Wise, Lance v. Wachovia Securities ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-2640
LANCE WISE and NANCY WISE,
Plaintiffs-Appellants,
v.
WACHOVIA SECURITIES, LLC, and NASD,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 7438—Wayne R. Andersen, Judge.
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ARGUED FEBRUARY 10, 2006—DECIDED JUNE 7, 2006
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Before POSNER, RIPPLE, and KANNE, Circuit Judges.
POSNER, Circuit Judge. Lance and Nancy Wise appeal from
the district court’s refusal to set aside a decision by a panel
of arbitrators that denied them relief. Before proceeding to
the merits, we must consider a jurisdictional question
mishandled by the parties and the district court. The
jurisdictional statement in the plaintiffs’ brief bases federal
jurisdiction on the Federal Arbitration Act, period. But the
Act (9 U.S.C. §§ 1 et seq.) confers federal jurisdiction in cases
involving arbitration only of disputes that, were they
litigated rather than arbitrated, would be within federal
2 No. 05-2640
jurisdiction. 9 U.S.C. § 4; Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 26 n. 32 (1983); City
of Chicago v. Comcast Cable Holdings, L.L.C., 384 F.3d 901, 904-
05 (7th Cir. 2004). The only possible such jurisdictional
ground in this case would be diversity of citizenship, and
the plaintiffs’ jurisdictional statement says nothing about
the citizenship of any of the parties. The defendants’
statement correctly notes that the basis of jurisdiction must
be found outside the Federal Arbitration Act, and asserts
that the basis here is diversity. But in violation of 7th Cir. R.
28, the statement does not indicate the citizenship of any of
the parties, but merely asserts that they are citizens of
different states. Rule 28(a)(1) requires in a diversity suit that
the jurisdictional statement name the states of which the
parties are citizens. The plaintiffs’ reply brief does not
mention jurisdiction.
The parties’ insouciance about jurisdiction, besides being
unprofessional, is particularly disturbing because the
defendants are not standard business corporations, and any
lawyer who practices in federal court should realize that
ascertaining the citizenship of other artificial persons can be
tricky. The NASD (formerly called the National Association
of Securities Dealers) is a membership corporation—a
corporation, ordinarily a nonprofit, that has members but
not stock. Wachovia Securities is a limited liability com-
pany.
Because the overriding goal in crafting a jurisdictional
rule is simplicity, Budinich v. Becton Dickinson & Co., 486 U.S.
196, 202 (1988), the courts have held that all corporations are
to be treated alike for diversity purposes: all are citizens
both of the state of incorporation and the state in which the
corporation has its principal place of business. Hoagland ex
rel. Midwest Transit, Inc. v. Sandberg, 385 F.3d 737, 738-39 (7th
No. 05-2640 3
Cir. 2004); Kuntz v. Lamar Corp., 385 F.3d 1177, 1183 (9th Cir.
2004); Saxe, Bacon & Bolan, P.C. v. Martindale-Hubbell, Inc.,
710 F.2d 87, 89 (2d Cir. 1983). In the case of the NASD those
states are Delaware and Washington, D.C. The citizenship
for diversity purposes of a limited liability company,
however, despite the resemblance of such a company to a
corporation (the hallmark of both being limited liability), is
the citizenship of each of its members. Commonwealth Ins.
Co. v. Titan Tire Corp., 398 F.3d 879, 881 n. 1 (7th Cir. 2004);
Belleville Catering Co. v. Champaign Market Place, L.L.C., 350
F.3d 691, 692 (7th Cir. 2003); Rolling Greens MHP, L.P. v.
Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1021-22 (11th
Cir. 2004); Handelsman v. Bedford Village Associates Limited
Partnership, 213 F.3d 48, 51-52 (2d Cir. 2000); see also Carden
v. Arkoma Associates, 494 U.S. 185, 192-96 (1990). Wachovia
Securities, LLC, it turns out, is owned by another limited
liability company, which is owned in turn by two affiliated
corporations one of which is a citizen of North Carolina and
the other a citizen of New Jersey. The plaintiffs, we have
learned, are citizens of Illinois. So there is the required
diversity of citizenship, and we can proceed to the merits.
The Wises had become customers of an investment
adviser named Scott Winters when he was employed by
Merrill Lynch. Winters left Merrill for Wachovia and the
Wises went with him, opening an account with Wachovia
and agreeing to arbitrate under rules of the NASD any
dispute arising from their dealings with the firm. In March
2000 Winters recommended that the Wises invest in a new
investment fund called the “Titan Fund.” He told them he’d
invested $2 million of his own money in Titan. On April 10
the Wises directed Winters to convert the holdings in their
Wachovia account to cash. He did this, and three days later
the Wises closed the account, which now had $135,000 in
cash in it, and wired all the money to Titan. Winters had
4 No. 05-2640
quit Wachovia the day before the Wises wired the money to
Titan.
Months later the Wises discovered that the Titan Fund
was a sham and their entire investment lost. Securities
regulators in California, where Winters lived, later ordered
him to stop acting as an investment adviser in that state.
The order was based on findings that he had made misrep-
resentations in marketing the Titan Fund; for example, his
own investment in the fund had been not $2 million, but
zero.
The Wises complained to Wachovia, contending that the
firm was responsible for Winters’ fraud because he had
hatched it before he resigned from the firm. They claimed to
have had no idea that the Titan Fund had not been recom-
mended by Wachovia—no idea that Winters had been on a
frolic of his own in persuading them to invest in Titan.
Their complaint, rejected by Wachovia, was referred to
arbitration pursuant to their contract with the firm. At
the conclusion of discovery in the arbitration, Mr. Wise
submitted an affidavit reciting the facts summarized above.
He attached documents relating to his ill-starred investment
in the Titan Fund. Wachovia submitted no evidence but
moved for summary judgment, which the panel of arbitra-
tors granted without explaining the basis of their decision.
Arbitrators have, however, no duty to explain. Bernhardt v.
Polygraphic Co. of America, 350 U.S. 198, 204 n. 4 (1956).
The Federal Arbitration Act lists the following grounds for
setting aside an arbitral award (an arbitral decision is called
an “award” whether or not it awards anything to the
complainant).
(1) where the award was procured by corruption, fraud,
or undue means;
No. 05-2640 5
(2) where there was evident partiality or corruption in
the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior
by which the rights of any party have been prejudiced;
or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted
was not made.
9 U.S.C. § 10(a). The Wises argue that there was not even an
atom of evidence to support summary judgment for
Wachovia. The argument might seem to invoke the provi-
sion in section 10(a)(3) that authorizes vacating an award for
“refusing to hear evidence pertinent and material to the
controversy,” but the arbitrators did not limit the Wises’
presentation of evidence. The Wises further argue that since
there was no evidence to support the award, the award
must be set aside as being “arbitrary and capricious.” But
“arbitrary and capricious” is not among the listed grounds
for setting aside an award. Brotherhood of Locomotive Engi-
neers v. Atchison, Topeka & Santa Fe Ry., 768 F.2d 914, 921
(7th Cir. 1985); see also National Wrecking Co. v. International
Brotherhood of Teamsters, Local 731, 990 F.2d 957, 961 (7th Cir.
1993). And although courts will also set aside arbitration
awards that are in “manifest disregard of the law,” e.g., id.,and this is often described as a nonstatutory ground, e.g.,
Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1460-61
(11th Cir. 1997); Willemijn Houdstermaatschappij, BV v.
Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997), we
have defined “manifest disregard of the law” so narrowly
6 No. 05-2640
that it fits comfortably under the first clause of the fourth
statutory ground— “where the arbitrators exceeded their
powers.” Cf. Todd Shipyards Corp. v. Cunard Line, Ltd., 943
F.2d 1056, 1059-60 (9th Cir. 1991); Ian R. Macneil et al.,
Federal Arbitration Law § 40.1.3.2 (3d ed. 1999). For we have
confined it to cases in which arbitrators “direct the parties
to violate the law.” George Watts & Son, Inc. v. Tiffany & Co.,
248 F.3d 577, 580 (7th Cir. 2001); see also IDS Life Ins. Co. v.
Royal Alliance Associates, Inc., 266 F.3d 645, 650 (7th Cir.
2001). Obviously this is not such a case.
It is tempting to think that courts are engaged in judicial
review of arbitration awards under the Federal Arbitration
Act, but they are not. Baravati v. Josephthal, Lyon & Ross, Inc.,
28 F.3d 704, 706 (7th Cir. 1994). When parties agree to
arbitrate their disputes they opt out of the court system, and
when one of them challenges the resulting arbitration award
he perforce does so not on the ground that the arbitrators
made a mistake but that they violated the agreement to
arbitrate, as by corruption, evident partiality, exceeding
their powers, etc.—conduct to which the parties did not
consent when they included an arbitration clause in their
contract. That is why in the typical arbitration, which unlike
the one in this case is concerned with interpreting a contract,
the issue for the court is not whether the contract interpreta-
tion is incorrect or even wacky but whether the arbitrators
had failed to interpret the contract at all, e.g., Tice v. Ameri-
can Airlines, Inc., 373 F.3d 851, 854 (7th Cir. 2004); Hill v.
Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987);
Schoch v. InfoUSA, Inc., 341 F.3d 785, 788 (8th Cir. 2003), for
only then were they exceeding the authority granted to
them by the contract’s arbitration clause.
Reluctantly driven back to the statutory grounds for
setting aside the arbitrators’ award, the Wises ask us to infer
No. 05-2640 7
corruption, partiality, exceeding granted authority, etc.,
from the absence of any evidence to support the arbitrators’
award. Absence of evidence as such is not a statutory
ground and does not fit our narrow concept of “manifest
disregard,” though it may that of other courts. See Labor
Relations Division v. Teamsters Local 379, 156 F.3d 13, 20-21
(1st Cir. 1998); Glennon v. Dean Witter Reynolds, Inc., 83 F.3d
132, 139 (6th Cir. 1996). But if this were really a no-evidence
case, there might be some basis for inferring the presence of
one or more of the statutory grounds. Suppose the Wises
had presented overwhelming evidence that Wachovia had
defrauded them and Wachovia had responded with no
evidence, no argument even, but merely a one-word denial:
“No.” If the arbitrators nevertheless awarded judgment to
Wachovia, a court might infer that the arbitrators had had
a corrupt motive or at least that they had exceeded the
powers granted to them by the arbitration clause.
The best interpretation of the Wises’ substantive claim is
as follows: A principal generally is not liable for the wrong-
doing of an agent who is acting wholly for himself. But
there is an exception if, acting with apparent authority, the
agent commits a fraud against a third party who reasonably
believed that he was entering into a bona fide transaction
with the agent’s principal. That is the rule of Gleason v.
Seaboard Air Line Ry., 278 U.S. 349 (1929); see Ackerman v.
Northwestern Mutual Life Ins. Co., 172 F.3d 467, 471 (7th Cir.
1999); Hartmann v. Prudential Ins. Co. of America, 9 F.3d 1207,
1211 (7th Cir. 1993), and the Wises’ characterization of the
wrong done to them.
But they may have known that Winters was on a frolic
of his own in marketing the Titan Fund to them, and if
they knew this—knew that he was acting beyond the
authority granted to him by his employer—they could not
8 No. 05-2640
have been relying on any appearance of authority when
they invested in the fund, and so their theory of liability
would collapse. It is true that the only evidence before the
arbitrators was Mr. Wise’s affidavit, which did not acknowl-
edge that he knew that Winters was not acting for
Wachovia. But arbitrators, like judges and jurors, are
allowed to use their common sense and background
knowledge to draw inferences from what the evidence
shows. And from what it omits. The Wises’ relationship was
with Winters rather than with Wachovia. They had been his
customers when he was at Merrill Lynch and when he
moved to Wachovia they moved with him. When he
decided to leave Wachovia and make his fortune with the
Titan Fund (of which he was the sponsor and president), the
Wises decided to go with him once again, abandoning
Wachovia—or so at least the arbitrators could find without
taking leave of their senses. The inference that the Wises
were dealing with Winters as principal rather than as agent
is reinforced by the curious fact that they closed their
account with Wachovia. Ordinarily when an investor
decides to change his investments, he directs his broker to
replace the securities in his account with other securi-
ties—he doesn’t close the account. The closing of their
account is a further indication that the Wises were indeed
leaving Wachovia with Winters.
AFFIRMED.
No. 05-2640 9
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-7-06