Opinion
SUCV2019600D
06-05-2019
SANTANDER BANK, N.A. v. Michael KLEIN
File Date: June 6, 2019
MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF’S APPLICATION TO VACATE OR IN THE ALTERNATIVE MODIFY, ARBITRATION AWARD AND ON DEFENDANT’S CROSS MOTION TO CONFIRM ARBITRATION AWARD
Douglas H. Wilkins, Justice
The Complaint in this case seeks to vacate an Arbitration Award of the Financial Industry Regulatory Authority’s ("FINRA") Office of Dispute Resolution dated January 22, 2019 ("FINRA Decision") in Michael Klein v. Santander Bank, N.A., Perry Vachon and Charles Wermuth, Case Number 17-02674 ("Arbitration Proceeding"). The plaintiff here is Santander Bank, N.A. ("Santander"), which was the respondent in the Arbitration Proceeding. The defendant is Michael Klein ("Klein"), who prevailed as the claimant in the Arbitration Proceeding. Before the court is Petitioner’s Application to Vacate, or in the Alternative Modify, Arbitration Award ("Motion"). Klein has filed a "Cross-Motion to Confirm Arbitration Award" ("Cross-Motion"). After hearing, the Motion is DENIED and the Cross Motion is ALLOWED.
BACKGROUND
By written Submission Agreement, dated February 16, 2018 ("Agreement"), Mr. Klein and Santander agreed:
The undersigned parties ("parties") hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, and all related cross claims, counterclaims and/or third-party claims which may be asserted, to arbitration in accordance with the FINRA By-Laws, Rules, and Code of Arbitration Procedure.
Agreement, ¶11. The parties also agreed that their dispute would be decided pursuant to FINRA procedures and rules:
The parties hereby state that they or their representative(s) have read the procedures and rules of FINRA relating to arbitration, and the parties agree to be bound by these procedures and rules.Id.
Klein’s Statement of Claim, dated November 30, 2017 alleged six counts against Santander: (1) violation of the public policy exception to the Employee at will doctrine, (2) breach of the covenant of good faith and fair dealing, (3) promissory estoppel, (4) fraudulent misrepresentation, (5) breach of contract, and (6) retaliation. The allegations of the statement of claim focused upon a former Santander employee, John Bartolo, who reported to Mr. Klein. The statement of Claim alleges that Santander improperly terminated Mr. Klein based on his complaints about Mr. Bartolo on various matters, including personal safety issues and complaints related to Mr. Bartolo’s failure to pass a FINRA securities licensing exam. It does not allege that other supposedly unlicensed employees at Santander sold managed products and did not make broad allegations regarding a series of partnerships where licensed individuals would split commissions with unlicensed individuals. Nor did it allege that Santander circumvented its automated exception monitoring of regulated products.
A three-member FINRA arbitration panel heard evidence on November 26-29, 2018 in Boston, Massachusetts. The presiding chairperson was Paul Peter Nicolai. During the hearing Mr. Nicolai called for testimony on licensing issues and questioned Mr. Klein regarding his complaints specific to Mr. Bartolo, as well as about broader licensing issues at Santander Securities, LLC ("SSLLC"), which was not a party to the arbitration proceeding. He also issued a warning to SSLLC’s Chief Compliance to review his records on licensing issues and later questioned that witness on licensing issues. The Chairperson disclosed during the hearing that he had reviewed evidence outside of the record relating to licensing and regulatory issues. By Santander’s count, the Chairperson asked about 330 questions during the hearing and occupied close to one hour of testimony.
The parties submitted post-hearing briefs addressing Mr. Bartolo’s licensing activity, not broader licensing issues concerning other employees.
The FINRA decision was entitled "Award." It also contained a separate section entitled "AWARD," which read:
After considering the pleadings, the testimony and evidence presented at the hearing, and the post-hearing submissions, the Panel has decided in full and final resolution of the issues submitted for determination as follows:
1. Respondent Santander is liable for and shall pay to Claimant $1, 227, 259.99 in compensatory damages.
2. Respondent Santander is liable for and shall pay to Claimant interest in the amount of $112.40 per day from September 23, 2015 to December 31, 2018.
3. Respondent Santander is liable for and shall pay to Claimant interest in the amount of $435.00 per day from January 1, 2019 until the award is paid in full.
4. Respondent Santander is liable for and shall pay to Claimant the sum of $77, 500.00 in attorneys fees pursuant to Massachusetts General Law Chapter 231, section 6f [sic].
5. Respondent Santander is liable for and shall pay to Claimant $375.00 as reimbursement of the non-refundable portion of the filing fee.
6. Claimant’s request for punitive damages is denied.
7. Respondent Santander and Vachon’s request for attorneys fees is denied.
8. Any and all claims for relief not specifically addressed herein are denied.
Following this "Award" is a section with 28 paragraphs entitled "Arbitrators’ Findings."
The Arbitrators found (¶5) that:
Within one month to six weeks after commencing his employment with Respondent Santander, Claimant became aware that one of the sales representatives reporting to him did not have the appropriate licensure to recommend and sell products in that the particular representative had repeatedly failed the Series 65-66 examination and had, in fact, ceased taking it. That person is referred to as "employee."
Klein reported the matter to the compensation at Santander. Findings, ¶7. Santander takes particular issue with findings 8, 9, 10 and 23 which discuss the employee in broader context and are quoted below. Unchallenged findings (¶¶11-17) conclude that Klein followed up with Santander’s management and compliance staff, that the customers were never advised even though the employee continued to counsel them and that, for a variety of reasons the employee was recommended for termination but was reported as having voluntarily resigned. On September 23, 2015, Klein was called into a meeting at which his employment was terminated without prior notice, warning or explanation, despite the improvement in his sales group’s performance. The Findings’ central conclusion appears in paragraph 25, which Santander also challenges for reasons set forth below:
We determine that the termination of Claimant’s employment was principally motivated by retaliation for his reporting the violation of FINRA rules to Respondent Santander’s management and his pressing for their resolution in the face of Respondent Santander’s determination to avoid exposing the fact that it was managing a process of subverting its securities software package and allowing unlicensed individuals to effect transactions which required licensure.
In context, "the violation of FINRA rules" reasonably is read to refer to the employee’s activities without a license, because that is what Klein reported. The second part of this finding (after "in the face of ...") places Santander’s decision in broader context for the purpose of assessing motive ("to avoid exposing" its improper activities).
DISCUSSION
I.
The court’s jurisdiction over this matter derives from G.L.c. 251, § 12, which confers the power to "vacate an award." The first question is: what constitutes the "award"? The parties have not expressly addressed this question, but it is jurisdictional.
The case law speaks in terms that distinguish between the award and the findings upon which the award is based. Pittsfield v. International Brotherhood of Police Officers, 480 Mass. 634, 638 (2018) ("An award cannot be disturbed even if an arbitrator’s findings are so confusing or unclear that, in order to evaluate the merits of an award, we would have to confront conflicting inferences"); Lynn v. Thompson, 435 Mass. 54, 60 (2001) ("Absent fraud, errors of law or fact are not sufficient grounds to set aside an award") (internal quotes and citations omitted). The principle is essentially the same as applied by the appellate courts who "review ‘judgments, not statements in opinions.’" Sexual Minorities Uganda v. Lively, 899 F.3d 24, 29 (1st Cir. 2018), citing Black v. Cutter Labs., 351 U.S. 292, 297 (1956). Accord, Elkin v. Metro. Prop. & Cas. Ins. Co. (In re Shkolnikov ), 470 F.3d 22, 24 (1st Cir. 2006), citing California v. Rooney, 483 U.S. 307, 311 (1987). Any potential harshness in this principle is completely remedied by the rules of collateral estoppel, which provide that a fact finder’s findings have no preclusive effect unless necessary to the judgment. See, e.g., Alba v. Raytheon Co., 441 Mass. 836, 841 (2004). See generally Pierce v. Morrison Mahoney LLP, 452 Mass. 718, 730-31 (2008) (issue-preclusive effect given to arbitration awards where the "arbitration affords opportunity for presentation of evidence and argument substantially similar in form and scope to judicial proceedings").
Here, Santander’s challenge to paragraphs 8, 9, 10, 19, 23 and 25 of the Arbitrators’ Findings does not qualify as a challenge to an "award" within the meaning of G.L.c. 251, § 12. Rather, it is a challenge to statements or findings. The court lacks authority to adjudicate such a claim. It follows that the court cannot grant the alternative request to "modify the award to strike the findings based on the arbitrators deciding issues that were not presented to them by the parties. Those Paragraphs are 8-10, 19, 23 and 25." See slide 23 of Santander’s oral argument presentation.
While Santander does ask the court to vacate the Award itself, it bases that prayer upon a challenge to the panel’s authority to find certain subsidiary facts, as discussed in Part II, below. It does not seriously question that the "Award" section itself grants the relief requested in the Statement of Claim and, therefore, falls within the scope of the agreement. The close link between the definition of "award" and the concept of "relief" is inherent in the passage that Santander itself cites for the proposition that a court will "vacate an award if an arbitrator exceeds his authority by granting relief beyond the scope of the arbitration agreement," Cent. Ceilings, Inc. v. Suffolk Constr. Co., Inc., 93 Mass.App.Ct. 207, 213 (2018). Cf. also Conway v. CLC Bio, Inc., 87 Mass.App.Ct. 203, 506-07 (2015) ("An arbitrator exceeds her authority if she awards relief beyond the scope of the arbitration agreement, beyond that to which the parties bound themselves, or enters an award prohibited by law") (emphasis added). That principle is enough, without more, to dispose of Santander’s application, which does not seriously contend that the "Award" section of the FINRA Decision, considered alone, warrants court intervention.
II.
Even where it applies, the Court’s power to vacate an arbitration award is very limited. Conway, 87 Mass.App.Ct. at 507 (2015). See also Superadio Ltd. Partnership v. Winstar Radio Products, LLC, 446 Mass. 330, 333-34 (2006). The Uniform Arbitration Act, G.L.c. 251, § 12, provides:
(a) Upon application of a party, the court shall vacate an award if:-
1. The award was procured by corruption, fraud or other undue means;
2. There was evident partiality by an arbitrator appointed as a neutral, or corruption in any of the arbitrators, or misconduct prejudicing the right of any party;
3. The arbitrators exceeded their powers;
4. The arbitrators refused to postpone the hearing upon sufficient cause being shown therefore or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of section five, as to prejudice substantially the rights of a party ...
Notably, the statute does not authorize the court to vacate an award if it disagrees with the arbitrator’s interpretation of the law. School Dist. of Beverly v. Geller, 50 Mass.App.Ct. 290, 293 (2000) ("Neither error of fact nor error of law provides grounds for vacating an award"). The Appeals Court in Conway, 87 Mass.App.Ct. at 506-07, set forth the limits on judicial review of an arbitrator’s award under a private arbitration agreement:
Absent fraud, corruption, or other undue means in the procurement of the agreement to arbitrate or a showing that the award is otherwise void or voidable, an arbitrator’s award is binding. Id. at 336-37. McInnes v. LPL Financial, LLC, 466 Mass. 256, 262-63 (2013). An arbitrator’s findings of fact and conclusions of law are binding even if erroneous. Boston Water Power Co. v. Gray, 6 Met. 131, 181 (1843). Jones v. Boston Mill Corp., 6 Pick. 148, 156 (1828). Trustees of the Boston & Me. Corp. v. Massachusetts Bay Transp. Authy., 363 Mass. 386, 390 (1973). Dane v. Aetna Cas. & Sur. Co., 369 Mass. 966, 967 (1976) (Dane). However, an arbitrator’s award may be vacated if the arbitrator exceeded her authority. See G.L.c. 251, § 12(a)(3); Superadio L.P., supra at 334.
... "The fact that an arbitrator [may have] committed an error of law does not alone mean that [s]he has exceeded [her] authority." City of Boston v. Professional Staff Ass’n, 61 Mass.App.Ct. 105, 112 (2004) (quotation omitted) ...
Mindful of these principles, Santander tries to argue that the panel "exceeded their powers." But its "only contention that the arbitrator exceeded his power is in substance a claim that the arbitrator committed an error of law," and is not subject to judicial review. Dane, supra .
In particular, Santander challenges the panel’s power to make following findings in the Award, acknowledging that references to "the employee" were to Mr. Bartolo:
8. Claimant was told that the employee was one of approximately nineteen individuals in Respondent Santander’s employment who were "grandfathered" under an unidentified loophole in Massachusetts law which allowed unlicensed individuals to sell managed products. Respondent Santander’s compensation staff agreed the "loophole" was no longer applicable and that Respondent Santander had to do something about the issue. Respondent Santander never provided any documentation of the "loophole" or any indication as to what period of time that "loophole" would have provided authority for unlicensed individuals to sell managed products. The employee was employed by Respondent Santander since 2012.
9. Respondent Santander had created and continued to maintain a series of internal "partnerships" where a licensed individual recorded transactions in products requiring the Series 65-66 license for the customers of unlicensed individuals in order to ensure that the transactions would occur and that any automated reporting system to prevent transactions in products requiring the Series 65-66 license by unlicensed individuals would not be triggered. The employee’s "partner" was a regulated individual who is still employed by Respondent Santander.
10. The "partnerships" and the circumvention of automated exception monitoring in the regulated product trading software was augmented by Respondent Santander’s maintenance of a manual system of splitting commissions on regulated product sales where unlicensed individuals were involved in the transactions. In the particular "partnership" between the employee [and] his partner, commissions on managed product transactions were manually split 50/50 between the two of them by respondent Santander.
* * *
19. The record shows Respondent Santander’s management was aware that the employee was at least inconsistent in his use of its computer systems since at least September 2014. Indeed, the "partnership" was designed to make use by the employee of the "securities systems" unnecessary to avoid any reporting to the compliance department of actual or attempted transactions by an unlicensed person in transactions requiring licensure [emphasis added].
Each of these paragraphs ultimately ties its broader findings to activities of Mr. Bartolo ("the employee") whose alleged misdeeds are indisputably within Klein’s Statement of Claim and therefore within the scope of issues submitted by the Agreement. The statements about other employees and other practices provide context for the discussion of Mr. Bartolo’s practices. The panel could reasonably view the extent of wrongdoing within the Santander "family" of companies as bearing upon Santander’s motivation, particularly where retaliation is much more likely against an employee who challenges a widespread practice than against one who challenges an isolated bad actor within the company.
Santander claims that the arbitration panel "based" its decision upon these findings of widespread practices. The section entitled "Award," however, is properly limited to matters raised by Klein’s Statement of Claim. Given the reference to Bartolo’s actions in paragraphs 8, 9 and 10 a fair reading of the Award is that the panel placed the allegations regarding Bartolo in context. There is nothing wrong with that. Even if there were, basing an award upon "confusing or unclear" or "conflicting inferences" or "errors of law or fact are not sufficient grounds to set aside an award." Lynn v. Thompson, 435 Mass. 54, 60 (2001); see Pittsfield v. International Brotherhood of Police Officers, 480 Mass. 634, 638 (2018). Santander has shown no more.
Paragraph 23 of the Findings raises somewhat different issues. It reads:
During Claimant’s employment, Respondent Santander faced a series of FINRA complaints and investigations for failure to supervise its sales staff in connection with Puerto Rico public debt. Those matters ended with fines of several million dollars.
It appears likely that this finding was wrong, because SSLLC, not Santander, was the subject of the FINRA enforcement action for alleged rule violations. As noted above, however, errors of fact do not warrant court intervention. Moreover, as with the challenged portions of findings 8, 9 and 10, the allegedly extraneous information was part of the panel’s evaluation of Santander’s motive to retaliate, since Klein had raised a concern that went to a larger pattern in Santander’s practices.
Santander also argues that the Chairman violated FINRA procedures concerning "Questions by Arbitrators and Factual Investigations," which provide, among other things that:
Every effort should be made to avoid taking over a hearing or becoming an advocate ... Arbitrators should not make independent factual investigations of a case.
Phrased in precatory terms, these procedures do not squarely prohibit the Chairman’s actions, even as characterized by Santander. They appear in a FINRA Office of Dispute Resolution Arbitrator’s Guide and do not appear to be among the by-laws, rules and code of arbitration procedure mentioned in the Agreement. More to the point, violation of those procedures would not amount to cause for vacating an award under G.L.c. 251, § 12.
While G.L.c. 251, § 12(4) authorizes vacation of an award if the arbitrators "so conducted the hearing, contrary to the provisions of section five, as to prejudice substantially the rights of a party," nothing in G.L.c. 251, § 5 alters the analysis. Section 5 provides that, "[u]nless otherwise provided by the agreement," the parties have the right "to present evidence material to the controversy," but does not, by its terms, evident intention or appellate construction, expand the court’s authority or scope of review. Cf. Katz, Nannis & Solomon, P.C. v. Levine, 473 Mass. 784, 789-95 (2016) (the grounds of judicial review of a commercial arbitration award are limited to those delineated in the Uniform Arbitration Act, G.L.c. 251, § § 12 and 13, and may not be altered by contract). The Chairman may have asked too many questions or considered extraneous material, but he did so on the record, with the opportunity for response and correction. Where the findings have a firm anchor in the Statement of Claim regarding Bartolo’s misconduct, Santander’s rights were not substantially prejudiced. Indeed, Santander points to no information that it was precluded from presenting- with the possible exception of the identity of Santander affiliate, SSLLC, as the party penalized by FINRA, which did not materially change the findings.
Under G.L.c. 251, § 5(d), "[i]f the application to vacate an award is denied and no motion to modify or correct the award is pending, the court shall confirm the award." Accordingly, the Court grants the Cross Motion and confirms the award.
CONCLUSION
For the above reasons, final judgment shall enter as follows:
1. Petitioner’s Application to Vacate, or in the Alternative Modify, Arbitration Award is DENIED .
2. Defendant Cross Motion to Confirm Arbitration Award is ALLOWED.
3. Pursuant to G.L.c. 251, the court confirms the Arbitration Award of the Financial Industry Regulatory Authority’s Office of Dispute Resolution dated January 22, 2019 in Michael Klein v. Santander Bank, N.A., Perry Vachon and Charles Wermuth, Case Number 17-02674.