Court Opinion

ID: 4101192
Source: CourtListenerOpinion
Date Created: 2016-11-22 20:01:52.531466+00
Date Added: 2024-06-11T14:23:45.295532
License: Public Domain

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).

                                          3
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

                                             4
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

                                            5
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

                                          7
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

                                           9
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

                                        10
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

                                               11
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.

                                          12
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.

                                       15