Downer v. Siegel

REVISED August 13, 2007

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

No. 06-30159 F I L E D
June 13, 2007
LINDA L DOWNER; HUNT B DOWNER Charles R. Fulbruge III
Clerk
Plaintiffs - Appellees

v.

FRED SIEGEL, Etc; ET AL

Defendants

FRED SIEGEL, also known as Michael Siegel, also known
as Michael Fred Siegel

Defendant - Appellant

-------------------------

PATRICK B LANDRY; DOROTHY A LANDRY; LINDA L DOWNER;
HUNT B DOWNER

Plaintiffs - Appellees

v.

MICHAEL F SIEGEL, Etc; ET AL

Defendants

MICHAEL F SIEGEL, also known as Fred Siegel

Defendant - Appellant

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Appeal from the United States District Court
for the Eastern District of Louisiana
--------------------

Before KING, WIENER, and OWEN, Circuit Judges.

KING, Circuit Judge:

Defendant-appellant Michael F. Siegel appeals the district

court’s order vacating an arbitration award in his favor. We
 No. 06-30159
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REVERSE and REMAND for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

Dain Rauscher, Inc. (“DR”) employed defendant-appellant

Michael F. Siegel (also known as Fred Siegel) as a stock broker.

In 1997, plaintiffs-appellees Linda and Hunt Downer (together,

“the Downers”) opened a brokerage account with DR and executed an

asset management agreement, which stated “[t]he client

understands, acknowledges and agrees that”:

(a) ALL CONTROVERSIES WHICH MAY ARISE BETWEEN
THE CLIENT AND [RAUSCHER PIERCE REFSNES
(“RPR”)],[1] ITS OFFICERS, DIRECTORS,
AGENTS, REPRESENTATIVES OR EMPLOYEES,
PRESENT OR FORMER, CONCERNING ANY ACCOUNT
MAINTAINED BY THE CLIENT WITH RPR, ANY
TRANSACTION INVOLVING RPR AND THE CLIENT,
REGARDLESS OF WHETHER SUCH TRANSACTION
OCCURRED IN THE CHOICE ACCOUNT OR ANOTHER
ACCOUNT, OR THE CONSTRUCTION, PERFORMANCE
OR BREACH OF THIS OR ANY OTHER AGREEMENT
BETWEEN THE CLIENT AND RPR, WHETHER
ENTERED INTO PRIOR, ON, OR SUBSEQUENT TO
THE DATE HEREOF, SHALL BE DETERMINED BY
ARBITRATION TO THE FULL EXTENT PROVIDED
BY LAW. ACCORDINGLY, BOTH RPR AND THE
CLIENT ARE WAIVING THEIR RESPECTIVE
RIGHTS TO SEEK REMEDIES IN COURT,
INCLUDING, AMONG OTHER THINGS, THE RIGHT
TO A JURY TRIAL.

Plaintiffs-appellees Patrick and Dorothy Landry

(collectively, “the Landrys”) signed an asset management

agreement with an identical arbitration clause when they opened a

brokerage account with DR in early 1998. Siegel, as an agent of

DR, served as a stock broker for the Landrys and the Downers

(collectively “the plaintiffs”).

In November 1997, the Downers transferred $300,000 from

1
DR is the successor-in-interest to RPR.
 No. 06-30159
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their DR account directly to an account of World Environmental

Technologie (“WET”), allegedly at Siegel’s suggestion. The

Landrys also allege that they were persuaded by Siegel to invest

$100,000 from their DR account in WET.

In 2002, unhappy with the failure of their WET investments,

the Landrys and the Downers filed separate actions in Louisiana

state court against multiple defendants including Siegel2

alleging, among other things, fraud in the inducement of both the

investments and account agreements and violations of the

Securities Exchange Act of 1934 and NASDAQ rules of conduct. The

defendants removed the actions to federal court. These cases

were later consolidated. The plaintiffs filed additional related

suits in state court, which were removed and consolidated with

the lead case.

The defendants moved to stay the actions pending

arbitration, but the Downers contested the arbitrability of the

dispute. The district court stayed the actions pending

arbitration and denied the Downers’ motion concerning

arbitrability. Throughout the next two years, the plaintiffs

attempted numerous times, albeit unsuccessfully, to have the

arbitration panel dismiss the arbitration proceeding and to

otherwise have the district court lift its stay and return the

case to the active docket.

Siegel initiated an arbitration, seeking a declaratory

judgment that he was not liable to the plaintiffs. The

plaintiffs filed a counterclaim against Siegel in the

2
Siegel is the only defendant involved in this appeal.
 No. 06-30159
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arbitration, alleging the same misconduct and requesting the same

relief as they had in the district court action. The arbitration

panel ultimately dismissed the plaintiffs’ claims based on

prescription.

On the plaintiffs’ motion, the district court vacated the

arbitration award, holding that (1) because the investments in

WET were private investments between Siegel and the plaintiffs,

they were not subject to the arbitration agreement and (2) given

the repeated challenges to the arbitrability of the disputes at

issue, the plaintiffs had not waived their right to challenge the

arbitration. Siegel, who filed a motion to confirm the

arbitration award, now appeals.

II. DISCUSSION

We review the district court’s decision to vacate an

arbitration award under a de novo standard, deferring greatly to

the arbitration panel’s decision. Kergosien v. Ocean Energy,

Inc., 390 F.3d 346, 352 (5th Cir. 2004). Pursuant to the Federal

Arbitration Act (“FAA”), a district court’s ability to set aside

an arbitration award is limited to four grounds. 9 U.S.C.

§ 10(a). Only one of those grounds is applicable in this case,

that is, whether the “arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and definite

award upon the subject matter submitted was not made.” Id.

§ 10(a)(4).

“‘[A] district court’s review of an arbitration award is

extraordinarily narrow.’” Kergosien, 390 F.3d at 352 (quoting

Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391,
 No. 06-30159
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393 (5th Cir. 2003)) (brackets in original). A presumption of

arbitrability exists which requires the court to decide in favor

of arbitration when “the scope of an arbitration clause is fairly

debatable or reasonably in doubt.” Mar-Len of La., Inc. v.

Parsons-Gilbane, 773 F.2d 633, 635 (5th Cir. 1985). “The weight

of this presumption is heavy: arbitration should not be denied

‘unless it can be said with positive assurance that an

arbitration clause is not susceptible of an interpretation that

could cover the dispute at issue.’” Id. at 636 (quoting Wick v.

Atl. Marine, Inc., 605 F.2d 166, 168 (5th Cir. 1979)).

A reasonable interpretation of the arbitration clause in the

instant case supports a conclusion that the clause covers the

dispute. Although the district court held that the plaintiffs’

dispute is with Siegel in his individual capacity and is not

subject to the arbitration clause in the agreement between the

plaintiffs and DR, “[w]hether a claim is subject to arbitration

depends on the contractual language.” Deputy v. Lehman Bros.,

Inc., 345 F.3d 494, 513 (7th Cir. 2003). The text of the clause

in the instant case does not limit the circumstances to which it

applies to those that fall within the scope of the employee’s

employment. Rather, the arbitration clause provides:

ALL CONTROVERSIES WHICH MAY ARISE BETWEEN THE
CLIENT AND RPR, ITS OFFICERS, DIRECTORS,
AGENTS, REPRESENTATIVES OR EMPLOYEES, PRESENT
OR FORMER, CONCERNING ANY ACCOUNT MAINTAINED
BY THE CLIENT WITH RPR . . . SHALL BE
DETERMINED BY ARBITRATION.

The broad language of this clause covers all controversies

between the plaintiffs and former or current employees of DR

concerning any account the plaintiffs maintained at DR. Here,
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because the WET investments were made from funds deposited in the

plaintiffs’ DR accounts, one reasonable interpretation of the

clause is that these claims concerned the Downers’ and the

Landrys’ accounts. The plaintiffs cannot maintain their

underlying action without discussing the asset management

agreement and why Siegel was in charge of their money. The

presumption of arbitrability dictates that the court find in

favor of arbitration because there is an interpretation of the

clause which covers the claims in this case. That there are

other interpretations which could lead to a conclusion that the

claims involve a private investment outside the scope of the

arbitration clause does not require vacation of the arbitration

award. “[I]f there is ambiguity as to whether an arbitrator is

acting within the scope of his authority, that ambiguity must be

resolved in favor of the arbitrator.” Am. Eagle Airlines, Inc.

v. Airline Pilots Ass’n, 343 F.3d 401, 405 (5th Cir. 2003).

Accordingly, the arbitration panel did not exceed its powers, and

the district court improperly vacated the arbitration award.

Our conclusion is consistent with decisions of other

circuits that have found other fraud claims to be arbitrable

under similar arbitration agreements. For example, in Fazio v.

Lehman Brothers, Inc., the plaintiffs’ broker had misappropriated

at least $54 million of his clients’ money. 340 F.3d 386, 391

(6th Cir. 2003). The plaintiffs sued the brokerage firms for

which their broker had worked over the course of his career, and

the defendants moved to stay the proceedings and compel

arbitration based on an arbitration clause materially similar to
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the one involved here.3 Id. at 391-92. The Sixth Circuit,

disagreeing with the district court’s determination that the

claims were outside the scope of the arbitration agreements, held

that the claims concerning the broker’s fraudulent conduct were

within the scope of the arbitration agreement because “[t]he

lawsuit by necessity must describe why [the broker] was in

control of the plaintiffs’ money . . . . The plaintiffs

therefore cannot maintain their action without reference to the

account agreements, and accordingly, this action is covered by

the arbitration clauses.” Id. at 395. On another claim for

fraudulent acts by the same broker involving the same arbitration

provision as in Fazio, the Seventh Circuit agreed that the

“claims clearly fell within the scope of this arbitration clause

because they all related to [the plaintiff’s] ‘accounts,

transactions or agreements.’” Deputy, 345 F.3d at 513.

The plaintiffs assert that the contract should be

invalidated because of the alleged fraudulent inducement, in

essence arguing that there was never a binding contract because

they would not have entered into the transaction if they had not

been misled by Siegel. This argument is beside the point. Even

if this contract had been induced by fraud, the arbitration

clause is enforceable unless the plaintiffs were fraudulently

3
The arbitration clause at issue in Fazio, provided that
“[a]ny controversy arising out of or relating to any of my
accounts, to transactions with you for me, or to this or any
other agreement or the construction, performance or breach
thereof, shall be settled by arbitration.” 340 F.3d at 392.
 No. 06-30159
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induced into agreeing to the arbitration clause itself.4 Prima

Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04

(1967). The district court cannot consider general claims of

fraud in the inducement of the contract. Id. The plaintiffs’

fraud argument focuses on the nature of the WET investment. At

no point do the plaintiffs’ fraudulent inducement claims focus on

the arbitration clause itself. Accordingly, the plaintiffs’

argument that the contract should be vitiated on fraudulent

inducement grounds also fails.5

III. CONCLUSION

For the foregoing reasons, the judgment of the district

court is REVERSED, and this case is REMANDED for confirmation of

the arbitration award.

4
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., the
Supreme Court stated that:

[I]f the claim is fraud in the inducement of
the arbitration clause itself——an issue which
goes to the ‘making’ of the agreement to
arbitrate——the federal court may proceed to
adjudicate it. But the [Federal Arbitration
Act’s] statutory language does not permit the
federal court to consider claims of fraud in
the inducement of the contract generally.

388 U.S. 395, 403-04 (1967).
5
Siegel also argues that the plaintiffs waived their right
to contest the arbitrability of the claims. We decline to reach
the waiver issue because even if, as the plaintiffs argue, they
did not waive that objection, the claims are subject to the
arbitration clause.