Opinion
11789004
Decided April 15, 2005.
This proceeding was commenced on December 22, 2004 by Petitioner James B. Fellus ("Fellus"), pursuant to Article 75 of the Civil Practice Law and Rules ("CPLR") to confirm an arbitration award delivered to him on December 9, 2004, (the "Award"), which awarded him $811,927.16 against Respondent A.B. Watley, Inc., ("Watley").
Watley, an NASD member, employed Fellus pursuant to an employment agreement dated December 10, 2002 (the "Agreement") which contained an arbitration clause (Agreement § 11(a)) requiring that "any action or proceeding arising out of this Agreement shall be brought only before an arbitration panel before the NASD." A dispute arose and after somewhat nasty charges and countercharges, Fellus and Watley parted company. Fellus then brought an arbitration proceeding before the NASD for damages for breach of his contract, the result of which was the Award.
In the arbitration, the parties hotly disputed the facts and their legal implication. Submitted in this proceeding are 425 pages of transcript of testimony and numerous trial and other briefs of the parties at the hearing.
In response to Fellus' petition, Watley cross-moved on February 4, 2004, pursuant to CPLR § 7511 to vacate the Award, on the grounds that the award was irrational, exceeded the scope of the arbitrator's authority and was in manifest disregard of law.
The concept of "manifest disregard" as a basis for the review of an arbitral award has been recognized by the Federal Courts in actions before them to enforce or set aside an award. Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2nd Cir. 1998). Whether and to what extent such doctrine is an available basis for review of an arbitration award in New York courts is at present unsettled. In Bank of America Securities v. Knight, 4 Misc 3d 756 (Sup.Ct. NY Co. 2004), this Court reviewed the New York State cases and CPLR Article 75 and concluded that such doctrine was not cognizable in New York courts. Such conclusion and the case was expressly followed by the Fourth Department in In re City of Buffalo ( Buffalo Police Benevolent Ass'n), 13 AD3d 1202 (4th Dept. 2004), which also cited United Federation of Teachers v. Board of Educ., 1 NY3d 72 (2003) for such proposition. However, the First Department has recently held in several cases that where the Federal Arbitration Act (USCA Tit. 9) ("FAA") applies, New York courts must apply the doctrine of "manifest disregard" in reviewing arbitral awards. Wein Malkin LLP v. Helmsley-Spear, Inc., 12 AD3d 65 (1st Dept. 2004); Morgan Stanley DW Inc. V. Afridi, 13 AD3d 248 (1st Dept. 2004). In effect, these cases reject the reasoning of Bank of America that the Federal mandate under FAA was intended only to compel arbitration and did not extend to the enforcement of an award by a state, except to the extent necessary to carry out the Federal mandate to arbitrate. Interestingly, in December 2004, the First Department also decided Secco Electric Corp. v. Kalikow, 13 AD3d 252 (1st Dept. 2004) wherein an arbitration under a contract was held reviewable for the standards set forth in CPLR Article 78, as specified in the contract. Although the agreement in such case probably "affected commerce" and would, under the standard in Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003), also been subject to the FAA, the impact of the FAA is not mentioned. As Secco Electric, supra, does not discuss the applicability of the FAA and as an Article 78 review, unlike a CPLR Article 75 review includes a full review of the law, this Court finds controlling authority on this case to be Morgan Stanley, supra and Wein Malkin, supra.
The doctrine is first mentioned in dicta in Wilco v. Swan, 346 US 427 (1953), overruled on other grounds, Rodriguez v. Shearson/American Express, Inc., 490 US 477 (1989). See the discussion of this history in Duferco International Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383 (2d Cir. 2003).
In Wein, the First Department had earlier found that the contract at issue was not subject to the FAA. Wein . Malkin, LLP v. Helmsley-Spear, Inc., 300 AD2d 32 (1st Dept. 2000). The Court of Appeals denied leave to appeal (99 NY2d 511(2003)). On certiorari, the United States Supreme Court vacated the decision in light of its decision in Citizens Bank v. Alafabco, Inc., 539 US 52 (2003), which ruled only on the applicability of the FAA to contracts and remanded Wein for further action not inconsistent with such decision.
As this Court is within the First Department, it is bound by Morgan Stanley and Wein, and accordingly, must initially inquire whether the FAA applies to this controversy. It does. While the FAA expressly limits itself to cases where there was "a written provision in any maritime contract or a contract evincing a transaction involving commerce" ( 9 USCA § 1), the United States Supreme Court has held that such language extends to employment contracts. Circuit City Stores, Inc. v. Adams, 532 US 105 (2001). In Circuit City, the Supreme Court read the words "involving commerce" to encompass the broadest jurisdictional scope permitted under the commerce clause. Accord, Citizens Bank v. Alafabco, Inc., supra. The New York Court of Appeals also recognizes this broad applicability of the FAA. See Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp., 2005 WL 6735 81, 2005 NY Slip Op. 02358, NY2d (2005).
FAA Section 1 was held to expressly exclude only certain classes of workers contracts, which Circuit City found to relate only to transportation workers — an issue not relevant here.
Here, Watley is a securities firm, which business is, for the purpose of the FAA, involved in commerce. Cf. Morgan Stanley, supra, which found that a contract between a securities broker and a customer to be subject to the FAA.
As Watley is involved in commerce, Fellus' employment agreement is, pursuant to Circuit City Stores, supra, also subject to the FAA. As such contract is subject to the FAA, under Morgan Stanley and Wein, the Award may be challenged in a New York court for having been rendered in "manifest disregard of the law."
As this Court must apply the manifest disregard standard judicially created by the Federal Courts, it must look to such courts to ascertain the parameters of such standard. As Morgan Stanley requires such doctrine to be enforced as it is mandated by Federal law superceding any state rule to the contrary, the doctrine cannot be expanded by state decisions.
The Second Circuit has decided many cases in this area, including quite a few since 2000. These recent cases, which at best represent the evolving standard of the doctrine in the Federal courts, have generally defined the standard under which "manifest disregard" is to be considered, and have analyzed how to apply such concept to actual fact patterns. The standard is generally articulated to be a two pronged one, as follows: "An arbitral award may be vacated for manifest disregardof the law 'only if a reviewing court . . . find[s] both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case'." Wallace v. Butar, 378 F.3d 182, 189 (2d. Cir. 2004), citing Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2d Cir. 2003). See also Hoeft v. MVL Group, Inc., 343 F.3d 57 (2d Cir. 2003), Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200 (2d Cir. 2002), Greenberg v. Bear, Stearns Co., 220 F.3d 22, 28, (2d Cir. 2000) cert. denied., 531 US 1075 (2001).
In Duferco, supra, in fn.1, the Court articulates a three pronged standard which effectively reaches the same result.
In these cases, the Second Circuit in extensive opinions wrestle with the concept to try to close as far as possible the Pandora's box they have opened since they first mentioned the doctrine in Amicizia Societa Navegazione v. Chilean Nitrate Sales Corp., 274 F2d 805 (2d Cir. 1960) cert den., 363 US 843 (1960). In their reported opinions "since 1960, [the Second Circuit has] vacated some part or all of an arbitral award for manifest disregard in . . . four of at least 48 cases where [the Second Circuit] applied the standard." Duferco International Steel Trading v. T Klaveness Shipping A/S, 333 F.3rd 383 (2d. Cir. 2003). Since 2003, there have been no further vacations by the Second Circuit on this ground. The opinions recognize, to an extent, the problem that the doctrine has generated in allowing a loser in an arbitration proceeding a new route to challenge the arbitral result requiring substantial judicial input and delay and thus undercutting the promise of arbitration as an inexpensive, rapid and efficient alternative to litigation.
For example, in Hoeft, in order to determine whether the arbitrator had acted in manifest disregard, the District Court allowed the arbitrator to be deposed. On appeal, the Second Circuit found this procedure chilling of the arbitration process and wholly improper. Hoeft at 66. Thus, manifest disregard, the Second Circuit said, must be found solely from the record and the award. The Court recognized that in Hoeft, in reversing the District Court's findings of manifest disregard, that the Award did not set forth the arbitrators reasoning, but only a conclusion and, as a result, it could be difficult or impossible to show how the arbitrator reached his decision. The remedy for this problem, the Court offered, is that the parties could have agreed that the arbitrator set forth his reasoning in the Award. Hoeft at 68.
After Hoeft, it becomes difficult to see how a court can find the knowledge and intention prong of the two-part test where the award is rendered without a reasoned opinion, unless 1) the record contains some statement or indicia that the arbitrator announced his intention to ignore the law, 2) the parties have clearly agreed on the law and so advised the arbitrator, or 3) the material submitted by the parties contains only one view of the law. In the two latter situations, the award would also have to be wholly inconsistent with such law.
Even if such a situation exists, it may not be enough for vacation of an award under the manifest disregard standard. Arbitrators are entitled to make a "mistake of law," and an award made on a mistake, in the absence of a "manifest disregard" would still stand.
The second requirement, that the law be clear and unambiguous presents even a more difficult problem is analyzing whether manifest disregard is present. While an agreement or stipulation of the parties as to the law would provide a basis for such a finding, any dispute between the parties as to what the law was would seem to preclude a finding of manifest disregard, perhaps unless the argument was so preposterous that absurdity would be obvious to the most casual observer. In Wallace v. Butar, supra, one party submitted substantial analysis of North Carolina law in their trial brief to the arbitrator and the other party apparently submitted nothing on the issue. As the submissions which supported the award were all that the arbitration panel had, the Second Circuit found that "manifest disregard" as to such law could not be found unless, given the manner in which the law was presented to the arbitrators, the Court could not find that they committed "an error too obvious that it would be instantly perceived as such by the average person qualified to serve as an arbitrator." While Wallace v. Butar, supra, which seems to imply an objective standard of an "average person qualified to serve as an arbitrator" should be the standard, it is not clear how this is to be determined. Clearly, the fact that a court might itself be able to sort out the conflicting legal contentions of the parties should not by itself be a sufficient basis for vacating an award. In many arbitrations, the arbitrators are not lawyers, and holding them to the standards of a lawyer defeats the intent of the FAA to promote arbitration, especially where the parties did not require the arbitrators to be lawyers and may have specifically selected them. As appellate courts often reverse trial courts and as intermediate courts are themselves often reversed by higher courts, requiring an arbitrator to reject a plausible legal argument sets an unreasonable standard for arbitrators — especially for those chosen by the parties.
More confusing yet, in this context, is the example given by the Second Circuit explaining where a finding of manifest disregard was appropriate. In a footnote, in Hoeft, the Court stated:
It is helpful to contrast the facts of this case with those of a case in which we found manifest disregard of the law. In New York Telephone Co. v. Communications Workers of America Local 1100, 256 F.3d 89 (2d Cir. 2001) (per curiam), we held that the arbitrator had manifestly disregarded the law by "explicitly reject[ing]" binding Second Circuit precedent in favor of more recent decisions of other circuits. Id. at 93.
Hoeft at 71, fn. 4. Duferco, supra, also cites this case with approval.
In New York Telephone, supra, arbitrators considered a prior decision of the Second Circuit, but rejected it, relying instead on two subsequent decisions of two other Federal circuits. In setting aside the arbitrator's award, the Court found that:
These opinions are not the law of this Circuit; it was therefore 'manifest disregard of the law' for the arbitrator to reject Seatrain and apply another rule. New York Telephone, at 93.
Thus, even though there was a difference between Federal circuits on an issue of Federal Law, and no controlling reconciliation by the United States Supreme Court, the Second Circuit found their own rule so controlling that not following it was a manifest disregard, requiring vacation of the award.
The arbitrators in New York Telephone, supra, had considered the conflict between Federal Circuits and the fact that the two other circuits also had the opportunity to consider the earlier Second Circuit case. Their decision to adopt the rule of the other two circuits was a reasoned result which did not ignore the earlier Second Circuit case, but rejected it as a determination of law. As a reasoned result, it was hardly a "manifest disregard," how much it may have been an error of law. It cannot be said that the concept is clear As a result, the gates for appeal of an arbitral award on these grounds are still ajar.
To the extent that New York Telephone, supra, stands for the proposition that where the law which has been disregarded is the law of the forum rather than the general state of the law, the arbitrator becomes required to both understand such difference as well as to presciently determine in which forum a party would bring an enforcement proceeding or a proceeding to set aside the arbitration. This is highly speculative as at least some parties may have the right to bring such actions in different Federal circuits or in different State courts or both. Further, State courts (including New York Courts), as distinct from a United States District Court sitting in the Second Circuit, considering the same federal question would not be bound by a Second Circuit ruling in light of subsequent contrary decisions of other Federal circuits, absent a reconciliation by the United States Supreme Court.
Even though these uncertainties create a less than clear definition of "manifest disregard," Watley cannot prevail in this case under even the most generous definition. Here the arbitrators neither discussed in the Award how they reached their decision (they were not required to do so) nor made any statement in the Award or the record that they knew of the proper applicable law and were not going to follow it. The parties certainly did not agree on the law or jointly instruct the arbitrators on the law. Further, Fellus in his trial brief submitted to the arbitrators substantial arguments on the law which were hardly obviously so erroneous as to "be instantly perceived as such by the average person qualified to serve as an arbitrator." Thus, Watley cannot establish the first prong of the test set forth in the Federal cases.
In New York Telephone, supra, the arbitrator explained that he declined to follow the Second Circuit case and relied on the two other subsequent decisions of other Federal Appeals Courts.
Wallace v. Butar, supra. As this Court has determined that there is no basis on other grounds for it to find that a manifest disregard exists, it has not even addressed whether Fellus' legal position is right or wrong, finding the resolution of such issue irrelevant for the decision here.
Watley also fails on the second prong of such test. For there to be a manifest disregard, not only must the arbitrator know the law and then disregard it altogether, but the law disregarded must be well defined, explicit and clearly applicable to the case. Bank of America, supra at 765; accord, Sawtelle v. Waddell Reed, 304 AD2d 103 (1st Dept. 2003); Halligan v. Piper Jaffray, Inc., supra. As the record here shows, the parties hotly disputed the applicable laws and facts at great length. Thus, even if the arbitrators erred in their conclusion in agreeing with Fellus' legal contentions, there was no well defined, explicit and clearly applicable law to disregard. Further, the facts themselves were in high contention between the parties and the arbitrators made no express findings of fact (they were not required to do so). To reach the Award required the arbitrators to have applied the law as found by them to the facts as also found by them. However, this Court has no basis to ascertain what facts were found by the arbitrators. As the arbitrators' legal conclusions in turn depended on the facts they found, the Court cannot, in the absence of knowing what facts they found, determine whether their legal conclusions were erroneous, which would be a condition precedent to the consideration of the more difficult question as to whether such legal determinations were a mistake of law or were in manifest disregard of the law. As mistaken finding of facts are not reviewable, this Court has no basis to determine whether the alleged "error" was one of the fact finding or the use of an improper standard of law. As there is no basis for this Court to reach these issues, there is no reason even to consider what the governing principle law was in this case or to speculate as to what possible facts, if found, would have rendered the Award to have been made in a manner contrary to law.
See, e.g. Wallace v. Butar, supra; Accord, Morgan Stanley v. Afridi, Id. at 250, fn.2.
The other claims of Watley, that the award was "irrational" and beyond the scope of the arbitrator's authority, are no more than rhetorical makeweights. The arbitrators awarded Fellus the base salary he claims to have lost, rejecting his other claims for punitive damages. Tying the award to such a basis is clearly rational, even if it were incorrect. The objection that the arbitrators exceeded the scope of their powers is also without merit. They were asked to resolve the dispute and they did.
The petition is granted and the Award is confirmed. The cross motion is denied. Settle Order.
This is the Decision and Order of the Court.