Court Opinion

ID: 4402958
Source: CourtListenerOpinion
Date Created: 2019-06-03 22:01:32.85808+00
Date Added: 2024-06-11T14:27:44.775219
License: Public Domain

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

 PHILIP ANTHONY PIZELO,                        No. 77448-4-I
 WILLIAM M. SWAYNE II, WILLIAM
 M. SWAYNE Ill, and WMS                       DIVISION ONE
 FINANCIAL PLANNERS, INC.,

                            Appellants,       UNPUBLISHED OPINION

              V.

 MARILYN HEINEMANN AND
 CHAKORN PHISUTHIKUL,

                            Respondents.      FILED: June 3, 2019

       CHuN, J.   —   Philip Anthony Pizelo, William Swayne II, William Swayne Ill,

and WMS Financial Planners, Inc. (Appellants) seek review of the trial court’s

order confirming a Financial Industry Regulatory Authority (FINRA) arbitration

award against them. Appellants contend the arbitration panel exceeded its

powers by granting claimants’ motion at the evidentiary hearing to amend their

claim by identifying unnamed “John Doe” defendants as Pizelo, Swayne II, and

WMS. For the reasons discussed in this opinion, we affirm.

                                   BACKGROUND

      In 2008, husband and wife, Marilyn Heinemann and Chakorn Phisuthikul

(Investors) invested in two tenant-in-common real estate interests through

registered broker-dealer Pacific West Securities, Inc. (PacWest). William M.

Swayne Ill, a registered representative with PacWest, marketed the investment
 No. 77448-4-112

 opportunity. The securities investment account form contained an arbitration

 provision that provided in pertinent part:
           Customer and Pacific West Securities, Inc., agree that if any dispute
           arises between them or their agents, the dispute shall be settled by
           arbitration pursuant to the Code of Arbitration Procedure
           administered by the National Association of Securities Dealers, Inc.
           The award of the arbitrator(s) shall be final and judgment on the
           award rendered by the arbitrator(s) may be entered in any court
           having jurisdiction thereof. 1
           The investments did not perform well. On May 23, 2013, Investors

initiated an arbitration before FINRA asserting claims against PacWest, Swayne

III, and “John Does” for negligence, misrepresentations and material omissions,

and control person liability and failure to supervise. The claim alleged that the

“John Does” were control persons of PacWest who ‘will be identified through

discovery.”

        A three-member FINRA panel conducted an evidentiary hearing from

June27 through July 1, 2016. During the evidentiary hearing, Swayne Ill

testified under oath that WMS was a d/b/a of himself and that his father, Swayne

II, was CEO of WMS. Upon learning this information, Investors orally moved to

name Pizelo, Swayne II, and WMS as the “John Does” in the claim. The panel

granted the motion at the evidentiary hearing.

       On July 20, 2016, the Panel issued a written ruling on the motion:
       The Statement of Claim in this matter named but did not identify John
       Doe respondents. By identifying three such respondents at hearing           -

       Anthony Pizelo, William Madison Swayne II and WMS Securities,
       Inc. Claimant initiated and Respondent William Madison Swain [sic]
              -

       1In 2007, the National Association of Securities Dealers (NASD) became known as
FINRA. FINRA arbitrations are governed by the FINRA “Code of Arbitration Procedure for
Customer Disputes” (Code).

                                             2
 No. 77448-4-113

          Ill answered, de facto, a Rule 12309(c) Motion to Amend Pleadings
          to Add Parties. This Motion is granted with respect to these three
          individuals.
          On August 3, 2016, Investors submitted a written Statement of Claim to

Conform to the Evidence (SOCCE) pursuant to FINRA Rule 12309(b) identifying

the “John Does” as Pizelo, Swayne II, and WMS. In a letter responding to the

Panel’s July 20, 2016 order, Investors asserted that their motion did not seek to

add new parties to the claim pursuant to FINRA Rule 12309(c), but rather to

amend the claim pursuant to FINRA Rule 12309(b). Pizelo, Swayne II, and WMS

subsequently filed objections, responses and replies in opposition to the SOCCE

with the Panel and also with the Director of FINRA. On September 14, 2016, the

director of FINRA ruled that the matter was within the purview of the Panel to

decide.

      On October 7, 2016, the Panel issued an order re-confirming its ruling at

the evidentiary hearing granting Investors’ FINRA Rule 12309(b) motion to

amend the SOCCE. No party moved to reopen the hearing.

      On November 16, 2016, the Panel issued a final arbitration award finding

Pizelo, PacWest, Swayne II, Swayne III, and WMS jointly and severally liable to

Investors for $1,134,911 in compensatory damages, $65,000 in attorney fees,

and $5,500 in hearing fees. Regarding the dispute concerning Investors’ motion

to amend the SOCCE, the award specified:
      None of the Newly Identified Respondents filed with the FINRA Office
      of Dispute Resolution a properly executed Submission Agreement.
      The Panel has determined that Swayne II and Pizelo are required to
      submit to arbitration pursuant to the Code and, being identified at the
      hearing as control persons, are bound by the determination of the
      panel on all issues submitted. WMS is not a member of FINRA. The

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 No. 77448-4-114

       Panel has determined that WMS is required to submit to arbitration
       and, being identified at the hearing as a control person, is bound by
       the determination of the Panel on all issues submitted.
       The Newly Identified Respondents did not appear at the evidentiary
       hearing, whether by their choice to not appear or by their unknown
       named identity as control persons prior to the hearing. Upon
       evidence produced during the hearing, the panel determined that the
       Newly Identified Respondents had sufficient notice of the hearing,
       and that arbitration of the matter would proceed without the Newly
       Identified Respondents present.
       On December 14, 2016, Pizelo filed a petition in superior court to vacate

the arbitration award on the basis that it violated the Washington Uniform

Arbitration Act (WAA) and the FINRA rules. On December 16, 2016, Swayne II,

Swayne III, and WMS filed a petition to vacate the award on similar grounds.

       On February 2, 2017, Investors moved to dismiss pursuant to CR 12(b)(6),

arguing that the petitions failed to reference the Federal Arbitration Act (FAA).

On February 14, 2017, Pizelo filed a motion to vacate the arbitration award, citing

the WAA, the FAA, and FINRA rules. On February 16, 2016, Swayne II, Swayne

III, and WMS filed motions to vacate the award.

       On February 27, 2017, the court granted Appellants’ motion for joinder

and stayed their motions to vacate pending a ruling on Investors’ motion to

dismiss. On March 13, 2017, Appellants filed a joint opposition to Investors’

motion to dismiss. On March 27, 2017, Appellants filed an amended joint petition

to vacate the arbitration award, which Investors opposed. On April 17, 2017, the

trial court ruled that Investors’ motion to dismiss was moot, and ordered them to

answer Appellants’ motion to vacate. Investors filed their answer to the amended

petition on April 21, 2017. On June 5,2017, Investors filed a CR 12(c) motion for

                                         4
No. 77448-4-115

judgment on the pleadings, which the trial court denied.

       On August 17, 2017, Investors moved to confirm the arbitration award.

They also filed a response to Appellants’ motion to vacate on August 23, 2017.

The trial court conducted a hearing on August 25, 2017. On September 6, 2017,

the trial court denied Appellants’ motion to vacate and granted Investors’ motion

to confirm the arbitration award. This appeal followed.

                                    ANALYSIS

       Appellants contend the Panel exceeded its powers in granting Investors’

motion to identify the “John Does” as Pizelo, Swayne II, and WMS. Specifically,

Appellants contend the trial court erred in refusing to vacate the arbitration award

because (1) the Panel violated due process protections and FINRA rules, (2) the

Panel violated state and federal principles of “John Doe” pleading, and (3) there

was no agreement to arbitrate before FINRA.

   1. Federal Law Ar~lies

       As a preliminary matter, we address the question of applicable law.

Appellants argue the trial court improperly ruled that the FAA preempted the

WAA in this case. They assert that the FAA and WAA both apply, and they rely

on both throughout their brief. “Determination of whether the FAA preempts a

state statute that otherwise applies to a transaction generally requires a two-part

analysis in which we consider (1) whether the FAA applies to the transaction and,

if so, (2) whether the state statute conflicts with the FAA.” Satomi Owners Ass’n

v. Satomi, LLC, 167 Wash. 2d 781, 797, 225 P.3d 213 (2009). “Conflict preemption

is found where it is impossible to comply with both state and federal law or where

                                         5
 No. 77448-4-116

 state law ‘stands as an obstacle to the accomplishment of the full purposes and

 objectives of Congress.” McKee v. AT&T Corp., 164 Wash. 2d 372, 387, 191 P.3d
845 (2008) (quoting Silkwood v. Kerr—McGee Corp., 464 U.S. 238, 248, 104 5.

 Ct. 615, 78 L. Ed. 2d 443 (1984)).

       Appellants are correct that the FAA preempts state arbitration acts only to

the extent they conflict. Volt Info. Sci., Inc. v. Bd. of Trs. of Leland Stanford

Junior Univ., 489 U.S. 468, 476-77, 109 5. Ct. 1248, 103 L. Ed. 2d 488 (1988).

But they provide no analysis, argument, or citations in support of their conclusory

assertion that the FAA and WAA do not conflict on any point relevant to this

case. “Passing treatment of an issue or lack of reasoned argument is insufficient

to merit judicial consideration.” Brownfield v. City of Yakima, 178 Wash. App. 850,

876, 316 P.3d 520 (2013); RAP 10.3(a)(6) (briefs must include “argument in

support of the issues presented for review, together with citations to legal

authority and references to relevant parts of the record.”). Because Appellants

fail to conduct a conflict preemption analysis, we need not address their claim

that both laws apply. Accordingly, we analyze their challenge through the lens of

the FAA only.

       The FAA gives “substan[ce to] a national policy favoring arbitration with

just the limited review needed to maintain arbitration’s essential virtue of

resolving disputes straightaway.” Hall Street Assocs. LLC v. Mattel, Inc., 552
U.S. 576, 588, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008). Section 10(a) of the

FAA permits vacatur of an arbitration award only under four narrow

circumstances:                                                         ~

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 No. 77448-4-1/7

        (1) where the award was procured by corruption, fraud, or undue
        means;
        (2) where there was evident partiality or corruption in the arbitrators,
        or either of them;
        (3) where the arbitrators were guilty of misconduct in refusing to
        postpone the hearing, upon sufficient cause shown, or in refusing to
        hear evidence pertinent and material to the controversy; or of any
        other misbehavior by which the rights of any party have been
        prejudiced; or
        (4) where 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.
9 U.S.C.   § 10(a).
       Arbitrators “exceed their powers” under 9     u.s.c. §      10(a)(4) when the

award is “completely irrational” or exhibits a “manifest disregard of law.” comedy

club, Inc. v. lmprov W. Assocs., 553 F.3d 1277, 1290       (gtI~   Cir. 2009). To
establish manifest disregard, “it must be clear from the record that the arbitrators

recognized the applicable law and then ignored it.” Biller v. Toyota Motor Corp.,

668 F.3d 655, 665 (9th    cir. 2012) (internal quotation marks and citations
omitted). “It is not enough for petitioners to show that the panel committed an

error—or even a serious error.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,

559 U.S. 662, 671, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010). “It is only when

[an] arbitrator strays from interpretation and application of the agreement and

effectively ‘dispense[s] [their] own brand of industrial justice’ that [their] decision

may be unenforceable.” Stolt-Nielsen S.A., 559 U.S. at 671 (quoting Maior

League Baseball Players Assn. v. Garvey, 532 U.S. 504, 509, 121 S. Ct. 1724,

149 L. Ed. 2d 740 (2001)).

                                           7
 No. 77448-4-1/8

        Although we review the trial court’s conclusions de novo, we remain

 ‘exceedingly deferential” to the arbitrator’s decisions. Kashner Davidson

 Securities Corp. v. Mscisz, 531 F.3d 68,74(1st Cir. 2008). “Broad judicial

 review of arbitration decisions could well jeopardize the very benefits of

 arbitration, [i.e., speed and informality,] rendering informal arbitration merely a

prelude to a more cumbersome and time-consuming judicial review process.”

Kyocera Corp. v. Prudential—Bache Trade Servs., Inc., 341 F.3d 987, 998 (9th

Cir. 2003). “Courts.   .   .   do not sit to hear claims of factual or legal error by an

arbitrator as an appellate court does in reviewing decisions of lower courts.”

United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 5.

Ct. 364, 98 L. Ed. 2d 286 (1987). “The bottom line is we will confirm the

arbitrator’s award even if we are convinced that the arbitrator committed serious

error, so long as the arbitrator is even arguably construing or applying the

contract and acting within the scope of [their] authority.” McGrann v. First Albany

Corp., 424 F.3d 743, 748 (8th Cir. 2005) (internal quotation marks and citation

omitted).

   2. Notice and Opportunity to be Heard

       Appellants argue the Panel exceeded its power and acted in manifest

disregard of the law by granting Investors’ motion at the evidentiary hearing to

amend their SOCCE by identifying the “John Does” as Pizelo, Swayne II, and

WMS. They contend this decision violated the FINRA Rules and basic principles

of due process because they did not receive notice prior to the evidentiary

hearing and were thereby deprived of an opportunity to be heard. We disagree.

                                               8
 No. 77448-4-119

        Here, the Investors moved to amend their SOCCE to add the newly

 identified respondents pursuant to FINRA Rule 12309(b). Under that rule,

‘[o]nce a panel has been appointed, a party may only amend a pleading if the

panel grants a motion to amend in accordance with Rule 12503. Motions to

amend a pleading must include a copy of the proposed amended pleading.” And

FINRA Rule 12503(a)(4) requires that such motions be “accompanied by copies

of the proposed amended pleading when the motion is served on the other

parties and filed with the Director.”

       Appellants argue that Investors’ motion at the evidentiary hearing was

procedurally improper because the newly identified respondents were not

contemporaneously served in writing pursuant to FINRA Rule 12309(b) and

12503. They contend the Panel acted in manifest disregard of the law because

no FINRA rules allow for a post-evidentiary oral motion to add parties. Under the

circumstances presented here, we are not persuaded that the Panel exceeded its

power or acted in manifest disregard of the law.

       FINRA Rule 12409 provides,
       The panel has the authority to interpret and determine the
       applicability of all provisions under the Code. Such interpretations
       are final and binding upon the parties.
“‘[P]rocedural 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 v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S. Ct. 588, 154 L.

Ed. 2d 491 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543,

557, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964)).

                                          9
 No. 77448~4-l/10

       The Panel expressly determined that “upon evidence produced during the

hearing,” Pizelo, Swayne II, and WMS “had sufficient notice.” The Panel was not

required to explain its rationale for this decision, as the parties did not request an

“explained decision” pursuant to FINRA Rule 12904(g). We note, however, that

the record shows Pizelo was former CEO of PacWest, and that Swayne Ill

testified under oath at the evidentiary hearing that WMS was a dlbla of himself

and that his father, Swayne II, was CEO of WMS. Upon learning this information

at the hearing, Investors immediately moved to identify the “John Does” in their

claim. Because the newly identified parties were not present at the evidentiary

hearing, strict procedural compliance with FINRA Rules 12309(b) and 12503 was

not possible. We cannot say this decision was irrational or made in manifest

disregard of the law. Nor can we say the trial court erred in concluding “[ajIl

parties knew what was going on at the FINRA hearings and that control persons

were included.”

       Appellants, relying primarily on Kashner, argue that the award must be

vacated because the Panel acted in disregard of FINRA Rules. In Kashner, the

court held that an NASD arbitration panel disregarded the unambiguous

language of the applicable NASD rules when it dismissed a case with prejudice

without first demonstrating that sanctions short of dismissal were effective.

Kashner, 531 F.3d at 76-78. Such “misapplication of the clear language of the

rule [could] only be deemed an intentional and willful disregard of the law.”

Kashner, 531 F.3d at 70. Here, in contrast, the Panel reasonably exercised its

                                         10
 No. 77448-4-I/li

discretion to interpret the FINRA Rules in accordance with the circumstances at

 hand.

         Appellants further contend that post-evidentiary amendments that add

new parties in a lawsuit violate due process when liability is imposed without

providing the new parties with an opportunity to be heard. However, the record

shows that Appellants’ post-hearing submissions to the Panel and FINRA raised

in detail their concerns regarding due process, violation of FINRA Rules, conflict

of interest, control person liability, and prejudice. The Panel’s award expressly

stated that the determination was made “[a]fter considering the pleadings, the

testimony and evidence presented at the hearing, and the post hearing

submissions.”

         Petitioners further assert that the Panel failed to follow FINRA Rule 12609,

which allows the Panel to “reopen the record on its own initiative or upon motion

of any party at any time before the award is rendered, unless prohibited by

applicable law.” They assert that the Panel failed to offer this option to

Appellants, choosing instead to proceed in bad faith. But FINRA Rule 12609 by

its express terms allows a party to move to reopen the record. Appellants could

have requested that the Panel reopen the evidentiary hearing pursuant to this

rule, but they did not.

         Appellants cite Nelson v. Adams USA, Inc., 529 U.S. 460, 466-68, 120 S.

Ct. 1579, 146 L. Ed. 2d 530 (2000) in support of their position. Nelson is readily

distinguishable. In Nelson, after acquiring a judgment against a plaintiff

corporation, the district court permitted defendants to use Federal Rule of Civil

                                          11
 No. 77448-4-1/12

 Procedure 15 to add the corporation’s president as a party. Nelson, 529 U.S. at

460. The united States Supreme Court held that this action violated due process

 because the president did not have the opportunity to defend himself prior to

entry of the judgment against him. Nelson, 529 U.S. at 460. Here, in contrast,

the newly identified parties were named months before entry of the award. And,

as described above, they had an opportunity to respond to the claims.

       Appellants have not shown that the Panel exceeded its powers by

granting Investors’ motion and concluding the newly identified respondents had

notice of the hearing. We decline to vacate the award on this basis.

    3. Agreement to Arbitrate

       Appellants contend the trial court improperly found there was an

agreement to arbitrate the dispute before FINRA. Arbitration is a matter of

contract, and a party cannot be required to submit to arbitration any dispute

absent agreement. Howsam, 537 U.S. at 83. Nonsignatory parties may be

bound by a written arbitration agreement if compelled by “ordinary principles of

contract and agency” such as incorporation by reference, assumption, agency,

veil piercing/alter ego, or estoppel. Thompson-CSF, S.A. v. American Arbitration

Ass’n, 64 F.3d 773, 776 (2nd Cir. 1995).

      The parties do not dispute that Investors and PacWest, represented by

Swayne III, entered into a written agreement to arbitrate that included any

disputes between customers and PacWest ‘or their agents.” The Panel found

that Pizelo, Swayne II, and WMS were identified at the hearing as “control

persons” of PacWest. In concluding that the parties agreed to arbitrate the

                                        12
 No. 77448-4-1113

 dispute before FINRA, the trial court noted that (1) Pizelo was former CEO of

 PacWest and “actively represented” PacWest during at least one pre-hearing

 conference and (2) Swayne Ill testified under oath at the arbitration hearing that

WMS was a dlbla of himself and that his father Swayne II was CEO of WMS.

Appellants have not shown that the Panel’s decision was irrational or manifestly

disregarded the law. As control persons, Pizelo, Swayne H, and WMS were

bound by the written arbitration agreement.

        Moreover, FINRA Rule 12200 requires FINRA members and associated

persons to arbitrate disputes under the FINRA Code when arbitration is

“requested” by the customer and the dispute “arises in connection with the

business activities of the member.” Pursuant to this Rule, customers can compel

registered members of FINRA to arbitrate certain disputes even when no written

arbitration agreement exists. Herbert J. Sims & Co., Inc. v. Roven, 548
F. Supp. 2d 759, 763 (2008). Pizelo and Swayne II were licensed FINRA

members at the time of the sale, and as such were also bound to arbitrate by the

Code.

        Appellants also contend that the Panel had no authority to render an

award against Pizelo, Swayne II, and WMS because they did not sign a

Submission Agreement. FINRA Rule 12100 states that “parties must sign [a

Submission Agreement] at the outset of an arbitration in which they agree to

submit to arbitration under the Code.” But Appellants have cited no authority for

the proposition that lack of a Submission Agreement divests FINRA of authority

where the parties are otherwise bound by a written arbitration agreement or via

                                        13
 No. 77448-4-1/14

 their status as FINRA members. Were this so, parties could avoid liability merely

 by refusing to sign a Submission Agreement. The Panel did not exceed its

 authority or act in manifest disregard of the law in concluding that Appellants

 were bound by agreements to arbitrate the dispute with FINRA.

    4. “John Doe” Pleading

        Appellants argue the Panel’s Order violated state and federal principles of

“John Doe” pleading. Citing Powers v. W.B. Mobile Services, Inc., 182 Wash. 2d
159, 164, 339 P.3d 173 (2014), they contend the Statement of Claim did not

identify the “John Does” with sufficient particularity to support an arbitration

award against them. In Powers, the plaintiff filed a personal injury lawsuit against

two named defendants and two “John Does.” 182 Wash. 2d at 161. The court held

that service of process on a named defendant tolled the statute of limitations

pursuant to RCW 4.16.170 as to an unserved “John Doe” who had been

identified with reasonable particularity. 182 Wash. 2d at 164-66. Appellants assert

the Statement of Claim failed to meet this standard because it merely identified

the “John Does” as “control persons.” But this is a FINRA arbitration, not a

personal injury claim filed in court. The parties’ rights with regard to arbitration

are governed by the contract, the FINRA Rules, and the provisions of the FAA.

And tolling of the statute of limitations is not at issue. Powers has no bearing on

this case.

       Appellants also note that fictitious pleading is generally not permitted in

federal court unless the plaintiff’s description of the defendant is so specific as to

be “surplusage.” Richardson v. Johnson, 598 F.3d 734, 738 (11th Cir. 2010).

                                          14
No. 77448-4-1/15

Again, Appellants cite no authority for the proposition that this principle applies in

a FINRA arbitration proceeding.

       Judicial review of an arbitration award governed by the FAA is limited to

the narrow grounds set forth in 9   u.s.c. §   10(a). Appellants do not meet those

narrow statutory grounds. We affirm the trial court’s decision upholding the

arbitration award.

      Affirmed.

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