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Securities ADR: Attorneys' Fees Reinstated by 10th Circuit Though Original Agreement (Web)

In Hollern v. Wachovia Securities Inc., Nos. 05-1253 and 05-1300 (10th Cir. Aug. 16, 2006)(Available at, a unanimous Tenth U.S. Circuit Court of Appeals panel reversed a district court order vacating the attorney's fees portion of the arbitration award.

Plaintiff Susan Hollern a successor trustee on behalf of William H. Price II Trust, initiated an arbitration proceeding before the National Association of Securities Dealers against Wachovia Securities Inc., and its employee, Randy Russell, alleging negligent and breach of fiduciary duty in managing the trust. The plaintiff–who became trustee of the trust after Price, her father, died in June 2002--claimed compensatory damages for the decline in value of trust investments, as well as and attorneys' fees and costs incurred in the arbitration proceeding.

Likewise, the defendants also sought reimbursement of attorneys' fees. The arbitrator denied the plaintiff's claims and awarded nearly $194,000 in attorney's fees to the defendants. Hollern asked a Colorado federal district court to set aside the attorney's fees portion of the arbitration, asserting that the arbitrators exceeded their powers and acted in manifest disregard of the law in awarding attorney's fees.

The district court agreed and vacated the fees award. Then the defendants filed a motion pursuant to Rule 60(b) of the Federal Rules of Civil Procedure, which was summarily denied by the district court. Thereafter, the defendants appealed both the district court's decision to vacate the attorney's fee portion of the award and its Rule 60 (b) motion.

The Tenth Circuit, on reviewing the district court's order vacating an arbitration award, reiterated the already established principles with respect to awards finality and exceptional circumstances under which the arbitral awards can be vacated.

Writing on behalf of the 10th Circuit panel, Judge Michael R. Murphy stated that the plaintiff's district court arguments, on whether the Virginia or the Colorado law governed the attorney's fees issue, were without merits. Hollern had contended that Virginia law governed the issue, requiring the parties to expressly authorize an attorney's fee award. Since the agreement between the parties did not expressly authorize the arbitrator to award attorney's fees, Hollern contended that the arbitrators had exceeded their authority.

The appellate court assessed the scope of the arbitrator's authority, and, under the assumption that Virginia law applied, held that the parties had satisfied the requirement of the parties’ express authorization. The court found that the arbitrators had not exceeded their powers in awarding attorneys' fees to the defendants.

The panel observed that the Option Account Agreement between the parties did not expressly permit an award of attorneys' fees. But it noted that the parties' subsequent submissions to the arbitrators amended the original arbitration to expressly authorize attorney's fees, from which the arbitrators drew their authority.

The appeals court went on to say that the parties explicitly requested the attorneys' fees award in their submissions. The plaintiff also had indicated on the Claim Information Sheet that she wished to have the arbitrator decide the attorney's fees issues; likewise, the defendants had made the same request.

Moreover, the parties had both entered into a Uniform Submission Agreement agreeing to submit all issues identified in their pleadings to arbitration--thereby empowering the arbitrator to award the attorney's fees. “Therefore, the arbitrators did not exceed their powers under Virginia law in awarding attorneys' fees and the district court erred in vacating the attorneys' fees' portion of the arbitral award on this ground,” it said.

The other contention of the plaintiff before the district court was, if Colorado law governed the issue of attorneys' fees, the arbitrators manifestly disregarded the law in their application of Colo. Rev. Stat. § 13-17-102. The plaintiff argued that under § 13-17-102 the state courts could award attorneys' fees only in civil actions and that the arbitrators' failure to consider the relevant statutory factors or set forth the reasons justifying the attorneys' fees constituted manifest disregard of law.

The Court in its opinion reiterated the exceptional rule laid down in Dominion Video Satellite Inc. v. Echostar Satellite L.L.C., 430 F.3d 1269, 1274 (10th Cir.2005), “[t]o warrant setting aside an arbitration award based on manifest disregard of the law, ‘the record must show the arbitrators knew the law and explicitly disregarded it.’”

The appeals court noted that the plaintiff did not provide any citation in support of the statutory interpretation. In light of the position taken by the parties during the arbitration proceedings, the opinion said, "we cannot say the arbitrators knew § 13-17-102 did not authorize arbitrators to award attorneys' fees and nevertheless chose to disregard the law."

In addition, the court, addressing the plaintiff's argument that the arbitrator did not set forth reasons justifying the attorneys' fees award, ruled that the parties' original arbitration agreement, the Option Account Agreement, specifically provided that “[t]he arbitrator's award is not required to include factual findings or legal reasoning.”

The arbitrators’ failure to state the reasons for the award did not constitute manifest disregard of the law and, thus, the district court erred in vacating the attorneys' fees portion of the arbitration award. The appellate court reversed, and remanded with instructions to reinstate the attorneys fees.

--Ongmu Tshering, CPR intern