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Saturday, November 19, 2011

When Is a Win Not a Win? (Or How Win-Win Becomes Lose-Lose)

A recent decision in Ohio state court shows how winners can also be losers. In Patrick R. Murray v. Citigroup Global Markets, Inc., Dist. Court, N.D. Ohio, W. Div. (Nov. 14, 2011), Case No. 3:09 CV 1514, Judge Katz was asked to rule on whether to confirm an arbitration award in favor of Citigroup Global Markets Inc. (CGMI) against a former broker, Patrick Murray (Murray).

In the underlying FINRA Arbitration, Citigroup Global Markets Inc. d/b/a/ Smith Barney v. Patrick Murray, #09-03430, CGMI sued Murray for $272,207, the balance he owed under a $1,508,401 promissory note issued in July 2000. This type of note is known in the industry as a “forgivable loan” because each year, a set portion of the note is forgiven on the note’s anniversary. Murray counterclaimed for $160,164.00 in assets he forfeited from the “CAP” Plan (Capital Appreciation Plan) when he left the firm in April 2009. The CAP plan provided restricted stock awards that vested over time, but unvested stock awards were deemed forfeited upon leaving the firm.

A panel of three arbitrators awarded CGMI the pro-rated balance Murray still owed on the note of $40,153 plus two years of interest at 10%, for a net total of about $48,184. However, the panel also awarded Murray $25,705.95 in compensatory damages, for a net recovery to CGMI of about $22,478.

CGMI moved to confirm the award, and Murray moved to vacate and for other relief. The court granted CGMI’s motion to confirm as well as its motion to strike an attempt by Murray to re-litigate part of the arbitration case in court. It gave brokerage firms some helpful language for future motions to confirm, when it stated that in Ohio, an irrational arbitration award provides no basis for review on appeal. The only ground for review was under the doctrine known as “manifest disregard of the law.” The court stated that it “does not have authority to re-litigate facts when reviewing an arbitration award for manifest disregard of the law.” Courts must enforce an award even if the award was based on an error of fact (citing to Bd. Of County Comm’rs of Lawrence County, Ohio v. L. Robert Kimball & Assocs., 860 F. 2d 683, 688 (6th Cir. 1988). The court further noted it would defeat the main purposes of arbitration (to provide a quicker and less costly resolution and reduce court congestion) were the court to insert itself into the case as a new fact-finder. The court would not permit Murray to re-try the case.

So, you may ask, how is this not a win for CGMI? From a monetary perspective, as well as a time and energy perspective, it is a pyrrhic victory. Here’s why:

The arbitration included ten pre-hearing sessions over a 14 month period as well as14 hearing sessions over an 8-day period. The pre-hearing sessions included at least two contested motions. Here’s a chart of the fees allegedly paid by the parties as set forth in the underlying FINRA award:
$      600
$    2,125
$    2,750
$   7,065
$  18,260
$       200
$         40
$       160

$    7,705
$   23,495
$   69,533
$ 116,523

In total, Murray spent at least $136,175 for a recovery of $25,705.95, which was reduced by his requirement that he pay to CGMI $40,153 plus interest. Thus, he spent $136,175 in FINRA fees and attorney fees and eight days in arbitration to find out that he still owed CGMI $22,478. By this estimate, Murray is now down by $158,653.

CGMI spent at least $116,523 to recover $40,153 plus about $8,031 in interest. However, since the panel determined that it owed $25,705.95 to Murray, CGMI actually spent over $116,523 to recover a net total of only $22,478. It outspent its recovery by well over $94,000.

Of course, this does not include the extra thousands of dollars that had to be spent by both parties on the motions to vacate/confirm the arbitration award in Ohio state court. We also don’t know whether Murray is currently employed and/or financially solvent or whether the $22,478 judgment that CGMI won is even collectible.

This case somehow spiraled out of control. It was simply not cost-effective for either party to take the case all the way to a hearing, given the dollars at stake and the total fees assessed. While neither the court opinion nor FINRA arbitration award mention whether the parties tried to mediate, it is typically FINRA’s practice to remind parties that mediation is an available alternative. This matter should have been settled before the arbitration hearing. Had the parties made a good-faith effort to negotiate either on their own or with the help of a mediator, the parties could have created a better outcome at a much lower cost, in a quicker timeframe, and with much less stress. The parties could have moved on with their lives.

In this time of economic uncertainty, one thing is clear: spending these kinds of sums for this type of outcome is just not common sense. The next time you are faced with a similar problem, do yourself a favor and give mediation a try. And if your client, your supervisor, or opposing counsel balks and wants to fight the case on principal, show them how much both sides paid and “won” here, and ask them if the rewards really outweigh the risks and costs.

If you have any questions about arbitration or mediation, feel free to contact me at

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