Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-94-05023/USCOURTS-ca10-94-05023-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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Tenth Ctrcuit 

JUL 1 0 1995 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT PATRICK FISHER 

Clerk 

B.F. KELLEY, JR., 

Trustee under the 

deceased; MILDRED 

Individually and as ) 

Will of Ben F. Kelley,) 

L. KELLEY, ) 

Plaintiffs-Appellees, 

v. 

WILLIAM B. MICHAELS, 

Defendant-Appellant, 

and 

PAINEWEBBER, INC.; LIBERTY BANK & TRUST 

COMPANY OF TULSA, N.A., in its capacity 

as Trustee of the Trust of Allene H. 

Michaels, deceased, 

Defendants. 

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Appeal from the United States District Court 

for the Northern District of.Oklahoma 

(D.C. No. 92-C-1004-E) 

No. 94-5023 

William w. O'Connor (Joel L. Wohlgemuth and John E. Dowdell, also 

of Norman & Wohlgemuth, Tulsa, Oklahoma, with him on the briefs) 

for Defendant-Appellant. 

Timothy A. Carney (James M. Sturdivant, also of Gable & Gotwals, 

Tulsa, Oklahoma, with him on the brief) for Plaintiffs-Appellees. 

Appellate Case: 94-5023 Document: 01019277361 Date Filed: 07/10/1995 Page: 1 
Before BALDOCK and LOGAN, Circuit Judges.* 

LOGAN, Circuit Judge. 

Defendant William B. Michaels appeals from the district 

court's judgment confirming an arbitration award. The arbitration 

panel awarded plaintiffs B.F. Kelley, Jr. and Mildred Kelley, and 

the B.F. Kelley Trust (for which B.F. Kelley, Jr. acted as trustee) (collectively the Kelleys) $292,750.00 actual and $505,217.50 

punitive damages against Michaels and $20,212.84 actual and 

$50,000.00 punitive damages against PaineWebber, Inc. The award 

also provided for a setoff in favor of Michaels based on an earlier settlement between the Kelleys and Merrill Lynch, Pierce, 

Fenner & Smith Inc. (Merrill Lynch) and made other monetary awards 

not at issue here.1 

Michaels argues that (1) the arbitration panel exceeded its 

authority because the Kelleys never asked for punitive damages 

based on Michaels' conduct while at Merrill Lynch, (2) the punitive damages award was contrary to the parties' designation that 

New York law governed the resolution of any conflicts, and (3) in 

* The late Honorable Juan G. Burciaga, United States District 

Judge, United States District Court for the District of New Mexico, sitting by designation, heard oral argument in this case but 

did not participate in the final decision. 

1 The award provided for a setoff of $290,000 in favor of 

Michaels, attributable to the Kelleys' settlement with Merrill 

Lynch, made a cost award in favor of the Kelleys, and partially 

granted the Kelleys' attorney's fee request against PaineWebber. 

The award made some distinctions between damages to the trust 

accounts and the joint tenant accounts. The arbitrators awarded 

Michaels $5217.50 on his counterclaim against the Kelleys for his 

costs of defending two court actions initiated by the Kelleys. 

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Appellate Case: 94-5023 Document: 01019277361 Date Filed: 07/10/1995 Page: 2 
any event the punitive damages award was excessive and violated 

due process. 

I 

In October 1988, the Kelleys placed significant amounts of 

money and the corpus of a trust for which B.F. Kelley was the 

trustee in two accounts with Michaels, then a broker with PaineWebber. They executed Resource Management Account Agreements for 

each account, which included the following language: 

12. This agreement and its enforcement shall be construed and governed by the laws of the State of New 

York. 

15. I agree, and by carrying any account(s) for me you 

agree, that all controversies which may arise between 

you and me (including your employees, agents, affiliates, subsidiaries, and correspondents) concerning any 

transactions in any account(s) in my name or in which I 

have a beneficial interest or the construction, performance or breach of this or any other agreement 

between us, whether entered into prior, on or subsequent 

to the date hereof, shall be determined by arbitration. 

Any arbitration shall be in accordance with the rules in 

effect of either the New York Stock Exchange, Inc., 

American Stock Exchange, Inc., National Association of 

Securities Dealers, Inc., or where appropriate, the 

Chicago Board Options Exchange or National Futures 

Association, as I may elect. 

App. 17, 24. Michaels made investment decisions regarding these 

accounts and earned commissions on the transactions. 

In October 1989, Michaels joined Merrill Lynch, and moved the 

Kelleys' accounts to Merrill Lynch. The Kelleys signed Customer 

Agreements with Merrill Lynch containing the following language: 

11. Arbitration is final and binding on the parties . 

. The parties are waiving their right to seek remedies in court, including the right to jury trial. 

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Appellate Case: 94-5023 Document: 01019277361 Date Filed: 07/10/1995 Page: 3 
.Pre-arbitration discovery is generally more limited than and different from court proceedings . 

. The arbitrators' award is not required to include 

factual findings or legal reasoning and any party's 

right to appeal or to seek modification of rulings 

by the arbitrators is strictly limited . 

. The panel of arbitrators will typically include a 

minority of arbitrators who were or are affiliated 

with the securities industry. 

I agree that all controversies which may arise between 

us, including but not limited to those involving any 

transaction or the construction, performance, or breach 

of this or any other agreement between us, whether 

entered into prior, on or subsequent to the date hereof, 

shall be determined by arbitration. Any arbitration 

under this agreement shall be conducted only before the 

New York Stock Exchange, Inc., the American Stock 

Exchange, Inc., or arbitration facility provided by any 

other exchange, the National Association of Securities 

Dealers, Inc., or the Municipal Securities Rulemaking 

Board, and in accordance with its arbitration rules then 

in force. 

12. This Agreement, with respect to all portions of the 

CMA Service, including interest charges on loans you may 

make to me, will be governed by and interpreted under 

the laws of the State of New York. The terms of my 

agreement with MLB&T, including those relating to the 

issuance of the Card, are governed by Federal and New 

Jersey law. The terms of my agreement with MLNF, 

including those relating to finance charges, are governed by Federal law and, except to the extent my state 

law explicitly applies, Utah law. The terms of my 

agreement with Bank One are governed by Ohio law. 

Supp. App. tabs 4 and 5. Michaels continued as the broker for the 

Kelleys' two accounts through mid-1991. 

In August 1991, while Michaels was affiliated with Merrill 

Lynch, the Kelleys' attorney sent him a demand letter alleging 

portfolio losses as a consequence of churning, unauthorized trading, and unsuitable investments, as well as unnecessary liquidating commissions when the PaineWebber accounts were closed. The 

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Appellate Case: 94-5023 Document: 01019277361 Date Filed: 07/10/1995 Page: 4 
Kelleys reached a confidential settlement with Merrill Lynch for 

$290,000; the agreement specifically excepted any claims they 

might have against Michaels. 

The Kelleys filed a suit against Michaels in Oklahoma state 

court which apparently included allegations of stockbroker fraud 

and federal securities violations. After Michaels removed that 

action to federal court, the Kelleys dismissed it without prejudice, and filed a second state action omitting the federal securities allegations. When Michaels sought to compel arbitration, 

the Kelleys dismissed that second state court action without 

prejudice and filed a Statement of Claim before the National 

Association of Securities Dealers (NASD) (NASD Claim) . 

The Kelleys' NASD Claim against Michaels and PaineWebber made 

specific allegations against Michaels of breach of fiduciary duty, 

churning, making unsuitable investments, and negligence. It 

alleged that PaineWebber breached its fiduciary duty to the Kelleys, committed fraud and lO(b)-5 violations, allowed unsuitable 

investments, and failed to supervise Michaels.2 The Kelleys 

sought actual and punitive damages from PaineWebber and Michaels. 

After five days of hearings, a three-member panel of arbitrators made the awards in favor of the Kelleys that are the subject of this appeal. The Kelleys then filed suit in federal district court pursuant to the Federal Arbitration Act (FAA) , 9 

2 The claim alleged that PaineWebber was aware of churning and 

excessive trading, and had charged improper exit fees upon liquidation of the Kelleys' accounts. The Kelleys also asserted that 

in allowing Michaels to voluntarily resign that PaineWebber effectively concealed Michaels' wrongdoing from his clients who would 

not otherwise have followed Michaels from PaineWebber to Merrill 

Lynch with their accounts. 

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Appellate Case: 94-5023 Document: 01019277361 Date Filed: 07/10/1995 Page: 5 
U.S.C. §§ 1-15, to confirm the award. After the district court 

confirmed the arbitration award Michaels appealed. 

Our standard of review in cases confirming arbitration awards 

is the same as for any other district court decision, "accepting 

findings of fact that are not 'clearly erroneous' but deciding 

questions of law de novo." First Options of Chicago. Inc. v. 

Kaplan, 115 S. Ct. 1920, 1926 (1995). We must consider, of 

course, the district court's standard of review, that it will set 

aside the arbitrator's decision "only in very unusual circumstances" such as fraud, corruption, or a decision in manifest 

disregard of the law. See id. at 1923. As invoked here, the FAA 

permits vacating an arbitration award when 

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 [or] 

awarded upon a matter not submitted to them, unless it 

is a matter not affecting the merits of the decision 

upon the matter submitted. 

9 U.S.C. §§ 10(a)(4) & ll(b). However, "[s]o long as an arbitrator draws his decision from the parties' agreements, a reviewing court is generally precluded from disturbing the award." 

Seymour v. Blue Cross/Blue Shield, 988 F.2d 1020, 1022 (lOth Cir. 

1993) (citing United Paperworkers Int'l Union v. Misco. Inc., 484 

u.s. 29, 36 (1987)). 

II 

We first address Michaels' argument that the arbitrators 

exceeded their authority by entering an award on a matter that was 

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not submitted because the Kelleys failed to request punitive damages for Michaels' conduct while at Merrill Lynch. Michaels makes 

several arguments that address a perceived lack of symmetry in the 

Kelleys' NASD Claim, the arbitration award, and the district court 

order confirming that award. Michaels relies on the Kelleys' 

"Demand for Relief"3 in their NASD Claim and argues that the 

allegations against him have been segregated so as to specifically 

not seek punitive damages for his conduct while at Merrill Lynch. 

Michaels also asserts that the arbitration award itself characterized the Kelleys' requested relief as not seeking punitive damages 

against Michaels for his Merrill Lynch activity. The arbitration 

panel, substantially paraphrasing the Deman~ for Relief, stated 

Claimants requested actual damages in the amount of 

$30,000.00, interest as allowed by law, punitive damages, legal fees, and costs against PaineWebber and 

3 The "Demand for Relief" in the NASD Claim reads as follows: 

21. Based upon the foregoing, Claimants are 

entitled to the following relief: 

From PaineWebber and Michaels: 

a. Actual damages of $30,000; 

b. Interest as allowed by law; 

c. Punitive damages in an amount that will deter 

others from doing what Respondents did to 

Claimants; and 

d. Legal fees and costs. 

From Michaels: 

a. Portfolio losses of $220,000 for damages at 

Merrill Lynch, 

b. Lost opportunity damages of $72,725. 

App. 54-55. 

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Michaels. Claimants also requested portfolio losses in 

the amount of $220,000.00 for damages at Merrill Lynch, 

and lost opportunity damages of $72,725.00. 

App. 84. Michaels also points out that the district court order 

confirming the award concluded that "the arbitration [panel] could 

have interpreted the request for punitive damages to cover all 

alleged wrongdoing of Michaels no matter where he was employed." 

Id. at 5 (emphasis added) . He then asserts that this language 

essentially conceded that the arbitration panel reached outside 

the specific claims the Kelleys submitted in an effort to award 

punitive damages for Michaels' Merrill Lynch activity. We disagree. 

The Kelleys' second state court action is attached to and 

referenced twice in their NASD Claim. That state petition clearly 

requests punitive damages from Michaels for his actions while 

employed at Merrill Lynch. App. 60-62. The NASD Claim also notes 

that the Kelleys had "voluntarily dismissed the state court action 

in deference to this arbitration proceeding." Id. at 51. The 

Kelleys thereby incorporated the allegations of their state action 

into their NASD Claim, which initiated the arbitration case, and 

sought punitive damages against Michaels for his Merrill Lynch 

conduct. 

The arbitrators' statement of the Kelleys' "Relief Requested" 

can fairly be read as seeking punitive damages from Michaels 

regardless of where he was employed. The NASD Claim sets out the 

alleged wrongful behavior by Michaels in some detail in each of 

its "causes of action." The first, second, fourth, fifth, sixth, 

and seventh cause each reference behavior by Michaels while at 

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Merrill Lynch. The arbitrators' award tracked these counts, 

finding for the Kelleys on each one. We have no doubt that the 

arbitrators intended the punitive damages award to encompass 

Michaels' behavior at Merrill Lynch. The district court language 

simply endorses as a permissible reading of the NASD Claim (and 

attached state court pleading) the arbitrators' interpretation of 

those documents. This was proper under the scope of review 

applicable to arbitrators' decisions. 

III 

We next address whether an arbitral award of punitive damages 

was contemplated by the parties' agreements. The brokerage 

agreements provided for binding arbitration of "all controversies." Likewise, those agreements designate that arbitration 

"shall be in accordance with the rules in effect of [the] 

National Association of Securities Dealers, Inc." App. 17, 24 

(PaineWebber agreements); Supp. App. tabs 4 & 5, ,I 11 (Merrill 

Lynch agreements). The Uniform Submission Agreement requested 

arbitration "in accordance with the Constitution, By-Laws, Rules, 

Regulations and/or Code of Arbitration Procedure of the [NASD] ." 

Supp. App. tab 6, ,I 1. Section 1 of the NASD Code of Arbitration 

Procedure applies "for the arbitration of any dispute, claim or 

controversy arising out of or in connection with the business of 

any member of the Association." Supp. App. tab 7. And the NASD 

arbitrators' manual contemplates that they may award punitive 

damages. See Mastrobuono v. Shearson Lehman Hutton. Inc., 115 

S. Ct. 1212, 1218 (1995). 

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Michaels' argument against the punitive damages award is that 

it was contrary to the designations in the brokerage agreements 

that New York law would govern the resolution of disputes, because 

New York law precludes arbitrators from awarding punitive damages. 

Garrity v. Lyle Stuart. Inc., 40 N.Y.2d 354, 386 N.Y.S. 2d 831, 

353 N.E.2d 793 (1976). The Supreme Court's recent opinion in 

Mastrobuono, which involved identical contentions to those 

Michaels advances and an identical arbitration clause, disposes of 

this argument. 

There a panel of arbitrators awarded punitive damages in 

favor of two investors alleging mishandling of their account. The 

client agreement provided for arbitration of "any controversy" 

under NASD (or other specified rules). Mastrobuono, 115 S. Ct. at 

1217. The agreement, like the one before us, was silent about 

claims for punitive damages, but designated the agreement "shall 

be governed by the laws of the State of New York." Id. Although 

New York case law prohibits arbitral awards of punitive damages, 

the Court noted that "the FAA ensures that [parties'] agreement[s] 

will be enforced according to [their] terms even if a rule of 

state law would otherwise exclude such claims from arbitration." 

Id. at 1216. The opinion references the common law rule that 

ambiguous contract language should be construed against the 

drafter. Id. at 1219. The Supreme Court then held that the contractual choice of law clause did not automatically invalidate an 

otherwise proper arbitration award for punitive damages, noting: 

the best way to harmonize the choice-of-law provision 

with the arbitration provision is to read "the laws of 

the State of New York" to encompass substantive principles that New York courts would apply, but not to 

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include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the 

rights and duties of the parties, while the arbitration 

clause covers arbitration; neither sentence intrudes 

upon the other. In contrast, respondents' reading sets 

up the two clauses in conflict with one another: one 

foreclosing punitive damages, the other allowing them. 

This interpretation is untenable. 

Id. at 1219. The Mastrobuono holding compels our conclusion that 

the arbitration panel did not exceed its authority by awarding the 

Kelleys punitive damages despite the choice of New York law. 

IV 

Michaels argues that the punitive damages award was excessive 

as a matter of law. He focuses on the large disparity between the 

net actual damages award of $2,750 and the punitive damages award 

of over $500,000. However, the arbitration panel awarded the 

Kelleys actual damages of $292,750. Michaels then received a 

setoff of $290,000 (the amount of the Merrill Lynch settlement in 

favor of the Kelleys) against the actual damages award. Thus, the 

punitive damages award was less than twice the actual damages 

before the setoff. This is not inherently unreasonable and under 

the limited standard of review applicable to arbitration awards, 

is not subject to modification by this court. 

Michaels argues that the punitive damages award violated due 

process. The Supreme Court has endorsed a three-tiered approach 

when assessing if a punitive damages award violates due process. 

Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 17, 20-21 

(1991) . Michaels does not specify how this approach was violated; 

instead he simply recharacterizes his position that the Kelleys 

did not seek punitive damages, that the punitive damages award was 

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excessive, and that New York law precludes the punitive damages 

award, as due process violations. We have already disposed of the 

substance of these arguments and will not repeat them here. 

AFFIRMED. 

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