Lee v. Chica
| Citation | 983 F.2d 883 |
| Decision Date | 04 March 1993 |
| Docket Number | Nos. 91-3043,91-3146,s. 91-3043 |
| Parties | , Fed. Sec. L. Rep. P 97,315 In the Matter of Arbitration Between Judy LEE, Appellant/Cross-appellee, v. James John CHICA; Engler-Budd & Co., Inc., Appellees/Cross-appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Graham Heikes, Minneapolis, MN, argued, Max C. Ramsey III, on the brief, for appellant.
Gregory L. Wilmes, Minneapolis, MN, for appellee.
Before McMILLIAN, JOHN R. GIBSON and BEAM, Circuit Judges.
Judy Lee appeals from a final order entered in the District Court 1 for the District of Minnesota to the extent that it vacates the punitive damages awarded by an arbitration panel. Lee v. Chica, No. 3-91-304 (D.Minn. Aug. 22, 1991) (order). For reversal, Lee argues the district court erred in refusing to confirm the arbitration panel's award of punitive damages because (1) federal law governs the arbitrability of the dispute and (2) the arbitration clause in the Customer Agreement incorporated the rules of the American Arbitration Association (AAA) which allow arbitration panels to award punitive damages.
James John Chica cross-appeals from the district court's final order to the extent that it confirms the arbitration panel's award of compensatory damages and attorney's fees to Lee. For reversal, Chica argues the district court erred in holding that Lee's claims against him individually were subject to arbitration because he did not sign, and therefore was not a party to the customer agreement. Chica agrees that the district court was correct in denying Lee punitive damages.
For the reasons discussed below, we affirm that part of the district court's order confirming compensatory damages and attorney's fees and reverse that part of the district court's order denying Lee punitive damages.
In 1987 Lee opened a securities account with the now defunct Engler-Budd & Company, Inc. (Engler-Budd), a broker-dealer and member of the National Association of Securities Dealers (NASD). Chica, a NASD registered securities representative, was Lee's original and sole account representative for the entire time Lee had an account at Engler-Budd.
Lee signed a Customer Agreement at the request of Chica when she opened the account. Paragraph 15 of the Customer Agreement contained the following arbitration clause:
This agreement and its enforcement shall be governed by the laws of the State of Minnesota. If any controversy arises out of this agreement, it shall be determined by arbitration, except where prohibited by law. Such arbitration shall be in accordance with the rules, then obtaining, of the American Arbitration Association. I authorize you, if I do not make such election ..., to make such election in my behalf. Any arbitration hereunder shall be before at least three arbitrators and judgment upon the award rendered by the arbitrators or a majority of them may be entered in any court, state or federal, having jurisdiction.
Lee is the only signatory of the Customer Agreement.
A dispute arose concerning the management of the account. In July of 1990, Lee filed a demand for arbitration with the AAA against Engler-Budd and Chica. Lee alleged that Engler-Budd and Chica had violated the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b); the Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; the Securities Act of 1933, 15 U.S.C. §§ 77a-77bbbb; and the Minnesota Securities Act, Minn.Stat. ch. 80A; and also alleged state common law claims of negligence, fraud and breach of fiduciary duty. Lee claimed that Engler-Budd and Chica opened a margin account in her name without informing her of the risks and that Engler-Budd and Chica bought and sold securities in this account without her authorization and failed to follow specific sell orders given by her.
Neither Engler-Budd 2 nor Chica answered the demand for AAA arbitration. Chica made no appearance at the arbitration hearings, did not answer the AAA complaint, nor did he sign the AAA arbitration submission agreement. In December of 1990, the arbitration panel held a hearing on the dispute and awarded Lee $10,600 in compensatory damages, $5,000 in attorney's fees and $31,800 in punitive damages against both Engler-Budd and Chica.
On June 7, 1991, Lee filed an application and motion in federal district court to confirm the arbitration award. Chica filed a cross-motion to vacate or modify the award. The district court confirmed the arbitration award of compensatory damages and attorney's fees, but vacated the award of punitive damages. The district court accepted the argument by Chica that Minnesota law prohibited an award of punitive damages by an arbitration panel. The district court noted that the arbitration clause in the customer agreement had incorporated Minnesota state law as the law to govern the contract. Therefore, the district court reasoned that the parties had intended to limit the scope of recovery in the event of a breach of contract to that which would be allowed by Minnesota law, which, in the view of the district court did not include punitive damages. This appeal and cross-appeal followed.
The issues in this appeal involve whether federal or state law applies in interpreting the arbitration clause in the customer agreement and in determining if arbitrators can award punitive damages. Lee argues that the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-14, applies in this case because there is federal subject matter jurisdiction and that the FAA specifically applies in cases involving interstate commerce. Chica contends that State law applies because courts are to use state law to interpret the arbitration clause in the contract and to determine the ability of arbitrators to award punitive damages. Each party contends that if the district court applied the law he or she contends is the proper law to apply, it will result in a decision that is favorable to him or her.
It is well-settled that judicial review of arbitration awards is narrowly limited and that an arbitration award will not be set aside unless it is completely irrational or evidences a "manifest disregard for law." E.g., Barbier v. Sherson Lehman Hutton, Inc., 948 F.2d 117, 120 (2d Cir.1991) (Barbier ); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir.1991) (Todd Shipyards ); General Tel. Co. v. Communications Workers of America, 648 F.2d 452, 457 (6th Cir.1981) (Communications Workers ) ().
The initial question raised is whether the law of Minnesota, governs the arbitrability of this case. Chica argues that he should not be a party to this action because he did not sign the customer agreement and Minnesota law would not enforce the terms of a contract between Lee and Engler-Budd against Chica. Kost v. Peterson, 292 Minn. 46, 193 N.W.2d 291 (1971). Chica relies on Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) (Perry ), to argue that the contract is not enforceable against him. The Supreme Court in Perry stated in a footnote that when this type of "standing" issue presents itself, courts, in determining whether to apply state or federal law, are to apply state law "if that law arose to govern issues concerning validity, revocability, and enforceability of contracts generally." Id. at 492 n. 9, 107 S.Ct. at 2527 n. 9 (emphasis in original). Furthermore, the Supreme Court stated that courts are to examine arbitration agreements in the same light they would examine any other contractual agreement. Id.
Perry involved a dispute over the amount of commissions due on the sale of securities between a former employee and his former employer and two of its employees. The former employee argued that his dispute could be heard by the California courts under the California Labor Code, 3 while the two employees argued that according to the employment contract the dispute had to be heard by an arbitration panel. The former employee argued that the two employees were not parties to the agreement, and therefore lacked "standing" to force him to arbitrate the dispute. Id. at 488, 107 S.Ct. at 2524.
While Chica relies on Perry for support, his argument is misplaced. In Perry, the specific issue was whether the parties could be compelled to arbitrate according to the contract provisions. In contrast, the present case is an action seeking to confirm an award already made by an arbitration panel in accordance with a provision in a contract. It is not an issue of validity, revocability or enforceability of the arbitration agreement within the contract.
Arbitrability of contracts evidencing interstate commerce is governed by federal substantive law rather than state law. Southland Corp. v. Keating, 465 U.S. 1, 15-16, 104 S.Ct. 852, 861, 79 L.Ed.2d 1 (1984) (Keating ); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (Cone ); Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-05, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967) (Prima Paint ); Letizia v. Prudential Bache Secur., Inc., 802 F.2d 1185, 1187 (9th Cir.1986) (Letizia ); Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d 1023, 1025 (9th Cir.1986); see also I.S. Joseph Co. v. Michigan Sugar Co., 803 F.2d 396, 399 n. 2 (8th Cir.1986). 4
Federal courts have found that an arbitration agreement between a customer and a brokerage firm can also be binding on the agent who represented or traded in the customer's account even if the agent had not signed the customer agreement. Letizia, 802 F.2d at 1188 (...
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