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Urquhart v. Kurlan

United States District Court, N.D. Illinois, Eastern Division

February 28, 2017

JASON URQUHART and DOUG URQUHART, Petitioners,
v.
HERBERT C. KURLAN and VTRADER PRO, LLC, Respondents.

          OPINION AND ORDER

          SARA L. ELLIS United States District Judge

         Alleging that Respondents Herbert C. Kurlan and VTrader Pro, LLC (“VTrader”) engaged in actions that caused Petitioners Jason and Doug Urquhart (collectively, the “Urquharts”) to lose over $4 million that they had in their trading accounts, the Urquharts instituted an arbitration proceeding against Kurlan and VTrader. An arbitration panel rendered a final award in favor of the Urquharts, prompting the Urquharts to file this action seeking confirmation of the award pursuant to the Federal Arbitration Act (“FAA), 9 U.S.C. § 1 et seq.[1]Kurlan and VTrader responded by filing a motion to vacate the arbitration award.[2] Kurlan and VTrader contend that the arbitrators exceeded the scope of their powers, failed to render a definite and final award, and did not conduct a fundamentally fair hearing. The Court rejects all of Kurlan and VTrader's arguments but one. Because the Court finds the apportionment of the award between the Urquharts, on the one hand, and Kurlan and VTrader, on the other, ambiguous, the Court remands this case to the arbitration panel for clarification on this discrete issue. The Court denies the Urquharts' motion to confirm the arbitration award without prejudice to renewal after the panel clarifies the award.

         BACKGROUND

         VTrader was a Chicago Board Options Exchange, Inc. (“CBOE”) member and trading permit holder registered with the Financial Industry Regulatory Authority. It operated from 2003 until it liquidated its business in 2013. Kurlan was VTrader's managing member and made all material decisions.

         VTrader contracted with Merrill Lynch Professional Clearing Corporation (“Merrill Lynch”) to establish a joint back office operation. This allowed VTrader to pool capital in a non-segregated environment, meaning that profits and losses of individual member traders were netted against one another. VTrader had Class A and Class B members. Texas Capital Management (“TCM”) became a Class B member in 2006. TCM was formed and controlled by Michael DeNio. TCM had its own members, including the Urquharts, who each opened individual sub-accounts with TCM in 2007. Jason was designated as the trader on both accounts, and the two were considered a single trading unit. The amounts in the Urquharts' and VTraders' accounts fluctuated. According to the Urquharts, in 2011, their accounts grew to over $4 million. VTrader allowed the Urquharts to withdraw $900, 000 from their accounts between January and April 2011. After this, however, the Urquharts were not able to withdraw any additional amounts. Instead, in September 2011, VTrader liquidated all positions, including those held by the Urquharts, to address shortages in other VTrader accounts.

         On or about October 31, 2012, the Urquharts filed a statement of claim against Kurlan, VTrader, and Merrill Lynch demanding arbitration, alleging negligent misrepresentation, fraudulent inducement and concealment, unjust enrichment, promissory estoppel, breach of fiduciary duty and good faith and fair dealing, and violations of industry rules and regulations.[3]The Urquharts claimed, among other things, that Kurlan and VTrader made material misrepresentations to induce the Urquharts to continue trading, all the while knowing the status of other VTrader accounts that would ultimately lead the Urquharts not to realize the profits from their trading activities. The Urquharts requested monetary damages, pre- and post-award interest, forum fees, and all other relief to which they were entitled. The parties agreed to submit the dispute to arbitration pursuant to the CBOE's rules of arbitration. The arbitration panel was constituted on December 23, 2013.

         The arbitration hearing took place from November 2 through 6, 2015, with an additional session on November 30, 2015. Kurlan represented himself and VTrader pro se for the first week of proceedings because their attorney withdrew shortly before the beginning of the hearings. Kurlan obtained an attorney, Shane Wachtel, to represent him individually shortly after the week of hearings concluded, providing Kurlan with representation for the final November 30 session. Both Kurlan and Wachtel repeatedly asked for additional time to prepare and present a defense, but the arbitration panel rebuffed those requests.

         Over the course of the hearing, the Urquharts testified themselves and called Kurlan as a witness. They also called an expert, Ed Keiley, and had their counsel, Michael Brown, testify concerning the attorneys' fees. Kurlan and VTrader called three witnesses: Gary Anderson, a fact witness and expert, Mark Bold, an industry expert, and Mark Duffy, an industry and legal expert. Kurlan also recalled Jason to testify on November 30. Kurlan and VTrader complained that they were not able to present the testimony of DeNio or Donald Mankin, VTrader's accountant. But at the close of the hearing, Wachtel affirmed to the panel that Kurlan had presented his case the best he could.

         On February 8, 2016, the arbitration panel rendered its final award in favor of the Urquharts and against Kurlan and VTrader in the total amount of $5, 405, 958.96, broken down as follows: (1) $3, 860, 265.00 in compensatory damages and pre-award interest; (2) $1, 182, 205.00 in attorneys' fees; (3) $360, 488.96 in punitive damages; and (4) $3, 000.00 in forum fees. The award remains outstanding.

         ANALYSIS

         Under the FAA, the Court must confirm the arbitration award unless certain statutory exceptions, as set forth in §§ 10 and 11 of the FAA, apply. 9 U.S.C. § 9. The Court addresses whether the exceptions that Kurlan and VTrader raise prevent confirmation in this case.

         I. Alleged Issues with Definiteness and Scope of Award

         Section 10(a)(4) provides that the Court may vacate an arbitration award 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)(4). The Court's review is extremely limited, with Kurlan and VTrader bearing a heavy burden. Oxford Health Plans LLC v. Sutter, __ U.S. __, 133 S.Ct. 2064, 2068, 186 L.Ed.2d 113 (2013). The Court may only vacate the award if the arbitrators acted outside the scope of their authority, i.e., if they issued an award that “does not draw its essence from the agreement between the parties.” Yasuda Fire & Marine Ins. Co. of Europe, Ltd. v. Cont'l Cas. Co., 37 F.3d 345, 349 (7th Cir. 1994). “[T]hinly veiled attempts to obtain appellate review of the arbitrator's decision . . . [are] not permitted under the FAA.” Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir. 1995). “Factual or legal error, no matter how gross, is insufficient to support overturning an arbitration award.” Halim v. Great Gatsby's Auction Gallery, Inc., 516 F.3d 557, 563 (7th Cir. 2008); see also Oxford Health Plans, 133 S.Ct. at 2068 (“[T]he sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.”).

         The Seventh Circuit has also indicated that the “mutual” and “final” requirement means that “the arbitrators must have resolved the entire dispute (to the extent arbitrable) that had been submitted to them” and the “definite” requirement means that “the award is sufficiently clear and specific to be enforced should it be confirmed by the district court and thus made judicially enforceable.” IDS Life Ins. Co. v. Royal Alliance Assocs., Inc., 266 F.3d 645, 650 (7th Cir. 2001). Stated another way, an arbitration award is unenforceable if it “is either incomplete in the sense that the arbitrators did not complete their assignment (though they thought they had) or so badly drafted that the party against whom the award runs doesn't know how to comply with it.” Smart v. Int'l Bhd. of Elec. Workers, Local 702, 315 F.3d 721, 725 (7th Cir. 2002). These requirements “are ones more of form than of substance . . . not to be confused with whether the arbitrators' award was correct or even reasonable, since neither error nor clear error nor even gross error is a ground for vacating an award.” IDS Life Ins. Co., 266 F.3d at 650.

         A. ...


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