UBS Financial Services, Inc. v. Gary T. Padussis

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 1:14-cv-03721-WDQ. [999973092]. [15-2148]

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-2148

UBS FINANCIAL SERVICES, INC.,
Petitioner - Appellant,
v.
GARY T. PADUSSIS,
Respondent - Appellee.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.
William D. Quarles, Jr., District
Judge. (1:14-cv-03721-WDQ)

Argued:

October 25, 2016

Decided:

November 22, 2016

Before WILKINSON, KING, and HARRIS, Circuit Judges.

Affirmed by published opinion.
Judge Wilkinson
opinion, in which Judge King and Judge Harris joined.

wrote

the

ARGUED: Francis X. Dee, MCELROY, DEUTSCH, MULVANEY & CARPENTER,
LLP, Newark, New Jersey, for Appellant.
Edward Patrick
McDermott, Sr., LAW OFFICE OF E. PATRICK MCDERMOTT LLC,
Annapolis, Maryland, for Appellee.
ON BRIEF: Margaret L.
Watson, MCELROY, DEUTSCH, MULVANEY & CARPENTER, LLP, New York,
New York, for Appellant.

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WILKINSON, Circuit Judge:
Appellant
arbitration
Padussis
court

UBS

Financial

award

over

refused

that,

$900,000
to

Services

in

in

disturb

(“UBSFS”)

practical

effect,

compensatory
the

award,

challenges
granted

damages.

The

and

we

now

an

Gary

district

affirm

its

judgment. Any other result would open arbitration proceedings to
a host of challenges over the very type of subsidiary questions
that Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002),
indicated should be left to the discretion of the arbitral body.
I.
Gary Padussis worked for UBSFS as a financial advisor from
2009 through 2013. When he joined UBSFS, Padussis brought with
him a team of three financial advisors as well as an established
business clientele. As part of his initial compensation, UBSFS
lent Padussis over $2.7 million. Padussis signed a promissory
note,

which

immediately
UBSFS.

provided
come

Padussis

describing

his

due

that
if

also

any

Padussis

executed

compensation

Agreement

governing

the

agreements

provided

that

remaining
ended

a

and

operations
any

his

Letter
a

balance
employment
of

Financial
of

dispute

would

his
would

with

Understanding
Advisor

team.
be

All

subject

Team
the
to

arbitration before the Financial Industry Regulatory Authority
(“FINRA”).

2

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Padussis

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resigned

from

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UBSFS

in

2013,

complaining

that

UBSFS had ruined his team of financial advisors and cost him
valuable clients. Upon his resignation, Padussis owed UBSFS the
remaining balance on the promissory note, nearly $1.6 million.
When he failed to pay that amount, UBSFS initiated arbitration
on June 3, 2013. Padussis responded with counterclaims on July
31, 2013, alleging that UBSFS’s interference with his team was
both tortious and a breach of contractual duties.
Under the FINRA Code of Arbitration Procedure for Industry
Disputes,
responsible

the
for

Director
the

of

process

FINRA
of

Dispute

selecting

the

Resolution
panel

of

is

three

arbitrators required here. First, the Director mails a list of
potential arbitrators for each of the three panel positions to
each party “within approximately 30 days after the last answer
is due.” FINRA Rule 13403. Each “party may strike up to four of
the arbitrators from each list” and rank the remaining ones.
FINRA

Rule

13404.

The

parties

must

return

their

preferences

within twenty days of the lists being sent, and the Director
then combines the rankings sent by the parties to select the
arbitration panel. FINRA Rule 13405.
If a party fails to return its ranked lists within twenty
days, the Director proceeds as if that party has no preferences.
FINRA Rule 13404(d). The Code allows the Director to extend any
deadline set by the Code for good cause. FINRA Rule 13207(c).
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Code

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also

gives

the

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Director

discretion

to

“make

any

decision that is consistent with the purposes of the Code to
facilitate the appointment of arbitrators.” FINRA Rule 13412.
The Director can delegate these duties. FINRA Rule 13100(k).
In this case, FINRA mailed lists of potential arbitrators
to the parties on August 21, 2013. UBSFS did not return its
ranked

lists

by

the

deadline

of

September

10

because,

UBSFS

claims, it never received them.
On September 11, UBSFS received a letter, dated September
3,

that

returning

reminded
their

the

parties

lists.

of

the

Realizing

impending

that

it

deadline

for

missed

the

had

deadline, UBSFS filed a motion to extend the time to submit its
preferences. Padussis opposed this motion. He argued that UBSFS
notified him in mid-August that it was transferring the case to
new counsel but that the new counsel had not yet filed a notice
of

appearance.

confusion

over

Padussis
which

claimed

counsel

that

was

this

transfer

responsible

for

led

to

submitting

UBSFS’s preferences.
FINRA’s

Regional

Director

–

to

whom

the

Director

had

apparently delegated responsibility – denied UBSFS’s motion for
an extension. UBSFS appealed to the Director, who affirmed the
denial.
deadline

The
did

Director
not

ruled

exist

that

because

4

good

FINRA

cause
had

to

extend

the

timely

mailed

the

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initial lists of arbitrators as well as a courtesy reminder, and
had not received any mail returned as undeliverable.
FINRA

proceeded

to

select

a

panel

of

three

arbitrators

based on Padussis’s lists of preferences. At the first panel
hearing, UBSFS challenged the composition of the panel based on
UBSFS’s

lack

arbitrators.

of
The

participation
panel

reviewed

in
the

the

selection

evidence,

denied

of

the

UBSFS’s

challenge, and proceeded with the arbitration.
On October 27, 2014, the panel issued its final decision.
The

panel

$932,887.

awarded
The

UBSFS

decision

$1,683,262

denied

“[a]ny

and

awarded

and

all

Padussis

relief

not

specifically addressed.” J.A. 24. Pursuant to the FINRA Code,
the decision did not explain the panel’s reasoning.
UBSFS was altogether displeased with this outcome. Padussis
insisted

that

due

to

a

statutory

lien

and

the

prospect

of

bankruptcy, he would be financially unable to pay the balance of
the note, which left UBSFS in the position of owing him over
$900,000 for the damage he claimed it had done to his business.
UBSFS then filed this action to vacate the arbitral award. It
argued that the arbitrators were not selected in accordance with
the

parties’

agreement

because

UBSFS

had

not

provided

its

preferences to FINRA. In the alternative, UBSFS sought to have
the

district

court

offset

the

awards,

citing

Padussis’s

admission that he was unlikely to be able to pay his portion of
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the judgment. The district court confirmed the arbitration award
in its entirety and declined to impose an offset. UBSFS now
appeals.
II.
The scope of judicial review of an arbitration award “is
among the narrowest known at law.” Apex Plumbing Supply, Inc. v.
U.S. Supply Co., Inc., 142 F.3d 188, 193 (4th Cir. 1998). Courts
may vacate or modify an arbitration award only under the limited
circumstances listed in the Federal Arbitration Act, 9 U.S.C.
§ 10-11, or under the common law if the award “fails to draw its
essence from the contract” or “evidences a manifest disregard of
the law.” Patten v. Signator Ins. Agency, Inc., 441 F.3d 230,
234 (4th Cir. 2006).
This circumscribed scope of review means that “in reviewing
such

an

award,

a

district

or

appellate

court

is

limited

to

determine whether the arbitrators did the job they were told to
do - not whether they did it well, or correctly, or reasonably,
but simply whether they did it.” Three S Del., Inc. v. DataQuick
Info. Sys., Inc., 492 F.3d 520, 527 (4th Cir. 2007) (internal
quotation marks omitted). To ensure arbitrators did the job they
were told to do and did not “exceed[] their powers,” 9 U.S.C.
§ 10(a)(4), courts will resolve certain threshold questions of
arbitrability. For example, a court will decide whether parties
agreed to arbitrate a particular dispute, AT&T Techs., Inc. v.
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Commc'ns Workers of Am., 475 U.S. 643, 651 (1986), or whether
arbitrators were appointed according to the parties’ agreement.
Cargill

Rice

v.

Empresa

Nicaraguense

Dealimentos

Basicos,

25

F.3d 223, 225 (4th Cir. 1994).
Beyond these basic questions of arbitrability, courts defer
to the arbitral panel both on the merits of the final decision
and on procedural questions that “grow out of the dispute,” even
where those questions “bear on its final disposition.” Howsam,
537 U.S. at 84 (quoting John Wiley & Sons, Inc. v. Livingston,
376

U.S.

standards

543,
of

557

(1964)).

review

discretionary

We

customarily

procedural

need

not

applied

rulings

because

repair
to

fact

that

here

to

the

finding

and

would

simply

constitute us, contrary to the Supreme Court’s admonitions, as a
typical appellate court.
The “widely recognized” policy “to encourage the use of
arbitration”

requires

this

limited

scope

of

judicial

review.

Remmey v. PaineWebber, Inc., 32 F.3d 143, 146 (4th Cir. 1994).
Parties agree to arbitration to avoid the time and expense of
litigation. But “to allow full scrutiny of such awards would
frustrate

the

purpose

of

having

arbitration

at

all.”

Apex

Plumbing, 142 F.3d at 193.
Instead, the narrow standard of review acts as a bulwark
against legal ingenuity. Lawyers can easily find one thing or
another in almost any proceeding to which they wish to take
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exception. There are benefits to such legal creativity in many
contexts

but

challenges

not

to

argue

their

costs

and

in

every

the
award

dispute
delays

one

a

would

second

they

before
force

time,

intended

us.

Allowing

parties

incurring

to

avoid

into
the

by

procedural
court

to

litigation

agreeing

to

arbitration in the first place.
In

other

words,

the

rules

that

limit

our

review

of

arbitration awards are meant to avoid exactly what has happened
here, which is a protracted set of judicial proceedings that
have sacrificed the very advantages inhering in the arbitral
forum.
III.
UBSFS seeks to vacate the arbitral award on two grounds. It
first contends that the arbitrators were not selected according
to the parties’ agreement. Section 5 of the Federal Arbitration
Act provides that if the parties’ arbitration agreement includes
a

method

for

followed.”

9

appointing
U.S.C.

§ 5.

arbitrators,
This

court

“such
will

method

shall

generally

be

vacate

“[a]rbitration awards made by arbitrators not appointed under
the method provided in the parties’ contract.” Cargill Rice, 25
F.3d at 226.
The parties here agreed to arbitrate according to the FINRA
Code. UBSFS complains that because it never received the lists
of arbitrators, the process of appointing arbitrators did not
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follow the method in the Code. An examination of the record
shows, to the contrary, that FINRA adhered to the Code.
FINRA Rule 13403(b) requires that the Director create three
lists of potential arbitrators for the panel. FINRA did this.
Rule 13403(c)(1) requires that the Director mail these lists to
the parties. FINRA did this. Rule 13404(d) requires that if the
Director does not receive a party’s ranked lists within twenty
days of sending the lists, “the Director will proceed as though
the party did not want to” provide its preferences. FINRA did
this too. Rules 13405 and 13406 describe how to appoint the
arbitrators after receiving the lists, and FINRA followed these
rules as well.
Unable to find a specific rule FINRA violated, UBSFS argues
that the Code as a whole “ensure[s] that each party ha[s] the
opportunity

to

participate

in

the

selection

of

arbitrators.”

Appellant’s Br. at 23. UBSFS points to the fact that a few rules
describe

the

parties’

participation

in

selecting

arbitrators,

but this is unsurprising in a Code that sets forth a process for
the mutual selection of arbitrators. The Code simply does not
require

the

participation

of

each

party

prior

to

the

valid

appointment of an arbitration panel.
In fact, Rule 13404(d) does the opposite. It requires the
Director to appoint arbitrators without a party’s input if the
Director

does

not

receive

that
9

party’s

preferences

by

the

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deadline. Rule 13404(d) could require the Director to contact
the party before proceeding, or it could allow the party an
opportunity to rebut any presumption that it did not wish to
participate in the selection of the arbitrators. Instead, it
simply instructs the Director to act as if the party did not
intend

to

submit

ranked

lists

and

to

proceed

with

the

appointment of arbitrators. That is exactly what FINRA did here.
This case, then, does not involve the question of whether
FINRA failed to follow the rules for appointing an arbitrator.
FINRA did. Instead, this is a question of whether FINRA properly
applied those rules. UBSFS seems to believe that the Director
erred in not finding good cause to extend the deadline for UBSFS
to

submit

its

preferences

under

Rule

13207

and

in

not

“exercis[ing] discretionary authority” to ensure that UBSFS had
a say in the composition of the arbitration panel under Rule
13412.

These

questions,

though,

are

procedural

questions

and

“are for arbitral, rather than judicial, resolution.” Dockser v.
Schwartzberg, 433 F.3d 421, 425 (4th Cir. 2006).
While courts decide some questions of arbitrability, the
Supreme

Court

has

directed

that

“‘procedural

questions

which

grow out of the dispute and bear on its final disposition’ are
presumptively

not

for

the

judge,

but

for

an

arbitrator,

to

decide.” Howsam, 537 U.S. at 84 (quoting John Wiley, 376 U.S. at
557). Thus, whether arbitration rules time-bar a claim is for
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the arbitral body to decide. Howsam, 537 U.S. at 85. Likewise,
the arbitral body decides whether arbitration rules require a
panel of one or three arbitrators. Dockser, 433 F.3d at 425.
Here, whether good cause existed to extend the deadline was
for FINRA to decide. UBSFS argues that it did not receive the
lists of arbitrators. Padussis responds that the mailing was
never

returned

to

FINRA

as

undeliverable

and

that

the

whole

problem was due to UBSFS’s negligence – that UBSFS should have
expected the lists shortly after Padussis filed his Answer and
Counterclaim

but

that

the

matter

fell

between

the

cracks

at

UBSFS due to the transfer of the case to different counsel. This
back

and

forth

is

rather

beside

the

point.

As

with

other

procedural questions, the parties would have expected FINRA to
decide

this

issue

because

the

rules

“provide

specific

non-

judicial procedures for its resolution.” Id. at 426. FINRA rules
expressly give the Director the power to “exercise discretionary
authority

and

make

any

purposes

of

the

decision

Code

to

that

is

facilitate

consistent

the

appointment

the

with

of

arbitrators.” FINRA Rule 13412. UBSFS cannot complain that the
Director – rather than the appointed arbitrators – resolved the
issue because the parties expressly granted this authority to
the Director. Dockser, 433 F.3d at 428.
Moreover, this claim concerns “the written rules governing
the

parties’

arbitration

proceeding,”
11

Id.

at

427,

and

the

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arbitral body is “comparatively more expert” in applying those
rules than courts. Howsam, 537 U.S. at 85. This is especially
true here, where the Director can better determine whether an
extension of a deadline will help reach a more just outcome or
simply deprive the parties of a timely resolution.
We will not second-guess FINRA’s decision that there was
not good cause to extend the deadline. The parties agreed to
arbitrate their disputes according to rules that clearly gave
the Director the authority to make that decision. To usurp the
Director’s
questions

authority
about

would

whether

be

to

arbitral

open
bodies

courts

to

properly

legions
applied

of
one

rule or another. This would deprive parties of the very benefits
they sought by agreeing to arbitration – relatively prompt and
inexpensive dispute resolution. 1
IV.
UBSFS
arbitration

next

asks

award.

As

this

court

discussed

to

impose

above,

the

an

offset

arbitration

on

the

panel

here found that (1) Padussis owed UBSFS $1.68 million on the
promissory note (which Padussis contends he would be unable to
pay) and that (2) UBSFS was liable to Padussis for $932,000
1

UBSFS also contends that we should vacate the award on the
common law ground that the award “fails to draw its essence from
the contract.” Patten, 441 F.3d at 234. UBSFS relies on its
argument that FINRA disregarded the agreed-upon method of
selecting arbitrators. As discussed above, FINRA followed those
rules. We thus find UBSFS’s common law claim meritless.
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based on his various employment claims. Offsetting the damages
granted to Padussis from the $1.68 million would result in a net
award

to

UBSFS

of

about

$750,000,

entirely

cancelling

out

Padussis’s award and freeing UBSFS of the need to cut a check.
This

court

has

previously

recognized

that

“an

offset

of

arbitration awards might constitute a modification of the award
in

some

circumstances.”

Nat'l

Risk

Underwriters,

Inc.

v.

Occidental Fire & Cas. Co. of N.C., 931 F.2d 1015, 1017 (4th
Cir. 1991). While such circumstances did not exist in that case,
they

do

exist

here.

This

arbitration

award

expressly

denied

“[a]ny and all relief not specifically addressed” by the award,
and the award did not mention an offset. J.A. 24. Thus, applying
an offset to this award would be a modification of the award.
Under the Federal Arbitration Act, a court can modify an
award only under specific, narrow circumstances. Relevant here,
a court may modify an award “[w]here the award is imperfect in
matter of form not affecting the merits of the controversy.” 9
U.S.C.

§ 11.

Any

order

to

modify

an

award

must

“effect

the

intent thereof and promote justice between the parties.” Id.
Assuming

arguendo

that

imposing

an

offset

would

be

a

“matter of form not affecting the merits of the controversy,” an
offset here would not effectuate the intent of the arbitrators,
and we thus decline to impose one. The award itself is silent on
the question of an offset, and there is no evidence in the
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record that would enable us to say that the arbitrators intended
for the award to include one.
UBSFS

contends

that

an

offset

“would

not

change

the

arbitrators’ valuation decision” but would provide a “simple,
fair”

result,

which

must

have

been

the

intent

of

the

arbitrators. Appellant’s Reply Br. at 25-26. An offset, though,
changes

the

practical

effect

of

the

award.

In

a

similar

situation, a FINRA arbitration panel heard arguments for and
against an offset and declined to provide one. UBS Fin. Servs.,
Inc. v. Mann, No. 14-10621, 2014 WL 1746249, at *3 (E.D. Mich.
Apr. 30, 2014). We cannot know what the arbitration panel in
this case would have ruled if UBSFS had asked it to provide an
offset. That decision, though, was for the arbitration panel,
and UBSFS should have asked the panel to make it. For whatever
reason, it did not do so, and the question is simply not one for
the courts to answer.
UBSFS

also

argues

that

regardless

of

the

arbitrators’

actual intent, we should recognize a presumption favoring an
offset.

However,

judicial

gloss

imposing
on

the

such

a

arbitration

presumption
award.

would

Such

a

place
gloss

a
is

inappropriate here, where the award expressly limits itself to
the relief specifically addressed and was rendered pursuant to a
detailed set of rules. As the Seventh Circuit has noted, the
“arbitrator’s failure to mention offsets in his ruling means
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that no offset was granted.” Int’l Union of Operating Eng’rs,
Local No. 841 v. Murphy Co., 82 F.3d 185, 190 (7th Cir. 1996). 2
V.
When
process

all

and

is
then

said

and

declined

done,
to

UBSFS

abide

by

plainly
the

agreed

result

of

to

a

that

process. It agreed to arbitration; the dispute was within the
scope of that agreement; and the rules by which the arbitration
would proceed were openly declared and followed. The arbitration
here spanned eighteen hearing sessions over nine separate days.
We can find no basis for overturning the arbitral decision. The
district court’s denial of UBSFS’s motion to vacate the award is
therefore
AFFIRMED.

2

In fact, FINRA has since amended its rules to provide for
a presumption of an offset, but that amendment is effective only
for arbitration awards rendered after October 24, 2016. Press
Release, FINRA, Regulatory Notice 16-36: SEC Approves Amendments
to the Codes of Arbitration Procedure Regarding Award Offsets
(Sept. 2016); see also Order Approving a Proposed Rule Change to
Permit Award Offsets in Arbitration, Exchange Act Release No.
78557, 81 Fed. Reg. 54,901 (Aug. 11, 2016). For us to rewrite
that amendment to make it effective for an arbitration award
rendered in October 2014 would be to displace FINRA’s authority
over its own arbitral proceedings. We must therefore observe the
rules in place at the time of the arbitration.
15