R.C. Layne Const., Inc. (Stratton Oakmont, Inc.), In re

• Decision Date: 24 December 1996
• Citation: 228 A.D.2d 45,651 N.Y.S.2d 973
• Parties: In re Arbitration between R.C. LAYNE CONSTRUCTION, INC., Petitioner-Appellant, and STRATTON OAKMONT, INC., et al., Respondents-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 973

651 N.Y.S.2d 973

228 A.D.2d 45

In re Arbitration between R.C. LAYNE CONSTRUCTION, INC. Petitioner-Appellant and STRATTON OAKMONT, INC., et al., Respondents-Respondents.

Supreme Court, Appellate Division First Department.

Dec. 24, 1996.

Leonard F. Lesser, of counsel (Schneck Weltman Hashmall & Mischel L.L.P., attorneys), for petitioner-appellant.

Fredda L. Plesser, of counsel (Martin P. Unger and Norman B. Arnoff, on the brief, Tenzer Greenblatt L.L.P. and Capuder & Arnoff, P.C., attorneys), for respondents-respondents.

Before ELLERIN, J.P., and RUBIN, KUPFERMAN, WILLIAMS and MAZZARELLI, JJ.

MAZZARELLI, Justice.

In July 1992 petitioner R.C. Layne Construction, Inc., a construction company based in Elko, Nevada opened a brokerage account with respondent Stratton Oakmont, Inc. ("Stratton"), a New York-based brokerage firm and member of the National Association of Securities Dealers, Inc. ("NASD"). Respondent Jordan Shamah is an employee of Stratton who, from August 1992 through January 1993, managed petitioner's brokerage account, and was responsible for the vast majority of petitioner's trading activity that was the subject of the arbitration underlying this appeal.

Petitioner executed a Customer Agreement with Bear Stearns Securities Corp, which served as Stratton's clearing agent. The Customer Agreement restricted petitioner's remedies to arbitration in the event of a controversy concerning the account. The arbitration clause provides:

22. ARBITRATION

-- ARBITRATION IS FINAL AND BINDING ON THE PARTIES.

-- THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY TRIAL.

-- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM COURT PROCEEDINGS.

-- THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED....

YOU AGREE, AND BY MAINTAINING AN ACCOUNT FOR YOU BEAR STEARNS SECURITIES AGREES, THAT CONTROVERSIES ARISING BETWEEN YOU AND BEAR STEARNS SECURITIES CONCERNING YOUR ACCOUNTS ON THIS OR ANY OTHER AGREEMENT BETWEEN YOU AND BEAR STEARNS SECURITIES, ... SHALL BE DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE HELD AT THE FACILITIES AND BEFORE AN ARBITRATION PANEL APPOINTED BY THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN STOCK EXCHANGE, INC., OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (AND ONLY BEFORE SUCH EXCHANGE). YOU MAY ELECT ONE OF THE FOREGOING FORUMS FOR ARBITRATION.

The Customer Agreement also contains a New York choice-of-law provision, that reads as follows:

21. NEW YORK LAW TO GOVERN. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES DETERMINED, IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.

In January 1993, after having suffered significant financial losses on purchases recommended by various Stratton employees, petitioner terminated its trading relationship with respondents. Pursuant to the arbitration clause of the Customer Agreement, petitioner then elected to proceed to arbitration before NASD and filed a Statement of Claim and Request for Arbitration against respondent Stratton and certain named individuals. Petitioner alleged that it had been the victim of various frauds and breaches of fiduciary duty, and that unsuitable and speculative securities had been traded in the securities account. The thrust of petitioner's claims was that, notwithstanding their knowledge that petitioner was limited by bonding requirements in both the degree of risk and the type of securities it could purchase, respondents engaged in a course of tortious conduct by recommending investments they knew to be inconsistent with petitioner's investment needs. Thus, as set forth in the Statement of Claim, petitioner sought compensatory damages exceeding $279,000 and "[p]unitive damages in an amount to be determined by the arbitrators."

To submit their dispute to NASD, petitioner and respondents all executed Uniform Submission Agreements wherein they expressly agreed to have their dispute arbitrated in accordance with NASD's Rules, Regulations and Code of Arbitration Procedure. The arbitration at issue was then conducted over three days in Las Vegas, Nevada before a panel of three arbitrators appointed by NASD. Respondent Freedman entered into a settlement with petitioner. The arbitrators ultimately awarded petitioner a total of $546,275.01, of which $265,005.01 was granted only as against Stratton, while the balance was assessed against respondents Stratton and Shamah jointly and severally. Of this award, $285,187.51 consisted of compensatory damages, and the balance was comprised of punitive damages.

Petitioner moved to confirm the arbitration award and respondents cross-moved to vacate it. Respondents argued below, as they do on appeal to this Court, that because the Customer Agreement provides that New York law governs determinations relating to the "rights and liabilities of the parties", the arbitrators did not have the authority to award punitive damages. Relying on Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793, respondents contend that the punitive damages portion of the award contravenes the rule articulated by the Court of Appeals that, as a matter of policy, punitive damages are a remedy reserved to the courts. Petitioner responds that the United States Supreme Court decision in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76 requires us to look at the terms of the Customer Agreement, and that, in the absence of language prohibiting the arbitrators from considering punitive damages claims, such claims should be permitted to be arbitrated. In seeking to vacate the compensatory damages portion of the award, the respondents argued that the arbitrators did not permit them to attack the veracity of a document received into evidence and that they failed to discount the award pursuant to the New York General Obligations Law for respondent Freedman's settlement with petitioner.

The motion court adopted respondents' view and vacated the award in its entirety. In explaining why it agreed with the respondents that the arbitrators could not entertain petitioner's punitive damages claim, the motion court attempted to distinguish Mastrobuono as follows:

However, here the arbitration agreement, unlike the one in Mastrobuono, supra, makes an explicit reference to the liabilities of the parties, which must of necessity include the question of punitive damages and states that such liabilities will be arbitrated in accordance with the law of the State of New York, which do not permit arbitrators to award punitive damages.

The motion court vacated the arbitration award, holding that, as a matter of law, the arbitrators were not empowered to award punitive damages and that the award of compensatory damages was not supported by the record. We reverse.

In Mastrobuono, the Supreme Court permitted a panel of NASD Arbitrators in Illinois to award punitive damages despite the presence of a choice-of-law clause choosing New York law in the parties' arbitration agreement. The Supreme Court held that the mere fact that an agreement contains a New York choice-of-law clause does not bar arbitrators from awarding punitive damages; rather, the determinative question is what was contemplated by the parties' agreement. Indeed, in this Court's recent decision in ...