December 7, 2015
Among the most common FINRA intra-industry arbitration matters are those involving attempts by former employers to collect allegedly unpaid balances due on promissory notes, which are often Employee Forgivable Loans or EFLs. When a registered person who has signed off on a promissory note quits or is fired, hostilities may break out if the parting was less than amicable. Among the accusations hurled from angry former employees is that they were "wrongfully terminated" -- and that circumstance is cited in support of the argument that the individual is now relieved of any obligation to repay the contested amounts. In addition to that legal theory, we often come across contentions by besieged former employees that they should not have to repay EFLs (or retention bonuses) because they were defrauded into accepting (or remaining on) the job. Consider a recent FINRA intra-industry arbitration.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2014, Claimants Morgan Stanley alleged breaches of two promissory notes following former employee Respondent Cutshall's termination on May 19, 2014. Claimants sought $551,100 and $200,400 respectively in compensatory damages on the unpaid balances-due on the two notes plus interest, attorneys' fee, and costs. In the Matter of the FINRA Arbitration Between Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC, Claimants/Counter-Respondents, vs. John Cutshall, Respondent/Counter-Claimant, (FINRA Arbitration 14-02394, November 24, 2015).
Going on the Offensive from the Defensive
Respondent Cutshall generally denied the allegations, asserted various affirmative defenses, and Counterclaimed. In his Counterclaim and as subsequently amended, Cutshall asserted causes of action including, fraud, fraudulent inducement, negligent misrepresentation, defamation, and wrongful interference with business relationships. Cutshall asserted in pertinent part that Claimants had fraudulently induced him into signing two promissory notes and that, thereafter, he was wrongfully terminated. Cutshall sought $3,995,600 in compensatory damages plus punitive damages, attorneys' fee, the "return of book of business," a declaratory judgment, and an expungement.
The Panel's Finding
The FINRA Arbitration Panel found Respondent Cutshall liable and ordered him to pay to Claimants Morgan Stanley:
- $751,500.00 for the principle due on both promissory notes;
- $66,221.20 for the pre-award interest on both promissory notes;
- 3.5% per annum post-award interest from and including November 14, 2015, until paid in full;
- $64,372.28 attorneys' fees; and
- $2,450.00 as reimbursement for Claimants' filing fees.
Additionally, the Panel denied Cutshall's Amended Counterclaim and his request for expungement
Bill Singer's Comment
Ya takes yer shots and ya win some, ya lose some. By most objective measures, Cutshall comes off as the loser in this bout. Assuming that he could have settled for some discount on the two notes (which is not always a given but generally in play), he might have been able to have paid off something less than the total principal due of about $750,000 and, who knows, he may have fully avoided any interest payments (certainly he would have reduced the number of days for which the $66,221.20 in pre-award interest was calculated). One thing for certain, Cutshall would have avoided getting hit with some $64,000 in his adversaries' attorneys' fees and his hearing-related costs and fees -- also, consider the fees and costs of his own lawyer.
Although Cutshall took the TKO in his fight against Morgan Stanley, that outcome, in and of itself, does not necessarily call into question his decision to contest repayment. Cutshall deferred having to repay the balances due on the promissory notes from his May 2014 discharge date until December 2015 or whatever later date full payment is accomplished. Even faced with the negative arbitration decision, Cutshall may further delay repayment via an appeal or he may investigate his options for obtaining a discharge of the award in bankruptcy. Whatever the final result, Cutshall gained at least a 19-month delay in repayment, although you must factor in the costs noted above in considering the merits of such a tactic.
Why didn't this case settle? What was it that may have fueled Cutshall's anger with his former employer? Although not set forth in the FINRA Arbitration Decision, online FINRA BrokerCheck records as of December 7, 2015, indicate that Morgan Stanley Smith Barney "Discharged" Cutshall on May 19, 2014, based upon allegations:
[R]ELATED TO EMPLOYEE'S DISCLOSURE OF FIDUCIARY STATUS WITH RESPECT TO OUTSIDE ACCOUNTS AS WELL AS EMPLOYEE'S WITHDRAWAL FROM A TRUST ACCOUNT ON ONE OCCASION.
In response to his former employer's disclosure, online FINRA BrokerCheck records as of December 7, 2015, reflect that Cutshall characterized the allegations attendant to his discharge as:
FIRM ALLEGED BROKER DID NOT REPORT OUTSIDE BUSINESS ACTIVITIES AND SINGLE WITHDRAWAL FROM TRUST CHECKING ACCOUNT.
In a further response to his former employer's disclosure, Cutshall offered this statement as reported on BrokerCheck:
RETRIEVED TRUST CHECKBOOK ERRONEOUSLY THINKING IT WAS MY PERSONAL CHECKBOOK. WROTE A CHECK FOR CASH AND REALIZING THE ERROR, REPORTED IT FIRM [sic].