Fifth Circuit Reinstates NASD Arbitration Award


The United States Court of Appeals for the Fifth Circuit held that a NASD arbitration panel did not exceed its authority when awarded attorney’s fees directly to counsel.

In Institutional Capital Management, Inc. v. Claus, No. 08-20710 (5th Cir. Feb. 11, 2010), Leonard Claus and Institutional Capital management (ICM) entered into an agreement to buy and sell bonds. After a dispute over some bonds that Claus originally purchased to sell to Sterling Financial Investment Group, Inc. (Sterling) Claus sued ICM alleging negligence, gross negligence, negligent representation, breach of contract, violations of federal and state securities laws, and violations of federal and state statutory fraud. Claus hired Michael Fallick to represent him on a contingency fee basis.

An arbitration panel at the National Association of Securities Dealers (NASD) awarded Claus $25,000 in compensatory damages and $70,000 in attorney’s fees directly to Fallick. The panel also charged Claus $22,000 in arbitration fees. Thus, the net award to Claus was for $3,000. Sterling and ICM moved to vacate the arbitration award and a magistrate judge agreed because “the arbitration panel exceeded its authority when it awarded attorney’s fees directly to Fallick in violation of Texas law.”

The Fifth Circuit first highlighted the Federal Arbitration Act (FAA) grounds to vacate an award. However, the court noted that there is no need to consider whether the alleged legal error violates the FAA, because there is no reversible error in this case. The court explained that Texas law prohibits the award of fees to be paid directly to counsel unless authorized by statute. But it noted that a party that has been ordered to pay attorney’s fees has no standing to challenge to whom those fees are paid to. The court also addressed appellees’ argument that the fee award was unreasonable. It stated that “[a] disproportionate fee award is not tantamount to an excessive attorney’s fee award under Texas law.”

Accordingly, the court reversed the judgment of the magistrate judge and reinstated the arbitral award.

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