Roubik v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 20 February 1998
• Docket Number: No. 82752,82752
• Citation: 230 Ill.Dec. 1,181 Ill.2d 373,692 N.E.2d 1167
• Parties: , 230 Ill.Dec. 1 Marcia M. ROUBIK, Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants.
• Court: Illinois Supreme Court

Page 1167

692 N.E.2d 1167

181 Ill.2d 373, 230 Ill.Dec. 1

Marcia M. ROUBIK, Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants.

No. 82752.

Supreme Court of Illinois.

Feb. 20, 1998.

Rehearing Denied March 30, 1998.

[230 Ill.Dec. 2] [181 Ill.2d 374] Peter A. Cantwell, Cantwell & Cantwell, Chicago, for Merrill Lynch.

Paul D. Carrier, Fishman & Marrick, Chicago, for Marcia M. Roubik.

Justice BILANDIC delivered the opinion of the court:

This appeal arises from a petition filed in the circuit court of Cook County by the claimant, Marcia Roubik, to confirm in part and vacate in part an arbitration award entered by a panel of the National Association of Securities Dealers (NASD) on February 5, 1993. The arbitration panel ordered the respondents, Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), Larry H. Lovitsch and Thomas R. Valaika, to pay the claimant $500,000 in compensatory damages. The panel denied the claimant's request for punitive damages. The claimant sought an order from the circuit court confirming the award of compensatory damages and setting aside the denial of punitive damages. The respondents filed a counterpetition seeking confirmation of the arbitration award in its entirety. The circuit court confirmed the arbitration award in its entirety. On the claimant's appeal, the appellate court reversed in part, holding that the arbitration panel improperly refused to award punitive damages. 285 Ill.App.3d 217, 220 Ill.Dec. 764, 674 N.E.2d 35 (1996). We accepted the respondents' petition for leave to appeal. 166 Ill.2d R. 315(a).

FACTS

In October 1985, the claimant and her now deceased mother executed a customer agreement with Merrill Lynch, a securities brokerage firm, opening a joint cash management account. The agreement contained a provision entitled "Agreement to Arbitrate Controversies," which provided that:

"it is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Directors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., as the undersigned may elect."

The customer agreement also provided that "this agreement and its enforcement shall be governed by the laws of the State of New York." Respondents Lovitsch and Valaika are On January 14, 1991, the claimant filed a statement of claim with the NASD charging the respondents with making unauthorized and unsuitable trades in her account for the purpose of maximizing the respondents' fees and commissions and other misconduct. The claimant alleged that respondents were guilty of willful misrepresentations and omissions, fraud, breach of contract, negligence, breach of fiduciary duty and violations of the rules and regulations of the NASD, the New York Stock Exchange and the American Stock Exchange. The claimant sought recovery of actual damages of not less than $900,000. The claimant also sought an award of punitive damages against the respondents.

[230 Ill.Dec. 3] employees of Merrill Lynch who handled the claimant's account.

The respondents filed a joint statement of answer and executed NASD uniform submission agreements for the arbitration. The submission agreement provided that the undersigned parties:

"hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, cross claims and all related counterclaims and/or third party claims which may be asserted, to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration Procedure of the sponsoring organization."

The arbitration proceeded in the Midwest Regional Arbitration Office of the NASD in Chicago. At the request of the arbitration panel, the parties provided briefs on the issue of the authority of arbitrators to award punitive damages. The arbitration panel received exhibits and heard several days of testimony. The panel issued its award on February 5, 1993. The panel found the respondents guilty of: (1) lack of supervision; (2) churning; and (3) violation of suitability rules. The panel awarded the claimant $500,000 in compensatory damages. The award further stated that the arbitrators "find that this misconduct was such that punitive damages should be awarded. However, the panel believes that the law of New York, the forum of the parties, precludes such an award."

On April 5, 1993, the claimant filed a petition in the circuit court to confirm that part of the arbitration award granting compensatory damages and to set aside that part of the award denying punitive damages. The claimant argued that the arbitrators' decision on the punitive damages issue must be set aside because it was contrary to Illinois public policy favoring punitive damages in the securities setting. The claimant asked that the claim be returned to the arbitration panel for entry of an award of punitive damages. In the alternative, the petition asked that the court retain jurisdiction for a jury determination on the punitive damages issue. The petition further asked for interest to be awarded on the compensatory award at the statutory rate of 9% from February 5, 1993. The respondents filed a counterpetition to confirm the arbitration award in its entirety, without interest.

On July 22, 1994, the circuit court issued its order confirming the arbitration award. In particular, the circuit court found that the arbitrators correctly ruled that they did not have the authority to award punitive damages. Further, the court found that Illinois public policy does not favor punitive damages. The court awarded the claimant interest at the statutory rate of 9% on the compensatory damages award from February 5, 1993.

The claimant appealed to the appellate court. The appellate court affirmed the award of compensatory damages and the interest on that award. Relying on 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 (1995), the appellate court reversed the circuit court's decision confirming the arbitrators' ruling that they were without authority to award punitive damages. The appellate court remanded the cause to the circuit court with directions to enter an order compelling further NASD arbitration on the issue of punitive damages. 285 Ill.App.3d 217, 220 Ill.Dec. 764, 674 N.E.2d 35.

We granted the respondents' petition for leave to appeal. The parties do not raise any issues in this court regarding the award of

[230 Ill.Dec. 4] compensatory damages or the interest award.

ANALYSIS

The question presented in this appeal is whether the arbitration panel's decision on the issue of punitive damages should be set aside. As noted, the parties' contract provided that it was to be governed by the laws of the State of New York. It is undisputed that New York law prohibits arbitrators from awarding punitive damages. See Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.2d 831 (1976). The respondents argued before the arbitration panel that, pursuant to the explicit terms of the contract, New York law applied and prohibited the arbitrators from awarding punitive damages. The arbitration panel agreed that New York law governed and that they were therefore without authority to award punitive damages. At the time the arbitrators issued their award, several courts had ruled on the effect on the availability of punitive damages of a New York choice-of-law provision in an arbitration agreement, with conflicting results. The United States courts of appeals for the Seventh and Second Circuits had held that the inclusion of a New York choice-of-law clause precluded an arbitration panel from awarding punitive damages. See Fahnestock & Co. v. Waltman, 935 F.2d 512, 517-19 (2d Cir.1991); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 338-39 (7th Cir.1984). Other federal courts of appeals, however, had reached the contrary conclusion. See, e.g., Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1387 (11th Cir.1988); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1062-63 (9th Cir.1991).

The United States Supreme Court granted certiorari in the case of Mastrobuono, to resolve this conflict among the federal courts of appeals. While the claimant's appeal to the appellate court was pending in this case, the Supreme Court announced its decision in Mastrobuono, 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76. Therein, the Court held, on facts very similar to those present here, that a NASD arbitration panel had the authority to award punitive damages, despite the presence of a New York choice-of-law provision in the contract.

In Mastrobuono, the petitioners opened a securities trading account with Shearson Lehman Hutton, Inc. (Shearson), by executing Shearson's standard-form client's agreement. That agreement contained an arbitration provision, providing that:

"any controversy arising out of or relating to [the petitioners'] accounts * * * shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc., or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange as I may elect."

The agreement in Mastrobuono further provided that it was to be " 'governed by the laws of the State of New York.' " Mastrobuono, 514 U.S. at 58-59, 115 S.Ct. at 1217, 131 L.Ed.2d at 85. The petitioners subsequently charged Shearson with mishandling their account and sought compensatory and punitive damages. The claims were submitted to arbitration before a NASD panel, which ruled in favor of the petitioners and awarded them both compensatory and punitive damages. Shearson filed a motion in the United States District Court for the Northern District of Illinois to vacate the award of...