Barnes v. Logan
| Decision Date | 20 August 1997 |
| Docket Number | No. 96-16299,96-16299 |
| Citation | 122 F.3d 820,1997 WL 472075 |
| Parties | 97 Cal. Daily Op. Serv. 6615, 97 Daily Journal D.A.R. 10,799 Milton BARNES, Petitioner-Appellant, v. Martin LOGAN, Koren Logan, Trustees for the Logan Inter Vivos Trust, Respondents-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Frank Lewis, Begam, Lewis, Marks & Wolfe, Phoenix, AZ, for petitioner-appellant.
Craig M. Hughes, Zelle & Larson, San Francisco, CA, for respondents-appellees.
Appeal from the United States District Court for the Northern District of California; Marilyn H. Patel, District Judge, Presiding. D.C. No. CV-96-00957-MHP.
Before: HUG, Chief Judge, and FARRIS and TASHIMA, Circuit Judges.
This is an appeal from a judgment of the district court confirming an arbitration award under the Federal Arbitration Act, 9 U.S.C. §§ 9, 10. The district court had jurisdiction under 28 U.S.C. § 1332. 1 We have jurisdiction under 28 U.S.C. § 1291, and we affirm.
Respondents-appellees Martin and Koren Logan, husband and wife, and trustees of the Logan Revocable Inter Vivos Trust (collectively, Logan), were long-time customers of petitioner-appellant Milton Barnes (Barnes), a registered securities representative. Logan had followed Barnes from two prior brokerage houses to John G. Kinnard and Company, Inc. (Kinnard & Co.)
Logan, claiming that his account at Kinnard & Co. had been mismanaged and had declined in value from $464,000 to $269,000 in nine months, during which period Barnes had earned $123,000 in commissions, instituted an arbitration proceeding against Barnes, Kinnard & Co. and Scott R. Grady, the Kinnard & Co. Branch Manager in Phoenix. At issue in the arbitration were Logan's investment objectives, the extent of his "sophistication," how Barnes managed the account, and related issues (such as asserted misrepresentations by Barnes and whether Barnes had engaged in churning the account).
Resolving the factual disputes in Logan's favor, a panel of arbitrators (arbitrators), appointed under the rules of the National Association of Securities Dealers (NASD), awarded Logan $261,561 in compensatory damages, plus $27,463 in pre-award interest. This award was made jointly and severally against Barnes, Kinnard & Co. and Grady. They also awarded Logan $500,000 in punitive damages against Kinnard & Co. and Grady, and $250,000 in punitive damages against Barnes. Barnes petitioned the district court to vacate the award against him, i.e., the joint and several award of $261,561 (plus interest) in compensatory damages and the separate award against him of $250,000 in punitive damages. 2 The district court denied Barnes' petition to vacate the arbitration award and granted Logan's motion to confirm the award. Barnes timely appeals.
Appellate courts review the confirmation or vacation of an arbitration award like "any other district court decision ... accepting findings of fact that are not 'clearly erroneous' but deciding questions of law de novo." First Options, Inc. v. Kaplan, 514 U.S. 938, 947, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995) (citation omitted); Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir.), cert. dismissed, --- U.S. ----, 117 S.Ct. 30, 135 L.Ed.2d 1123 (1996). However, judicial review of an arbitrator's decision "is both limited and highly deferential." Sheet Metal Workers' Int'l Ass'n v. Madison Indus., Inc., 84 F.3d 1186, 1190 (9th Cir.1996). An award will not be set aside unless it manifests a complete disregard of the law. Id. Thus, an award must be confirmed if the arbitrators even arguably construed or applied the contract and acted within the scope of their authority. United Food & Commercial Workers Int'l Union v. Foster Poultry Farms, 74 F.3d 169, 173 (9th Cir.1995). We may affirm the judgment of the district court on any ground fairly supported by the record. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989).
The Customer Agreement between Logan and Kinnard & Co. provided in its paragraph 14, Choice of Laws:
This agreement shall be deemed to have been made in the State of Minnesota and shall be construed, and the rights and liabilities of the parties determined, in accordance with the laws of the State of Minnesota.
Barnes contends that the arbitrators erred in awarding punitive damages because (1) the agreement is governed by Minnesota law, and (2) punitive damages are not permitted under Minnesota law where the only injury is economic.
In Volt Info. Sciences, Inc. v. Board of Trustees of the Leland Stanford Jr. Univ., 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), the Court held that the parties to an arbitration agreement could agree to which state's law governed, even where the law chosen differed from the Federal Arbitration Act. Id. at 479, 109 S.Ct. at 1256. This principle was somewhat refined in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). There the Client's Agreement contained an arbitration clause and a choice-of-law provision. The latter specified that the agreement was governed by New York law. Id. at 54-56, 115 S.Ct. at 1215. New York decisional law held that only judicial tribunals, and not arbitrators, were empowered to award punitive damages. 3 Id. The Court held that application of that caselaw was inconsistent with the Federal Arbitration Act and construed the choice-of-law provision, as follows:
We think the best way to harmonize the choice-of-law provision with the arbitration provision is to read "the laws of the State of New York" to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.
Id. at 63-64, 115 S.Ct. at 1219.
Both sides claim to find support for their respective positions in Mastrobuono. Barnes contends that the substantive law of Minnesota governs the availability of punitive damages and, therefore, under Mastrobuono, we must look to the Minnesota decisional law to determine if punitive damages were appropriately awarded. Logan contends that Mastrobuono stands for the proposition that because the parties chose to abide by the NASD rules of arbitration, and the NASD rules allow arbitrators to award punitive damages, punitive damages were appropriately awarded in this case. The Minnesota caselaw at issue, unlike the New York case involved in Mastrobuono, is part of the substantive law of Minnesota--it is not a law that limits arbitrators or applies only to arbitration proceedings. It addresses the kinds of injuries for which punitive damages can be awarded.
In this respect, this case is similar to Gateway Tech., Inc. v. MCI Telecomm. Corp., 64 F.3d 993 (5th Cir.1995). Gateway involved an arbitration in which the arbitrator awarded $2 million in punitive damages. However, applying the holding of Mastrobuono, the court held that because punitive damages were available under applicable state law only for torts, and that case involved only a breach of contract, the arbitrator's award of punitive damages was beyond his authority. Id. at 999 (also collecting cases), 1001. This case is like Gateway and unlike Mastrobuono in that the law on punitive damages, discussed below, is the substantive law of Minnesota.
The arbitrators expressly in this case awarded punitive damages "pursuant to Section 3294 of the California Civil Code and pursuant to Mastrobuono." Thus, they acted beyond their authority and the applicable law in awarding punitive damages under California law, because the parties clearly had chosen Minnesota law as the governing law. However, as we demonstrate below, this error was harmless.
The Minnesota Supreme Court has held, at least in products liability cases, that punitive damages are recoverable only in cases of personal injury and not for economic injury.
[T]he school district here only suffered property damage. The remedy of punitive damages concerns the "vital state interest of protecting persons against personal injury." We believe ... that denying punitive damages where a plaintiff only suffers property damage reflects the greater importance society places on protecting people.
Independent Sch. Dist. No. 622 v. Keene Corp., 511 N.W.2d 728, 732 (Minn.1994) (citation omitted) (Keene). Keene has been broadly interpreted as barring punitive damages in all cases not involving personal injury. Soucek v. Banham, 524 N.W.2d 478, 480 (Minn.Ct.App.1994). However, Soucek, in turn, has been limited by what seems to be a more sensible interpretation of Keene. The latest expression from a Minnesota appellate court limits Keene to products liability actions and permits the award of punitive damages for the deliberate disregard of rights, including for fraud. Molenaar v. United Cattle Co., 553 N.W.2d 424, 428 (Minn.Ct.App.1996).
Barnes contends that the arbitrators' decision should be vacated because they failed properly to apply Minnesota law. This contention is based on Barnes' reading of Soucek that, under Keene, punitive damages cannot be awarded in any case that does not involve personal injury. In his reply brief, he contends that Molenaar, which was not decided until after the arbitration was completed, represents a change in the law. On this basis, Barnes suggests that the arbitrators should have followed Minnesota law as it existed at the time of the arbitration.
On the other hand, Logan contends that Minnesota permitted punitive damages to be recovered for fraud well before Molenaar, citing Jensen v. Peterson, 264 N.W.2d 139, 144 (Minn.1978). Logan is correct, at least in the sense that the Minnesota Supreme Court has continued to approve the award of...
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