Wells Fargo Advisors, LLC v. Shaffer

Filing 38

ORDER by Judge Samuel Conti denying #4 Motion to Vacate ; granting #26 Motion to Confirm Arbitration Award (sclc1, COURT STAFF) (Filed on 7/7/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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WELLS FARGO ADVISORS, LLC, a
limited liability company,
Petitioner,

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v.

For the Northern District of California

United States District Court

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) Case No. 11-1500 SC
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) ORDER CONFIRMING
) ARBITRATION AWARD
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KENNETH C. SHAFFER,

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Respondent.

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I.

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INTRODUCTION
Petitioner Wells Fargo Advisors, LLC ("Wells Fargo") commenced

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this action seeking vacatur of an arbitration award entered by the

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Financial Industry Regulatory Authority ("FINRA") in a proceeding

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Wells Fargo commenced against its former employee, Respondent

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Kenneth C. Shaffer ("Shaffer").

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Court are two fully briefed motions.

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the award.

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("Pet.'s Reply").

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and for an award of attorneys' fees.

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33 ("Resp.'s Opp'n"), 34 ("Pet.'s Reply").

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reasons, the Court GRANTS Shaffer's Motion, DENIES Wells Fargo's

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Motion, CONFIRMS the FINRA arbitration award, and orders Respondent

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to submit evidence in support of its motion for attorneys' fees.

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///

ECF No. 1 ("Pet.").

Before the

Wells Fargo moves to vacate

ECF Nos. 4 ("Pet.'s Mot."), 30 ("Resp.'s Opp'n"), 35
Shaffer moves to confirm the arbitration award
ECF Nos. 26 ("Pet.'s Mot"),
For the following

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II.

BACKGROUND
Wells Fargo commenced FINRA arbitration against Shaffer in

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Resp.'s Mot. at 2; Kane Decl. Ex. A ("FINRA Cl.").1

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February 2010.

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In the claim it submitted for arbitration, Wells Fargo alleged that

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it is a broker-dealer registered with the U.S. Securities and

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Exchange Commission ("SEC"), as well as a FINRA member.

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Wells Fargo alleged that Shaffer was employed by Wells Fargo from

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June 2006 to October 1, 2009.

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employment included an opportunity for Shaffer to participate in

Id. ¶ 2.

Id. ¶ 1.

Shaffer's offer of

United States District Court

For the Northern District of California

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what Wells Fargo calls a "forgivable loan program."

Pet.'s Mot. at

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1.

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on January 4, 2008, when he signed a promissory note ("the Note")

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with Wells Fargo.

Wells Fargo alleged that Shaffer entered into this loan program

FINRA Cl. ¶ 4.

Under the Note, Wells Fargo loaned Shaffer $111,347 at a 3.58

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percent annual interest rate; while Shaffer was obligated to make

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monthly payments on the loan, Wells Fargo would forgive each

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monthly payment of principal and interest for each month Shaffer

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remained employed by Wells Fargo.

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("Note").

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Wells Fargo for sixty months, the loan would be forgiven in its

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entirety.

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was terminated "for any reason whatsoever," the outstanding balance

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would immediately become due.

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arbitration clause under which both parties agreed to resolve all

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disputes through binding arbitration before FINRA.

Id. ¶¶ 6-7; FINRA Cl. Ex. A

Under these terms, if Shaffer continued working for

Id.

If, however, Shaffer's employment with Wells Fargo

Id. ¶ 8.

The Note included an

Id. ¶ 4.

The

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Ronald P. Kane ("Kane"), counsel for Wells Fargo, submitted a
declaration in support of Wells Fargo's Motion. ECF No. 5.
Exhibits D through Z, attached to this declaration, were e-filed
separately. ECF Nos. 6-14.
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Note also included a provision stating that if "any action or

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lawsuit is required to be brought for collection of any amount

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under this Note, the Undersigned promises to pay reasonable

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attorney's fees and costs, including all fees and costs involved in

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collection."

Note at 2.

Wells Fargo alleged that Shaffer's employment was terminated

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on October 1, 2009, and that Wells Fargo made a written demand for

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full payment of the $74,617.76 that was then owed on the note.

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FINRA Cl. ¶¶ 9-10.

Wells Fargo sought this amount plus attorneys'

United States District Court

For the Northern District of California

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fees, pursuant to a provision in the Note requiring the borrower to

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pay reasonable attorneys' fees and costs.

Resp.'s Mot. at 3.

In April 2010, Shaffer submitted an answer to Wells Fargo's

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Statement of Claim; in May 2010, Shaffer submitted a counterclaim

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against Wells Fargo.

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commissions, alleged discrimination on the basis of a disability,

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libel, slander, wrongful termination, and defamation.

Pet.'s Mot. at 1-3.

Shaffer claimed unpaid

Id. at 3.

A two-day evidentiary hearing before a FINRA panel of three

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arbitrators commenced on January 4, 2011.

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Wells Fargo was represented by counsel; Shaffer appeared in pro

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per.

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Fargo employees.

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was enforceable against Shaffer and that Shaffer's counterclaims

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should be dismissed.

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represented the Note as a "sales bonus" and alleged that its terms

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were unconscionable.

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Shaffer claimed that the reasons provided by Wells Fargo for his

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termination were pretextual, with Shaffer's "serious illness" being

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one of the real reasons for termination.

Id.

Resp.'s Mot. at 4.

The panel heard testimony from Shaffer and from Wells
Id.

Wells Fargo argued that the promissory note

Id.

Shaffer argued that Wells Fargo had

Kane Decl. Ex. X ("Arb. Tr.") at 311.

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Id. at 311, 322.

Shaffer

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claimed that when it terminated his employement, Wells Fargo filed

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with FINRA a Uniform Termination Notice for Securities Industry

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Registration, or "Form U-5," which stated that Shaffer was

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terminated for violation of company policy and provided

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descriptions of these infractions.

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that these descriptions were misleading and resulted in Shaffer

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"repeatedly being refused employment" and "effectively ended"

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Shaffer's career in the brokerage business.

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Id. at 312.

Shaffer alleged

Id.

On January 18, 2011, the FINRA panel issued their award.

United States District Court

For the Northern District of California

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Shaffer Decl. Ex. 6 ("FINRA Award").

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Foundation Health Psychcare Services, 24 Cal. 4th. 83 (2000), the

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panel found the promissory note to be both procedurally and

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substantively unconscionable.

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Fargo's motion to dismiss Shaffer's counterclaims.

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recommended the expungement of the language in Shaffer's Form U-5

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stating that he had charged an excessive fee and failed to forward

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a customer complaint to his supervisor.

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Fargo liable to Shaffer for $75,000 in compensatory damages "as a

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result of the defamatory nature of the Form U5 Termination

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Explanation."

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Citing Armendariz v.

Id. at 3.

The panel dismissed Wells

Id.

Id.

The panel

The panel found Wells

Id.

Wells Fargo then commenced this action to set aside the
See Pet.

Shaffer has filed a motion to confirm

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arbitration award.

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the award and for an award of attorneys' fees.

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that "the issue of attorney fees is premature."

Wells Fargo argues
Pet.'s Opp'n at 1.

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III. LEGAL STANDARD
Under the Federal Arbitration Act ("FAA"), judicial review of
an arbitration award is "both limited and highly deferential."

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Sheet Metal Workers' Int'l Ass'n Local 359 v. Madison Indus., Inc.,

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84 F.3d 1186, 1190 (9th Cir. 1996).

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arbitration award unless it is vacated, modified, or corrected as

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prescribed in 9 U.S.C. §§ 10 and 11.

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award under four conditions:

A court must confirm an

District courts may vacate an

(1) where the award was procured by corruption,
fraud, or undue means;

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(2) where there was evident partiality
corruption in the arbitrators, or either
them;

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or
of

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(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

United States District Court

For the Northern District of California

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(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.

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9 U.S.C. § 10(a).

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IV.

DISCUSSION

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Wells Fargo argues that vacatur of the arbitration award is

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appropriate under section 10(a)(4) of the FAA, alleging that the

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FINRA panel exceeded its powers.

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that the panel ignored California law in ruling that the Note's

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terms were unconscionable and that Wells Fargo defamed Shaffer

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through the statements it made on Shaffer's Form U-5.

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at 1.

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Specifically, Wells Fargo alleges

Pet.'s Mot.

The Ninth Circuit has recognized that vacatur is appropriate

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under section 10(a)(4) when there has been a manifest disregard for

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law or the award is completely irrational.

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Johnson v. Wells Fargo

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Home Mortg., Inc., 635 F.3d 401, 414 & n.10 (9th Cir. 2011).

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"'Manifest disregard of the law' means something more than just an

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error in the law or a failure on the part of the arbitrators to

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understand or apply the law."

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Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995).

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the record that the arbitrators recognized the applicable law and

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then ignored it."

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have been ignored by the arbitrators must be well defined,

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explicit, and clearly applicable."

United States District Court

For the Northern District of California

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Id.

Mich. Mut. Ins. Co. v. Unigard Sec.
"It must be clear from

Furthermore, the governing law alleged to

Carter v. Health Net of

California, Inc., 374 F.3d 830, 838 (9th Cir. 2004).
Wells Fargo's first argument in favor of setting aside the

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arbitration award is that the arbitrators manifestly disregarded

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the law when they found the Note to be unconscionable.

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at 6.

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procedural and a substantive element, the former focusing on

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oppression or surprise due to unequal bargaining power, the latter

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on overly harsh or one-sided results."

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114.

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Federal Savings and Loan Insurance Corp., v. Musacchio,

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695 F. Supp. 1044 (N.D. Cal. 1988) and Koehl v. Verio, Inc., 142

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Cal. App. 4th 1313 (2006), and contend that the panel manifestly

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disregarded these cases by finding the Note to be unconscionable.

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Pet.'s Mot. at 7.

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a contract cannot be found to be unconscionable unless it is a

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contract of adhesion, and contends that Musacchio holds that as a

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matter of law, standardized promissory note forms are not

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unenforceable contracts of adhesion.

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Pet.'s Mot.

Under California law, "unconscionability has both a

Armendariz, 24 Cal. 4th at

Wells Fargo argues that it provided the panel with two cases,

Wells Fargo contends that Armendariz holds that

Pet.'s Mot. at 7-8.

Shaffer challenges Wells Fargo's reading of Armendariz,

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arguing that the case makes it clear that in California,

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unconscionability is a "case-specific factual determination which

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depends upon the terms and language of that particular contract,

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the parties' relationship, and the circumstances under which the

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contract was made."

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Fargo does nothing more than attempt to reargue the facts.

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Resp.'s Opp'n at 6.

The Court agrees with Shaffer.

Shaffer argues that Wells
Id.

Having reviewed the record of

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the arbitration proceedings and the case law cited by Wells Fargo,

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the Court finds that Wells Fargo has fallen far short of

United States District Court

For the Northern District of California

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establishing that the panel manifestly disregarded the law in

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ruling that the Note's terms were unconscionable.

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Wells Fargo also argues that the panel exceeded its powers in

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ruling that Wells Fargo defamed Shaffer through statements made in

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the Form U-5.

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California law, statements made on a Form U-5 by a broker-dealer

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concerning the reasons for terminating a registered representative

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are 'privileged' and cannot, as a matter of law, form the basis of

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a defamation claim."

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Investments, LLC, 129 Cal. App. 4th 719 (2005), for the proposition

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that "California law extends an absolute privilege against

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defamation claims arising out of statements contained in a Form U-

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5, because the Form U-5 is a communication made 'in anticipation of

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the bringing of an action or other official proceeding.'"

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Mot. at 13.

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Pet.'s Mot. at 13.

Id.

Wells Fargo claims: "Under

Wells Fargo cites Fontani v. Wells Fargo

Pet.'s

Shaffer counters that this "is not an accurate statement of

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California law."

Resp.'s Opp'n at 12.

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Apartment Association, Inc. v. City of Santa Monica abrogates

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Fontani with its holding that "a prelitigation communication is

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Shaffer argues that Action

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privileged only when it relates to litigation that is contemplated

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in good faith and under serious consideration."

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1251-52 (2007).

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41 Cal. 4th 1232,

The Court agrees with Shaffer -- given the highly deferential

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standard of review afforded under the FAA, the Court finds that the

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panel did not ignore law that was defined, explicit, and clearly

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applicable in finding that Wells Fargo defamed Shaffer.

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United States District Court

For the Northern District of California

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For these reasons, Wells Fargo's motion to set aside the
arbitration award is DENIED, and Shaffer's motion to confirm the
award is GRANTED.
Shaffer seeks an award of attorneys' fees, citing the Note's

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one-sided attorneys' fees provision.

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Shaffer argues that this attorneys' fees provision interpreted in

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light of section 1717 of California's Civil Code, which states that

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one-sided attorneys' fees provisions in contracts permit the party

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who prevails at trial, "whether he or she is the party specified in

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the contract or not," to collect "reasonable attorney's fees in

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addition to other costs."

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Resp.'s Mot. at 5; Note at 2.

Cal. Civ. Code § 1717(a).

Wells Fargo argues that Shaffer's motion for attorneys' fees

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is premature, citing Rule 54(d)(2) of the Federal Rules of Civil

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Procedure.

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Rule 54(d)(2) requires a claim for attorneys' fees to be made on a

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motion; by filing the instant motion for confirmation of the

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arbitration award and for attorneys' fees, Shaffer has satisfied

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this requirement.

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the Court finds that Shaffer is entitled to recover the attorneys'

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fees incurred in enforcing the arbitration award and participating

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in this action.

Pet.'s Opp'n at 1.

This argument is without merit.

Having reviewed the Note and the applicable law,

Within thirty (30) days of this Order, Shaffer's

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counsel shall file a declaration stating the amount in attorneys'

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fees Shaffer alleges to have incurred in defending this action and

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enforcing the arbitration award; this declaration should be

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supported by appropriate evidence, including detailed attorney time

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logs.

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to this evidence.

Wells Fargo shall have seven (7) days to register objections

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V.

CONCLUSION
For the foregoing reasons, the Court DENIES the motion and

United States District Court

For the Northern District of California

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petition of Petitioner Wells Fargo Advisors, LLC to vacate an

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arbitration award entered by the Financial Industry Regulatory

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Authority in an arbitration proceeding against Respondent Kenneth

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C. Shaffer.

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arbitration award.

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$75,000 plus attorneys' fees after the Court reviews evidence

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submitted on the issue of attorneys' fees.

The Court GRANTS Shaffer's motion to confirm the
The Court will enter judgment in the amount of

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IT IS SO ORDERED.

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Dated: July 7, 2011
UNITED STATES DISTRICT JUDGE

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