Alex Montez, Jr. v. Prudential Sec. Inc. ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 00-3957
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Alex Montez, Jr., *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* Eastern District of Arkansas
Prudential Securities, Inc., *
*
Appellee. *
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Submitted: June 13, 2001
Filed: July 31, 2001
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Before McMILLIAN and RICHARD S. ARNOLD, Circuit Judges, and
ROSENBAUM,1 District Judge.
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McMILLIAN, Circuit Judge.
Alex Montez appeals from a final order entered in the United States District
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Court for the Eastern District of Arkansas, denying his petition to vacate an arbitration
award, pursuant to 9 U.S.C. § 10(a)(2). Montez v. Prudential Securities, Inc.,
1
The Honorable James M. Rosenbaum, United States District Judge for the
District of Minnesota, sitting by designation.
2
The Honorable George Howard, Jr., United States District Judge for the Eastern
District of Arkansas.
No. 4:97MC0022GH (E.D. Ark. Nov. 6, 2000) (memorandum and order) (hereinafter
"slip op."). For reversal, Montez argues that the district court erred in holding that the
arbitrator's undisclosed business and professional relationship with Prudential
Securities, Inc. ("PSI") did not show "evident partiality" warranting vacatur of the
arbitration award. For the reasons discussed below we affirm the order of the district
court.
The factual background preceding Montez's filing for arbitration is as follows.
In October 1994, Montez entered into an employment agreement with PSI, whereby
Montez was hired by PSI as a senior vice-president and financial consultant. Pursuant
to this employment agreement, PSI loaned Montez $270,000. Montez was to repay
this loan by having PSI deduct $6,279, plus interest, from his net monthly commission
check from March 1995 through September 1998. The employment agreement
between PSI and Montez further provided that PSI would pay Montez compensation
of $270,000 in monthly installments of $6,279 during this same period, plus additional
monthly compensation of seven percent of the difference between the total amount of
compensation and the amount of any monthly installments already paid. The
employment agreement further provided that if Montez was terminated for cause, he
would, in effect, be required to repay the $270,000, plus interest. Four months after
Montez was hired, PSI terminated him, allegedly for a material misrepresentation on
his employment application.
Pursuant to an arbitration provision in the employment agreement between
Montez and PSI,3 PSI, represented by David Sterling of the law firm of Baker & Botts,
filed for arbitration with the National Association of Securities Dealers, Inc. ("NASD"),
3
Rule 10201 of the Manual of the National Association of Securities Dealers,
Inc. ("NASD") - Code of Arbitration Procedures, provides that as a condition of
employment with a NASD-member firm, employment disputes must be submitted to
arbitration.
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alleging it had cause to terminate Montez. Montez filed an answer and a counterclaim.
In November 1996, a three-member arbitration panel, which included James Benson,
issued a unanimous decision in PSI's favor and ordered Montez to repay PSI according
to the employment agreement.
Subsequently, Montez learned that, while employed as general counsel for the
investment banking firm of Underwood & Neihaus from 1977 to 1987, Benson had
worked with Baker & Botts, and, while employed as general counsel for WNS, Inc.
("WNS"), from 1988 to 1991, Benson had engaged Baker & Botts as outside counsel.
Work performed for WNS by Baker & Botts, while Benson was its general counsel,
included sixty-eight attorneys and fees of $2,800,000 billed by the law firm. In January
1992, when WNS filed for voluntary protection from creditors, Baker & Botts was its
largest unsecured creditor. It is uncontroverted that Benson did not disclose his past
business and professional relationship with Baker & Botts to Montez prior to the
arbitration. However, Benson asserted in a deposition, given subsequent to the
initiation of the proceedings in district court, that he orally disclosed his relationship
with Baker & Botts to NASD staff when he was contacted to serve on the panel in
Montez's arbitration, although NASD staff had no recollection of such a disclosure.
Also, Benson did disclose his prior relationship with Baker & Botts in January 1995 in
another arbitration, the so-called "Berg matter," in which PSI was represented by
Baker & Botts. In the Berg matter, where Benson was removed for cause, Benson
allegedly discussed the pending case with Berg's counsel, with whom he had a personal
and professional relationship.
Rule 10312 of the NASD code requires arbitrators to disclose "direct or indirect
financial or personal interest in the outcome of the arbitration" and any such
relationships "that are likely to affect impartiality or might reasonably create an
appearance of partiality or bias." Rule 10312 of the NASD Manual- Code of
Arbitration Procedures. NASD also asks arbitrators to make such disclosures in
questionnaires, on the record at arbitration hearings, and at the time an award is given.
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Montez sought to vacate the arbitration award in the district court pursuant to 9
U.S.C. § 10(a)(2), which provides that a federal court may vacate an arbitration award
where there was "evident partiality" on the part of the arbitrator. The district court
noted that courts have had difficulty resolving the issue of what constitutes "evident
partiality," but that Justice Black, writing for at least four justices in Commonwealth
Coating Corp. v. Continental Casualty Co., 393 U.S. 145, 149 (1968) (Commonwealth
Coatings) explained that arbitrators must "'avoid even the appearance of bias' and must
'disclose to the parties any dealings that might create an impression of bias.'" Slip op.
at 8 (citing Olson v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 51 F.3d 157, 159 (8th
Cir. 1995) (Olson)). The district court concluded that, under any of the standards
articulated by courts in an attempt to interpret the meaning of "evident partiality," "the
Court would not find evident partiality in this case." Id. at 12 We agree.
We review the district court's order declining to vacate the arbitration award
under ordinary standards. Conclusions of law are reviewed de novo, and findings of
fact are reviewed for clear error. Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 591(8th
Cir. 1998) (citations omitted).
As stated by this court in Olson, 51 F.3d at 158-59, under 9 U.S.C. § 10(a)(2),
a district court may vacate an arbitration award if "there was evident partiality . . . in
the arbitrators." In Olson, the arbitrator failed to disclose his substantial interest in a
company which did business with a party to the arbitration. We concluded that such
a relationship created "an impression of possible bias" which, under the majority
opinion in Commonwealth Coatings, established "evident partiality." Id. at 159.
Additionally, we noted that the concurring justices in Commonwealth Coatings added
that an arbitrator "must disclose a business relationship if the arbitrator has a
substantial interest in a firm that does more than trivial business with a party" and that
this explanation of "evident partiality" presents an arguably narrower standard than that
of the four justice majority. Id. We further noted in Olson that other courts have held
"an arbitrator's failure to disclose business dealings between the arbitrator's employer
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and a party to the arbitration could show evident partiality." Id. (citing Sanko S.S. Co.
Ltd., v. Cook Indus., Inc., 495 F.2d 1260, 1261-65 (2d Cir. 1973). This court
concluded that, based on the majority opinion and the concurrence in Commonwealth
Coatings, the arbitrator had an obligation to disclose his business relationship and,
therefore, the failure to do so established "evident partiality" under § 10(a)(2). See id.
at 159.
The absence of a consensus on the meaning of "evident partiality" is evidenced
by the approaches adopted by the different circuits. See, e.g., ANR Coal Co. v.
Cogentrix of North Carolina, Inc., 173 F.3d 493, 500 (4th Cir. 1999) (ANR), (to
establish evident partiality, the party seeking vacatur under 9 U.S.C. § 10(a)(2) has the
burden to demonstrate "that a reasonable person would have to conclude that an
arbitrator was partial to the other party to the arbitration") (citing Consolidation Coal
Co. v. Local 1643, United Mine Workers, 48 F.3d 125, 128 (4th Cir. 1995)) cert.
denied, 528 U.S. 877 (1999); Ginnelli Money Purchase Plan & Trust v. ADM Investor
Servs., Inc., 146 F.3d 1309, 1312 (11th Cir. 1998) (evident partiality requires that an
actual conflict exist or the "arbitrator knows of, but fails to disclose, information which
would lead a reasonable person to believe that a potential conflict exists"); Schmitz v.
Zilveti, 20 F.3d 1043, 1046 (9th Cir. 1994) (applying a "reasonable impression of
partiality" standard in finding evident partiality where arbitrator failed to disclose his
law firm had represented parent company of a party); Morelite Const. Corp. v. New
York City Dist. Council, 748 F.2d 79, 84 (2d Cir. 1984) (requiring more than an
"appearance of bias" and holding that a "reasonable person would have to conclude that
an arbitrator was partial to one party to the arbitration"; evident partiality found under
this standard where there was father-son relationship between arbitrator and an officer
of an international union of which local union which was a party to the arbitration was
a member); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir. 1983)
(evident partiality not found where arbitrator once worked under a party's principal
stockholder at a different company).
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In the matter before us, there is no indication that Benson had any financial
interest related to Baker & Botts, PSI, or WNS. Benson was neither a major
shareholder or owner of WNS, nor did he have anything to gain from fostering a
relationship with either Baker & Botts or PSI. Moreover, Benson's former employer,
WNS, did not have business dealings with a party to the arbitration. Thus, the
circumstances under which this court found vacatur appropriate in Olson are
distinguishable from this matter. Most significantly, the relationship between Benson
and Baker & Botts ended five years prior to the arbitration. In addition, unlike the Berg
matter, Benson did not actually discuss the pending case with a party's counsel. Even
under NASD Rule 10312 Benson arguably did not have an obligation to disclose his
prior relationship with Baker & Botts because this rule refers to relationships which
suggest possible bias; Benson's relationship with this law firm did not necessarily
suggest possible bias. Moreover, a federal court cannot vacate an arbitration award
based on a failure to disclose merely because an arbitrator failed to comply with NASD
rules. Rather, as stated above, 9 U.S.C. § 10(a)(2) establishes the standard for vacatur
of an arbitration award by a federal court, not the NASD rules. See Commonwealth
Coatings, 393 U.S. at 149 (Rules of American Arbitration Association are significant
but not controlling); ANR, 173 F.3d at 499 (same). Thus, even if Benson's failure to
disclose had violated NASD Rule 10312, "that would not by itself, require or even
permit a court to nullify an arbitration award." Id. We, therefore, hold that the district
court did not err in holding that, under any of the standards articulated by the federal
courts, "evident partiality" cannot be found under the present circumstances.
For the reasons stated above, we affirm the order of the district court denying
vacatur of the arbitration award pursuant to 9 U.S.C. § 10(a)(2).
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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