R.M. Perez & Associates, Inc. v. Welch

• Decision Date: 13 May 1992
• Docket Number: 91-3119 and 91-3191,Nos. 90-3815,s. 90-3815
• Citation: 960 F.2d 534
• Parties: Fed. Sec. L. Rep. P 96,841 R.M. PEREZ & ASSOCIATES, INC., Plaintiff, v. James WELCH, et al., Defendants. Victoria A. Carleton JOLLEY, et al., Plaintiffs-Appellants, v. PAINE WEBBER JACKSON & CURTIS, INC. and James Welch, Defendants-Appellees. Victoria A. Carleton JOLLEY, et al., Plaintiffs-Appellees, Cross-Appellants, v. PAINE WEBBER JACKSON & CURTIS, INC., Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 534

960 F.2d 534

Fed. Sec. L. Rep. P 96,841

R.M. PEREZ & ASSOCIATES, INC., Plaintiff, v. James WELCH, et al., Defendants.

Victoria A. Carleton JOLLEY, et al., Plaintiffs-Appellants, v. PAINE WEBBER JACKSON & CURTIS, INC. and James Welch,

Defendants-Appellees.

Victoria A. Carleton JOLLEY, et al., Plaintiffs-Appellees, Cross-Appellants, v. PAINE WEBBER JACKSON & CURTIS, INC., Defendant-Appellant,

Cross-Appellee.

Nos. 90-3815, 91-3119 and 91-3191.

United States Court of Appeals Fifth Circuit.

May 13, 1992.

As Modified June 17, 1992.

Frank Messengale, Gene W. Lafitte and Marie Breaux Stroud, Liskow & Lewis, New Orleans, La., for Victoria A. Carleton Jolley, et al.

George C. Freeman, III, Phillip A. Wittmann and Stephen H. Kupperman, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, La., for Paine Webber Jackson & Curtis, Inc., et al.

James Welch, pro se.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before THORNBERRY, KING, and DEMOSS, Circuit Judges.

THORNBERRY, Circuit Judge:

This is an appeal from the final disposition of several consolidated securities fraud cases. The cases against Welch and Paine Webber have been percolating in the federal court system for seven years; only a few isolated issues are presented here for review. We affirm on all issues except the district court's award of attorneys' fees.

I. Background

The plaintiffs are eight customers of James Welch, a former Paine Webber stockbroker. The eight plaintiffs--Huey Clemons, Gilbert Disotell, Henry Fry, Stanley Gardeman, Victoria Carleton Jolley, Valerie Mills, Charles Pendleton, and Eugene Young--sued James Welch and Paine Webber for violations of RICO and federal and state securities laws. After the plaintiffs filed suit, Paine Webber moved to compel arbitration of the claims against it. Welch did not seek arbitration of the claims against him. The court referred Paine Webber's motion to a magistrate, who recommended that the motion be denied. The district court disregarded the magistrate's recommendation and granted Paine Webber's motion to compel arbitration as to seven of the eight plaintiffs, leaving one suit by Plaintiff Mills pending in the district court against Paine Webber in addition to the eight against Welch. The plaintiffs appealed this ruling to a prior panel of the Fifth Circuit, which found that it lacked jurisdiction to hear the appeal. Jolley v. Paine Webber Jackson & Curtis, 864 F.2d 402 (5th Cir.), opinion supplemented, 867 F.2d 891 (5th Cir.1989). In this appeal, however, we will consider the district court's ruling on Paine Webber's motion to compel arbitration.

All claims against Welch and Mills' claims against Paine Webber were tried to a jury in the summer of 1988. The jury found in favor of the plaintiffs on the securities claims, but rejected the plaintiffs' RICO claims. The district court entered the jury's award of damages in the amount of $274,610.88, and the Fifth Circuit affirmed. Jolley v. Welch, 904 F.2d 988 (5th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 762, 112 L.Ed.2d 781 (1991). The district court subsequently awarded attorneys' fees to the plaintiffs: $193,149.50 for all plaintiffs against Welch and Paine Webber jointly, and $57,264.12 against Welch only. The district court later reduced the fee award against Paine Webber and Welch jointly from $193,149.50 to $168,639.37. The district court also denied an award of costs for the plaintiffs because they failed to submit a detail of costs along with their application for fees and costs. In this appeal, the parties challenge the district court's rulings on fees and costs.

The plaintiffs also appeal the disposition of the claims that were sent to arbitration. The arbitrators awarded $146,425.61 in damages for the plaintiffs. The arbitrators also denied fees because they found that both parties had a legitimate claim to fees, and their fee awards were offsetting. Paine Webber moved to confirm the arbitrators' award; the plaintiffs sought to vacate or modify the award. The district court granted Paine Webber's motion, confirming the arbitrators' award in its entirety. The plaintiffs challenge the district court's confirmation of the award, and both sides seek attorneys' fees in connection with the arbitration proceedings.

II. The Arbitration Proceedings

A. Paine Webber's Motion to Compel Arbitration

The plaintiffs contend that the district court erred by rejecting the magistrate's Report and Recommendation and compelling seven of the eight plaintiffs to submit their claims against Paine Webber to arbitration. The magistrate that conducted an evidentiary hearing on the issue of arbitrability recommended that none of the eight plaintiffs' claims against Paine Webber were subject to arbitration. Regarding one plaintiff, Mills, the magistrate found that Paine Webber failed to introduce any documents proving that she had agreed to arbitrate any claims and that she was therefore entitled to pursue her claims against Paine Webber in front of a jury. The magistrate also found, as a matter of law, that three plaintiffs had established a prima facie case of fraud in the factum, rendering their arbitration agreements void. Furthermore, the magistrate found that the unauthorized transactions that all eight plaintiffs complained of could not have been within the scope of the agreements and therefore, that none of the eight plaintiffs' claims were subject to arbitration.

The district court partially rejected the Magistrate's Report and Recommendation, finding that seven of the eight plaintiffs were required to submit their claims against Paine Webber to arbitration, while the remaining plaintiff, Mills, was entitled to assert her claims in district court. The district court's interpretation of the documents containing the arbitration agreements is a question of law subject to de novo review. Webb v. Carter Constr. Co v. Louisiana Central Bank, 922 F.2d 1197, 1199 (5th Cir.1991). After a thorough review of the record, we find that the district court did not err in compelling seven of the eight plaintiffs to submit their claims against Paine Webber to arbitration.

Courts perform a two-step inquiry to determine whether parties should be compelled to arbitrate a dispute. First, the court must determine whether the parties agreed to arbitrate the dispute. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985). Once the court finds that the parties agreed to arbitrate, it must consider whether any federal statute or policy renders the claims nonarbitrable. Id. 105 S.Ct. at 3355. We first consider whether, by signing the various documents containing arbitration agreements, the plaintiffs agreed to arbitrate the claims that they assert against Paine Webber.

Seven of the eight plaintiffs agree that each signed at least one document (a Client Agreement, Customer Agreement, or Option Agreement) containing an arbitration clause. Some plaintiffs contend, however, that their respective signatures were obtained by fraud, and all assert that the transactions complained of are outside the scope of the arbitration agreement. Those plaintiffs alleging fraud insist that the fraud constitutes fraud in the factum rather than fraud in the inducement. They argue that the distinction between fraud in the factum and fraud in the inducement is determinative of whether they can be compelled to arbitrate.

We disagree that the type of fraud alleged is determinative of arbitrability. Under Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967), and its progeny, the central issue in a case like this is whether the plaintiffs' claim of fraud relates to the making of the arbitration agreement itself or to the contract as a whole. See C.B.S. Emp. Fed. Cr. Union v. Donaldson, Et Al., 912 F.2d 1563 (6th Cir.1990); Bhatia v. Johnson, 818 F.2d 418 (5th Cir.1987) ("We must determine whether Bhatia's complaint is directed at the entire contract or only the arbitration clause."). If the fraud relates to the arbitration clause itself, the court should adjudicate the fraud claim. If it relates to the entire agreement, then the Federal Arbitration Act requires that the fraud claim be decided by an arbitrator. C.B.S. Emp. Fed. Cr. Union v. Donaldson, Et Al., 912 F.2d 1563, 1566 (6th Cir.1990).

We find that the fraud alleged by the plaintiffs relates to the Agreements as a whole and not to the arbitration clauses themselves. Only three of the plaintiffs put forth evidence regarding the circumstances surrounding the signing of the various agreements. Victoria Carleton Jolley testified that she signed the documents before reading them because she trusted Welch and he was in a hurry to get back to his office. She testified that he never mentioned margin, options, or arbitration. Plaintiff Stanley Gardemal testified that he signed the documents because Welch caught him at a weak moment. Welch had called him repeatedly to say that if Gardemal signed the agreements, Welch could transfer some money he had made on a transaction into Gardemal's account. Gardemal agreed to sign the papers but thought that they pertained only to the transaction that had already been completed. Gardemal stated that he never knew he was agreeing to an arbitration clause. Plaintiff Gilbert Disotell testified that although he signed the option agreement, he did not know about any risks involved in signing the agreement and that Welch did not tell him that the agreement contained an arbitration clause. He signed the agreement because he trusted Welch.

The testimony of the plaintiffs clearly indicates that the fraud they complain of goes to the Client Agreements and Option Agreements in their entirety and not to the arbitration clauses themselves. The plaintiffs' allegations that they did not read or understand the documents and that Welch did not explain...