Merrill Lynch, Pierce, Fenner & Smith Inc. v. Schwarzwaelder , 496 F. App'x 227 ( 2012 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 11-2605
_____________
MERRILL LYNCH, PIERCE, FENNER & SMITH INC.,
Appellant
v.
CHERYL SCHWARZWAELDER
_____________
On Appeal from the District Court
for the Western District of Pennsylvania
(Nos. 11-cv-107, 11-cv-162)
District Judge: Honorable Arthur J. Schwab
_____________
Argued on February 9, 2012
Before: SLOVITER and VANASKIE, Circuit Judges,
and POLLAK, District Judge*
(Opinion Initially Filed: August 13, 2012)
(Opinion Reinstated: December 26, 2012)
Michael J. Fortunato, Esq. [Argued]
Patricia Tsipras, Esq.
Rubin, Fortunato & Harbison P.C.
10 South Leopard Road
*
Honorable Louis H. Pollak, Senior Judge of the United States District Court for
the Eastern District of Pennsylvania, sitting by designation. Judge Pollak participated in
the argument in this case and in the conference following the argument. However, his
death occurred prior to the filing of this opinion. The case is decided by a quorum of the
court pursuant to 28 U.S.C. § 46(d) and Third Circuit IOP 12.1(b).
Paoli, Pennsylvania 19301
Lauren D. Rushak, Esq.
Thorp, Reed & Armstrong, LLP
One Oxford Centre
301 Grant Street, 14th Floor
Pittsburgh, PA 15219
Counsel for Appellant
Joseph H. Chivers, III, Esq. [Argued]
100 First Avenue
First & Market Building
Suite 1010
Pittsburgh, PA 15222
Counsel for Appellee
______________
OPINION
______________
VANASKIE, Circuit Judge.
The question presented in this appeal is whether an arbitration award is so
untethered from the facts and underlying agreements as to be “irrational.” The arbitration
award requires Cheryl Schwarzwaelder to repay a loan given to her by her former
employer, Merrill Lynch, Pierce, Fenner & Smith Inc., when she first joined the
company. Schwarzwaelder argues that she is entitled to other compensation from Merrill
Lynch in an amount that would offset her loan repayment obligation. The arbitrators
decided that Schwarzwaelder had released her claim to this other compensation in a
settlement agreement in related litigation between the same parties. We find that the
arbitrators‟ decision is not irrational. Therefore, we hold that the arbitration award must
2
be confirmed. Accordingly, the District Court decision vacating the arbitration award in
favor of Merrill Lynch will be reversed.
I. Facts and Procedural History
A. Schwarzwaelder’s Compensation Package
Schwarzwaelder joined Merrill Lynch as a financial advisor in the company‟s
Pittsburgh offices in 2002. One aspect of her initial compensation arrangement is central
to this appeal. Under her written employment agreement, Merrill Lynch agreed to pay
Schwarzwaelder “monthly transition compensation payments” of $16,687.15 from March
2003 to November 2007. (A. 295-96.) In a separate promissory note, Merrill Lynch
loaned Schwarzwaelder $850,000, which she agreed to repay with interest in monthly
installments of $16,687.15 from March 2003 to November 2007. Thus,
Schwarzwaelder‟s obligation to repay the loan would be matched each month by a
payment of transition compensation. The compensation arrangement also included a
provision for acceleration of the transition compensation payments in the event that
Schwarzwaelder became disabled. Specifically, the parties‟ agreement provided that, in
the event she became disabled, Schwarzwaelder was to receive “a lump sum payment
equal to the remaining transition compensation payments through November 2007.” (A.
296.)
B. Schwarzwaelder’s Disability Claim
In November 2003, Schwarzwaelder ceased work and applied for benefits under
Merrill Lynch‟s long-term disability benefit plan. Her claim was denied, and she brought
suit under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C.
3
§§ 1001 et seq. Ultimately, after a remand to the claims administrator, the District Court
determined that Schwarzwaelder was disabled within the meaning of the plan.
Schwarzwaelder v. Merrill Lynch & Co., 606 F. Supp. 2d 546, 558-70 (W.D. Pa. 2009).
Merrill Lynch appealed to this court. While the appeal was pending, the parties
settled the ERISA litigation. The settlement was memorialized in an agreement and
release executed on November 25, 2009. Of central importance to this case is the fact
that, with the exception of certain specifically identified claims brought by
Schwarzwaelder and Merrill Lynch against each other in an arbitration proceeding before
the Financial Industry Regulatory Authority (FINRA), the parties released each other
from all claims or liabilities “arising out of, or relating to, [Schwarzwaelder]‟s
employment or termination of employment.” (A. 389.) Specifically, the release executed
as part of the ERISA settlement provided:
Nothing in . . . this Agreement shall prohibit or restrict the parties from
prosecuting or defending the following claims before the Financial Industry
Regulatory Authority (“FINRA”): Schwarzwaelder‟s claim for two asset
bonuses pursuant to the terms of her hiring Agreement; Schwarzwaelder‟s
claim for payment under Merrill Lynch‟s Financial Advisor Capital
Accumulation Award Plan pursuant to the terms of her hiring Agreement;
Schwarzwaelder‟s claim for payment under Merrill Lynch‟s Short Term
Deferred Contingent Award Plan pursuant to the terms of her hiring
Agreement; Schwarzwaelder‟s claim for a referral fee in connection with
Merrill Lynch‟s hire of Mr. Smith, an investment banker;
Schwarzwaelder‟s potential claims (claims not yet filed in the pending
FINRA proceeding) under common law theories of civil conspiracy, fraud,
and tortious interference relating to the circumstances of the denial of her
benefits and to her separation from Merrill Lynch; and Merrill Lynch‟s
claim for payment pursuant to the terms of Schwarzwaelder‟s Promissory
Note (“FINRA claims”).
(A. 389-90.)
4
The final item from that list is pertinent here: the ERISA settlement permitted
Merrill Lynch to arbitrate a claim for repayment of the $850,000 promissory note.
Notably, the release is silent on the matter of the monthly transition compensation
payments of $16,687.15. Nor did the release mention any claim to entitlement to a lump
sum payment equal to the remaining transition compensation payments based upon
Schwarzwaelder‟s alleged disability.
C. The FINRA Arbitration
The FINRA arbitration had begun in April 2004. Prior to the ERISA settlement,
Merrill Lynch asserted in the arbitration that it was owed nearly $700,000 in unpaid
principal on the promissory note. Schwarzwaelder believed that Merrill Lynch‟s
arbitration claim for payment on the promissory note depended upon the outcome of the
ERISA litigation. As noted above, under her employment agreement, if Schwarzwaelder
became disabled—a determination she sought in the ERISA litigation—then her
transition compensation payments would be accelerated: in lieu of monthly payments,
Schwarzwaelder was entitled to receive “a lump sum payment equal to the remaining
transition compensation payments through November 2007.” (A. 296.) In May 2005, the
parties jointly stipulated to a stay of the arbitration pending the resolution of the ERISA
litigation.
After the ERISA litigation was resolved by settlement in November 2009,
Schwarzwaelder re-opened the arbitration. Her amended arbitration complaint did not
request a lump sum payment of the transition compensation. Merrill Lynch submitted a
counterclaim for payment of the unpaid balance on the promissory note. Schwarzwaelder
5
maintained that her obligation to repay the note was offset, dollar-for-dollar, by her
entitlement to a lump sum payment of transition compensation upon being found to be
disabled in the ERISA litigation. Although she had not affirmatively sought payment of
this lump sum amount, she argued that she could rely on it as a form of defense to Merrill
Lynch‟s claim.
A panel of arbitrators held a hearing in the matter in December 2010 and issued a
written decision on January 6, 2011. The arbitrators accepted the finding of the District
Court in the ERISA litigation that Schwarzwaelder had become disabled, but they
nevertheless held that any entitlement Schwarzwaelder may have had to a lump sum
payment of transition compensation was released in the ERISA settlement. The
arbitration award explained:
Not only did [Schwarzwaelder] fail to make a claim for monthly transition
compensation payments in her action before FINRA, although she made
other compensation claims, the Panel finds that any such claim was waived
by the terms of the Settlement and Release dated 11/25/09, since the
monthly transition compensation payments were not an excepted claim.
(A. 261.)
After adjusting for awards on claims presented by Schwarzwaelder, the arbitrators
entered an award in favor of Merrill Lynch in the amount of $544,244.
D. District Court Review of the Arbitration Award
Merrill Lynch commenced an action in the District Court for confirmation of the
arbitration award as permitted by the Federal Arbitration Act, 9 U.S.C. § 9.
Schwarzwaelder applied to the same Court for an order vacating the arbitration award,
6
arguing that the arbitrators “exceeded their powers” within the meaning of 9 U.S.C.
§ 10(a)(4) by issuing an irrational decision. The two proceedings were consolidated.
The District Court denied Merrill Lynch‟s application, granted Schwarzwaelder‟s
application, and vacated the arbitration award. Merrill Lynch, Pierce, Fenner & Smith
Inc. v. Schwarzwaelder, Civ. No. 2:11-107, 2011 WL 1882450, at *5 (W.D. Pa. May 17,
2011). The District Court held that the arbitrators had “exceeded their powers” by
irrationally construing the parties‟ arrangements. The District Court reasoned that the
promissory note and the employment agreement “[w]hen read together . . . created a
forgivable loan” and “[t]he assertion that a loan has been forgiven is routinely viewed as
a defense . . . , not a claim that must be plead[ed] separately.” Id. at *3-4; see also id. at
*5 (remanding to the arbitrators to calculate lump sum payment of transition
compensation). Merrill Lynch appealed the District Court‟s order to this court.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction to hear the parties‟ applications to confirm or
vacate the arbitration award because the parties are completely diverse and the amount in
controversy exceeds $75,000. 28 U.S.C. § 1332(a); cf. Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983) (explaining that Federal Arbitration
Act “does not create any independent federal-question jurisdiction”). As to our
jurisdiction, the Federal Arbitration Act permits us to hear an appeal from an order
“confirming or denying confirmation of an award” or “vacating an award.” 9 U.S.C.
§ 16(a)(1)(D), (E). The fact that the District Court also ordered that the matter be
remanded to the arbitrators does not impair our jurisdiction, because we may entertain an
7
appeal even when the district court‟s order contemplates further arbitration proceedings.
See V.I. Hous. Auth. v. Coastal Gen. Constr. Servs. Corp., 27 F.3d 911, 913-14 (3d Cir.
1994) (holding that order vacating arbitration award and remanding for “re-evaluation of
the entire controversy” was an appealable final order); see also Bull HN Info. Sys., Inc. v.
Hutson, 229 F.3d 321, 328 (1st Cir. 2000) (“[A]n order of the district court which vacates
and remands an arbitral award is not thus made an interlocutory order.”).
The District Court‟s order vacating the arbitration award is subject to ordinary
principles of appellate review. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947-
48 (1995). Factual findings are reviewed for clear error, and legal conclusions are
reviewed de novo. Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998
Year of Account, 618 F.3d 277, 287 (3d Cir. 2010). In the present case, the District Court
made no findings of fact, and our review is plenary. We apply the same legal standard
under the Federal Arbitration Act that the District Court applied. Metromedia Energy,
Inc. v. Enserch Energy Servs., Inc., 409 F.3d 574, 579 (3d Cir. 2005).
III. Discussion
The sole ground advanced by Schwarzwaelder for vacating the arbitration award is
that “the arbitrators exceeded their powers” by concluding that the release executed as
part of the ERISA settlement barred her from claiming an offset to her liability on the
promissory note in the amount of unpaid transition compensation payments.1 Arbitrators
exceed their powers when they fashion an award that cannot “be rationally derived from
1
Section 10(a)(4) of the Federal Arbitration Act authorizes a court to set aside an
arbitration “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4).
8
the agreement between the parties or from the parties‟ submissions to the arbitrators” or
when the terms of the arbitration award itself “are completely irrational.” Ario, 618 F.3d
at 295 (internal quotation marks and alteration omitted). An arbitration award is not
rationally derived from the agreement of the parties only when there is “absolutely no
support at all in the record justifying the arbitrators‟ determinations.” Id.; see also
Brentwood Med. Assocs. v. United Mine Workers of Am., 396 F.3d 237, 241 (asking
“whether the arbitrator‟s conclusion is supported, in any way, by a rational interpretation
of the collective bargaining agreement”).
This is a “singularly undemanding” standard. Ario,618 F.3d at 296 (internal
quotation marks and citation omitted). Although we will not “„rubber stamp‟ the
interpretations and decisions of arbitrators,” Matteson v. Ryder Sys. Inc., 99 F.3d 108,
113 (3d Cir. 1996), we nevertheless afford arbitration awards “a strong presumption of
correctness.” Major League Umpires Ass’n v. Am. League of Prof’l Baseball Clubs, 357
F.3d 272, 280 (3d Cir. 2004). The parties to an arbitration agreement have bargained for
their dispute to be resolved by the arbitrators rather than by the courts. Id. The role of
the courts is to ask only “whether the parties . . . got what they bargained for, namely an
arbitrator who would first provide an interpretation of the contract that was rationally
based on the language of the agreement, and second would produce a rational award.”
Brentwood Med. Assocs., 396 F.3d at 242.
In this case, the arbitrators construed the ERISA settlement to mean that
Schwarzwaelder released any claim she may otherwise have had to a lump sum payment
of transition compensation under her employment agreement. A straightforward reading
9
of the ERISA settlement provides at least some support for that conclusion. The ERISA
settlement identifies six specific claims or sets of claims that the parties agreed to allow
to go forward in arbitration. Schwarzwaelder‟s claim for transition compensation is not
among them.
To avoid this result, Schwarzwaelder relies on one principal counterargument: the
ERISA settlement preserves Schwarzwaelder‟s right to raise defenses to Merrill Lynch‟s
claim for the unpaid balance of the promissory note. Schwarzwaelder contends that the
transition compensation payments were intended as a form of loan forgiveness; that loan
forgiveness is a defense; and that she is therefore entitled to rely on the transition
compensation as a defense to Merrill Lynch‟s claim. She argues that the arbitrators‟
rejection of this theory rested on an irrational separation of the promissory note and the
employment agreement.
According to Schwarzwaelder, a forgivable loan is a common compensation
device within the securities industry. See, e.g., PaineWebber, Inc. v. Agron, 49 F.3d 347,
349 (8th Cir. 1995) (loan of $100,933 forgiven over three years in equal annual
installments); Lewis v. UBS Fin. Servs. Inc., 818 F. Supp. 2d 1161, 1163 (N.D. Cal. 2011)
(loan of $520,488 forgiven over six years). Often the terms of the loan explicitly
contemplate forgiveness. But Schwarzwaelder also offers instances of compensation
arrangements more akin to the facts of this case, where the promissory note is paired with
equal and offsetting compensation. See Jenkins v. Prudential-Bache Secs., Inc., 847 F.2d
631, 632 (10th Cir. 1988) (promissory note for $60,000 loan and employment agreement
provision for bonus of $60,000 to be paid in future yearly installments, with employer
10
reserving right to apply bonus to loan repayment); Banus v. Citigroup Global Mkts., Inc.,
Civ. No. 98-7128, 2010 WL 1643780, at *2 (S.D.N.Y. Apr. 23, 2010) (promissory note
requiring repayment in seven equal annual installments, paired with “special
compensation” payments in same amount over same time); In re Killian, 422 B.R. 903,
907 (Bankr. S.D. Ill. 2009) (similar).
The parties‟ two agreements in the present case appear to have been drafted to fit
together. The monthly transition compensation payments in the employment agreement
and the schedule of loan repayments in the promissory note are identical in amount and
duration—offsetting payments of $16,687.15 every month from March 2003 to
November 2007. While the two agreements do not explicitly refer to each other, the
promissory note states that the sum of $16,687.15 will be deducted each month from
Schwarzwaelder‟s total “compensation,” which is defined in the promissory note to
include “transition compensation.” (A. 305.) Similarly, the employment agreement
states that if Schwarzwaelder is disabled, the transition compensation will be paid in a
lump sum “less any outstanding debts Schwarzwaelder owes to Merrill Lynch.” (A.
296.)
Thus, we acknowledge that there is a basis in the record to construe the parties‟
agreements as intending to effect a single transaction akin to a forgivable loan. But the
question before us is whether Schwarzwaelder‟s favored construction is so overwhelming
that the arbitrators‟ contrary reading was irrational. 9 U.S.C. § 10(a)(4); Ario, 618 F.3d
at 295. It was not.
11
There are three significant factors that lend support to the arbitrators‟ decision.
First, neither the promissory note nor the employment agreement describes the parties‟
arrangement as a form of loan forgiveness. Under the terms of the promissory note,
Schwarzwaelder agreed to repay the loan “unconditionally”—i.e., without regard to any
offsetting payment of transition compensation. (A. 305.) Although the promissory note
contemplates that repayments will be deducted from Schwarzwaelder‟s “transition
compensation,” the note provides that repayments may also be deducted from other forms
of compensation. (A. 305.) Second, the employment agreement makes no mention of the
promissory note and does not require that the monthly transition compensation be used
for debt repayment. Finally, the release in the ERISA case explicitly enumerated a
number of preserved claims for compensation without mentioning transition
compensation, even though Merrill Lynch‟s demand for repayment of the promissory
note was outstanding at the time of the ERISA settlement and the parties had agreed to
stay the arbitration proceedings because the outcome of the ERISA litigation could
trigger an entitlement on the part of Schwarzwaelder to transition compensation.
Schwarzwaelder‟s defense to repayment of the promissory note is entirely dependent
upon the existence of a claim to transition compensation, and she relinquished that claim
in the release.
Given these factors, we find that the arbitrators‟ decision can be rationally derived
from the parties‟ agreements and submissions to the panel. Even if the decision is open
to criticism, “we may not overrule an arbitrator simply because [we] disagree.” Ario, 618
F.3d at 295 (alteration in original) (internal quotation marks omitted); see also Patten v.
12
Signator Ins. Agency, Inc., 441 F.3d 230, 235 (4th Cir. 2006) (“[A]n arbitration award
does not fail to draw its essence from the agreement merely because a court concludes
that an arbitrator has misread the contract.”).
It is hard to see why Schwarzwaelder would have given up her claim for a lump
sum payment of transition compensation in the ERISA settlement, while preserving
numerous other claims for arbitration. But why she would have placed such great stock
in her right to “defend” Merrill Lynch‟s claim—rather than specifying that she could seek
a lump sum payment of transition compensation—is equally a mystery. Perhaps both
sides favored some ambiguity in the language of the settlement. Perhaps oversight or
neglect played a role. Or perhaps a release of the claim to transition compensation was
part of the bargained-for exchange to settle the ERISA case. All that must be said for the
purposes of resolving this appeal is that the arbitrators‟ decision—in the face of the
ERISA settlement, the promissory note, and the employment agreement—was not
irrational.
IV. Conclusion
We have concluded that the FINRA arbitrators did not exceed their powers within
the meaning of the Federal Arbitration Act. 9 U.S.C. § 10(a)(4). Schwarzwaelder
proffers no other reason on appeal to vacate, modify, or correct the arbitration award.
Accordingly, the award must be confirmed. Id. § 9. We will remand the case to the
District Court for the entry of an appropriate order.
13