Max Marx Color & Chem. Employees' Profit v. Barnes
| Decision Date | 21 January 1999 |
| Docket Number | No. 98 Civ. 7652(LAK).,98 Civ. 7652(LAK). |
| Citation | 37 F.Supp.2d 248 |
| Parties | MAX MARX COLOR & CHEMICAL CO. EMPLOYEES' PROFIT SHARING PLAN, and Walter Sichel, Petitioners, v. Milton R. BARNES, Kemper Securities Group, Inc., Bateman Eichler, Hill Richards, John G. Kinnard & Company, and Texas Capital Securities, Respondents. |
| Court | U.S. District Court — Southern District of New York |
Timothy J. Dennin, New York City, for Plaintiff.
Jonathan K. Lagemann, New York City, Diane C. Fischer, Ronald P. Kane, Gomberg Kane & Fischer, Ltd., Chicago, IL, for Defendants.
This case calls upon the Court to determine whether an arbitration award should be vacated due to alleged misconduct and manifest disregard of the law by a National Association of Securities Dealers, Inc. ("NASD") arbitration panel.
In March 1997, Max Marx Color & Chemical Co. Employees Profit Sharing Plan (the "Plan")1 commenced an arbitration before the NASD seeking damages that allegedly resulted from losses in its securities account handled by Milton R. Barnes. The claim named Barnes along with the various brokerage firms at which Barnes was employed and the Plan maintained its account.2 Also named as claimants were Max Marx Color & Chemical Co. ("Max Co."), the Plan's sponsor, and Walter M. Sichel in his capacity as trustee and participant of the Plan and as president and shareholder of Max Co.3
In the statement of claim, petitioners claimed that the respondents were liable on a number of theories, including breach of ERISA's fiduciary duties of prudence and diversification. unauthorized and excessive trading amounting to fraud, fraudulent concealment, negligent misrepresentation, constructive fraud, and violation of NASD rules of fair conduct. Petitioners claimed also that each of the respondent firms failed adequately to supervise Barnes's activities. The respondent securities firms in turn answered the complaint and filed various other claims. In particular, Kinnard filed a cross-claim against Barnes and a counterclaim against Sichel. EVEREN filed counterclaims against Sichel and Max Co. and a motion to dismiss. Paine Webber filed a counterclaim against Sichel. Texas Capital counterclaimed against both Sichel and Max Co.4 The counterclaims, in essence, asserted claims for contribution against Max Co. as the Plan sponsor and against Sichel in his capacity as the Plan trustee with responsibility for authorizing all investment transactions. In addition, EVEREN moved to dismiss, arguing that petitioners' ERISA claims were barred by ERISA's statute of limitations and that their other claims were preempted by ERISA.
In a memorandum dated July 14, 1997, the NASD informed the parties that, absent voluntary submission to the jurisdiction of the NASD, Sichel and Max Co. had no standing to require the respondents to submit to NASD arbitration inasmuch as those claimants were not public customers of the respondent NASD member firms.5 Respondents denounced the decision to remove Sichel and Max Co. from the action arguing, in part, that they had submitted to the NASD's jurisdiction when Sichel filed his statement of claim in his capacity as President and shareholder of Max Co., as a participant in the Plan, and as trustee of the Plan. Sichel and Max Co., however, took advantage of their immediate good fortune and declined the invitation voluntarily to submit to the NASD's jurisdiction.6 In consequence, the claims by and against Sichel and Max Co. were eliminated from the arbitration.7
Subsequent to the removal of Max Co. and Sichel, EVEREN and Kinnard filed motions to dismiss the Plan's statement of claim, arguing in the main that (1) the Plan itself did not have standing under ERISA, and (2) ERISA preempted all of the Plan's other claims.8 The parties allegedly were invited to submit memoranda and pertinent documents to the NASD arbitrators for consideration of the motions,9 and oral argument on the respondents' motions to dismiss was set for May 15, 1998 before an arbitration panel (the "Panel"). The Panel allegedly ordered that no witnesses would be permitted to testify or to present evidence during the oral argument.10
The arbitration panel rendered its award on July 30, 1998, dismissing the Plan's claim against all of the respondents. The award stated:
"Having considered the Respondents' Motions to Dismiss and arguments with regard to statute of limitations, standing and preemption issues, the panel hereby grants the Motions of each Respondent to dismiss all claims."11
Petitioners claim here that the arbitration award should be vacated pursuant to Section 10 of the Federal Arbitration Act ("FAA")12 on the grounds that the Panel (1) was guilty of misconduct in failing to hear pertinent evidence and in failing to allow petitioners to amend their statement of claim; (2) was guilty of manifest disregard of law; and (3) failed to delineate the basis of the award.
As an initial matter, a party moving to vacate an arbitration award faces a high threshold.13 Arbitration awards generally are accorded great deference.14 Judicial review of arbitration awards is necessarily narrowly limited in order to avoid "undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."15
A district court may vacate an arbitration award when the arbitration panel is "guilty of misconduct 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."16 This has been interpreted to mean that the federal courts will not pursue evidentiary review of arbitration proceedings unless fundamental fairness is violated.17 That is to say, "an arbitrator `need not follow all the niceties observed by the federal courts'" in making his or her evidentiary determinations.18 An arbitration panel has broad discretion as to whether to hear evidence at all and need not compromise speed and efficiency, the very goals of arbitration, by allowing cumulative evidence.19 What is required is that each party be given an opportunity to present its evidence and argument.20
Petitioners contend that this Court should vacate the arbitration award because the Panel refused to hear certain testimony at the May 15 oral argument. They cite two batches of evidence allegedly pertinent and material to the controversy. First, petitioners contend that they were precluded from presenting testimony regarding when they had actual notice concerning defendants' illegal conduct.21 This, petitioners argue, was pertinent and material because the Panel dismissed their ERISA claim based in part on the expiration of ERISA's statute of limitations.22 This argument, however, is misguided. The evidence in question was evidence that already had been presented to the Panel in respondents' written submissions.23 It is precisely this sort of cumulative presentation that an arbitration panel need not hear. Petitioners confuse the Panel's failure to be persuaded by their evidence with a failure to consider their evidence.24
Petitioners next contend that the Panel refused to hear evidence pertinent and material to two open issues of fact: (1) the primary source of investment decisions, and (2) whether the defendant broker-dealers owed certain fiduciary duties to petitioners.25 Petitioners, however. do not explain the materiality of such evidence to the motion to dismiss. And indeed they cannot. The motion to dismiss was brought on the issues of standing, statute of limitations and preemption; the Panel stated that its decision was predicated on those issues. Petitioners apparently fail to recognize that the Panel need not address every question presented in the controversy on a motion to dismiss, and that there is no misconduct in dismissing a claim — and not receiving evidence — on matters unnecessary to disposition of the claim. In consequence, there was nothing unfair in the Panel's decision not to hear testimony at the May 15 hearing and thus no misconduct for purposes of Section 10(a)(3).
Petitioner next claims that the Panel was guilty of misbehavior for refusing to permit petitioners to amend the complaint to add a beneficiary of the Plan, or to rename Sichel, as a claimant. This request was made only in a footnote to petitioners' memorandum of law in opposition to respondents' motion to dismiss.26
Misbehavior cognizable under Section 10(a)(3) "must amount to a denial of fundamental fairness of the arbitration proceeding," a denial without reasonable basis.27 Such conduct "typically arises where there is proof of either bad faith or gross error on the part of the arbitrator."28 If it were otherwise, "`the ostensible purpose for resort to arbitration, which is the avoidance of litigation, would be frustrated.'"29 Accordingly, in evaluating arbitrators' actions. courts apply a fairness standard.30 Here, the Panel's decision not to allow petitioners to add claimants to the statement of claim was not unreasonable, nor is there any evidence that the decision was the product of bad faith or gross error.
Sichel was a party to the claim initially, but allowed himself to be removed from the action due to his non-customer status following the filing of respondents' counterclaims against him. The NASD stated that it could not force Sichel to submit to its jurisdiction, but that he was entitled to do so voluntarily. Sichel declined the invitation, opting not to be a part of the action.31 In consequence, petitioners made a strategic decision to remove Sichel from the action in what appears to have been an effort to frustrate respondents' counterclaims. That this strategy ultimately backfired is of no moment. The arbitration process is intended to facilitate speedy resolutions to parties' disputes. Sichel's antics of attempting to rejoin as a claimant, or to add a...
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