F I L E D United States Court of Appeals Tenth Circuit UNITED STATES COURT OF APPEALS JUN 10 1998 TENTH CIRCUIT PATRICK FISHER Clerk
COHIG & ASSOCIATES, INC., Petitioner - Appellant, No. 97-1119 v. (D.C. No. 95-D-2083) NORMAN STAMM, (D. Colo.) Respondent - Appellee.
ORDER AND JUDGMENT *
Before TACHA, McKAY, and EBEL, Circuit Judges.
Appellant Cohig & Associates, Inc. [Cohig], a securities broker-dealer,
seeks vacation of an award entered against it in an arbitration proceeding
conducted by the National Association of Securities Dealers, Inc. [NASD]. Cohig
appeals the district court’s confirmation of the award in favor of Appellee
* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. The court generally disfavors the citation of orders and judgments; nevertheless, an order and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3. Mr. Norman Stamm.
Mr. Stamm filed a pro se claim with the NASD alleging that he suffered
losses as a customer of Kober Financial Corp. [Kober Financial], 1 another
securities broker-dealer, resulting from its material misrepresentations regarding
the stock of Brush Creek Mining and Development [Brush Creek]. Mr. Stamm
transferred his IRA and securities account to Kober Financial when his son, Neil
Stamm, entered its brokerage training program. Mr. Stamm purchased shares of
Brush Creek after Kober Financial allegedly represented to his son that Brush
Creek was in strong financial condition and would increase in value quickly.
According to a Brush Creek internal audit, however, its financial viability was in
“substantial doubt.” R., Vol. I at 17. After Neil Stamm left Kober Financial, Mr.
Stamm’s accounts were transferred to another account representative. This
representative, who allegedly considered Brush Creek a weak and speculative
stock, also eventually left Kober Financial and managed Mr. Stamm’s accounts
from another brokerage service.
Mr. Stamm claimed that his Brush Creek shares were reversely split which
reduced their total value from $22,961 to $2,220. Id. at 14-15, 168. He alleged
that Cohig was liable for those losses because Cohig took over the assets of
1 Kober Financial is a subsidiary of Kober Corporation. Cohig’s parent company is Cherry Creek Investments [CCI]. Mr. Stamm’s claim against Cohig implicates the brokerage actions of Kober Financial.
-2- Kober Financial. Cohig moved to dismiss contending that an asset purchaser
cannot be held liable for the misconduct of the asset seller under these facts.
Cohig submitted evidence to the arbitrator concerning the general rule of and the
exceptions to successor liability.
After considering the “proof of the [p]arties,” id. at 169, the arbitrator
awarded Mr. Stamm $20,741, plus interest. 2 Cohig filed a motion to vacate the
award in the district court on the basis that the award was arbitrary and capricious
and in manifest disregard of the law. The district court confirmed the award
holding that, even if the arbitrator’s factual conclusions were erroneous and his
application of the law to those facts was erroneous, the “award is not open to
review on the merits.” Id. at 229 (citing Checkrite of San Jose, Inc. v. Checkrite,
Ltd., 640 F. Supp. 234, 237 (D. Colo. 1986)). The court also held that the theory
of de facto merger supported the award. See id. at 229-30. The court found that
“[t]here has been nothing presented here that even suggests that the arbitrator’s
decision was not the result of careful consideration of Cohig’s arguments.” Id. at
229. Cohig asserts that the district court erred in failing to vacate the award for
three reasons. We address each argument in turn.
2 Because both parties agreed to submit the matter to arbitration under the NASD’s Simplified Rules, the arbitrator based his decision “solely upon the pleadings and evidence filed by the parties” without a hearing. R., Vol. I at 181 (NASD C ODE OF A RBITRATION P ROCEDURE § 10302(f) (1996)).
-3- In reviewing a district court’s confirmation or vacation of an arbitration
award, we review its factual findings for clear error and questions of law de novo.
See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48 (1995);
Denver & Rio Grande W. R.R. Co. v. Union Pac. R.R. Co., 119 F.3d 847, 849
(10th Cir. 1997). Our review, however, is restricted by the finality that courts
should afford the arbitration process. “Because a primary purpose behind
arbitration agreements is to avoid the expense and delay of court proceedings, it is
well settled that judicial review of an arbitration award is very narrowly limited.”
Foster v. Turley, 808 F.2d 38, 42 (10th Cir. 1986); see Denver & Rio Grande W.
R.R. Co., 119 F.3d at 849; Litvak Packing Co. v. United Food & Commercial
Workers, 886 F.2d 275, 276 (10th Cir. 1989) (“Our review of arbitration awards
is among the narrowest known to the law.”). “We must consider . . . that [the
district court] will set aside the arbitrator’s decision ‘only in very unusual
circumstances’ such as fraud, corruption, or a decision in manifest disregard of
the law.” Kelley v. Michaels, 59 F.3d 1050, 1053 (10th Cir. 1995) (quoting First
Options, 514 U.S. at 942).
Cohig argues that the district court erroneously confirmed the award on the
basis of a legal theory of successor liability, de facto merger, which was not
presented to the arbitrator by Mr. Stamm. Cohig contends that because Mr.
Stamm raised the de facto merger theory for the first time at the district court
-4- hearing, the arbitrator could not have relied on this theory in entering the award.
Mr. Stamm asserts that Cohig itself presented the various legal theories, including
de facto merger, on which the arbitrator could have based his decision. He argues
that because the law on de facto merger was submitted to the arbitrator, even
though it was submitted by Cohig, the arbitrator could have properly relied on it
in determining an award.
An arbitration award may be based only upon those theories or matters
which may “fairly be read” as included in the arbitration submissions. Kelley, 59
F.3d at 1054. The NASD Code of Arbitration Procedure, which guided this
arbitration, states that “the arbitrator shall decide the dispute, claim or
controversy solely upon the pleadings and evidence filed by the parties.” R., Vol.
I at 181 (NASD C ODE § 10302(f)). The NASD Code does not dictate that when
an arbitrator makes an award he may consider only the pleadings and legal
authority submitted by the party in whose favor he awards. Cohig has presented
no law, and we can find none, that requires an arbitrator to base an award only on
the prevailing party’s submissions without examining the submissions of the other
party. If, during an arbitrator’s examination of the law, he finds that the law,
when applied to the pertinent facts, demands a certain result, he need not refrain
from imposing that result merely because it disfavors the party who presented the
law. Further, Cohig has presented no authority to support its contention that the
-5- district court’s confirmation erroneously relied on a legal theory not presented by
Mr. Stamm to the arbitrator. This argument is contrary to principles of law
requiring a court to review all the evidence before rendering a decision. Mr.
Stamm succinctly stated at oral argument a realistic yet ironic truth about the
practice of law: Occasionally, the opposing party proves your case for you or you
inadvertently prove your opponent’s case. This may occur in litigation or
arbitration and likely occurred here, especially considering Mr. Stamm’s pro se
status.
We construe Mr. Stamm’s pro se pleadings liberally. See Haines v. Kerner,
404 U.S. 519, 520 (1972); Riddle v. Mondragon, 83 F.3d 1197, 1202 (10th Cir.
1996). His initial claim against Cohig states that Cohig has “taken over the assets
of Kober Financial.” R., Vol. I at 11. Although not responding to a precise
statement of the law supporting the relief requested by Mr. Stamm, Cohig
submitted to the arbitrator the law on successor liability, which included the
theory of de facto merger. Cohig’s assertion that no successor liability exists
demonstrates at least that it understood from Mr. Stamm’s plainly worded
complaint that he believed Cohig was liable as the successor to Kober Financial.
The arbitrator is entitled to make the same reasonable inference. We conclude
that the de facto merger theory of successor liability was properly before the
arbitrator because it was part of the material submitted by one of the parties.
-6- Although the claimant did not use the magic words or himself present the law of
de facto merger, the district court did not erroneously confirm the award.
Cohig also argues that the district court’s confirmation of the award was
erroneous because the arbitrator acted in manifest disregard of the law. We have
previously characterized the “manifest disregard” standard as “willful
inattentiveness to the governing law.” Jenkins v. Prudential-Bache Sec., Inc., 847
F.2d 631, 634 (10th Cir. 1988). To find manifest disregard, “there must be some
showing in the record, other than the result obtained, that the arbitrator[] knew
the law and expressly disregarded it.” Prudential-Bache Sec., Inc. v. Tanner, 72
F.3d 234, 240 (1st Cir. 1995) (internal quotation marks and citation omitted).
“An arbitrator’s erroneous interpretations or applications of law are not
reversible.” ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10th Cir.
1995); see Wilko v. Swan, 346 U.S. 427, 436-37 (1953), overruled on other
grounds by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S.
477 (1989); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808
F.2d 930, 933 (2d Cir. 1986) (stating that manifest disregard “clearly means more
than error or misunderstanding with respect to the law”). Cohig asserts two bases
for its manifest disregard claim.
Cohig first argues that the arbitrator displayed manifest disregard for the
law of successor liability in entering an award against Cohig because the facts in
-7- the record do not support a finding of de facto merger. Cohig contends that the
facts were not disputed and, therefore, the arbitrator must have acted in manifest
disregard of the law because he did not properly apply the law to those facts.
Generally, a company that acquires all, or substantially all, of the assets of
another company is not liable for the debts and liabilities of that seller unless (1)
there is an express or implied agreement to assume such debts; (2) the transaction
amounts to a merger or a consolidation; (3) the purchasing corporation is a mere
continuation of the selling company; or (4) the “transaction is entered
fraudulently in order to escape liability for such debts.” Florom v. Elliot Mfg.,
867 F.2d 570, 575 n.2 (10th Cir. 1989); see Alcan Aluminum Corp., Metal Goods
Div. v. Electronic Metal Prods., Inc., 837 P.2d 282, 283 (Colo. App. 1992); Ruiz
v. ExCello Corp., 653 P.2d 415, 416 (Colo. App. 1982). Under Colorado law, a
de facto merger may exist if there is evidence suggesting (1) continuity of
management, personnel, physical location, assets, and business operations; (2)
continuity of shareholders; (3) cessation of the seller’s business and liquidation of
its assets; (4) assumption by the purchaser of those liabilities of the seller
necessary to continue uninterrupted the seller’s former business operations. See
Johnston v. Amsted Indus., Inc., 830 P.2d 1141, 1146-47 (Colo. App. 1992); cf.
Ekotek Site PRP Comm. v. Self, 948 F. Supp. 994, 1002 (D. Utah 1996); V.C.
Video, Inc. v. National Video, Inc., 755 F. Supp. 962, 969 (D. Kan. 1990). The
-8- absorbing corporation receives the added capital and franchise of the merged
corporation and holds itself out to the world as continuing the business of the
seller.
Although the arbitrator in this case did not make explicit factual findings
and did not explain his reasons for the award, the Supreme Court has held that an
“award may be made without explanation of [the arbitrator’s] reasons and without
a complete record of [the] proceedings.” Wilko, 346 U.S. at 436. If the court can
find any “argument that is legally plausible and supports the award,” then it must
confirm the award. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d
418, 421 (6th Cir. 1995). Our review of the record indicates that the facts are not
as undisputed as Cohig contends; certain facts in the record could support a de
facto merger between Cohig and Kober Financial. 3 Mr. Stamm submitted a form
letter he received from Kober Financial stating that securities accounts at Kober
Financial would be transferred to Cohig along with the account executives. The
sale-purchase agreement states that Kober Financial affirmatively covenants that
What Cohig has characterized in its brief as the elements of a de facto 3
merger, see Appellant’s Opening Br. at 18, actually describes an expanded de facto merger theory, “continuity of the enterprise,” and does not include the requisite continuity of shareholders. See Johnston, 830 P.2d at 1146. Assuming that Cohig unintentionally misrepresented this law to the arbitrator, the facts in the record also could support successor liability on a “continuity of the enterprise” theory. Even though this form of successor liability is not legitimate in Colorado, see id. at 1147, the arbitrator’s possible erroneous application of the law is not reversible. See ARW Exploration Corp., 45 F.3d at 1463.
-9- it will transfer all existing customer accounts and account representatives to
Cohig. Mr. Stamm presented to the arbitrator a Cohig Account Statement
showing that his Kober Financial account was in fact transferred. The record
shows that Cohig assumed leases for or sublet Kober Financial’s offices,
furniture, and equipment. The arbitrator could have concluded that these facts
satisfied the de facto merger theory’s requirement of continuation of business
operations, personnel, management, location, and assets.
The record reveals some dispute about the extent to which Kober
Financial’s assets were purchased by Cohig. Mr. Stamm presents this factual
question by asserting that Cohig “[took] over the assets of Kober Financial.” R.,
Vol. I at 11. Cohig acquired assets from Kober Financial valued at $350,000 in
cash and $188,000 in furniture and equipment. See id. at 41, 46, 55. Cohig,
however, argues that the record shows that Kober’s total assets were valued at $6
million and that it only purchased $188,000 worth of Kober’s assets. To
emphasize the cloudy nature of the record concerning “assets,” we point out
Cohig’s interchangeable use of the name “Kober” for both Kober Financial and its
parent company, Kober Corp., which are two separate corporate entities. It is
possible that the arbitrator found, perhaps mistakenly, that the $6 million in assets
were attributable to Kober Corp., not to Kober Financial. The arbitrator could
have found that Cohig totally assumed the assets and liabilities of Kober Financial
-10- while Kober Corp. continued its various operations and retained $6 million in
assets.
The arbitrator could have found that the continuity of shareholders
requirement was satisfied when Kober Corp. and Kober Financial became
shareholders of Cohig. See id. at 41. Cohig’s parent company, CCI, on behalf of
Cohig, transferred to Kober Financial and Kober Corp. approximately fifteen
percent of CCI’s preferred stock and a stock option to purchase up to forty
percent of its common stock. See id. 41, 56.
Cohig’s own statements and submissions to the arbitrator also could
support a de facto merger theory of liability. A vice president of Cohig stated in
his affidavit that Kober Corp. “decided to discontinue its securities brokerage
operation (Kober Financial).” Id. at 46. Cohig represented that “Kober
[Financial] was not in a position to continue in the business of securities
brokerage,” Appellant’s Opening Br. at 21, and that Kober Financial “intended to
cease its brokerage business.” R., Vol. I at 41. Cohig also stated that it
performed a service to the Kober Financial customer by servicing the Kober
Financial accounts because the brokerage firm was “go[ing] out of business.” Id.
at 221. According to Cohig, a salutary function of its asset purchase of Kober
Financial was that the seller’s clients had the opportunity to move their accounts
to a functioning brokerage where they could continue to trade and access their
-11- securities. From these statements, the arbitrator could have found that Cohig
assumed the liabilities of Kober Financial necessary to continue uninterrupted the
business operations formerly performed by Kober Financial. The statements also
support a possible finding that Kober Financial ceased operations and terminated
or liquidated its brokerage business. There is no evidence in the record that
Kober Financial continued other businesses after the transaction with Cohig.
Cohig also contends that the arbitrator could not have found a de facto
merger because of the inclusion of a paragraph in the sale agreement between
Cohig and Kober Financial disclaiming successor liability. See id. at 55-56, 217-
19. Notwithstanding this expression of Cohig’s intent not to assume liability, the
arbitrator could have found a de facto merger if he believed the facts supported
the requirements of such a merger. 4 Thus, the district court did not creatively
invent the de facto merger theory to support the arbitrator’s award. Instead, the
court merely found that a plausible argument existed which could support the
award. See Jaros, 70 F.3d at 421. Because an arbitrator has the discretion to
view evidence and determine credibility, the district court correctly stated that
“[i]t could well be that the arbitrator looked at [Cohig’s] Motion to
4 Our review of the record reveals that the arbitrator, whether correctly or erroneously, also could have interpreted the disclaimer paragraph, in conjunction with the evidence of Kober Financial’s regulatory and disciplinary problems, see R., Vol. I at 52-54, as an attempt to fraudulently avoid liability. See Florom, 867 F.2d at 575 n.2 (listing fraudulent transfer as a theory of successor liability).
-12- Dismiss, . . . [and] at the other evidence and somehow concluded that despite
th[e] provision in the contract [disclaiming liability] there had been in effect a de
facto merger, so liability was actually being assumed.” R., Vol. I at 219-20.
Cohig’s second manifest disregard argument claims that, because the facts
in the record do not support any successor liability, the arbitrator must have
disregarded the law in accordance with Mr. Stamm’s express request for the
arbitrator to do so. In his response to Cohig’s amended answer, Mr. Stamm stated
that arbitration is not a legal action and requested that the arbitrator’s decision
“assure[s] the full responsibility towards the public and the good will and moral
result.” Id. at 167. Cohig has mischaracterized this statement. Mr. Stamm, a pro
se complainant, did not “expressly argue[] that an arbitrator is free to dispense his
or her own personal brand of justice, without regard for the law.” Appellant’s
Reply Br. at 8. Mr. Stamm was merely urging the arbitrator to consider the policy
supporting his claim. It is also likely that Mr. Stamm, a 78-year-old retiree
representing himself, was not aware of the legal implications of an arbitration.
We are confident that he is now fully cognizant of those implications.
Contrary to Cohig’s assertion, the Eleventh Circuit’s reversal of an
arbitration award where a party “flagrantly and blatantly urged” the panel of
arbitrators to expressly disregard the law is not pertinent to the facts in this case.
Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11th Cir. 1997).
-13- The court in Montes limited its holding to situations where (1) the record does not
clearly support the award; (2) the record and award show the arbitrators
understood that a party expressly urged disregard for the law; and (3) neither the
record nor the award refuted the suggestion that the law was disregarded. See id.
at 1462-64. In this case, neither the record nor the award indicates that the
arbitrator viewed Mr. Stamm’s innocuous statement as urging disregard of the
law. Mr. Stamm’s statement, viewed in the context of his status as an elderly pro
se individual, differs markedly from the more explicit assertions of Shearson
Lehman Bros., a sophisticated business entity undoubtedly represented by
counsel. More importantly, as we explained above, the record in this case could
support an award and thereby refute an inference from Mr. Stamm’s statement
that the arbitrator disregarded the law. See id. at 1461-62 & n.8. Cohig cannot
claim that Mr. Stamm simultaneously failed to present any law on successor
liability and urged the arbitrator to disregard that precise law. The district court
correctly determined that nothing in the record shows that the arbitrator expressly
or manifestly disregarded the law.
Finally, Cohig argues that the district court’s confirmation of the arbitration
award was erroneous because the award controverts the public policy of
arbitration and the public policy encouraging asset purchases in the securities
industry. Cohig’s public policy arguments, however, merely rehash its other
-14- substantive efforts to persuade us that the award should be vacated and that the
arbitrator acted in manifest disregard of the law. Because we hold that (1) the de
facto merger theory was properly presented to the arbitrator, (2) the facts in the
record could reasonably be construed by the arbitrator to support a possible
finding of de facto merger, and (3) the record does not show a manifest disregard
of the law by the arbitrator, we conclude that the general public policy of
encouraging arbitration is not hindered by this award. We need not determine
whether the policy behind encouraging arbitration awards is preempted by an
alleged public policy encouraging asset purchases in the securities industry. See
Denver & Rio Grande W. R.R. Co., 119 F.3d at 850.
AFFIRMED.
Entered for the Court
Monroe G. McKay Circuit Judge
-15-