Fahnestock & Co., Inc. v. Waltman

• Citation: 935 F.2d 512
• Decision Date: 10 June 1991
• Docket Number: Nos. 927,D,928,s. 927
• Parties: , Fed. Sec. L. Rep. P 96,028 In the Matter of the New York Stock Exchange Arbitration between, FAHNESTOCK & CO., INC., Petitioner-Appellant, Cross-Appellee, v. Joseph J. WALTMAN, Respondent-Appellee, Cross-Appellant. ockets 90-7867, 90-7869.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 512

935 F.2d 512

59 USLW 2772, Fed. Sec. L. Rep. P 96,028

In the Matter of the New York Stock Exchange Arbitration

between, FAHNESTOCK & CO., INC., Petitioner-Appellant, Cross-Appellee, v. Joseph J. WALTMAN, Respondent-Appellee, Cross-Appellant.

Nos. 927, 928, Dockets 90-7867, 90-7869.

United States Court of Appeals, Second Circuit.

Argued Jan. 24, 1991.

Decided June 10, 1991.

Lee D. Unterman, New York City (Patricia L. Moore, Broudy & Jacobson, New York City, of counsel), for petitioner-appellant, cross-appellee.

Robert Scandone, Philadelphia, Pa. (Mark J. Astarita, Gusrae, Kaplan & Bruno, New York City, Jane R. Goldberg, of counsel), for respondent-appellee, cross-appellant.

Paul Windels III, New York City (Perry & Windels, New York City, William J. Fitzpatrick, Gerard J. Quinn, New York City, of counsel), submitted a brief for amicus curiae the Securities Industry Ass'n, Inc.

Before VAN GRAAFEILAND, MINER and MAHONEY, Circuit Judges.

MINER, Circuit Judge:

Petitioner-appellant, Fahnestock & Co., Inc. ("Fahnestock") appeals from a judgment entered in the United States District Court for the Southern District of New York (Leisure, J.) confirming the compensatory damages portion of an arbitration award in favor of its former employee, Joseph J. Waltman. Waltman cross-appeals from the same judgment insofar as it vacates the punitive damages portion of the arbitration award.

On appeal, Fahnestock contends that the district court erred by denying its petition to vacate the entire defamation award because the members of the arbitration panel ("Arbitrators") exceeded their authority and manifestly disregarded the applicable law. Fahnestock argues that its filing of an amended Form U-5, a termination notice form that the National Association of Securities Dealers ("NASD") requires stock brokerage firms to file when they dismiss an employee, was absolutely privileged and could not serve as a basis for an award for defamation. On cross-appeal, Waltman argues that the court erred in vacating the Arbitrators' award for punitive damages because federal substantive law, as opposed to the New York law applied by the district court, permits such an award in arbitration proceedings brought pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. Secs. 1-16 (1988). For the reasons that follow, we affirm the judgment of the district court.

BACKGROUND

The arbitration proceeding subject of this action arose as a result of the events surrounding the discharge of Waltman from the employ of Fahnestock. Waltman was hired on March 16, 1982 as a "registered representative to head Fahnestock's Retirement Trust Division" and "to manage and build Fahnestock's insurance products business." During the course of his employment, in addition to overseeing Fahnestock's Retirement Division, Waltman acted as an insurance sub-licensee for Fahnestock. In addition, he established a general insurance agency in Pennsylvania for the purpose of marketing insurance and annuity products for Fahnestock in Pennsylvania and other states. Waltman was discharged on December 12, 1988 when Fahnestock closed down its Retirement Trust Division.

When Waltman was terminated, Fahnestock filed a Form U-5 termination notice with the NASD, indicating that the discharge was occasioned by "business consolidation." When Fahnestock later was unable to locate some insurance files that it believed were maintained by Waltman, it contacted Waltman and requested that he return the files. Waltman refused to return the files, claiming that they belonged to his general insurance agency. Waltman explained that he would turn over the files only if Fahnestock obtained a release and indemnification from each registered agent named in the files.

Instead of complying with Waltman's request, Fahnestock filed a Statement of Claim with the Director of Arbitration of the New York Stock Exchange ("NYSE"), requesting the following relief: return of the original files, damages and costs, and other expenses. Fahnestock then filed an amended Form U-5. On the amended form, Fahnestock changed its previous answer in response to the question about whether the employee was under "internal review for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct," from a "NO" to a "YES."

Waltman filed an answer in the NYSE arbitration, denying the allegations that he wrongfully took Fahnestock's property. He also filed a counterclaim, in which he alleged that Fahnestock and three of its officers, the chairman of the board, the president, and the general counsel, defamed him by filing the amended Form U-5.

During the course of eight hearings, the Arbitrators heard testimony concerning the chairman's threats to arrest Waltman for his failure to return the files, the chairman's instruction to refile the Form U-5 "in such a way as to indicate that [Waltman] had been fired for cause and noting that he had stolen property from Fahnestock," and the threats made to Waltman's current employer in an attempt to pressure Waltman into abandoning his defamation action. The Arbitrators awarded Waltman $56,000 in compensatory damages for wrongful discharge, $14,700 in legal fees, $100,000 for defamation and $100,000 in punitive damages. Liability was imposed on Fahnestock alone, and the claims against the individual officers were dismissed.

Waltman filed a petition to confirm the arbitral award under NYSE Arbitration rule 628(a) in the Eastern District of Pennsylvania. On March 15, 1990, Fahnestock filed a petition in the Southern District of New York to vacate the arbitral award under the Federal Arbitration Act, 9 U.S.C. Sec. 10(d), claiming that the Arbitrators exceeded their authority by granting an award for defamation and by awarding punitive damages. No other challenges to the award were made. Federal jurisdiction was based on the diversity of the parties, as Fahnestock's principal place of business was New York and Waltman resided in Pennsylvania. The Eastern District of Pennsylvania court stayed the petition to confirm the arbitral award pending the outcome of the New York action to vacate it.

On August 22, 1990, the district court denied Fahnestock's petition to vacate the compensatory damages portion of the arbitral award for defamation, but granted its petition to vacate the punitive damages portion of the award. The court rejected Fahnestock's claim that statements made in the amended Form U-5 were absolutely privileged. Instead, it found only a qualified privilege, which could be overcome upon a showing of malice or lack of probable cause for the statement. Holding that a finding of malice or probable cause was a factual matter and, as such, could be reviewed by the courts only on a limited basis, the court found that the Arbitrators did not exceed their powers in rendering the compensatory defamation award.

With respect to the punitive damages portion of the arbitral award, the district court, relying on Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.2d 831 (1976), held that the Arbitrators were prohibited from awarding punitive damages. In response to Fahnestock's contention that federal substantive law governs arbitrations conducted pursuant to the Federal Arbitration Act, the court held that "the state substantive law as set forth in Garrity v. Lyle Stuart, Inc. regarding the inability of arbitrators to award punitive damages, is not in direct conflict with any express provision of the Federal Arbitration Act," and therefore the application of Garrity would not violate the supremacy clause of the United States Constitution.

DISCUSSION

I. Compensatory Award

An arbitration award may be vacated "[w]here the arbitrators exceeded their powers," 9 U.S.C. Sec. 10(d), or where the arbitrators acted in "manifest disregard of the law." Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche Int'l, Ltd., 888 F.2d 260, 265 (2d Cir.1989); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir.1986); Siegel v. Titan Indus. Corp., 779 F.2d 891, 892 (2d Cir.1985) (per curiam). Fahnestock asserts that the Arbitrators exceeded their powers and manifestly disregarded the law in granting an award for defamation based on its filing of the amended Form U-5. Fahnestock argues that, because it was required by law to file the form, the filing was subject to an absolute privilege. Therefore, it urges that the filing of the Form U-5 could not serve as a basis for an award for defamation. Fahnestock's arguments are without merit.

We have consistently accorded the narrowest reading to section 10(d), "especially when it 'has been invoked in the context of the arbitrators' alleged failure to correctly decide a question which all concede to have been properly submitted in the first instance.' " Synergy Gas Co. v. Sasso, 853 F.2d 59, 63 (2d Cir.) (citation omitted), cert. denied, 488 U.S. 994, 109 S.Ct. 559, 102 L.Ed.2d 585 (1988). Consequently, we have recognized that if arbitrators "rule[ ] on issues not presented to [them] by the parties, [they have] exceeded [their] authority and the award must be vacated." Dighello v. Busconi, 673 F.Supp. 85, 87 (D.Conn.1987), aff'd mem., 849 F.2d 1467 (2d Cir.1988); see Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 703 (2d Cir.1978). Here, it is uncontested that the ruling of the Arbitrators was confined to the issues presented by the parties. Moreover, we have recognized that defamation claims based on statements in a Form U-5 are arbitrable.

See Fleck v. E.F. Hutton Group, Inc., 891 F.2d 1047, 1049, 1053 (2d Cir.1989). Therefore, any argument that it is beyond the power of arbitrators to decide these types of claims is contrary to the law of this circuit.

Nor are we persuaded that the Arbitrators manifestly disregarded the law in awarding Waltman damages for defamation. Judicial inquiry under the manifest disregard...