Broker Unable To Clear The “High Hurdle” Necessary To Justify Vacatur Of An Arbitral Award Under Section 10 Of The Federal Arbitration Act

• Posted on: Jul 10 2017

Under Section 10 of the Federal Arbitration Act (“FAA”), a party can vacate or modify an arbitral award under four narrow circumstances: “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption…; (3) where the arbitrators were guilty of misconduct … or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers ….” 9 U.S.C. §10(a).  These grounds are the exclusive ones for vacating an arbitration award under federal law. Hall Street Associates, LLC v. Mattel Inc., 552 U.S. 576 (2008).

Under FAA, the burden is on the parties seeking to modify or vacate an award to demonstrate that the relief sought is warranted. This burden, however, often proves too difficult to overcome. The reason is rooted in the deference accorded by the courts to arbitrators in the decisions they reach.  So long as the arbitrators act within the scope of their contractually delegated authority, their interpretation of the parties’ contract, including the law and facts related thereto, prevails even if the court has a better one.

One of the more common bases for seeking vacatur of an arbitral award is that the arbitrators exceeded their authority. Essentially, the movant argues that the arbitrators abandoned their interpretative role. Under Section 10(a)(4) of the FAA (discussed below), courts will vacate an award only when the arbitrators stray from their task of interpreting a contract, not when they perform that task poorly.

Section 10(a)(4): Arbitrator Exceeds Authority

As noted, Section 10(a)(4) of the FAA permits a court to vacate an award “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Courts have “consistently accorded the narrowest of readings to this provision.” ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co., 564 F.3d 81, 85 (2d Cir. 2009) (citation and internal quotation marks omitted). Consequently, the courts’ inquiry is focused on “whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue.” Jock v. Sterling Jewelers Inc., 646 F.3d 113, 122 (2d Cir. 2011) (emphasis in original) (citation omitted).

Moreover, a court “will uphold an award so long as the arbitrator ‘offers a barely colorable justification for the outcome reached.’” Jock, 646 F.3d at 122 (quoting ReliaStar, 564 F.3d at 86). The Supreme Court has made it clear that “[i]t is not enough . . . to show that the panel committed an error—or even a serious error.” Instead, vacatur is appropriate only “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.…” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671 (2010) (internal citations and quotation marks omitted). Thus, “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, a court’s conviction that the arbitrator has committed serious error in resolving the disputed issue does not suffice to overturn his decision.” Jock, 646 F.3d at 122 (quoting ReliaStar, 564 F.3d at 86).

Against this background, Larry Bogar (“Bogar”), a former registered representative at Ameriprise Financial Services, Inc. (“Ameriprise”), learned how difficult it is to vacate an award under Section 10(a)(4) of the FAA. Bogar v. Ameriprise Fin’l Servs., Inc., No. 1:16-CV-7199-GHW (S.D.N.Y. May 4, 2017).

Background

Bogar worked as a registered representative at Ameriprise, a broker-dealer. In August 2013, Bogar signed a promissory note with Ameriprise in which Ameriprise agreed to loan $143,199 to Bogar in exchange for his agreement to repay the loan with interest at 1.47% per annum, in monthly installments for nine years (the “Promissory Note”). The Promissory Note had an acceleration clause that provided if Bogar’s employment with Ameriprise ended for any reason, the “unpaid principal balance of the principal sum, plus accrued interest, shall be due and payable as of the date of the termination.”

On December 7, 2015. Bogar’s employment with Ameriprise ended making the outstanding balance ($107,819.56) due and owing under the Promissory Note. Thereafter, Ameriprise demanded payment of the outstanding balance on the loan. Bogar failed to repay the outstanding debt as demanded, and the matter proceeded to arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”).

Ameriprise asserted four claims for relief in arbitration, all which sought recovery for Bogar’s failure to repay the amount due on the Promissory Note. Bogar failed to appear in the arbitration. On September 28, 2016, the arbitrator issued an award in favor of Ameriprise comprising $107,819.56 in compensatory damages, plus interest at the rate of 1.47% per annum from December 7, 2015 until the award is paid in full, and attorneys’ fees and costs of $2,429.83.

Bogar moved to vacate the award under the FAA on the grounds that the arbitrator exceeded his powers. Ameriprise opposed the petition and moved to confirm the award. The Court denied the petition and confirmed the award.

The Court’s Decision

Bogar sought vacatur on two grounds. First, Bogar argued that the arbitrator exceeded his authority because he considered Ameriprise’s claims of unjust enrichment and conversion in addition to its direct claim for breach of contract in violation of FINRA Rule 13806. Second, Bogar argued that Ameriprise failed to submit proof of non-payment on the Promissory Note required to justify relief under New York law.

As to the first grounds for vacatur, the Court found that the arbitrator did not violate the FINRA rule, which provides, in pertinent part, that “a claim may not include any additional allegations.” Rule 13806 applies to arbitrations involving a member’s claim that an associated person “failed to pay money owed on a promissory note.” The Court found “that is precisely the nature of the dispute on which the Award is based.” That Ameriprise pleaded “alternative nominal causes of action” did not, said the Court, “remove its claim for recovery of the debt from the scope of Rule 13806.” Indeed, found the Court, “the basis for Ameriprise’s claim was plainly ‘that an associated person failed to pay money owed on a promissory note.’”

Moreover, said the Court, “even if the Arbitrator could not consider those additional counts, the breach of contract claim, uncontested by plaintiff, provides a sufficient basis for the Award.” Noting that an “arbitrator’s rationale for an award need not be explained,” and that the “award should be confirmed if a ground for the arbitrator’s decision can be inferred from the facts of the case” (citation omitted), the Court found that it could “easily infer that the Award was based on Ameriprise’s cause of action for breach of contract,” which Bogar did not claim was beyond “the arbitrator’s power to reach ….”

As to the second grounds for vacatur, the Court rejected Bogar’s argument that the “Award must be vacated because Ameriprise did not submit to the Arbitrator any proof of Bogar’s failure to make payment on the note.” In doing so, the Court noted that “[a]n arbitrator’s factual findings are generally not open to judicial challenge” because “a court accepts the facts as the arbitrator finds them.” Because Bogar “made no concrete showing that the arbitrator lacked sufficient evidence to support a finding of non-payment,” despite having “the opportunity to appear at the arbitration hearing to contest the evidence presented to the arbitrator,” he could not “undermine the arbitrator’s conclusions … based on unsupported speculation.”

The Court denied the petition to vacate “[b]ecause neither of Bogar’s asserted bases come close to clearing the “high hurdle” necessary to justify vacatur of the Award.”

Takeaway

The Supreme Court has long-held that the FAA “promotes a national policy favoring arbitration.” See, e.g., Hall St. Assocs., 552 U.S. at 583-84. Among the reasons why arbitration is favored for resolving disputes include its ability to respond to the parties’ intentions and contractual agreements, its ability to offer greater flexibly and speed than litigating in court, and its cost effectiveness.

In order to promote the arbitral forum and its benefits, therefore, judicial review of an arbitration award is strictly limited. Indeed, the limitations on judicial review under the FAA are designed to preserve due process, without undermining the benefits of arbitration, by rendering it “merely a prelude to a more cumbersome and time-consuming judicial review process.” Hall St. Assocs., 552 U.S. at 587 (quotation omitted). Given the foregoing benefits and policies, Bogar learned a hard and expensive lesson: the FAA not only establishes a “high hurdle” for vacatur, but that the hurdle it imposes is virtually impossible to overcome.

Tagged with: Alternative Dispute Resolution, Arbitration, Securities Arbitration