United States District Court, N.D. California
September 16, 2005.
STANLEY J. KATZ, et al., Petitioners,
ROUND HILL SECURITIES, INC., et al., Respondents.
The opinion of the court was delivered by: PHYLLIS HAMILTON, District Judge
ORDER GRANTING PETITION TO CONFIRM ARBITRATION AWARD
On August 31, 2005, the court heard argument in connection with
the petition of Stanley J. Katz, Edwin L. Katz, and First
Alliance Management, Inc., to confirm an arbitration award
entered in favor of petitioners and against respondents Round
Hill Securities, Inc., and First Allied Securities, Inc.
Petitioners appeared by their counsel Richard T. White and Thomas
P. Whelley II, and respondents appeared by their counsel Michael
R. Simmonds. Having read the parties' papers and carefully
considered their arguments and the relevant legal authority, and
good cause appearing, the court hereby GRANTS the petition to
confirm the arbitration award.
Petitioners Stanley J. Katz and Edwin L. Katz ("the Katz
brothers") are residents of Dayton, Ohio. Petitioner First
Alliance Management, Inc. ("First Alliance"), is an Ohio corporation owned by the Katz brothers, and is registered with
the Securities and Exchange Commission as an investment advisor.
Respondent Round Hill Securities, Inc. ("Round Hill") is a
California corporation and a registered broker-dealer of
On March 26, 1998, each of the Katz brothers executed a
National Association of Securities Dealers ("NASD") Form U-4
(Uniform Application for Securities Industry Registration or
Transfer). Round Hill filed the Form U-4s, which also stated that
each of the Katz brothers would be transferring as a broker from
Paine Webber on March 27, 1998, with the appropriate regulators.
In signing the Form U-4, the Katz brothers agreed to
arbitrate any dispute, claim, or controversy that may
arise between me and my firm, or a customer, or any
other person, that is required to be arbitrated under
the rules, constitutions, or by-laws of the
organizations indicated in item 10 as may be amended
from time to time and that any arbitration award
rendered against me may be entered as a judgment in
any court of competent jurisdiction.*fn1
On March 27, 1998, the Katz brothers and First Alliance entered
into a Registered Representative Agreement ("the Agreement") with
Round Hill, whereby Round Hill appointed petitioners independent
"Contractors" for Round Hill in the sales of securities to the
The Agreement, which was drafted by Round Hill, provided in ¶
8.3 that "any" controversy between the parties "arising out of or
relating to this Agreement or the breach thereof" would be
submitted to binding arbitration in accordance with the rules of
either NASD or the American Arbitration Association ("AAA"), "as
the Contractor [i.e., the petitioners herein] may elect." The
Agreement provided further that any court state or federal
having jurisdiction was granted power to enter a judgment on any
award resulting from arbitration because the arbitration award
resulting from arbitration was to be a final and nonappealable
decision on the controversy submitted.
In January 2003, a dispute arose between the parties concerning
the payment of commissions to the Katz brothers, and management
fees to First Alliance. This was a matter "arising out of" the
Agreement. Petitioners elected to take the matter to arbitration
with the AAA. An arbitrator was selected and confirmed in
September 2003, and the arbitrator held hearings and heard evidence. On April 4, 2005, the arbitrator
issued an award in favor of petitioners in the amount of
$306,902, plus $141,000 in attorneys' fees. On April 8, 2005,
petitioners filed the present petition for confirmation of the
On May 9, 2005, Round Hill filed an application for an order
vacating the arbitration award (in lieu of filing an opposition
to the petition). Round Hill asserted that the arbitrator had
exceeded his powers because he did not have jurisdiction to hear
the Katz brothers' claim, and because the award ordered Round
Hill to pay commissions to a non-broker-dealer and non-NASD
member (First Alliance), in violation of NASD rules.
In June 2005, Round Hill merged with respondent First Allied
Securities, Inc. ("First Allied"), a New York corporation with
its principal place of business in San Diego, with First Allied
as the surviving entity. After Round Hill and First Allied
merged, petitioners filed a supplemental petition to confirm the
award, and served First Allied. First Allied then filed a notice
of joinder in the application to vacate the award.
A. Legal Standard
The Federal Arbitration Act ("FAA") "gives federal courts only
limited authority to review arbitration decisions, because broad
judicial review would diminish the benefits of arbitration."
Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010,
1012 (9th Cir. 2004) (citing Kyocera Corp. v. Prudential-Bache
Trade Servs., Inc., 341 F.3d 987, 998 (9th Cir. 2003) (en
banc)). Under the FAA, if a party seeks a judicial order
confirming an arbitration award, "the court must grant such an
order unless the award is vacated, modified, or corrected as
prescribed in sections 10 and 11 of this title." 9 U.S.C. § 9.
Confirmation is required "even in the face of erroneous findings
of fact or misinterpretations of law." French v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 784 F.2d 902, 906 (9th Cir. 1986)
(citation and quotation omitted).
Section 10 permits vacatur only
(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).
The grounds set forth in § 10(a) "afford an extremely limited
review authority, a limitation that is designed to preserve due
process but not to permit unnecessary public intrusion into
private arbitration procedures." Kyocera, 341 F.3d at 997. The
"exceeded their powers" provision of § 10(a)(4) allows vacatur
only when arbitrators purport to exercise powers that the parties
did not intend them to possess or otherwise display a manifest
disregard for the law. Id. at 1002. Arbitrators exceed their
powers in this regard not when they merely interpret or apply the
governing law incorrectly, but when the award is "completely
irrational," French, 784 F.2d at 906, or exhibits a "manifest
disregard of law," Todd Shipyards Corp. v. Cunard Line, Ltd.,
943 F.2d 1056, 1059-60 (9th Cir. 1991). See Kyocera,
341 F.3d at 997.
The risk that arbitrators may construe the governing
law imperfectly in the course of delivering a
decision that attempts in good faith to interpret the
relevant law, or may make errors with respect to the
evidence on which they base their rulings, is a risk
that every party to arbitration assumes, and such
legal and factual errors lie far outside the category
of conduct embraced by § 10(a)(4).
Id. at 1002-03.
B. The Parties' Arguments
Petitioners assert that the award should be confirmed under § 9
of the FAA. They note that the parties agreed that "any dispute"
between Round Hill and a Contractor (the Katz brothers and First
Alliance) "arising out of" the Agreement should be settled by
arbitration pursuant to the rules of either NASD, or AAA at the
election of the Contractors. They contend that because the
arbitration went forward before the AAA, as specified in the
Agreement, and the arbitrator issued the award, the award should
now be confirmed. They argue that respondents should not now be permitted to declare a
provision in their own agreement invalid.
Respondents assert that the award should be vacated because the
arbitrator exceeded his powers. Based on the fact that the Katz
brothers signed the NASD Form U-4 agreeing to arbitrate any
disputes under the rules of the NASD, respondents contend that
the NASD had exclusive jurisdiction to hear the claims raised by
the Katz brothers, and that the arbitrator exceeded his powers by
improperly exercising jurisdiction over those claims and by
awarding commissions to the Katz brothers. Respondents argue that
the Form U-4 requires arbitration of all claims before NASD (not
another entity, such as AAA), and that the arbitration provision
in the Agreement between petitioners and Round Hill was
"superceded as a matter of law" by the arbitration clause in the
Respondents contend that the Agreement between Round Hill and
petitioners cannot be read to confer jurisdiction contrary to
NASD rules. They note that the § 4.2 of the Agreement provides
that "[i]n connection with all of Contractor's activities" under
the Agreement, "Contractor shall comply with all rules and
regulations of the Securities Act of 1933, the Securities
Exchange Act of 1934, the Adviser Act, the NASD, SEC and
securities laws of the states and all Interpretations therof,
where securities will be offered for sale." Respondents submit
that to the extent that the arbitration provision of the
Agreement conflicts with other provisions of the agreement (such
as the provision requiring compliance with NASD rules), it must
be deemed invalid and unenforceable. They argue that NASD member
firms and associated persons cannot simply "agree" to violate the
rules and regulations of the NASD, which have been approved by
the SEC and which govern them.
Petitioners respond that Round Hill was aware of the NASD rules
and the contents of the Form U-4 at the time it signed the
Agreement with petitioners, and that it agreed to arbitrate
before either the NASD or the AAA, with petitioners to make the
choice. Petitioners contend that Round Hill has never challenged
the basic premise that it is bound to arbitrate the claims
brought by petitioners, nor has it challenged the viability of
its Registered Representative Agreement, but has instead asserted
that the contractual arbitration agreement was superceded by a subsequent agreement, the NASD Form
U-4, with its requirement of arbitration under the NASD rules.
Petitioners claim, however, that the Katz brothers signed the
Form U-4 on March 26, 1998, the day before they signed the
Agreement with Round Hill on March 27, 1998. Thus, they assert,
the Form U-4 could not have "superceded" the arbitration
provision in the Agreement.
Petitioners argue further that the respondents' jurisdictional
arguments were waived because they were not timely raised in the
AAA arbitration, noting that there was a six-month delay between
the filing of the statement of claim in April 2003 and Round
Hill's filing of the motion to dismiss in October 2003.
Petitioners assert that during that period, Round Hill actively
participated in the AAA proceedings, submitting briefing on the
subject of the location of the arbitration, and participating in
the choosing of the arbitrator. Petitioners assert that only
after completion of these activities did Round Hill file a
jurisdictional challenge to the arbitrability of claims by the
Katz brothers (but not the claims of First Alliance). Petitioners
assert that the failure to timely raise these arguments in the
AAA arbitration, and failure to seek a stay of the arbitration in
district court, constitute a waiver of the arguments.
Respondents contend that Round Hill did not waive the
requirement that the dispute be arbitrated before the NASD. They
claim there was no substantial delay and that petitioners did not
suffer undue prejudice, because after the issue was raised in
Round Hill's motion to dismiss, the Katz brothers continued to
press their claims before the AAA for twenty months more, finally
obtaining the award that is the subject of this action.
Respondents maintain that the Katz brothers knew that Round Hill
would eventually seek to vacate any award on that ground, but
nonetheless improperly proceeded with the AAA arbitration.
Petitioners also dispute respondents' assertion that the
arbitration provision in Form U-4 and the NASD rules require
arbitration before the NASD. Petitioners argue that the reference
in Form U-4 to "any dispute . . ." that is "required to be
arbitrated" under the rules of NASD simply means that there must
be an arbitration of any such dispute, but does not mean that the
arbitration must be conducted in accordance with the NASD rules
or under the auspices of an NASD arbitrator. Respondents, on the
other hand, contend that Form U-4 should be interpreted as requiring that any dispute, claim, or
controversy be arbitrated under the NASD rules.
With regard to the NASD rules, petitioners argue that NASD Code
of Arbitration Rule 10201, which requires arbitration under the
NASD rules "at the instance of" an NASD member or person
associated with a member against another member or person
associated with a member means that the arbitration must be
brought with the NASD where one of the parties to the arbitration
demands that it be brought with the NASD. Petitioners contend
that the NASD is not concerned with members who may agree to
arbitrate in another forum.
Respondents, on the other hand, contend that the language of
Rule 10201 means that except for special claims, "all disputes
shall be arbitrated under the [NASD] Code." However, they omit
the four words following that clause "at the instance of" and
argue that there is no authority for petitioners' "novel
interpretation" of the phrase. Instead, they cite NASD Code of
Arbitration Rule 10101, which simply states that the rules in the
Code are prescribed and adopted "for the arbitration of any
dispute, claim or controversy . . . (b) between or among members
and associated persons. . . ."
Respondents claim that their interpretation is supported by the
fact that the NASD recently announced proposed rule changes
(still under consideration by the SEC), which include a New
Proposed Rule 13200, "Required Arbitration," stating, "Except as
otherwise provided in the Code, a dispute must be arbitrated
under the Code if the dispute arises under the business
activities of a member or an associated member and is between or
among . . . Members and Associated Persons. . . ." Respondents
contend that the present dispute does not fall under any of the
enumerated exceptions, and argue that because the NASD has stated
that these proposed rules represent "no substantive change" from
the current rules, the court should find that NASD arbitration is
required in the present dispute. They also assert that if the
Katz brothers' interpretation of the phrase "at the instance of"
were the correct one, then the New Proposed Rule 13200 would
constitute a radical change.
In a final argument, petitioners contend that in arguing that
the arbitration should properly have been brought before the
NASD, and that First Alliance cannot arbitrate before the NASD because it is not a member, respondents are attempting
to deprive First Alliance of a forum in which to arbitrate its
claims against respondents. Petitioners assert that the AAA was
the only jurisdiction where all interested parties could obtain
relief, as NASD rules do not permit First Alliance (a non-member)
to bring its claims to arbitration before the NASD. Petitioners
argue that enforcing the award in favor of First Alliance would
not violate public policy because there is no clearly defined
statutory or other explicit public policy that would be violated
by confirming the arbitration award in the present case.
In response, respondents contend that while First Alliance was
free to submit its claim for arbitration before the AAA, the Katz
brothers were not. Respondents also contend that because the
arbitrator did not indicate the specific amount awarded to First
Alliance, the entire $306,902 can be viewed as an award of
"commissions" to First Alliance. They argue that because it is a
violation of NASD rules and regulations for a member firm (such
as Round Hill) to pay commissions to a non-member (such as First
Alliance), an award that orders Round Hill to pay commissions to
a non-NASD-licensed or -registered broker-dealer is therefore a
violation of law and a violation of public policy.
Proceedings under § 9 of the FAA are intended to be summary,
and confirmation can be denied only if an award has been
corrected, vacated, or modified in accordance with the FAA.
See, e.g., Northrop Corp. v. Triad Int'l Marketing, S.A.,
842 F.2d 1154, 1157 & n. 7 (9th Cir. 1988); Schwarzer, Tashima &
Wagstaffe, Federal Civil Procedure Before Trial (2004) §
16:132. Based on the clear policy favoring confirmation of
arbitration awards, the court finds that the petition to confirm
the award should be GRANTED. The court finds further that the
application to vacate the award should be DENIED, as respondents
have not met the high standard for vacating arbitration awards.
Respondents have not established that the arbitrator exceeded
his powers. Section 10(a)(4) of the FAA has been interpreted by
the Ninth Circuit as meaning that the award is "completely
irrational" or "exhibits a manifest disregard of the law."
Respondents do not argue that the award falls into either of
those categories. Arbitrators may also "exceed their powers" where they purport to exercise powers that the parties did not
intend them to possess. Here, the Agreement provided that
petitioners would be permitted to choose whether they wanted to
arbitrate before the AAA or the NASD. There is no question of the
arbitrator purporting to exercise powers that the parties did not
intend him to have.
The court finds that the NASD rules on which respondents rely
are ambiguous and far from clear. The court does not agree with
respondents that the language in Rule 10201 "shall be
arbitrated under the Code, at the instance of" a member or
associated person simply means "shall be arbitrated under the
Code." The word "instance" as used in the phrase "at the instance
of" means "urgent solicitation or insistence." Black's Law
Dictionary (7th ed. 1999) at 800; see also Bryan A. Garner, A
Dictionary of Modern Legal Usage (2nd ed., Oxford Press, 2001),
at 454-55. In the court's view, the requirement that a dispute
"shall be arbitrated under the Code at the instance of" a member
or associated person appears to be a requirement that the dispute
be arbitrated under the NASD Code if a request to arbitrate under
the Code is made by a member or associated person. At a bare
minimum, the provision is ambiguous.
Moreover, the other rules cited by respondents do not compel
arbitration under the NASD Code or rules but rather simply
require arbitration of certain issues, without specifying the
arbitral body. The court finds nothing in the rules cited by
respondents that clearly prohibits parties from agreeing to
arbitrate in a forum other than the NASD. The case cited by
respondents, Burns v. New York Life Ins. Co., 202 F.3d 616 (2nd
Cir. 2000), simply stated (not as part of the holding) that the
"relevant `rules' and `by-laws'" referenced in Form U-4's
agreement to arbitrate ("I agree to arbitrate any dispute . . .
that may arise . . . that is required to be arbitrated under the
rules, constitutions, or by-laws of the organizations with which
I register") referred in that case to the NASD Code of
Arbitration Procedure. Burns, 202 F.3d at 619. However, the
Form U-4 agreement does not state that any dispute between NASD
members must be arbitrated under the auspices of the NASD, but
rather simply that the person signing agrees that he or she will
arbitrate any dispute that the NASD rules require to be
arbitrated. The court is also not persuaded by respondents' argument with
regard to the "New Proposed Rule 13200" and the statement by NASD
that none of the proposed new rules represents any substantive
change from the old rules. The new rules have not yet been
approved, and there is no way of knowing whether they will. A
"proposed rule" is not a rule, and provides no basis for finding
that the arbitration award should be vacated.
Finally, with regard to the claim that the award improperly
awards "commissions" to First Alliance because it does not
distinguish between the award to the Katz brothers and the award
to First Alliance, the court is not persuaded that respondents
have articulated a valid basis under the FAA for vacating the
award. At the arbitration, the petitioners collectively asserted
a total damage claim of $252,297.54, plus interest, costs, and
attorneys' fees, plus "miscellaneous claims" of $7,329.29. Among
the "miscellaneous claims," First Alliance asserted that Round
Hill had improperly retained a portion of "management fees"
billed to Bear Stearns accounts for the quarter in which First
Alliance was terminated. Respondents argue that it is impossible
to tell from the award whether any of the $6,164.29 requested for
"management fees" was awarded by the arbitrator, or whether First
Alliance was also improperly awarded "commissions."
The court is not in a position to know for certain how much of
the award was intended to be allocated to First Alliance, as that
knowledge lies with the arbitrator. However, Thomas Whelley,
counsel for petitioners, who also represented the petitioners at
the arbitration, represented to the court at the hearing that
Round Hill never requested payment of commissions to First
Alliance, that the amount of the final award approximated the
total sought by claimants in the arbitration, and that the amount
of the management fees sought by First Alliance was such a minor
concern that it was not even raised during the arbitration
proceeding itself. Thus, the court has no basis to assume that
the respondents contemplated or that the arbitrator intended that
First Alliance recover any amount in excess of its $6,164.29 in
management fees. CONCLUSION
In accordance with the foregoing, the court CONFIRMS the award
of the arbitrator. The clerk shall close the file.
IT IS SO ORDERED.
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