Moreland v. Perkins

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No. 102,629

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

JACK W. MORELAND
Appellee,

v.

PERKINS, SMART & BOYD,
Appellant.


SYLLABUS BY THE COURT

1.
The Kansas Uniform Arbitration Act (Act), K.S.A. 5-401 et seq., permits an
appeal from an order confirming or vacating an arbitration award, pursuant to K.S.A. 5-
418(a).

2.
On appeal, an appellate court's standard of review of an arbitration award is highly
deferential and the court must affirm an arbitration award if the arbitrator acted within the
scope of his or her authority. As long as errors are not in bad faith or so gross as to
amount to affirmative misconduct, the court is bound by an arbitrator's findings of fact
and conclusions of law.

3.
An arbitrator is not required to provide the reasons for his or her award. The
district court must presume an award is valid unless one of the specific grounds in K.S.A.
5-412(a) is proven.

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4.
K.S.A. 5-412(a) sets forth five limited circumstances in which an arbitration award
must be vacated: "(1) The award was procured by corruption, fraud or other undue
means; (2) There was evident partiality by an arbitrator appointed as a neutral or
corruption in any of the arbitrators or misconduct prejudicing the rights of any party; (3)
The arbitrators exceeded their powers; (4) The arbitrators refused to postpone the hearing
upon sufficient cause being shown therefore or refused to hear evidence material to the
controversy or otherwise so conducted the hearing, contrary to the provisions of K.S.A.
5-405, as to prejudice substantially the rights of a party; or (5) There was no arbitration
agreement and the issue was not adversely determined in proceedings under K.S.A. 5-402
and the party did not participate in the arbitration hearing without raising the objection;
But the fact that the relief was such that it could not or would not be granted by a court of
law or equity is not ground for vacating or refusing to confirm the award."

5.
Arbitration awards, which courts regard as valid and suitable for judicial
enforcement, are neither contract nor judgment but partake of the nature of both. The
award partakes of the nature of a contract because it is the result of a contract, the
submission agreement, whereby the parties agree to comply with the award. It differs
from a contract in that it is the act of the arbitrators, not of the parties themselves. It
partakes of the nature of a judgment in that, if it is valid, it is binding upon them though
imposed by an outside source.

6.
The dual nature of the award serves to explain the limited grounds on which it
may be successfully impeached. In general it may be said that the ground urged must be
good, both for attack upon a judgment and for relief against the terms of a contract. But,
certain grounds that would be sufficient in an appeal from a judgment would not be
grounds for impeaching an award, for the reason that the contractual element is present in
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the award. Thus, the fact that the arbitrator made erroneous rulings during the hearing, or
reached erroneous findings of fact from the evidence, is no ground for setting aside the
award, because the parties have agreed that the arbitrator should be the judge of the facts.
Even the arbitrator's erroneous view of the law would be binding, for the parties have
agreed to accept the arbitrator's view of the law. Were it otherwise, arbitration would fail
of its chief purpose; instead of being a substitute for litigation, it would merely be the
beginning of litigation. Error of law renders the award void only when it would require
the parties to commit a crime or otherwise to violate a positive mandate of the law.

7.
Judicial intervention is ill-suited to the special characteristics of the arbitration
process in labor disputes.

8.
Maximum deference is owed to the arbitrator's decision, and the standard of
review is among the narrowest known to law.

9.
Once an arbitration award is entered, the finality that courts should afford the
arbitration process weighs heavily in favor of the award, and courts must exercise great
caution when asked to set aside an award. Moreover, because a primary purpose behind
arbitration agreements is to avoid the expense and delay of court proceedings, it is well
settled that judicial review of an arbitration award is very narrowly limited.

10.
Where a defamatory statement is made in a situation where there is a qualified
privilege the injured party has the burden of proving not only that the statements were
false, but also that the statements were made with actual malice—with actual evil-
mindedness or specific intent to injure.
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11.
Arbitrators are under no requirement to explain the award. When an arbitration
panel does not give its reasons for the award, determining manifest disregard becomes
nearly impossible.

12.
A party making a claim based on manifest disregard shoulders a heavy burden. An
arbitration panel's interpretation of the law will not be reversed unless there is a clear
showing that the panel understood the law and chose to ignore it. A court's belief that the
law has been misapplied does not justify vacation of the arbitral award.

13.
K.S.A. 17-12a507 reads: "A broker-dealer, agent, investment adviser, federal
covered investment adviser, or investment adviser representative is not liable to another
broker-dealer, agent, investment adviser, federal covered investment adviser, or
investment adviser representative for defamation relating to a statement that is contained
in a record required by the administrator, or designee of the administrator, the securities
and exchange commission, or a self-regulatory organization, unless the person knew, or
should have known at the time that the statement was made, that it was false in a material
respect or the person acted in reckless disregard of the statement's truth or falsity."

14.
The factors to be considered in determining an appropriate sanction under K.S.A.
60-211 are enumerated as follows: (1) whether the improper conduct was willful or
negligent; (2) whether it was part of a pattern of activity or an isolated event; (3) whether
it infected the entire pleading or only one particular count or defense; (4) whether the
person has engaged in similar conduct in other litigation; (5) whether it was intended to
injure; (6) what effect it had on the litigation process in time or expense; (7) whether the
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responsible person is trained in the law; (8) what amount, given the financial resources of
the responsible person, is needed to deter that person from repetition in the same case;
and (9) what amount is needed to deter similar activity by other litigants.

Appeal from Johnson District Court; KEVIN P. MORIARITY, judge. Opinion filed October, 1,
2010. Affirmed in part and vacated in part.

Laura L. McConwell and Edward A. McConwell, of McConwell Law Offices, of Mission, for the
appellant.

Jeffrey S. Kruske, of Law Office of Jeffrey S. Kruske, P.A., of Overland Park, for the appellee.

Before HILL, P.J., PIERRON and LEBEN, JJ.

PIERRON, J.: In this employment termination case, Perkins, Smart & Boyd, Inc.,
(PSB) appeals the district court's decision to affirm an arbitration award entered in favor
of Jack W. Moreland. PSB argues the court erred in denying a motion to vacate the
arbitration award because the arbitration panel manifestly disregarded or willfully
ignored controlling Kansas law. PSB also argues the court erred in granting sanctions and
attorney fees in favor of Moreland. We vacate the sanctions but affirm the award.

For the most part, the parties do not dispute the controlling facts in this case.
Rather, the issues involve questions of law and application of the law by the arbitration
panel.

In October 2006, Moreland worked for PSB, an investment firm. PSB terminated
Moreland upon allegations that he forged the names of his wife, son, and daughter on a
letter of instruction to a mutual fund company in order to redeem fund shares from a trust
set up for their benefit.

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Both Moreland and PSB were subject to the rules and regulations of the Financial
Industry Regulatory Authority (FINRA). Upon his termination, PSB was required to
submit a Form U-5 to FINRA indicating the reasons for termination. PSB filed the Form
U-5 on October 27, 2006. On the Form U-5, PSB gave the following reason for
Moreland's termination:

"Mr. Moreland had a notary public notarize signatures of his wife, son and daughter that
he had forged. This is conduct that is inconsistent with standards of this firm. The
document that he signed was a letter to a mutual fund redeeming fund shares from a trust
that was set up by his deceased mother-in-law for the benefit of Mr. Moreland and [his]
children."

Moreland was outraged with the allegation of forgery and immediately voiced his
concerns to PSB. Mrs. Moreland and her children told PSB they had in fact signed the
letter and confirmed this in affidavits filed in November 2006. On October 27, 2006, and
November 1, 2006, F. Scott Perkins, president/CEO of PSB, entered Registration
Comments with FIRNA stating respectively: "I incorrectly stated in my comments that
Mr. Moreland's deceased set up a trust for 'Mr. Moreland and his children'. It should have
said 'for Mr. Moreland's wife and children.'" PSB also wrote: "I had put that Mr.
Moreland was permitted to resign. The reasons listed are not true. There was no forgery
involved."

On April 24, 2007, Moreland filed a claim with National Association of Securities
Dealers (NASD), now FINRA, alleging that as a result of the statements made in PSB's
Form U-5, he had been turned down for employment by multiple insurance companies
and brokerage firms. Moreland stated the signatures on the letter were not forged. But he
had persuaded/asked the notary public to notarize the letter without the signatories
present. Moreland alleged claims of defamation, violation of the Kansas Uniform Trade
Practices Act, tortious interference with business expectancy, and false light/invasion of
privacy. Moreland requested no less than $100,000 in damages, expungement of the
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statement, punitive damages, and attorney fees. PSB denied any wrongdoing and pled
several affirmative defenses, including privilege.

PSB and Moreland were required to submit to arbitration on Moreland's claim.
The parties agreed on a three-person arbitration panel, and the matter was submitted to
the panel during an evidentiary hearing September 3-5, 2008. Both Moreland and PSB
submitted briefs and argued the law and facts to the panel. After consideration of the
presentation, the panel granted an award in favor of Moreland. The panel specifically
found that "[Moreland] was not involved in the alleged forgery and that such allegation
was false. The issue was not disputed as evidenced by [PSB's] attempted retraction soon
after the event." The panel awarded $65,000 in compensatory damages to Moreland and
also reimbursement for the filing fee. The panel also granted Moreland's request for
expungement of language in the Form U-5 concerning the forgery and that the form
should indicate Moreland's termination was voluntary. The panel stated: "The
recommended expungement is based on the defamatory nature of the information." The
panel denied PSB's counterclaims and indicated that "[a]ny relief not specifically
enumerated, including punitive damages and attorneys' fees, is hereby denied with
prejudice." The panel assessed $6,000 in arbitration fees to PSB.

On December 8, 2008, PSB filed a motion to vacate the arbitration award in
district court. PSB alleged that absolute privilege barred Moreland's claims in total and,
alternatively, that qualified privilege required a finding that PSB acted with actual malice,
had knowledge that a statement was false, and acted with either evil-mindedness or a
specific intent to injure. PSB argued that the panel made no findings concerning privilege
and that "having knowledge of the controlling law, manifestly ignored it and exceeded
their authority by granting relief to [Moreland]." Moreland filed a motion in opposition to
PSB's motion to vacate and also a motion to confirm the arbitration award.

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The district court denied PSB's motion to vacate. The court stated that it could not
substitute its judgment for that of the arbiters with regard to the determination of the
facts. The court stated there was no indication, nor did PSB raise any allegations, that the
award was procured by fraud or corruption. The court found the issue of privilege was
completely briefed for the panel, the arbitration panel considered PSB's claim of
privilege, and "[w]hile the term 'privilege', whether qualified or absolute, was not used in
the award, there is no indication that the arbiters had complete indifference to the law."
The court awarded $750 in attorney fees to Moreland. The court later denied PSB's
motion to alter or amend.

PSB appeals.

The Kansas Uniform Arbitration Act (Act), K.S.A. 5-401 et seq., permits an
appeal from an order confirming or vacating an arbitration award, pursuant to K.S.A. 5-
418(a). K.S.A. 5-418(b) provides: "The appeal shall be taken in the manner and to the
same extent as from orders or judgments in a civil action."

On appeal, an appellate court's standard of review of an arbitration award is highly
deferential and the court must affirm an award if the arbitrator acted within the scope of
her or his authority. As long as errors are not in bad faith or so gross as to amount to
affirmative misconduct, the appellate court is bound by an arbitrator's findings of fact and
conclusions of law. City of Coffeyville v. IBEW Local No. 1523, 270 Kan. 322, 336, 14
P.3d 1 (2000). An arbitrator is not required to provide the reasons for his or her award.
Griffith v. McGovern, 36 Kan. App. 2d 494, 500, 141 P.3d 516 (2006). The district court
must presume an award is valid unless one of the specific grounds in K.S.A. 5-412(a) is
proven. Alexander v. Everhart, 27 Kan. App. 2d 897, 900-01, 7 P.3d 1282, rev. denied
270 Kan. 897 (2000).

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K.S.A. 5-412(a) sets forth five limited circumstances in which an arbitration award
must be vacated:

"(1) The award was procured by corruption, fraud or other undue means;
"(2) There was evident partiality by an arbitrator appointed as a neutral or
corruption in any of the arbitrators or misconduct prejudicing the rights of any party;
"(3) The arbitrators exceeded their powers;
"(4) The arbitrators refused to postpone the hearing upon sufficient cause being
shown therefore or refused to hear evidence material to the controversy or otherwise so
conducted the hearing, contrary to the provisions of K.S.A. 5-405, as to prejudice
substantially the rights of a party; or
"(5) There was no arbitration agreement and the issue was not adversely
determined in proceedings under K.S.A. 5-402 and the party did not participate in the
arbitration hearing without raising the objection;
"But the fact that the relief was such that it could not or would not be granted by
a court of law or equity is not ground for vacating or refusing to confirm the award."

PSB does not argue any of those circumstances apply here.

In determining the question raised in the present case, it is helpful to review some
general comments by the court in Coleman v. Local No. 570, 181 Kan. 969, 975-76, 317
P.2d 831 (1957), concerning the sanctity, deferential nature, and judicial economy of
arbitration:

"Arbitration awards, which courts regard as valid and suitable for judicial
enforcement, are neither contract nor judgment but partake of the nature of both. The
award partakes of the nature of a contract because it is the result of a contract, the
submission agreement, whereby the parties agree to comply with the award. It differs
from a contract in that it is the act of the arbitrators, not of the parties themselves. It
partakes of the nature of a judgment in that, if it is valid, it is binding upon them though
imposed by an outside source.
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"The dual nature of the award serves to explain the limited grounds on which it
may be successfully impeached. In general it may be said that the ground urged must be
good, both for attack upon a judgment and for relief against the terms of a contract. But,
certain grounds that would be sufficient in an appeal from a judgment would not be
grounds for impeaching an award, for the reason that the contractual element is present in
the award. Thus, the fact that the arbitrator made erroneous rulings during the hearing, or
reached erroneous findings of fact from the evidence, is no ground for setting aside the
award, because the parties have agreed that he should be the judge of the facts. Even his
erroneous view of the law would be binding, for the parties have agreed to accept his
view of the law. Were it otherwise . . . , arbitration would fail of its chief purpose; instead
of being a substitute for litigation, it would merely be the beginning of litigation. Error of
law renders the award void only when it would require the parties to commit a crime or
otherwise to violate a positive mandate of the law. [Citation omitted.]
"Judicial intervention is ill-suited to the special characteristics of the arbitration
process in labor disputes."

See Jackson Trak Group, Inc. v. Mid States Port Authority, 242 Kan. 683, 689, 751 P.2d
122 (1988).

The Tenth Circuit has stressed this very limited standard of review. Durkin v.
CIGNA Prop. & Cas. Corp., 986 F. Supp. 1356, 1357-58 (D. Kan. 1997) (citing ARW
Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 [10th Cir. [Okla.] 1995]); see also
Brown v. Coleman Co., Inc., 220 F.3d 1180, 1182 (10th Cir. (Kan.) 2000). "'Maximum
deference is owed to the arbitrator's decision,' and the standard of review 'is among the
narrowest known to law.'" Durkin, 986 F. Supp. at 1357; see Bowen v. Amoco Pipeline
Co., 254 F.3d 925, 932 (10th Cir. (Okla.) 2001). Therefore, once an arbitration award is
entered, the finality that courts should afford the arbitration process weighs heavily in
favor of the award, and courts must exercise great caution when asked to set aside an
award. Moreover, "[b]ecause a primary purpose behind arbitration agreements is to avoid
the expense and delay of court proceedings, it is well settled that judicial review of an
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arbitration award is very narrowly limited." ARW Exploration Corp., 45 F.3d at 1463
(quoting Foster v. Turley, 808 F.2d 38, 42 [10th Cir. [N.M.]1986]).

PSB claims Kansas courts have recognized nonstatutory grounds for vacating an
arbitration award where an applicant demonstrates the arbitrator's award is in manifest
disregard of the law. Griffith, 36 Kan. App. 2d at 499 (citing Jackson Trak Group, 242
Kan. at 689); see Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001) (violation
of public policy, manifest disregard of the law, and denial of a fundamentally fair
hearing). An arbitrator's manifest disregard of the law occurs when the arbitrator knew of
a governing legal principle yet refused to apply it. This exception does not apply when an
arbitrator simply misinterprets the law. See Jackson Trak Group, 242 Kan. at 689; ARW
Exploration Corp., 45 F.3d at 1463. However, PSB does not cite any Kansas case, nor
did we discover any, where the arbitration award was actually overturned for a manifest
disregard of the law. See Griffith, 36 Kan. App. 2d at 500; Dunn v. A.G. Edwards &
Sons, Inc., 2007 WL 2767997, at *7 (Kan. App. 2007) (unpublished opinion) ("the Dunns
have failed to demonstrate the arbitrator manifestly disregarded the law in calculating
damages, and we conclude the district court did not err in confirming the award"). Courts
must tread lightly in the area of manifest disregard of the law. The statutory mandate of
K.S.A. 5-412(a) indicates the legislature's clear intention to not permit a court to vacate
or refuse to confirm an award even if the relief "could not or would not be granted by a
court of law or equity."

In short, even though the limited scope of review of what could appear to be very
odd arbitration awards might cause cold shivers to go down the spines of reviewing
courts, highly limited review is the law.

We now turn to PSB's contention that it is entitled to absolute privilege regarding
the statements it made in Moreland's Form U-5. Indeed, to prevail in this appeal,
considering the applicable statutory and case law, that appears to be its only potential
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avenue for success. Without absolute privilege, the arbitrator's findings of fault on PSB's
actions are dispositive.

PSB argues the arbitration panel manifestly disregarded or was willfully ignorant
of controlling Kansas law on absolute privilege concerning reports such as Form U-5. As
we will set out below, we believe PSB is incorrect on this issue concerning both statutory
law and case law.

PSB maintains the filing of the Form U-5 is absolutely privileged. PSB cites other
instances of absolute privilege. See Jarvis v. Drake, 250 Kan. 645, 830 P.2d 23 (1992)
(attorney discipline proceedings); Schulze v. Board of Education, 221 Kan. 351, 559 P.2d
367 (1977) (school board); Clear Water Truck Co. v. M. Bruenger & Co. Inc., 214 Kan.
139, 519 P.2d 682 (1974) (Interstate Commerce Commission); Thompson v. Amis, 208
Kan. 658, 493 P.2d 1259, cert. denied 409 U.S. 847 (1972) (administrative board);
Gawith v. Gage's Plumbing & Heating Co., Inc., 206 Kan. 169, 476 P.2d 966 (1970)
(administrative board); Ellis v. Isoray Medical, Inc., 2008 WL 3915097 (D. Kan. 2008)
(unpublished opinion) (unemployment compensation).

PSB argues that because of the Form U-5's compulsory nature, its role in the
NASD's quasi-judicial process, and with the protection of public interests in mind, the
courts in New York have concluded that statements made by an employer on the form
should be subject to an absolute privilege. See Rosenberg v. MetLife, Inc., 493 F.3d 290
(2d Cir. (N.Y.) 2007); Pierre v. JP Morgan Chase Bank, 2008 WL 3157330 (S.D.N.Y.
2008) (unpublished opinion); Rosenberg v. MetLife, Inc., 8 N.Y.3d 359, 866 N.E.2d 439,
834 N.Y.S.2d 494 (2007); Barclays Capital Inc. v. Shen, 857 N.Y.S.2d 873, 20 Misc. 3d
319 (2008). However, this position is clearly the minority.

The majority of courts addressing the issue of whether statements on arbitration
Form U-5 are privileged have held that statements on Form U-5 are entitled only to a
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qualified privilege. See Dawson v. New York Life Ins. Co., 135 F.3d 1158 (7th Cir. (Ill.)
1998); Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132 (6th Cir. (Tenn.) 1996);
Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 708 (7th Cir. (Ill.) 1994) ("the
[employer] has a qualified privilege to defame the employee on the U-5"); Fahnestock &
Co., Inc. v. Waltman, 935 F.2d 512, 516 (2d Cir. (N.Y.) 1991) (employer's statements on
amended Form U-5 were subject to qualified privilege); Boxdorfer v. Thrivent Financial
for Lutherans, 2009 WL 2448459 (S.D. Ind. 2009) (unpublished opinion); Shanklin v.
Columbia Management Advisors, L.L.C., 2008 WL 4899631 (S.D. Tex. 2008)
(unpublished opinion); Wietecha v. Ameritas Life Ins. Corp., 2006 WL 2772838 (D. Ariz.
2006) (unpublished opinion); Dickinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
431 F. Supp. 2d 247 (D. Conn. 2006); Prudential Securities, Inc. v. Dalton, 929 F. Supp.
1411 (N.D. Okla.1996); Haburjak v. Prudential Bache Securities, Inc., 759 F. Supp. 293
(W.D.N.C. 1991); Eaton Vance Distributors, Inc. v. Ulrich, 692 So. 2d 915 (Fla. Dist. Ct.
App. 2d Dist. 1997).

In 1995, Anne H. Wright, in Wright Form U-5 Defamation, 52 Wash. & Lee L.
Rev. 1299, 1330 (1995), debated the issue of absolute verse qualified privilege in the
context of Form U-5 defamation and concluded with these words:

"As the Seventh Circuit noted in Baravati, an absolute privilege is 'strong
medicine,' and a compelling case has not been made for extending the privilege beyond
the judicial and quasi-judicial context into the area of Form U-5 reporting, especially
given the abuses that have sometimes occurred with respect to such reporting. Given the
possibility of such abuses and the very serious damage that improper Form U-5 reporting
can do to individuals' business reputations and employment prospects, immunizing
broker-dealers from all liability for defamatory Form U-5 statements would afford
insufficient protection to the reputational interest of individuals employed in the
securities industry. Any response to Form U-5 defamation concerns must balance these
reputational interests, securities regulators' need for accurate and complete information
about the movements of problem representatives, and broker-dealers' desire for protection
against civil liability for good-faith errors in Form U-5 reporting. To achieve such a
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balance, Form U-5 statements should enjoy only qualified protection from defamation
liability."

PSB argues the only way the arbitration panel could have awarded Moreland
damages is if it disregarded what it claims to be Kansas' clear controlling law of absolute
immunity and all of Moreland's claim should have been dismissed except for the
expungement. PSB contends that all statements made and collected in the FINRA process
which relate to the proceeding are absolutely immune from claims flowing from the
statements, including defamation, libel, and invasion of privacy.

We disagree and side with the majority of the courts addressing this issue. We
hold the statements by PSB in the Form U-5 were entitled to a qualified privilege at most,
both under case law, and even more importantly, under Kansas statutory law.

A qualified privilege exists with respect to business or employment
communications made in good faith and between individuals with a corresponding
interest or duty in the subject matter of the communication. Turner v. Halliburton Co.,
240 Kan. 1, 8, 722 P.2d 1106 (1986). Further, "'[w]here a defamatory statement is made
in a situation where there is a qualified privilege the injured party has the burden of
proving not only that the statements were false, but also that the statements were made
with actual malice—with actual evil-mindedness or specific intent to injure.'" Turner, 240
Kan. at 8 (quoting Munsell v. Ideal Food Stores, 208 Kan. 909, 920-21, 494 P.2d 1063
[1972]).

Moreland argues PSB's motion to vacate must be denied because the arbitration
panel could have imposed liability on PSB and awarded damages on any of his claims.
Moreland cites Dunn, 2007 WL 2767997. However, Dunn does not involve the claims of
privilege as in the present case. Rather, Dunn involved an investor suing an investment
firm for making untrue statements or omissions of material fact in conjunction with the
15

sale of securities in a retirement account. The Dunns claimed violations of the Kansas
Securities Act and the Kansas Consumer Protection Act, common-law fraud, negligence,
negligent misrepresentation, and breach of fiduciary duty. The arbitrator awarded the
Dunns only $10,000, and they contended the arbitrator manifestly disregarded the law by
not awarding damages pursuant to the Kansas Securities Act. The arbitrator's award was
silent on its method of calculation, and the Dunn court held:

"It is possible the arbitrator's award in this case was based upon a finding the
defendants violated the Kansas Securities Act, thus requiring an award of damages under
the Act's mandatory damages provision. We need not vacate the award, however, because
it is equally possible the award may have been based upon at least three other grounds
asserted by the Dunns which did not encompass their claim under the Securities Act. As
such, the Dunns have failed to demonstrate the arbitrator manifestly disregarded the law
in calculating damages, and we conclude the district court did not err in confirming the
award." 2007 WL 2767997, at *7.

Moreland compares the arbitration award in this case to the functional and legal
equivalent of a general jury verdict. Consequently, the arbitration award is valid as long
as it is legally supportable on any one of the submitted grounds. See Griffin v. United
States, 502 U.S. 46, 48, 116 L. Ed. 2d 371, 112 S. Ct. 466 (1991); Black v. Don Schmidt
Motor, Inc., 232 Kan. 458, 474, 657 P.2d 517 (1983). Moreland argues the arbitration
panel identified no single basis for its monetary award and that it strains logic and reason
to contend that the panel's specific mention of the defamatory language in the Form U-5
compels a conclusion that the panel silently rejected all of Moreland's remaining claims.

The arbitrators are under no requirement to explain the award. See Griffith, 36
Kan. App. 2d at 500 (an arbitration panel is not required to set forth the reasons for its
award citing Sheldon v. Vermonty, 269 F.3d 1202, 1207 n.6 [10th Cir. [Kan.] 2001]).
When an arbitration panel does not give its reasons for the award, such as here,
determining manifest disregard becomes nearly impossible. See Willemijn
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Houdstermaatschappij, BV v. Standard Micro, 103 F.3d 9, 12-13 (2d Cir. (N.Y.) 1997);
O.R. Securities v. Professional Planning Assoc., 857 F.2d 742, 747 (11th Cir. [Ga.]
1988). He contends that a high percentage of arbitration awards do not contain an
explanation of the decision. Moreland contends that even without the defamation claim,
there was substantial evidence to support a monetary award on the basis of any of the
other legal theories relied upon in his claim.

In Griffith, 36 Kan. App. 2d 494, Griffith filed an arbitration claim with the
National Association of Securities Dealers (NASD) against McGovern and his
investment firm arguing that she was defrauded when she lost money after switching
from certificates of deposit to stocks and bonds. Griffith claimed violations of the Kansas
Securities Act, negligence, breach of contract, violation of NASD and Exchange Rules,
and breach of fiduciary duty. An arbitration panel granted an award of $3,000 in
compensatory damages to Griffith. The district court denied the motion to vacate.

The Griffith court rejected Griffith's claims of failure to disclose and fraud of one
of the arbitrators concerning an unsatisfied judgment and previous litigation. 36 Kan.
App. 2d at 497-98. In addition to these claims, Griffith alleged that the arbitration panel
irrationally and manifestly disregarded the Kansas Securities Act and that the award
should have been vacated. Griffith claimed $213,340 in damages, but the arbitrators
awarded $3,000 without disclosing the manner of their calculation. After citing the
principle that arbitrators are not required to give reasons for the award, the Griffith court
held as follows:

"As the district court noted, the arbitrators may or may not have considered the Kansas
Securities Act in determining Griffith's damages. Nevertheless, the burden was upon
Griffith to prove a basis for setting aside the award. Because the arbitration panel did not
make any statements regarding the law, Griffith cannot show the arbitration panel
manifestly disregarded the Kansas Securities Act. Accordingly, the district court did not
17

err by finding the arbitration panel did not manifestly disregard the law." 36 Kan. App.
2d at 500.

Moreland argues the arbitration panel heard and rejected PSB's claim that the
Form U-5 was subject to absolute privilege and now PSB dresses up its argument in the
guise of a claim that the panel's decision was in manifest disregard of the law. Moreland
makes this claim based on the arbitration panel's statement that it had considered all the
pleadings, testimony, and evidence and after granting Moreland an award stated: "Any
relief not specifically enumerated, including punitive damages and attorneys' fees, is
hereby denied with prejudice."

The arbitrators would seem to have clearly considered PSB's claims of privilege in
rendering their decision. The district court stated: "The award states that the panel
considered the claims made by the parties, including privilege. . . . While the term
'privilege', whether qualified or absolute, was not used in the award, there is no indication
that the arbiters had complete indifference to the law." PSB has the burden to prove a
basis for setting aside the award. Because the arbitration panel did not make any
statements regarding the law, PSB cannot show the arbitration panel manifestly
disregarded the law of privilege.

The court in Van Pelt v. UBS Financial Services, Inc., 2007 WL 2997598,
(W.D.N.C. 2007) (unpublished opinion), considered employment, privilege, and
arbitration facts under Form U-5 and FINRA similar to the case at bar. The Van Pelt
court held:

"A party making a claim based on manifest disregard shoulders a heavy burden.
A panel's interpretation of the law will not be reversed unless there is a clear showing that
the panel understood the law and chose to ignore it. A court's belief that the law has been
misapplied 'does not justify vacation of the arbitral award.' Remmey, 32 F.3d at 149. The
Court finds nothing on the face of the award which would show that the panel was aware
18

of the law, understood it correctly, and found it applicable to the case, and yet chose to
ignore it in the decision. At best, the award of compensatory damages and finding of
defamation is ambiguous. Since the panel was silent as to its reasoning for the
compensatory damages, UBS cannot meet its burden of showing that the panel manifestly
disregarded the law, and the award cannot be vacated on this ground." 2007 WL
2997598, at *5.

Kansas Statutory Law Concerning Absolute and Qualified Privilege

The parties and the district court focused on the case law in this area, and after
consideration of their arguments and the court's ruling, we have determined that only a
qualified privilege is due to PSB under that case law.

However, our own post-oral argument research has convinced us that there is also
a statutory basis for this position.

K.S.A. 17-12a507 reads:

"A broker-dealer, agent, investment adviser, federal covered investment adviser ,
or investment adviser representative is not liable to another broker-dealer, agent,
investment adviser, federal covered investment adviser , or investment adviser
representative for defamation relating to a statement that is contained in a record required
by the administrator, or designee of the administrator, the securities and exchange
commission, or a self-regulatory organization, unless the person knew, or should have
known at the time that the statement was made, that it was false in a material respect or
the person acted in reckless disregard of the statement's truth or falsity."

This is apparently taken from § 507 of the Uniform Securities Act. See Uniform
Securities Act (U.L.A.) § 507, pp. 156-58 (2006).

19

It would appear the Kansas Legislature took the bull by the horns and the bear by
the paws and statutorily set the level of immunity at "qualified" for these kinds of
situations.

PSB was afforded a full and fair opportunity to present to the arbitration panel its
argument that the statement that it placed on the Form U-5 was not actionable because it
was subject to an absolute, if not qualified, privilege. The statutory grounds for vacating
an arbitration award permit challenges on sufficiently improper conduct in the course of
the proceedings; they do not permit rejection of the panel's award based on disagreement
with the particular result the arbitrators reached. Accordingly, parties are not entitled to a
second bite at the apple simply because they desire a different outcome. Such a result
would transform a binding arbitration process into a purely advisory step in the litigation
process. The arbitration panel considered PSB's arguments, including privilege, and
implicitly rejected them. We conclude the arbitrators did the job they were told to do, and
PSB has failed to show that the arbitrators failed to consider PSB's claim of privilege or
manifestly disregarded the law.

PSB also argues the district court erred in granting Moreland's motion for
sanctions and attorney fees against PSB. We agree.

The standard of review in these matters was clarified by our Supreme Court in
Evenson Trucking Co. v. Aranda, 280 Kan. 821, Syl. ¶ 1, 127 P.3d 292 (2006): "When an
appellate court reviews a district court's decision to impose sanctions under K.S.A. 2004
Supp. 60-211, its function is to determine whether substantial competent evidence
supports the trial court's findings of fact that the statutory requirements for sanctions are
present." In Vondracek v. Mid-State Co-Op, Inc., 32 Kan. App. 2d 98, 104, 79 P.3d 197
(2003), the court noted the sanction under K.S.A. 2002 Supp. 60-211 "is generally
utilized when a party files a claim based upon a legal theory that is clearly contrary to
statute or case law."
20


The factors to be considered in determining an appropriate sanction under K.S.A.
60-211 are enumerated as follows:

"(1) whether the improper conduct was willful or negligent;
"(2) whether it was part of a pattern of activity or an isolated event;
"(3) whether it infected the entire pleading or only one particular count or defense;
"(4) whether the person has engaged in similar conduct in other litigation;
"(5) whether it was intended to injure;
"(6) what effect it had on the litigation process in time or expense;
"(7) whether the responsible person is trained in the law;
"(8) what amount, given the financial resources of the responsible person, is needed to
deter that person from repetition in the same case; and
"(9) what amount is needed to deter similar activity by other litigants. [Citation omitted.]"
Wood v. Groh, 269 Kan. 420, 431, 7 P.3d 1163 (2000).

The district court considered a postaward letter sent to Moreland stating:

"We've reviewed the opinion of the arbiter panel, and we've decided to challenge the
decision in the courts. In light of the substantial cost of appeal, I've recommended that an
effort be made to resolve this matter without judicial challenge. If your client has any
interest in the alternative, please let me know."

The district court found $750 in attorney fees to be in order and awarded those to
Moreland. The journal entry awarding the attorney fees states: "The Court does not like
the manner that the November 13, 2008 offer of settlement letter was written by counsel
for Perkins, Smart & Boyd to counsel for Jack W. Moreland." The judge explained his
ruling further at the hearing on the motion to alter or amend and the perceived purpose of
the November 13, 2008, letter:

21

"The purpose is - - It wasn't for the reason that it was a settlement. It was
basically a threat as I saw it. The record will speak for itself. If the litigation was
continued, the defendant was going to make it as costly as possible for the plaintiff. . . .
It's not clearly an offer of compromise. That letter was primarily an offer saying either
take it or we're going to make your life miserable."

The district court's journal entry on the motion to amend states: "The Court does not find
that the letter from Perkins, Smart & Boyd's counsel to Jack W. Moreland's counsel as
clearly an offer of compromise, but rather finds it to be an admission of Perkins, Smart &
Boyd's obligation to pay the October 20, 2008, Arbitration Award and refusal to pay."

PSB argues that it is being penalized for appealing the arbitration award and what
it contends is a legitimate challenge to the defense of absolute immunity for quasi-
judicial proceedings. PSB contends the district court did not analyze the nine-part test
enunciated above. Moreland states that PSB did not raise the failure to discuss the nine-
part test in the district court and should be precluded from raising it on appeal.

We find the letter could not be considered a naked threat sent only for the purpose
of being an unreasonable threat to cause Moreland extra in litigation costs. PSB simply
stated that it believed it had grounds for an appeal and asked if a settlement was possible.

While we have ruled in favor of Moreland on all issues, PSB's arguments are not
frivolous. We agree with the district court's analysis that PSB's case for appeal was weak.
Had PSB, the district court, or the arbitration panel noted the devastating impact of
K.S.A. 17-12a507 on what was PSB's only real appealable issue, we might give more
credence to the district court's and Moreland's position. However, absent this statute, PSB
was able to argue with fairly good authority that it was entitled to absolute privilege
which would have allowed it to checkmate the arbitrators' award. Until that possibility
was shown to be without basis, PSB's intention to appeal could not be fairly categorized
22

as the kind of behavior that should incur sanctions. We therefore vacate the attorney fee
award.

Affirmed in part and vacated in part.

* * *

LEBEN, J., concurring: I express no opinion regarding the debate that has been
waged in courts of other states about whether absolute or qualified immunity applies
when a securities broker fills out the U-5 form that the Financial Industry Regulatory
Authority (FINRA) requires when an agent leaves the broker's employment. Those courts
were deciding a policy question that their legislature did not answer. But our legislature
has answered the policy question, so we need only follow its directive.

K.S.A. 17-12a507 provides that a broker-dealer is not liable to an agent for
defamation contained in a record required by a self-regulatory organization like the
Financial Industry Regulatory Authority (FINRA) unless actual malice (knowledge of
falsity or reckless disregard) is shown. That statute comes from section 507 of the
Uniform Securities Act (2002), which Kansas adopted in 2004 and made effective July 1,
2005. L. 2004, ch. 154, sec. 36. The official comments to section 507 of the uniform act
note that this section was based on a proposal from FINRA's predecessor, the National
Association of Securities Dealers, which sought specifically to provide for qualified
immunity for its forms U-4 and U-5. See Uniform Securities Act (U.L.A.) (2000), § 507,
Official Comments, pp. 156-57 (2006). Our case involves form U-5. Thus, the language
of K.S.A. 17-12a507 clearly provides for only qualified immunity, and the history of
section 507 of the Uniform Securities Act (2002) shows that this immunity provision
applies to the very form at issue in our case.

23

The parties argued the immunity issue to the arbitrators, and the arbitrators heard
the testimony that the parties wanted to present under both the employer's claim of
absolute immunity and the former agent's claim of qualified immunity. The arbitrators are
not required to explain their decision, and they could have concluded from the evidence
that the employer here acted with actual malice. Under that finding, PSB would be liable
even though it had qualified immunity. Thus, we are unable to conclude that the
arbitrators acted in manifest disregard toward the law, and we cannot set aside the
arbitration award. On this basis, I concur with the majority on resolution of the main
issue in this case.

As to the district court's sanction award under K.S.A. 60-211, Perkins, Smart &
Boyd's counsel candidly admitted in oral argument that if the rules typically applied to
arbitration awards were followed, this award could not be set aside unless absolute
immunity applied to a party filling out the U-5 form. K.S.A. 17-12a507 clearly provides
qualified, not absolute, immunity. So it would seem that there was no legal basis under
which PSB's attempt to vacate the arbitrators' award was likely to succeed.

But K.S.A. 60-211 makes a legal position subject to sanction only when it is not
warranted by some "nonfrivolous argument" for the modification or reversal of existing
law. K.S.A. 60-211(b)(2). The district judge did not base his award on a violation of that
standard. Instead, the only basis he gave for the award was that the judge did not "like the
manner" in which a letter proposing settlement—sent from PSB's lawyer to Moreland's—
was written. Based on that violation, the judge awarded "[s]ignificantly limited attorneys
fees" of $750.

K.S.A. 60-211 does not authorize sanctions based upon the manner in which a
letter proposing settlement is written: the statute applies to a "pleading, motion or other
paper" called for under civil procedure rules. K.S.A. 60-211(a). While Moreland did
suggest the imposition of fees based on his claim that the motion to vacate the arbitrator's
24

award itself was frivolous, the district court concluded only that the law was "pretty
clear" despite perhaps "a little bit of uncertainty."

In my view, it's a close question whether the sanction award might be upheld on
the basis that the entire attempt to vacate the arbitrator's award was frivolous. When the
law truly is clear and a party opposes confirmation of an arbitrator's award in bad faith,
sanctions under federal Rule 11, the federal counterpart to K.S.A. 60-211, have been
upheld. See Prospect Capital Corp. v. Enmon, 2010 WL 907956, at *7 (S.D.N.Y. 2010)
(unpublished opinion) (citing cases).

In making that judgment in this case, however, we must consider the importance
of the privilege that PSB sought to uphold. After all, much of the regulation of financial
markets is done—under the authority of federal law—by FINRA, the entity to whom
these forms were submitted. See 15 U.S.C. § 78o-3 (2006); Rosenberg v. MetLife, Inc., 8
N.Y.3d 359, 366-67, 866 N.E. 2d 439, 834 N.Y.S.2d 873 (2007).

Assuming the arbitrators followed the law, they determined that Kansas grants a
qualified privilege to brokers filling out U-5 forms but that PSB acted with actual malice
in completing the form. While arbitrators generally do not have to explain their rulings, I
do not believe it was frivolous to argue in the factual circumstance before us that
arbitrators should at least be required to show that they have followed the state's privilege
law in their ruling. Given the importance of this privilege to the regulation of our
financial markets and the importance of that task, I conclude that PSB's arguments to
enforce at least a qualified privilege for statements made on required FINRA forms were
nonfrivolous under K.S.A. 60-211. On that basis, I agree with the majority that the
district court's sanction award should be vacated.