Morgan Stanley Dw Inc. v. Afridi

• Decision Date: 21 December 2004
• Docket Number: 4630.
• Citation: 13 A.D.3d 248,2004 NY Slip Op 09425,788 N.Y.S.2d 11
• Parties: MORGAN STANLEY DW INC., Respondent v. ABDUL AFRIDI, Appellant.
• Court: New York Supreme Court — Appellate Division

13 A.D.3d 248

788 N.Y.S.2d 11

2004 NY Slip Op 09425

MORGAN STANLEY DW INC., Respondent v. ABDUL AFRIDI, Appellant.

4630.

Appellate Division of the Supreme Court of the State of New York, First Department.

December 21, 2004.

Judgment, Supreme Court, New York County (Edward H. Lehner, J.), entered October 29, 2003, granting the petition to vacate an arbitration award and denying the cross petition to confirm the same award, unanimously reversed, on the law, without costs, the petition denied and dismissed, the cross petition granted and the award confirmed.

In July 1999, respondent-appellant Abdul Afridi (Afridi), a retiree, put the bulk of his life savings into an investment account at petitioner-respondent brokerage firm (Morgan Stanley). Afridi opened the Morgan Stanley account at the behest of his son, Adel, who was then a newly licensed broker employed by Morgan Stanley. Afridi alleges that Adel, the broker with responsibility for his account, put the funds into risky and speculative investments, purchased on margin, that were unsuitable to a person of Afridi's age and means. Ultimately, Adel's management of the account resulted in the loss of Afridi's entire investment. In June 2001, Afridi commenced an arbitration proceeding before the National Association of Securities Dealers (NASD), in which he asserted claims for the recovery of his losses against Morgan Stanley, Adel and the manager of the Morgan Stanley branch where the account had been maintained. Afridi sought to hold Morgan Stanley vicariously liable, under the doctrine of respondeat superior, for the misconduct of Adel, its employee, and directly liable for Morgan Stanley's own alleged negligence in supervising Adel. After a hearing, the NASD arbitration panel rendered an award, dated March 23, 2003, that, while dismissing the claims against Adel and the branch manager, held Morgan Stanley "solely liable" to Afridi for $150,000 in compensatory damages, $30,000 in pre-award interest, and $40,000 in attorney's fees. The arbitrators did not state the rationale for their disposition of Afridi's claims.

Morgan Stanley filed a CPLR article 75 petition seeking to vacate the award on the ground that the arbitrators, in holding Morgan Stanley solely liable to Afridi while dismissing all claims against Adel, had "manifestly disregarded the law" and had reached an "inherently contradictory and completely irrational" result. Supreme Court, agreeing with Morgan Stanley that the award was "totally irrational," granted the petition to vacate and denied Afridi's cross petition for confirmation. We now reverse.

Judicial review of the award in this matter is governed by the Federal Arbitration Act ([FAA] 9 USC § 1 et seq.), which mandates the enforcement of written arbitration agreements relating to transactions affecting interstate commerce (see Wien & Malkin LLP v Helmsley-Spear, Inc., 12 AD3d 65, 70 [2004], citing Citizens Bank v Alafabco, Inc., 539 US 52, 56-57 [2003]; see also Sawtelle v Waddell & Reed, 304 AD2d 103, 107 [2003] [because the FAA applied to the subject arbitration agreement "judicial review of this award is governed by the FAA"]).¹ It is undisputed that none of the grounds for vacating an arbitration award set forth in the FAA itself (9 USC § 10 [a]) applies here. While "manifest disregard of the law" is a judicially created ground for vacating an arbitration award under the FAA (see e.g. Hoeft v MVL Group, Inc., 343 F3d 57, 64 [2d Cir 2003]), that doctrine applies only where the record shows that "the arbitrator knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it" (Westerbeke Corp. v Daihatsu Motor Co., Ltd., 304 F3d 200, 217 [2d Cir 2002]). Accordingly, the subject award cannot be vacated for manifest disregard of the law, since Morgan Stanley's counsel never argued to the arbitrators that applicable law required either a finding of liability against both Morgan Stanley and Adel or, alternatively, dismissal of the claims against both.

Finally, to the extent the FAA permits vacatur of an arbitration award on the ground that it is irrational (see Sawtelle, 304 AD2d at 108, citing I/S Stavborg [O.H. Meling, Mgr.] v National Metal Converters, Inc., 500 F2d 424, 430 [2d Cir 1974]; see also Marcy Lee Mfg. Co. v Cortley Fabrics Co., 354 F2d 42, 43 [2d Cir 1965]; Coutee v Barington Capital Group, L.P., 336 F3d 1128, 1132, 1133 [9th Cir 2003]; Hoffman v Cargill Inc., 236 F3d 458, 461 [8 th Cir 2001]), we cannot say that the arbitrators' decision to hold only Morgan Stanley liable was irrational. As previously noted, Afridi contended in the arbitration that Morgan...