Kanuth v. Prescott, Ball & Turben, Inc.

• Decision Date: 13 December 1991
• Docket Number: No. 90-7182,90-7182
• Citation: 292 U.S. App. D.C. 319,949 F.2d 1175
• Parties: , Fed. Sec. L. Rep. P 86,411, Fed. Sec. L. Rep. P 96,411 Robert C. KANUTH, Jr., Appellee, v. PRESCOTT, BALL & TURBEN, INC., Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1175

949 F.2d 1175

292 U.S.App.D.C. 319, Fed. Sec. L. Rep. P 86,411,

Fed. Sec. L. Rep. P 96,411

Robert C. KANUTH, Jr., Appellee, v. PRESCOTT, BALL & TURBEN, INC., Appellant.

No. 90-7182.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 22, 1991.

Decided Dec. 13, 1991.

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

Joan M. Hall, with whom J. Kevin McCall, Sidney I. Schenkier and Jeffrey T Shaw, Chicago, Ill., were on the brief, for appellant.

Thomas A. Gottschalk, with whom John G. Froemming, Washington, D.C., was on the brief, for appellee.

Before BRENNAN, Associate Justice (Retired), ^* WALD and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

Appellant Prescott, Ball & Turben, Inc. ("PBT") appeals from a decision of the district court granting the motion of appellee Robert C. Kanuth, Jr. ("Kanuth") to confirm an arbitral award of $38,233,079 and denying PBT's motion to vacate or modify that award. Appellant has made two arguments on appeal: First, that the district court erred in confirming the award because the arbitral panel ("panel") ignored an unambiguous provision of the employment agreement which had the result of improperly increasing the total damage award by over $12 million; and, second, that the district court erred in confirming the award, because the panel manifestly disregarded applicable law in failing to take into account the actual performance of Kanuth's company when accepting the expert's projection of future revenues.

Because we believe that the district court was correct in holding that the panel did not ignore the plain and unambiguous meaning of the governing contract and that it did not manifestly disregard applicable law when reaching its decision on the proper award, we affirm.

I. BACKGROUND

Kanuth was the founder, chief executive officer, and principal shareholder of Cranston Corporation ("Cranston"). Cranston owned all outstanding shares of Cranston Securities, Inc., a firm engaged principally in the business of underwriting tax-exempt municipal bonds. Cranston Securities, Inc. was extremely successful, earning almost $8 million in 1986 alone. In September 1987, Kanuth agreed to sell Cranston to PBT, a division of Kemper Securities Group, Inc., and the parties entered into a Stock Purchase Agreement and an Employment Agreement. PBT purchased Cranston's shares in Cranston Securities, Inc. for approximately $11.3 million, and it retained Kanuth as head of Cranston/Prescott, the newly-organized finance division of PBT.

The Employment Agreement was executed on September 4, 1987. Kanuth describes the contract as an "earnout" agreement according to which Kanuth would be paid during an initial five-year period from future earnings of Cranston/Prescott in order to compensate Kanuth for the remainder of the purchase price of Cranston Securities, Inc. Although PBT does not describe the agreement in these terms, there is no dispute that the Employment Agreement provided that Kanuth would receive not only a salary and bonus, but that he would also retain complete control over the distribution of an "incentive compensation pool." ¹ This pool was to be funded from any net pretax earnings generated by Cranston/Prescott. During the initial five-year period, the first $2 million of net pretax earnings in each year would go to PBT, and eighty percent of any remaining revenues would flow into Kanuth's incentive compensation pool. ²

The "net pretax earnings" for any given year were to be determined in accordance with the requirements found in Exhibit A to the Employment Agreement. ³ After first listing what should be included in net pretax earnings, Exhibit A then provided that certain expenses should be deducted. Of particular relevance for this appeal is the following: With respect to the Initial Period only, deductible expenses were to include "all bonuses or other incentive compensation paid to or for the benefit of Business employees." Employment Agreement, Exhibit A, p 2(d) ("p 2(d)"). The district court concluded that "[p]aragraph 2(d) of the employment contract clearly requires that bonus and incentive compensation payments be included in Deductible Expenses." Kanuth v. Prescott, Ball & Turben, Inc., No. 88-01416, Memorandum Opinion at 11, 1990 WL 179601 (D.D.C. Nov. 2, 1990) ("Mem.Op.").

Several months after the acquisition of Cranston by PBT, disputes arose between the parties. According to Kanuth, PBT's parent company had fired PBT's chairman and installed new managers for PBT that were unhappy with the agreement between Kanuth and the previous PBT management. According to PBT, Cranston/Prescott had been unprofitable, and PBT was concerned about Kanuth's managerial autonomy. Kanuth filed suit in federal district court on May 24, 1988, alleging breach of the Employment Agreement, breach of the implied covenant of good faith and fair dealing, and fraud.

On June 13, 1988, PBT filed an arbitration claim with the National Association of Securities Dealers, Inc., alleging that Kanuth had engaged in various forms of misconduct, both before and after the acquisition. PBT fired Kanuth one week later, on June 21, 1988. Finally, PBT moved to compel arbitration pursuant to a standard arbitration clause, and the district court granted the motion on August 8, 1988. See Kanuth v. Prescott, Ball & Turben, Inc., No. 88-01416, Order, 1988 WL 90392 (D.D.C. Aug. 8, 1988).

Between May 23, 1989 and April 20, 1990, a panel of three arbitrators heard testimony from 40 witnesses, taken over 22 days. The transcript of the proceedings comprises nearly 7,000 pages, and the panel examined approximately 1,200 exhibits. The panel heard closing arguments and considered post-trial briefs submitted by both parties. On May 2, 1990, the panel issued its decision awarding Kanuth $38,233,079 in damages. ⁴ The award consisted of the following:

Award (May 2, 1990) ("Award") at 6-8; see also Mem. Op. at 2.

Kanuth filed a motion to confirm the arbitration award and to enter judgment on May 25, 1990. PBT opposed this motion and filed a motion to vacate or modify the arbitral award on July 9, 1990. PBT argued that the panel exceeded its authority and disregarded applicable law in reaching its decision. After oral argument on these motions, the district court confirmed the arbitral award of $38,233,079 and entered judgment for that amount. PBT has appealed the judgment of the district court on the following two grounds: First, the district court erred in not modifying the amount of the award attributable to lost incentive compensation, because the panel ignored the plain meaning of p 2(d) in failing to deduct from the projected net pretax earnings the amount of incentive compensation that would have been payable for the previous year; and, second, the district court erred in not vacating the entire incentive compensation award because the panel did not consider the actual performance history of Cranston/Prescott when estimating future revenues as required for lost profit projections under the governing law of the contract, which in this case is the law of Ohio. ⁵

II. DISCUSSION

The United States Arbitration Act provides for the vacation of arbitral awards only under limited circumstances:

(a) Where the award was procured by corruption, fraud, or undue means.

(b) Where there was evident partiality or corruption in the arbitrators, or either of them.

(c) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

(d) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

(e) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.

9 U.S.C. § 10 (1988).

Courts have recognized that judicial review of arbitral awards is extremely limited. "Courts thus do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts." United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 371, 98 L.Ed.2d 286 (1987). As the Supreme Court made clear almost forty years ago, "[t]he United States Arbitration Act establishes by statute the desirability of arbitration as an alternative to the complications of litigation." Wilko v. Swan, 346 U.S. 427, 431, 74 S.Ct. 182, 185, 98 L.Ed. 168 (1953). In the famous Steelworkers' Trilogy, the Court emphasized that "[i]t is the arbitrator's construction which was bargained for; and so far as the arbitrator's decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his." United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599, 80 S.Ct. 1358, 1362, 4 L.Ed.2d 1424 (1960); see id. at 597, 80 S.Ct. at 1361 (in interpreting and applying a contract, an arbitrator "may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the [contract]"). ⁶

Courts have suggested that, in addition to the statutory grounds for vacating an arbitral award, an award may be vacated if the arbitrators made the award in "manifest disregard of the law." Advest, Inc. v. McCarthy, 914 F.2d 6, 9 & n. 5 (1st Cir.1990); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir.1986). This formulation comes from dicta in Wilko v. Swan, 346 U.S. at 436-37, 74 S.Ct. at 187-88, 98 L.Ed. 168, and it is clear that it means more than error or misunderstanding with respect to the law. Sargent...