Sterne Agee Wins Partial Subrogation In FINRA Customer Arbitration

On or about August 3, 2018, Claimant filed a Motion for Protective Order in which she requested that the Panel enter a Protective Order that prevents Third-Party Respondent from contacting Claimant in any way during the pendency of the final arbitration hearing, including, but not limited to, being in the same final arbitration hearing room as Claimant. In his response, Third-Party Respondent requested that the Panel enter an order bifurcating the claims of Respondent Sterne Agee against Third-Party Respondent Anthony A. Grey and the claims of Third-Party Respondent Anthony A. Grey against Claimant Susan C. Grey. In her reply, Claimant agreed to Third-Party Respondent's proposed structure, provided that he is ordered to appear to testify in the arbitration hearing of Claimant against Respondent, if called by either of the Parties. On or about August 17, 2018, the Panel issued an Order that bifurcated the claims involving Third-Party Respondent, and the Panel conducted two sets of evidentiary hearings in this matter. All claims, Third-Party claims, and Crossclaims are addressed in this one final Award. 

Claimant Anne Grey: $1,725 Initial Claim Filing Fee; $1,083.33 Postponement Fee; $66.66 Discovery-Related Motion Fee; $83.33 Contested Motion for Issuance of Subpoenas Fee; and $8,241.65 Hearing Session Fees

Respondent Sterne, Agee: $2,550 Third-Party Claim Filing Fee; $2,475 Member Surcharge; $5.075 Member Process Fee; $1,083.33 Postponement Fee; $66.66 Discovery-Related Motion Fee;$83.33 Contested Motion for Issuance of Subpoenas Fee; and $7,591.65 Hearing Session Fees

Third-Party Respondent Anthony Grey: $1,575 Crossclaim Filing Fee; $433.33 Postponement Fee; $66.66 Discovery-Related Motion Fee;$83.33 Contested Motion for Issuance of Subpoenas Fee; and $9,316.65 Hearing Session Fees

I respectfully dissent for the following reasons. 

Relevant Facts: The Claimant's husband opened an account with the Respondent in the name of Fair Ventures LLC Profit Sharing Plan ("Account"). One month later, the husband sent an email to the Respondent requesting that no withdrawals be made from the Account without the Claimant's and husband's signatures. In response, the Respondent sent a signature form which Claimant signed and returned. The Claimant intended that dual signatures be required for any wire or other transfers. However, the husband ordered many wire transfers from the Account in his signature only and the Claimant is seeking damages for those unauthorized transfers. 

The Majority found negligence on the part of the Respondent because it allowed wire transfers to be withdrawn from the Account without the Claimant's signature and awarded compensatory damages. This dissent is not based upon the Majority's finding of negligence but, rather, is based upon UCC 4A (described below) which applies to this case and displaces Claimant's common law negligence claims. 

From all the documents presented and the witness testimony at the hearing, there is no factual dispute that: (a) Many of the wire transfer orders from the husband to the Respondent for the withdrawal of funds from the Account were made only in the husband's name. (b) The Claimant brought this claim against the Respondent for damages resulting from unauthorized wire transfers. (c) Respondent sent monthly notifications identifying every wire transfer made out of the Account with specific FINRA Office of Dispute Resolution Arbitration No. 16-01784 Award Page 8 of 9 information that would allow the Claimant to identify and object to any funds transfer, including those she believed to be unauthorized wires. These monthly statements were sent by the Respondent to its customer's address which is also the Claimant's address. (d) Claimant did not notify the Respondent of her objection to any of the unauthorized wire transfers for well over one year after receiving the monthly notifications from the Respondent. 

U.C.C. -Article 4A-505 Preclusion Of Objection To Debit Of Customer's Account, and its related Official Comments ("UCC 4A"): UCC 4A provides: 

"If a receiving bank has received payment from its customer with respect to a payment order issued in the name of the customer as sender and accepted by the bank, and the customer received notification reasonably identifying the order, the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer's objection to the payment within one year after the notification was received by the customer." 

UCC 4A is a statute of repose which prohibits a bank customer from recovering on an unauthorized funds transfer if the customer fails to object within 1 year of receiving notice. Unlike statutes of limitation which are subject to equitable tolling in cases if the claimants can show that they did not discover its damages until long after the fact, statutes of repose strictly bar any claims from being brought after the time stated in the statute has lapsed. 

UCC 4A was created to define the rights and obligations regarding wire funds transfers (at the time of drafting, such transfers were a recent and growing technology). The Official Comments state that the rules "present a careful and delicate balancing" of the competing interests between financial organizations and public interest and "are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this article." In order to create this delicate balance of competing interests, each party has specific duties they must perform to protect their respective interests. 

A bank's UCC 4A duty after accepting and acting upon a payment order is to send notification reasonably identifying the order to the customer and the customer received the notification. A "person receives a notice or notification when it is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications." (UCC 1-202 Notice; Knowledge) 

The customer's UCC 4A duty is to review the bank's notifications and notify the bank of any objections within one year after the notification is received. If the customer does not notify the bank of objections within one year, the customer is precluded from asserting any claim against the bank. 

UCC 4A bars the Claimant's negligence claim: UCC 4A is a Statute of Repose that governs wire transfers and balances the rights and responsibilities between banks and their customers for wire transfer disputes. The Claimant's claim against the Respondent is for damages resulting from the Respondent negligently and improperly transferring funds out of the Account through unauthorized wire transfers which clearly falls within UCC 4A. It is undisputed that the Respondent appropriately sent monthly statements to Claimant. There is also no dispute that the Claimant failed to object to any wire transfer transactions within a year after receiving such notifications. Where the bank has fulfilled its duty to send notifications to the customer, the repose period of UCC 4A is triggered requiring the customer to object to any transaction within one year of receiving notice. Because Claimant did not object within the required time period, UCC 4A clearly applies and, therefore, displaces the Claimant's negligence claim against the Respondent. 

Arbitrator Discretion effect on UCC 4A: FINRA rules are clear that Arbitrators may use discretion when adjudicating FINRA cases under certain circumstances. Arbitrators are not required to follow federal or state rules of evidence, and Arbitrators are not bound by legal precedent, which is a system of jurisprudence based on case law, not statutory law. It does not appear that FINRA rules provide any guidance for statutory law. It may be proper use of Arbitrator discretion in cases involving statutes of limitations in which there may be issues of equitable tolling if the claimant can show that they did not discover their damages until long after the fact. However, statutes of repose are very different from statutes of limitations. UCC 4A imposes a bright line cut-off date for any common law claim or equitable consideration if the customer fails to comply with its requirements. In balance, if the bank does not send appropriate notifications, the customer can sue the bank for negligence at any time (subject to any other limitation requirement). However, if such notifications are sent and the customer does not object within the required time period, the bank has no liability to the customer. The UCC 4A provides a balance of rights and obligations. If an Arbitrator uses his or her discretion to allow a negligence claim that is clearly inconsistent with and barred by UCC 4A, it will go completely against its stated purpose, and basically render this statutory law null and void. It is hard to believe that such discretion can operate to disregard a statute of repose that is the established law for wire transfer disputes such as this case. In the cases presented by both the Complaint and Respondent in which the plaintiffs brought action against the bank asserting negligence claims related to unauthorized wire transfers, the courts have dismissed those claims on the basis of UCC 4A. 

Bill Singer's Comment

I've been lawyering on the Street for four decades and, gotta tell ya, I'm not sure that I've ever heard about a Claimant asking a Panel of arbitrators to "enter a Protective Order that prevents Third-Party Respondent from contacting Claimant in any way during the pendency of the final arbitration hearing, including, but not limited to, being in the same final arbitration hearing room as Claimant." That sort of sounds like something you should seek from a court and have enforced at the arbitration hearing. As best I understand the FINRA Arbitration Decision, the arbitrators solved the whole protective order issue by bifurcating "the claims involving Third-Party Respondent, and the Panel conducted two sets of evidentiary hearings in this matter. All claims, Third-Party claims, and Crossclaims are addressed in this one final Award."  So they conducted two hearings in order to separate Claimant and Third-Party Respondent? Interesting.

To the extent that Respondent Sterne Agee and Third-Party Respondent Anthony Grey are unhappy with the Panel's verdict, the bases for moving to vacate are presented in:

Federal Arbitration Act ("FAA") Title 9 U.S. Code § 10: Same; vacation; grounds; rehearing

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) 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.

(b) If an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.

(c) The United States district court for the district wherein an award was made that was issued pursuant to section 580 of title 5 may make an order vacating the award upon the application of a person, other than a party to the arbitration, who is adversely affected or aggrieved by the award, if the use of arbitration or the award is clearly inconsistent with the factors set forth in section 572 of title 5.

If an Arbitrator uses his or her discretion to allow a negligence claim that is clearly inconsistent with and barred by UCC 4A, it will go completely against its stated purpose, and basically render this statutory law null and void. It is hard to believe that such discretion can operate to disregard a statute of repose that is the established law for wire transfer disputes such as this case. In the cases presented by both the Complaint and Respondent in which the plaintiffs brought action against the bank asserting negligence claims related to unauthorized wire transfers, the courts have dismissed those claims on the basis of UCC 4A. 

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