Institutional Capital Management Inc. v. Claus , 364 F. App'x 168 ( 2010 )

Case: 08-20710 Document: 00511025939 Page: 1 Date Filed: 02/11/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 11, 2010
No. 08-20710 Charles R. Fulbruge III
Clerk
INSTITUTIONAL CAPITAL MANAGEMENT INC; DANIEL L RITZ, JR;
Plaintiffs - Appellees
STERLING FINANCIAL INVESTMENT GROUP INC
Plaintiff - Appellee-Cross-Appellant
v.
LEONARD CLAUS;
Defendant - Appellant-Cross-Appellee
and
IMS SECURITIES INC
Defendant - Cross-Appellee
-------------------------------------------------------
STERLING FINANCIAL INVESTMENT GROUP INC
Respondent - Appellee-Cross-Appellant
and
GERARD JOSEPH PEPE; ROBERT LEE HARVEY; INSTITUTIONAL
CAPITAL MANAGEMENT INC; JERRY SHORT; DANIEL L RITZ, JR
Claimants - Appellees
v.
Case: 08-20710 Document: 00511025939 Page: 2 Date Filed: 02/11/2010
No. 08-20710
LEONARD CLAUS;
Claimant - Appellant-Cross-Appellee
and
IMS SECURITIES INC
Claimant - Cross-Appellee
Appeal from the United States District Court
for the Southern District of Texas
Nos: 4:07-CV-2067 & 4:07-CV-2058
Before JONES, Chief Judge, SMITH and DeMOSS, Circuit Judges.
PER CURIAM:*
Leonard Claus and IMS Securities appeal the magistrate judge’s vacatur
of an arbitration award in their favor. For the following reasons, we reverse the
court’s decision and reinstate the arbitration award.
I.
Claus and Jerry Short, an employee of Institutional Capital Management
(ICM), entered into a verbal agreement to buy and sell bonds. Claus purchased
bonds with the intent to sell them to Sterling Financial Investment Group, Inc.
(Sterling). The plan fell through and Claus sold the bonds to another party for
his original purchase price. Claus subsequently brought suit against Sterling
and ICM, alleging negligence, gross negligence, negligent misrepresentation,
breach of contract, violations of federal and state securities laws, and violations
of federal and state statutory fraud. Claus hired attorney Michael Fallick to
represent him on a contingency fee basis.
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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No. 08-20710
The issues were heard by a National Association of Securities Dealers
arbitration panel (“the panel”). The panel ruled in Claus’s favor, awarding him
$25,000 in compensatory damages, and awarding $70,000 in attorney’s fees
directly to Fallick. The panel also charged Claus $22,000 in arbitration fees,
resulting in a net amount to Claus of $3,000. The panel did not specify the basis
of its award.
Sterling and ICM filed motions to vacate the award before the district
court. The parties consented to proceed before a magistrate judge for all
purposes, including entry of final judgment, pursuant to 28 U.S.C. § 636(c). The
magistrate judge vacated the award because “the arbitration panel exceeded its
authority” when it awarded attorney’s fees directly to Fallick in violation of
Texas law.
Claus and IMS argue on appeal that the magistrate judge erred in
vacating the entirety of the award solely on the basis that the attorney’s fees
were awarded directly to Fallick. Sterling and ICM argue that this court should
affirm the vacatur because the fee award violated Texas law, and partial vacatur
would constitute an impermissible modification of the award affecting the merits
of the decision. Sterling and ICM alternatively argue that the fee award conflicts
with Fallick’s contingency fee agreement with Claus and the panel exceeded its
authority by overriding the agreement. Sterling and ICM also argue that the fee
award was unreasonable. Sterling filed a cross-appeal, arguing that the
magistrate judge erred in (1) failing to reverse the award on the basis that
Sterling was found vicariously liable for acts of which its employees were
exonerated; (2) not awarding costs and fees to Sterling because it was the
prevailing party; and (3) failing to reverse the award on the basis that Claus
suffered no loss.
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II.
This court reviews de novo the vacatur of an arbitration award, but our
review of the underlying award is “exceedingly deferential.” Brabham v. A.G.
Edwards & Sons, Inc., 376 F.3d 377, 380 (5th Cir. 2004). Section 10 of the
Federal Arbitration Act (FAA) provides the exclusive grounds for vacatur of an
arbitration award. Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th
Cir. 2009) (citing Hall Street Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1405
(2008)). This court may vacate an award:
(1) where the award was procured by corruption, fraud,
or undue means; (2) where there was evident partiality
or corruption in the arbitrators, or either of [the
parties]; (3) where the arbitrators were guilty of
misconduct in refusing to postpone the hearing, upon
sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party
have been prejudiced; or (4) where 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.
9 U.S.C. § 10(a)(1)–(4). Claus and IMS argue that the panel’s award of attorney’s
fees directly to Fallick was legal error. We need not consider whether the alleged
legal error violates the FAA, because there is no reversible legal error in this
case. Texas law prohibits the award of fees directly to counsel unless authorized
by statute. See Nu-Way Energy Corp. v. Delp, 205 S.W.3d 667, 684 (Tex.
App.–Waco 2006, pet. denied); Fort Bend County v. Martin-Simon, 177 S.W.3d
479, 486 (Tex. App.–Houston [1st Dist.] 2005, no pet.); Graco, Inc. v. CRC, Inc.
of Tex., 47 S.W.3d 742, 746-47 (Tex. App.–Dallas 2001, pet. denied); Transp. Ins.
Co. v. Franco, 821 S.W.2d 751, 755 (Tex. App.–Amarillo 1992, writ denied).
However, a party who has been ordered to pay attorney’s fees in this manner
does not have standing to challenge this aspect of the attorney’s fee award. See
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Martin-Simon, 177 S.W.3d at 486; Transp. Ins. Co., 821 S.W.2d at 755. It is
usually immaterial to the party paying the attorney’s fee award how those fees
are handled by the prevailing party; therefore any such error is harmless.
Transp. Ins. Co., 821 S.W.2d at 755-56. The Appellees are obligated to pay
Claus’s attorney’s fees, regardless of to whom the fees were directed; any alleged
error was harmless.
III.
Appellees also argue that the fee award was unreasonable, relying solely
on the disproportionality of the fee award as compared to the small net amount
awarded to Claus. A disproportionate fee award is not tantamount to an
excessive attorney’s fee award under Texas law. See Gorman v. Countrywood
Prop. Owners Ass’n, 1 S.W.3d 915, 919 (Tex. App.–Beaumont 1999, pet. denied).
Appellees make no argument that the evidence Claus submitted to support the
fee award was incorrect or unreliable. We will not disturb the arbitration award
on this basis.
IV.
We also decline to vacate the award on the basis of Appellees’ cross-appeal.
Sterling challenges the award on the substantive grounds that it cannot be held
vicariously liable for acts its employees did not commit, and that Claus suffered
no losses. “If an award is rationally inferable from the facts before the arbitrator,
the award must be affirmed.” Kergosien, 390 F.3d at 353 (citation omitted).
Because the arbitration panel did not state the grounds for its award, the court
cannot determine on what basis Sterling was found liable. As noted by the
magistrate judge, Sterling could have been liable directly to Claus for securities
violations. Further, Claus could have suffered damages in the form of lost
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opportunities or commissions. There is a rational basis for the award and we
affirm.1
Accordingly, the judgment of the magistrate judge is REVERSED, and the
arbitrator’s award is REINSTATED.
1
Because we find that the arbitration award should be reinstated, we do not reach
Appellants’ argument that the magistrate judge erred in vacating the entirety of the award.
6