirmation of the punitive damages award violates its due process rights. Davis cross-appeals, arguing that the district court erred in confirming the arbitrators' ruling that each party was to bear its own attorneys' fees. For the reasons that follow, we affirm that portion of the district court's judgment confirming the punitive damages award, vacate the district court's order on attorneys' fees and remand the case for consideration of the attorneys' fees issue on the merits.

I. BACKGROUND

In 1985, Davis, a Florida resident, opened an investment account with PSI, a Delaware corporation with its principal place of business in New York, through Peter Rukrigl ("Rukrigl"), an account executive at PSI's Miami office. Davis signed an account agreement, which provided in pertinent part:

This Contract shall be governed by the laws of the State of New York.... Any controversy arising out of or relating to my account ... shall be settled by arbitration in accordance with the rules then obtaining of either the American Arbitration Association ["AAA"] or the Board of Governors of the New York Stock Exchange as I may elect.

Davis alleged that despite his stated desire for "low risk, high grade" investments, PSI recommended and sold to him $800,000.00 worth of highly speculative limited partnerships. Davis claimed that this conduct caused him to suffer severe financial damages, including the loss of capital in his account and the loss of a reasonable rate of return on his funds. Thus, in 1991, Davis initiated an arbitration before the AAA against PSI and Rukrigl, asserting claims for fraud, breach of fiduciary duty and negligence, and alleging violations of federal securities laws and Florida's Blue Sky Laws, Fla.Stat.Ann. Sec. 517.011 et seq. (West 1988). Davis sought relief including compensatory damages, punitive damages, recision, prejudgment interest, and costs. Davis did not claim attorneys' fees, and neither party presented any evidence or argument on the issue of attorneys' fees. After the arbitration hearing, the arbitration panel awarded to Davis compensatory damages under Section 517.011 et seq. in the amount of $483,684.00 and punitive damages in the amount of $300,000.00. The panel's award also stated that "each party [was] to bear all of its own additional cost [sic] and attorneys' fees."

Pursuant to the account agreement, Davis sought to have a judgment entered upon the award in a state court in Dade County, Florida. Davis filed three pleadings: (1) a petition for confirmation of the award; (2) a motion for attorneys' fees; and (3) a motion for modification or correction of the award or, in the alternative, a motion to vacate the award only to the extent that the arbitrators ruled on the issue of attorneys' fees. PSI removed the state court confirmation action to the United States District Court for the Southern District of Florida, invoking diversity of citizenship jurisdiction under 28 U.S.C. Sec. 1332. PSI also filed a cross-motion to vacate the award, arguing that the arbitrators exceeded their powers by awarding punitive damages because the account agreement called for the application of New York law, which precludes arbitrators from awarding punitive damages.

The district court issued two orders. First, the court granted Davis's motion to confirm the award, relying on Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378 (11th Cir.1988). In its second order, the court denied Davis's motions for modification or correction of the award and for attorneys' fees, stating that "the arbitration panel ... was aware of Fla.Stat. Sec. 517, which allows for attorneys' fees." This appeal followed.

II. ISSUES

In this appeal, we are called upon to decide: (1) whether the district court erred in confirming the arbitration panel's award of punitive damages where the parties agreed that their contract would be governed by New York law, which does not allow arbitral awards of punitive damages; (2) whether the confirmation of the punitive damages award violates the Due Process Clause of the Fifth and Fourteenth Amendments; and (3) whether the district court erred in denying Davis's motion to vacate, modify, or correct the arbitration award with respect to attorneys' fees.

III. STANDARD OF REVIEW

The Supreme Court recently held that "courts of appeals should apply ordinary, not special, standards when reviewing district court decisions upholding arbitration awards." First Options of Chicago, Inc. v. Kaplan, --- U.S. ----, ----, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995). Thus, the Court adopted the view of the majority of circuit courts, which hold that review of a district court's confirmation of an arbitration award "should proceed like review of any other district court decision finding an agreement between parties, i.e., accepting findings of fact that are not 'clearly erroneous' but deciding questions of law de novo." Id. In so holding, the Court expressly rejected the "abuse of discretion" standard previously applied by this court to district court decisions that confirm arbitration awards. Id. (rejecting Robbins v. Day, 954 F.2d 679, 681-82 (11th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 201, 121 L.Ed.2d 143 (1992)). We therefore review the district court's factual findings for clear error and examine its legal conclusions de novo.

IV. ANALYSIS

A. Arbitrators' Power to Award Punitive Damages

PSI first argues that the district court erred in granting Davis's motion to confirm and in denying PSI's cross-motion to vacate the arbitration award to the extent that it upheld the award of punitive damages. Rule 43 of the AAA Security Arbitration Rules, under which Davis and PSI agreed to arbitrate, provides to the arbitrator the authority 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." American Arbitration Association, Securities Arbitration Rules (1989). New York law, however, which the parties agreed would govern their contract, prohibits arbitrators from awarding punitive damages. Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 833-35, 353 N.E.2d 793, 795-97 (1976). Accordingly, PSI asserts that the arbitrators exceeded their powers by awarding punitive damages.

The district court confirmed the award based on this court's decision in Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378 (11th Cir.1988). In Bonar, this court held that the arbitrators were not limited by New York law in deciding whether to award punitive damages. The court reasoned that "a choice of law provision in a contract governed by the Arbitration Act merely designates the substantive law that the arbitrators must apply in determining whether the conduct of the parties warrants an award of punitive damages; it does not deprive the arbitrators of their authority to award punitive damages." Id. at 1387 (citation omitted). PSI contends that this court should disregard Bonar in light of the United States Supreme Court's later decision in Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). In Volt, the Court held that where private parties have agreed to apply the laws of a particular state, applicable state rules govern the conduct of the arbitration even if those rules restrict the arbitration in a manner inconsistent with the Federal Arbitration Act ("FAA"), 9 U.S.C. Sec. 1 et seq. 489 U.S. at 479, 109 S.Ct. at 1255-56.

PSI's argument, however, has been foreclosed by the Supreme Court's recent decision in Mastrobuono v. Shearson Lehman Hutton, Inc., --- U.S. ----, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). ¹ In Mastrobuono, the Court held that a contract between a securities brokerage firm and customers permitted an arbitral award of punitive damages, despite a provision in the parties' agreement that New York law would govern the contract. Id. --- U.S. at ---- - ----, 115 S.Ct. at 1215-19. The Court stated that "if contracting parties agree to include claims for punitive damages within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration." Id. --- U.S. at ----, 115 S.Ct. at 1216 (emphasis in original). Noting that the rules of the National Association of Securities Dealers ("NASD"), under which the parties agreed to arbitrate, provided that arbitrators may award "damages and other relief," the Court concluded that the arbitral award of punitive damages should have been enforced as within the scope of the contract. Id. --- U.S. at...