California Court Modifies FINRA Arbitration Award to Provide for a Setoff

UBS Financial Services, Inc. and Piper Jaffray & Co. v. Mark C. Riley, 2012 WL 1831720 (S.D. Calif. May 18, 2012)

In a case before the Southern District of California involving a setoff in a FINRA arbitration award, UBS Financial Services, et al, (“UBS”) petitioned to confirm, or in the alternative modify, a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued September 2, 2011.  Mark Riley (“Riley”), a former USB employee, filed a reply.  The court granted UBS’s alternative motion to modify the award and awarded UBS pre and post judgment interest.  All other motions were denied.

Case Background

The underlying dispute in this case arose when Riley failed to satisfy his indebtedness on two promissory notes after he terminated his employment with UBS, which had acquired his previous employer, Piper Jaffray.  The two loans were received during Riley’s course of employment with Piper Jaffray and UBS.  Because submission to FINRA arbitration was included in Riley’s employment agreement with UBS, the firm initiated a FINRA arbitration claim against Riley to recover the outstanding balances, as well as interest and attorneys’ fees.   Riley filed a counterclaim against UBS and Piper Jaffray, alleging claims related to his employment with the firms.

FINRA appointed a panel of three arbitrators to hear the matter.  The panel issued an arbitration award in favor of UBS for $377,024.83, including principal, interest and attorneys’ fees.  The panel also held UBS and Piper Jaffray jointly and severally liable to Riley in the amount of $127,024.83.  One week after the award, UBS filed a motion with the arbitration panel requesting clarification of the award to provide for Riley’s award to be offset against the UBS award.

Debate about Setoff

The Director of Arbitration rejected the motion because it did not comply with the FINRA Code of Arbitration Procedure for Industry Disputes Rule 13905, which provides that parties may not submit documents to arbitrators in cases that have been closed except under limited circumstances.  Therefore, UBS petitioned the federal district court to confirm, or alternatively modify, the award with a setoff of the amount awarded to Riley against the larger amount awarded to UBS, and to enter a single judgment in favor of UBS in the net amount of $250,000, plus interest, attorneys’ fees and costs.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16, governs the role of federal courts in reviewing arbitration decisions and provides very limited grounds on which a federal court may correct, modify or vacate such decision.  “Under the statute, confirmation [by federal court] is required even in the face of erroneous findings of fact and misinterpretations of law.” Kyocera Corp. v. Prudential–Bache T Serv’s, Inc., 341 F.3d 987, 997 (9th Cir. 2003) (internal quotation marks and citation omitted)

Riley argued the award should be confirmed without setoff on three separate grounds: (1) the court does not have the authority to provide a setoff; (2) UBS and Piper Jaffray are jointly and severally liable so to allow an offset against the money awarded to UBS would deprive him of the ability to recover from Piper Jaffray; and (3) his counsel’s attorneys’ fee lien on his award takes priority over UBS’s right to a setoff.   He opposed modification of the award for the same reasons.

Section 11 of the FAA

The court denied UBS’s motion to confirm the arbitration award with a setoff because it was unable to find any authority in the Ninth Circuit to permit a setoff in the confirmation of an arbitration award.  However, section 11 of the FAA permits a federal court to modify or correct an award “as to effect the intent thereof and promote justice between the parties” under the following circumstances:

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

Decision for Setoff

The court determined that allowing for a setoff in the instant case was consistent with the requirements of section 11(c).  The court was not required to reconsider the merits of the arbitration decision, and the modification did not affect the amount of damages awarded to either party.  Setoff only modified the form of the award to avoid the potentially unjust consequences of UBS paying Riley a substantial sum of money in a situation where there was a high likelihood that Riley would not pay UBS in return.  Finally, allowing Riley to pay just his net obligation would avoid “the absurdity of making A pay B when B owes A.” Studley v. Boylston Nat’l Bank of Boston, 229 U.S. 523, 528 (1913).

The court ordered the FINRA arbitration award be modified to a single judgment of $250,000 in favor of UBS.  It also awarded UBS prejudgment interest at the state interest rate of nine percent per annum on the sum of $250,000.00 from the date of the arbitration award until the judgment was entered in federal court, and post-judgment interest at the federal interest rate as provided for in 28 U.S.C. § 1961 from the entry of the judgment until the judgment award is paid in full.

Should you have any questions relating to FINRA, employment or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.