Bonar v. Dean Witter Reynolds, Inc.
| Decision Date | 22 January 1988 |
| Docket Number | No. 87-3270,87-3270 |
| Parties | James W. BONAR and Beverly J. Bonar, Plaintiffs-Appellees, v. DEAN WITTER REYNOLDS, INC., John S. Mc Nally, Jr., Defendants-Appellants, Ed Leavenworth, Defendant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Stanley T. Padgett, Marvin E. Barkin, Trenam, Simmons, Kemker, Scharf, Barking, Frye & O'Neil, Tampa, Fla., for defendants-appellants.
Robert Dyer, Duckworth, Allen & Dyer, Orlando, Fla., for plaintiffs-appellees.
Appeal from the United States District Court for the Middle District of Florida.
Before TJOFLAT and KRAVITCH, Circuit Judges, and TUTTLE, Senior Circuit Judge.
Arbitrators of a dispute between the Bonars and Dean Witter Reynolds awarded punitive as well as compensatory damages to the Bonars. Dean Witter claims that the district court abused its discretion in refusing to vacate the award of punitive damages because (1) it was obtained through fraud; (2) the arbitrators lacked authority to award punitive damages; (3) the appellees contractually waived any right they may have had to punitive damages; and (4) the punitive damages award was so irrational as to be an abuse of the arbitrators' discretion. Concluding that the district court abused its discretion in not vacating the award on the ground of fraud, we reverse and remand for a new hearing on the issue of punitive damages.
In July, 1982, appellees James and Beverly Bonar opened a securities trading account at Dean Witter's Orlando, Florida office with an initial deposit of $16,436.77 in cash. During November of 1982, Ed Leavenworth, the appellees' account executive, stole $4,920 from their account. By the end of November, 1983, due to trading losses and Leavenworth's embezzlement, all of the funds that the appellees had originally deposited into their account had been depleted and they owed Dean Witter a margin balance of $539.99. The margin balance had increased to $547.86 by the end of December, 1983 and to $553.92 by the end of January, 1984. Dean Witter never attempted to collect payment on these margin balances.
On February 22, 1984, Leavenworth deposited funds into the appellees' account to clear the balance due Dean Witter. Then, in July of 1984, Leavenworth stole $15,890.20 from the account of another Dean Witter customer and deposited that money into the appellees' account. The stolen funds appeared on the appellees' monthly statements and were used to purchase stocks that also appeared on the monthly statements.
In September of 1984, Leavenworth left the employ of Dean Witter to work for another investment firm. Apparently satisfied with Leavenworth's service, the appellees closed their account at Dean Witter and opened an account at Leavenworth's new firm. When they closed their account, Dean Witter delivered to the appellees stocks that had a market value of $11,489.90 after all margin balances had been cleared.
In January of 1985, Dean Witter received an inquiry from a former Leavenworth customer about a transaction in her account. When Dean Witter received a second inquiry later that month, it instituted an audit of every account that Leavenworth had managed. That audit revealed that Leavenworth had embezzled funds from a number of Dean Witter customers. Shortly after Dean Witter discovered the fraud, it contacted the customers whose accounts had been affected, including the appellees, and advised them of the apparent embezzlement of funds from their accounts. In addition, Dean Witter turned over the results of its investigation to the State Attorney for Orange County, Florida, and assisted in the criminal prosecution and ultimate incarceration of Leavenworth.
On August 9, 1985, the appellees filed a complaint and demand for arbitration with the American Arbitration Association alleging violations of various state and federal laws, 1 breach of fiduciary duty, negligence, and gross negligence in the handling of their account. The complaint, seeking compensatory and punitive damages, named as defendants Dean Witter, John McNally, Jr., the branch manager of the Orlando office, and Leavenworth. Leavenworth was never served with process and thus never became a party to the arbitration proceedings.
A three member arbitration panel heard the appellees' case on May 8-9, 1986. At the hearing, Dean Witter and McNally admitted liability for compensatory damages. 2 Because of this admission, the central factual issue for the arbitrators to decide was whether the conduct of Dean Witter and McNally justified the imposition of punitive damages. 3 At the hearing, in addition to the testimony from lay witnesses, the appellees presented the testimony of two expert witnesses to support their claim for punitive damages. The second expert, Thomas E. Nix, testified that he was president and owner of an investment advisory firm, that he graduated from the University of Alabama in 1980 with a bachelor's degree in finance and that in 1981 he attended Columbia University and received a bachelor's degree in accounting. Nix further testified that after his graduation from Columbia he worked for St. Paul in New York as the money manager of a $30 million portfolio and that in the summer of 1985 he received an honorary doctorate in finance from the Technical University of Vienna.
During voir dire, Nix admitted that he was not, and never had been, a licensed securities broker or branch manager of a securities brokerage house. Based on this, Dean Witter requested that Nix not be allowed to testify on the ground that he was "not qualified as an expert to render testimony on the trading in any account." After the panel rejected this request, Nix testified that, in his opinion, the trading in the appellees' account was excessive, and that Dean Witter and McNally had not properly supervised the appellees' account. On June 5, 1986, the arbitrators assessed compensatory damages against both Dean Witter and McNally, and punitive damages of $150,000 against Dean Witter alone. Following the award, Dean Witter applied to the arbitration panel for a reduction in, or the elimination of, the award of punitive damages. The arbitrators denied that application on July 15, 1986.
On July 30, 1986, Dean Witter moved to vacate or modify the arbitration award pursuant to the Federal Arbitration Act, 9 U.S.C. Secs. 10 and 11, (the "Arbitration Act") on the grounds that the arbitrators lacked authority to award punitive damages, that the appellees contractually waived any right to punitive damages, and that the punitive damage award was based upon a manifest disregard of the evidence and was so irrational as to be an abuse of the arbitrators' discretion. Before the district court decided this motion, Dean Witter discovered that the credentials asserted by Nix as a basis for his testimony as an expert witness were completely false. Nix was an engineering student at the University of Alabama and never graduated from that institution. Furthermore, he never attended Columbia University or worked for St. Paul.
Accordingly, on November 20, 1986, Dean Witter filed an amended motion to vacate or modify the arbitration award adding as grounds that the award should be vacated under 9 U.S.C. Sec. 10(a) because it was procured through fraud. At the same time, pursuant to local court rules, Dean Witter filed a motion for leave to file a memorandum in excess of twenty pages, and attached to the motion a copy of its proposed memorandum and documentation supporting its claim that Nix had perjured himself. Shortly thereafter, the appellees filed motions to confirm the arbitration award, to file a memorandum in excess of twenty pages, and to strike as untimely Dean Witter's amended motion to vacate. In the motion to strike, the appellees admitted that Nix had committed perjury at the arbitration hearing.
By orders dated December 9, 1986, the district court granted appellees' motion to confirm the arbitration award, denied Dean Witter's amended motion to vacate or modify the award, and denied all other motions of both parties. The district court took the above actions by stamping GRANTED or DENIED on the face of the parties' motions. As a result, there is no written order explaining the basis for these decisions. The district court entered a final judgment based on the arbitration award against Dean Witter and McNally on April 2, 1987 and this appeal followed. 4
Before we reach the issue of whether Nix's perjury requires vacating the arbitrators' award under 9 U.S.C. Sec. 10(a), we must consider the appellees' contention that Dean Witter did not timely raise this issue. Section 12 of the Arbitration Act provides that "[n]otice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered." The award in this case was filed on June 5, 1986. Dean Witter's original motion to vacate or modify the award was filed on July 30, 1986, well within the three month period, but only challenged the award on grounds other than fraud. The amended motion to vacate, which raised the fraud issue, was not filed until November 20, 1986.
Thus, the issue is whether an amended motion to vacate an arbitration award, filed outside of the three month period and raising additional grounds for vacation, is deemed timely if the original motion to vacate was timely. In challenging the amended motion as untimely, the appellees admit that they have found no cases deciding this issue. 5 Nevertheless, they urge, with no support from the legislative history, that "the [Arbitration Act] does not contemplate a procedure where a timely motion to vacate preserves a right to file additional and separately grounded challenges outside of the three month period."
By concentrating only on the provisions of the Arbitration Act, the appellees' argument overlooks the key source for determining any question regarding...
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