UBS Fin. Servs., Inc. v. Padussis

• Decision Date: 22 November 2016
• Docket Number: No. 15-2148,15-2148
• Citation: 842 F.3d 336
• Parties: UBS Financial Services, Inc., Petitioner–Appellant, v. Gary T. Padussis, Respondent–Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

842 F.3d 336

UBS Financial Services, Inc., Petitioner–Appellant,

v.Gary T. Padussis, Respondent–Appellee.

No. 15-2148

United States Court of Appeals, Fourth Circuit.

Argued: October 25, 2016

Decided: November 22, 2016

ARGUED: Francis X. Dee, McElroy, Deutsch, Mulvaney & Carpenter, LLP, Newark, New Jersey, for Appellant. Edward Patrick McDermott, Sr., Law Office of E. Patrick McDermott LLC, Annapolis, Maryland, for Appellee. ON BRIEF: Margaret L. Watson, McElroy, Deutsch, Mulvaney & Carpenter, LLP, New York, New York, for Appellant.

Before WILKINSON, KING, and HARRIS, Circuit Judges.

Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Judge King and Judge Harris joined.

WILKINSON, Circuit Judge:

Appellant UBS Financial Services ("UBSFS") challenges an arbitration award that, in practical effect, granted Gary Padussis over $900,000 in compensatory damages. The district court refused to disturb the award, and we now affirm its judgment. Any other result would open arbitration proceedings to a host of challenges over the very type of subsidiary questions that Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002), indicated should be left to the discretion of the arbitral body.

I.

Gary Padussis worked for UBSFS as a financial advisor from 2009 through 2013. When he joined UBSFS, Padussis brought with him a team of three financial advisors as well as an established business clientele. As part of his initial compensation, UBSFS lent Padussis over $2.7 million. Padussis signed a promissory note, which provided that any remaining balance would immediately come due if Padussis ended his employment with UBSFS. Padussis also executed a Letter of Understanding describing his compensation and a Financial Advisor Team Agreement governing the operations of his team. All the agreements provided that any dispute would be subject to arbitration before the Financial Industry Regulatory Authority ("FINRA").

Padussis resigned from UBSFS in 2013, complaining that UBSFS had ruined his team of financial advisors and cost him valuable clients. Upon his resignation, Padussis owed UBSFS the remaining balance on the promissory note, nearly $1.6 million. When he failed to pay that amount, UBSFS initiated arbitration on June 3, 2013. Padussis responded with counterclaims on July 31, 2013, alleging that UBSFS's interference with his team was both tortious and a breach of contractual duties.

Under the FINRA Code of Arbitration Procedure for Industry Disputes, the Director of FINRA Dispute Resolution is

responsible for the process of selecting the panel of three arbitrators required here. First, the Director mails a list of potential arbitrators for each of the three panel positions to each party "within approximately 30 days after the last answer is due." FINRA Rule 13403. Each "party may strike up to four of the arbitrators from each list" and rank the remaining ones. FINRA Rule 13404. The parties must return their preferences within twenty days of the lists being sent, and the Director then combines the rankings sent by the parties to select the arbitration panel. FINRA Rule 13405.

If a party fails to return its ranked lists within twenty days, the Director proceeds as if that party has no preferences. FINRA Rule 13404(d). The Code allows the Director to extend any deadline set by the Code for good cause. FINRA Rule 13207(c). The Code also gives the Director discretion to "make any decision that is consistent with the purposes of the Code to facilitate the appointment of arbitrators." FINRA Rule 13412. The Director can delegate these duties. FINRA Rule 13100(k).

In this case, FINRA mailed lists of potential arbitrators to the parties on August 21, 2013. UBSFS did not return its ranked lists by the deadline of September 10 because, UBSFS claims, it never received them.

On September 11, UBSFS received a letter, dated September 3, that reminded the parties of the impending deadline for returning their lists. Realizing that it had missed the deadline, UBSFS filed a motion to extend the time to submit its preferences. Padussis opposed this motion. He argued that UBSFS notified him in mid-August that it was transferring the case to new counsel but that the new counsel had not yet filed a notice of appearance. Padussis claimed that this transfer led to confusion over which counsel was responsible for submitting UBSFS's preferences.

FINRA's Regional Director—to whom the Director had apparently delegated responsibility—denied UBSFS's motion for an extension. UBSFS appealed to the Director, who affirmed the denial. The Director ruled that good cause to extend the deadline did not exist because FINRA had timely mailed the initial lists of arbitrators as well as a courtesy reminder, and had not received any mail returned as undeliverable.

FINRA proceeded to select a panel of three arbitrators based on Padussis's lists of preferences. At the first panel hearing, UBSFS challenged the composition of the panel based on UBSFS's lack of participation in the selection of the arbitrators. The panel reviewed the evidence, denied UBSFS's challenge, and proceeded with the arbitration.

On October 27, 2014, the panel issued its final decision. The panel awarded UBSFS $1,683,262 and awarded Padussis $932,887. The decision denied "[a]ny and all relief not specifically addressed." J.A. 24. Pursuant to the FINRA Code, the decision did not explain the panel's reasoning.

UBSFS was altogether displeased with this outcome. Padussis insisted that due to a statutory lien and the prospect of bankruptcy, he would be financially unable to pay the balance of the note, which left UBSFS in the position of owing him over $900,000 for the damage he claimed it had done to his business. UBSFS then filed this action to vacate the arbitral award. It argued that the arbitrators were not selected in accordance with the parties' agreement because UBSFS had not provided its preferences to FINRA. In the alternative, UBSFS sought to have the district court offset the awards, citing Padussis's admission that he was unlikely to be able to pay his portion of the judgment. The district court confirmed the arbitration award in its entirety and declined to impose an offset. UBSFS now appeals.

II.

The scope of judicial review of an arbitration award "is among the narrowest known at law." Apex Plumbing Supply, Inc. v. U.S. Supply Co., Inc., 142 F.3d 188, 193 (4th Cir. 1998). Courts may vacate or modify an arbitration award only under the limited circumstances listed in the Federal Arbitration Act, 9 U.S.C. § 10 –11, or under the common law if the award "fails to draw its essence from the contract" or "evidences a manifest disregard of the law." Patten v. Signator Ins. Agency, Inc., 441 F.3d 230, 234 (4th Cir. 2006).

This circumscribed scope of review means that "in reviewing such an award, a district or appellate court is limited to determine whether the arbitrators did the job they were told to do—not whether they did it well, or correctly, or reasonably, but simply whether they did it." Three S Del., Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520, 527 (4th Cir. 2007) (internal quotation marks omitted). To ensure arbitrators did the job they were told to do and did not "exceed[ ] their powers," 9 U.S.C. § 10(a)(4), courts will resolve certain threshold questions of arbitrability. For example, a court will decide whether parties agreed to arbitrate a particular dispute, AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 651, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986), or whether arbitrators were appointed according to the parties' agreement. Cargill Rice v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 225 (4th Cir. 1994).

Beyond these basic questions of arbitrability, courts defer to the arbitral panel both on the merits of the final decision and on procedural questions that "grow out of the dispute," even where those questions "bear on its final disposition." Howsam, 537 U.S. at 84, 123 S.Ct. 588 (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964) ). We need not repair here to the standards of review customarily applied to fact finding and discretionary procedural rulings because that would simply constitute us, contrary to the Supreme Court's admonitions, as a typical appellate court.

The "widely recognized" policy "to encourage the use of arbitration" requires this limited scope of judicial review. Remmey v. PaineWebber, Inc., 32 F.3d 143, 146 (4th Cir. 1994). Parties agree to arbitration to avoid the time and expense of litigation. But "to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all." Apex Plumbing, 142 F.3d at 193.

Instead, the narrow standard of review acts as a bulwark against legal ingenuity. Lawyers can easily find one thing or another in almost any proceeding to which they wish to take exception. There are benefits to such legal creativity in many contexts but not in the one before us. Allowing procedural challenges to every award would force parties into court to argue their dispute a second time, incurring the litigation costs and delays they intended to avoid by agreeing to arbitration in the first place.

In other words, the rules that limit our review of arbitration awards are meant to avoid exactly what has happened here, which is a protracted set of judicial proceedings that have sacrificed the very advantages inhering in the arbitral forum.

III.

UBSFS seeks to vacate the arbitral award on two grounds. It first contends that the arbitrators were not selected according to the parties' agreement. Section 5 of the Federal Arbitration Act provides that if the parties' arbitration agreement includes a method for appointing arbitrators, "such method shall be followed." 9 U.S.C. § 5. This court will generally vacate "[a]rbitration awards made by arbitrators not appointed under the method provided in the parties' contract." Cargill Rice,...