UBS Financial Services, Inc. v. Gary Padussis

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-2148
UBS FINANCIAL SERVICES, INC.,
Petitioner - Appellant,
v.
GARY T. PADUSSIS,
Respondent - Appellee.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. William D. Quarles, Jr., District
Judge. (1:14-cv-03721-WDQ)
Argued: October 25, 2016 Decided: November 22, 2016
Before WILKINSON, KING, and HARRIS, Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Judge King and Judge Harris joined.
ARGUED: Francis X. Dee, MCELROY, DEUTSCH, MULVANEY & CARPENTER,
LLP, Newark, New Jersey, for Appellant. Edward Patrick
McDermott, Sr., LAW OFFICE OF E. PATRICK MCDERMOTT LLC,
Annapolis, Maryland, for Appellee. ON BRIEF: Margaret L.
Watson, MCELROY, DEUTSCH, MULVANEY & CARPENTER, LLP, New York,
New York, for Appellant.
WILKINSON, Circuit Judge:
Appellant UBS Financial Services (“UBSFS”) challenges an
arbitration award that, in practical effect, granted Gary
Padussis over $900,000 in compensatory damages. The district
court refused to disturb the award, and we now affirm its
judgment. Any other result would open arbitration proceedings to
a host of challenges over the very type of subsidiary questions
that Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002),
indicated should be left to the discretion of the arbitral body.
I.
Gary Padussis worked for UBSFS as a financial advisor from
2009 through 2013. When he joined UBSFS, Padussis brought with
him a team of three financial advisors as well as an established
business clientele. As part of his initial compensation, UBSFS
lent Padussis over $2.7 million. Padussis signed a promissory
note, which provided that any remaining balance would
immediately come due if Padussis ended his employment with
UBSFS. Padussis also executed a Letter of Understanding
describing his compensation and a Financial Advisor Team
Agreement governing the operations of his team. All the
agreements provided that any dispute would be subject to
arbitration before the Financial Industry Regulatory Authority
(“FINRA”).
2
Padussis resigned from UBSFS in 2013, complaining that
UBSFS had ruined his team of financial advisors and cost him
valuable clients. Upon his resignation, Padussis owed UBSFS the
remaining balance on the promissory note, nearly $1.6 million.
When he failed to pay that amount, UBSFS initiated arbitration
on June 3, 2013. Padussis responded with counterclaims on July
31, 2013, alleging that UBSFS’s interference with his team was
both tortious and a breach of contractual duties.
Under the FINRA Code of Arbitration Procedure for Industry
Disputes, the Director of FINRA Dispute Resolution is
responsible for the process of selecting the panel of three
arbitrators required here. First, the Director mails a list of
potential arbitrators for each of the three panel positions to
each party “within approximately 30 days after the last answer
is due.” FINRA Rule 13403. Each “party may strike up to four of
the arbitrators from each list” and rank the remaining ones.
FINRA Rule 13404. The parties must return their preferences
within twenty days of the lists being sent, and the Director
then combines the rankings sent by the parties to select the
arbitration panel. FINRA Rule 13405.
If a party fails to return its ranked lists within twenty
days, the Director proceeds as if that party has no preferences.
FINRA Rule 13404(d). The Code allows the Director to extend any
deadline set by the Code for good cause. FINRA Rule 13207(c).
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The Code also gives the Director discretion to “make any
decision that is consistent with the purposes of the Code to
facilitate the appointment of arbitrators.” FINRA Rule 13412.
The Director can delegate these duties. FINRA Rule 13100(k).
In this case, FINRA mailed lists of potential arbitrators
to the parties on August 21, 2013. UBSFS did not return its
ranked lists by the deadline of September 10 because, UBSFS
claims, it never received them.
On September 11, UBSFS received a letter, dated September
3, that reminded the parties of the impending deadline for
returning their lists. Realizing that it had missed the
deadline, UBSFS filed a motion to extend the time to submit its
preferences. Padussis opposed this motion. He argued that UBSFS
notified him in mid-August that it was transferring the case to
new counsel but that the new counsel had not yet filed a notice
of appearance. Padussis claimed that this transfer led to
confusion over which counsel was responsible for submitting
UBSFS’s preferences.
FINRA’s Regional Director – to whom the Director had
apparently delegated responsibility – denied UBSFS’s motion for
an extension. UBSFS appealed to the Director, who affirmed the
denial. The Director ruled that good cause to extend the
deadline did not exist because FINRA had timely mailed the
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initial lists of arbitrators as well as a courtesy reminder, and
had not received any mail returned as undeliverable.
FINRA proceeded to select a panel of three arbitrators
based on Padussis’s lists of preferences. At the first panel
hearing, UBSFS challenged the composition of the panel based on
UBSFS’s lack of participation in the selection of the
arbitrators. The panel reviewed the evidence, denied UBSFS’s
challenge, and proceeded with the arbitration.
On October 27, 2014, the panel issued its final decision.
The panel awarded UBSFS $1,683,262 and awarded Padussis
$932,887. The decision denied “[a]ny and all relief not
specifically addressed.” J.A. 24. Pursuant to the FINRA Code,
the decision did not explain the panel’s reasoning.
UBSFS was altogether displeased with this outcome. Padussis
insisted that due to a statutory lien and the prospect of
bankruptcy, he would be financially unable to pay the balance of
the note, which left UBSFS in the position of owing him over
$900,000 for the damage he claimed it had done to his business.
UBSFS then filed this action to vacate the arbitral award. It
argued that the arbitrators were not selected in accordance with
the parties’ agreement because UBSFS had not provided its
preferences to FINRA. In the alternative, UBSFS sought to have
the district court offset the awards, citing Padussis’s
admission that he was unlikely to be able to pay his portion of
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the judgment. The district court confirmed the arbitration award
in its entirety and declined to impose an offset. UBSFS now
appeals.
II.
The scope of judicial review of an arbitration award “is
among the narrowest known at law.” Apex Plumbing Supply, Inc. v.
U.S. Supply Co., Inc., 142 F.3d 188, 193 (4th Cir. 1998). Courts
may vacate or modify an arbitration award only under the limited
circumstances listed in the Federal Arbitration Act, 9 U.S.C.
§ 10-11, or under the common law if the award “fails to draw its
essence from the contract” or “evidences a manifest disregard of
the law.” Patten v. Signator Ins. Agency, Inc., 441 F.3d 230,
234 (4th Cir. 2006).
This circumscribed scope of review means that “in reviewing
such an award, a district or appellate court is limited to
determine whether the arbitrators did the job they were told to
do - not whether they did it well, or correctly, or reasonably,
but simply whether they did it.” Three S Del., Inc. v. DataQuick
Info. Sys., Inc., 492 F.3d 520, 527 (4th Cir. 2007) (internal
quotation marks omitted). To ensure arbitrators did the job they
were told to do and did not “exceed[] their powers,” 9 U.S.C.
§ 10(a)(4), courts will resolve certain threshold questions of
arbitrability. For example, a court will decide whether parties
agreed to arbitrate a particular dispute, AT&T Techs., Inc. v.
6
Commc'ns Workers of Am., 475 U.S. 643, 651 (1986), or whether
arbitrators were appointed according to the parties’ agreement.
Cargill Rice v. Empresa Nicaraguense Dealimentos Basicos, 25
F.3d 223, 225 (4th Cir. 1994).
Beyond these basic questions of arbitrability, courts defer
to the arbitral panel both on the merits of the final decision
and on procedural questions that “grow out of the dispute,” even
where those questions “bear on its final disposition.” Howsam,
537 U.S. at 84 (quoting John Wiley & Sons, Inc. v. Livingston,
376 U.S. 543, 557 (1964)). We need not repair here to the
standards of review customarily applied to fact finding and
discretionary procedural rulings because that would simply
constitute us, contrary to the Supreme Court’s admonitions, as a
typical appellate court.
The “widely recognized” policy “to encourage the use of
arbitration” requires this limited scope of judicial review.
Remmey v. PaineWebber, Inc., 32 F.3d 143, 146 (4th Cir. 1994).
Parties agree to arbitration to avoid the time and expense of
litigation. But “to allow full scrutiny of such awards would
frustrate the purpose of having arbitration at all.” Apex
Plumbing, 142 F.3d at 193.
Instead, the narrow standard of review acts as a bulwark
against legal ingenuity. Lawyers can easily find one thing or
another in almost any proceeding to which they wish to take
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exception. There are benefits to such legal creativity in many
contexts but not in the one before us. Allowing procedural
challenges to every award would force parties into court to
argue their dispute a second time, incurring the litigation
costs and delays they intended to avoid by agreeing to
arbitration in the first place.
In other words, the rules that limit our review of
arbitration awards are meant to avoid exactly what has happened
here, which is a protracted set of judicial proceedings that
have sacrificed the very advantages inhering in the arbitral
forum.
III.
UBSFS seeks to vacate the arbitral award on two grounds. It
first contends that the arbitrators were not selected according
to the parties’ agreement. Section 5 of the Federal Arbitration
Act provides that if the parties’ arbitration agreement includes
a method for appointing arbitrators, “such method shall be
followed.” 9 U.S.C. § 5. This court will generally vacate
“[a]rbitration awards made by arbitrators not appointed under
the method provided in the parties’ contract.” Cargill Rice, 25
F.3d at 226.
The parties here agreed to arbitrate according to the FINRA
Code. UBSFS complains that because it never received the lists
of arbitrators, the process of appointing arbitrators did not
8
follow the method in the Code. An examination of the record
shows, to the contrary, that FINRA adhered to the Code.
FINRA Rule 13403(b) requires that the Director create three
lists of potential arbitrators for the panel. FINRA did this.
Rule 13403(c)(1) requires that the Director mail these lists to
the parties. FINRA did this. Rule 13404(d) requires that if the
Director does not receive a party’s ranked lists within twenty
days of sending the lists, “the Director will proceed as though
the party did not want to” provide its preferences. FINRA did
this too. Rules 13405 and 13406 describe how to appoint the
arbitrators after receiving the lists, and FINRA followed these
rules as well.
Unable to find a specific rule FINRA violated, UBSFS argues
that the Code as a whole “ensure[s] that each party ha[s] the
opportunity to participate in the selection of arbitrators.”
Appellant’s Br. at 23. UBSFS points to the fact that a few rules
describe the parties’ participation in selecting arbitrators,
but this is unsurprising in a Code that sets forth a process for
the mutual selection of arbitrators. The Code simply does not
require the participation of each party prior to the valid
appointment of an arbitration panel.
In fact, Rule 13404(d) does the opposite. It requires the
Director to appoint arbitrators without a party’s input if the
Director does not receive that party’s preferences by the
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deadline. Rule 13404(d) could require the Director to contact
the party before proceeding, or it could allow the party an
opportunity to rebut any presumption that it did not wish to
participate in the selection of the arbitrators. Instead, it
simply instructs the Director to act as if the party did not
intend to submit ranked lists and to proceed with the
appointment of arbitrators. That is exactly what FINRA did here.
This case, then, does not involve the question of whether
FINRA failed to follow the rules for appointing an arbitrator.
FINRA did. Instead, this is a question of whether FINRA properly
applied those rules. UBSFS seems to believe that the Director
erred in not finding good cause to extend the deadline for UBSFS
to submit its preferences under Rule 13207 and in not
“exercis[ing] discretionary authority” to ensure that UBSFS had
a say in the composition of the arbitration panel under Rule
13412. These questions, though, are procedural questions and
“are for arbitral, rather than judicial, resolution.” Dockser v.
Schwartzberg, 433 F.3d 421, 425 (4th Cir. 2006).
While courts decide some questions of arbitrability, the
Supreme Court has directed that “‘procedural 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, 537 U.S. at 84 (quoting John Wiley, 376 U.S. at
557). Thus, whether arbitration rules time-bar a claim is for
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the arbitral body to decide. Howsam, 537 U.S. at 85. Likewise,
the arbitral body decides whether arbitration rules require a
panel of one or three arbitrators. Dockser, 433 F.3d at 425.
Here, whether good cause existed to extend the deadline was
for FINRA to decide. UBSFS argues that it did not receive the
lists of arbitrators. Padussis responds that the mailing was
never returned to FINRA as undeliverable and that the whole
problem was due to UBSFS’s negligence – that UBSFS should have
expected the lists shortly after Padussis filed his Answer and
Counterclaim but that the matter fell between the cracks at
UBSFS due to the transfer of the case to different counsel. This
back and forth is rather beside the point. As with other
procedural questions, the parties would have expected FINRA to
decide this issue because the rules “provide specific non-
judicial procedures for its resolution.” Id. at 426. FINRA rules
expressly give the Director the power to “exercise discretionary
authority and make any decision that is consistent with the
purposes of the Code to facilitate the appointment of
arbitrators.” FINRA Rule 13412. UBSFS cannot complain that the
Director – rather than the appointed arbitrators – resolved the
issue because the parties expressly granted this authority to
the Director. Dockser, 433 F.3d at 428.
Moreover, this claim concerns “the written rules governing
the parties’ arbitration proceeding,” Id. at 427, and the
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arbitral body is “comparatively more expert” in applying those
rules than courts. Howsam, 537 U.S. at 85. This is especially
true here, where the Director can better determine whether an
extension of a deadline will help reach a more just outcome or
simply deprive the parties of a timely resolution.
We will not second-guess FINRA’s decision that there was
not good cause to extend the deadline. The parties agreed to
arbitrate their disputes according to rules that clearly gave
the Director the authority to make that decision. To usurp the
Director’s authority would be to open courts to legions of
questions about whether arbitral bodies properly applied one
rule or another. This would deprive parties of the very benefits
they sought by agreeing to arbitration – relatively prompt and
inexpensive dispute resolution. 1
IV.
UBSFS next asks this court to impose an offset on the
arbitration award. As discussed above, the arbitration panel
here found that (1) Padussis owed UBSFS $1.68 million on the
promissory note (which Padussis contends he would be unable to
pay) and that (2) UBSFS was liable to Padussis for $932,000
1 UBSFS also contends that we should vacate the award on the
common law ground that the award “fails to draw its essence from
the contract.” Patten, 441 F.3d at 234. UBSFS relies on its
argument that FINRA disregarded the agreed-upon method of
selecting arbitrators. As discussed above, FINRA followed those
rules. We thus find UBSFS’s common law claim meritless.
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based on his various employment claims. Offsetting the damages
granted to Padussis from the $1.68 million would result in a net
award to UBSFS of about $750,000, entirely cancelling out
Padussis’s award and freeing UBSFS of the need to cut a check.
This court has previously recognized that “an offset of
arbitration awards might constitute a modification of the award
in some circumstances.” Nat'l Risk Underwriters, Inc. v.
Occidental Fire & Cas. Co. of N.C., 931 F.2d 1015, 1017 (4th
Cir. 1991). While such circumstances did not exist in that case,
they do exist here. This arbitration award expressly denied
“[a]ny and all relief not specifically addressed” by the award,
and the award did not mention an offset. J.A. 24. Thus, applying
an offset to this award would be a modification of the award.
Under the Federal Arbitration Act, a court can modify an
award only under specific, narrow circumstances. Relevant here,
a court may modify an award “[w]here the award is imperfect in
matter of form not affecting the merits of the controversy.” 9
U.S.C. § 11. Any order to modify an award must “effect the
intent thereof and promote justice between the parties.” Id.Assuming arguendo that imposing an offset would be a
“matter of form not affecting the merits of the controversy,” an
offset here would not effectuate the intent of the arbitrators,
and we thus decline to impose one. The award itself is silent on
the question of an offset, and there is no evidence in the
13
record that would enable us to say that the arbitrators intended
for the award to include one.
UBSFS contends that an offset “would not change the
arbitrators’ valuation decision” but would provide a “simple,
fair” result, which must have been the intent of the
arbitrators. Appellant’s Reply Br. at 25-26. An offset, though,
changes the practical effect of the award. In a similar
situation, a FINRA arbitration panel heard arguments for and
against an offset and declined to provide one. UBS Fin. Servs.,
Inc. v. Mann, No. 14-10621, 2014 WL 1746249, at *3 (E.D. Mich.
Apr. 30, 2014). We cannot know what the arbitration panel in
this case would have ruled if UBSFS had asked it to provide an
offset. That decision, though, was for the arbitration panel,
and UBSFS should have asked the panel to make it. For whatever
reason, it did not do so, and the question is simply not one for
the courts to answer.
UBSFS also argues that regardless of the arbitrators’
actual intent, we should recognize a presumption favoring an
offset. However, imposing such a presumption would place a
judicial gloss on the arbitration award. Such a gloss is
inappropriate here, where the award expressly limits itself to
the relief specifically addressed and was rendered pursuant to a
detailed set of rules. As the Seventh Circuit has noted, the
“arbitrator’s failure to mention offsets in his ruling means
14
that no offset was granted.” Int’l Union of Operating Eng’rs,
Local No. 841 v. Murphy Co., 82 F.3d 185, 190 (7th Cir. 1996). 2
V.
When all is said and done, UBSFS plainly agreed to a
process and then declined to abide by the result of that
process. It agreed to arbitration; the dispute was within the
scope of that agreement; and the rules by which the arbitration
would proceed were openly declared and followed. The arbitration
here spanned eighteen hearing sessions over nine separate days.
We can find no basis for overturning the arbitral decision. The
district court’s denial of UBSFS’s motion to vacate the award is
therefore
AFFIRMED.
2 In fact, FINRA has since amended its rules to provide for
a presumption of an offset, but that amendment is effective only
for arbitration awards rendered after October 24, 2016. Press
Release, FINRA, Regulatory Notice 16-36: SEC Approves Amendments
to the Codes of Arbitration Procedure Regarding Award Offsets
(Sept. 2016); see also Order Approving a Proposed Rule Change to
Permit Award Offsets in Arbitration, Exchange Act Release No.
78557, 81 Fed. Reg. 54,901 (Aug. 11, 2016). For us to rewrite
that amendment to make it effective for an arbitration award
rendered in October 2014 would be to displace FINRA’s authority
over its own arbitral proceedings. We must therefore observe the
rules in place at the time of the arbitration.
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