Federal Court Confirms FINRA Arbitration Award that Refuses to Classify a Forgivable Loan as Employee Compensation Subject to the Wage Act
Pauline Sheedy v. Lehman Brothers Holdings, Inc., 2011 WL 5519909 (D. Mass. Nov. 14, 2011)
In a recent Massachusetts case, Pauline Sheedy (“Sheedy”), a former managing director at Lehman Brothers, Inc., filed an action in state court seeking to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award entered in favor of Lehman Brothers Holdings, Inc. (“LBHI”). LBHI removed the case from state to federal court, and filed a motion to dismiss Sheedy’s complaint, confirm the FINRA arbitration award and award “collection expenses.” The United States District Court for the District of Massachusetts allowed LBHI’s motion.
The underlying dispute in this case involves LBHI’s efforts to collect the unpaid principal balance, plus interest and fees, for a forgivable loan that was extended to Sheedy when she began her employment with Lehman Brothers, Inc. Sheedy alleged that her compensation package included a “one-time incentive signing bonus” of $1 million; however, Lehman’s offer letter characterized the $1 million payment a loan to be forgiven in five equal installments of $200,000 on the first through fifth anniversary of her employment start date. The offer letter further stated that if Sheedy separated from Lehman Brothers, Inc. for “any reason” prior to full forgiveness of the loan, she would be required to repay the remaining principal balance, plus interest accrued through her separation date. In 2008, Lehman Brothers, Inc. was forced to file for bankruptcy protection and ceased doing business in Massachusetts. As a result, Sheedy was separated from Lehman Brothers, Inc. in September 2008, approximately two months prior to the second anniversary of her employment start date. During the marshaling of assets for the bankruptcy estate, Lehman Brothers, Inc. assigned Sheedy’s promissory note for the loan to LBHI.
LBHI initiated FINRA arbitration proceedings against Sheedy, claiming the principal balance due of $800,000, plus interest and fees. A single FINRA arbitrator was appointed to hear the case. In June 2011, the arbitrator entered an award ordering Sheedy to repay LBHI the outstanding balance of $800,000, plus interest and attorneys’ fees.
After the arbitration award, Sheedy filed an action in Massachusetts state court to vacate the FINRA arbitration award pursuant to the state Uniform Arbitration Act for Commercial Disputes. Mass. Gen. Laws ch. 251, §§ 1-19. LBHI timely removed the case from state to federal court. Sheedy sought vacatur on two grounds: (1) that the arbitrator exceeded her authority because the award requires her to “forfeit earned compensation” in violation of the Massachusetts Weekly Wage Act (“Wage Act”), Mass. Gen. Laws ch. 149, § 148; and (2) that the award violated the Massachusetts public policy prohibiting the unlawful restraint of trade and competition.
Both the Massachusetts Uniform Arbitration Act for Commercial Disputes and the Federal Arbitration Act (“FAA”) provide statutory grounds for vacating an arbitration award where an arbitrator exceeds his authority. Compare Mass. Gen. Laws ch. 251, §§ 12(a)(3) with 9 U.S.C. § 10(a)(3). Sheedy argued that the FINRA arbitrator exceeded her authority by issuing an award that required Sheedy to forfeit earned compensation in violation of the Wage Act. The Wage Act defines the requirements for payment of employee wages and commissions, and prohibits the use of “special contract…or other means” to create exemptions from these requirements. Citing Massachusetts case law, Sheedy argued that the provisions of the Wage Act cover any payment that an employer is obligated to pay an employee; therefore, once she signed Lehman’s offer letter and Lehman was bound to make the $1 million payment to her, that payment became a nondiscretionary deed subject to the Wage Act. The court disagreed with this characterization of the payment. The court determined that the accepted offer clearly made forgiveness of the full amount of the loan contingent upon completing five years of employment at Lehman Brothers, Inc.; therefore, the portion of the payment which remained outstanding at the time of Sheedy’s termination was never “earned” within the meaning of the Wage Act. The court denied vacatur on the grounds that the arbitrator exceeded her authority because the award was not in violation of the Wage Act.
An arbitration award may also be challenged by reference to a “well-defined and dominant” public policy. United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 28, 43 (1987). Arbitrators may not award relief that offends public policy or requires a result contrary to statutory provisions. Plymouth–Carver Reg’l Sch. Dist. v. J. Farmer & Co., 553 N.E.2d 1284 (1985). Sheedy argued that the FINRA arbitration award should be vacated because forfeiture of the payment is an unlawful penalty to punish her if she chose to leave Lehman and freely compete in the market place. The court determined that the structure of the forgivable loan in the offer letter was not equivalent to a non-compete agreement that restricted an employee’s ability to work in the same field within a given geographic area. Therefore, the arbitration award did not violate the state public policy against unlawful restraint of trade and competition and the court denied vacatur on these grounds.
The court allowed LBHI’s motion to dismiss Sheedy’s complaint, confirm the arbitration decision and award collection expenses. The court gave LBHI fourteen days from the date of its order to submit a request for attorneys’ fees and a proposed form of judgment.
Should you have any questions relating to FINRA, arbitration or employment 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.