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BARBIER v. SHEARSON LEHMAN HUTTON

December 3, 1990

IN THE MATTER OF THE ARBITRATION BETWEEN MARCO BARBIER, SILVANA BARBIER, AND STEPHANIA BARBIER, PETITIONERS, AND SHEARSON LEHMAN HUTTON, INC., SUCCESSOR-IN-INTEREST TO SHEARSON LEHMAN BROTHERS, INC., AND ROGER BENDELAC, RESPONDENTS.


The opinion of the court was delivered by: Robert J. Ward, District Judge.

  OPINION

Marco Barbier, Silvana Barbier and Stefania Barbier (collectively, "the Barbiers") have petitioned this Court, pursuant to section 9 of the Federal Arbitration Act (the "Act," or the "FAA"), 9 U.S.C. § 9, to confirm an arbitration award entered by a New York Stock Exchange arbitration panel on May 18, 1990. Respondent Roger Bendelac ("Bendelac") has moved to vacate the arbitration award in its entirety. Respondent Shearson Lehman Hutton, Inc. ("Shearson") has moved to vacate the punitive damages component of the award against it. For the reasons that follow, the Barbiers' petition to confirm the arbitration award is granted, and the motions to vacate the award are denied.

BACKGROUND

The relevant facts are not disputed. On or about January 7, 1986, the Barbiers entered into a written agreement with Shearson (the "Agreement") by which they opened an account for the purchase and sale of securities.*fn1 In performance of the Agreement, Shearson directed its employee, Respondent Bendelac, to service the Barbiers' account as their broker.

The Agreement contained an arbitration provision which stated, in pertinent part:

  This agreement shall . . . be governed by the laws
  of the State of New York. Unless unenforceable due
  to federal or state law, any controversy arising
  out of or relating to [the Barbiers'] accounts, to
  transactions with [Shearson, its] officers,
  directors, agents and/or employees for [the
  Barbiers] or to this agreement or the breach
  thereof, shall be settled by arbitration in
  accordance with the rules then in effect of the
  National Association of Securities Dealers, Inc.
  or the Boards of Directors of the New York Stock
  Exchange, Inc. as [the Barbiers] may elect. . . .
  Judgement upon any award rendered by the
  arbitrators may be entered in any court having
  jurisdiction thereof.

Agreement at ¶ 13.

On or about October 19, 1988, a dispute arose between the parties in which the Barbiers claimed that Bendelac and Shearson had forged certain agreements and then engaged in discretionary commodities trading on their account without their knowledge or authorization, resulting in the loss of their investment. Respondents maintained that the Barbiers had executed the agreements and had authorized the discretionary trading.

In accordance with the arbitration clause of the Agreement the parties, without objection, submitted their dispute to arbitration before a New York Stock Exchange ("NYSE") arbitration panel. On or about August 20, 1989, the Barbiers filed an Amended Statement of Claims with the NYSE, in which they asserted claims for conversion, breach of fiduciary duty, breach of contract, negligence and/or recklessness, and assault.*fn2 They demanded an award of, inter alia, punitive damages. Respondents denied liability and raised a number of affirmative defenses and counterclaims.*fn3

The arbitration panel conducted several days of hearings, during which the parties appeared and submitted evidence on the issues presented. On May 18, 1990, the arbitrators filed their unanimous award. Their decision stated:

  The undersigned arbitrators have decided and
  determined in full and final settlement of all
  claims between the parties that:
  Claimants are awarded the total sum of
  $155,645.00, which amount includes: Loss of
  principle [sic], interest at 9% from 2/1/87,
  attorney fees and punitive damages in the amount
  of $25,000. Shearson Lehman Brothers Inc. will be
  assessed $31,129.00 of the total award. Roger
  Bendelac will be assessed $124,516 of the total
  award. Costs of arbitration shall be borne by
  Shearson 20% ($2,400) and Roger Bendelac 80%
  ($9,600) to be paid to the New York Stock
  Exchange.

On or about June 12, 1990, the Barbiers filed the instant petition to confirm the arbitration award. Bendelac now moves to vacate the award in its entirety. He argues that the arbitrators exceeded and/or imperfectly executed their powers by (1) awarding punitive damages, and (2) failing to render an award on all issues submitted. Shearson, challenging only that portion of the award which granted punitive damages to petitioners, contends that the arbitrators' award of punitive damages is proscribed. Petitioners maintain that the award was in all respects proper and should be confirmed.

DISCUSSION

I. The Applicable Law.

The threshold issue for the Court is whether federal, or New York, arbitration law applies in the instant case. Respondents maintain, for a variety of reasons, that the New York state law of arbitration must be applied. The issue assumes primary importance in the instant case because, under New York law, "an arbitrator's award which imposes punitive damages, even though agreed upon by the parties, should be vacated" as contrary to public policy. Garrity v. Lyle Stuart, Inc., 386 N.Y.S.2d 831, 833, 40 N.Y.2d 354, 353 N.E.2d 793, 795 (1976).

Bendelac asserts that the Federal Arbitration Act does not apply at all in the instant case. He argues, somewhat confusingly, that the Act is not "trigger[ed]" because this Court's jurisdiction is based solely on diversity of citizenship and because the underlying claims do not raise a federal question.*fn4 This argument is wholly without merit.

Section 2 of the Federal Arbitration Act, 9 U.S.C. § 2, sets forth the statutory criteria utilized to determine the scope of the Act's coverage. It provides:

  A written provision in any . . . contract
  evidencing a transaction involving commerce to
  settle by arbitration a controversy thereafter
  arising out of such contract or transaction, or
  the refusal to perform the whole or any part
  thereof, or an agreement in writing to submit to
  arbitration an existing controversy arising out of
  such a contract, transaction, or refusal, shall be
  valid, irrevocable, and

  enforceable, save upon such grounds as exist at
  law or in equity for the revocation of any
  contract.

Commerce is defined in section 1 as "commerce among the several states or with foreign nations."

There is little dispute as to the interstate nature of the underlying transactions in the instant case. These involved Venezuelan investors, a New York financial institution and the purchase and sale of securities on a national exchange. Thus, the Act clearly applies to the arbitration provision at issue.*fn5

"In enacting the federal Arbitration Act, Congress created national substantive law governing questions of the validity and the enforceability of arbitration agreements under its coverage." Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 845 (2d Cir. 1987). See Southland Corp. v. Keating, 465 U.S. 1, 12, 104 S.Ct. 852, 859, 79 L.Ed.2d 1 (1984) (Act creates a body of federal substantive law which governs question of arbitrability); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (federal substantive law created by Act applicable in both state and federal courts). Thus, once it is determined that a dispute is covered by the Act, "federal substantive law as set forth in the Act and federal court decisions governs the scope and interpretation of the agreement." Cook Chocolate Co. v. Salomon, Inc., 684 F. Supp. 1177, 1182 (S.D.N.Y. 1988). See also Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972) (once a dispute is covered by the Act, federal law governs all questions of interpretation, construction, validity, revocability and enforceability).

Shearson argues that the existence of a choice-of-law clause in the Agreement alters the above analysis. It maintains that, because the Agreement provides for the application of New York law, the Court should look solely to New York state, rather than federal, ...


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