Barbier v. Shearson Lehman Hutton Inc.

• Decision Date: 31 October 1991
• Docket Number: No. 1420,D,1420
• Citation: 948 F.2d 117
• Parties: Fed. Sec. L. Rep. P 96,290 In the Matter of New York Stock Exchange Arbitration between Marco BARBIER; Silvana Barbier and Stefania Barbier, Petitioners-Appellees, v. SHEARSON LEHMAN HUTTON INC., Successor-in-interest to Shearson Lehman Brothers, Inc.; and Roger E. Bendelac, Respondents, Roger E. Bendelac, Respondent-Appellant. ocket 91-7070.
• Court: U.S. Court of Appeals — Second Circuit

Page 117

948 F.2d 117

Fed. Sec. L. Rep. P 96,290

In the Matter of New York Stock Exchange Arbitration between Marco BARBIER; Silvana Barbier and Stefania Barbier, Petitioners-Appellees, v. SHEARSON LEHMAN HUTTON INC., Successor-in-interest to Shearson Lehman Brothers, Inc.; and Roger E Bendelac, Respondents Roger E. Bendelac, Respondent-Appellant.

No. 1420, Docket 91-7070.

United States Court of Appeals Second Circuit.

Argued May 10, 1991.

Decided Oct. 31, 1991.

Roger E. Bendelac, New York City, respondent-appellant, pro se.

Daniel J. Kornstein, New York City (Wayne O. Alpern, Kornstein Veisz & Wexler, New York City, of counsel), for petitioners-appellees.

William J. Fitzpatrick, New York City (Gerard J. Quinn, New York City, of counsel), submitted a brief for amicus curiae the Sec. Industry Ass'n, Inc.

Stuart C. Goldberg, Danbury, Conn. (Seth E. Lipner, Danbury, Conn., of counsel), submitted a brief for amicus curiae the Public Investors Arbitration Bar Ass'n.

Before PRATT, MINER and ALTIMARI, Circuit Judges.

MINER, Circuit Judge:

Respondent-appellant Roger Bendelac appeals from a judgment entered in the United States District Court for the Southern District of New York (Ward, J.) confirming a New York Stock Exchange arbitration award of compensatory and punitive damages in the total amount of $155,645.00 in favor of petitioners-appellees Marco Barbier, Silvana Barbier and Stefania Barbier (collectively, the "Barbiers"). In their complaint, the Barbiers alleged claims of conversion, breach of fiduciary duty, breach of contract, negligence and/or recklessness and assault against Bendelac and his former employer, Shearson Lehman Hutton, Inc. ("Shearson").

On appeal, Bendelac contends that the district court erred by denying his motion to vacate the arbitral award in its entirety. As grounds for vacatur, Bendelac maintains that the arbitration award is based partly on issues that were withdrawn from arbitral consideration and that the arbitration panel (the "Panel") failed to consider all the issues presented to it. He also argues that the court incorrectly applied the Federal Arbitration Act ("FAA"), see 9 U.S.C. §§ 1-16 (1988), rather than New York's arbitration statute, see N.Y.Civ.Prac.L. & R. §§ 7501-7511 (McKinney 1980 & Supp. 1991). Bendelac asserts that the FAA does not apply in this case because jurisdiction was predicated on the diversity of the parties and, on that basis, the Erie doctrine requires the court to apply New York's arbitration statute. He further argues that, under the Erie doctrine, the court was required to apply settled New York law, which prohibits arbitrators from awarding punitive damages, see Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.2d 831 (1976), and therefore it was error to confirm the Panel's award of punitive damages. For the reasons that follow, we affirm the portion of the judgment confirming the compensatory damages award. We reverse the portion of the judgment confirming the arbitral award of punitive damages, although for reasons other than those asserted by Bendelac.

BACKGROUND

On January 7, 1986, the Barbiers entered into a written agreement ("Agreement") with Shearson and opened an investment account for the purchase and sale of securities. Shearson assigned Bendelac as the broker to service the Barbiers' investment account. Paragraph 13 of the Agreement contained an arbitration clause, which provided in pertinent part:

This agreement shall ... be governed by the laws of the State of New York. Unless unenforceable due to federal or state law, any controversy arising out of or relating to [the Barbiers'] accounts, to transactions with [Shearson, its] officers, directors, agents and/or employees for [the Barbiers] or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. or the Boards of Directors of the New York Stock Exchange, Inc. as [the Barbiers] may elect.... Judgement upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

On October 19, 1988, after learning that the funds in their investment account had been nearly depleted, the Barbiers filed a Statement of Claim with the Arbitration Tribunal of the New York Stock Exchange, Inc. ("NYSE"), alleging that Bendelac and Shearson engaged in commodities trading for their account without their knowledge or authorization, resulting in the loss of their investment.

The Barbiers asserted claims of conversion, breach of fiduciary duty, breach of contract, negligence and/or recklessness, and assault. The assault claim, which was predicated on an alleged threat by Shearson to have Marco Barbier forcibly removed from its offices when he showed up to discuss the unauthorized trading claims, was withdrawn during the course of the arbitration proceedings. The Barbiers contended that because their account was non-discretionary, Shearson could trade for the account only after obtaining the Barbiers' express authorization. They asserted that Bendelac and Shearson had forged several documents conferring on Shearson discretionary authority to trade in commodities and commodities options. In their Statement of Claim, the Barbiers demanded an arbitral award for compensatory, consequential and punitive damages. Bendelac and Shearson denied the allegations and maintained that no Shearson employee had forged the Barbiers' signature on any documents.

After several days of hearings, the Panel filed its unanimous award in favor of the Barbiers on May 18, 1990. The arbitrators awarded the total sum of $155,645.00, of which $25,000 represented punitive damages. Of the total sum, the Panel apportioned $31,129.00 to Shearson and $124,516.00 to Bendelac.

On June 12, 1990, pursuant to paragraph 13 of the Agreement, the Barbiers filed a petition to confirm the arbitral award in the district court. Bendelac filed a motion to vacate the award in its entirety, arguing that the Panel exceeded its powers or imperfectly executed its powers by failing to render an award on all of the submitted issues, by basing its award on a claim that had been withdrawn, and by awarding punitive damages. Shearson challenged only that portion of the award granting punitive damages.

On December 3, 1990, the district court granted the Barbiers' petition to confirm the arbitral award and denied the motions of Bendelac and Shearson to vacate the award. Barbier v. Shearson Lehman Hutton, Inc., 752 F.Supp. 151, 164 (S.D.N.Y.1990). Initially, the district court found as wholly without merit Bendelac's contention that, since federal court jurisdiction was predicated on diversity of citizenship, the New York arbitration statute applies rather than the FAA. 752 F.Supp. at 154.

Next, citing Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Jr. Univ., 489 U.S. 468, 477, 109 S.Ct. 1248, 1254-55, 103 L.Ed.2d 488 (1989), the district court recognized that the FAA does not preempt the application of all state laws, especially where the parties have provided in their agreement for the application of state law. 752 F.Supp. at 155. The court, however, rejected the contention that it was required to apply Garrity on account of the choice-of-law clause in the Agreement.

Construing the arbitration clause, the court concluded that the parties did not intend for their arbitration proceeding to be governed by Garrity. First the court found that the choice-of-law provision was ambiguous because it was susceptible to two interpretations: On the one hand, it might be read to require only the application of New York substantive law and on the other hand it might be construed to require the application of New York arbitration law as well as New York substantive law. 752 F.Supp. at 156. Given the perceived ambiguity in the choice-of-law clause, the court considered extrinsic evidence of the parties' intent. "[T]he [c]ourt [then concluded] that the parties did not intend, through the inclusion of a choice-of-law clause in the Agreement, that New York arbitration law be applied to disputes under the Agreement." 752 F.Supp. at 157. To arrive at that conclusion, the court characterized Garrity as arbitration law. Finally, finding that the arbitrators were authorized to award punitive damages under paragraph 13 of the Agreement, which provides that "any controversy arising out of or relating to [the] accounts ... shall be settled by arbitration," the district court confirmed the arbitral award. 752 F.Supp. at 159-61, 164. Only Bendelac filed a notice of appeal.

DISCUSSION

I. Compensatory Award

Bendelac contends that the FAA does not apply in this case. He acknowledges that there is a basis of federal jurisdiction, namely diversity of citizenship, but maintains that the Erie doctrine mandates that the New York arbitration statute be invoked when federal jurisdiction is predicated on diversity. This is a strange contention because diversity jurisdiction serves as a basis for invoking the provisions of the FAA, not as a ground for invoking the application of a state arbitration statute. See Smiga v. Dean Witter Reynolds, Inc., 766 F.2d 698, 703 (2d Cir.1985), cert. denied, 475 U.S. 1067, 106 S.Ct. 1381, 89 L.Ed.2d 607 (1986); Ballantine Books, Inc. v. Capital Distributing Co., 302 F.2d 17, 19 (2d Cir.1962); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 408-09 (2d Cir.1959). The FAA applies when there is federal subject matter jurisdiction, i.e., diversity jurisdiction, see Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983), and when the contract calling for arbitration "evidenc[es] a transaction involving interstate commerce." 9 U.S.C. § 2. That the first requirement is met here is not called into question. Nor could Bendelac dispute the interstate nature of the transactions...