21st Century Financial Services, L.L.C. v. Manchester Financial Bank ( 2014 )

Case: 13-50389 Document: 00512578817 Page: 1 Date Filed: 03/31/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 13-50389 FILED
March 31, 2014
Lyle W. Cayce
Clerk
21st CENTURY FINANCIAL SERVICES, L.L.C.,
Plaintiff–Appellee,
versus
MANCHESTER FINANCIAL BANK,
Also Known as Manchester Financial Bank (In Organization),
Also Known as Manchester Financial Bank (Proposed),
Defendant–Appellant.
Appeal from the United States District Court
for the Western District of Texas
Before SMITH, DeMOSS, and HIGGINSON, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
An arbitration tribunal issued an award in favor of 21st Century
Financial Services, L.L.C. (“21st Century”), and against Manchester Financial
Bank. Seeking to vacate the award, the bank claims that 21st Century did not
provide it with adequate notice of the arbitration proceedings and did not
engage in good-faith negotiations before compelling arbitration. Because the
bank had notice of the proceedings and 21st Century sufficiently engaged in
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No. 13-50389
good-faith negotiations, we affirm the judgment confirming the arbitration
award.
I.
A group of bank organizers 1 sought to charter a bank to be called Man-
chester Financial Bank, N.A. In February 2008, Manchester Bank 2 entered
into an “Agreement for Computer Processing Services” (the “Agreement”) with
21st Century. The Agreement identified Mandelbaum as Manchester Bank’s
CEO, included an arbitration provision, and provided the bank’s address as
7825 Fay Street, Suite 100, La Jolla, CA 92037 (the “La Jolla address”).
In connection with the Agreement, Manchester Financial Group, L.P.
(“MFG”), issued two checks to pay deposits to 21st Century for services to be
provided to Manchester Bank. In spite of the bank’s having received FDIC
approval, Mandelbaum, on October 3, 2008, emailed 21st Century that the
bank’s principal investor had “decided not to move forward based on the cur-
rent economic turmoil.”
In response, Pat Jerge, president of 21st Century, forwarded two invoices
to Mandelbaum for amounts due under the Agreement. Mandelbaum emailed
Jerge back, agreeing to pay one invoice but disputing liability on the second. 3
In spite of this email exchange, the parties did not resolve the amount
Among others, the group included Douglas Manchester, Richard Gibbons, Frederick
1
Mandelbaum, and Steven Strauss.
2The bank’s name evolved from Manchester Financial Bank (proposed) to Manchester
Financial Bank (in organization). Like the district court, we refer to it as Manchester Bank.
3 Mandelbaum noted that Manchester Bank was “receptive” to paying one invoice plus
an amount “for terminating the contract.” He also instructed Jerge to offset from the deposit
certain amounts the bank did not contest and to return the remaining balance to “Manchester
Financial Group, L.P., ℅ Crystral Tidball, One Market Place, 33rd Floor, San Diego, CA
92101-7714” (the “San Diego address”).
2
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due under the Agreement. Shortly thereafter, Timothy Nolan, counsel for 21st
Century, sent a letter to Tidball at the San Diego address. Michael Levinson,
an attorney with the San Diego office of the Cooley Law Firm (“Cooley”),
replied, copying Gibbons, another bank organizer, and contending that neither
MFG nor Manchester Bank was liable for the disputed amounts. Levinson
closed his letter by requesting that 21st Century “promptly refund to the Bank”
part of the initial deposit.
In light of these failed communications, 21st Century demanded arbitra-
tion, addressing the demand to Levinson at the San Diego address. Strauss, a
bank organizer and Levinson’s partner, replied in a letter to Nolan 4 stating
(1) that Cooley did not represent Manchester Bank and (2) that because the
entity had never come into existence, no one represented the bank. The AAA
confirmed receipt of Straus’s letter, gave notice to Levinson that it would con-
duct an arbitration, and asked Nolan to confirm the bank’s address. Nolan
provided the AAA with the La Jolla and San Diego addresses and asked that
communications be sent to both unless the bank directed otherwise.
Because correspondence the AAA had sent to the La Jolla address had
been returned as undeliverable, Kathleen Cantrell, an AAA case manager,
emailed Nolan in August 2009 requesting that he again confirm Manchester
Bank’s address. Nolan responded by providing the San Diego address.
On September 8, 2009, the AAA sent a letter to the San Diego address,
attaching an executed “Notice of Appointment” of an arbitrator that set the
date for a preliminary hearing via conference call on September 14. On
September 10, Levinson responded (with copies to Strauss, Gibbons, and
Nolan), referenced the September 8 letter, and stated no correspondence
4Strauss copied the letter to the American Arbitration Association (“AAA”), Levinson,
and Gibbons.
3
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should be sent to MFG.
On September 14 and 15, Nolan sent two letters to the AAA. The first
asked that all notices be sent to Tidball at the San Diego address; the second
asked that the service list be revised to serve Manchester Bank at the San
Diego address in care of Douglas Manchester.
On September 28, the AAA sent notice of its revised list and confirmed
that it had held a preliminary hearing but that no appearance had been made
by or for Manchester Bank. 5 In response, Mari Waldron of MFG sent an email
asking the AAA to substitute her and Gibbons for Tidball as service recipients.
Nolan agreed but asked that Douglas Manchester be kept on the service list as
well so he could receive service for the bank. On November 5, Summer Wynn,
another attorney at Cooley, emailed the AAA with an attached letter from
Strauss (also addressed to the AAA), that repeated his earlier position: “The
Proposed Bank is merely a proposed entity that never came into existence, and
to our knowledge, has not been properly served with Claimant’s Demand.”
As the arbitration date approached, Nolan and the AAA served Gibbons
and Manchester Bank with various pleadings and notices. 6 According to 21st
Century, during the six-month period before entry of the award, a bank organ-
izer either received, sent, or was copied on notices or correspondence concern-
ing the arbitration on at least fifteen occasions.
The arbitration was held on January 13, 2010. In spite of Manchester
Bank’s absence, the arbitration did not result in a default award; the tribunal
required 21st Century to provide evidence in support of its claim. On Febru-
ary 2, the arbitration tribunal issued an award in favor of 21st Century for
5 This notice was sent to Manchester Bank ℅ Manchester and MFG ℅ Tidball.
6These documents included 21st Century’s exhibit list, its prehearing brief, and a
reminder notice from the AAA.
4
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$477,070.29 in damages, $44,274.00 in legal fees, $10,760.00 in arbitration
costs, and any post-judgment interest.
21st Century sued in state court under the Federal Arbitration Act
(“FAA”) to confirm the award; Manchester Bank removed to federal court.
After a bench trial on an agreed record and stipulated facts, the district court
entered findings of fact and conclusions of law, granting 21st Century’s motion
to confirm the award and rejecting the bank’s two theories opposing
confirmation.
Manchester Bank repeats those theories on appeal. First, it maintains
that 21st Century did not comply with the notice provision in the Agreement.
Alternatively, it contends that the tribunal exceeded its powers because, before
invoking arbitration, the parties had not attempted to negotiate in good faith
with senior management as the Agreement required.
II.
“Congress enacted the FAA to replace judicial indisposition to arbitra-
tion with a national policy favoring [it] and plac[ing] arbitration agreements
on equal footing with all other contracts.” Hall St. Assocs., L.L.C. v. Mattel,
Inc., 552 U.S. 576, 581 (2008) (alterations in original, citations and internal
quotation marks omitted). In line with that policy, the FAA supplies “mechan-
isms for enforcing arbitration awards: a judicial decree confirming an award,
an order vacating it, or an order modifying or correcting it.” Id. at 582.
Appellate review of an order confirming an arbitration award proceeds
de novo, using the same standards that apply to the district court. See Brown
v. Witco Corp., 340 F.3d 209, 216 (5th Cir. 2003). “We accept [a district court’s]
findings of fact that are not clearly erroneous . . . .” Hughes Training Inc. v.
Cook, 254 F.3d 588, 592 (5th Cir. 2001). We limit review of arbitration awards
to give deference to the decisions of the arbitrator. Harris v. Parker Coll. of
5
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Chiropractic, 286 F.3d 790, 792 (5th Cir. 2002). “Judicial review of an arbitra-
tion award is extraordinarily narrow . . . .” Antwine v. Prudential Bache Sec.,
Inc., 899 F.2d 410, 413 (5th Cir. 1990). We
may vacate an award only if: (1) the award was procured by corruption,
fraud, or undue means; (2) there is evidence of partiality or corruption
among the arbitrators; (3) the arbitrators were guilty of misconduct
which prejudiced the rights of one of the parties; or (4) the arbitrators
exceeded their powers.
Harris, 286 F.3d at 792 (citing 9 U.S.C. § 10(a) (2012)).
Parties may limit the scope of arbitration through contract. See Brook v.
Peak Int’l, Ltd., 294 F.3d 668, 672 (5th Cir. 2002). “Where arbitrators act con-
trary to express contractual provisions, they have exceeded their powers.”
Apache Bohai Corp. LDC v. Texaco China BV, 480 F.3d 397, 401 (5th Cir. 2007)
(citations and internal quotation marks omitted). “If the contract creates a
plain limitation on the authority of an arbitrator, we will vacate an award that
ignores the limitation.” Id. “[L]imitations on an arbitrator’s authority must
be plain and unambiguous . . . .” Id. at 404 (emphasis added). “A reviewing
court examining whether arbitrators exceeded their powers must resolve all
doubts in favor of arbitration.” Brook, 294 F.3d at 672. The party challenging
the enforcement of the arbitration award has the burden of proof. See Karaha
Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364
F.3d 274, 288 (5th Cir. 2004).
III.
Manchester Bank claims that because 21st Century did not send it notice
of the arbitration proceedings via certified or registered mail to its La Jolla
address, it did not comply with section 15.2 of the Agreement 7 and that that
7 Section 15.2 of the Agreement provides:
6
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deficiency is adequate ground to vacate the arbitration award. 8 The arbitra-
tion tribunal determined that the AAA and 21st Century had given adequate
notice to the bank. 9 Acknowledging that the notice may have been technically
deficient under the Agreement, the district court found that the bank had
actual notice of the arbitration proceedings, so the court declined to vacate the
award on that ground. 10
This matter is controlled by Bernstein Seawell & Kove v. Bosarge, 813
F.2d 726 (5th Cir. 1987), in which Bosarge argued that “the arbitration award
All notices, requests, and other communications required or permitted to be given
or delivered hereunder to either Party must be in writing, and shall be personally
delivered, sent, by certified or registered mail, postage prepaid and addressed, by
overnight courier such as FedEx, by fax, or by email to such Party at the address
shown on the first page of this Agreement, or at such other address as has been
furnished by notice given in compliance with this Section. All notices, requests, and
other communications shall be deemed to have been given upon delivery as evi-
denced by return receipt, courier records, fax confirmation, or confirming email.
8Manchester Bank gestures at two possible statutory grounds for vacatur stemming
from deficient notice: (1) Under § 10(a)(1), “the award was procured by corruption, fraud, or
undue means,” or (2) under § 10(a)(4), “the arbitrators exceeded their powers.” Because we
conclude that the bank had actual notice of the arbitration proceedings, we do not need to
determine whether insufficient notice constitutes a proper ground for vacatur.
9 The tribunal explained as follows:
Claimant has brought this arbitration matter before the [AAA], and due notice
was given of the case and the hearing date upon which the Arbitrator would hear
the testimony of witnesses, receive evidence and arguments in support of and in
defense of the claims made. There is evidence that the AAA and the Claimant
attempted to further contact representatives of the Respondent of this arbitration
matter and of the date and time of the hearing. Despite these communications and
numerous notices and emails by the AAA and the Claimant over several months,
neither the Respondent nor its representative appeared at the hearing on Janu-
ary 13, 2010 in Austin, Texas.
10 See 21st Century Fin. Servs., LLC v. Manchester Fin. Bank, No. A-10-CV-803-LY,
slip op. at 10 (W.D. Tex. Mar. 22, 2013) (“After Nolan provided the AAA with the San Diego
address, the AAA sent its letter notice to that address. Douglas Manchester later confirmed
receipt of both demand letter and the notice through its communications with the AAA and
21st Century before the date of arbitration. Therefore, the court concludes that 21st Century
and the AAA gave and Manchester Bank received actual notice of the arbitration
proceedings.”).
7
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[was] unenforceable because he was not informed of the arbitration proceed-
ings until after the hearing had been held, and the arbitrators had reached a
final decision.” Id. at 729. The district court determined that (1) Bernstein
had provided notice under the terms of the partnership agreement and
(2) Bosarge had actual notice of the proceedings.
On appeal, this court acknowledged that “‘all parties in an arbitration
proceeding are entitled to notice and an opportunity to be heard.’” 11 For vaca-
tur of an arbitration award, however, the court required the absence of actual
or constructive notice. 12 Regardless of whether Bernstein had complied with
the partnership agreement, we enforced the award because the record con-
tained “sufficient evidence to support the conclusion that Bosarge received
actual or constructive notice of the arbitration hearing.” Id.
Our sister courts similarly have refused to vacate arbitration awards for
defective notice where the party had actual notice. 13 Manchester Bank has not
11Bernstein, 813 F.2d at 729 (quoting Totem Marine Tug & Barge, Inc. v. N. Am.
Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979)).
12 See id. (“[D]ue process is not violated if the hearing proceeds in the absence of one
of the parties when that party’s absence is the result of his decision not to attend.”).
13 See Gingiss Int’l, Inc. v. Bormet, 58 F.3d 328, 332 (7th Cir. 1995) (“The Bormets
contend that the arbitration award should be vacated because they did not receive proper
notice of the arbitration proceedings. We have repeatedly held that 9 U.S.C. § 10(a) provides
the exclusive grounds for setting aside an arbitration award under the FAA. Inadequate
notice is not one of these grounds, and the Bormets’ claim therefore fails.” (citations omitted));
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Lecopulos, 553 F.2d 842, 845 (2d Cir. 1977)
(“Lecopulos argues that even if the agreement confers jurisdiction on courts in New York,
proper service of a demand for arbitration is required to bring him within the power of the
courts or arbitrators. The only notice Lecopulos received here was the motion to stay the
court action pending arbitration, which was served on his attorneys. . . . Regardless of the
precise legal status of Lecopulos’s attorneys when they appeared in the district court, no
unfairness results from giving effect to the notice they actually received.” (emphasis added));
see also Smith v. Positive Prods., 419 F. Supp. 2d 437, 446 (S.D.N.Y. 2005) (“[I]n light of the
strong policy favoring arbitration and undisputed proof that Smith had notice of the arbi-
tration, the award will not be disturbed on the ground that a suite number was missing from
a mailing address or that a notice was not sent by certified or registered mail.”); Marsillo v.
8
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identified any case in which a court vacated an award where a party did not
receive notice per the terms of its contract but nevertheless had actual notice
of the arbitration proceedings. The bank points only to Choice Hotels Int’l, Inc.
v. SM Prop. Mgmt., LLC, 519 F.3d 200, 208 (4th Cir. 2008). There, however,
in upholding a vacatur, the court noted that the parties did not have actual or
constructive notice of the arbitration. 14
The district court did not clearly err in determining that Manchester
Bank had actual or constructive notice of the arbitration. The record contains
several communications showing that various bank organizers knew of the
forthcoming proceedings. 15 Because the bank had actual or constructive notice
and Bernstein requires no more, we do not need to decide whether 21st Century
failed to comply with section 15.2 of the Agreement.
IV.
Manchester Bank provides two related alternative assertions as to why
we should vacate the arbitration award. First, because 21st Century did not
attempt to negotiate in good faith with the bank’s senior management before
invoking arbitration and the Agreement required a second level of
Geniton, No. 03-2117, 2004 WL 1207925, at *5–6 (S.D.N.Y. June 1, 2004) (confirming arbi-
tration award where the party had actual notice of NASD arbitration proceedings and “his
failure to make any inquiries” about other correspondence “suggest[s] that [he] simply chose
to ignore the arbitration proceedings”); Borop v. Toluca Pac. Sec. Corp., No. 97-4591, 1997
WL 790588, at *2 n.7 (N.D. Ill. Dec. 17, 1997) (“Absent fraudulent or improper conduct, defec-
tive notice cannot justify an order vacating an arbitration award under Section 10 of the
FAA.”).
14 Choice Hotels, 519 F.3d at 208 (“[T]he record is devoid of evidence to contradict the
Franchisees’ sworn assertions that they never received notice of the arbitration proceedings
until after the AAA Arbitrator had issued the Arbitration Award.”).
15 Examples are the June 25, 2009, letter from Strauss to Nolan, which acknowledges
the arbitration demand, and Manchester Bank’s confirmed receipt of the September 29, 2009,
demand letter from the AAA.
9
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negotiations, the bank maintains that the arbitration tribunal exceeded its
powers. Second, the bank contends that the district court clearly erred in find-
ing that good-faith negotiations had occurred at the operational level.
The court rejected Manchester Bank’s arguments, noting that § 11.1’s
“plain language [ ] neither requires senior management to negotiate nor condi-
tions arbitration on such negotiations.” The court also made the factual find-
ings that (1) “negotiations at all levels were attempted and failed to succeed”
and (2) “the dispute over liability under the Agreement was escalated to senior
management as the e-mail correspondence from Manchester Bank’s CO, Man-
delbaum, to 21st Century president, Jerge, attests.”
Sections 11.1, 11.2, and 15.1 speak to the parties’ obligation to act in good
faith in the event of a dispute. Section 11.1 provides,
In the event of any claim, controversy, or dispute between [Man-
chester Bank] and [21st Century] . . . , the parties agree to negotiate in
good faith toward resolution of the issues, and to escalate the dispute
to senior management personnel in the event that the dispute cannot
be resolved at the operational level. Disputes that cannot be resolved
shall be submitted to binding arbitration under the following Section.
Section 11.2 states that “[i]f the parties cannot resolve any claim, controversy,
or dispute through good faith negotiations, including any dispute regarding the
validity, construction, or enforcement of this Agreement, either Party may
demand that such matter be submitted to final and binding arbitration.”
Finally, § 15.1 notes that the parties agree to act in good faith. 16
For us to vacate the arbitration award, Manchester Bank needs to show
that the Agreement contained “express contractual provisions” that created a
16 “Each Party agrees to perform its obligations as set forth in this Agreement in good
faith and in a prompt and reasonable manner. All objections and complaints shall be made
in good faith, and the parties agree to work together to resolve all issues and disputes within
the framework and according to the terms of this Agreement.”
10
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“plain limitation on the authority of [the] arbitrator.” Apache Bohai, 480 F.3d
at 401 (internal citations and quotation marks omitted). The bank must estab-
lish that (1) the Agreement expressly conditioned arbitration on the failure of
senior management negotiations and (2) no such senior management negotia-
tions occurred.
The contract does not expressly require senior management to engage in
negotiations. A plain reading of § 11.1 suggests that 21st Century was only
required to engage in one round of negotiations at the operational level. We
agree with the district court that § 11.1 does not plainly and unambiguously
require negotiation by senior management.
Furthermore, even if senior management were required to engage in a
second round of negotiations, the Agreement does not expressly condition the
ability to arbitrate a dispute on failed senior management negotiations. Sec-
tion 11.2 states that “[i]f the parties cannot resolve any claim[] through good
faith negotiations,” alluding to the negotiations that should take place in
§ 11.1, “either Party may demand that such matter be submitted to final and
binding arbitration.” Manchester Bank cannot show that the Agreement
expressly conditioned arbitration on senior-management negotiations.
As for good-faith negotiations on the operational level, the record sup-
ports the district court’s finding. 17 Jerge’s email to Mandelbaum and Nolan’s
letter to Tidball, to which Levinson 18 responded, demonstrate that 21st
17 See 21st Century Fin. Servs., LLC v. Manchester Fin. Bank, No. A-10-CV-803-LY,
slip op. at 11 (W.D. Tex. Mar. 22, 2013) (“The bank’s demands for payment and refusal to
negotiate continued through correspondence between attorney[s] of both parties . . . .”).
18 Manchester Bank maintains that because Levinson represented MFG and not the
bank, he cannot have negotiated on its behalf. This reasoning misses the point. First, in
light of Mandelbaum’s instruction to return the bank’s deposit to MFG ℅ Tidball, it is obvious
that, by mailing to Tidball, 21st Century was attempting to continue negotiations with the
bank. Second, in his letter to Nolan, Levinson made several legal arguments on behalf of the
bank and again insisted 21st Century return money to it. Even if Levinson represented only
11
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Century tried to negotiate in good faith with Manchester Bank. The bank has
not demonstrated that the district court clearly erred in making this finding.
The judgment confirming the arbitration award is AFFIRMED.
MFG, 21st Century could have properly understood Levinson’s letter as indicating that any
further negotiations with the bank would have been futile.
12