Philip Pizelo v. Marilyn Heinemann And Chakorn Phisuthikul ( 2019 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
PHILIP ANTHONY PIZELO, No. 77448-4-I
WILLIAM M. SWAYNE II, WILLIAM
M. SWAYNE Ill, and WMS DIVISION ONE
FINANCIAL PLANNERS, INC.,
Appellants, UNPUBLISHED OPINION
V.
MARILYN HEINEMANN AND
CHAKORN PHISUTHIKUL,
Respondents. FILED: June 3, 2019
CHuN, J. — Philip Anthony Pizelo, William Swayne II, William Swayne Ill,
and WMS Financial Planners, Inc. (Appellants) seek review of the trial court’s
order confirming a Financial Industry Regulatory Authority (FINRA) arbitration
award against them. Appellants contend the arbitration panel exceeded its
powers by granting claimants’ motion at the evidentiary hearing to amend their
claim by identifying unnamed “John Doe” defendants as Pizelo, Swayne II, and
WMS. For the reasons discussed in this opinion, we affirm.
BACKGROUND
In 2008, husband and wife, Marilyn Heinemann and Chakorn Phisuthikul
(Investors) invested in two tenant-in-common real estate interests through
registered broker-dealer Pacific West Securities, Inc. (PacWest). William M.
Swayne Ill, a registered representative with PacWest, marketed the investment
No. 77448-4-112
opportunity. The securities investment account form contained an arbitration
provision that provided in pertinent part:
Customer and Pacific West Securities, Inc., agree that if any dispute
arises between them or their agents, the dispute shall be settled by
arbitration pursuant to the Code of Arbitration Procedure
administered by the National Association of Securities Dealers, Inc.
The award of the arbitrator(s) shall be final and judgment on the
award rendered by the arbitrator(s) may be entered in any court
having jurisdiction thereof. 1
The investments did not perform well. On May 23, 2013, Investors
initiated an arbitration before FINRA asserting claims against PacWest, Swayne
III, and “John Does” for negligence, misrepresentations and material omissions,
and control person liability and failure to supervise. The claim alleged that the
“John Does” were control persons of PacWest who ‘will be identified through
discovery.”
A three-member FINRA panel conducted an evidentiary hearing from
June27 through July 1, 2016. During the evidentiary hearing, Swayne Ill
testified under oath that WMS was a d/b/a of himself and that his father, Swayne
II, was CEO of WMS. Upon learning this information, Investors orally moved to
name Pizelo, Swayne II, and WMS as the “John Does” in the claim. The panel
granted the motion at the evidentiary hearing.
On July 20, 2016, the Panel issued a written ruling on the motion:
The Statement of Claim in this matter named but did not identify John
Doe respondents. By identifying three such respondents at hearing -
Anthony Pizelo, William Madison Swayne II and WMS Securities,
Inc. Claimant initiated and Respondent William Madison Swain [sic]
-
1In 2007, the National Association of Securities Dealers (NASD) became known as
FINRA. FINRA arbitrations are governed by the FINRA “Code of Arbitration Procedure for
Customer Disputes” (Code).
2
No. 77448-4-113
Ill answered, de facto, a Rule 12309(c) Motion to Amend Pleadings
to Add Parties. This Motion is granted with respect to these three
individuals.
On August 3, 2016, Investors submitted a written Statement of Claim to
Conform to the Evidence (SOCCE) pursuant to FINRA Rule 12309(b) identifying
the “John Does” as Pizelo, Swayne II, and WMS. In a letter responding to the
Panel’s July 20, 2016 order, Investors asserted that their motion did not seek to
add new parties to the claim pursuant to FINRA Rule 12309(c), but rather to
amend the claim pursuant to FINRA Rule 12309(b). Pizelo, Swayne II, and WMS
subsequently filed objections, responses and replies in opposition to the SOCCE
with the Panel and also with the Director of FINRA. On September 14, 2016, the
director of FINRA ruled that the matter was within the purview of the Panel to
decide.
On October 7, 2016, the Panel issued an order re-confirming its ruling at
the evidentiary hearing granting Investors’ FINRA Rule 12309(b) motion to
amend the SOCCE. No party moved to reopen the hearing.
On November 16, 2016, the Panel issued a final arbitration award finding
Pizelo, PacWest, Swayne II, Swayne III, and WMS jointly and severally liable to
Investors for $1,134,911 in compensatory damages, $65,000 in attorney fees,
and $5,500 in hearing fees. Regarding the dispute concerning Investors’ motion
to amend the SOCCE, the award specified:
None of the Newly Identified Respondents filed with the FINRA Office
of Dispute Resolution a properly executed Submission Agreement.
The Panel has determined that Swayne II and Pizelo are required to
submit to arbitration pursuant to the Code and, being identified at the
hearing as control persons, are bound by the determination of the
panel on all issues submitted. WMS is not a member of FINRA. The
3
No. 77448-4-114
Panel has determined that WMS is required to submit to arbitration
and, being identified at the hearing as a control person, is bound by
the determination of the Panel on all issues submitted.
The Newly Identified Respondents did not appear at the evidentiary
hearing, whether by their choice to not appear or by their unknown
named identity as control persons prior to the hearing. Upon
evidence produced during the hearing, the panel determined that the
Newly Identified Respondents had sufficient notice of the hearing,
and that arbitration of the matter would proceed without the Newly
Identified Respondents present.
On December 14, 2016, Pizelo filed a petition in superior court to vacate
the arbitration award on the basis that it violated the Washington Uniform
Arbitration Act (WAA) and the FINRA rules. On December 16, 2016, Swayne II,
Swayne III, and WMS filed a petition to vacate the award on similar grounds.
On February 2, 2017, Investors moved to dismiss pursuant to CR 12(b)(6),
arguing that the petitions failed to reference the Federal Arbitration Act (FAA).
On February 14, 2017, Pizelo filed a motion to vacate the arbitration award, citing
the WAA, the FAA, and FINRA rules. On February 16, 2016, Swayne II, Swayne
III, and WMS filed motions to vacate the award.
On February 27, 2017, the court granted Appellants’ motion for joinder
and stayed their motions to vacate pending a ruling on Investors’ motion to
dismiss. On March 13, 2017, Appellants filed a joint opposition to Investors’
motion to dismiss. On March 27, 2017, Appellants filed an amended joint petition
to vacate the arbitration award, which Investors opposed. On April 17, 2017, the
trial court ruled that Investors’ motion to dismiss was moot, and ordered them to
answer Appellants’ motion to vacate. Investors filed their answer to the amended
petition on April 21, 2017. On June 5,2017, Investors filed a CR 12(c) motion for
4
No. 77448-4-115
judgment on the pleadings, which the trial court denied.
On August 17, 2017, Investors moved to confirm the arbitration award.
They also filed a response to Appellants’ motion to vacate on August 23, 2017.
The trial court conducted a hearing on August 25, 2017. On September 6, 2017,
the trial court denied Appellants’ motion to vacate and granted Investors’ motion
to confirm the arbitration award. This appeal followed.
ANALYSIS
Appellants contend the Panel exceeded its powers in granting Investors’
motion to identify the “John Does” as Pizelo, Swayne II, and WMS. Specifically,
Appellants contend the trial court erred in refusing to vacate the arbitration award
because (1) the Panel violated due process protections and FINRA rules, (2) the
Panel violated state and federal principles of “John Doe” pleading, and (3) there
was no agreement to arbitrate before FINRA.
1. Federal Law Ar~lies
As a preliminary matter, we address the question of applicable law.
Appellants argue the trial court improperly ruled that the FAA preempted the
WAA in this case. They assert that the FAA and WAA both apply, and they rely
on both throughout their brief. “Determination of whether the FAA preempts a
state statute that otherwise applies to a transaction generally requires a two-part
analysis in which we consider (1) whether the FAA applies to the transaction and,
if so, (2) whether the state statute conflicts with the FAA.” Satomi Owners Ass’n
v. Satomi, LLC, 167 Wash. 2d 781, 797, 225 P.3d 213 (2009). “Conflict preemption
is found where it is impossible to comply with both state and federal law or where
5
No. 77448-4-116
state law ‘stands as an obstacle to the accomplishment of the full purposes and
objectives of Congress.” McKee v. AT&T Corp., 164 Wash. 2d 372, 387, 191 P.3d
845 (2008) (quoting Silkwood v. Kerr—McGee Corp., 464 U.S. 238, 248, 104 5.
Ct. 615, 78 L. Ed. 2d 443 (1984)).
Appellants are correct that the FAA preempts state arbitration acts only to
the extent they conflict. Volt Info. Sci., Inc. v. Bd. of Trs. of Leland Stanford
Junior Univ., 489 U.S. 468, 476-77, 109 5. Ct. 1248, 103 L. Ed. 2d 488 (1988).
But they provide no analysis, argument, or citations in support of their conclusory
assertion that the FAA and WAA do not conflict on any point relevant to this
case. “Passing treatment of an issue or lack of reasoned argument is insufficient
to merit judicial consideration.” Brownfield v. City of Yakima, 178 Wash. App. 850,
876, 316 P.3d 520 (2013); RAP 10.3(a)(6) (briefs must include “argument in
support of the issues presented for review, together with citations to legal
authority and references to relevant parts of the record.”). Because Appellants
fail to conduct a conflict preemption analysis, we need not address their claim
that both laws apply. Accordingly, we analyze their challenge through the lens of
the FAA only.
The FAA gives “substan[ce to] a national policy favoring arbitration with
just the limited review needed to maintain arbitration’s essential virtue of
resolving disputes straightaway.” Hall Street Assocs. LLC v. Mattel, Inc., 552
U.S. 576, 588, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008). Section 10(a) of the
FAA permits vacatur of an arbitration award only under four narrow
circumstances: ~
6
No. 77448-4-1/7
(1) where the award was procured by corruption, fraud, or undue
means;
(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).
Arbitrators “exceed their powers” under 9 u.s.c. § 10(a)(4) when the
award is “completely irrational” or exhibits a “manifest disregard of law.” comedy
club, Inc. v. lmprov W. Assocs., 553 F.3d 1277, 1290 (gtI~ Cir. 2009). To
establish manifest disregard, “it must be clear from the record that the arbitrators
recognized the applicable law and then ignored it.” Biller v. Toyota Motor Corp.,
668 F.3d 655, 665 (9th cir. 2012) (internal quotation marks and citations
omitted). “It is not enough for petitioners to show that the panel committed an
error—or even a serious error.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,
559 U.S. 662, 671, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010). “It is only when
[an] arbitrator strays from interpretation and application of the agreement and
effectively ‘dispense[s] [their] own brand of industrial justice’ that [their] decision
may be unenforceable.” Stolt-Nielsen S.A., 559 U.S. at 671 (quoting Maior
League Baseball Players Assn. v. Garvey, 532 U.S. 504, 509, 121 S. Ct. 1724,
149 L. Ed. 2d 740 (2001)).
7
No. 77448-4-1/8
Although we review the trial court’s conclusions de novo, we remain
‘exceedingly deferential” to the arbitrator’s decisions. Kashner Davidson
Securities Corp. v. Mscisz, 531 F.3d 68,74(1st Cir. 2008). “Broad judicial
review of arbitration decisions could well jeopardize the very benefits of
arbitration, [i.e., speed and informality,] rendering informal arbitration merely a
prelude to a more cumbersome and time-consuming judicial review process.”
Kyocera Corp. v. Prudential—Bache Trade Servs., Inc., 341 F.3d 987, 998 (9th
Cir. 2003). “Courts. . . do not sit to hear claims of factual or legal error by an
arbitrator as an appellate court does in reviewing decisions of lower courts.”
United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 5.
Ct. 364, 98 L. Ed. 2d 286 (1987). “The bottom line is we will confirm the
arbitrator’s award even if we are convinced that the arbitrator committed serious
error, so long as the arbitrator is even arguably construing or applying the
contract and acting within the scope of [their] authority.” McGrann v. First Albany
Corp., 424 F.3d 743, 748 (8th Cir. 2005) (internal quotation marks and citation
omitted).
2. Notice and Opportunity to be Heard
Appellants argue the Panel exceeded its power and acted in manifest
disregard of the law by granting Investors’ motion at the evidentiary hearing to
amend their SOCCE by identifying the “John Does” as Pizelo, Swayne II, and
WMS. They contend this decision violated the FINRA Rules and basic principles
of due process because they did not receive notice prior to the evidentiary
hearing and were thereby deprived of an opportunity to be heard. We disagree.
8
No. 77448-4-119
Here, the Investors moved to amend their SOCCE to add the newly
identified respondents pursuant to FINRA Rule 12309(b). Under that rule,
‘[o]nce a panel has been appointed, a party may only amend a pleading if the
panel grants a motion to amend in accordance with Rule 12503. Motions to
amend a pleading must include a copy of the proposed amended pleading.” And
FINRA Rule 12503(a)(4) requires that such motions be “accompanied by copies
of the proposed amended pleading when the motion is served on the other
parties and filed with the Director.”
Appellants argue that Investors’ motion at the evidentiary hearing was
procedurally improper because the newly identified respondents were not
contemporaneously served in writing pursuant to FINRA Rule 12309(b) and
12503. They contend the Panel acted in manifest disregard of the law because
no FINRA rules allow for a post-evidentiary oral motion to add parties. Under the
circumstances presented here, we are not persuaded that the Panel exceeded its
power or acted in manifest disregard of the law.
FINRA Rule 12409 provides,
The panel has the authority to interpret and determine the
applicability of all provisions under the Code. Such interpretations
are final and binding upon the parties.
“‘[P]rocedural questions which grow out of the dispute and bear on its final
disposition’ are presumptively not for the judge, but for an arbitrator, to decide.”
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S. Ct. 588, 154 L.
Ed. 2d 491 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543,
557, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964)).
9
No. 77448~4-l/10
The Panel expressly determined that “upon evidence produced during the
hearing,” Pizelo, Swayne II, and WMS “had sufficient notice.” The Panel was not
required to explain its rationale for this decision, as the parties did not request an
“explained decision” pursuant to FINRA Rule 12904(g). We note, however, that
the record shows Pizelo was former CEO of PacWest, and that Swayne Ill
testified under oath at the evidentiary hearing that WMS was a dlbla of himself
and that his father, Swayne II, was CEO of WMS. Upon learning this information
at the hearing, Investors immediately moved to identify the “John Does” in their
claim. Because the newly identified parties were not present at the evidentiary
hearing, strict procedural compliance with FINRA Rules 12309(b) and 12503 was
not possible. We cannot say this decision was irrational or made in manifest
disregard of the law. Nor can we say the trial court erred in concluding “[ajIl
parties knew what was going on at the FINRA hearings and that control persons
were included.”
Appellants, relying primarily on Kashner, argue that the award must be
vacated because the Panel acted in disregard of FINRA Rules. In Kashner, the
court held that an NASD arbitration panel disregarded the unambiguous
language of the applicable NASD rules when it dismissed a case with prejudice
without first demonstrating that sanctions short of dismissal were effective.
Kashner, 531 F.3d at 76-78. Such “misapplication of the clear language of the
rule [could] only be deemed an intentional and willful disregard of the law.”
Kashner, 531 F.3d at 70. Here, in contrast, the Panel reasonably exercised its
10
No. 77448-4-I/li
discretion to interpret the FINRA Rules in accordance with the circumstances at
hand.
Appellants further contend that post-evidentiary amendments that add
new parties in a lawsuit violate due process when liability is imposed without
providing the new parties with an opportunity to be heard. However, the record
shows that Appellants’ post-hearing submissions to the Panel and FINRA raised
in detail their concerns regarding due process, violation of FINRA Rules, conflict
of interest, control person liability, and prejudice. The Panel’s award expressly
stated that the determination was made “[a]fter considering the pleadings, the
testimony and evidence presented at the hearing, and the post hearing
submissions.”
Petitioners further assert that the Panel failed to follow FINRA Rule 12609,
which allows the Panel to “reopen the record on its own initiative or upon motion
of any party at any time before the award is rendered, unless prohibited by
applicable law.” They assert that the Panel failed to offer this option to
Appellants, choosing instead to proceed in bad faith. But FINRA Rule 12609 by
its express terms allows a party to move to reopen the record. Appellants could
have requested that the Panel reopen the evidentiary hearing pursuant to this
rule, but they did not.
Appellants cite Nelson v. Adams USA, Inc., 529 U.S. 460, 466-68, 120 S.
Ct. 1579, 146 L. Ed. 2d 530 (2000) in support of their position. Nelson is readily
distinguishable. In Nelson, after acquiring a judgment against a plaintiff
corporation, the district court permitted defendants to use Federal Rule of Civil
11
No. 77448-4-1/12
Procedure 15 to add the corporation’s president as a party. Nelson, 529 U.S. at
460. The united States Supreme Court held that this action violated due process
because the president did not have the opportunity to defend himself prior to
entry of the judgment against him. Nelson, 529 U.S. at 460. Here, in contrast,
the newly identified parties were named months before entry of the award. And,
as described above, they had an opportunity to respond to the claims.
Appellants have not shown that the Panel exceeded its powers by
granting Investors’ motion and concluding the newly identified respondents had
notice of the hearing. We decline to vacate the award on this basis.
3. Agreement to Arbitrate
Appellants contend the trial court improperly found there was an
agreement to arbitrate the dispute before FINRA. Arbitration is a matter of
contract, and a party cannot be required to submit to arbitration any dispute
absent agreement. Howsam, 537 U.S. at 83. Nonsignatory parties may be
bound by a written arbitration agreement if compelled by “ordinary principles of
contract and agency” such as incorporation by reference, assumption, agency,
veil piercing/alter ego, or estoppel. Thompson-CSF, S.A. v. American Arbitration
Ass’n, 64 F.3d 773, 776 (2nd Cir. 1995).
The parties do not dispute that Investors and PacWest, represented by
Swayne III, entered into a written agreement to arbitrate that included any
disputes between customers and PacWest ‘or their agents.” The Panel found
that Pizelo, Swayne II, and WMS were identified at the hearing as “control
persons” of PacWest. In concluding that the parties agreed to arbitrate the
12
No. 77448-4-1113
dispute before FINRA, the trial court noted that (1) Pizelo was former CEO of
PacWest and “actively represented” PacWest during at least one pre-hearing
conference and (2) Swayne Ill testified under oath at the arbitration hearing that
WMS was a dlbla of himself and that his father Swayne II was CEO of WMS.
Appellants have not shown that the Panel’s decision was irrational or manifestly
disregarded the law. As control persons, Pizelo, Swayne H, and WMS were
bound by the written arbitration agreement.
Moreover, FINRA Rule 12200 requires FINRA members and associated
persons to arbitrate disputes under the FINRA Code when arbitration is
“requested” by the customer and the dispute “arises in connection with the
business activities of the member.” Pursuant to this Rule, customers can compel
registered members of FINRA to arbitrate certain disputes even when no written
arbitration agreement exists. Herbert J. Sims & Co., Inc. v. Roven, 548
F. Supp. 2d 759, 763 (2008). Pizelo and Swayne II were licensed FINRA
members at the time of the sale, and as such were also bound to arbitrate by the
Code.
Appellants also contend that the Panel had no authority to render an
award against Pizelo, Swayne II, and WMS because they did not sign a
Submission Agreement. FINRA Rule 12100 states that “parties must sign [a
Submission Agreement] at the outset of an arbitration in which they agree to
submit to arbitration under the Code.” But Appellants have cited no authority for
the proposition that lack of a Submission Agreement divests FINRA of authority
where the parties are otherwise bound by a written arbitration agreement or via
13
No. 77448-4-1/14
their status as FINRA members. Were this so, parties could avoid liability merely
by refusing to sign a Submission Agreement. The Panel did not exceed its
authority or act in manifest disregard of the law in concluding that Appellants
were bound by agreements to arbitrate the dispute with FINRA.
4. “John Doe” Pleading
Appellants argue the Panel’s Order violated state and federal principles of
“John Doe” pleading. Citing Powers v. W.B. Mobile Services, Inc., 182 Wash. 2d
159, 164, 339 P.3d 173 (2014), they contend the Statement of Claim did not
identify the “John Does” with sufficient particularity to support an arbitration
award against them. In Powers, the plaintiff filed a personal injury lawsuit against
two named defendants and two “John Does.” 182 Wash. 2d at 161. The court held
that service of process on a named defendant tolled the statute of limitations
pursuant to RCW 4.16.170 as to an unserved “John Doe” who had been
identified with reasonable particularity. 182 Wash. 2d at 164-66. Appellants assert
the Statement of Claim failed to meet this standard because it merely identified
the “John Does” as “control persons.” But this is a FINRA arbitration, not a
personal injury claim filed in court. The parties’ rights with regard to arbitration
are governed by the contract, the FINRA Rules, and the provisions of the FAA.
And tolling of the statute of limitations is not at issue. Powers has no bearing on
this case.
Appellants also note that fictitious pleading is generally not permitted in
federal court unless the plaintiff’s description of the defendant is so specific as to
be “surplusage.” Richardson v. Johnson, 598 F.3d 734, 738 (11th Cir. 2010).
14
No. 77448-4-1/15
Again, Appellants cite no authority for the proposition that this principle applies in
a FINRA arbitration proceeding.
Judicial review of an arbitration award governed by the FAA is limited to
the narrow grounds set forth in 9 u.s.c. § 10(a). Appellants do not meet those
narrow statutory grounds. We affirm the trial court’s decision upholding the
arbitration award.
Affirmed.
CL~%~. ci
WE coNcuR:
-.7
4~1
/
15