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

• Decision Date: 01 May 1996
• Docket Number: No. 1-94-2774,1-94-2774
• Citation: 674 N.E.2d 35,220 Ill.Dec. 764,285 Ill.App.3d 217
• Court: United States Appellate Court of Illinois
• Parties: , 220 Ill.Dec. 764 Marcia M. ROUBIK, Petitioner-Appellant/Cross-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Larry H. Lovitsch and Thomas R. Valaika, Respondents-Appellees/Cross-Appellants.

Page 35

674 N.E.2d 35

285 Ill.App.3d 217, 220 Ill.Dec. 764

Marcia M. ROUBIK, Petitioner-Appellant/Cross-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Larry H.

Lovitsch and Thomas R. Valaika,

Respondents-Appellees/Cross-Appellants.

No. 1-94-2774.

Appellate Court of Illinois,

First District, Third Division.

May 1, 1996.

Rehearing Denied Jan. 3, 1997.

Appeal from the Circuit Court of Cook County, Honorable Dorothy K. Kinnaird.

Paul D. Carrier, of Chicago, of counsel, for appellants.

Peter A. Cantwell and Stephen F. Boulton, of Chicago, for appellee.

Roland W. Burris, Attorney General, Rosalyn B. Kaplan, Solicitor General, Tanya Solov, Special Assistant Attorney General, of Chicago, of counsel. (Amicus Curiae Brief)

Justice TULLY delivered the opinion of the court:

Petitioner, Marcia M. Roubik, appeals from an order of the circuit court of Cook County denying her petition to vacate a National Association of Securities Dealers (NASD) arbitration panel ruling that the law of New York precludes an award of punitive damages in this case and granting the cross-petition of respondents, Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), Larry H. Lovitsch and Thomas R. Valaika, to confirm said ruling. Petitioner also appeals from the circuit court's denial of her alternative petition that she be granted a jury determination of any claim held to be non-arbitrable. Respondents cross-appeal from the circuit court's award of interest for the period of time after the entry of the arbitration award, but prior to the circuit court's entry of a confirming judgment. The Illinois Secretary of State's Securities Department has filed an amicus brief in this case. Jurisdiction is vested in this court pursuant to Supreme Court Rule 301. 157 Ill.2d R. 301.

For the reasons which follow, we affirm in part and reverse in part and remand with directions.

In October of 1985, petitioner and her now-deceased mother had a joint account with Merrill Lynch having a total value at that time of around $787,000. Respondents, in essence, assert that Lovitsch and Valaika, brokers employed for Merrill Lynch, a securities brokerage, "churned" the account in order to generate excessive commissions. According to petitioner, this churning of the account and its attendant brokerage fees accompanied with mismanagement of the investment portfolio caused a loss of approximately $1.67 million from 1985 through 1988.

Petitioner subsequently initiated arbitration proceedings against respondents as was called for in the "Customer Agreement" she signed with Merrill Lynch. Petitioner sought both compensatory damages and punitive damages. The arbitration panel awarded petitioner $500,000 in compensatory damages. However, the panel did not award punitive damages in spite of its finding that such damages were appropriate in this case. The panel based this decision on the fact that the Customer Agreement contained a provision that stated that the "Agreement and its enforcement shall be governed by the laws of the State of New York * * *." In 1976, the New York Court of Appeal decided that in New York the power to award punitive damages is limited to judicial tribunals and may not be exercised by arbitrators. (See Garrity v. Lyle Stuart, Inc (1976), 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793.) Thus, the arbitrators concluded that as New York law applied to the agreement that the Garrity rule precluded their awarding punitive damages to petitioner.

Petitioner subsequently filed an action in the circuit court seeking enforcement of the arbitrators' $500,000 compensatory award as well as reversal of the panel's determination that punitive damages were unavailable. The circuit court affirmed in toto the arbitration panel's award of compensatory damages and determination that punitive damages were not permitted under the terms of the Customer Agreement. The circuit court also awarded petitioner pre-judgment interest from the time period after the entry of the arbitration award, but prior to the circuit court's entry of a confirming judgment. In so doing, the circuit court relied heavily on the decision of the United States Court of Appeals for the Seventh Circuit in Mastrobuono v. Shearson Lehman Hutton, Inc. (7th Cir.1994), 20 F.3d 713, which has subsequent to the filing of the appellate briefs in this case been reversed by the United States Supreme Court in Mastrobuono v. Shearson Lehman Hutton, Inc. (1995), 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76.

Petitioner argues that the circuit court erred in confirming the arbitrators' decision that they were precluded by New York law from awarding punitive damages in this case. We agree. We note that as this case involves purely legal questions our review of it is de novo. Benedictine Sisters of the Sacred Heart v. Department of Revenue (1987), 155 Ill.App.3d 325, 108 Ill.Dec. 309, 508 N.E.2d 470; see also T. O'Neill & S. Brody, Taking Standards of Appellate Review Seriously: A Proposal to Amend Rule 341, 83 Ill.B.J. 512 (1995).

As respondents noted in their brief, "[t]he Customer Agreement in the case at bar is quite parallel to that construed in Mastrobuono * * *." We agree and believe the Supreme Court's recent decision in Mastrobuono is directly on point and controlling of this case.

In Mastrobuono, two clients opened a securities trading account with a securities dealer in 1985 by executing, in Illinois, the broker's standard-form client agreement. Under the agreement's choice-of-law provision, the agreement was to be governed by the "laws of the State of New York." The agreement's arbitration provision authorized arbitration in accordance with the rules of (1) NASD, or (2) either the New York Stock Exchange or the American Stock Exchange. The agreement itself contained no express reference to claims for punitive damages. In 1989, the clients filed an action in the United States District Court for the Northern District of Illinois against the brokerage and several individuals. The district court stayed the court action and compelled arbitration pursuant to NASD rules. A NASD arbitration panel ruled in favor of the clients and awarded both compensatory and punitive damages. The district court vacated the award of punitive damages and in doing so held that the arbitration panel had not been authorized to award punitive damages under New York's Garrity rule. The Seventh Circuit affirmed the district court. The Supreme Court reversed both the Seventh Circuit and the district court.

In reversing the lower courts, the Supreme Court held that the punitive damages award was enforceable as within the scope of the client agreement because (1) the agreement's arbitration provision strongly implied that an arbitral award of punitive damages was appropriate; (2) the agreement's choice-of-law provision was not, in itself, an unequivocal exclusion of punitive damages claims, but at the most introduced an ambiguity into the arbitration agreement; (3) in light of such doubt or ambiguity, it is improper to impute to the clients an intent to give up an important substantive right; and (4) a reading of the choice-of-law and arbitration provisions as together expressing an intent to preclude a punitive damages award would violate the principle that a document should be read to give effect to all of the document's provisions and to render such provisions consistent with each other.

In both Mastrobuono and the case sub judice the client agreements contained almost identical arbitration and choice-of-law...