Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-alnd-2_06-cv-00868/USCOURTS-alnd-2_06-cv-00868-0/pdf.json

Nature of Suit Code: 150
Nature of Suit: Overpayments &amp; Enforcement of Judgments
Cause of Action: 28:1332 Diversity - Enforcement of Judgment

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Plaintiffs did not file a motion to remand, and the time to file such a motion has expired. 1

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

MARTIN RUETER and TONI

RUETER,

Plaintiffs,

v.

MERRILL LYNCH, PIERCE,

FENNER & SMITH, INC.,

Defendant.

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Case No.: 2:06-CV-868-VEH

 

MEMORANDUM OPINION

This matter comes before the court on Plaintiffs’ Motion to Vacate an

Arbitration Award (doc. 1), Defendant’s Motion for Sanctions (doc. 2); and Plaintiffs’

Motion for Reconsideration (doc. 11). 

This action was filed in the Circuit Court of Jefferson County, Alabama, and

Defendant removed to this court on the basisthat complete diversity exists among the

parties and the amount in controversy exceeds $75,000. On June 29, 2006, the court 1

FILED

 2006 Jul-18 PM 03:32

U.S. DISTRICT COURT

N.D. OF ALABAMA

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 1 of 27
While counsel for Plaintiffs received notice, on June 6, 2006, that a hearing was to take 2

place in this action, Plaintiffs’ counsel did not attend and did not notify the court that he would

be absent from the proceeding. The court conducted the hearing despite the absence of Plaintiffs’

counsel, noted counsel’s absence on the record, and further noted that the court would rely

exclusively on the parties’ papers in reaching a ruling on the pending motions.

*The court has done so despite the failure of Plaintiffs’ counsel to pay the required fee for

admission pro hac vice.

The facts and procedural history are not in dispute. Plaintiffs only dispute the Panel’s 3

failure to award damages in this case.

2

held a hearing on both motions. At the hearing, the court stated it would deny 2

Plaintiffs’ Motion to Vacate and Grant Defendant’s Motion for Sanctions, with a

written Order to follow. The Plaintiffs then filed a Motion for Reconsideration (doc.

11), which Defendant opposed. The court has fully considered all of the parties’

pleadings.* 

For the reasons stated herein, Plaintiffs’ Motion to Vacate an Arbitration

Award is due to be DENIED, Defendant’s Motion for Sanctions is due to be

GRANTED, and Plaintiffs’ Motion for Reconsideration is due to be DENIED.

Factual and Procedural Background3

Plaintiffs became customers of Merrill Lynch in October 1995. The stated

investment objectives for the majority of Plaintiffs’ Merrill Lynch accounts were

growth and total return with moderate to aggressive risk. Plaintiffs closed their

Merrill Lynch accounts in May 2005.

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 2 of 27
Damian Bell is not a party to this action. 4

3

Prior to closing their accounts, on or about April 1, 2004, Plaintiffs filed a

Statement of Claim against Defendant with the New York Stock Exchange in

accordance with the arbitration agreements entered into by Plaintiffs with Defendant.

[Def. Answer; Exhibit A]. In the Statement of Claim, Plaintiffs alleged that their

investments were unsuitable in light of their objectives. They sought $400,000 in

damages from Merrill Lynch.

Defendant filed an Answer to the Statement of Claim on June 9, 2004, which

denied all liability and asserted a number of affirmative defenses. [Def. Answer;

Exhibit B.]

Following a four-day evidentiary hearing, the Arbitration Panel (hereinafter

“Panel”) entered an Award on January 12, 2006, denying the relief requested in the

Statement of Claim “in all respects.” [Def. Answer; Exhibit C]. The Panel’s Award

did not set forth any findings of wrongdoing by Plaintiffs’ financial advisor, Damian

Bell . The Award further specifically found that Plaintiffs achieved overall gains, in 4

the amount of roughly $278,000, on their investments with Merrill Lynch, and that

they therefore incurred no damages.

On or about April 11, 2006, Plaintiffs filed a Motion to Vacate the Arbitration

Award pursuant to the Federal Arbitration Act, 9 U.S.C. §1, et seq. (the "FAA"), with

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 3 of 27
All parties have relied on Alabama law in their arguments.

5

4

the Circuit Court of Jefferson County, Alabama. Defendant removed this action to

this Court by filing a Notice of Removal on May 4, 2006. 

In the Motion to Vacate, Plaintiffs contend that the Award is due to be vacated

because, according to Plaintiffs, the Panel refused to consider expert testimony

regarding “prudently managed account” damages. Plaintiffs argue that (1) the award

is in “manifest disregard of the law;” (2) the award “is not founded on a clear, rational

basis and, thus, is arbitrary and capricious;” and (3) the arbitrators are “guilty of

misconduct” because the Panel “admitted expert evidence offered by the [Plaintiffs]

but then refused to consider it.”

Discussion

I. Plaintiff’s Motion to Vacate an Arbitration Award

There are two central themes behind Plaintiffs’ arguments that, once defeated,

cause this motion to fail. First, Plaintiffs contend that Alabama law provides for 5

damages in “gains” cases under the “prudently managed account” theory. Second,

Plaintiffs maintain that the Panel found liability on the part of Plaintiffs’ account

manager, Damian Bell, or on the part of Defendant, Merrill Lynch.

A. The Alabama Supreme Court case on which Plaintiffs rely is

distinguishable from the instant action; thus, Plaintiffs’ argument

that Alabama law provides for damages in “gains” cases under the

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 4 of 27
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“prudently managed account” theory is untenable.

Plaintiffs cite to the case of First Alabama Bank of Huntsville v. Spragins, 515

So.2d 962 (Ala. 1987), and state that, pursuant to that decision, the Panel had a duty

to award “prudently managed account” theory damages in this case. In Spragins, the

Alabama Supreme Court concluded that a circuit court was not in error in finding that

a trust suffered a compensable loss, despite overall gains in the account, and that the

method of calculating damages employed by the plaintiff’s expert “was not mere

speculation or hindsight.” Id. at 965. However, the facts presented in the

Spragins case are materially different from the facts of the instant action. The

account at issue in Spragins was a trust account, and the Court devoted a large

portion of the opinion to discussing the fiduciary duty imposed on a trustee to

diversify trust assets. In addition, the trust account was a discretionary account

whereas the investment accounts that are the subject of this litigation were

nondiscretionary accounts. 

More important than the factual differences between Spragins and the action

currently before this court is that Spragins does not hold or imply that an arbitration

panel has a duty to give consideration to the “prudently managed account” theory and

likewise to award damages based on that consideration. Plaintiffs’ reliance on the

limited holding in Spragins is misplaced. 

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 5 of 27
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It is worthy of note that there exists a wealth of authority to support the Panel’s

determination that an award of damages would be improper as a result of the

Plaintiffs’ realization of a substantial gain from their investments with Mr. Bell. The

Defendant cites persuasive decisions in which courts have held that the “prudently

managed account” theory is too speculative and is unacceptable as a matter of law;

rather, the courts in those cases stated that a more appropriate measure of damages

should be calculated based on the actual net out-of-pocket losses proximately caused

by the alleged misconduct. See Madigan, Inc. v. Goodman, 498 F.2d 233, 239 (7th

Cir. 1974); Fey v. Walston & Co., 493 F.2d 1036 (7 Cir. 1974). Out-of-pocket th

damages are limited to “the excess of what [a plaintiff] paid over the value of what

[a plaintiff] got ...” Stone v. Kirk, 8 F.3d 1079, 1093 (6 Cir. 1993) (quoting Levine th

v. Seilon, Inc., 439 F.2d 328, 334 (2 Cir. 1971). See also Estate Counseling Service, nd

Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527 (10 Cir. 1962) th

(stating that the rule of damages in cases involving defrauded investors is the out-ofpocket rule).

In connection with the arbitration, Plaintiffs submitted a brief and offered

expert testimony and charts based on what they calculated their accounts would have

gained had they been “properly” managed. However, as the Panel found, this lost

profits approach to awarding damages is fatally flawed and contrary to well-accepted

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 6 of 27
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law. Courts, including the Eleventh Circuit, have held that such a theory is inherently

speculative and therefore inappropriate. See Messer v. E.F. Hutton & Co., 833 F.2d

909 (11 Cir. 1987) (court upheld J.N.O.V. on damage award holding that investor

th

had failed to prove lost profits because he had not shown the “existence of a

programmed investment plan which incorporates a predetermined response to market

conditions . . . which the investor would in fact follow”); Barrows v. Forest

Laboratories, Inc., 742 F.2d 54 (2d Cir. 1984) (court rejected the benefit of bargain

theory as too speculative); Resolution Trust Co. v. Stroock, Stroock & Lavan, 853 F.

Supp. 1422 (S.D. Fla. 1994) (court denied claim for lost profits because comparison

with standard index was, as a matter of law, too speculative).

In Stevens v. Abbott, Proctor & Paine, 288 F. Supp. 836 (E.D. Va. 1968), the

district court for the Eastern District of Virginia provided the following explanation

for rejecting the well-managed portfolio theory:

[T]he loss of bargain recovery is an attempt to award the plaintiff the

profits that a properly managed account may have yielded. This,

however, requires the Court, to a great extent, to engage in speculation

and conjecture. ... The fallacy in this approach ... is that it requires the

Court to ignore the fact that even “properly managed accounts” are

subject to losses, and, second, it imposes upon a defendant stock broker

a presumption that being an expert he is endowed with unparagoned

powers of prediction, and this the Court is not willing to do. Indeed, to

so do would require the Court to blind itself to the financial facts of life

and would, in the Court’s opinion, amount to the awarding of punitive

damages under the guise of compensatory damages. It seems to the

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 7 of 27
Absent a finding of liability on the part of Mr. Bell, Plaintiffs cannot recover damages 6

from Merrill Lynch under a failure to supervise theory. In order to recover on a failure to

supervise claim against a broker-dealer, a claimant must prove each and every one of the

following four elements: (1) an underlying violation of the federal securities laws by the

registered representative, (2) association of the registered representative or other person who

committed the violation, (3) supervisory jurisdiction over that person, and (4) failure to

reasonably supervise the person committing the violation. See Philadelphia Investors, LTD.,

Initial Decision, 66 SEC Docket 1992 at *11 (Mar. 20, 1998), Final, 68 SEC Docket 572 (Oct. 6,

1998); see also In the Matter of Dean Witter Reynolds, Inc., Initial Decision, 74 SEC Docket 522

at *38 (Jan. 22, 2001). Moreover, a claimant cannot recover from a broker-dealer absent a

finding that the claimant suffered damages.

Similarly, Alabama law provides that an employer cannot be held liable for failure to

supervise absent a finding of tortious conduct on the part of the employee. See Stevenson v.

Precision Standard, Inc., 762 So.2d 820, 824-25 (Ala. 2000) (“[T]he only means of attaching

liability to Pemco would be to prove wrongful conduct by Windsor as its agent.... Accordingly, a

verdict against Pemco based on a finding of negligent training and supervision would be

inconsistent with a verdict exonerating Windsor.”).

Absent a finding that the financial advisor – in this case Mr. Bell – committed

wrongdoing, a claimant cannot recover on a failure to supervise claim. In this case, the Panel

noted its dissatisfaction with the supervision over the Fairhope, Alabama office. The Panel

further noted that “[o]versight conditions were ripe for mischief, had Mr. Bell been so inclined.” 

(Emphasis added). There is no finding in the Award that Mr. Bell committed any underlying

wrongdoing. Indeed, the language of the Award suggests that the Panel found that Mr. Bell was

not “so inclined” to commit violations. Thus, even if Plaintiffs had suffered losses in their

accounts, a dismissal of their claims still would have been appropriate. 

8

Court to be more equitable and justice requires that the amount awarded

be based, insofar as possible, upon the unemotional mathematical

evidence elicited throughout the trial as to what actually took place in

this plaintiff’s account.

Id. at 849 (emphasis added). The court concludes that the Panel’s Award is premised

upon a correct application of the law of damages.

B. The Panel denied all of Plaintiffs’ claims and did not find any

liability on the part of Mr. Bell or on the part of the Defendant to

this action.6

Plaintiffs’ motion focuses on Paragraph 4 of the Award, in which the Panel

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 8 of 27
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expressed concern regarding the level of supervision within the branch office where

Mr. Bell was employed. However, the Panel did not find anymisconduct with respect

to Mr. Bell’s servicing of Plaintiffs’ accounts. In fact, the Panel specifically stated

that “[o]versight conditions were ripe for great mischief, had Mr. Bell been so

inclined.” There is no finding in the Award that Mr. Bell was “so inclined.” The

language of the Award suggests that the Panel did not believe that Mr. Bell was

“inclined” to commit any violations, and that they found he did not commit any

wrongdoing in connection with the servicing of Plaintiffs’ accounts. A reliance by

the Plaintiffs on Paragraph 4 for the proposition that the Panel found liability is

contrary to the plain meaning of the language of the Award. The Panel made no

conclusory statements as to Defendant’s liability. The mere fact that the Panel did not

endorse all of the Defendant’s actions does not equate to a determination of liability

for any of those actions. 

C. The Award was not made in manifest disregard of the law.

Plaintiffs’ assertion is that, because the arbitration panel found wrongdoing on

the part of Defendant but failed to award damages in accordance with Alabama law,

the failure to award damages constitutes a manifest disregard for the law. As

discussed supra, Plaintiffs exercise mistaken reliance on Spragins for the proposition

that, under Alabama law, the arbitration panel had a duty to award damages based on

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 9 of 27
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Plaintiffs’ expert testimony as to the performance of a “prudently managed account”

as well as on the belief that the Panel found wrongdoing on the part of the Defendant.

See 515 So.2d 962 (Ala. 1987).

However, even accepting arguendo Plaintiffs’ assertion that the Panel found

wrongdoing on the part of the Defendant sufficient to entitle Plaintiffs to an award

of damages, the Plaintiffs have failed to meet the narrowly tailored criteria necessary

for this court to vacate the Award.

Manifest disregard of the law “requires clear evidence that the arbitrator was

conscious of the law and deliberately ignored it.” B.L. Harbert International, LLC

v. Hercules Steel Company, 441 F.3d 905, 910 (11 Cir. 2006) (quoting Montes v. th

Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11 Cir. 1997)) (internal marks th

omitted). “A showing that the arbitrator merely misinterpreted, misstated, or

misapplied the law is insufficient.” Id. 

The Montes case “adopted manifest disregard for the law as a basis for

challenging an arbitration award,” and the case remains the sole instance in which the

11 Circuit has “ever found the exceptional circumstances that satisfy the exacting th

requirements” justifying the vacation of an award due to manifest disregard for the

law. Id. 

In Harbert, the 11 Circuit carved out a set of four conjunctively joined factors th

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 10 of 27
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which are specific to Montes and that must be present before a court should consider

whether to vacate an arbitration award. See 411 F.3d at 911. In order for a plaintiff

to mount a successful challenge to an award under the theory of manifest disregard

for the law, a plaintiff must demonstrate that:

1) the party who obtained the favorable award had conceded to the

arbitration panel that its position was not supported by the law, which

required a different result, and had urged the panel not to follow the law;

2) that blatant appeal to disregard the law was explicitly noted in the

arbitration panel's award; 3) neitherin the award itself nor anywhere else

in the record is there any indication that the panel disapproved or

rejected the suggestion that it rule contrary to law; and 4) the evidence

to support the award is at best marginal.

Id. (emphasis added).

The instant case does not present this court with the rare circumstances of

Montes; therefore, the court must conclude that the Panel’s decision was not made

with manifest disregard for the law. The Panel’s decision does not explicitly note,

nor does it imply, that the Defendant made a “blatant appeal to disregard the law” nor

is there any evidence before this court that the Defendant conceded its position was

not supported by the law, that Defendant sought a different result than the law

demanded, or that the Defendant “urged” the Panel to deviate from the law. Id.

Because Plaintiffs have failed to demonstrate that the first and second prongs of the

Harbert test have been met, the court will not venture into an analysis of Plaintiffs’

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claims in light of the 11 Circuit’s holding in Montes. In addition, having concluded th

that the first two of the four necessary elements of Harbert are not present in the

instant action, the court need not reach a determination as to whether the third and

fourth elements of the Harbert test have been satisfied. As such, Plaintiffs’ argument

that the Panel’s decision was made in manifest disregard for the law is without merit.

D. The Panel’s award is not arbitrary and capricious.

Plaintiffs argue that the Panel’s failure to award damages in this case is

arbitrary and capricious; specifically, Plaintiffs state, “Given that Alabama law

endorses prudently managed account theory damages, the Award is not founded on

a clear, rational basis and, thus, is arbitrary and capricious.” [Pl. Mot. To Vacate; p.9].

The 11 Circuit reviews a district court’s denial of a Motion to Vacate an

th

Arbitration Award for abuse of discretion. See Brown v. Rauscher Pierce Refsnes,

Inc., 994 F.2d 775, 780 (11 Cir. 1993). If, as in the instant case, an award is not th

silent as to its rationale, then it is an abuse of discretion for a district court to discern

whether the award has a proper basis; rather, the court is bound to proceed directly

to a determination as to whether the award is arbitrary and capricious. See Id.

“An arbitration award will not be held to be arbitrary and capricious unless a

ground for the arbitrator's decision cannot be inferred from the facts of the case.”

Scott v. Prudential Securities, Inc., 141 F.3d 1007, 1017-1018 (11 Cir. 1998) th

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(internal marks and citations omitted). “For an award to be vacated as arbitrary and

capricious, the Panel's award must contain more than an error oflaw or interpretation.

 Rather, there must be no ground for the Panel's decision.” Brown, 994 F.2d at 781

(internal citations omitted). A court may vacate an award as being arbitrary and

capricious in only two instances: (1) when the award “exhibits a wholesale departure

from the law;” or (2) when the award “is not grounded in the contract which provides

for the arbitration.” Id. Plaintiffs argue that only the first instance is applicable to the

this action.

A party contesting an arbitration award faces a “difficult standard” to overcome

as an arbitration award “is presumptively correct.” Lifecare Intern., Inc. v. CD

Medical, Inc., 68 F.3d 429, 435 (11 Cir. 1995). The court must employ a rational th

basis test in making its determinations. See Brown, 994 F.2d 779.

Plaintiffs argue that the facts and the 11 Circuit’s holding in Ainsworth v. th

Skurnick, 960 F.2d 939 (11 Cir. 1992), are similar enough to the instant action such th

that this court should rely on Ainsworth as controlling and should vacate the Award

due to its arbitrary and capricious nature. The facts of Ainsworth are easily

distinguishable from the facts of this Plaintiffs’ litigation; thus, its limited holding is

inapplicable to the instant action. The court in Ainsworth was confronted with a

situation in which an arbitration panel twice refused to award damages to a plaintiff

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despite issuing a finding that the broker had been negligent and contrary to

instructions directed to the arbitration panel from a United States District Court that

damages were mandatory under the law. In noting that there “was no rational basis

upon which the panel may have acted,” the 11 Circuit vacated the award stating that th

“[t]here is simply no explanation in the award itself why damages were not awarded.”

Ainsworth, 960 F.3d at 940.

In contrast, this court is met with a case in which the Panel did not hold the

Defendant liable for any of Plaintiffs’ claims. The thrust of Plaintiffs’ argument is

premised on the mistaken assumption that the Panel, in the instant case, issued a

finding that Mr. Bell and the Defendant to this action were culpable for certain

wrongdoing. Quite to the contrary, there is nothing in the Award that attributes any

liability to any Defendant appearing before the Panel.

Absent this mistaken interpretation of the Award, Plaintiffs have failed to

demonstrate that there is “no ground” for the Panel’s decision not to award damages.

In refusing to award Plaintiffs damages, 

The panel found no basis for assessing damages in this matter since

Claimants’ accounts enjoyed a profit of over $278,000 during the time

they were managed by Respondent’s employee Damian Bell. Claimants

urged the Panel to measure damages from the peak value their accounts

achieved in March, 2000, until Mrs. Rueter ordered Mr. Bell to liquidate

all equity positions in 2001, arguing that their accounts were improperly

structured to defray market risk. However, it was that “improper

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structure” which produced the peak value. Had the fixed income/equity

structure Claimants advocated as appropriate been in place and

maintained after Mr. Rueter deposited his large check in December,

1998, the peak value reached in March, 2000, may have been much

lower with concomitantly lower profit. Assessing how any restructuring

might have played out would require a great deal of speculation which

the Panel has no reasonable basis for, and therefore is unwilling to

engage in.

In light of the Panel’s decision, Plaintiffs seek to have this court determine that

Alabama law provides for damages in “gains” cases based on the “prudently managed

account” theory. It is Plaintiffs’ contention that, should the court agree that their

interpretation of Alabama law is correct, the award should be vacated as being

arbitrary and capricious. The court need not reach the merits of Plaintiffs’ argument

as “there must be no ground for the Panel's decision.” Brown, 994 F.2d at 781

(internal citations omitted) (emphasis added).

The Panel clearly articulated two separate rationales for denying Plaintiffs’

prayer for damages. First, the Panel stated that it would not award Plaintiffs damages

because they enjoyed a sizable profit as a result of their investments with the

Defendants. It is this first rationale which Plaintiffs now seek to have this court find

arbitrary and capricious. Second, the Panel noted that any assessment of damages in

this case would “require a great deal ofspeculation which the Panel has no reasonable

basis for.” Because the Panel articulated a separate basis beyond that of which the

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Plaintiffs complain, the court again must find that the Award was not arbitrary and

capricious. See id. Plaintiffs have failed under their burden to overcome the

presumption of validity afforded to arbitration awards. 

E. The Arbitration Award is not due to be vacated under 9 U.S.C. §

10(a)(3).

Plaintiffs argue that the award is due to be vacated because the arbitrators

engaged in misconduct by refusing to consider Plaintiffs’ expert testimony on

damages. The FAA permits a court to vacate an arbitration award where “the

arbitrators refused to hear pertinent information.” Scott v. Prudential Sec., Inc., 141

F.3d 1007, 1016 (11 Cir. 1998). th

It is undisputed that the Plaintiffs’ expert was permitted to file a brief with the

Panel prior to the hearing, to testify at the hearing, and to supplement his testimony

with documentary evidence. Plaintiffs’ argument is essentially that, because the

Panel did not award damages, the Panel must have failed to consider the Plaintiffs’

expert’s testimony as to damages. There is no case cited to by the parties, and the

court is unaware of any authority, holding that a Panel’s refusal to adopt a party’s

expert’stestimony istantamount to a refusal to hearsuch testimony. On the contrary,

“a mere difference of opinion between the arbitrators and the moving party ... will not

support vacatur under section 10(a)(3).” Id. (citing Robbins v. Day, 954 F.2d 679,

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685 (11 Cir. 1992)). “An arbitrator need not consider all the evidence the parties th

seek to introduce but may reject evidence that is cumulative or irrelevant.” Id. at

1017. An arbitrator “need only give each party the opportunity to present its

arguments and evidence.” Robbins, 954 F.2d at 685.

The undisputed facts of this case are that Plaintiffs were given an opportunity

to present expert evidence to the Panel. Plaintiffs’ argument that they were denied

such an opportunity is simply inconsistent with the facts of this case. Accordingly,

there was no arbitration misconduct.

II. An award of sanctions against the Plaintiffs is proper in this case based on

the 11 Circuit’s holding in B.L. Harbert International, LLC v. Hercules

th

Steel Co., 441 F.3d 905 (11 Cir. 2006). th

 In the Harbert decision, 441 F.3d 905, the Eleventh Circuit encouraged courts

to award sanctions when faced with such frivolous motions to vacate:

Courts cannot prevent parties from trying to convert arbitration losses

into court victories, but it may be that we can and should insist that if a

party on the short end of an arbitration award attacks that award in court

without any real legal basis for doing so, that party should pay sanctions.

A realistic threat of sanctions may discourage baseless litigation over

arbitration awards and help fulfill the purposes of the pro-arbitration

policy contained in the FAA. It is an idea worth considering.

We have considered ordering Harbert and its counsel to show cause why

sanctions should not be imposed in this case, but have decided against

doing so. That decision is the product of the combined force of three

reasons. First, there is speculative dicta in the University Commons

opinion that provided Harbert with a little cover for its actions, although

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this factor alone does not carry much weight.... Second, Hercules did

not move for sanctions against Harbert in either the district court or this

Court....

Third, and most importantly, when Harbert took its arbitration loss into

the district court and then pursued this appeal, it did not have the benefit

of the notice and warning this opinion provides. The notice it provides,

hopefully to even the least astute reader, is that this Court is exasperated

by those who attempt to salvage arbitration losses through litigation that

has no sound basis in the law applicable to arbitration awards. The

warning this opinion provides is that in order to further the purposes of

the FAA and protect arbitration as a remedy we are ready, willing, and

able to consider imposing sanctionsin appropriate cases. While Harbert

and its counsel did not have the benefit of this notice and warning, those

who pursue similar litigation positions in the future will.

441 F.3d at 914. The facts of the case at bar present the court with precisely the type

of action admonished by the 11 Circuit in Harbert; however, unlike the plaintiff in th

Harbert, the Plaintiffs here had both notice and warning of the possibility of

sanctions. 

While Harbert delineates that sanctions are appropriate in cases such as this,

the decision, unfortunately, does not point to a standard, statute, or rule pursuant to

which a court might craft an appropriate sanction. Therefore, this court will analyze

the propriety and scope of sanctions in the instant case according to well established

law for another avenue to sanctions imposed as a result of frivolous litigation;

specifically, the court will examine the facts of this case under precedent set forth for

sanctions awarded pursuant to Rule 11 of the Federal Rules of civil Procedure (Rule

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 18 of 27
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11).

An appellate court reviews all aspects of a district court's Rule 11

determination for an abuse of discretion. Jones v. International Riding Helmets, Ltd.,

49 F.3d 692, 694 (11th Cir.1995) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S.

384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990)). 

Rule 11(b) imposes a duty upon attorneys and parties to refrain from filing or

pursuing frivolous claims. See Fed.R.Civ.P. 11(b). Rule 11 sanctions are proper: (1)

when a party files a pleading that has no reasonable factual basis; (2) when the party

files a pleading that is based on a legal theory that has no reasonable chance of

success and that cannot be advanced as a reasonable argument to change existing law;

or (3) when the party files a pleading in bad faith for an improper purpose. See

Worldwide Primates, Inc. v. McGreal, 87 F.3d 1252, 1254 (11th Cir.1996). Rule

11(c) allows a court to “impose an appropriate sanction upon the attorneys, law firms,

or parties that have violated subdivision (b) or are responsible for the violation,”

which may include “some or all of the reasonable attorneys' fees and other expenses

incurred as a direct result of the violation.” Id.

The objective standard for testing conduct under Rule 11 is “reasonableness

under the circumstances” and “what was reasonable to believe at the time” the

pleading was submitted. Baker v. Alderman, 158 F.3d 516, 524 (11th Cir.1998). A

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 19 of 27
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court must follow a two part test: (1) whether the party's claims are objectively

frivolous; and (2) whether the person who signed the pleadings should have been

aware that they were frivolous. Id. 

Although sanctions are warranted when the claimant exhibits a “deliberate

indifference to obvious facts,” they are not warranted when the claimant's evidence

is merely weak but appears sufficient, after a reasonable inquiry, to support a claim

under existing law. Baker, 158 F.3d at 524. The purpose of Rule 11 is to deter

frivolous lawsuits and not to deter novel legal arguments or cases of first impression.

Id. 

Rule 11 emphasizes the duty of candor by subjecting litigants to potential

sanctions for insisting upon a position after it is no longer tenable. Ruszala v. Walt

Disney World Co., 132 F.Supp.2d 1347, 1352 (M.D. Fla. 2000). “A litigant's

obligations with respect to the contents of these papers are not measured solely as of

the time they are filed with or submitted to the court, but include reaffirming to the

court and advocating positions contained in those pleadings and motions after

learning that they cease to have any merit.” Ruszala, 132 F.Supp.2d at 1352 (quoting

Fed.R.Civ.P. 11, advisory committee's notes) (internal marks omitted). “Rule 11

stresses the need for some prefiling inquiry.” Worldwide Primates, Inc., 87 F.3d at

1254 (quoting Mike Ousley Productions, Inc. v. WJBF-TV, 952 F.2d 380, 382 (11th

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 20 of 27
Rule 11 mandates procedural requirements that, if ignored, prove fatal to a movant under 7

the rule.

Rule 11(c)(1)(A) calls for a motion for sanctions to be made separately from other

motions. Further, it may not be presented to [the] Court for twenty-one (21) days

after the service of the motion for sanctions to the opposing party, in order to

provide the party filing the motions to dismiss time to withdraw its challenged

paper. These provisions are intended to provide a type of “safe harbor” against

motions under Rule 11 in that a party will not be subject to sanctions on the basis

of another party's motion unless, after receiving the motion, it refuses to withdraw

that position or to acknowledge candidly that it does not currently have evidence

to support a specified allegation. Under the former rule, parties were sometimes

reluctant to abandon a questionable contention lest that be viewed as evidence of a

violation of Rule 11; under the revision, the timely withdrawal of a contention

will protect a party against a motion for sanctions.

Rondolino v. Provident Life and Acc. Ins. Co., 1994 WL 143066, *2 (M.D. Fla. 1994) (citing

Fed. R. Civ. P. 11). The 11 Circuit indicated that an imposition of sanctions, pursuant to the th

authority of Harbert, could be shouldered upon a party by the court sua sponte. Accordingly,

this court finds that the procedural requirements set forth in Rule 11 are inapplicable to a motion

for sanctions under Harbert. The Defendant’s failure, in this case, to move for sanctions in

accordance with the procedural requirements of Rule 11 is not detrimental to a motion for

sanctions filed in light of the holding in Harbert. The Defendant indicated, in its Answer, that it

would seek sanctions. The court finds that Defendant’s Answer was sufficient to put Plaintiffs

on notice although, under Harbert, no notice was required to be given.

21

Cir.1992)).7

In the instant case, Plaintiffs’ Motion to Vacate is based on a legal theory that

has no reasonable chance of success and that cannot be advanced as a reasonable

argument to change existing law. See Worldwide Primates, Inc., 87 F.3d at 1254.

The court concludes that Plaintiffs’ Motion to Vacate is both frivolous and has no real

legal basis. See Baker, 158 F.3d at 524. Plaintiffs’ motion has needlessly increased

the cost of litigation. In addition, there is no authority or contention relied upon by

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 21 of 27
Any such “cover” would appropriately “not carry much weight.” Harbert, 444 F.3d at

8

914.

22

the Plaintiffs that provides even the slightest “cover” for their legal positions asserted

in this litigation. Upon analyzing Defendant’s Motion for Sanctions in light of 8

Harbert and under the law applicable to sanctions awarded under Rule 11, sanctions

are due to be imposed in this case.

The explicit and unveiled threat of sanctions articulated in Harbert did not

deter the Plaintiffs in this instance; therefore, this court will craft and impose a

sanction in keeping with the goals of compensating the Defendant for its expenses

incurred as a result of having to defend against this litigation and protecting

arbitration as a cost effective alternative form of dispute resolution.

The Defendant has presented evidence to the court that its actual costs incurred

as a result of having to defend against this action are $15,037.60. This court does not

infer from Harbert that an appropriate sanction in cases of this sort should be limited

to the actual costs shouldered upon a defendant. Baseless litigation of this kind not

only burdens a defending party, it needlessly drains valuable judicial resources and

violates the purpose of the FAA. However, any award of sanctions must be

reasonably related to Plaintiffs’ malfeasance. Clearly the fees and costs incurred by

Defendant are so related. Further, the Court has reviewed Defendant’s itemized

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 22 of 27
23

statement and finds the fees and costs both reasonable and necessary. Therefore, the

court awards to Defendant the sum of $15,037.60 as sanctions.

III. Plaintiffs’ Motion for Reconsideration

A district court has plenary power over an interlocutory order and the power

to reconsider, revise, alter or amend it. Toole v. Baxter Healthcare Corp., 235 F.3d

1307, 1315 (11 Cir. 2000) (citations and internal quotations omitted). th

In the interests of finality and conservation of scarce judicial resources,

reconsideration of an order is an extraordinary remedy and is employed sparingly.

See United States v. Bailey, 288 F.Supp.2d 1261, 1267 (M.D. Fla. 2003);

Pennsylvania Ins. Guar. Ass’n v. Trabosh, 812 F. Supp. 522, 524 (E.D. Pa. 1992);

Spellman v. Haley, 2004 WL 866837, *2 (M.D. Ala. Feb. 22, 2002) (“litigants should

not use motions to reconsider as a knee-jerk reaction to an adverse ruling”). Indeed,

as a general rule, “[a] motion to reconsider is only available when a party presents the

court with evidence of an intervening change in controlling law, the availability of

new evidence, or the need to correct clear error or manifest injustice.” Summit

Medical Center of Alabama, Inc. v. Riley, 284 F.Supp.2d 1350, 1355 (M.D.Ala.

2003). It is well established in this circuit that “[a]dditional facts and arguments that

should have been raised in the first instance are not appropriate grounds for a motion

for reconsideration.” Rossi v. Troy State University, 330 F.Supp.2d 1240, 1249 (M.D.

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 23 of 27
 Likewise, motions to reconsider are not a platform to relitigate arguments previously 9

considered and rejected. See Lazo v. Washington Mutual Bank, 2001 WL 577029, *1 (9 Cir. th

May 29, 2001) (motion to reconsider is properly denied where movant merely reiterates meritless

arguments); American Marietta Corp. v. Essroc Cement Corp., 2003 WL 463493, *3 (6 Cir. th

Feb. 19, 2003) (similar).

 This discussion is lifted almost verbatim from Judge Steele’s opinion in Gougler v. 10

Sirius Products, Inc., 370 F.Supp.2d 1185, 1189 (S.D. Ala. 2005).

24

Ala. 2002) (denying motion to reconsider where plaintiff failed to submit evidence

in question prior to entry of order and failed to show good cause why he could not

have done so). Furthermore, the Eleventh Circuit has declared that “a motion to 9

reconsider should not be used by the parties to set forth new theories of law.” Mays

v. U.S. Postal Service, 122 F.3d 43, 46 (11 Cir. 1997); see also Russell Petroleum

th

Corp. v. Environ Products, Inc., 333 F.Supp.2d 1228, 1234 (M.D. Ala. 2004) (relying

on Mays to deny motion to reconsider where movant advanced several new

arguments); Coppage v. U.S. Postal Service, 129 F.Supp2d 1378, 1379-81 (M.D. Ga.

2001) (similar). See also Richards v. United States, 67 F.Supp.2d 1321,1322 10

(M.D.Ala. 1999) (same).

Notwithstanding these limitations, reconsideration is appropriate to correct

manifest errors of law or fact. See Fed.R.Civ.P.60(b); Caisse Nationale de Credit

Agricole v. CBI Industries, Inc., 90 F.3d 1264, 1269 (7 Cir. 1996) (“Motions for th

reconsideration serve a limited function: to correct manifest errors of law or fact or

to present newly discovered evidence.”); Summit Medical Center of Alabama, Inc. v.

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 24 of 27
25

Riley, 284 F.Supp.2d 1350, 1355 (M.D. Ala. 2003) (“A motion to reconsider is only

available when a party presents the court with evidence of an intervening change in

controlling law, the availability of new evidence, or the need to correct clear error or

manifest injustice.”). The grant or denial of a motion to reconsider is left to the

discretion of the district court. See Chapman v. AI Transport, 229 F.3d 1012, 1023-

24 (11 Cir. 2000). th

In their Motion for Reconsideration, Plaintiffs continue to maintain that the

Spragins decision, discussed supra, embraced the “prudently managed account”

theory and that the holding is not limited to awards of damages associated with trust

accounts. Also, Plaintiffs restate their argument that the Panel improperly

disregarded the Plaintiffs’ expert’s testimony as to “prudently managed account”

damages. The repetition of an argument which has been previously raised and found

to be baseless does not meet the standard employed on review of a Motion for

Reconsideration. Plaintiffs fail to offer “evidence of an intervening change in

controlling law, the availability of new evidence, or the need to correct clear error or

manifest injustice.” Summit Medical Center of Alabama, 284 F.Supp.2d at 1355. As

such, Plaintiffs’ Motion to Reconsider the court’s Order denying the Motion to

Vacate is due to be DENIED.

In addition, Plaintiffs contend that sanctions are inappropriate in that the

Case 2:06-cv-00868-VEH Document 18 Filed 07/18/06 Page 25 of 27
26

Motion to Vacate is not frivolous, was not brought in manifest disregard for the law,

and that sanctions are improperly awarded where a Plaintiff has not been afforded

reasonable notice and an opportunity to be heard. These arguments are discussed in

Sections I & II of this Memorandum Opinion and are found wanting. Nonetheless,

the court has considered each of Plaintiffs’ arguments in light of the appropriate

standard on a Motion for Reconsideration. 

Plaintiffs merely restate their arguments with regard to the Motion to Vacate’s

frivolous nature and its having been brought in manifest disregard of the law. These

contentions are discussed in Section I of this Memorandum Opinion and will not be

revisited here as Plaintiffs fail to offer “evidence of an intervening change in

controlling law, the availability of new evidence, or the need to correct clear error or

manifest injustice.” Summit Medical Center of Alabama, 284 F.Supp.2d at 1355.

Plaintiffs’ assertions that they were not provided with notice or an opportunity

to be heard on Defendant’s Motion for Sanctions are contrary to the record of

pleadings filed in this case. As an initial matter, the court has stated that there is no

notice requirement for sanctions to be awarded pursuant to Harbert and that the

court’s Order denying Plaintiffs’ Motion to Vacate and granting Defendant’s Motion

for Sanctions was based entirely upon the pleadings. 

Plaintiffs incorrectly state that Defendant did not move for sanctions, pursuant

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27

to Harbert, in its Answer and that the court granted Defendant’s “oral motion” for

sanctions during the June 29, 2006, hearing before the undersigned. [Pla. Mot. for

Reconsideration; p. 6-7]. In its Answer, Defendant clearly moved for an award of

sanctions in this case based upon the holding in Harbert, and the court verbally

granted Defendant’s written motion at the June 29, 2006, hearing and stated that a

written opinion would follow. [Def. Answer; p. 17-18]. Plaintiffs did not respond to

Defendant’s Answer. Plaintiffs had both notice and an opportunity to be heard on

Defendant’s Motion for Sanctions; however, as stated previously, neither notice nor

an opportunity to respond to a Harbert motion for sanctions is required. As such,

Plaintiffs’ Motion for Reconsideration of the imposition of sanctions is due to be

DENIED. 

Conclusion

A written Order will be entered consistent with this Memorandum Opinion.

DONE this 18th day of July, 2006.

 

 VIRGINIA EMERSON HOPKINS

United States District Judge

 

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