Opinion
No. 96,669.
November 20, 2007
Appeal from Johnson District Court; THOMAS M. SUTHERLAND, judge. Opinion filed September 21, 2007. Affirmed.
Richard Petersen-Klein, of Fisher, Patterson, Sayler Smith, L.L.P., of Topeka, for appellants.
Stephen J. Torline, of Blackwell, Sanders, Peper and Martin, L.L.P., of Kansas City, for appellees.
Before CAPLINGER, P.J., ELLIOTT and MALONE, JJ.
MEMORANDUM OPINION
Dallas and Helen Dunn filed suit against A.G. Edwards Sons, Inc. and one of its broker-dealers for making untrue statements or omissions of material fact in conjunction with the sale of securities in their retirement account. They alleged violations of the Kansas Securities Act and the Kansas Consumer Protection Act, as well as common-law fraud, negligence, negligent misrepresentation, and breach of fiduciary duty. The parties submitted their case to arbitration and the arbitrator awarded the Dunns $10,000 in damages. The arbitrator did not indicate, however, the grounds upon which she based her award or the method used to calculate damages. After confirmation by the district court, the Dunns appealed to this court, claiming the award was in manifest disregard of the law because the arbitrator failed to award damages pursuant to the Kansas Securities Act.
Factual and procedural background
On May 23, 2003, the Dunns filed suit against A.G. Edwards Sons, Inc. (Edwards) and James Wiklund, a broker-dealer employed by Edwards (collectively referred to as "the defendants").
Generally, the Dunns alleged the defendants made inappropriate recommendations regarding the securities in their retirement account. They claimed the defendants induced them into purchasing securities of poor quality that were not suitable investments by misrepresenting the nature of those securities. Moreover, the Dunns claimed the defendants failed to timely sell or advise them to sell securities. They also alleged a failure by the defendants to timely advise them of the status of their investments. As a result, the Dunns claim to have suffered significantly lower returns on their investments that, but for the defendants' actions, would not have occurred.
The Dunns' petition contained six specific grounds for relief: (1) the defendants violated the Kansas Securities Act by omitting and misrepresenting material facts, and defrauding or deceiving the Dunns regarding the purchase of the securities; (2) the defendants violated the Kansas Consumer Protection Act by misrepresenting that the securities were beneficial and suitable investments despite knowledge to the contrary; (3) the defendants committed fraud by knowingly or recklessly rendering untrue representations regarding the suitability and profitability of the securities sold to the Dunns; (4) the defendants negligently misrepresented the nature of the securities; (5) the defendants were negligent in failing to exercise reasonable care when providing information to the Dunns and failing to timely sell or advise the Dunns to sell the securities; (6) the defendants breached their fiduciary duties by failing to act in the Dunns' best interests when providing advice and executing the sale of these securities.
Pursuant to the parties' agreement, the district court dismissed the case without prejudice and granted the Dunns' motion for arbitration according to the American Arbitration Association (AAA) rules, regulations, and procedures. The Dunns subsequently refiled the petition, which contained allegations nearly identical to those in the original petition. Shortly thereafter, the defendants filed their answer to the Dunns' petition, denying all allegations of wrongdoing. The defendants claimed the Dunns were experienced and informed investors who knowingly authorized all transactions on their account. Moreover, the defendants asserted the securities the defendants recommended to the Dunns were suitable and consistent with the Dunns' objectives. The defendants denied the Dunns sustained any losses and also pled several affirmative defenses, including the statute of limitations.
Following a hearing, the arbitrator awarded the Dunns $10,000 in damages but did not specify the grounds on which she found for the defendants or the method she used to calculate the award. The arbitrator also ordered both parties to equally divide costs and expenses of the arbitration. Thereafter, the Dunns filed an application for modification, completion, or clarification, claiming the award was inappropriately calculated. The arbitrator issued a response indicating she did not have authority to modify the award.
The Dunns subsequently filed an application in the district court to vacate the arbitration award. Following oral argument on the application, the district court held the Dunns failed to demonstrate any reason to vacate the award. The Dunns appeal the district court's order confirming the arbitrators award.
Discussion
The Kansas Uniform Arbitration Act, K.S.A. 5-401 et seq., permits an appeal from an order confirming or vacating an arbitration award, pursuant to K.S.A. 5-418(a). K.S.A. 5-418(b) provides "[t]he appeal shall be taken in the manner and to the same extent as from orders or judgments in a civil action." Thus, the Act does not impose restrictions on this court's power to review the district court's decision, but it does restrict this court's review of the arbitrator's decision.
On appeal, this court's standard of review is highly deferential and we must affirm an arbitration award if the arbitrator acted within the scope of her or his authority. As long as errors are not in bad faith or so gross as to amount to affirmative misconduct, we are bound by an arbitrator's findings of fact and conclusions of law. City of Coffeyville v. IBEW Local No, 1523, 270 Kan. 322, 336, 14 P.3d 1 (2000). An arbitrator is not required to provide the reasons for her or her award. Griffith v. McGovern, 36 Kan. App. 2d 494, 500, 141 P.3d 516 (2006). The court must presume an award is valid unless one of the specific grounds in K.S.A. 5-412(a) is proven. Alexander v. Everhart, 27 Kan. App. 2d 897, 900-01, 7 P.3d 1282, rev. denied 270 Kan. 897 (2000).
K.S.A. 5-412(a) sets forth five limited circumstances in which an arbitration award must be vacated. The Dunns do not suggest any of those circumstances apply here.
Rather, the Dunns point out that Kansas courts have also recognized nonstatutory grounds for vacating an arbitration award where an applicant demonstrates the arbitrator's award is in manifest disregard of the law. Griffith, 36 Kan. App. 2d at 499 (citing Jackson Trak Group, Inc. v. Mid States Port Authority, 242 Kan. 683, 689, 751 P.2d 122). An arbitrator's manifest disregard of the law occurs when the arbitrator knew of a governing legal principle yet refused to apply it. This exception does not apply when an arbitrator simply misinterprets the law. See Jackson, 242 Kan. at 689; ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10th Cir. 1995).
Here, the Dunns claim the arbitrator's award was in manifest disregard of the law. Generally, they allege all of the claims they asserted in their complaint encompassed the elements required to prove a fraud-based claim under the Kansas Securities Act. Thus, the Dunns suggest that because the arbitrator found in their favor without specifying the grounds upon which the award was based, the award necessarily included a determination the defendants violated the Kansas Securities Act. Accordingly, the Dunns maintain the arbitrator at least was required to award damages pursuant to the mandatory damages provision in the Kansas Securities Act.
In addition to a violation of the Kansas Securities Act, the Dunns alleged violations of the Kansas Consumer Protection Act, fraud, negligence, negligent misrepresentation, and breach of fiduciary duties. If this court concludes a violation of any one of these claims would not necessarily have encompassed the elements of the Securities Act claim, the Dunns' challenge to the arbitrator's award must fail.
Kansas Securities Act claim
Before considering whether any of the Dunns' individual claims encompassed the elements of a fraud-based claim under the Kansas Securities Act, we must first examine the requisite elements of the claim advanced by the Dunns under the Securities Act. The Dunns insist they are entitled to a minimum award pursuant to the formula included in K.S.A. 2002 Supp. 17-1268(a), which permits a private cause of action by a purchaser. That statute provides:
"Any person, who offers or sells a security in violation of K.S.A. 17-1254 or 17-1255, and amendments thereto, or offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made in the light of the circumstances under which they are made not misleading (the buyer not knowing of the untruth or omission) and who does not sustain the burden of proof that such person did not know and in the exercise of reasonable care could not have known of the untruth or omission, is liable to the person buying the security from such person, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at 15% per annum from the date of payment, costs, and reasonable attorney fees, less the amount of any income received on the security, upon the tender of the security, or for damages if the buyer no longer owns the security."
In essence, K.S.A. 2002 Supp. 17-1268(a) contemplates three types of civil actions arising from an offer or sale of a security: (1) an action alleging a violation of K.S.A. 2002 Supp. 17-1254, which requires that sellers of securities be registered with the State; (2) an action alleging a violation of K.S.A. 2002 Supp. 17-1255, which prohibits selling unregistered securities; and (3) an action alleging a material and misleading misrepresentation or omission by one who has offered or sold a security ( i.e., a "fraud-based" action). Here, the Dunns asserted a claim pursuant to the last alternative, alleging the defendants misrepresented or omitted material facts.
Unlike common-law fraud, K.S.A. 2002 Supp. 17-1268(a) does not require a claimant to demonstrate the elements of intent, justifiable reliance, and damages. Cf. Crandall v. Grbic, 36 Kan. App. 2d 179, Syl. ¶ 3, 138 P.3d 365 (2006). Rather, a claimant under the third alternative of K.S.A. 2002 Supp. 17-1268(a) need only demonstrate that any person, in connection with the sale or offer to sell a security: (1) made an untrue statement or omission of material fact; and (2) the buyer was unaware of the untruth or omission.
With these elements in mind, we consider the plaintiffs' individual claims to determine whether, as the Dunns assert, each of these individual claims necessarily encompasses the elements set out under the third alternative of K.S.A, 2002 Supp. 17-1268(a).
Violation of the Kansas Consumer Protection Act
The Dunns allege the defendants violated certain provisions of the Kansas Consumer Protection Act (KCPA), K.S.A. 50-623 et seq. Specifically, K.S.A. 50-626(a) prohibits any supplier from engaging in any deceptive act or practice in connection with a consumer transaction. K.S.A. 50-626(b) further provides a nonexclusive list of deceptive acts and practices that constitute a violation of the statute, regardless of whether a consumer has in fact been misled:
"(1) Representations made knowingly or with reason to know that:
(A) Property or services have sponsorship, approval, accessories, characteristics, ingredients, uses, benefits or quantities that they do not have;
. . . .
(F) property or services has uses, benefits or characteristics unless the supplier relied upon and possesses a reasonable basis for making such representation; or
(G) use, benefit or characteristic of property or services has been proven or otherwise substantiated unless the supplier relied upon and possesses the type and amount of proof or substantiation represented to exist;
"(2) the willful use, in any oral or written representation, of exaggeration, falsehood, innuendo or ambiguity as to a material fact;
"(3) the willful failure to state a material fact, or the willful concealment, suppression or omission of a material fact."
Like a claim under K.S.A. 2002 Supp. 17-1268(a), the KCPA does not require a proof of intent to defraud in order to establish a violation. Haag v. Dry Basement, Inc., 11 Kan. App. 2d 649, 650, 732 P.2d 392, rev. denied 241 Kan. 838 (1987). The KCPA also applies regardless of whether a consumer actually was misled or relied upon the deceptive act or practice. Clearly, the KCPA encompasses the first element of a claim under K.S.A. 2002 Supp. 17-1268(a), requiring an untrue statement or omission of material fact.
However, unlike the second element under K.S.A. 2002 Supp. 17-1268(a), the KCPA's inclusion of the phrase "whether or not any consumer has in fact been misled," indicates the buyer's knowledge is irrelevant. Common-law fraud, from which the KCPA is primarily derived, requires evidence the consumer justifiably relied on the misrepresentation, meaning the consumer neither knew nor had reason to know of the false statement or omission. Ray v. Ponca/Universal Holdings, Inc., 22 Kan. App. 2d 47, 49-50, 913 P.2d 209 (1995); Goff v. American Savings Association, 1 Kan. App. 2d 75, 82, 561 P.2d 897 (1977). In drafting the KCPA, however, the legislature omitted the elements requiring a consumer to prove justifiable reliance and damages. K.S.A. 50-626; Ray, 22 Kan. App. 2d at 49-50. Although the legislature similarly omitted these two elements in drafting K.S.A. 2002 Supp. 17-1268(a), the statute nevertheless requires proof the consumer was unaware of the misrepresentation or omission.
This comparison of the KCPA and the Kansas Securities Act reveals that a claim under K.S.A. 2002 Supp. 17-1268(a) requires proof of an element not required under the KCPA i.e., the buyer was unaware of the untruth or omission. As such, the arbitrator here could have concluded the Dunns knew of the misrepresentations or omissions of material fact by the defendants or had reason to know, and therefore the defendants violated the provisions of the KCPA but not the Kansas Securities Act.
Because it is possible the arbitrator could have based her award upon a finding the defendants violated the KCPA but not the Kansas Securities Act, the Dunns cannot prevail upon their assertion that they were entitled to mandatory damages under the Securities Act regardless of the basis for the arbitrator's award. Nevertheless, as discussed below, the arbitrator could have found for the Dunns based upon at least two additional claims — negligence and breach of fiduciary duty — which would not necessarily have encompassed their claims under the Securities Act. Negligence
The Dunns also allege the defendants were negligent in failing to exercise reasonable care or competence in supplying information to the Dunns regarding their investments, as well as failing to exercise reasonable care or competence in selling or advising the Dunns to sell their securities.
"Negligence is the lack of ordinary care. It is the failure of a person to do something that a reasonably careful person would do, or the act of a person in doing something that a reasonably careful person would not do, measured by all the circumstances then existing [citation omitted]." Johnston, Administratrix v. Ecord, 196 Kan. 521, 528, 412 P.2d 990 (1966). To recover for negligence, a claimant has the burden to prove the existence of a duty, breach of such duty, injury, and a causal connection between the duty breached and the injury. Reynolds v. Kansas Dept. of Transportation, 273 Kan. 261, Syl. ¶ 1, 43 P.3d 799 (2002).
The Dunns argument that a finding of negligence equates to a violation of the Kansas Securities Act also lacks merit. The Dunns fail to acknowledge that their original claim for negligence also included allegations the defendants were negligent in obtaining and failing to timely sell the securities, failing to timely advise the Dunns to sell their securities, and failing to timely advise the Dunns of the status of their investments. The arbitrator could feasibly have concluded the defendants were careless in managing the Dunns' investments without having concluded the Dunns made untrue statements or omissions of material fact as required by K.S.A. 2002 Supp. 17-1268(a). Therefore, the arbitrator could have based her award on the Dunns' negligence claim without invoking the mandatory damages provision of the Kansas Securities Act.
Breach of fiduciary duty
Finally, the Dunns claim the defendants breached their fiduciary duty by failing to act in the Dunns' best interests when providing advice and executing the initial sale of the securities, Where a fiduciary relationship exists between the parties, it is the duty of the person in whom confidence was placed to act with the utmost good faith and loyalty for the furtherance and advancement of the interests of his or her principal. Stevens v. Jayhawk Realty Co., 9 Kan. App. 2d 338, 342, 677 P.2d 1019, affd. 236 Kan. 90, 689 P.2d 786 (1984).
Assuming a fiduciary relationship existed, the defendants clearly would have breached their fiduciary duty by making an untrue statement or omission of material fact of which the Dunns were unaware. Therefore, the question becomes whether the defendants could have breached their duty by means other than the making of untrue statements or omissions.
As with their claim for negligence, the Dunns fail to acknowledge that their original petition contained allegations of a breach of fiduciary duty for failing to timely advise the Dunns to sell the securities, failing to actually sell the securities, and failing to timely advise the Dunns regarding the status of their investments. The arbitrator may have concluded the defendants did not make any false or misleading representations or omissions of material fact regarding the sale of securities, but nevertheless breached their fiduciary duty by not acting in good faith in actually selling the securities or by failing to keep the defendants advised regarding the status of their investments. In other words, the arbitrator could have concluded the defendants were careless in their management of the Dunns' retirement account without having made untrue statements or omissions of material fact.
In conclusion, the Dunns' causes of action for violations of the KCPA, simple negligence, and breach of fiduciary duty are not sufficiently similar to a claim of fraud under K.S.A. 2002 Supp. 17-1268(a) to invoke the mandatory damages provision of the Kansas Securities Act.
Because a finding in favor of the Dunns on any one of these claims would not have required the arbitrator to award mandatory damages under the Kansas Securities Act, we need not consider whether the Dunns' remaining allegations of common-law fraud and negligent misrepresentation encompassed the plaintiffs' claim under the Securities Act.
Measure of damages
The Dunns next contend that even if the arbitrator properly based her award on their common-law claims, the amount of the award cannot be reconciled with any measure of damages relevant to this case; thus, the arbitrator manifestly disregarded the law, According to the Dunns, the arbitrator should have followed either the "benefit of the bargain" theory, the "well-managed portfolio" theory, or the "out-of-pocket losses" theory in assessing damages. The Dunns assert the arbitrator's failure to award damages pursuant to one of these theories indicates the award was in manifest disregard of the law. The Dunns also contend the award was improper because the damages were nominal.
For the reasons discussed above, the damages formula set forth in the Kansas Securities Act does not apply here. Thus, the Dunns would have been required to prove actual damages if the arbitrator relied on a common-law basis, such as negligence, for their award. The Dunns' assertion that the measure of damages they provided to the arbitrator was undisputed is without merit. To the contrary, the defendants have continually maintained they were not liable to the Dunns in any amount. Rather than providing an alternate calculation of damages, the defendants denied the allegations of liability and damages in their entirety.
That the arbitrator did not award the Dunns damages in the amount they alleged does not require us to find the arbitrator disregarded the proper theory for calculating damages under Kansas law. Rather, the arbitrator was not bound by the Dunns' estimation of damages and was free to reject their approach. The Dunns also fail to acknowledge that the arbitrator may have declined to award the Dunns full damages based upon comparative fault or the failure to mitigate.
Finally, as the defendants point out, the Dunns fail to support their assertion of nominal damages.
Attorneys fees
Finally, the Dunns argue the arbitrator should have awarded attorney fees upon concluding the defendants were liable under one of their asserted theories. This argument, however, lacks merit as it is based upon a premise we have rejected — i.e., that any basis upon which the arbitrator found against the defendants would encompass a violation of the Kansas Securities Act.
Conclusion
It is possible the arbitrator's award in this case was based upon a finding the defendants violated the Kansas Securities Act, thus requiring an award of damages under the Act's mandatory damages provision. We need not vacate the award, however, because it is equally possible the award may have been based upon at least three other grounds asserted by the Dunns which did not encompass their claim under the Securities Act. As such, the Dunns have failed to demonstrate the arbitrator manifestly disregarded the law in calculating damages, and we conclude the district court did not err in confirming the award.
Affirmed.