Dawahare v. Spencer

• Court: Court of Appeals for the Sixth Circuit
• Decided: April 27, 2000
• Docket: 98-6356
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0150P (6th Cir.) File Name: 00a0150p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  WOODROW W. DAWAHARE,  Plaintiff-Appellant,   No. 98-6356 v.  > ADAM A. SPENCER; DEAN    WITTER REYNOLDS, INC.;

Defendants-Appellees.  SMITH BARNEY, INC.,  1 Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 98-00027—Karl S. Forester, District Judge. Argued: September 14, 1999 Decided and Filed: April 27, 2000 Before: SUHRHEINRICH, COLE, and GIBSON,* Circuit Judges.

* The Honorable John R. Gibson, Circuit Judge of the United States Court of Appeals for the Eighth Circuit, sitting by designation.

1 2 Dawahare v. Spencer, et al. No. 98-6356

_________________ COUNSEL ARGUED: J. Robert Lyons, Jr., WOODWARD, HOBSON & FULTON, Lexington, Kentucky, for Appellant. William E. Johnson, JOHNSON, JUDY, TRUE & GUARNIERI, Frankfort, Kentucky, Nancy H. Baughan, PARKER, HUDSON, RAINER & DOBBS, Atlanta, Georgia, for Appellees. ON BRIEF: J. Robert Lyons, Jr., Glen S. Bagby, WOODWARD, HOBSON & FULTON, Lexington, Kentucky, for Appellant. William E. Johnson, JOHNSON, JUDY, TRUE & GUARNIERI, Frankfort, Kentucky, Nancy H. Baughan, David G. Russell, PARKER, HUDSON, RAINER & DOBBS, Atlanta, Georgia, Theodore E. Cowen, GRASCH, WALTERS & COWEN, Lexington, Kentucky, for Appellees. _________________ OPINION _________________ JOHN R. GIBSON, Circuit Judge. Woodrow Dawahare appeals from the district court's denial of his motion to vacate the arbitration award he obtained against Adam Spencer and Dean Witter Reynolds, Inc. Dawahare argues that because the damages awarded were grossly inadequate and bore no relationship to the evidence submitted, the award itself shows evident partiality. Further, he argues that the arbitrators manifestly disregarded the law of damages. We affirm the district court's confirmation of the award. In view of the limited issues presented, many of the factual details are irrelevant to our discussion. Dawahare established a brokerage account at Shearson Lehman Brothers, Inc. after receiving a "cold call" from Spencer. Smith Barney, Inc. acquired Shearson Lehman sometime after Dawahare opened his account. In August 1994, Spencer informed Dawahare that he planned to leave Smith Barney and go to Dean Witter, and Dawahare agreed to transfer his account. Both before and No. 98-6356 Dawahare v. Spencer, et al. 3

after the transfer, Spencer engaged in short trading with the Dawahare account. As a result of the price increase of stocks in which Dawahare held short positions, the account declined in value by $495,322 during the last two months of 1994. After Dean Witter learned that Dawahare's son had complaints about the handling of his father's account, Spencer was fired. Pursuant to pre-dispute arbitration agreements between the parties, Dawahare submitted the controversy to a National Association of Securities Dealers, Inc. arbitration panel in 1996. Dawahare claimed that Spencer had engaged in unsuitable and excessive trading, causing him damages in excess of $600,000. The NASD panel denied Dawahare's claims against Smith Barney, but found in his favor against Dean Witter, awarding $25,000 in compensatory damages and $24,000 in punitive damages. The arbitrators also found Spencer liable to Dawahare for $1000. In the district court, Dawahare moved to vacate the award; the court denied his motion and granted cross motions to confirm the award. The district court had before it the transcript of the arbitration hearing. At the hearing, Dawahare presented evidence that his health was failing and that he was unable to understand the significance of the short trading strategy pursued by Spencer because of progressive dementia. His wife testified that she thought Dawahare was in over his head. The brokerage firms maintained that Dawahare was an experienced investor, that he was happy with Spencer and with his handling of the account while it was profitable, and that they were unaware of any health or memory problems Dawahare may have had. Smith Barney's expert witness testified that Dawahare's account increased in value while it was at Smith Barney. Dawahare's expert witness testified that a conservative investment strategy, assuming a reasonable return of six percent, would have resulted in an account value of $776,603.28 in contrast to the $258,731.97 the Dean Witter account was worth at the end of January 1995. Dawahare's 4 Dawahare v. Spencer, et al. No. 98-6356 No. 98-6356 Dawahare v. Spencer, et al. 9

expert then added interest to the difference between these two would be to disregard the fact finder's responsibility to figures, arriving at a total of $604,463.06 in damages. Dean evaluate testimony. Witter argued that Dawahare had authorized the activity in his account. Neither Dawahare nor Spencer testified at the We decline to adopt Dawahare's suggestion that we engage arbitration hearing. in a more extensive review of arbitration awards. To do so would undermine the goal of the arbitration process: to The district court rejected Dawahare's argument that the resolve disputes efficiently while avoiding extended litigation. arbitration award should be vacated because of evident See, e.g., Willemijn Houdstermaatschappij, BV v. Standard partiality or manifest disregard of the law and confirmed the Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997); Island award. We review the confirmation of an arbitration award Creek Coal Sales Co. v. City of Gainesville, 764 F.2d 437, for clear error on findings of fact and de novo on questions of 441 (6th Cir. 1985). law. See Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 135 (6th Cir. 1996); Merrill Lynch, Pierce, Fenner & Smith, Smith Barney requests attorneys' fees and double the costs Inc. v. Jaros, 70 F.3d 418, 420 (6th Cir. 1995). incurred in this appeal, arguing that Dawahare's appeal is frivolous. We deny Smith Barney's motion for sanctions. For "It is well established that courts should play only a limited the foregoing reasons, the judgment of the district court is role in reviewing the decisions of arbitrators." Shelby County affirmed. Health Care Corp. v. A.F.S.C.M.E., Local 1733, 967 F.2d 1091, 1094 (6th Cir. 1992). The Federal Arbitration Act presumes that arbitration awards will be confirmed. See 9 U.S.C. § 9 (1994); Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 328 (6th Cir. 1998). A court may vacate an arbitration award in the following situations: (1) where the award was procured by fraud, (2) where the arbitrators were evidently partial or corrupt, (3) where the arbitrators misbehaved so that a party's rights were prejudiced, or (4) where the arbitrators exceeded their powers or executed them so that a final, definite award was not made. See 9 U.S.C. § 10(a) (1994). In addition, a reviewing court may vacate an award where the arbitrators have manifestly disregarded the law. See Glennon, 83 F.3d at 136. Dawahare first argues that the award should be vacated under 9 U.S.C. § 10(a) because the discrepancy between the damages awarded and the damages alleged shows evident partiality. We see no basis to sustain this argument. Only if a reasonable person would have to conclude that the arbitration panel was partial to a party will we find evident partiality. See Andersons, Inc., 166 F.3d at 328. "The alleged partiality must be direct, definite, and capable of 8 Dawahare v. Spencer, et al. No. 98-6356 No. 98-6356 Dawahare v. Spencer, et al. 5

simply no evidence that the arbitrators were aware of some demonstration, and 'the party asserting [it] . . . must establish relevant law on damages that they chose to ignore, and we specific facts that indicate improper motives on the part of the question whether the damages evidence presented by arbitrator.'" Id. at 329 (quoting Consolidation Coal Co. v. Dawahare required any particular outcome. Local 1643, United Mine Workers of Am., 48 F.3d 125, 129 (4th Cir. 1995)). Because Dawahare points to nothing but the During closing argument at the arbitration hearing, amount of the award to establish evident partiality, there is no Dawahare's attorney characterized the damages as two types: basis to vacate the award on this ground. excessive commissions paid while Spencer churned the account at Smith Barney and the loss in value that occurred at Dawahare also argues that the substantial disparity between Dean Witter due to the short positions in the account. His the damages awarded and the damages evidence presented expert, however, concluded that Dawahare should recover the establishes a manifest disregard of the law of damages. He amount of money that his account would have earned had it asserts that the common law entitles him to recover all losses been invested conservatively and earned 6%. Dawahare's proximately caused by the wrongful acts of the liable parties. attorney stated: "So, I would like to give you a nice clean Our review for manifest disregard of the law does not open theory for allocating this award among these respondents, and the door to extensive review of arbitral awards. See Jaros, 70 I'm afraid I can't do that. I'm going to have to leave it to your F.3d at 421 ("This court has emphasized that manifest wisdom." Dawahare cannot rely upon the wisdom of the disregard of the law is a very narrow standard of review."). decision makers without citing any rule of law to support his damages claim and then later argue that the arbitrators An arbitration decision "must fly in the face of established disregarded the law. legal precedent" for us to find manifest disregard of the law. Id. An arbitration panel acts with manifest disregard if Dawahare's argument on manifest disregard of the law is "(1) the applicable legal principle is clearly defined and not premised on the fact that the only damages evidence was his subject to reasonable debate; and (2) the arbitrators refused to expert's opinion that he had sustained damages in excess of heed that legal principle." Id. Thus, to find manifest $600,000. In essence, he argues that the arbitrators were disregard a court must find two things: the relevant law must compelled to accept this testimony and award that amount. be clearly defined and the arbitrator must have consciously We agree with the district court's observation that "[e]xpert chosen not to apply it. See M & C Corp. v. Erwin Behr testimony, even if uncontradicted, may be believed in its GmbH & Co., 87 F.3d 844, 851 n.3 (6th Cir. 1996) (noting entirety, in part, or not at all." See also Quinones-Pacheco v. that if its review of an arbitral award were based on FAA American Airlines, Inc., 979 F.2d 1, 5 (1st Cir. 1992) (fact standards, there was no manifest disregard since any mistake finder not ordinarily bound by uncontradicted expert opinion in applying the law was inadvertent and not based on a testimony, particularly where testimony "lacks great conscious decision to ignore the law). Arbitrators are not convictive force" in context of evidence as a whole); Gregg required to explain their decisions. If they choose not to do v. U. S. Indus., Inc., 887 F.2d 1462, 1469-70 (11th Cir. 1989) so, it is all but impossible to determine whether they acted (expert testimony is not conclusive and need not be accepted). with manifest disregard for the law. See Jaros, 70 F.3d at The court also pointed out that the expert's opinion had been 421. impeached on cross-examination and that there was evidence that Dawahare maintained substantial control over his Chief Judge Martin, concurring in Federated Department investments. For us to hold that the arbitration panel was Stores, Inc. v. J.V.B. Industries, Inc., 894 F.2d 862 (6th Cir. compelled to accept Dawahare's expert's damages evidence 1990), recognized the problems inherent in reviewing an 6 Dawahare v. Spencer, et al. No. 98-6356 No. 98-6356 Dawahare v. Spencer, et al. 7

arbitration award for manifest disregard of the law where the 70 F.3d at 421 (stating that an arbitrator must refuse to heed arbitrators fail to state a reason for their decision. He stated a clearly defined legal principle in order to manifestly that courts are forced to participate in a "judicial snipe hunt" disregard the law). Here, Dawahare points to nothing in the with the parties arguing about law that may or may not have record that indicates the arbitration panel was aware of the been disregarded by the arbitrators. See id. at 871. He would law he alleges it ignored. Also, the Halligan court allow reversal when there are no reasons given for an particularly emphasized the importance of assuring plaintiffs arbitration decision and the record is insufficient to show that with employment discrimination claims a forum in which to the arbitrators did not manifestly disregard the law. See id. effectively vindicate their statutory rights. See 148 F.3d at No panel of this court has adopted this reasoning. 201-03. The arbitrators' decision in this case outlined the parties' In Montes v. Shearson Lehman Brothers, Inc., 128 F.3d contentions and discussed the claims and evidence in some 1456 (11th Cir. 1997), the Eleventh Circuit reversed the detail for some three-and-a-half, single-spaced pages. The district court's confirmation of an arbitration award because monetary award simply designated the amount of damages the arbitration panel acted in manifest disregard of the law. without detailed explanation. It is difficult to say that the An employee sued her former employer for overtime pay arbitrators refused to heed a clearly defined legal principle. pursuant to the Fair Labor Standards Act, and the dispute Dawahare points to nothing in the record that shows the went to arbitration. See id. at 1458. The employer's attorney arbitrators' awareness of the common law that he alleges to be repeatedly urged the arbitration panel to disregard the FLSA applicable. This is not a case where one of the parties clearly when making its decision and the panel denied the employee's stated the law and the arbitrators expressly chose not to claim. See id. at 1458-59. Because there was no evidence the follow it. arbitrators rejected the urging and because there was a lack of factual support for the ruling, the court remanded with Since Supreme Court dictum established the manifest instructions to refer the case to a new arbitration panel. See disregard of the law standard forty-seven years ago, see Wilko id. at 1464. The concurrence emphasized that the decision v. Swan, 346 U.S. 427, 436 (1953), overruled on other was narrowly limited to the unusual facts of the case. See id. grounds, Rodriguez de Quijas v. Shearson/American Express, Here, there is no evidence that Spencer, Smith Barney, or Inc., 490 U.S. 477 (1989), only two federal courts of appeals Dean Witter urged the arbitrators to disregard the applicable have used it to vacate arbitration decisions. Dawahare law. understandably cites to these cases, but to no avail, as both cases are easily distinguished from the case before us. Dawahare's vague assertion that the arbitrators manifestly disregarded the common law of damages falls far short of the The Second Circuit held that an arbitration panel that necessary showing of the law that clearly applied in the case denied relief on an ADEA claim showed manifest disregard and of conscious disregard of that law by the arbitrators. It is by ignoring "the law or the evidence or both" where the possible to argue that the arbitrators misapplied the law of plaintiff presented strong evidence that he was fired because damages, that is, punitive damages would only be warranted of his age. Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 204 for egregious conduct by Dean Witter and, in that case, a (2d Cir. 1998), cert. denied, 119 S.Ct. 1286 (1999). The court compensatory award of less than 5% of the damages alleged pointed out that the parties explained the applicable law to the is likely too low. To show manifest disregard, however, a arbitrators. See id. at 204. This is important because manifest party must show more than "[a] mere error in interpretation or disregard requires awareness of the relevant law. See Jaros, application of the law." Jaros, 70 F.3d at 421. There is