Rainier DSC 1, L.L.C. v. Rainier Capital Management, L.P. ( 2016 )

Case: 15-20383 Document: 00513582733 Page: 1 Date Filed: 07/07/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 7, 2016
No. 15-20383
Lyle W. Cayce
Clerk
RAINIER DSC 1, L.L.C.; RAINIER DSC 2, L.L.C.; RAINIER DSC 3, L.L.C.;
RAINIER DSC 4, L.L.C.; RAINIER DSC 5, L.L.C.; RAINIER DSC 6, L.L.C.;
RAINIER DSC 7, L.L.C.; RAINIER DSC 8, L.L.C.; RAINIER DSC 11, L.L.C.;
RAINIER DSC 13, L.L.C.; RAINIER DSC 14, L.L.C.; RAINIER DSC 15,
L.L.C.; RAINIER DSC 16, L.L.C.; RAINIER DSC 18, L.L.C.; RAINIER DSC
9, L.L.C.,
Plaintiffs – Appellants,
v.
RAINIER CAPITAL MANAGEMENT, L.P.; RAINIER DSC ACQUISITION,
L.L.C.; RAINIER PROPERTIES, L.P.; RAINIER PROPERTIES G.P., L.L.C.,
Defendants – Appellees.
Appeal from the United States District Court
for the Southern District of Texas
Before KING, JOLLY, and ELROD, Circuit Judges.
PER CURIAM:
In one of several appeals arising from an ill-fated real estate investment,
Plaintiffs appeal the district court’s judgment confirming the arbitration
award in favor of the Rainier parties involved in marketing the investment.
Because Plaintiffs have not established any basis for vacating the arbitration
award, we AFFIRM.
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I.
The real estate transactions underlying this appeal have already been
described in greater depth in Rainier DSC 1, L.L.C. v. Rainier Capital
Management, L.P., 546 F. App’x 491, 492–93 (5th Cir. 2013) (“Rainier I”). In
brief, Foundation Surgery Affiliate of Southwest Houston, LLC (“Southwest”),
the owner of a surgical and imaging facility in Houston, entered into a
purchase and sale agreement in 2008 with Rainier Capital Acquisitions, LP,
which in turn assigned its interest to Rainier DSC Acquisitions, LLC (“Rainier
DSC,” and together with the other related appellees, “Rainier”). Rainier DSC
purchased the property and sold fractional tenant-in-common interests to
Plaintiffs (the “Investors”), who each signed an agreement with Rainier DSC
that included an arbitration agreement. Two years later, Southwest stopped
making full rent payments, and thereafter stopped paying rent altogether and
vacated the property.
In May 2012, the Investors sued Southwest, Rainier, and the twenty-
nine individual physician members of Southwest, among others. The original
petition, filed in state court, alleged various state law claims including fraud
and breach of contract, in addition to violations of federal securities law. After
the case was removed, Rainier moved to compel arbitration. The Investors
ultimately agreed to proceed to arbitration with Rainier.
The district court ordered the Investors and Rainier to arbitration. In
March 2015, the arbitrator issued his award, denying relief on all claims and
awarding Rainier over $500,000 in attorneys’ fees and expenses. The district
court severed the arbitrated claims against Rainier and entered judgment
confirming the award. 1
1While the arbitration was ongoing, the district court dismissed the Investors’ claims
against most of the non-arbitrating defendants in a series of judgments. Those judgments
are the subject of Appeal No. 15-20375, which is also before this panel. The Investors also
2
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On appeal, the Investors argue that: (1) the arbitration award should be
vacated because the district court’s failure to stay the litigation of the non-
arbitrating parties was “misbehavior” that prejudiced the Investors’ right to a
fair arbitration; (2) the arbitration award should be vacated because the
arbitrator refused to hear pertinent and material evidence; and (3) the case
should be reassigned on remand.
II.
We review both a district court’s confirmation of an arbitration award
and its denial of a motion to stay litigation pending arbitration de novo, using
the same standard as the district court. Wartsila Finland OY v. Duke Capital
LLC, 518 F.3d 287, 291 (5th Cir. 2008) (arbitration confirmation); Waste
Mgmt., Inc. v. Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339,
341 (5th Cir. 2004) (denial of motion to stay).
Under the Federal Arbitration Act (“FAA”), an arbitrator’s decision will
be vacated “only in very unusual circumstances.” First Options of Chicago, Inc.
v. Kaplan, 514 U.S. 938, 942 (1995). “To constitute misconduct requiring
vacation of an award, an error in the arbitrator’s determination must be one
that is not simply an error of law, but which so affects the rights of a party that
it may be said that he was deprived of a fair hearing.” Laws v. Morgan Stanley
Dean Witter, 452 F.3d 398, 399 (5th Cir. 2006) (quoting El Dorado Sch. Dist.
No. 15 v. Continental Cas. Co., 247 F.3d 843, 848 (8th Cir. 2001)).
filed an appeal in 2012, arguing that the district court’s orders after the motion to compel
arbitration should be vacated because the district court erred by not staying the proceedings.
We dismissed the appeal for lack of jurisdiction because the district court had not entered an
order refusing a stay. Rainier I, 546 F. App’x 491.
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III.
A.
The Investors first argue that the arbitration award should have been
vacated under 9 U.S.C. § 10(a)(3) because the district court was required by
the FAA to stay its own proceedings when it sent the Investors and Rainier to
arbitration, its failure to do so was “misbehavior” under § 10(a)(3), and the
arbitration was prejudiced by the district court’s subsequent opinion on the
issues involved in the arbitration.
This argument is premised on a plainly impossible reading of § 10(a)(3).
That section permits a district court to vacate an arbitration award
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.
9 U.S.C. § 10(a)(3). The Investors conclusorily argue that the “other
misbehavior by which the rights of any party have been prejudiced” in the final
clause “does [not] have to be done by the arbitrator, as internal to paragraph
three, [C]ongress used a semicolon instead of a comma.” This is irreconcilable
with the statutory text. Regardless of whether Congress used a comma or a
semicolon, 2 the relevant clause begins with “or of any other misbehavior,”
which can only refer back to “the arbitrators were guilty of misconduct.” There
is no other possible antecedent. Because the Investors’ argument is premised
on purported misbehavior by the district court and not the arbitrator, it fails. 3
2 The use of a semicolon is perfectly natural given the structure of the conditions and
does not suggest that any actors other than the arbitrators are implicated. See Bryan A.
Garner, The Redbook: A Manual on Legal Style 14 (3d ed. 2013) (“Use semicolons to separate
elements of a series of phrases or clauses if one or more of the elements contains an internal
comma.”).
3 In any event, the Investors have not shown that the district court erred in declining
to stay the non-arbitrating parties’ litigation.
4
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To the extent that the Investors argue indirectly that Rainier or the
arbitrator engaged in misconduct by relying on the district court’s summary
judgment opinion involving some of the same issues involved in the arbitration,
their argument fails. The Investors argue in their brief that “[Rainier’s]
counsel testified through his questions, during the arbitration, that the issues
before the arbitrator had already been ruled on ‘as a matter of law.’” This is
patently false. Rainier never stated that the issues had been ruled on “as a
matter of law,” and instead expressly stated that the arbitrator was not bound
by the district court’s opinion and that Rainier would abide by the arbitrator’s
opinion. The fact that the arbitrator and the district court reached the same
result regarding the meritlessness of the Investors’ claim is not in itself
evidence of improper bias—indeed, we reached the same conclusion in our de
novo review of the district court’s summary judgment in Appeal No. 15-20375.
The arbitrator’s award does not reference the district court’s order, and nothing
in the award suggests that it was not the product of an independent evaluation
by the arbitrator. Nor do the Investors cite to any authority suggesting that
awareness of a court’s ruling by an arbitrator constitutes bias or misconduct
justifying the vacatur of an arbitration award.
B.
The Investors next argue that the district court should have vacated the
arbitration award because the arbitrator was “guilty of misconduct . . . in
refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C.
§ 10(a)(3). The essence of the Investors’ argument is that the arbitrator
improperly permitted Rainier to put on excerpts of deposition testimony of two
witnesses, Kenneth Dunn and Thomas Mock, without allowing the Investors
to cross-examine them at the hearing.
The Investors deposed Dunn and Mock for approximately three hours
each. Rainier’s counsel asked no questions at Dunn’s deposition. At Mock’s
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deposition, after the Investors’ attorney had completed his initial questions,
Rainier’s counsel conducted a brief examination. The Investors’ attorney
stated that if Rainier was using the opportunity to do a direct examination, “I
have the right to recross-examine this witness. He may not show up at trial,”
and complained that denial of that right would prejudice the case and deny
him due process. The Investors’ attorney then questioned Mock further.
After Rainier produced its witness list indicating that Dunn and Mock
would be testifying by deposition, the Investors e-mailed the arbitrator, stating
that they would be prejudiced if Dunn and Mock did not appear in person and
requesting the execution of subpoenas for them. In the ensuing exchange of e-
mails, the arbitrator instructed the Investors’ counsel to “[t]ell me exactly what
you need to establish through these two witnesses that you cannot establish
from the corporate witnesses that are attending” and to explain why they had
been unable to obtain the needed information during the depositions. The
Investors responded at length complaining about Rainier’s conduct but did not
answer either of the arbitrator’s questions. The arbitrator then declined to
issue the subpoenas. After watching Rainier’s portions of the two video
depositions at the hearing, the arbitrator admitted the entire deposition
transcripts into evidence pursuant to the Investors’ request.
Under these circumstances, the arbitrator did not refuse to hear material
evidence, did not otherwise engage in “misconduct,” and did not deprive the
Investors of a fair hearing. The arbitrator decided not to issue subpoenas when
the Investors failed to answer his questions about what evidence they needed
from the two witnesses, who were outside the legal subpoena range, and who
were less involved in the relevant transactions than the two Rainier witnesses
who testified live at the hearing. Even on appeal, the Investors have utterly
failed to identify any evidence that they would have been able to elicit from
further examination of Dunn and Mock. The arbitrator did not refuse to hear
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any evidence; he admitted the entire deposition transcripts at issue. The
Investors’ reliance on the AAA rule that requires evidence to be taken in the
presence of the arbitrator is misplaced; they cite no authority applying this
rule to prohibit the use of deposition testimony, and in any event, they
requested, conducted, and relied on depositions. Especially in light of the
deference required in reviewing an arbitration award, the district court
properly confirmed the award. See Forsythe Int’l, S.A. v. Gibbs Oil Co. of Tex.,
915 F.2d 1017, 1022 (5th Cir. 1990) (“Parties to voluntary arbitration may not
superimpose rigorous procedural limitations on the very process designed to
avoid such limitations. . . . Submission of disputes to arbitration always risks
an accumulation of procedural and evidentiary shortcuts that would properly
frustrate counsel in a formal trial. . . . [W]hatever indignation a reviewing court
may experience in examining the record, it must resist the temptation to
condemn imperfect proceedings without a sound statutory basis for doing
so.”). 4
IV.
Because the Investors have not identified any basis for vacating the
arbitration award, we AFFIRM the district court’s judgment confirming the
award. 5
In light of our affirmance, we do not reach the Investors’ argument that the case
4
should be reassigned on remand.
5 Rainier’s motion to partially dismiss the appeal as to Rainier Properties, GP, LLC,
is denied as moot.
7