Gianelli Money v. ADM Investor , 146 F.3d 1309 ( 1998 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 97-2586
FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
D.C. Docket No. 96-469-CIV-ORL-18 2/18/03
THOMAS K. KAHN
GIANELLI MONEY PURCHASE PLAN CLERK
AND TRUST, PENELOPE GIANELLI,
Trustee,
Plaintiffs-Appellees,
versus
ADM INVESTOR SERVICES, INC.,
Defendant-Appellant.
___________________________
Appeal from the United States District Court
for the Middle District of Florida
___________________________
(July 22, 1998)
Before CARNES and HULL, Circuit Judges, and HENDERSON, Senior Circuit Judge.
CARNES, Circuit Judge:
ADM Investor Services, Inc. (“ADM”) appeals the district court’s
order vacating an arbitration award in its favor. The district court
concluded that the arbitrator had displayed “evident partiality” because of
past business contacts between his employer and ADM’s corporate
representative at the arbitration. Because we hold that an arbitrator cannot
be guilty of “evident partiality” absent actual knowledge of a real or
potential conflict, we conclude that the district court erred in vacating the
arbitration award. Accordingly, we reverse the district court’s order and
remand with instructions to grant ADM’s cross-petition for confirmation
of the arbitration award.
I. BACKGROUND
ADM is a futures commission merchant licensed with the Commodity
Futures Trading Commission ("CFTC"). Basic Commodities, Inc.
(“Basic”) is also registered with the CFTC. In 1992, ADM and Basic
entered into an agreement under which ADM executed commodities trades
for customers brought in by Basic. The agreement contained an indemnity
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provision requiring Basic to indemnify and hold ADM harmless for any
damages it incurred because of losses suffered by Basic clients. Basic
president Kent C. Kelley (“Kelley”) executed this agreement on behalf of
Basic, and also personally guaranteed Basic’s contractual undertakings.
One of the clients that Basic brought to ADM was the Gianelli Money
Purchase Plan and Trust, Penelope Gianelli, Trustee (“Gianelli”). Gianelli
lost approximately $100,000 from November 1994 through July 1995 as a
result of its investments in the futures markets. Gianelli claims that
Kelley’s mismanagement of its account caused these losses. In an attempt
to recoup its losses, Gianelli filed a claim against ADM with the American
Arbitration Association (“AAA”). It sought to hold ADM liable on an
agency theory, asserting that it was liable for the wrongdoings and
mismanagement of Kelley, Basic’s president.
The parties jointly selected Keith Houck ("Houck") as sole arbitrator.
Houck has served as officer manager for the law firm of Gray, Harris &
Robinson ("Gray Harris") since 1990. Immediately prior to the arbitration
hearings, Gianelli discovered that Gray Harris had represented Kelley in a
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1992 securities case, the Neilson case. When Gianelli asked about this,
Houck asserted that he was unaware of the case, while Kelley asserted
(falsely) that Gray Harris's representation of him was an isolated incident.
In addition, Houck signed an Arbitrator's Oath which stated that he had
nothing to disclose. After receiving these assurances, Gianelli accepted
Houck as the sole arbitrator. Houck conducted the arbitration hearings on
January 25 and 26, 1996. Kelley was present throughout the hearing, and
the district court found that Kelley was ADM's corporate representative at
the "mediation." The proceedings were not recorded. On February 7,
1996, Houck rendered an award in favor of ADM, finding it not liable to
the Trust.
Gianelli contends that, after Houck rendered the decision in favor of
ADM, it discovered Kelley had frequent contact with Gray Harris. In
particular, Gray Harris helped Kelley form three companies and
represented two others in 1976; the firm also represented Kelley as an
individual from 1977 to 1986. On May 2, 1996, Gianelli filed this petition
to vacate the arbitration award, contending that Houck, as an employee of
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Gray Harris, had displayed partiality to ADM. ADM subsequently filed a
cross-petition to confirm the arbitration award. The matter was referred to
a magistrate judge, who, after hearing oral argument, issued a Report and
Recommendation recommending that the district judge grant Gianelli’s
petition to vacate the arbitration award. The district court adopted that
Report and Recommendation in its entirety, and vacated the arbitration
award. ADM appeals.
II. STANDARD OF REVIEW
We have previously held that we review an order vacating an
arbitration award de novo. See Robbins v. Day, 954 F.2d 679, 681 (11th
Cir. 1991). We justified that standard of review, which is more stringent
than the abuse of discretion standard under which we reviewed orders
confirming arbitration awards, by relying on the federal policy favoring
arbitration and limited review of arbitral awards. See id. at 682. Since we
issued our decision in Robbins, however, the Supreme Court has provided
additional instruction about the proper standard that courts of appeals must
use to review orders confirming or vacating arbitration awards. Of course,
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“[w]here prior panel precedent conflicts with a subsequent Supreme Court
decision, we follow the Supreme Court decision.” Cottrell v. Caldwell, 85
F.3d 1480, 1485 (11th Cir. 1996); accord, e.g., Lufkin v. McCallum, 956
F.2d 1104, 1107 (11th Cir. 1992).
In First Options of Chicago, Inc. v. Kaplan, 115 S. Ct. 1920, 1926
(1995), the Court indicated that where the district court has confirmed an
arbitration award, the appellate court must review the district court’s factual
findings for clear error and its holdings of law de novo. Several other
courts of appeals have concluded that First Options mandates the same
standard whether the order being reviewed confirms or vacates the
arbitration award. See, e.g., Wackenhut Corp. v. Amalgamated Local 515,
126 F.3d 29, 31 (2d Cir. 1997) (“We review a district court decision
upholding or vacating an arbitration award de novo on questions of law and
for clearly erroneous findings of fact.”); Barnes v. Logan, 122 F.3d 820,
821 (9th Cir. 1997) (“Appellate courts review the confirmation or vacation
of an arbitration award like any other district court decision . . . accepting
findings of fact that are not 'clearly erroneous' but deciding questions of law
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de novo.”) (internal quotes omitted), cert. denied, 118 S. Ct. 1385 (1998);
Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 135 (6th Cir. 1996)
(“When reviewing a district court's decision to vacate or confirm an
arbitration award, we review findings of fact for clear error and questions
of law de novo.”).
We also conclude that First Options requires us to apply the same
standard of review to orders vacating arbitration awards as we apply to
orders confirming arbitration awards. Three considerations that the
Supreme Court identified in First Options compel that conclusion. First,
the Court stated that “it is undesirable to make the law more complicated
by proliferating review standards without good reasons.” First Options, 115
S. Ct. at 1926. Second, the Court indicated that the policy considerations
that work to create a presumption of validity for arbitration awards cannot
be the basis for a two-tiered review system, depending on whether the
district court confirmed or vacated the award. Specifically, the Court
stated,“[T]he reviewing attitude that a court of appeals takes toward a
district court decision should depend upon the respective institutional
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advantages of trial and appellate courts, not upon what standard of review
will more likely produce a particular substantive result.” See id. (internal
quotes omitted). That statement directly undercuts our position in Robbins
that the policy favoring confirmation of arbitration awards justifies
different standards of review depending on whether we are reviewing an
order confirming or vacating an arbitration award. See Robbins, 954 F.2d
at 682.
Finally, the Supreme Court stated that the policy giving arbitrators
considerable leeway in their decision making does not mean that reviewing
courts should give additional deference to district courts when they confirm
arbitration awards. See First Options, 115 S. Ct. at 1926. We cannot hold
orders vacating an arbitration award to a stricter standard, because doing so
would accord greater deference to orders confirming awards, and First
Options prohibits that. Our Robbins decision and any others providing a
dual standard of review for arbitration orders must yield to First Options.
Accordingly, orders vacating arbitration awards, like orders confirming
8
them, are to be reviewed for clear error with respect to factual findings and
de novo with respect to the district court’s legal conclusions.
III. DISCUSSION
The Federal Arbitration Act (“FAA”) provides that a federal district
court can vacate an arbitration award, but only in extremely narrow
circumstances. See 9 U.S.C. § 10. One of the grounds the FAA expressly
sanctions as a basis for vacating an arbitration award is partiality on the part
of the arbitrators:
In any of the following cases the United States court in and for
the district wherein the award was made may make an order
vacating the award upon the application of any party to the
application --
(2) Where there was evident partiality or corruption in the
arbitrators, or either of them.
9 U.S.C. § 10(a). The district court relied on that ground -- evident
partiality, not corruption -- in vacating the arbitration award in this case.
Specifically, it concluded that Kelley’s frequent business contacts with
Gray Harris, Houck’s employer, would lead a reasonable person to
conclude that Houck “was tainted with evident partiality.”
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We begin our analysis by noting that the purpose of the Federal
Arbitration Act was “to relieve congestion in the courts and to provide
parties with an alternative method for dispute resolution that would be
speedier and less costly than litigation.” O.R. Secs. v. Prof’l Planning
Assocs., Inc., 857 F.2d 742, 745 (11th Cir. 1988) (internal quotes omitted).
Judicial review of arbitration awards is “narrowly limited,” and the FAA
presumes that arbitration awards will be confirmed. See Davis v.
Prudential Sec., Inc., 59 F.3d 1186, 1188 (11th Cir. 1995). Therefore, the
“evident partiality” exception is to be strictly construed, as it must be if the
federal policy favoring arbitration, see, e.g., Booth v. Hume Publ’g, Inc.,
902 F.2d 925, 932 (11th Cir. 1990), is to be given full effect. The alleged
partiality must be “direct, definite and capable of demonstration rather than
remote, uncertain and speculative.” Middlesex Mut. Ins. Co. v. Levine, 675
F.2d 1197, 1202 (11th Cir. 1982) (internal quotes omitted); see Scott v.
Prudential Secs., Inc., 141 F.3d 1007, 1015 (11th Cir. 1998).
In vacating the arbitration award in this case, the district court relied
heavily on Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994). In that case,
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the Ninth Circuit found evident partiality where an arbitrator, who was also
an attorney, did not investigate potential conflicts or disclose that his firm
had performed legal work for one of the parties’ corporate parents. See id.
at 1048. Schmitz held that the arbitrator’s failure to investigate could
create a reasonable perception of partiality. See id. at 1048-49.1
The district court found Schmitz to be closely analogous to this case.
In particular, the court noted that, as in Schmitz, the arbitrator (Houck) was
employed by a law firm (Gray Harris) that had a long-standing relationship
with someone closely connected to one of the arbitrating parties (Kelley).
Furthermore, the district court reasoned that had Houck investigated
possible conflicts of interest as Schmitz requires, he would have discovered
the previous work that Gray Harris had performed for Kelley, and
disclosure of that relationship would have afforded Gianelli a more
informed basis upon which to decide whether to proceed with Houck as
1
We note that although Schmitz cites to our decision in Middlesex
Mutual Ins. Co. v. Levine, 675 F.2d 1197, 1202 (11th Cir. 1982), it does
so only for the proposition that “[s]ome courts have considered an
arbitrator’s lack of knowledge as a factor in determining whether evident
partiality was present.” Schmitz, 20 F.3d at 1048.
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arbitrator. Therefore, the district court, following Schmitz, concluded that
it should vacate the arbitration award.
The problem with the district court’s analysis is that Schmitz conflicts
with the law of this Circuit. In Lifecare Int’l, Inc. v. CD Medical, Inc., 68
F.3d 429 (11th Cir. 1995), the arbitrator accused of “evident partiality”
became “of counsel” to a law firm that had two contacts with CD Medical,
including one “for the purpose of obtaining representation in the instant
dispute.” Id. at 434. This Court noted that even the most routine
background check by the arbitrator would have brought this information to
light. However, we also pointed out that there was no evidence that the
arbitrator was actually aware of these past contacts. Because there was no
evidence that the arbitrator had actual knowledge of the past contacts, we
confirmed the arbitration award and rejected the proposition that the
arbitrator had a duty to investigate the past contacts to avoid evident
partiality. In the present case it was error for the district court to rely on
Schmitz, because its holding that an arbitrator’s failure to investigate past
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contacts with one of the parties may constitute “evident partiality” is
squarely at odds with the position we took in Lifecare.
Instead of following Schmitz, the district court should have applied
the law of our circuit, which is that an arbitration award may be vacated
due to the “evident partiality” of an arbitrator only when either (1) an actual
conflict exists, or (2) the arbitrator knows of, but fails to disclose,
information which would lead a reasonable person to believe that a
potential conflict exists. See Lifecare, 68 F.3d at 433; Levine, 675 F.2d at
1202 (party challenging arbitration award must establish reasonable
impression of partiality that is “direct, definite and capable of
demonstration rather than remote, uncertain and speculative.”) (internal
quotes omitted). Whether these conditions have been met ordinarily
requires a fact-intensive inquiry. See Lifecare, 68 F.3d at 435.
Performance of that inquiry here leads us to conclude that neither of
the conditions for “evident partiality” exists in this case. The district court
made a factual finding, supported by the evidence in the record, that Houck
was not actually biased against Gianelli. Therefore, the first condition
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under which an award may be vacated for evident partiality, the existence
of an actual conflict, was not present in this case.
As for the second condition, the district court did not expressly find
that Houck was aware of Kelley’s involvement with Gray Harris with the
exception of the Neilson case, and Houck became aware of that only when
Gianelli informed him immediately prior to the arbitration hearings.
Gianelli accepted Houck as an arbitrator with full knowledge of Gray
Harris’ representation of Kelley in the Neilson case. Therefore, Houck’s
knowledge of that connection cannot be the basis for a finding of “evident
partiality.”
It is not entirely clear from the district court opinion whether it
implicitly found that Houck was aware of any relationship Kelley had with
Gray Harris other than the Neilson case. However, if the district court did
make such an implicit finding, that finding is clearly erroneous. All of
Kelley’s contacts with Gray Harris, with the exception of the Neilson case,
pre-date Houck’s employment at the firm. There is nothing in the record
to indicate that Houck knew of any connection between Kelley and Gray
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Harris prior to 1990, when Houck joined the firm. Although given
abundant opportunity to do so, Gianelli, who has the burden of persuasion,
has not pointed to any evidence suggesting that Houck was aware of any
relationship between Kelley and Gray Harris other than the Neilson case.
As a result, the only conclusion that the record will support is that Houck
was unaware of any other relationship. Because Houck did not have actual
knowledge of the information upon which the alleged “conflict” was
founded, the second “evident partiality” condition is not present in this
case.
We reverse the district court’s order vacating the arbitration award in
favor of ADM and remand with instructions that the district court grant
ADM’s cross-petition for confirmation of the arbitration award.
REVERSED and REMANDED.
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