AFC Coal Properties v. Delta Mine Holding ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 00-3646
___________
Delta Mine Holding Company; *
Meadowlark, Inc., *
*
Appellants, * Appeal from the United States
* District Court for the
v. * Eastern District of Missouri.
*
AFC Coal Properties, Inc., *
*
Appellee. *
___________
Submitted: June 14, 2001
Filed: December 28, 2001
___________
Before LOKEN, Circuit Judge, ROSENBAUM* and DAWSON,** District Judges.
___________
LOKEN, Circuit Judge.
Delta Mine Holding Company (“Delta Mine”) petitioned the district court to
confirm, and AFC Coal Properties, Inc. (“AFC”), petitioned the district court to
vacate, two arbitration awards resolving disputes over Delta Mine’s right to terminate
*
The HONORABLE JAMES M. ROSENBAUM, Chief Judge of the United
States District Court for the District of Minnesota, sitting by designation.
**
The HONORABLE ROBERT T. DAWSON, United States District Judge for
the Western District of Arkansas, sitting by designation.
coal mining lease agreements. The district court vacated the awards because of the
partiality and misconduct of the non-neutral arbitrator chosen by Delta Mine. Delta
Mine appeals, raising difficult issues concerning how the grounds for vacating an
award under the Federal Arbitration Act, 9 U.S.C. § 10(a)(1)-(3), should be applied
to party-selected arbitrators. Delta Mine seeks confirmation of one award, and
modification of the other to eliminate an offset provision favorable to AFC. AFC
defends the district court’s decision and also urges us to affirm on any of several
alternative grounds not reached by the district court. We conclude that the conduct
of Delta Mine’s party arbitrator does not warrant vacating the awards. We further
conclude that AFC’s other arguments for vacating the awards, and Delta Mine’s
argument that one award should be modified, are without merit. Accordingly, we
reverse and remand with directions to confirm both awards.
I. BACKGROUND
In 1980, the predecessors of Delta Mine and AFC entered into long-term leases
for the mining of coal on AFC lands in Illinois. The parties refer to these agreements
as the Williamson County and the Saline County leases.1 Complex provisions
permitted Delta Mine to terminate each lease upon notice to AFC that all
“Economically Recoverable Coal” had been mined. Paragraph 8.2 provided that
disputes over this provision were subject to arbitration by a panel of three arbitrators,
one selected by Delta Mine, one by AFC, “and a third selected by the other two
arbitrators in accordance with the then applicable rules of the American Arbitration
Association.” Paragraph 8.3 provided that “each of the arbitrators . . . shall be a
professional mining engineer, or firm of professional mining engineers,” and that the
1
The leases were signed by The Penn Central Corporation as lessor and by
Meadowlark Farms, Inc., as lessee. Meadowlark was a subsidiary of AMAX Inc., a
large diversified mining company,
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third or neutral arbitrator may not be “an officer, employee or shareholder of, attorney
or auditor to, or otherwise interested in” either party or the matter to be arbitrated.
In November 1995, Delta Mine invoked the termination provision in each
lease. AFC objected, and these two arbitration proceedings followed. Delta Mine
designated as its party arbitrator the consulting engineering firm of Stagg Engineering
Services Inc. and its principal, Alan Stagg. AFC designated mining engineer Paul
Jones. Stagg and Jones selected mining engineer John Wilson as the neutral
arbitrator for the Williamson County arbitration and mining engineer Eugene Kitts
as the neutral arbitrator for the Saline County arbitration.
The two arbitration panels held a joint organizational meeting on November
24, 1997, attended by the four arbitrators, the parties, and their attorneys. At the
suggestion of arbitrator Jones, each arbitrator briefly described his background.
Stagg stated that he had maintained a client consulting relationship with Delta Mine’s
predecessors since 1981, that he had never worked with Delta Mine’s law firm, and
that he had previously met the neutral arbitrators. There followed a discussion of
when the hearings should be held. The neutral arbitrators overruled AFC’s objection
to joint proceedings, concluding that the two panels would hold a joint hearing on
common issues, followed by separate hearings on issues unique to each arbitration.
Delta Mine urged an expedited process -- informal exchanges of documents and
witness statements followed by hearings in late January 1998. AFC argued for a
more lengthy process, including formal document discovery and depositions “because
they have all the information and they have all the witnesses.” After the arbitrators
conferred, neutral arbitrator Kitts announced the pre-hearing schedule -- document
discovery during December and January, depositions during February, and the
hearings during the week of March 23, 1998. Over AFC’s strenuous objection,
arbitrator Kitts ruled “that the two partial panel members [Stagg and Jones] should
be in a position to ask the pertinent questions of the witnesses, rather than having it
turn into a more formal judicial [proceeding] with cross-examinations and so forth.”
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Not surprisingly, the ambitious discovery schedule was later extended. On
March 31, 1998, after deposing Delta Mine witnesses, AFC’s counsel wrote the
arbitrators complaining that Delta Mine’s party arbitrator, Alan Stagg, had been
present at Delta Mine’s witness preparation and strategy sessions and was acting as
Delta Mine’s expert in preparing witnesses for depositions and the hearings. AFC
expressed concern “whether an arbitrator who invests himself deeply in the
preparation of a case, and then becomes the chief interrogator for his side at the
hearing, can be reasonably expected to judge a case on its merits as called for by the
Code of Ethics for Arbitrators in Commercial Disputes.”2 AFC concluded by
requesting “a brief postponement of perhaps a few weeks, to a convenient date in
May, to allow each side a reasonable opportunity to prepare.”
On April 13, 1998, the two panels responded. In a letter ruling signed by each
of the four, the arbitrators rescheduled the hearings to the first week in May. As a
“compromise” between AFC’s request for full attorney cross-examination of
witnesses and the arbitrators’ intent “that this arbitration should not become a formal
judicial exercise,” the panels ruled that only the arbitrators would be permitted to
question witnesses during the presentation of their testimony, but the panels would
receive follow-up questions, comments, and requests for clarification from counsel
following each witness’s presentation. (As the hearings later progressed, AFC’s
counsel was permitted to cross-examine Delta Mine’s witnesses.)
The April 13 letter ruling did not address AFC’s concern over Stagg’s role in
assisting Delta Mine with the preparation of its case. However, on April 8, AFC’s
party arbitrator, Paul Jones, had sent AFC’s attorneys a long memorandum describing
a two-hour meeting of the arbitrators. Jones reported:
2
Hereinafter referred to as the “Code of Ethics.” The Code of Ethics was
prepared in 1977 by a joint committee of the American Arbitration Association and
the American Bar Association.
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ROLE OF PARTY ARBITRATOR AT HEARING: It was the
opinion or expectation of the two Neutral Arbitrators that each Party
Arbitrator would serve to question witnesses to bring out issues which
were not clear in the witness presentations. To do this, the Neutrals
expect the Party Arbitrator to be adequately briefed to know where the
testimony is going and to be able to ask questions for clarification, etc.
They did not seem ‘taken back’ by Alan Stagg’s attendance at the prep
sessions.
* * * * *
[JONES] COMMENTS: Gentlemen, I know you are not happy with
the results of today’s meeting but I am certainly willing to do what I can
to make the hearing effective for your position. . . . I would suggest if
you could Fed Ex to me (home delivery Saturday) as much material
regarding the depositions, your expert witness concepts, etc. as possible.
I can then spend this weekend and early next week reviewing the
material. . . . If [the hearing] is not delayed, we need to discuss ASAP
when I might be briefed on your side of the issues so that I can do a
decent job in raising questions at the hearings.
Following the hearings, the two panels began their separate deliberations. In
the district court, AFC conducted thorough discovery of party arbitrator Stagg, but
neither party conducted discovery of party arbitrator Jones or the neutral arbitrators.
Thus, the record provides a substantial but incomplete picture of the deliberations.
We know that each neutral arbitrator discussed the issues with Stagg and Jones,
prepared a draft award and circulated it to the party arbitrators for comment, and after
further deliberations prepared the final award. Neutral arbitrator Wilson ruled that
Delta Mine was entitled to terminate the Williamson County lease under the
Economically Recoverable Coal provision but awarded AFC an offset based upon
amounts Delta Mine had received from its coal customer for future mining royalties.
Party arbitrator Stagg concurred in the termination ruling but dissented from the
offset award, while party arbitrator Jones dissented from the termination ruling but
concurred in the offset award. In the other arbitration, neutral arbitrator Kitts ruled
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that Delta Mine was entitled to terminate the Saline County lease. Arbitrator Stagg
concurred in this award; arbitrator Jones dissented.
AFC then petitioned the district court to vacate both awards. Delta Mine
petitioned to confirm the Saline County award and to modify the Williamson County
award. The district court vacated both awards based upon the following misconduct
by Delta Mine’s party arbitrator Stagg:
• Stagg’s failure to fully disclose his substantial and ongoing relationship
with Delta Mine and its attorneys, including his consulting relationship
in these proceedings.
• The substantial role played by Stagg and his firm in helping Delta Mine
prepare for the arbitration hearings, including Stagg’s participation in a
mock arbitration held days before the hearings.
• Stagg’s disclosure of the ongoing panel deliberations to Delta Mine and
his communications with Delta Mine and its attorneys concerning “how
to sway the arbitrators to rule in Delta Mine’s favor.”3
Accepting AFC’s view of the legal issues, the district court discussed at length how
Stagg’s conduct violated the Code of Ethics and then asserted in conclusory fashion
that such misconduct justified vacating the awards under § 10(a) of the Federal
Arbitration Act. On appeal, Delta Mine argues that the district court erred in placing
3
Stagg communicated with Delta Mine’s counsel at several points during the
deliberations and sought the advice of Delta Mine’s counsel, particularly regarding
neutral arbitrator Wilson’s unexpected proposed offset in the Williamson County
award. It is apparent that neutral arbitrator Wilson was aware of and encouraged at
least some of these communications. But in the district court’s view, Stagg’s
disclosures “destroy[ed] the confidentiality of the panels’ deliberations” and
“manipulate[d] the process to Delta Mine’s advantage.”
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undue emphasis on the Code of Ethics and in applying the statutory grounds for
vacating arbitration awards found in § 10(a) of the Act.
II. DISCUSSION
Though arbitration has been present in America as a form of dispute resolution
since the eighteenth century, the Federal Arbitration Act of 1925 firmly established
a “national policy favoring arbitration.” Southland Corp. v. Keating, 465 U.S. 1, 10
(1984). Under that Act, “the grounds for challenging an arbitration award are
narrowly limited, reflecting the voluntary contractual nature of commercial
arbitration.” IDS Life Ins. Co. v. Royal Alliance Assoc., Inc., 266 F.3d 645, 649 (7th
Cir. 2001). As relevant to this case, § 10(a) of the Act authorizes a reviewing court
to vacate an arbitration award:
(1) Where the award was procured by corruption, fraud, or undue
means.
(2) Where there was evident partiality or corruption in the
arbitrators, or either of them.
(3) Where the arbitrators were guilty of . . . any other misbehavior
by which the rights of any party have been prejudiced.
In this case, the lease agreements provided that arbitration proceedings shall
“comply with the then applicable rules of the American Arbitration Association.”
However, the district court focused on whether party arbitrator Stagg violated the
Code of Ethics, not the AAA’s Commercial Arbitration Rules. The Code of Ethics
provides that it “does not form a part of the arbitration rules of the American
Arbitration Association,” nor does it “establish new or additional grounds for judicial
review of arbitration awards.” It is well-settled that only the statutory grounds in
§ 10(a) of the Act justify vacating an award; arbitration rules and ethical codes “do
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not have the force of law.” Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680
(7th Cir.), cert. denied, 464 U.S. 1009 (1983); see Commonwealth Coatings Corp. v.
Continental Cas. Co., 393 U.S. 145, 149 (1968); Montez v. Prudential Sec., Inc., 260
F.3d 980, 984 (8th Cir. 2001). Thus, the district court erred in placing primary
emphasis on whether party arbitrator Stagg violated various provisions of the Code
of Ethics. “Unless there is a specific [statutory] ground for vacating an award, it must
be confirmed.” IDS Life Ins., 266 F.3d at 650; see ANR Coal Co., Inc. v. Cogentrix
of N.C., 173 F.3d 493, 499 (4th Cir.), cert. denied, 528 U.S. 877 (1999). We
therefore focus exclusively on those statutory grounds.
1. Section 10(a)(2) -- “Evident Partiality.” The district court ruled that
Stagg’s on-going consulting relationship with Delta Mine and its attorneys, his
participation in the pre-hearing preparation of Delta Mine’s case, and his
communications with Delta Mine and its attorneys during the panels’ deliberations
constituted “evident partiality” requiring that the awards be vacated under § 10(a)(2).
In one sense, the district court’s ruling was factually accurate -- Stagg was obviously
partial, and his conduct during the course of the arbitrations was clearly inconsistent
with the impartiality required of a neutral arbitrator in numerous cases such as the
Supreme Court’s Commonwealth Coatings decision. But whether we view the ruling
as a finding of fact or a conclusion of law, it cannot be upheld because the court
committed three errors of law in applying § 10(a)(2):
First, AFC waived this contention by failing to raise it to the arbitrators. AFC
learned of Stagg’s on-going participation in the preparation of Delta Mine’s case well
before the hearings. AFC expressed concern to the arbitrators, but only in the context
of requesting a delay in the hearings (which was granted). AFC did not request
Stagg’s removal. Even when a neutral arbitrator is challenged for evident partiality,
the issue is deemed waived unless the objecting party raised it to the arbitration panel.
See Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 593 (8th Cir. 1998). This rule
furthers the policy of judicial deference to voluntary contractual arbitration:
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It does not seem that general statutory language calling for the
arbitrators to be impartial should be interpreted as refusing enforcement to the
awards of arbitrations in which the parties contract for partisanship or waive
objections to partiality. An interpretation under which a party could wait until
it lost and then successfully raise the objection of partiality should be avoided.
Note, The Use of Tripartite Boards in Labor, Commercial, and International
Arbitration, 68 HARV. L. REV. 293, 325 (1954).
Second, had AFC timely requested Stagg’s removal on the ground of evident
partiality, the request would have been denied as contrary to the parties’ agreements
to arbitrate. “Generally, partisan arbitrators are permissible.” ATSA of Cal., Inc. v.
Continental Ins. Co., 754 F.2d 1394, 1395 (9th Cir. 1985). Here, the lease
agreements authorized the selection of a party arbitrator who is “an officer, employee
or shareholder of, attorney or auditor to, or otherwise interested in, either of the
Parties or the matter to be arbitrated.” In other words, the arbitration agreements
expressly contemplated the selection of partial arbitrators -- persons with substantial
financial interests in and duties of loyalty to one party. “The parties to an arbitration
choose their method of dispute resolution, and can ask no more impartiality than
inheres in the method they have chosen.” Merit Ins., 714 F.2d at 679.
AFC counters by arguing, without citation to pertinent authority, that party
arbitrator Stagg’s failure to fully disclose the extent of his relationship with Delta
Mine and its attorneys constitutes evident partiality for purposes of § 10(a)(2). We
disagree. At the organizational meeting, Stagg disclosed that “I’ve had a client
consultant relationship with [Delta Mine’s predecessor] since probably 1981, ‘82,
somewhere in there.” AFC should have assumed that Stagg had the same degree of
“evident partiality” as an officer, employee, or attorney of Delta Mine, persons the
lease agreements expressly authorized to be party arbitrators. Moreover, because the
leases authorized the selection of partial party arbitrators, Stagg would have
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perceived no apparent need to disclose more than his long-standing “client consultant
relationship,” absent a direction from the neutral arbitrators to do so.
Third, AFC failed to show that Stagg’s “evident partiality” had a prejudicial
impact on the arbitration awards. When a neutral arbitrator fails to disclose a
relationship with one party that casts significant doubt on the arbitrator’s impartiality,
as in Commonwealth Coatings, it is appropriate to assume that the concealed
partiality prejudicially tainted the award. But where the parties have expressly agreed
to select partial party arbitrators, the award should be confirmed unless the objecting
party proves that the party arbitrator’s partiality prejudicially affected the award.
In this case, AFC failed to show that the neutral arbitrators were deceived or
misled by party arbitrator Stagg’s partiality. During the initial organizational
meeting, neutral arbitrator Kitts referred to the party arbitrators as “partial.”4 The
neutral arbitrators ruled that the party arbitrators, not the parties’ attorneys, would
question witnesses at the hearings. When AFC complained that party arbitrator Stagg
was participating in the preparation of Delta Mine’s case, the neutral arbitrators were
not “taken back” because they wanted the party arbitrators fully prepared to question
witnesses at the hearings. During deliberations, the neutral arbitrators dealt with the
party arbitrators as advocates for their respective positions, precisely as one would
expect from the terms of the agreements to arbitrate. So long as the neutral arbitrators
were not deceived -- an issue AFC did not pursue in the district court5 -- there was
4
The Commercial Arbitration Rules provide that, absent an agreement to the
contrary, party-appointed arbitrators are presumed to be non-neutral. See AMERICAN
ARBITRATION ASSOCIATION, COMMERCIAL ARBITRATION RULES § 12 (1996).
5
Though the district court’s discovery order authorized inquiry into “the
arbitration panels’ understanding of arbitrator Stagg’s role” and whether Stagg had
influenced the proceedings in an improper manner, AFC did not depose the neutral
arbitrators to explore these issues.
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nothing insidious about this process. As Judge Posner observed in IDS Life Ins., 266
F.3d at 651, “Arbitration is customized, not off-the-rack, dispute resolution.”
Nor did AFC prove that its ability to prepare and present its case was
prejudiced by Stagg’s role as a partial party arbitrator. AFC knew from the
agreements to arbitrate that the party arbitrators would be partial in the conflict-of-
interest sense of that word. At the organizational meeting, AFC learned that the party
arbitrators would question witnesses at the hearings. Weeks before the hearings, AFC
learned that Stagg was helping Delta Mine prepare its case. Thus, AFC had ample
time to prepare its party arbitrator to play a comparable role. As the Eleventh Circuit
said in Sunkist Soft Drinks v. Sunkist Growers, 10 F.3d 753, 759 (11th Cir. 1993),
cert. denied, 513 U.S. 869 (1994), a non-neutral party arbitrator’s conduct in
participating in meetings with witnesses, suggesting lines of testimony, helping select
consultants, and advising an expert witness as to his testimony is “not only
unobjectionable, but commonplace.”
2. Sections 10(a)(1) and (3) -- “undue means” and “misbehavior.” The
district court also ruled that the awards must be vacated because Stagg’s conduct
before the hearings and during deliberations constituted “undue means” and
“misbehavior by which [AFC’s rights were] prejudiced” within the meaning of
§§ 10(a)(1) and (3). A party seeking vacation of an award on either of these grounds
must demonstrate that the conduct influenced the outcome of the arbitration. See
Painewebber Group v. Zinsmeyer Trust Partnership, 187 F.3d 988, 994 (8th Cir.
1999), cert. denied, 529 U.S. 1020 (2000) (“there must be some causal relation
between the undue means and the arbitration award.”); M&A Elec. Power Coop. v.
Local Union No. 702, IBEW, 977 F.2d 1235, 1238 (8th Cir. 1992). Once again, AFC
failed to sustain its burden on this issue.
AFC argues that Stagg disclosed to Delta Mine the substance of the panels’
deliberations and the neutral arbitrators’ draft decisions, and obtained input from
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Delta Mine before responding to neutral arbitrator Wilson’s proposed offset. But
there is no evidence that this was contrary to what the neutral arbitrators expected and
encouraged, and there is considerable evidence that party arbitrator Jones knew the
role Stagg was playing and had equal access to his client and to the neutral
arbitrators, for example, on the offset issue. We know that the neutral arbitrators’
final awards were consistent with their draft decisions, so Stagg failed to dissuade
arbitrator Wilson from awarding AFC an offset in the Williamson County award.
AFC failed to satisfy its substantial burden to “demonstrate that the conduct
influenced the outcome of the arbitration.” M & A Electric, 977 F.2d at 1238; see
Painewebber, 187 F.3d at 994-95.
3. AFC’s Alternative Grounds. AFC argues that the awards should be
vacated because the arbitrators improperly consolidated two separate arbitrations,
disallowed cross-examination of witnesses, refused to hear new evidence, ignored key
lease provisions, and issued awards that are irrational on their face. Having carefully
reviewed the arbitration records, we conclude these contentions are without merit.
Arbitration awards should be construed, whenever possible, so as to uphold their
validity. “A contrary course would be a substitution of the judgment of the chancellor
in place of the judges chosen by the parties, and would make an award the
commencement, not the end, of litigation.” Burchell v. March, 58 U.S. (17 How.)
344, 349 (1854). The arbitrators’ rulings were well within their procedural
discretion,6 their analysis drew its essence from the lease agreements, and we are
satisfied that the awards were not “completely irrational” and did not “evidence[] a
manifest disregard for the law.” Kiernan, 137 F.3d at 594.
6
“Arbitration may or may not be a desirable substitute for trials in courts; as to
that the parties must decide in each instance. But when they have adopted it, they
must be content with its informalities; they may not hedge it about with those
procedural limitations which it is precisely its purpose to avoid.” American Almond
Prods. Co. v. Consolidated Pecan Sales Co., 144 F.2d 448, 451 (2d Cir. 1944).
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4. Delta Mine’s Petition To Modify. Delta Mine argues that the Williamson
County award must be modified because neutral arbitrator Wilson exceeded his
authority by including an offset in favor of AFC. Although an arbitration award may
be modified to eliminate mistakes affecting the merits of the controversy “[w]here the
arbitrators have awarded upon a matter not submitted to them,” 9 U.S.C. § 11, we are
satisfied the offset was fairly within the controversy submitted to the Williamson
County panel. We decline Delta Mine’s further invitation “to invade the province of
the panel and re-adjudicate this [portion of the] dispute on its merits.” UHC Mgmt.
Co. v. Computer Sciences Corp., 148 F.3d 992, 998 (8th Cir. 1998).
III. CONCLUSION
For the foregoing reasons, we conclude that neither party arbitrator Stagg’s
conduct nor the other grounds urged on appeal warrant either vacating or modifying
the arbitration awards. The parties expressly agreed to the selection of partisan party
arbitrators. Arbitrators Stagg and Jones were selected and performed accordingly,
and courts have long upheld awards by tripartite arbitration panels consisting of two
non-neutral party arbitrators and one neutral decision-maker. See generally Note, 68
HARV. L. REV. at 296-310.
It may be that many professional neutral arbitrators, if presented with this
situation, would have required fuller initial disclosures by the party arbitrators and
would have established clearer and better articulated procedural ground rules for the
pre-hearing preparations and the post-hearing deliberations. But consistent with the
agreements to arbitrate, the neutral arbitrators in this case were mining engineers, not
professional arbitrators. Each announced at the organizational meeting that he had
not previously served as a neutral arbitrator. Because arbitration is a matter of
contract, we neither endorse nor condemn this mode of proceeding (though the
litigation it has produced is certainly unfortunate). We merely hold that, because
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AFC failed to demonstrate that arbitrator Stagg’s conduct either misled the neutral
arbitrators, prevented AFC from fairly presenting its case, or otherwise prejudiced the
outcome of the arbitrations, the awards must be confirmed. The judgment of the
district court is reversed and the case is remanded with instructions to confirm the
Williamson County and Saline County awards in their entirety.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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