Hayne, Miller & Farni, Inc. v. Flume

• Decision Date: 24 May 1995
• Docket Number: No. 94-C-406.,94-C-406.
• Citation: 888 F. Supp. 949
• Parties: HAYNE, MILLER & FARNI, INC., Plaintiff, v. Charles W. FLUME, D.D.S., S.C., Defined Benefit Plan; Charles W. Flume; Charles W. Flume, D.D.S., S.C., a Wisconsin Professional Corporation; and Nancy Flume, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

888 F. Supp. 949

HAYNE, MILLER & FARNI, INC., Plaintiff, v. Charles W. FLUME, D.D.S., S.C., Defined Benefit Plan; Charles W. Flume; Charles W. Flume, D.D.S., S.C., a Wisconsin Professional Corporation; and Nancy Flume, Defendants.

No. 94-C-406.

United States District Court, E.D. Wisconsin.

May 24, 1995.

Briggs & Morgan by Gregory J. Stenmos, Minneapolis, MN and Michael, Best & Friedrich by Jonathan Margolies, Milwaukee, WI, for plaintiff.

Briol & Wilmes by Gregory L. Wilmes, Minneapolis, MN and Curtis Law Office by Ronald Curtis, Milwaukee, WI, for defendants.

DECISION AND ORDER

MYRON L. GORDON, District Judge.

Plaintiff Hayne, Miller & Farni, Inc., "HMF" commenced the above-captioned action on April 14, 1994, by filing an application to vacate an arbitration award pursuant to 9 U.S.C. § 10 and Rule 81(a)(3), Federal Rules of Civil Procedure, Wis.Stats. § 788.10 and Minn.Stats. § 572.19. The case was assigned to Magistrate Judge Aaron E. Goodstein for pretrial processing. HMF filed a motion to vacate the arbitration award and the defendants, Charles W. Flume, D.D.S., S.C., Defined Benefit Plan, Dr. Charles W. Flume, Charles W. Flume, D.D.S., S.C., a Wisconsin professional corporation, and Nancy Flume, the "Flumes", filed a motion to confirm the arbitration award.

Magistrate Judge Goodstein recommended that the plaintiff's motion be denied and that the defendants' motion be granted. Subsequently, this action was reassigned to this branch for consideration of the parties' motions, and Magistrate Judge Goodstein's recommendation.

Pursuant to 28 U.S.C. § 636(b)(1) and Local Rule § 13.03(c), a party may file written objections to a magistrate judge's recommendation within ten days after being served with a copy of the recommendation. De novo review of a magistrate judge's recommendation is required only for those portions of the recommendation for which particularized objections, accompanied by legal authority and argument in support of the objections, are made. 28 U.S.C. § 636(b)(1); Local Rule § 13.03(c); United States v. Molinaro, 683 F.Supp. 205, 211 (E.D.Wis.1988). Where no objection is made, I will adopt the magistrate judge's findings and recommendation if they are not clearly erroneous or contrary to law. United States v. Dacri, 827 F.Supp. 550, 551-552 (E.D.Wis.1993).

In this action, the plaintiff timely filed objections to the magistrate judge's recommendation. After undertaking de novo review of the magistrate judge's recommendation in accordance with each of HMF's objections, I find that I concur with all of his recommendations and find no merit to any of the plaintiff's objections.

I. BACKGROUND

The following facts are set forth in the magistrate judge's recommendation. HMF is a New York corporation with its principal place of business in Minnesota. HMF is a member of the National Association of Securities Dealers (NASD) and is also a registered broker-dealer with the Securities Exchange Commission. James D. Peterson is a registered representative of HMF and is licensed to sell securities in Minnesota.

Dr. Flume is a dentist who operates a dental practice in Wisconsin under the name Dr. Charles W. Flume, D.D.S., S.C., a Wisconsin professional corporation. In late 1986 or early 1987, Dr. Flume sought investment advice for his retirement savings from the now defunct firm of Heiner & Stock. The Charles W. Flume, D.D.S., S.C., Defined Benefit Plan "the plan" was established under the Employee Retirement Income Security Act "ERISA", 29 U.S.C. § 1001 et seq. Dr. Flume is the trustee of the plan; he and his wife, Nancy Flume, are the sole beneficiaries of the plan.

In February 1988, the plan was transferred to Mr. Peterson, then a broker at Heiner & Stock, because the broker who had previously been managing the plan left that firm. The Flumes claim that Mr. Peterson engaged in a trading pattern that was unsuitable for the plan. They also charge that Mr. Peterson encouraged Dr. Flume to allow Mr. Peterson to engage in short term trading to make quick profits. In May 1990, Mr. Peterson transferred the plan and his license to sell securities to HMF. Dr. Flume claims that HMF failed to advise him that the plan contained unsuitable securities upon transfer of the plan to HMF.

Later that same month, Mr. Peterson caused an overdraft in the plan's bank account by purchasing shares of United Systems Technology when the plan did not have sufficient funds to cover the purchase. First Bank Milwaukee, the authorized agent and depository of all securities in the plan, demanded that other securities be sold to pay for the following losses incurred by the plan: (1) the overdraft; (2) the resulting losses on the forced sales; and (3) the lost interest on funds expended to cover the purchase of the United Systems Technology shares.

In June 1993, the Flumes commenced an NASD arbitration asserting various claims against HMF, including common law claims of fraud, breach of fiduciary duty and negligence, ERISA violations, and state and federal securities fraud. The Flumes claimed that the plan incurred losses in excess of $300,000. HMF responded and filed a counterclaim. Both HMF and the Flumes signed Uniform Submission Agreements consenting to arbitration of the dispute in accordance with § 12 of the NASD Code of Arbitration Procedure. In the Submission Agreements both parties agreed "to abide by and perform any award(s)" that might be rendered. A three-person arbitration panel was selected and five days of evidentiary hearings were held in January and February 1994. The panel heard testimony from eight witnesses and received 14 volumes of documents containing more than 2,000 pages. On March 15, 1994, the arbitrators awarded the Flumes $150,000 in damages and $28,034.40 in costs.

HMF filed its motion to vacate the arbitration award pursuant to the Federal Arbitration Act, 9 U.S.C. § 10, the Wisconsin Arbitration Act, Wis.Stat. § 788.10, and the Minnesota Arbitration Act, Minn.Stat. § 572.19. HMF asserts that the arbitration award should be vacated because: (1) the arbitrators were prejudiced against HMF due to misconduct on the part of counsel for the Flumes; (2) the arbitrators exceeded their authority and rendered an award that was excessive, not supported by the evidence and contrary to law; (3) the award evidenced partiality on the part of the arbitrators. The Flumes deny the plaintiff's allegations and seek judicial confirmation of the arbitration award pursuant to the Federal Arbitration Act, 9 U.S.C. § 9 and the Wisconsin Arbitration Act, Wis.Stat. 788.09.

II. ANALYSIS

The parties have asserted their positions under both federal and state arbitration law. Magistrate Judge Goodstein applied federal law in his recommendation, because the parties did not insist on the application of a specific law. The plaintiff does not object to the magistrate judge's reliance on federal law. The language of Wis.Stat. § 788.10 is virtually identical to the language of 9 U.S.C. § 10, and the language of Minn.Stat. § 572.19 is substantially similar to the language of the federal act. Consequently, I will rely on federal law in addressing the magistrate judge's recommendation and the plaintiff's objections. HMF requests de novo review of the magistrate judge's determinations that: (1) HMF was not denied a fair hearing due to misconduct on the part of counsel for the Flumes; (2) there was no evident partiality on the part of the arbitrators; and (3) HMF is not entitled to have the arbitration award overturned on the grounds that the arbitrators exceeded their authority.

Pursuant to 9 U.S.C. § 10(a) the court may vacate an arbitration award upon application of any party to the arbitration:

(1) Where the award was procured by corruption, fraud, or undue means.

(2) Where there was evident partiality or corruption in the arbitrators, or either of them.

(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

(4) Where 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.

The court's scope of review of the arbitration award is narrow. Moseley, Hallgarten, Estabrook & Weeden v. Ellis, 849 F.2d 264, 267 (7th Cir.1988). The arbitration award can be set aside only on the grounds set forth in the Federal Arbitration Act. Id. at 267.

A. MISCONDUCT BY THE FLUMES' COUNSEL

HMF asserts that counsel for the Flumes introduced prejudicial evidence at the arbitration hearing which biased the arbitrators. Specifically, the plaintiff alleges that the Flumes' counsel introduced evidence of an FBI investigation of HMF with regard to HMF's alleged manipulation of Angeion Corporation's stock price. HMF maintains that the introduction of this evidence created an "`aura of guilt' around HMF which could not be erased."

The plaintiff does not allege that the arbitrators engaged in misconduct. See 9 U.S.C. § 10(a)(3). Rather, HMF alleges that there was misconduct by the Flume's counsel at the arbitration hearing. Misconduct by a party can be a basis for setting aside an arbitration award. Robbins v. Day, 954 F.2d 679, 683 (11th Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 201, 121 L.Ed.2d 143 (1992). However, the improper admission of evidence does not warrant vacation of the arbitration award. Arbitrators have wide latitude in conducting arbitration proceedings and are not bound by formal rules of evidence. Hoteles Condado Beach etc. v. Union De etc., 763 F.2d 34, 38 (1st Cir.1985); Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310, 313 (7th Cir.1981) ("Arbitrations are not governed by the rules of evidence."). "In handling evidence an arbitrator need not follow all of the niceties observed by the federal courts." Bell...