Banc of Am. Sec. v. Knight

• Decision Date: 19 May 2004
• Citation: 4 Misc.3d 756,781 N.Y.S.2d 829
• Parties: In the Matter of BANC OF AMERICA SECURITIES, Petitioner,<BR>v.<BR>PARKER W. KNIGHT, JR., Respondent.
• Court: New York Supreme Court

4 Misc.3d 756

781 N.Y.S.2d 829

In the Matter of BANC OF AMERICA SECURITIES, Petitioner,

v.PARKER W. KNIGHT, JR., Respondent.

May 19, 2004.

Epstein, Becker & Gree for petitioner.

Hoguet, Newman & Regal for respondent.

OPINION OF THE COURT

LEWIS BART STONE, J.

This proceeding was commenced by petitioner Banc of America Securities (BAS), by motion to this court dated October 30, 2003, pursuant to article 75 of the Civil Practice Law and Rules to vacate an arbitration award rendered on October 1, 2003, in favor of respondent, Parker W Knight, Jr. The arbitration was conducted before arbitrators designated by the National Association of Securities Dealers (NASD) and conducted pursuant to NASD rules. BAS claims that "the Award is irrational, the arbitrators exceeded their powers, and that the Award is in manifest disregard of the law."

Knight began employment for BAS in July 1999 as a managing director and head of International Syndicated Finance. In 2000, Knight received a guaranteed bonus for 1999. In 2001, he received a discretionary bonus of $1.6 million for 2000. In November 2001, BAS offered Knight a position in London, which he accepted. Knight asserted that he was told that his compensation would be the same as the previous year. Knight arranged to move to London in June 2002. However, in January 2002, effective March 2002, Knight's employment was terminated in connection with a reorganization of BAS. BAS denied that it promised Knight to pay him $1.6 million in incentive compensation for 2000, but instead advised him that his compensation would be $600,000.

Knight commenced an arbitration against BAS before the NASD as arbitrator, on May 29, 2002, asserting that BAS failed to pay him the full amount for his year-end discretionary incentive compensation that was due to him. Knight also sought claim damages against BAS for breach of contract, promissory estoppel, quantum meruit, and attorneys' fees, seeking $1 million in compensation. BAS denied all liability for the $1 million and counterclaimed for $9,014.21, on the basis of unjust enrichment seeking to recover the value of two payroll checks that it claimed were mistakenly issued to Knight following the termination of his employment. Knight has conceded during the arbitration the counterclaim of the $9,014.21 was valid.

The hearings were held on September 8, 9 and 10, 2003 before the NASD Arbitration Panel. Knight testified on his own behalf and two employees testified for BAS. In its award, the panel awarded Knight $680,000 and dismissed the counterclaim and all other requests for relief sought by either party. The award set forth the causes of action claimed by each party and the relief requested, but set forth no reasoning or the underlying basis or the grounds for the award.

BAS now seeks to set aside and vacate the award. Knight opposes vacatur on the ground that there is no basis in law to overturn the decision of the arbitration panel.

Although BAS claims that the arbitrators exceeded their powers, they did not, at least with respect to Knight's claim. They were asked to determine the validity of his claim and they did within the parameters set forth by the parties. Exceeding powers relates to cases where the arbitrators decided matters not submitted to them or awarded more than was sought. Certainly, the award on Knight's claim was within the parameters of the submission.

"Manifest disregard of the law"^[1] and "irrational" are objections to arbitrator's awards often interposed by losing parties to arbitrations. Before considering these claims it is necessary to determine the source of review powers of this court, which are apparently different under federal and New York law. Federal law provisions governing arbitration are found in the Federal Arbitration Act (9 USC § 1 et seq.) (FAA). The FAA applies to arbitrations involving interstate and foreign commerce, such as those between citizens of different states or between citizens of the United States and a foreign country.

In this case, the record is unclear whether this arbitration falls within such jurisdictional requirements. While there seems little dispute that Knight is a citizen of New York State, the citizenship of BAS is never stated. While BAS is said to have its "principal place of business in North Carolina," it also has offices in New York. (BAS petition ¶ 2.) Whether BAS, a limited liability company, is a North Carolina, New York, or even a Delaware LLC is not disclosed by the record.

However, the New York Court of Appeals in Matter of Salvano v Merrill Lynch, Pierce, Fenner & Smith (85 NY2d 173 [1995]) has held that "[u]nder settled law, the arbitration of disputes concerning employment in the securities industries and the enforceability of the arbitration clause" are governed by the FAA. At issue here is not, however, whether the arbitration clause is enforceable (which it is equally under both New York and federal law) but whether, now that the arbitration has been held, this court must adopt a federal standard of review of the award, rather than applying the New York standard.

Because this court finds there may be differences in the scope of the permissible review of an arbitration award under New York and federal law, this fact may be important. Under certain federal decisions, an arbitration may be reviewed to determine whether it was made in "manifest disregard" of law. (Halligan v Piper Jaffray, Inc., 148 F3d 197 [2d Cir 1998].) The New York Court of Appeals has, however, not recognized such grounds and has expressly stated that

"[u]nder CPLR 7511, an award may be vacated only if (1) the rights of a party were prejudiced by corruption, fraud or misconduct in procuring the award, or by the partiality of the arbitrator; (2) the arbitrator exceeded his or her power or failed to make a final and definite award; or (3) the arbitration suffered from an unwaived procedural defect." (Hackett v Milbank, Tweed, Hadley & McCloy, 86 NY2d 146, 154-155 [1995] [emphasis added].)

Even where the arbitrator makes a mistake of fact or law, or disregards the plain words of the parties' agreement, the award is not subject to vacatur "unless the court concludes that it is totally irrational or violative of a strong public policy" and thus in excess of the arbitrator's powers. (Hackett v Milbank, Tweed, Hadley & McCloy, 86 NY2d at 155; see also Maross Constr. v Central N.Y. Regional Transp. Auth., 66 NY2d 341, 346 [1985]; Matter of Silverman [Benmor Coats], 61 NY2d 299, 308 [1984]; Matter of Sprinzen [Nomberg], 46 NY2d 623, 631 [1979]; Garrity v Lyle Stuart, Inc., 40 NY2d 354, 357 [1976].) Thus, although the New York Court of Appeals recognizes "irrationality" as a nonstatutory ground for setting aside an arbitral award under New York law, it does not recognize any independent "manifest disregard" ground. As recently as November 20, 2003, the Court of Appeals reiterated this principal in United Fedn. of Teachers v Board of Educ. (1 NY3d 72 [2003]). In that case, the Court considered public policy grounds for the vacation of an arbitration award, and found such grounds not present in the case. In the course of its decision, however, the Court, in listing the grounds for vacation of a New York arbitration award, again included "irrationality," but not "manifest disregard" of law.

Even in Salvano (supra at 180), the Court of Appeals, after having found that the FAA applied because the arbitration was a dispute "concerning employment in the securities industry and the enforceability of the arbitration clause embodied in petitioners' U-4 Form applications," went on to limit the grounds for its review of the award to those expressly set forth in CPLR article 75.

Several Supreme Court and Appellate Division cases, however, some of which are cited by BAS, seem to support New York's recognition of "manifest disregard" as a basis for the vacation of an arbitral award. The most recent of these cases are: Sawtelle v Waddell & Reed (304 AD2d 103 [1st Dept 2003]), Cohen v Ark Asset Holdings (302 AD2d 209 [1st Dept 2003]), Matter of Bart v Miller (302 AD2d 379 [2d Dept 2003]), Matter of UBS Warburg (Auerbach, Pollack & Richardson) (294 AD2d 245 [1st Dept 2002]), Matter of Spear Leeds & Kellogg v Bullseye Sec. (291 AD2d 255 [1st Dept 2002]), Matter of Stewart Tabori & Chang (Stewart) (282 AD2d 385 [1st Dept 2001]), and Layne Constr. v Stratton Oakmont (228 AD2d 45 [1st Dept 1996]).

Sawtelle (supra), the most recent First Department case cited by BAS, involved an arbitration of a dispute concerning employment in the securities industry. Although the First Department stated that such case was to be decided under the FAA, following Salvano, the Appellate Division's reference to the FAA was also clearly required because the parties were citizens of different states, in which case, the FAA by its terms, expressly applies. The Sawtelle decision (at 107), however, went further and stated that as the Court of Appeals has held, "the arbitration of disputes concerning employment in the securities industry . . . [is] governed by the Federal Arbitration Act (Matter of Salvano v Merrill Lynch, Pierce, Fenner & Smith, 85 NY2d 173, 180), judicial review of this award is governed by the FAA (9 USC § 1 et seq.)" (internal quotation marks omitted). This court finds no support in Salvano (supra) for such conclusion. In Sawtelle, the Appellate Division, following two Federal Second Circuit cases, found that the rules of the FAA, including the federal rule of "manifest disregard" were applicable to the case, and vacated the award of punitive damages on such grounds "as a separate basis for vacating the award." (Id. at 113.)

The remainder of the Appellate Division cases where the concept of manifest disregard is discussed are memorandum or short decisions not particularly enlightening on the issue. In fact, the most recent decision, Cohen v Ark Asset Holdings (supra), a memorandum decision, even cites Hackett in upholding a...