Unanimous Eleventh Circuit: Under the FAA, an Award Can Be Modified by a Court for Evident Miscalculation Only If the Mistake Is Clearly Evident on the Face of the Award
Posted on Categories Arbitration Awards, Court Decisions, Securities ArbitrationTags , , ,

By George H. Friedman, SAA Editor-in-Chief

The amount of damages in an arbitration award may only be modified by a federal court if there is a mathematical error in calculating the damage “clearly evident” on the face of the award, a unanimous Eleventh Circuit holds in a case of first impression.

We covered Mid Atlantic Capital v. Bien, No. 18-1195 (10th Cir. Apr. 14, 2020), in a “Quick Take” in SAA 2020-16 (Apr. 29), and promised a more thorough analysis in a future Alert. The Court reviews on appeal a decision of the District Court of Colorado (SOLA 2018-22) confirming a FINRA Arbitration Award (FINRA ID #15-00333). According to Mid Atlantic, the Arbitrators made a material miscalculation in awarding damages and granted in damages far more than Claimants were asking. Mid Atlantic believes, not unreasonably in the District Court’s view, that the Panel assessed the brokerage firm damages equating to a double recovery. The District Court confirmed the Award, but, in doing so, it ordered interest and reassignment of post-Award distributions in a way that displeased the Claimants. Thus, both sides appealed.

A Double Recovery?

According to the Court, Claimants’ expert offered the Panel two ways to award damages: one via a net out-of-pocket calculation of losses, yielding $292,411; and the other using market-adjusted damages. Using the latter method of calculation, the expert offered a range, from $484,684 to $618,049. The Arbitrators adopted their own terms for their damage awards (“initial investment loss” and “compensatory”) and assessed Mid Atlantic, with pre-Award interest of 8%, the sum of $777,094. To that, the Panel added $118,560 in attorney fees and $26,812.82 in costs. Finally, it directed Claimants to reassign ownership rights in Sonoma Ridge Partners and KBS REIT to Respondent.

District Court Confirms

Immediately post-Award, Claimants were satisfied with the Panel’s decision and asked for confirmation. Mid Atlantic claimed the Arbitrators’ Award must either be vacated or modified under Federal Arbitration Act (“FAA”) section 11 (“evident material miscalculation of figures”). Claimants argued that section 11 only allowed for modification of a “material miscalculation” that was apparent on the face of the Award. The District Court conceded that the Panel was probably wrong, as Mid Atlantic urged, but it also agreed with Claimants that it had no authority to correct an error that required reviewing the merits. It declined, however, to award interest on the attorney fees and costs and ordered Claimants to return any distributions or interest received on the investments since the date of the Award, as part of the reassignment process.

Eleventh Circuit Affirms

The primary issue on appeal was the correct interpretation of section 11. Is it enough that a mistake is “evident” to the court or does the FAA restrict modification to only miscalculations appearing on the face of the Award? The Court deems this an issue of first impression and it carefully examines the “text and context” of the FAA for its answer, referring at length to the “persuasive authority of our sister circuits.... [W]e conclude that Section 11(a) embodies a face-of-the-award limitation.” First, the word “miscalculation” connotes concern with a mathematical, not a legal, error. Given that the FAA’s purpose is to ensure enforcement of arbitration agreements and awards, the word “evident” must relate to the face of the Award, not to the arbitration record. “The broad construction that Mid Atlantic proposes would transform § 11(a) from an exception to address egregious circumstances into a freewheeling authorization for the courts to dig through the arbitration record in search of significant miscalculations.” The miscalculation urged by Mid Atlantic cannot fit the face-of-award criterion.

Award of Interest OK

The Court proceeds somewhat more expeditiously with the Claimants’ objections on cross-appeal. First, the Award said nothing about interest, when awarding attorney fees and costs. While Claimants make the argument that Rule 12904(j) awards interest on the whole award, the Court counters that the Arbitrators are free to interpret that requirement and chose to award interest on the investment losses only. As for the post-Award interest rate that is set by federal rule; while it can be altered by specific action by the Arbitrators, the Panel here did not address the issue. Finally, the return of post-Award distributions ordered by the trial court was proper. They are part and parcel of the ownership interests that the Panel ordered reassigned to Mid Atlantic. The District Court’s judgment is affirmed in all respects.

(ed: *While the Court’s attention to detail in this 65-page Opinion seems tedious at times, its analysis is painstaking and its conclusions resolve a lot of technical issues that frequently arise in construing arbitrators’ intentions. **There is a split in the Circuits on this issue, yet the Court says:We close our analysis of this matter by recognizing, moreover, that the persuasive authority of our sister circuits has reached a similar conclusion.” ***This analysis is adapted from one appearing in our sister SOLA publication -- SOLA 2020-17.) (SAC Ref. No. 2020-18-02)

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