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Merrill Lynch, Pierce, Fenner & Smith Incorporated v. Cheryl Schwarzwaelder

May 17, 2011

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
PLAINTIFF,
v.
CHERYL SCHWARZWAELDER,
DEFENDANT.
CHERYL SCHWARZWAELDER,
PLAINTIFF,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH INC.,
DEFENDANT.



The opinion of the court was delivered by: Arthur J. Schwab United States District Judge

ELECTRONICALLY FILED

MEMORANDUM OPINION

I.Introduction

In January 2011, a Financial Industry Regulatory Authority ("FINRA") arbitration panel entered an award, in favor of Merrill Lynch, in a matter captioned Schwarzwaelder v. Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA No. 04-04184 (Jan. 6, 2011). On January 27, 2011, Plaintiff Merrill Lynch ("Merrill Lynch") initiated the current civil action and moved this Court to confirm the arbitration award and enter final judgment in its favor. Doc. No. 1. Subsequently, on February 7, 2011, Defendant Cheryl Schwarzwaelder ("Schwarzwaelder") sought an Order from this Court in 11-cv-0162 vacating the same arbitration award. Doc. No. 2. On February 10, 2011, upon Joint Motion to Consolidate Cases by both parties, 11-cv-0162 was consolidated with 11-cv-0107.

Because there is complete diversity between the parties (Plaintiff is a Delaware corporation with its principal place of business in New York, and Defendant is a resident of Pennsylvania) and the amount in controversy is greater than $75,000, exclusive of interest and costs, the Court has jurisdiction over these actions pursuant to 28 U.S.C. §1332(a). For the reasons discussed below, the judgment of the arbitration panel will be vacated.

II.Factual Background

On December 15, 2004, Schwarzwaelder filed a claim under ERISA for long-term disability benefits. 04-cv-01879, Doc. No. 1. On March 9, 2009, Judge McVerry, of this Court, granted summary judgment in favor of Schwarzwaelder. See Schwarzwaelder v. Merrill Lynch & Co., Inc., 606 F. Supp. 2d 546 (W.D. Pa. 2009), 04-cv-01879, Doc. No. 95. Schwarzwaelder was awarded long-term disability benefits from Merrill Lynch arising out of an employment relationship between the parties that began in November 2002. Id.

While an appeal of that determination was pending before the United States Court of Appeals for the Third Circuit, the parties entered into a settlement agreement on November 9, 2009, whereby all claims of the parties against each other were settled and released save certain specifically excepted claims, which the parties agreed to arbitrate before the FINRA. See Schwarzwaelder, FINRA No. 04-04184, at 5. Those excepted claims -- including claims regarding a loan from Merrill Lynch to Schwarzwaelder -- were the subject of the FINRA arbitration.

At the beginning of her employ at Merrill Lynch, Schwarzwaelder was given a loan of $850,000.00. Doc. No. 24, Ex. B ("Promissory Note"). The Promoissory Note signed by the parties set forth that during the course of her employment with Merrill Lynch, Schwarzwaelder would receive "monthly transition compensation payments" equal (before taxes) to the monthly payment due under the Promissory Note. Doc. No. 24, Ex. C, at 2-3 ("Employment Agreement").*fn1 According to Schwarzwaelder‟s employment agreement, she would receive any remaining monthly transition compensation payments in a lump sum if she was terminated without cause or in the event of her "death or disability (as defined in the Merrill Lynch & Co. Long Term Disability Plan)." Id. at 3. In the event Schwarzwaelder resigned or was terminated for cause, she would not be entitled to such a lump sum payment and would therefore have to pay the remaining amount due under the Promissory Note out of her own funds. See id.

The FINRA arbitrators ultimately asserted that Schwarzwaelder failed to make a claim during the arbitration for the monthly transition compensation payments and that, in any event, "any such claim was waived by the terms of the Settlement and Release dated 11/25/09, since the monthly transition payments were not an excepted claim." See Schwarzwaelder, FINRA No. 04-04184, at 7. The arbitrators determined that Schwarzwaelder owes Merrill Lynch $708,790.00 on the Promissory Note, plus interest, from May 1, 2006 to December 8, 2010 in the amount of $154,871.00. See id. Because the arbitrators also found that Merrill Lynch owes Schwarzwaelder, $319,417.00, they found Schwarzwaelder‟s final obligation to Merrill Lynch to be $544,244.00. See id. This arbitration award is the basis of the present action.

III. Standard of Review

Vacatur of an arbitration award is governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16. The statute provides four grounds for vacatur:

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 ...


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