Hunter, Keith Industries, Inc. v. Piper Capital Management Inc.

• Citation: 575 N.W.2d 850
• Decision Date: 17 March 1998
• Docket Number: No. C3-97-1796,C3-97-1796
• Parties: In the Matter of the Arbitration between HUNTER, KEITH INDUSTRIES, INC., Respondent, v. PIPER CAPITAL MANAGEMENT INCORPORATED, et al., Appellants.
• Court: Minnesota Court of Appeals

Page 850

575 N.W.2d 850

In the Matter of the Arbitration between HUNTER, KEITH INDUSTRIES, INC., Respondent, v. PIPER CAPITAL MANAGEMENT INCORPORATED, et al., Appellants.

No. C3-97-1796.

Court of Appeals of Minnesota.

March 17, 1998.

Syllabus by the Court

I. The facts do not establish that the arbitration panel manifestly disregarded the law by awarding punitive damages, and it is therefore unnecessary to decide whether Minnesota should adopt the "manifest disregard doctrine" as a basis for overturning arbitration awards.

II. By agreeing to arbitrate a dispute, parties vest the arbitrator with the authority to determine the proper remedy, and the fact that a court of law would not or could not apply that remedy is not, by itself, grounds for overturning it.

Lewis A. Remele, Jr., Christopher R. Morris, Jeffer Ali, Bassford, Lockhart, Truesdell & Briggs, P.A., Minneapolis, for respondent.

George F. McGunnigle, Lawrence J. Field, Catherine A. McEnroe, Leonard, Street & Deinard, Minneapolis, for appellants.

Considered and decided by LANSING, P.J., and CRIPPEN and KALITOWSKI, JJ.

OPINION

LANSING, Judge.

Piper Capital Management Incorporated and Piper Jaffray, Inc. (Piper), appeal from a judgment confirming an arbitration award of $1,000,000 in punitive damages. The punitive damages were awarded in a National Association of Securities Dealers (NASD) arbitration commenced by Hunter, Keith Industries, Inc. (Hunter, Keith). We reject Piper's argument that the punitive damages were awarded in manifest disregard of the law or in violation of public policy.

FACTS

Hunter, Keith appointed Piper as investment manager for its qualified ERISA profit sharing plan. The plan covered Andrew Hunter, owner and chairman of the board, and Robert Keith, president. The plan was funded solely through contributions from the corporation that were allocated to separate sub-accounts maintained for Hunter and Keith. Hunter and Keith could direct the investment of their accounts to several investment funds managed by Piper. When Hunter, Keith transferred the plan's assets to Piper, each sub-account had a market value of $1,254,679. Piper served as the plan's investment manager from January 1992 until April 1995.

Under the Investment Management Contract, the parties agreed that all controversies "shall be determined by arbitration to the fullest extent provided by law." In July 1995, Hunter, Keith initiated a NASD arbitration action against Piper on behalf of the two participants. The complaint alleged that Piper was a fiduciary under a plan governed by the Employee Retirement Income Security Act (ERISA) and that it breached its fiduciary duties, causing the Hunter, Keith plan to lose hundreds of thousands of dollars. The complaint also alleged breach of contract, fraud, negligence, and violations of state and federal securities laws. Both parties signed submission agreements in which they agreed to arbitrate under the NASD rules and "to abide by and perform any awards" rendered under the agreement. After an eight-day arbitration in the summer of 1996, arbitrators ordered Piper to pay $303,724 in compensatory damages, $170,000 in attorneys' fees, and $1,000,000 in punitive damages "pursuant to the authorities submitted including state law, federal law, and ERISA statues."

After receiving the order, Hunter, Keith sent a letter to NASD requesting clarification of the compensatory damages award. The next day, Piper sent a responsive letter to NASD. Piper's response also asked the panel to clarify the authority for its punitive damages award and argued that ERISA prohibits punitive damages. Hunter, Keith sent a second letter to NASD responding to Piper's letter. Six weeks later, NASD's staff attorney sent a letter confirming the amount of the compensatory damage award but declining to comment on the punitive damage award or any other aspect of the award. Piper paid the compensatory damages and attorneys' fees but refused to pay the punitive damages award.

Hunter, Keith filed a motion to confirm the award in state district court. Piper attempted to remove the state court action to federal court, commenced a separate federal action seeking to vacate the award, and filed a conditional motion to vacate the state court action. On motion by Hunter, Keith, the federal court dismissed the federal court action for lack of federal jurisdiction and remanded the state court action. Hunter, Keith then filed a second motion in state district court to confirm the award, and Piper filed an opposing memorandum. The district court granted Hunter, Keith's motion to confirm the award. Piper appeals that decision.

ISSUES

Did Piper waive the right to appeal the punitive damages award?

Is manifest disregard of the law a basis for overturning an arbitration award in Minnesota?

Should this court exercise its discretion to award attorneys' fees to Hunter, Keith under Minn. R. Civ.App. P. 138?

ANALYSIS

I

Whether Piper waived the right to appeal this arbitration award is a question of law, which we review de novo. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn.1984). Hunter, Keith raises four arguments to support its claim that Piper waived its right to review. First, Hunter, Keith argues that Piper waived all right to judicial review by including an arbitration clause in its standard investment management contract. We find no language in the contract that could be interpreted as a waiver, and imputing waiver because Piper required an arbitration clause in the management contract would contradict the specific grounds for appeal set forth in Minn.Stat. § 572.19, subd. 1 (1996) (listing bases on which court may vacate arbitration award).

Second, Hunter, Keith argues that Piper's appellate challenge is impermissible because Piper failed to move in state court to vacate the award under Minn.Stat. § 572.19. Piper properly moved to vacate the award when the Hunter, Keith action was removed to federal court. In remanding the action to the state district court, the federal court also remanded Piper's pending motion to vacate. Doerr v. Warner, 247 Minn. 98, 105-06, 76 N.W.2d 505, 510 (1956).

Third, Hunter, Keith contends that Piper waived its right to oppose the arbitrators' punitive damages award by failing to make a timely request for correction or modification under Minn.Stat. § 572.16, subd. 1 (1996). We reject this argument because Piper properly moved to vacate the award, and its failure to apply for modification or correction does not preclude this appeal. See Minn.Stat. § 572.18 (1996) ("the court shall confirm an award, unless within the time limits hereinafter imposed grounds are urged for vacating or modifying or correcting the award") (emphasis added.)

Hunter, Keith's final procedural argument is more significant. It is a close question whether Piper waived the ERISA defenses it now asserts by failing to raise them during the arbitration proceeding. Under the NASD Code of Arbitration Procedure (NASD Code), which governed the proceeding, the respondent's answer "shall specify all available defenses and relevant facts thereto that will be relied upon at the hearing[.]" NASD Code 25(b)(1). A respondent who "fails to specify all available defenses and relevant facts" in the answer may "upon objection by a party, in the discretion of arbitrators, be barred from presenting such facts or defenses." Id. at 25(b)(2)ii. Until arbitrators render an award, they have the discretion to reopen the hearings upon application by one of the parties. Id. at 40. Unless applicable law provides otherwise, arbitration awards are not subject to review or appeal. Id. at 41(b).

Piper did not address ERISA's preemption and remedy provisions in its answer to the complaint. Piper argues the panel was aware of these provisions because Hunter, Keith tried the matter "largely as an ERISA case," but we have no transcript of the arbitration that would allow us to determine whether this is an accurate characterization of the proceedings. On this record, whether Piper properly raised its ERISA defense during the arbitration proceeding turns, in large part, on the effect of its post-award letter to NASD's staff attorney.

As a general rule, post-award communications to arbitrators have no effect. Once arbitrators render an award, parties may seek judicial review under the Minnesota Arbitration Act or the Federal Arbitration Act, but they cannot petition the arbitration panel. See id. (arbitration awards are not subject to appeal unless applicable law provides otherwise); see also 9 U.S.C. §§ 10, 11 (1996) (grounds for vacating, modifying or correcting an award under the federal act); Minn.Stat. §§ 572.19, 572.20 (1996) (grounds for vacating, modifying or correcting an award under the Minnesota act).

The post-hearing exchange between Hunter, Keith and Piper was conducted without objection by either party, and each addressed substantive issues on the computation of damages. Hunter, Keith sent the first post-hearing letter to NASD's staff attorney on August 27, 1996, asking NASD to "clarify" its compensatory damage award. In responding to Hunter, Keith's letter on August 28, 1996, Piper explained its position on the compensatory damage award and asked the panel to clarify the authority for its punitive damages award. Piper outlined its position that ERISA prohibits punitive damages and questioned "whether any of the [p]anel's articulated bases can support such an award."

Instead of contesting the procedural effect of Piper's letter, Hunter, Keith wrote a second letter on August 29, 1996, to the NASD staff attorney. Hunter, Keith responded to Piper's August 28 letter on the merits, arguing that federal circuits are split on the issue of punitive damage awards under ERISA. The absence of any procedural objections to the substantive exchange on the calculation of damages incorporates this issue into the proceedings. See Brzowski v. Md. Home...