Opinion
Civil Case #: 97-CV-1382 DAE
December 15, 1997
Wendell H. Fuji, Kobayashi Sugita Goda, Honolulu, HI, Howard Schiffman, Howard N. Felman, James M. Wines, Dickstein Shapiro Morin Oshinsky LLP, Washington, DC, for Petitioners.
Howard Schiffman, HAWAII, Howard N. Felman, James M. Wines, Dickstein Shapiro Morin Oshinsky LLP, Washington, DC, Paul A. Schraff, Dwyer Imanaka Schraff Kudo Meyer Fujimoto, Honolulu, HI, Jacquelyn F. Kidder, Lawrence R. Samuels, Jacqueline F. Kidder, Ross Hardies, Chicago, IL., for Respondents.
ORDER GRANTING PETITIONER'S MOTION TO CONFIRM ARBITRATION AWARD; DENYING COUNTER-PETITIONER'S MOTION TO VACATE ARBITRATION AWARD
The court heard the parties' Motions on December 8, 1997. Howard Schiffman, Esq., and Howard N. Feldman, Esq., appeared at the hearing on behalf of Petitioner; Lawrence R. Samuels, Esq., appeared at the hearing on behalf of Counter-Petitioner. After reviewing the motion and the supporting and opposing memoranda, the court GRANTS Petitioner's Motion to Confirm Arbitration Award and DENIES Counter-Petitioner's Motion to Vacate Arbitration Award.
BACKGROUND
In March of 1994, Investors Equity Life Insurance Company of Hawaii ("Investors") and ADM Investor Services, Inc. ("ADM") entered into a Customer Agreement whereby ADM agreed to execute and clear orders for financial futures contracts placed by Investors. The parties also signed a separate Arbitration Agreement which provided that:
[a]ny controversy between [ADM] and Customer arising out of or related to Customer's account, or to an agreement or the breach thereof, shall be settled only by arbitration in accordance with the rules of the National Futures Association, the American Arbitration Association, or the exchange upon which the transaction complained of was executed, as Customer may elect. . . .
Arbitration Agreement, p. 1, attached as Exh. A to ADM's Motion to Vacate Arbitration Award. The Arbitration Agreement also specified that "[j]udgment upon the arbitration award shall be final and may be entered in any court having jurisdiction thereof." Id.
Pursuant to the Arbitration Agreement, Investors filed a Demand for Arbitration against ADM on June 22, 1995. The demand was filed in the American Arbitration Association's ("AAA") office in Honolulu, Hawaii. The arbitration hearing commenced on March 31, 1997. On or about July 24, 1997, the arbitration panel ("the Panel") issued an Arbitral Award against ADM and in favor of Reynaldo D. Graulty, the Insurance Commissioner for the State of Hawaii, in his official capacity as Liquidator for Investors. The Panel awarded damages in the amount of $6,917,667, plus interest thereon at the rate of ten percent (10%) per annum from the date of filing of the demand for arbitration.
In this proceeding, the Liquidator for Investors, Reynaldo D. Graulty, is seeking to confirm the arbitration award pursuant to the Federal Arbitration Act. ADM has filed a counter-motion to vacate the arbitration award.
STANDARD OF REVIEW
An arbitration award will not be set aside unless the arbitrators acted in manifest disregard of the law. Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991). Where the parties have agreed to submit their dispute to arbitration, it "will not be set aside by a court for error in law or fact." Id. (citation and internal quotation marks omitted). "Arbitrators are judges chosen by the parties to decide the matters submitted to them, finally and without appeal. As a mode of settling disputes, it should receive every encouragement from courts. . . . If the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court . . . will not set it aside for error, either in law or fact. . . . It is not even enough that the Panel may have failed to understand or apply the law. . . . An arbitrator's decision must be upheld unless it is `completely irrational' or it constitutes a `manifest disregard of law.'" Id. (citations and internal quotation marks omitted); see also Barnes v. Logan, 122 F.3d 820, 821 (9th Cir. 1997).
The court also notes that the Ninth Circuit recently issued a decision on the standard of review for an arbitration award. In Lapine Technology Corp. v. Kyocera Corp., the Ninth Circuit held that federal courts can expand their review of an arbitration award beyond the grounds specified in the Federal Arbitration Act when the parties agree to an expanded review in their arbitration agreement. Lapine, Nos. 96-15319, 96-15321, 96-16142, 96-16143, 96-16318, 1997 WL 755261 (December 9, 1997).
DISCUSSION
In its motion to vacate the arbitration award, ADM makes numerous arguments in support of its contention that the award should be vacated. First, ADM argues that the arbitrators exceeded their powers by adjudicating claims that belonged to Investors' creditors, policyholders and annuitants. ADM contends that, pursuant to the arbitration agreement, the arbitrators were only authorized to adjudicate those claims belonging to Investors. Second, ADM asserts that the arbitrators exceeded their authority and committed manifest error of law by applying Hawaii law, rather than the law of Illinois. Third, ADM contends that the arbitrators committed manifest error of law by holding ADM "liable on the theories that it violated a [Chicago Board of Trade] rule and failed to act reasonably with regard to [Investors'] trading activity and account." ADM's Motion to Vacate, p. 20. ADM asserts that these rulings were directly contrary to applicable law and governing legal principles and therefore the arbitration award must be vacated. Id. Fourth, ADM argues that the Panel acted in manifest disregard of the law by awarding Investors prejudgment interest. Finally, ADM contends that the panel acted in manifest disregard of the law by awarding Investors net losses.
A. Whether the Arbitrators Exceeded Their Powers by Adjudicating Claims Belonging to Investors' Creditors, Policyholders, and Annuitants
ADM argues that only Investors and ADM were parties to the arbitration agreement. ADM therefore asserts that the arbitrators had no authority to adjudicate the claims of Investors' creditors, policyholders, and annuitants and that the arbitrators could not compel ADM "to arbitrate those third-party claims in the absence of a mutual, express agreement to do so." ADM's Motion to Vacate, p. 9. ADM asserts that by adjudicating these claims, the arbitrators exceeded the powers given to them under the arbitration agreement.
ADM incorrectly asserts that this court is required to review the arbitration award de nova. ADM contends that de novo review is appropriate because ADM has raised issues concerning the arbitrabilitiy of the issues decided in the award. De nova review is appropriate where there is a dispute as to whether the parties agreed that the subject matter of the dispute would be resolved by arbitration. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995). In this case, ADM does not dispute the fact that Investors and ADM agreed to submit their claims to arbitration. Therefore, de novo review is not appropriate.
In the arbitration proceeding, the Liquidator was acting in his official capacity as the Insurance Commissioner for the State of Hawaii. The Liquidator was appointed by the First Circuit Court of Hawaii after it concluded that Investors was insolvent. As the Liquidator for Investors, the Insurance Commissioner was authorized to prosecute all claims on behalf of the insurer, Investors. See H.R.S. § 431:15-310 (a) (12).
In the arbitration proceeding, the Liquidator asserted claims on behalf of Investors, based on the harm Investors allegedly suffered as a result of ADM's conduct. Specifically, the Liquidator sought to recover the $6.9 million in trading loss, commissions and fees, allegedly suffered by Investors while its account was maintained at ADM. The Liquidator did not attempt to assert claims which independently belonged to Investors' creditors, policyholders, and annuitants. Instead, the Liquidator was asserting derivative claims on behalf of these parties based on the damages Investors suffered as a result of ADM's conduct. Under the terms of the Arbitration Award, ADM is required to pay the Liquidator the $6.9 million in trading losses suffered by Investors. This money was not directly awarded to Investors' policyholders, annuitants and creditors. Their recovery, if any, will only be as a result of an independent liquidation proceeding. The court therefore concludes that the Panel did not act in manifest disregard of the law in finding that the Liquidator was entitled to assert a claim against ADM for "any actionable wrongdoing which caused [Investors'] insolvency." Arbitration Award, p. 2.
ADM additionally argues that the arbitrators exceeded their power by awarding damages to Investors' policyholders and annuitants. ADM contends that it was an abuse of power for the arbitrators to award damages for a loss that these parties never suffered. As explained above, the arbitrators awarded damages to the Liquidator based on the harm allegedly suffered by Investors. The $6.9 million in losses was the harm suffered by the company, and only indirectly suffered by Investors' policyholders and annuitants based on their financial interest in Investors. Therefore, in awarding the $6.9 million in damages, the arbitrators were not compensating Investors' policyholders and annuitants for an independent damage they allegedly suffered as a result of ADM's conduct. Instead, the damage award was designed to compensate Investors for the harm suffered by that entity.
As an alternative basis for upholding the Panel's decision, the court finds that the Liquidator's right to recover on behalf of Investors' policyholders, annuitants and creditors, was a procedural issue which was within the province of the Panel, and which should not be disturbed this court. As the United States Supreme Court explained, "[o]nce it is determined . . . that the parties are obligated to submit the subject matter of a dispute to arbitration, `procedural' questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator." John Wiley Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964). Other courts have similarly concluded that where a party does not dispute the arbitrability of the dispute, but instead argues that there is a procedural defect in the arbitration proceedings, this is an issue which should be determined by the arbitrator, not the court. See, e.g.,Glass v. Kidder Peabody Co., Inc., 114 F.3d 446, 466 (4th Cir. 1997);United Rubber, Cork, Linoleum, and Plastic Workers of America, AFL-CIO, CLU, Local 164 v. Pirelli Armstrong Tire Corp., 104 F.3d 181, 183 (8th Cir. 1997). In Daiei, Inc. v. United States Shoe Corp., this court held that the issue of whether a particular person or entity is a proper party to the arbitration proceeding is a procedural issue to be decided by the arbitrator. Daiei, 755 F. Supp. 299, 303 (D. Haw. 1991). The court therefore concludes that the issue of whether the Liquidator was entitled to assert derivative claims on behalf of Investors' creditors, annuitants, and policyholders was a procedural issue to be determined by the arbitrators. Accordingly, the court finds that the Panel did not act in manifest disregard of the law by awarding damages to the Liquidator.
B. Whether the Arbitrators Exceeded Their Authority and Committed Manifest Error of Law By Applying the Substantive Law of Hawaii
ADM asserts that, pursuant to the choice-of-law provision in the parties' agreement, ADM and Investors agreed that any actions and proceedings arising out of the parties' agreement would be governed by Illinois law. ADM therefore contends that in applying Hawaii law to the Liquidator's claims, the arbitrators exceeded their authority "and acted in manifest disregard of the applicable law." ADM's Motion to Vacate, p. 18.
In a choice of law provision, the parties are entitled to select the law which applies to their contractual claims. However, the Ninth Circuit has expressly determined that tort claims are not governed by a contractual choice of law provision. See Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 408 (9th Cir. 1992); Consolidated Data Terminals v. Applied Digital Data Systems, 708 F.2d 385, 390 n. 3 (9th Cir. 1983). Other courts have similarly concluded that a contractual choice of law clause does not encompass tort causes of action. See Shelley v. Trafalgar House Public Ltd. Co., 918 F. Supp. 515, 521 (D. P.R. 1996); Invacare Corp. v. Sperry Corp., 612 F. Supp. 448, 461 n. 4 (N.D. Ohio 1984); Anglo American Ins. Group. P.L.C. v. Calfed Inc., 940 F. Supp. 554, 558 (S.D.N.Y. 1996).
In this case, the Panel awarded damages to Investors based on a finding that ADM had negligently handled Investors' account. This negligence cause of action did not stem from any obligations created by the parties in their contractual agreement, but instead derived from general principles of professional negligence. See Arbitration Award, p. 3. The parties' choice of law provision would not therefore govern this negligence claim.
ADM cites Barnes v. Logan, 122 F.3d 820 (9th Cir. 1997), in support of its contention that the parties' choice of law clause is applicable to this negligence claim. The court finds, however, that this case does not stand for the proposition that tort claims are governed by a contractual choice of law provision. In the Barnes case, the parties had provided in their contractual choice of law provision that Minnesota law would govern the rights and liabilities of the parties. The parties were arguing over whether Minnesota law or the rules of the National Association of Securities Dealers (NASD) governed the issue of punitive damages. Id. at 822. From the opinion, it does not appear that either party argued to the court that the law of the forum state, and not Minnesota law, should be applied to resolve this issue. In finding that Minnesota law did govern the issue of punitive damages, the court did not address the issue of whether the petitioner's negligence claim was controlled by the choice of law provision. Instead, the court only dealt with the issue of whether the choice of law provision meant that the arbitrators could not rely on NASD rules in awarding punitive damages. In its opinion, the court also did not suggest that it was reversing prior Ninth Circuit authority which had explicitly concluded that tort claims are not governed by a contractual choice of law provision. The court therefore finds that theBarnes decision does not stand for the proposition that both contractual and tort claims are governed by a contractual choice of law provision. Accordingly, the Barnes decision does not suggest that the Panel acted in manifest disregard of the law in concluding that the contractual choice of law provision did not govern the Investors' tort claims.
The court additionally finds that, based on the language of the contractual choice of law provision, it was reasonable for the Panel to conclude that Investors' claims were not governed by the choice of law provision. The choice of law provision is contained in the parties' Customer Agreement. That clause provides that "[a]ll actions or proceedings arising directly, indirectly or otherwise in connection with, out of, related to, or from this Agreement or any transaction covered hereby shall be governed by the law of Illinois and may, at the discretion and election of [ADM], be litigated in courts whose situs is within Illinois." Agreement, p. 2 (emphasis added) Based on this language, it is not at all clear that the choice of law provision even applies to the arbitration proceeding. The choice of law clause clearly contemplates litigation of the parties' disputes in court and does not make any reference to the possibility of arbitration. The Arbitration Agreement is contained in a separate document which does not contain a choice of law clause. The Arbitration Agreement provides that "[a]ny controversy between [ADM] and Customer arising out of or related to Customer's account, or to this agreement or the breach thereof, shall be settled only by arbitration in accordance with the rules of the National Futures Association, the American Arbitration Association, or the exchange upon which the transaction complained of was executed, as Customer may elect." Arbitration Agreement, p. 1 (emphasis added). The court finds that, based on the language of the Arbitration Agreement, it was reasonable for the Panel to conclude that the choice of law provision did not govern Investors' claims in the arbitration proceeding. Accordingly, the court finds that the Panel did not commit manifest error of law in concluding that Illinois law did not govern the arbitration proceeding.
The court also rejects ADM's argument that the Panel was internally inconsistent in concluding that Investors' claims were not governed by the choice of law clause, yet somehow were covered by the Arbitration Agreement. The language of the choice of law clause specifies that the law of Illinois would govern any disputes arising out of the Customer Agreement. However, the Arbitration Agreement was not limited to disputes arising out of the Customer Agreement, but was much broader. The Arbitration Agreement explicitly covered any controversy arising out of, or related to, the Customer's account, as well as any disputes relating to the Customer Agreement or a breach thereof. See Arbitration Agreement, p. 1. In the arbitration proceeding, Investors' claims related to the Customer Account, and were not in any way based on obligations created by ADM pursuant to the Customer Agreement. The court therefore concludes that the Panel was not internally inconsistent in finding that the choice of law provision did not govern Investors' claims, but that the Arbitration Agreement did govern these claims.
In the absence of a governing choice of law provision, the Panel was obligated to apply the choice of law provisions for the forum state of Hawaii. See Sutter Home, 971 F.2d at 407. "Hawaii s choice-of-law approach creates a presumption that Hawaii law applies unless another state's law would best serve the interests of the states and persons involved." Abramson v. Aetna Casualty Surety Co., 76 F.3d 304, 305 (9th Cir. 1996) (citations and internal quotation marks omitted); see also Peters v. Peters, 634 P.2d 586, 591 (Haw. 1981). In this case, the Panel found that Hawaii's law should apply because "that State having substantially greater contracts with, and far the stronger governmental interest in, the controversy sounding in tort that is under adjudication." Arbitration Award, p. 3.
The court finds that this conclusion was not in manifest disregard of the law. In this case, the Liquidator was attempting to recover, on behalf of Investors, its policyholders, annuitants and creditors, over $6 million in trading losses sustained while Investors' account was at ADM. Investors was a Hawaii insurance company which was licensed and regulated under the laws of Hawaii. As a Hawaii insurance company, the state clearly had a substantial interest in regulating Investors' trading activity. The state also had an interest in ensuring the financial stability of Investors in order to protect the investment of its policyholders, annuitants and creditors. The court therefore concludes that the Panel did not commit manifest error of law in applying Hawaii law to Investors' claims.
C. Whether the Arbitrators Committed Manifest Error of Law by Holding ADM Liable for Failing to Act Reasonably With Respect to Investors' Trading Activities and Account
ADM correctly points out that ADM is located in Illinois and that Investors' trades were placed on the Chicago Board of Trade in Illinois. However, the court finds that these facts are not sufficient to establish that the Panel acted in manifest disregard of the law in concluding that Hawaii had a substantially greater interest in Investors' claims, than did the state of Illinois.
ADM contends that the arbitrators committed manifest error of law by imposing liability upon ADM for failing to act reasonably with respect to Investors' account. ADM argues that Investors' account was a nondiscretionary account and that ADM had no control over the trades placed by Investors and did not provide Investors with investment advice or help Investors in the development of its investment strategy. ADM alleges that the duty owed by a commodities broker holding a non-discretionary account is "an exceedingly narrow one, consisting at most of a duty to properly carry out transactions ordered by the customer." ADM's Motion to Vacate, p. 25 (quoting Index Futures Group v. Ross, 557 N.E.2d 344, 348 (Ill.App. 1990)). ADM contends that no published decision has held that "a [Futures Commodities Merchant] providing execution only services for a customer-directed account, where the FCM neither recommended trades nor gave investment advice, owes a duty based on common law principles or on any federal or state statute, rule or regulation to determine the suitability of the customer's trading, or to prevent the customer from trading in futures." Id. at 24.
ADM also points out that the customer agreement signed between ADM and Investors at the time Investors opened its account at ADM explicitly provided that:
Customer acknowledges and agrees that [ADM] shall not be responsible to Customer for any losses resulting from conduct or advice (including but not limited to errors and negligence) on the part of any . . . person or entity . . . having trading authority over the account of Customer at [ADM]. Customer specifically agrees that [ADM] shall have no obligation to supervise to [sic] activities of any such person or entity and Customer will indemnify [ADM] and hold [ADM] harmless from and against all losses, liabilities, and damages (including attorney's fees) incurred by [ADM] as a result of any actions taken or not taken by such person or entity."Id. at 26 (emphasis in original). ADM argues that the Panel, acting in complete ignorance of this Customer Agreement and all legal authority to the contrary, found that ADM owed Investors a duty with respect to its trading in the nondiscretionary account. ADM asserts that, in reaching this conclusion, the Panel acted in manifest disregard of the law.
In support of its motion to confirm the arbitration award, the Liquidator argues that it is clear from the text of the arbitration award that the Panel imposed liability on ADM based on the "simple" common law tort of negligence. The Liquidator quotes from the portion of the arbitration award in which the Panel stated that "[t]he arbitrators have determined that the evidence strongly supports liability on the simple basis of failure on the part of [ADM] to act reasonably." Investors' Opposition to ADM's Motion to Vacate, p. 23. The Liquidator asserts that once the Panel found that ADM failed to act reasonably with respect to the handling of Investors' account, the Panel proceeded to hold ADM liable for the foreseeable consequences of its breach of duty. Id. at 23-24. The Liquidator asserts that, by imposing liability on ADM, the Panel was merely following the established principle that brokers may be held liable for their professional negligence. Consequently, the Liquidator argues that, in awarding damages to Investors, the Panel recognized that "[ADM], like everyone, is accountable for its failure to act in accord with a reasonable standard of care." Id. at 27. Accordingly, the Liquidator asserts that the Panel's decision was not in manifest disregard of the law.
"An arbitration award must be upheld unless it can be shown that there was partiality on the part of an arbitrator, or that the arbitrator exceeded his authority, or that the award was rendered `in manifest disregard of the law.' Manifest disregard of the law has been defined as something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law. The reviewing court should not concern itself with the `correctness' of an arbitration award. Where the parties have agreed to arbitration, the courts will not review the merits of the dispute." Thompson v. Tega-Rand Int'l, 740 F.2d 762, 763 (9th Cir. 1984) (citations and internal quotation marks omitted); see also Barnes v. Logan, and internal quotation marks omitted); see also Barnes v. Logan, 122 F.3d 820, 821 (9th Cir. 1997);Michigan Mutual Ins. Co. v. Unigard Sec. Ins. Co. 44 F.3d 826, 832 (9th Cir. 1995); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991).
Before the court can conclude that the arbitrators acted in "manifest disregard of the law", "[i]t must be clear from the record that the arbitrators recognized the applicable law and then ignored it." Michigan Mutual, 44 F.3d at 832; see also Prudential-Bache Securities, Inc. v. Tanner, 72 F.3d 234, 240 (1st Cir. 1995) ("[T]here must be some showing in the record, other than the result obtained, that the arbitrators knew the law and expressly disregarded it."). "We must confirm the arbitrators' decision `if a ground for the arbitrator[s'] decision can be inferred from the facts of the case. This is so even if the ground for their decision is based on an error of fact or an error of law. Conversely, a court may infer that the arbitrators manifestly disregarded the law if it finds that the error made by the arbitrators is so obvious that it would be instantly perceived by the average person qualified to serve as an arbitrator. However, determining whether to make this inference is not an easy task and a reviewing court must proceed with caution. If there is `even a barely colorable justification for the outcome reached,' the court must confirm the arbitration award."Willemijn Houdstermaatschappij, BV, v. Standard Microsystems Corp, 103 F.3d 9, 13 (2nd Cir. 1997) (citations omitted); see also Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997); Marshall v. Green Giant Co., 942 F.2d 539, 550 (8th Cir. 1991).
See also Merrill Lynch, Pierce, Fenner Smith, Inc. v. Jaros, 70 F.3d 418, 420 (6th Cir. 1995) ("Where the arbitrators decline to explain their resolution of certain questions of law, a party seeking to have the award set aside faces a tremendous obstacle. If a court can find any line of argument that is legally plausible and supports the award then it must be confirmed. Only where no judge or group of judges could conceivably come to the same determination as the arbitrators must the award be set aside.")
In support of its contention that the Panel acted in manifest disregard of the law, ADM cites numerous cases which have concluded that a commodities broker in a non-discretionary account only has a duty to carry out the trades as authorized by the customer. See, e.g., Tatum v. Legg Mason Wood Walker, Inc., 83 F.3d 121, 123 (5th Cir. 1996); Wasnick v. Refco, Inc., 911 F.2d 345 349 (9th Cir. 1990); Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817, 824 (10th Cir. 1986); Unity House, Inc. v. North Pacific Investments, Inc., 918 F. Supp. 1384, 1392 (D. Haw. 1996); Tatum v. Smith, 887 F. Supp. 918, 925 (N.D. Miss. 1995);Sherman v. Sokoloff, 570 F. Supp. 1266, 1269 n. 10 (S.D.N.Y. 1983);Puckett v. Rufenacht, Bromagen Hertz, Inc., 587 So.2d 273, 278 (Miss. 1991); Index Futures Group, Inc. v. Ross, 557 N.E.2d 344, 348 (Ill App. Ct. 1990); McCracken v. Conticommodity Services, Inc., 755 P.2d 454, 455 (Colo.Ct.App. 1988). As the court explained in Index, "[t]he duty of care owed by a broker carrying a nondiscretionary account for a customer is an exceedingly narrow one, consisting at most of a duty to properly carry out transactions ordered by the customer." Index, 557 N.E.2d at 348. Similarly, in Puckett, the court held that "a commodities broker in a non-discretionary account only owes his customer the duty to properly execute trades as directed by him, and has no further duty to call upon their own professional skill and prudence as to the wisdom of any of his customer's trades." Puckett, 587 So.2d at 279. ADM contends that the above-cited authority clearly establishes that, as a matter of law, it did not owe a duty to Investors to supervise or manage the trading in its account. ADM therefore contends that by imposing such a duty on ADM, the panel acted in manifest disregard of the law.
The Liquidator argues that the Panel did not act in manifest disregard of the law by concluding that ADM owed a duty to Investors to properly handle its account. The Liquidator asserts that the Panel's decision was clearly supported by cases which have concluded that a broker may be held liable for professional negligence. See, e.g., Vucinich v. Paine,Webber, Jackson Curtis, Inc., 803 F.2d 454, 461 (9th Cir. 1986);Merrill Lynch, Pierce, Fenner Smith, Inc. v. Cheng, 697 F. Supp. 1224, 1227 (D.C. 1988); Merrill Lynch, Pierce, Fenner Smith, Inc., 377 N.W.2d 605, 607 (Wisc. 1985). As the court explained in Vucinich, "[i]f expert testimony establishes that the professional standards of brokers were not observed by Moore, both Moore and Paine, Webber may be found liable for professional negligence." Vucinich, 803 F.2d at 461. The Liquidator therefore asserts that, by holding ADM liable for its professional negligence, the Panel was merely holding ADM "accountable for its failure to act in accord with a reasonable standard of care." Liquidator's Opposition to ADM's Motion to Vacate, p. 27.
In the arbitration award, the arbitrators concluded that "the evidence strongly supports liability on the simple basis of failure on the part of [ADM] to act reasonably with respect to the known interests of [Investors] and its policyholders and annuitants." Arbitration Award, p. 3. The arbitrators found that ADM was aware that Investors' trading in the ADM account was speculative and not a bona fide hedge. The Panel concluded that, pursuant to the Chicago Board of Trade Rules and the Hawaii Insurance Code, ADM had a duty to supervise Investors' account in order to ensure that Investors was not improperly using the account to speculate. Despite ADM's knowledge of Investors' speculation, ADM did not stop its trading in the account. The arbitrators concluded that ADM's "continuation of the account placed on [ADM] liability for the foreseeable consequences of its breach of an industry standard." Id. at 5.
In the arbitration award, the Panel also concluded that ADM was aware of the following information:
* [Investors], as a life insurance company, had financial obligations to a large population of policyholders and annuitants — equity holders who relied on [Investors] for prudent investment of premiums and who had no capacity to oversee [Investors'] investment activities.
* [Investors] pretended hedge-trading account contained, on its transfer to [ADM], an obvious imbedded unrealized loss of $17.79 million. [ADM] had a report of the A.M. Best rating service stating that as of year-end 1992 [Investors] had a net worth as low as $6 million. [ADM] also had a draft `Blue Book' for the year ended [sic] December 31, 1993, prepared by [Investors], claiming an unaudited net worth of only $16 million. [ADM] thus had information at the very beginning of the relationship strongly indicating that [Investors] was already insolvent.
* If the pretended hedge account had been properly designated as a speculative account, recognition of the $17+ million imbedded loss would have been compelled by accounting rules; liquidation of [Investors] would have been immediate and the further losses in bond futures trading handled by [ADM] would have been obviated.
* [Investors'] trading behavior every day, from the opening of the account until the seizure of the company, was obviously desperate speculation for the purpose of attempting to bet the company's way out of past speculative losses. The trading pattern cannot be reconciled with any plausible hedge strategy.
* When [Investors] became insolvent, the risk of added loss from further speculative trading rested not with [Investors'] sole shareholder but with [Investors'] unknowing and helpless policyholders and annuitants.
Arbitration Award, pp. 5-6. The Panel went on to state that ADM's "actions were motivated by the desire to generate large and above-market fee revenue while permitting [Investors'] management to attempt escape from its desperate situation of insolvency. . . . It was not reasonable for [ADM] so to act in disregard of the rights of unknowing and helpless policyholders and annuitants." Id. at 6.
Based on this factual record, the court concludes that the Panel did not act in manifest disregard of the law in awarding damages to Investors based on ADM's negligence. As the Panel's findings of fact indicate, ADM was aware at the time Investors opened its account in 1994, that Investors had an unrealized loss of $17.79 million as a result of its trading in other accounts. ADM also had information, at that time, that Investors' net worth was at most $16 million. Thus, at the time Investors opened its account, ADM clearly had information which suggested that Investors was already insolvent.
In contrast to ADM's characterization of the Arbitration Award, the Panel did not award damages to Investors based on a private right of action under the Chicago Board of Trade Rules. Instead, the Panel used the Rules as a measure of the standard of care which ADM should have followed in the handling of Investors' account. In holding ADM liable for Investors' trading losses, the Panel found that ADM failed to abide by this standard of care.
The panel also had before it substantial evidence which indicated that ADM did not prevent Investors from illegally using its account for speculation, not hedging. Based on the volume of the trades, the size of the trades, and the frequency of the trades, ADM had sufficient information to indicate that Investors was improperly using its account for speculation. Under the Hawaii Insurance Code, Investors was prohibited from using its account for anything other than hedging. See H.R.S. § 431:6-103(a); H.R.S. § 431:6-321. Pursuant to Chicago Board of Trade Rule 431.02.07 and the Hedge Account Representation, ADM was required to ensure that Investors was only using its account for bona-fide hedging. However, despite the fact that "evidence of speculation known to [ADM's] account officer, was immediate, repeated, and overwhelming," ADM did nothing to stop Investors' trading in the account. Instead, ADM permitted Investors to continue its speculative trading, while it continued to collect substantial commissions on the trades. Based on this evidence, the court concludes that the Panel did not act in manifest disregard of the law in holding ADM liable for its professional negligence.
D. Whether the Panel Acted in Manifest Disregard of the Law in Awarding Investors Prejudgment Interest
The court also rejects ADM's argument that the Panel acted in manifest disregard of the law in awarding damages to Investors, despite the exculpatory language in the parties' Customer Agreement. In the Customer Agreement, Investors did not specifically agree to indemnify ADM for losses it suffered as a result of ADM's own negligence. The language of the indemnity clause refers to the actions of third parties, not ADM. The court therefore concludes that the Panel did not act in manifest disregard of the law in finding that the clause did not bar Investors' claims in this case.
In the arbitration award, the panel awarded Investors prejudgment interest from the date of the filing of the demand for arbitration in the amount of 10% per annum ($1,895.25 per day). ADM asserts that the award of prejudgment interest is in manifest disregard of the law because the Illinois Interest Act and Illinois case law do not permit an award of prejudgment interest in tort cases. ADM additionally argues that, in awarding prejudgment interest, the Panel fixed the interest rate at twice the maximum allowable rate. ADM contends that under the Illinois Interest Act, prejudgment interest is limited to five percent per annum. Accordingly, ADM asks the court to vacate the Panel's award of prejudgment interest as it was awarded in manifest disregard of the law.
The Liquidator contends that the award of pre-judgment interest was not in manifest disregard of the law. First, the Liquidator argues that "the choice of the applicable law was a matter of contract interpretation submitted to the Arbitrators for their determination and is not reviewable by this Court." Liquidator's Mem. in Opp. to ADM's Motion to Vacate, P. 28. The Liquidator therefore contends that whether Illinois law would have permitted the award of prejudgment interest is irrelevant. Second, the Liquidator argues that the "manner of computation of damages is exclusively for the arbitrators and not for the courts."Id. The Liquidator argues that under the American Arbitration Association's ("AAA") Commercial Arbitration Rules, the arbitrator is permitted to grant any remedy or relief which the arbitrator believes is just and equitable. The Liquidator contends that because the award of prejudgment interest falls within this authority, it cannot be overturned by this court.
As discussed above, the Panel was not bound to apply the Illinois choice of law provision to Investors' claims. Instead, the Panel was permitted to look to the AAA's Commercial Arbitration Rules or Hawaii law to determine whether prejudgment interest was authorized. The AAA Rules do not specifically address the issue of prejudgment interest. However, under Rule 43, the Panel is authorized to award any relief that the arbitrators feel is just and equitable. Under Hawaii law, prejudgment interest is discretionary. See H.R.S. § 636-16; Sussel v. Civil Service Commission of the City and Count of Honolulu, 851 P.2d 311, 320 (Haw. 1993); Amfac, Inc. v. Waikiki Beachcomber Investment Co., 839 P.2d 10, 36 (Haw. 1992); Page v. Domino's Pizza, Inc., 908 P.2d 552, 556 (Haw.Ct.App. 1995). Pursuant to Hawaii Revised Statutes Section 478-3, prejudgment interest may be fixed at 10 percent per annum. H.R.S. § 478-3; Sussel, 851 P.2d at 321.
Based on this authority, the court finds that the Panel did not act in manifest disregard of the law in awarding Investors' prejudgment interest. Although Illinois law would not have permitted such an award, the Panel was not bound by Illinois law under the facts of this case. Pursuant to AAA Rules and Hawaii law, the Panel was authorized to award prejudgment interest in their discretion. Under Hawaii Revised Statutes Section 478-3, the Panel was authorized to award prejudgment interest at the rate of 10 percent per annum. The court therefore rejects ADM's argument that the Panel acted in manifest disregard of the law in awarding Investors' prejudgment interest in the amount of 10 percent per annum.
See, e.g., Movitz v. First Nat'l Bank, No. 86 C 2696, 1997 WL 634009 (N.D. Ill. 1997); Continental Casualty Co. v. Commonwealth Edison Co., 676 N.E.2d 328, 331-34 (Ill.App.Ct. 1997); Wilson v. Cherry, 612 N.E.2d 953, 958 (Ill.App.Ct. 1993); Congregation of the Passion, Holy Cross Province v. Touche Ross Co., 586 N.E.2d 600, 621 (Ill.App.Ct. 1991).
E. Whether the Panel Acted in Manifest Disregard of the Law in Awarding Investors Net Losses
In its Memorandum in Opposition to the Liquidator's Motion to Confirm the Arbitration Award, ADM raises a new argument which it did not discuss in its original motion to vacate the arbitration award and which was not raised before the arbitration panel. In this new argument, ADM contends that the Panel acted in manifest disregard of the law by awarding Investors net losses. ADM argues that instead of awarding Investors net losses, the Panel should have applied either the Illinois or Hawaii Uniform Contribution Among Joint Tortfeasors Acts.
ADM alleges that, prior to the arbitration award in this case, Investors settled with numerous tortfeasors who are jointly responsible for Investors' losses. For example, ADM states that the Liquidator "entered into settlement agreements with Nomura Securities International for $6.5 million and Merrill Lynch for $4.9 million, releasing claims asserting that [Investors'] trading in accounts at Nomura and Merrill Lynch contributed to [Investors'] insolvency, claims essentially identical to the claim asserted against [ADM]." ADM's Reply Memorandum, p. 12. ADM claims that "thus far [Investors] has recovered at least $91 million in settlements from those claimed to be responsible for reducing [Investors] to insolvency." Id. at 13. Based on this evidence, ADM contends that the Panel acted in manifest disregard of the law in awarding Investors net losses.
At the arbitration hearing, ADM did elicit testimony regarding the amount of various settlement agreements between Investors and other brokerage firms. See Hearing Transcript, pp. 30, 95-96, 149-150, attached as Exhibit "F" to ADM's Reply Memorandum. However, ADM never presented any argument to the Panel regarding the impact of these settlement agreements. In its pre-hearing statement, trial memorandum, post-hearing statement, and post-hearing reply memorandum, ADM never once addressed the issue of joint contribution under the Hawaii or Illinois statutes. ADM nevertheless argues that the Panel should have considered this issue in awarding damages to Investors.
The court finds that this belated argument does not provide ADM with a basis for vacating the arbitration award. As the Ninth Circuit explained in United Steelworkers, "[p]arties to arbitration proceedings cannot sit idle while an arbitration decision is rendered and then, if the decision is adverse, seek to attack the award collaterally on grounds not raised before the arbitrator." United Steelworkers of America, AFL-CIO.CLC v. Smoke-Craft, Inc., 652 F.2d 1356, 1360 (9th Cir. 1981). As ADM failed to raise the issue of joint contribution before the Panel, the court finds that the Panel did not act in manifest disregard of the law in failing to address this issue. Accordingly, this argument does not provide ADM with a basis for vacating the arbitration award.
CONCLUSION
For the reasons stated above, the court GRANTS Petitioner's Motion to Confirm the Arbitration Award and DENIES Counter-Petitioner's Motion to Vacate the Arbitration Award.
IT IS SO ORDERED.
Investors Equity Life Insurance Company of Hawaii, Ltd., et al. v. ADM Investor Services, Inc., Civil No. 97-01382 DAE; ORDER GRANTING PETITIONER'S MOTION TO CONFIRM ARBITRATION AWARD; DENYING COUNTER-PETITIONER'S MOTION TO VACATE ARBITRATION AWARD