Bulko v. Morgan Stanley DW Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT May 30, 2006

Charles R. Fulbruge III
Clerk
No. 05-10242

SIMON A. BULKO,

Plaintiff-Appellee,

versus

MORGAN STANLEY DW INC.; SHANE KHUBCHANDANI,

Defendants-Appellants.

Appeal from the United States District Court
for the Northern District of Texas

Before KING, BARKSDALE, and PRADO, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

Morgan Stanley DW Inc., and Shane Khubchandani, a Morgan

Stanley stockbroker (together, Morgan Stanley), appeal the summary

judgment awarded Simon A. Bulko, vacating an arbitration award to

Morgan Stanley. The district court held: one of the arbitrators

was not properly qualified; and, therefore, the arbitration panel

acted outside the scope of its authority. It ordered the dispute

to be considered by a new arbitration panel. REVERSED AND

RENDERED.

I.

In March 2002, pursuant to a customer agreement, Bulko

initiated a National Association of Securities Dealers (NASD)

arbitration against Morgan Stanley, stemming from Bulko’s
stock–market loss of approximately $16 million within a 14–month

period. As part of the NASD process, the arbitration was pursuant

to NASD rules.

For matters in which the amount in controversy exceeds

$50,000, those rules require a three–member panel consisting of two

public, and one non-public, arbitrators. A non-public arbitrator

“is an attorney, accountant, or other professional who has devoted

20 percent or more of his or her professional work, in the last two

years, to clients who are engaged” in the securities industry.

NASD Code of Arbitration Procedure § 10308(a)(4)(C)(amended 1984)

(NASD Code) (emphasis added).

By a 14 October 2003 letter, the NASD advised the parties:

the designated non–public arbitrator had withdrawn and was being

replaced by Mary Beth Marshall; and the parties had the option of

agreeing to proceed with only the two public arbitrators. No party

objected to Marshall.

In 1994, Marshall stated in her initial application to become

a NASD arbitrator: she was a shareholder with Munch Hardt Kopf

Harr Dinan, P.C. (Munch); and her practice was commercial

litigation, with an emphasis on securities law. The 1994

disclosure form stated half of her practice consisted of securities

work. That form imposed a duty on Marshall to inform the NASD of

any changes to her answers to the form’s questions. In 2000,

Marshall informed the NASD she was no longer practicing law full

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time; this was disclosed to the parties in the NASD’s 14 October

2003 letter.

Following the panel’s deciding in Morgan Stanley’s favor,

Bulko discovered Marshall had not practiced law since 1999, because

she took inactive status that year with the Texas State Bar. As a

result, this action contests the award, claiming the panel acted

outside the scope of its authority because it was not properly

constituted. Concluding Marshall was not qualified to serve as a

non-public arbitrator, the district court granted Bulko summary

judgment and directed the dispute to be heard by a new panel.

II.

The merits of the arbitration panel’s decision are not at

issue. Instead, the sole issue is whether the district court erred

in vacating the award by determining the panel acted outside the

scope of its authority. (Morgan Stanley claims that, even if the

award was properly vacated, the court abused its discretion by

requiring the dispute to be heard by a new panel, instead of by the

two non–challenged arbitrators and a new non-public one. Because

the court erred in vacating the award, we do not reach this

contention.)

A summary judgment is reviewed de novo, applying the same

standard as the district court. Wyatt v. Hunt Plywood Co., 297

F.3d 405, 408 (5th Cir. 2002), cert. denied, 537 U.S. 1188 (2003).

Such judgment is proper when “there is no genuine issue as to any

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material fact and ... the moving party is entitled to a judgment as

a matter of law”. FED. R. CIV. P. 56(c). Our de novo review is

conducted against the backdrop of the Federal Arbitration Act’s

(FAA) policy favoring the enforcement of arbitration agreements;

the scope of our review of an arbitration award is extremely

narrow. Brook v. Peak Int’l Ltd., 294 F.3d 668, 672 (5th Cir.

2002).

Bulko claims, and the district court held, that FAA § 10(a)(4)

permits vacating the award: “the arbitrators exceeded their

powers, or so imperfectly executed them that a mutual, final, and

definite award upon the subject matter was not made”. 9 U.S.C. §

10(a)(4). Bulko maintains the panel acted outside the scope of its

authority because Marshall was not qualified to serve as a non-

public arbitrator.

A.

After graduating from law school in 1988, Marshall started

working at Munch. She became a shareholder and remained there

until 31 December 1997, when she became of counsel, continuing in

that capacity until the end of 2003 (the record does not describe

any activities she undertook in that position). She was not

treated as a Munch employee after 31 December 1997 and performed no

work for Munch after mid–1999. That year, Marshall took inactive

status with the Texas State Bar.

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 It is undisputed that Marshall’s practice with Munch

emphasized securities law. In June 2000, she notified the NASD she

was not practicing law full time but still had an office at Munch.

As noted, that updated disclosure was reflected in the 14 October

2003 NASD letter to the parties, which included a disclosure report

detailing Marshall’s qualifications: she stated she was of counsel

to Munch, “although [she was] not currently practicing full time”.

(Arguably: this suggests she was practicing law to some extent,

other than full time; and conflicts with the above–described

evidence in the summary–judgment record, including taking inactive

status in 1999 with the Texas State Bar.)

In May 2004, in connection with an unrelated arbitration for

which Marshall was serving as the non-public arbitrator, she

submitted an updated disclosure report stating: her Munch

of–counsel position ended 31 December 2003; and she had taken

inactive status with the Texas State Bar. Nevertheless, the NASD

continued classifying Marshall as a non-public arbitrator due to

her employment history.

1.

An arbitration agreement is a contract; accordingly,

arbitrators must be selected pursuant to the method provided in it.

Brook, 294 F.3d at 672. Courts do not hesitate to vacate an award

when an arbitrator is not selected according to the

contract–specified method. Id. at 673.

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 For example, in Brook, the contract required the American

Arbitration Association (AAA) to submit a list of nine names as

potential arbitrators and instructed the parties “alternately to

strike names from the list until only one remained”. Id. Instead,

the AAA provided a list of 15 arbitrators and told the parties to

strike the unacceptable names and then rank by preference the

“remaining candidates”. Id. (but holding failure to object

constituted waiver); see Cargill Rice, Inc. v. Empresa Nicaraguense

Dealimentos Basicos, 25 F.3d 223 (4th Cir. 1994) (vacating award

where arbitration agreement called for appointment of arbitrators

by mutual agreement, but arbitral body appointed panel without

parties’ input, despite objections); Avis Rent A Car Sys., Inc. v.

Garage Employees Union, Local 272, 791 F.2d 22, 25 (2d Cir. 1986)

(vacating award when arbitrator appointed by city mediation board

instead of AAA, as contract required).

a.

The above cases, however, are distinguishable from the

situation at hand. They involve deviations from contract

provisions prescribing the method for selecting arbitrators. Here,

however, the customer agreement (contract) was not included by

Bulko in the record on appeal. Nevertheless, it is undisputed

that, in the customer agreement, the parties agreed to submit

disputes to arbitration. The parties’ subsequent Uniform

Submission Agreement (submitting the matter to arbitration),

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provides “the arbitration will be conducted in accordance with ...

[NASD] Rules ... and/or NASD Code of Arbitration Procedure ....”

Therefore, in the light of this record, we cannot say Marshall’s

selection violated a specific method of selection in the customer

agreement (contract). Restated, based on this record, we cannot

say the customer agreement incorporated NASD Rules. In any event,

the rules’ method for selection was followed. At issue is whether

Marshall qualified to serve pursuant to that method. As discussed

below, she did.

Concerning the NASD rules, when summary judgment was granted,

the NASD continued classifying Marshall as a non-public arbitrator

in the light of her employment history, although she had not

practiced law since 1999. Although it is unclear whether the NASD

had full disclosure from Marshall, this action was public

information when the NASD continued to classify Marshall as a non-

public arbitrator. Thus, it is reasonable to infer the NASD had

available to it all relevant information regarding her. In

addition, the NASD director of arbitration has discretion, when

appointing arbitrators, to “make any decision ... consistent with

the purposes of [the NASD arbitration code] to facilitate the

appointment of arbitration panels and the resolution of arbitration

disputes”. NASD Code § 10308(e).

Again, a non–public arbitrator is “an attorney, accountant, or

other professional who has devoted 20 percent or more of his or her

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professional work, in the last two years, to clients who are

engaged” in the securities industry. Id. § 10308(a)(4)(C)

(emphasis added). Contrary to Bulko’s contention, and as reflected

in the foregoing provision, the NASD Code does not limit non-public

arbitrator eligibility to practicing attorneys-at-law. Rather, §

10308(a)(4)(C) provides that attorneys, among others, who have

devoted a certain amount of their professional activity to

securities related matters qualify as non-public arbitrators.

“Attorney”, of course, encompasses more than practicing law. An

attorney is “one ... designated to transact business for another;

a legal agent”. BLACK’S LAW DICTIONARY 138 (8th ed. 2004). Thus, it

is not clear Marshall’s inactive–member–of–the–bar status precludes

her satisfying § 10308(a)(4)(C)’s plain language, even absent the

NASD arbitration director’s discretion to facilitate arbitration to

further the Code’s purposes. In fact, as discussed, Marshall’s

2004 updated disclosure was in connection with another arbitration

panel for which she was serving as a non-public arbitrator.

In the absence of a specific agreement to the contrary,

determining Marshall’s qualifications and eligibility is a matter

left to the NASD. See Howsam v. Dean Witter Reynolds, Inc., 537

U.S. 79, 85 (2002) (holding NASD, not court, determines the

application of NASD rules because NASD has more expertise).

Because the parties’ agreement (contract) did not have a specific

method–of–selection clause, appointing Marshall as the panel’s non-

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public arbitrator was arguably not a departure from their

agreement. It called for any dispute to be decided by NASD

arbitration. For disputes involving more than $50,000, NASD

arbitration rules call for an arbitration panel consisting of two

public arbitrators and one non-public arbitrator. That is what

Bulko and Morgan Stanley received, with the NASD classifying

Marshall as the non-public arbitrator.

b.

Assuming, arguendo, that Marshall’s selection contradicted the

parties’ agreement, it was, at most, a trivial departure not

warranting vacatur. See Brook, 294 F.3d at 673; R.J. O’Brien &

Assoc., Inc. v. Pipkin, 64 F.3d 257 (7th Cir. 1995). Based on her

work experience, Marshall fulfilled the purpose of a non-public

arbitrator, which is to serve as an industry insider on the

arbitration panel. And, as discussed, the NASD continues to

classify Marshall as a non-public arbitrator due to that

experience. Lacking a specific method–of–selection clause in the

relevant contract, and in the light of the strong federal policy

favoring arbitration contracts, any error in selecting Marshall was

trivial.

B.

Because the district court erred in vacating the award, we

need not decide whether, by failing to raise the issue pre–award,

Bulko waived objecting to Marshall’s serving as a non-public

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arbitrator. It is worth noting, however, that the parties were

aware, pre–arbitration, that Marshall was not practicing law full

time. Yet, no party asked for any further information; nor,

apparently, did any party independently investigate until

post–award. Marshall’s disclosure should have put the parties on

notice of any potential issue with her qualifications. Likewise,

the parties were aware her position with Munch was of counsel, a

loosely–defined term that describes a wide variety of arrangements.

BLACK’S LAW DICTIONARY 375 (8th ed. 2004). Marshall’s of–counsel title

did not guarantee she was performing any work. Despite Bulko’s

contention that Marshall could not have been practicing as an

attorney after 1999, nothing in the record disputes her serving as

of counsel until the end of 2003. In sum, pre–arbitration, the

parties were on notice of any potential claims regarding Marshall’s

qualifications as a non-public arbitrator.

III.

For the foregoing reasons, the arbitration award was

improperly vacated by the district court; accordingly, the summary

judgment is REVERSED and judgment reinstating the award is RENDERED

for Morgan Stanley DW Inc., and Shane Khubchandani.

REVERSED AND RENDERED

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