A.G. Edwards & Sons, Inc. v. McCollough

• Decision Date: 26 June 1992
• Docket Number: No. 91-15839,91-15839
• Citation: 967 F.2d 1401
• Parties: Fed. Sec. L. Rep. P 96,863 A.G. EDWARDS & SONS, INC., a Delaware corporation, Plaintiff-Appellant, v. William F. McCOLLOUGH; Jeanene McCollough, husband and wife, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1401

967 F.2d 1401

Fed. Sec. L. Rep. P 96,863

A.G. EDWARDS & SONS, INC., a Delaware corporation, Plaintiff-Appellant, v. William F. McCOLLOUGH; Jeanene McCollough, husband and wife, Defendants-Appellees.

No. 91-15839.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 9, 1992.

Decided June 26, 1992.

Charles W. Herf, Quarles & Brady & Fannin, Phoenix, Ariz., for plaintiff-appellant.

Brian K. Stanley, and Frank Lewis, Langerman, Begam, Lewis & Marks, Phoenix, Ariz., for defendants-appellees.

Appeal from the United States District Court for the District of Arizona.

Before: BROWNING, PREGERSON, and RYMER, Circuit Judges.

PER CURIAM:

A.G. Edwards & Sons appeals the district court's order vacating an arbitration award against the McColloughs. 764 F.Supp. 1365. We reverse and remand.

I

The McColloughs, investors, agreed to arbitration in lieu of a federal court suit to resolve a dispute with their brokers, Edwards & Sons, as to the cause of a considerable loss in their account. The McColloughs then filed with the New York Stock Exchange Director of Arbitration, their complaint alleging in conclusory fashion violation of federal and Arizona RICO, securities, and Consumer Protection statutes. Edwards & Sons answered, raising fourteen affirmative defenses, two of which the district court below found facially meritless. The McColloughs responded by filing a brief which sought to rebut these defenses, and specifically argued that the two defenses in question were without merit. At the close of arbitration, the panel found in favor of Edwards & Sons and awarded the firm $310,850.12. The panel did not state the reasons for its award.

The brokers filed an Application to Confirm Arbitrator's Award in federal court in Arizona. In response, the McColloughs moved to vacate the award or to remand for a statement of reasons.

The district court rejected the McColloughs' argument that the arbitrators were guilty of misconduct in refusing to hear material evidence. It also rejected their argument that the award was procured through fraud because Edwards & Sons made knowing misstatements of the law by raising the meritless defenses. The court noted that federal courts must be slow to vacate an arbitral award on the grounds of fraud and that fraud is only a viable ground for vacatur when it is undiscoverable during the proceeding. The Court held the McColloughs failed to make out fraud because all the alleged misstatements had been pointed out to the arbitrators. The court also rejected the McColloughs' motion to remand for a statement of reasons, finding it well settled that arbitrators are not required to state their reasons.

The court did, however, accept the McColloughs' third argument for vacatur--that the award was procured through "undue means" within the meaning of 9 U.S.C. § 10(a)(1). The McColloughs argued that two of the defenses put forth by Edwards & Sons were so facially meritless that to offer them was to engage in "undue means." The court agreed, finding that such behavior constituted grounds for vacatur. The court then remanded the case to a different arbitration panel.

II

As the district court noted, federal court review of arbitration awards is extremely limited. "It is generally held that an arbitration award will not be set aside unless it evidences a 'manifest disregard for law.' " Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir.1991) (citing "Steelworkers Trilogy"). The courts should not reverse even in the face of erroneous interpretations of the law. Id.

The district court did not state whether (1) in the face of a lack of findings, it would presume the arbitrators had been persuaded by the meritless defenses; or (2) the mere act of putting forth the arguments, whether they were relied upon or not, constituted "undue means." In either case, the court's decision is in conflict with the law of this circuit.

If the district court employed a presumption that the meritless defenses had an impact on the arbitrator's decision, its holding is in obvious tension with the applicable case law. As the district court recognized, arbitrators are not required to state the reasons for their decisions. United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598, 80 S.Ct. 1358, 1361, 4 L.Ed.2d 1424 (1960); Kaiser Cement Corp. v. Fischbach and Moore, Inc., 793 F.2d 1100, 1102 n. 6 (9th Cir.1986). The rule that arbitrators need not state their reasons presumes the arbitrators took a permissible route to the award where one exists. See Sargent v. Paine Webber Jackson & Curtis, Inc., 882 F.2d 529, 532 (D.C.Cir.1989). Under the district court's rationale in this case, courts would be free to vacate an award in any case in which the winning side had raised even one meritless defense and the arbitrators had not specifically identified the reasons for their award. Panels of arbitrators wishing to avoid relitigation would be forced to state the reasons for their decisions in direct contradiction of the universally accepted rule that a statement of reasons is not required and arbitrators are presumed to have relied on permissible grounds. See United Steelworkers, 363 U.S. at 598, 80 S.Ct. at 1361.

If the district court meant to hold that no reliance by the arbitrators on the meritless arguments need be demonstrated because the mere offering of the defenses itself constitutes "undue means," its holding conflicts with the language of § 10 and cases interpreting it. The statute allows for vacation of an award "procured by corruption, fraud, or undue means." 9 U.S.C. § 10(a)(1). Thus the statute requires a showing that the undue means caused the award to be given. Cf. Forsythe Int'l, S.A. v. Gibbs Oil Co. of Texas, 915 F.2d 1017, 1022 (5th Cir.1990) (the statutory language requires a nexus between the alleged fraud and the basis for the panel's decision).

Nor do we agree with the district court that mere sloppy or overzealous lawyering constitutes "undue means." ¹ Although the term has not been defined in any federal case of which we are aware, it clearly connotes behavior that is immoral if not illegal. See Black's Law Dictionary 1697 (Rev. 4th ed. 1968) ("Undue" means "more than necessary; not proper; illegal," and "denotes something wrong, according to...