Summary
holding that the arbitration panel did not engage in misconduct when it excluded from evidence documents that had not been exchanged within twenty days of the commencement of the hearing pursuant to NASD Rule 10321(c)
Summary of this case from PENSON FINANCIAL SERV., INC. v. MISR SECURITIES INTL.Opinion
99 Civ. 3613 (SWK).
April 28, 2000.
MPR Law Practice, P.C. By: Martin P. Russo, For Plaintiff.
Pryor, Cashman, Sherman Flynn, LLP By: Peter D. Wolfson, For Defendant.
MEMORANDUM OPINION AND ORDER
In this case, plaintiff Fiero Brothers, Inc. ("Fiero") moves to vacate or modify an arbitration award entered in favor of defendant Southwest Securities, Inc. ("Southwest"), dismissing Fiero's claim in its entirety and awarding Southwest attorneys' fees (the "Award") Southwest cross-moves for confirmation of the Award and requests that the Court grant attorneys' fees incurred in connection with the instant motion. For the reasons set forth below, Fiero's motion to vacate or modify the Award is denied. Southwest's cross-motion to confirm the Award is granted, and its application for attorneys' fees is denied.
BACKGROUND
Fiero is in the business of securities trading and is a broker/dealer member of the National Association of Securities Dealers (the "NASD"). Notice of Claim, ¶ 1, attached to Affidavit of Martin P. Russo, sworn to July 23, 1999 ("Russo Aff."), as Exh. "4" Southwest is a "clearing broker" and is also a member of the NASD. Id. ¶ 2. In or about January, 1998, Fiero began "selling short" shares of a stock but failed to deliver those shares to its purchaser. Transcript of Hearing, Jan. 12, 1999 ("Tr. Jan. 12, 1999"), at 56-67, 59-60, attached to Declaration of Peter D. Wolfson ("Wolfson Dec.") as Exh. "C." On or about April 11, 1998, a demand was made upon Southwest, as a clearing broker, to buy-in Fiero for the shares of the stock that it had sold short but failed to deliver. Transcript of Hearing, Jan. 13, 1999, at 56-67, 59-60, attached to Wolfson Dec. as Exh. "D." Southwest executed the buy-in. Id. at 275. Fiero contends that when Southwest executed the buy-in, it wrongfully paid an above-market price. See Notice of Claim, attached to Affidavit of Martin P. Russo, sworn to July 23, 1999 ("Russo Aff.") as Exh. "4." On April 16, 1998, Fiero commenced an arbitration proceeding, alleging that Southwest was unjustly enriched by the buy-in transaction.
When one "sells short" shares of a particular stock, one sells shares that one does not currently own. However, the short seller is obligated to deliver those shares to the purchaser at some date in the future. After the sale to the purchaser, but before delivery, the short seller seeks to purchase the shares he has sold at a price lower than he agreed to sell them to the purchaser, keeping the difference as profit. If the date on which the short seller was supposed to deliver the shares passes without delivery, the purchaser can demand that the shares be purchased in the market and delivered to it by its clearing broker. Essentially, the clearing broker purchases the shares, and bills the short seller for their price. This process is known as "buying-in." However, under NASD rules, the clearing broker must "defend" the price at which it bought-in the short seller. In other words, the clearing broker must show that the price it bought the short seller in at was indeed the current market price.
Discovery commenced in the arbitration proceeding and a hearing was scheduled to commence on January 12, 1999 (the "Hearing").See Letter from Susan M. Kozacik, to Peter Wolfson, dated, Sept. 9, 1998, attached to Russo Aff. as Exh. "7." On December 23, 1998 the parties were required to have exchanged copies of any documents they intended to introduce into evidence at the Hearing. See. e.g. NASD Code of Arbitration Procedure, Rule 10321 (c), attached to Wolfson Dec. as Exh. "B." Fiero failed to exchange with Southwest on or before December 23, 1998 certain documents that it intended to introduce as evidentiary exhibits at the Hearing. See Southwest's Memorandum of Law in Support of Motion to Confirm ("Southwest's Memo.") at 12; Fiero's Memorandum of Law in Support of Motion to Vacate/Modify ("Fiero's Memo.") at 6-7. On or about December 29, 1998, approximately two weeks prior to the Hearing, Southwest made a motion to exclude the documents not exchanged by Fiero by December 23, 1998. Fiero's Memo. at 7.
On January 12, 1998, at the commencement of the Hearing, the arbitration panel (the "Panel") ruled in favor of Southwest and excluded all documents that were not exchanged within 20 days of the commencement of the Hearing. Tr. Jan. 12, 1999 at 81-82. The Hearing continued until January 14, 1999. During the Hearing, Fiero and Southwest each called several witnesses. After hearing testimony and reviewing evidence submitted by both parties, the Panel denied Fiero's claim and awarded Southwest attorneys' fees and costs. See Award, attached to Wolfson Dec. as Exh. "A." On or about July 26, 1999, Fiero commenced this action to vacate the Award, and on or about August 13, 1999, Southwest moved to confirm the award.
DISCUSSION
I. Judicial Review of Arbitration Awards
The standard for a district court's review of arbitration awards is clear:
The showing required to avoid summary confirmation of an arbitration award is high, Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987), and a party moving to vacate the award has the burden of proof, see generally Matter of Andros Compania Maritima. S.A. of Kissavos (Marc Rich Co. A.G.), 579 F.2d 691, 700 (2d Cir. 1978); Folkwavs Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir. 1993) Moreover, "[a]rbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, setthng disputes efficiently and avoiding long and expensive litigation." Folkways Music Publishers v. Weiss, 989 F.2d at 111. "[T]he court's function in confirming or vacating an arbitration award is severely limited." Amicizia Societa Navegazione v. Chilean Nitrate Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960).Willemijn Houdstermaatschappii. BV v. Standard Microsystems Corp., 1 F.3d 9, 12 (2d Cir. 1997). With the limited nature of this Court's review of the arbitration award in mind, the Court turns to Fiero's specific bases for challenging the Award.
II. Exclusion of Exhibits: 9 U.S.C. § 10 (a)(3)
Fiero argues that the Award must be set aside because the Hearing was fundamentally unfair. Fiero's Memo. at 10. Specifically, Fiero alleges that it was prejudiced when the arbitration panel excluded the documents Fiero failed to exchange with Southwest on or before December 23, 1998. Id.
Section 10(a)(3) of the Federal Arbitration Act, upon which Fiero relies, provides in relevant part that the district court may issue an order vacating an arbitration award "[w] here the arbitrators were guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy." 9 U.S.C. § 10 (a)(3). However, an arbitrator's refusal to hear evidence does not automatically require the vacatur of an award: "[i]t is well settled that arbitrators are afforded broad discretion to determine whether to hear evidence." Areca, Inc. v. Oppenheimer Co. Inc., 960 F. Supp. 52, 55 (S.D.N.Y. 1997) (citations omitted). Moreover, "[i]n handling evidence, an arbitrator need not follow all the niceties observed by the federal courts. He need only grant the parties a fundamentally fair hearing." Bell Aeropspace Co. Div. of Textron. Inc. v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974). A fundamentally fair hearing requires that the parties be permitted to present evidence and cross-examine adverse witnesses. See Aferiat v. Grossman, No. 96 Civ. 1744, 1998 WL 99797, at *5 (S.D.N.Y. March 4, 1998). "Only the most egregious error which resulted in adversely affecting the rights of a party would justify and require vacatur of an award." Pompano-Windy City Partners v. Bear Stearns Co., 794 F. Supp. 1265, 1277 (S.D.N.Y. 1992)
As an initial matter, Fiero has not established that the arbitration panel engaged in any misconduct when it excluded the evidence. NASD Rule 10321(c) provides in relevant part:
At least twenty (20) calendar days prior to the first scheduled hearing date, all parties shall serve on each other copies of documents in their possession they intend to present at the hearing. . . . The arbitrators may exclude from the arbitration any documents not exchanged
NASD Rule 10321(c). There is no dispute that the arbitration proceeding commenced by Fiero was governed by the NASD Rules. Fiero does not dispute that the documents excluded by the Panel were subject to the exchange requirement embodied in NASD Rule 10321(c). Likewise, Fiero does not dispute that it failed to comply with this rule. Instead, Fiero contends that the Panel abused its discretion when it excluded the documents because the Panel stated that it was "aggravated" that Fiero did not comply with NASD Rule 10321(c). Fiero's Memo. at 11-12. The Court is not persuaded.
In support of its argument that the Panel abused its discretion, Fiero also argues that the Panel exhibited "favoritism" towards, and was "biased" in favor of, Southwest. Fiero's Memo. at 13. Presumably, if sufficient evidence of bias in favor of Southwest existed, Fiero would have also moved for vacation of the Award pursuant to 9 U.S.C. § 10 (2), which provides for vacation or modification of an arbitration award "[w]here there was evident partiality or corruption in the arbitrators, or either of them."
Approximately two weeks prior to the hearing, Southwest made a motion to exclude the documents that Fiero failed to serve on Southwest in accordance with NASD Rule 10321(c). At the commencement of the Hearing, the Panel ruled in favor of Southwest and excluded all documents Fiero sought to offer into evidence which were not timely served on Southwest pursuant to NASD Rule 10321(c). Based on this record, the Court finds that the Panel's decision to exclude Fiero's exhibits was well within its discretion, notwithstanding the Panel's indication that it was "aggravated."
Moreover, assuming arguendo that exclusion of the documents was misconduct, to justify vacation of the Award, Fiero would have to establish that the misconduct resulted in a fundamentally unfair hearing. Pompano-Windy City Partners v. Bear Stearns Co., 794 F. Supp. at 1277 (S.D.N.Y. 1992). Fiero argues that the Panel's ruling on Southwest's motion to exclude at the commencement of the Hearing was untimely, as the Panel was aware of the motion at least one week prior to the Hearing. Fiero's Memo. at 13. Had the Panel ruled earlier, Fiero argues, it would have prepared its case without relying on the excluded exhibits, or requested an adjournment. Id. Fiero's argument is unavailing.
Just like the Panel, Fiero was aware of the motion to exclude prior to the Hearing. In fact, Fiero was aware of the motion two weeks prior to the Hearing. Fiero's Memo. at 12. Therefore, Fiero could, and should, have prepared its case for the possibility that Southwest's motion to exclude would be granted.
Similarly, Fiero was not foreclosed from requesting an adjournment by the timing of the Panel's ruling. Indeed, if, as Fiero contends, it would have requested an adjournment had the Panel ruled to exclude the documents one week prior to the Hearing, it would seem that such an adjournment would have been all the more necessary when that ruling was made on the day the Hearing commenced. However, Fiero did not request an adjournment. In light of these facts, the Court finds incredulous Fiero's contention that it was "severely prejudiced" by the Panel's ruling. Accordingly, the Court declines to vacate or modify the award pursuant to 9 U.S.C. § 10 (a)(3).
This finding is reinforced by the fact that the excluded evidence appears to have been neither pertinent nor material to the case. See 9 U.S.C. § 10 (a)(3). Fiero alleges that the excluded evidence would have shown that purchases of shares of the stock for which it was bought-in just prior to and after it was bought-in, were executed at a much lower price than what Southwest had paid. Fiero's Memo. at 13-14. However, Fiero's evidence pertained to shares which were not for so-called "guaranteed delivery." Id. It appears from the record that the Panel determined that the relevant market price which Southwest had to defend was for shares that were for "guaranteed delivery," an issue upon which Fiero's evidence would have shed little or no light.
III. Attorneys' Fees
1. Manifest Disregard of the Law
Fiero also argues that "[t]he panel exhibited manifest disregard for the law when it awarded attorneys' fees to Southwest. . . ." Fiero's Memo. at 14. To establish manifest disregard for the law, Fiero must show "something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law. . . . Neither the erroneous application of the rules of law, nor the arbitrator's erroneous decision of the facts is ground for vacating the award." Siegel v. Titan Indus. Corp., 779 F.2d 891, 892-93 (2d Cir. 1985). Manifest disregard may only be found where an arbitrator "understood and correctly stated the law but proceeded to ignore it." Id.
Attorneys' fees may be awarded where an action was frivolous or pursued in bad faith. See, e.g., Nemeroff v. Abelson, 704 F.2d 652, 654 (2d Cir. 1983). Southwest argued to the Panel that Fiero acted in bad faith and that the action was frivolous because (1) Fiero filed suit too quickly and failed to afford Southwest sufficient opportunity to defend the buy-in price, and (2) Fiero should have terminated the action after receiving Southwest's answer. Fiero argues that these facts cannot sustain a finding of bad faith upon which the panel could have based its award of attorneys' fees. Fiero's Memo. at 14-16. While Fiero may disagree with the Panel's finding, it was not in manifest disregard of the law. Accordingly, the Court will not vacate the award of attorneys' fees.
Fiero next argues that the award of attorneys' fees to Southwest should be vacated pursuant to 9 U.S.C. § 10 (a)(4), because the Panel exceeded its authority by awarding an amount of attorneys' fees and expenses based on estimates rather than billing records and receipts. See Fiero's Memo. at 17. Fiero contends that the parties agreed that the Panel would accept estimates of fees and expenses and then would base its award on submissions of "documents evidencing the actual attorneys' fees." Fiero's Reply Memorandum of Law at 7. However, neither party ever supplemented their fee estimates with billing records. From this fact, Fiero would have the Court conclude that the Panel was unauthorized in making an award of attorneys' fees and expenses based only on the estimates. The Court is not persuaded.
Fiero and Southwest agree that the Panel was authorized to award attorneys fees and expenses. The parties' failure to submit supplementary billing records and receipts to the Panel did not remove the fees and expenses issue from the panel's consideration. In fashioning the award of attorneys' fees, the Panel based the award on the only information it had before it, i.e. the parties' estimates. Accordingly, the Court declines to vacate the award of attorneys fees pursuant to 9 U.S.C. § 10 (a)(4).
Moreover, because Fiero also failed to submit its billing records and receipts, whatever windfall Fiero presumes Southwest to have gained by a fee award based on estimates could equally have inured to the benefit of Fiero. Thus, Fiero's belated objection to the parties' failure to submit those records appears to come only because Fiero has emerged as the losing party on this issue; had Fiero truly thought an award based on estimates objectionable, it would have, at the very least, submitted its own records to the panel.
IV. Forum Fees
Fiero argues that there were five hearing sessions but that the Panel erroneously billed for six. Fiero's Memo. at 18. Thus, Fiero argues, the Award should be modified pursuant to 9 U.S.C. § 11 (a), which provides that the Court may modify an arbitration award:
Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.Id.
In response, Southwest contends that the Panel was not only permitted to bill for six hearing sessions, but seven. Southwest's Memo. at 18. Southwest points to NASD Rule 10205(b) which provides, in pertinent part: "[a] hearing session is any meeting between the parties and the arbitrator(s) . . . which lasts four hours or less." See Code of Arbitration Procedure, NASD Rule 10205(b), attached to Wolfson Dec. as Exh. "B." It is undisputed that at least two hearing sessions exceeded four hours.
The law is clear on this issue: "An award must be confirmed provided any colorable grounds for it can be inferred from the facts of the case." See, e.g. Blue Bell, Inc. v. Western Glove Works Ltd., 816 F. Supp. 236, 241 (S.D.N.Y. 1993). Here, such grounds can be inferred from the facts. The undisputed fact, is that two hearing sessions exceeded four hours. Therefore, the Panel was permitted to bill for a total of six hearing sessions pursuant to NASD Rule 10205(b). Accordingly, Fiero's motion to modify the award pursuant to 9 U.S.C. § 11 (a) is denied.
V. Confirmation
"Absent a statutory basis for modification or vacatur, the district court's task [is] to confirm the arbitrator's final award as mandated by [the Federal Arbitration Act]. . . ." Blue Bell, Inc. v. Western Glove Works Ltd., 816 F. Supp. 236, 243 (S.D.N.Y. 1993). Having disposed of Fiero's arguments for modification and vacatur, the Award as ordered by the Panel is confirmed.
VI. Southwest's Application for Attorneys' Fees
Southwest argues that Fiero's motion for arbitration is frivolous and "entitles Southwest to compensation for the reasonable fees and expenses incurred in responding thereto, including attorneys' fees." Southwest's Memo. at 34-35. The Court does not find that Fiero's motion was frivolous or made in bad faith. Accordingly, Southwest's application for attorneys' fees is denied.
CONCLUSION
For the reasons set forth above, Fiero's motion to vacate or modify the Award is denied, Southwest's cross-motion to confirm the Award is granted, and Southwest's application for attorneys' fees is denied.
SO ORDERED.