Morgan Keegan & Company, Inc. v. Michael Starnes ( 2014 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
April 23, 2014 Session
MORGAN KEEGAN & COMPANY, INC. v. MICHAEL STARNES, ET AL.
Direct Appeal from the Chancery Court for Shelby County
No. CH-10-1717-1 Walter L. Evans, Chancellor
No. W2012-00687-COA-R3-CV - Filed June 20, 2014
The trial court vacated an arbitration award in favor of Petitioner/Appellant Morgan Keegan
& Company, Inc., on the basis of “evident partiality” and remanded the matter for re-
arbitration before a different panel. We reverse and remand for further proceedings
consistent with this Opinion.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed
and Remanded
D AVID R. F ARMER, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and J. S TEVEN S TAFFORD, J., joined.
Michael A. Brady, Annie T. Christoff and Shepherd D. Tate, Memphis, Tennessee, and Peter
S. Fruin, Birmingham, Alabama, for the appellant, Morgan Keegan & Company, Inc.
John James Heflin, III, Memphis , Tennessee, for the appellees, Michael S. Starnes, Laura
M. Starnes f/k/a Laura Ann Murchison, The Michael S. Starnes Charitable Remainder Trust
and TCX, Inc.
OPINION
The only issue presented by this appeal is whether the trial court erred by vacating an
arbitration award in favor of Morgan Keegan & Company, Inc. (“Morgan Keegan”) on the
ground of evident partiality under the Federal Arbitration Act (“FAA”) pursuant to 9 U.S.C.
§ 10(a)(2) and the Tennessee Uniform Arbitration Act (“TUAA”) pursuant to Tennessee
Code Annotated § 29-5-313(a)(1)(B)(2012). The background facts relevant to our
disposition of this issue are largely undisputed. Respondents/Appellees Michael S. Starnes,
Laura M. Starnes f/k/a Laura Ann Murchison, the Michael S. Starnes Charitable Remainder
Trust, and TCX, Inc., (collectively, “Claimants”) owned investment accounts at Morgan
Keegan.1 A portion of Claimants’ portfolio included investments in the Regions Morgan
Keegan Funds (“the RMK Funds”). The documents governing Claimants’ accounts provided
for dispute resolution by the Financial Industry Regulatory Authority (“FINRA”), the
independent, non-governmental organization of the financial industry which conducts
virtually all securities-related arbitration and mediation in the United States. Morgan Keegan
& Co. v. Smythe, No. W2010-01339-COA-R3-CV, 2014 WL 2462853, at *1 n.1 (Tenn. Ct.
App. May 29, 2014) (quoting see http:// www.finra.org/AboutFINRA/WhatWeDo (last
visited April 28, 2014)).
In December 2008, Claimants filed an arbitration proceeding against Morgan Keegan
following the collapse of the RMK Funds. In their statement of claim, Claimants asserted
claims of misrepresentation and omissions, breach of fiduciary duty, unsuitable investments,
violation of Section 11 of the Securities Act as codified at 15 U.S.C. § 77k, violation of
Section 12 of the Securities Act as codified at 15 U.S.C. § 77l, violation of Section 15 of the
Securities Act of 1933, breach of the Securities Act of 1934, breach of the Tennessee
Securities Act, fraud, negligence, failure of supervision, breach of contract, vicarious
liability, and violation of the FINRA Rules. Claimants sought compensatory damages in
excess of $7 million, interest, and costs, and “reserve[d] the right to seek punitive damages.”
Claimants also filed state court actions against individual agents and advisors.
As provided by the FINRA rules governing disputes in excess of $100,000, a
three-member arbitration panel consisting of two public arbitrators and a non-public
arbitrator with extensive industry experience was selected and approved by the parties for
arbitration of claims against Morgan Keegan. The panel ultimately agreed upon by the parties
was composed of Elliott Zachary Seff (Mr. Seff), Public Arbitrator and Chair; Austin
O’Toole (Mr. O’Toole), Public Arbitrator; and William Lacy (Mr. Lacy), the non-public
arbitrator. As required by the FINRA rules, the panel members filed disclosures including
biographical information, potential conflicts, and other relevant information. Following a
somewhat tortured discovery process, scheduling difficulties, and two continuances,
arbitration proceedings commenced on Monday, August 16, 2010. At the outset of the
proceedings, Mr. Lacy recognized one of Morgan Keegan’s expert witnesses, Steve Scales
(Mr. Scales), and disclosed that he and Mr. Scales both worked at Dean Witter approximately
twenty years earlier. A brief exchange ensued between Mr. Lacy and Mr. Scales confirming
that Mr. Lacy was the Dean Witter manager in Birmingham while Mr. Scales was the
manager in Memphis in the late 1980’s. A more lengthy discussion ensued regarding
whether Claimants’ state court actions impacted the arbitration proceedings, opening
1
Claimant Laura M. Starnes, formerly Laura Ann Murchison, is the wife of Claimant Michael S.
Starnes. The Michael S. Starnes Charitable Remainder Trust is a trust established by Mr. Starnes. Claimant
TCX, Inc. is a corporation owned by Mr. Starnes with its principal place of business in Tennessee.
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statements were made by counsel, and examination of Claimants’ first witness commenced.
When the proceedings recommenced on August 17, 2010, Claimants filed a motion
to remove Mr. Lacy from the panel and requested that the proceedings be adjourned until a
new panel could be assembled. Claimants alternatively requested a stay of the proceedings
to permit them to seek injunctive relief in Tennessee State courts. Morgan Keegan opposed
Claimants’ motion and offered to release Mr. Scales as a witness and to replace him with
another expert witness. Claimants rejected this offer and, apparently while the panel was in
recess to consider their motion to recuse, filed a motion to stay the matter. Claimants’
motions were denied. A lengthy and at times heated discussion ensued regarding whether
recusal of Mr. Lacy was warranted, proper procedure under FINRA rules, and whether Mr.
Seff’s authority included “ordering” Claimants to participate in further proceedings while the
matter was under review. Mr. Seff “warn[ed]” Claimants’ counsel, “on behalf of the parties
and FINRA, [that] the failure to proceed could result in the imposition of sanctions” under
FINRA rules. Counsel for Claimants refused to proceed further; refused to permit further
examination of Claimants’ witness; refused the panel’s offer to temporarily adjourn at the
end of the week; and informed the panel that he and Claimants would not participate the next
day. Claimants did not appear when the proceedings resumed on August 18 and Morgan
Keegan presented its case. On September 20, 2010, the panel denied Claimants’ claims in
their entirety and awarded Morgan Keegan attorneys’ fees in the amount of $235,578.10 and
costs in the amount of $29,720.74.
On September 21, 2010, Morgan Keegan filed a petition to confirm the arbitration
award in the Chancery Court for Shelby County. Claimants filed an answer in opposition to
Morgan Keegan’s petition and counter-petitioned for vacatur on the grounds of misconduct
and evident partiality on the part of Mr. Lacy and the panel under the Federal Arbitration Act
as codified at 9 U.S.C. § 10(a)(2), (3) and Tennessee Code Annotated § 29-5-313(a). They
also asserted that the arbitrators exceeded their powers or so imperfectly executed them that
a mutual, final, and definite award was not made under 9 U.S.C. § 10(a)(4) and Tennessee
Code Annotated § 29-5-313(a)(1)(C). Following protracted proceedings in the trial court,
the matter was heard on January 5, 2012. On January 19, 2012, the parties again appeared
before the trial court to address the status of the matter in light of the court’s oral ruling that
Morgan Keegan’s motion to confirm would be held in abeyance pending re-arbitration.
Morgan Keegan urged the court to reconsider this ruling, asserting that, “by implication and
for all practical effects,” the trial court had denied its motion to confirm the arbitration
award. By order entered January 19, 2012, the trial court granted Claimants’ counter-
petition for vacatur on the ground of evident partiality and remanded the matter for a new
hearing before a different FINRA arbitration panel. The trial court also held Morgan
Keegan’s motion to confirm the arbitration award “in abeyance” pending the outcome of re-
arbitration before a different panel.
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Morgan Keegan filed a notice of appeal to this Court on February 17, 2012. On the
same day, Morgan Keegan also filed a motion for interlocutory appeal in light of that part of
the trial court’s order holding its motion to confirm in abeyance pending re-arbitration. In
April 2012, Claimants filed a motion to dismiss Morgan Keegan’s appeal on the ground that
the trial court’s judgment was not final where it held Morgan’s Keegan’s motion to confirm
in abeyance. In its response, Morgan Keegan urged this Court to deny Claimants’ motion,
asserting the trial court’s order was final and appealable. By order entered July 30, 2012, we
denied Claimants’ motion to dismiss and held the matter in abeyance pending the Tennessee
Supreme Court’s judgment in Morgan Keegan & Co. v. William Hamilton Smythe, III, No.
W2011-01339-SC-R11. By order entered January 24, 2013, we stayed the trial court
proceedings and specifically stayed operation of the trial court’s judgment remanding the
matter for re-arbitration. The supreme court filed its judgment in Morgan Keegan v. Smythe
on April 25, 2013. On October 7, 2013, Morgan Keegan moved to lift the stay of its appeal
and to dismiss its motion for interlocutory appeal. In its motion, Morgan Keegan asserted
that the trial court’s judgment must be considered final under Morgan Keegan v. Smythe. In
their response, Claimants expressed no objection to dismissal of Morgan Keegan’s
interlocutory appeal and to the lifting of the stay imposed on Morgan Keegan’s Rule 3
appeal. We granted Morgan Keegan’s motion by order entered October 8, 2013, and oral
argument was heard on April 23, 2014.
Standard of Review
The FINRA rules and applicable statutory framework governing this matter were
recently examined by the supreme court in Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595
(Tenn. 2013), and we find it unnecessary to engage in that examination here. It is well-
settled that “courts should play only a limited role in reviewing the decisions of arbitrators.”
Arnold v. Morgan Keegan & Co., 914 S.W.2d 445, 448 (Tenn.1996) (citing United
Paperworkers Int’l Union, AFL–CIA v. Misco, Inc., 484 U.S. 29, 36, 108 S. Ct. 364, 369
(1987)). Therefore, the courts will set-aside arbitrators’ determinations “‘only in very unusual
circumstances.’” Id. (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942,
115 S. Ct. 1920, 1923 (1995)). “‘[T]he standard for judicial review of arbitration procedures
is merely whether a party to arbitration has been denied a fundamentally fair hearing.’”
Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 625 (6th Cir2002) (quoting
National Post Office v. U.S. Postal Serv., 751 F.2d 834, 841 (6th Cir.1985)). We have
observed that judicial review of an arbitration decision is ““one of the narrowest standards
of judicial review in all of American jurisprudence.”” Morgan Keegan & Co. v. Smythe, No.
W2010-01339-COA-R3-CV, 2014 WL 2462853, at *2 (Tenn. Ct. App. May 29, 2014)
(quoting Uhl v. Komatsu Forklift Co., 512 F.3d 294, 305 (6th Cir.2008) (quoting Nationwide
Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 643 (6th Cir.2005) (quoting Lattimer-Stevens
Co. v. United Steelworkers, 913 F.2d 1166, 1169 (6th Cir.1990))). We review a trial court’s
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findings of fact in an arbitration case under a “clearly erroneous standard.” Williams Holding
Co. v. Willis, 166 S.W.3d 707, 710 (Tenn. 2005) (citation omitted). We review questions of
law de novo, however, with no presumption of correctness. Pugh’s Lawn Landscape Co. v.
Jaycon Dev. Corp., 320 S.W.3d 252, 258 n. 4 (Tenn.2010)).
Discussion
Before turning to the issue presented for our review, we first turn to the procedural
posture of this case. As noted above, the trial court neither granted nor denied Morgan
Keegan’s petition to confirm the arbitration award in its January 2012 order, but held it in
abeyance pending re-arbitration. We stayed the matter pending the supreme court’s judgment
in Morgan Keegan & Co. v. Smythe, which was filed on April 25, 2013. See Morgan Keegan
& Co. v. Smythe, 401 S.W.3d 595 (Tenn. 2013)(“ Smythe I ”). In Smythe I, the supreme court
held that
[a]n order that vacates an arbitration award and orders a second arbitration is
an order “denying confirmation of an award” for the purposes of Tenn. Code
Ann. § 29-5-319(a)(3), regardless of whether the party opposing the petition
to vacate the award filed a separate cross-petition for confirmation under Tenn.
Code Ann. § 29-5-312 or whether the trial court has expressly denied
confirmation in its written order.
Smythe I, 401 S.W.3d at 612. In Smythe, no motion to confirm the arbitration award was
filed. Id. at 600. In the current case, however, the trial court curiously held Morgan
Keegan’s motion to confirm in abeyance, thereby apparently indicating its intention to retain
jurisdiction pending re-arbitration. Thus, as an initial matter, we must determine whether we
have jurisdiction over this appeal.
Jurisdiction and Finality
Our jurisdiction of this matter is governed by Tennessee Code Annotated § 29-5-
319(a)(2012). Smythe I, 401 S.W.3d at 602. It is well-settled that
our role in construing a statute is to ascertain and give effect to the legislative
intent without unduly restricting or expanding a statute’s coverage beyond its
intended scope. To do this, we focus initially on the statute’s words, giving
these words their natural and ordinary meaning in light of their statutory
context. We avoid any forced or subtle construction that would limit or extend
the meaning of the language. Every word in a statute is presumed to have
meaning and purpose. If the statutory language is clear and unambiguous, we
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apply the statute’s plain language in its normal and accepted use. We need look
no further than the statute itself, enforcing it just as it is written.
Id. (quoting Keen v. State, 398 S.W.3d 594, 610 (Tenn. 2012) (internal citations and
quotation marks omitted); citing see also Eastman Chem. Co. v. Johnson, 151 S.W.3d 503,
507 (Tenn. 2004)). If the statutory language is ambiguous, however, we may discern its
meaning by examining “the broader statutory scheme, the history of the legislation, or other
sources[.]” Id. (citing Leggett v. Duke Energy Corp., 308 S.W.3d at 851–52 (citing Colonial
Pipeline Co. v. Morgan, 263 S.W.3d 827, 836 (Tenn.2008))). In light of the supreme court’s
reasoning in Smythe I, we agree with Morgan Keegan that the trial court’s order with respect
to Morgan Keegan’s motion to confirm the arbitration award may properly be construed as
a denial of Morgan Keegan’s motion for the purposes of appellate jurisdiction under section
29-5-319(a)(3)(2012).
In Bronstein v. Morgan Keegan & Co., the trial court neither confirmed nor denied
Morgan Keegan’s motion to confirm the arbitration award, but determined that it was moot
in light of its judgment vacating the award and ordering re-arbitration before a new panel.
Bronstein v. Morgan Keegan & Co., No. W2011-01391-COA-R3-CV, 2014 WL 1314843,
at *2 n.2 (Tenn. Ct. App. April 1, 2014). We determined that, in light of Smythe I, we had
jurisdiction to adjudicate the appeal “notwithstanding the trial court’s disinclination to
specifically deny Morgan Keegan’s cross-motion to confirm the arbitration award.” Id.
Notwithstanding its order holding the motion in abeyance in this case, the trial court’s
judgment necessarily denied Morgan Keegan’s motion to confirm the 2010 FINRA
arbitration award. See Smythe I, 401 S.W.3d at 608 (stating: “there can be no doubt that the
trial court[] . . . necessarily denied [respondent’s] request for confirmation when it granted
[petitioner’s] petition to vacate the award.”). Should the matter be re-arbitrated as ordered
by the trial court, the 2010 award would be rendered ineffective and Morgan Keegan’s
motion to confirm it would be meaningless. Under Smythe I, an order that does not expressly
confirm an arbitration award may fairly be construed as denying it for the purposes of section
29-5-319(a)(3), notwithstanding the lack of jurisdiction under section 29-5-319(a)(5). See
id. at 609. Accordingly, we are satisfied that we may exercise jurisdiction over this appeal
under Tennessee Code Annotated § 29-3-319(a)(3).
Upon further review of the record following oral argument, however, we observe that,
in their cross-petition to vacate the award and remand for a new hearing, Claimants asserted
three distinct grounds: evident partiality under 9 U.S.C. § 10(a)(2), misconduct under §
10(a)(3), and that the arbitrators exceeded or imperfectly executed their powers under §
10(a)(4). The trial court vacated the award on the ground of evident partiality but did not
adjudicate Claimants’ allegations of misconduct on the part of Mr. Lacy and on the part of
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the panel as a whole or Claimants’ allegation that the panel exceeded its powers.
Notwithstanding appellate jurisdiction over a judgment that implicitly denies a motion to
confirm for the purposes of Tennessee Code Annotated § 29-5-319(a)(3), neither the statute
nor Smythe I stand for the proposition that a motion to vacate an arbitration award on
multiple grounds may be serially adjudicated and appealed piecemeal.
Pursuant to Rule 3, this Court generally assumes jurisdiction over appeals from final
judgments only. Bayberry Assoc. v. Jones, 783 S.W.2d 553, 559 (Tenn. 1990). Rule 3(a)
of the Tennessee Rules of Appellate Procedure provides, in relevant part:
In civil actions every final judgment entered by a trial court from which an
appeal lies to the Supreme Court or Court of Appeals is appealable as of right.
Except as otherwise permitted in rule 9 and in Rule 54.02 Tennessee Rules of
Civil Procedure, if multiple parties or multiple claims for relief are involved
in an action, any order that adjudicates fewer than all the claims or the rights
and liabilities of fewer than all the parties is not enforceable or appealable and
is subject to revision at any time before entry of a final judgment adjudicating
all the claims, rights, and liabilities of all parties.
Under certain circumstances, a judgment which adjudicates fewer than all of the claims
asserted by the parties may be made final and appealable pursuant to Rule 54.02 of the
Tennessee Rules of Civil Procedure. In order to enter judgment under Rule 54.02, however,
the trial court must make an explicit finding that there is “no just reason for delay” and must
expressly direct that a final judgment be entered. Tenn. R. Civ. P. 54.02. An order is not
properly made final pursuant to Rule 54.02 unless it disposes of an entire claim or is
dispositive with respect to a party. Bayberry Assoc., 783 S.W.2d at 558. In the absence of
an order meeting the requirements of Rule 54.02, any trial court order that adjudicates fewer
than all the claims or the rights and liabilities of fewer than all the parties is not final or
appealable as of right. Id.
We have held that, notwithstanding the finality requisites of Rule 3, Tennessee Code
Annotated § 29-5-319(a)(1) provides for an appeal as a matter of right from an order denying
a motion to compel arbitration. Philpot v. Tenn. Health Mgmt., Inc., 279 S.W.3d 573, 578
(Tenn. Ct. App. 2007)(perm. app. denied Feb. 17, 2009). A trial court’s order compelling
arbitration, however, is not appealable under the statute. T.R. Mills Contractors, Inc. v. WRH
Enterprises, LLC, 93 S.W.3d 861, 865 (Tenn. Ct. App. 2002). Section 29-5-319(b),
moreover, provides that an appeal pursuant to the section “shall be taken in the manner and
to the same extent as from orders or judgments in a civil action.”
In Bronstein, we stated,
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although we have jurisdiction to adjudicate this appeal under Morgan Keegan
v. Smythe, we do not perceive Smythe to stand for the proposition that petitions
asserting multiple grounds to set-aside an arbitration award, and defenses
thereto, may be serially litigated and appealed. Such serial litigation would be
a considerable misuse of judicial resources and the time and resources of the
parties. See Morgan Keegan v. Smythe, 401 S.W.3d 595, 610 (Tenn.2013)
(noting “the interests of ‘speed, simplicity, and economy’” advanced by the
arbitration process, and seeking to avoid the loss of time and resources
resulting from “do-over” proceedings.); White v. Empire Express, Inc., No.
W2010-02380-COA-R3-CV, 2011 WL 6182091, at *7 n.14 (Tenn. Ct. App.
Dec. 13, 2011) (noting, with respect to the appealability of an order compelling
arbitration under the FAA, “We are mindful that, under the Federal Arbitration
Act, an order compelling arbitration and dismissing all of the claims before it
is considered to be a final, appealable order.” See Green Tree Fin.
Corp.-Alabama v. Randolph, 531 U.S. 79, 88–89 (2000)). Nevertheless, even
if the FAA were applicable to the underlying contract, the state law on
appealability governs this procedural issue. Morgan Keegan & Co. v. Smythe,
No. W2010-01339-COA-R3-CV, 2011 WL 5517036 (Tenn. Ct. App. Nov. 14,
2011). Even under federal jurisprudence, however, it appears that the rule on
appealability applies only when the trial court has dismissed all of the claims
before it and leaves nothing for the trial court to decide. When some claims
are arbitrable but others are not, an order dismissing and compelling arbitration
of the arbitrable claims only is not a final, appealable order. See In re Hops
Antitrust Litigation, 832 F.2d 470, 473-74 (8th Cir.1987); see Green Tree, 531
U.S. at 88-89.
Bronstein, 2014 WL 1314843, at *5 (footnote omitted). In Bronstein, we found it
unnecessary to determine whether, notwithstanding section 29-5-319(a)(3), the trial court’s
order was appealable where it did not adjudicate all the grounds for vacatur asserted by the
petitioner. We reached this conclusion in light of our holding that petitioner failed to carry
his burden of proof on any ground where petitioner failed to introduce any evidence,
including the arbitration record, until more than one month after the trial court entered
judgment in the matter. Id.
We observed in Bronstein that the Smythe I court “did not address whether the trial
court in that case had adjudicated all the grounds asserted by Petitioner Morgan Keegan as
justifying vacatur of the arbitration award in that case.” Id. n.7. Upon remand in Smythe, we
directed the parties to obtain entry of a judgment adjudicating Morgan Keegan’s claim of
misconduct or misbehavior on the part of the arbitrators. Morgan Keegan & Co. v. Smythe,
No. W2010-01339-COA-R3-CV, 2014 WL 2462853, at *2 (Tenn. Ct. App. May 29,
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2014)(“Smythe II”). The trial court entered an order denying Morgan Keegan’s motion to
vacate on the basis of misconduct, that judgment was not appealed, and we reversed the trial
court’s judgment vacating the FINRA arbitration award in that case on the ground of evident
partiality. Id.
In this case, Claimants alleged 13 acts on the part of Mr. Lacy and the panel in support
of their assertion that the arbitrators exceeded their power and were guilty of misconduct as
grounds for vacatur in their October 2010 petition. Similarly, they devote a considerable
portion of their brief to this Court to the question of misconduct and the execution of powers
by the panel. In its reply brief, Morgan Keegan asserts that the trial court “rejected” these
claims with respect to Mr. Lacy and the panel. Morgan Keegan references nothing in the
record to support this assertion, however. In its January 19, 2012, order granting Claimants’
counter-petition to vacate, the trial court found that Claimants had “demonstrate[d] evident
partiality justifying vacatur of the award” but did not address Claimants’ claims of
misconduct or whether the panel had exceeded or misapplied its powers. These claims
clearly have not been adjudicated in the trial court with respect to either Mr. Lacy or the
panel.
As noted above, we generally assume jurisdiction over final judgments and we have
emphasized that piecemeal appeals of a matter are disfavored. E.g., Tuturea v. Tenn.
Farmers Mut. Ins. Co., No. W2006-02100-COA-R3-CV, 2007 WL 2011049, at *3 (Tenn.
Ct. App. July 12, 2007). In the context of judgments made final pursuant to Tennessee Rule
of Civil Procedure 54.02, moreover, we have held that:
“[o]rders certifying interlocutory judgments as final ‘should not be entered
routinely’ and ‘cannot be routinely entered as a courtesy to counsel.’ Such
orders must be supported by a record indicating why there is ‘no just reason for
delay,’ and will preferably include specific findings of fact to that effect.”
Harris v. Chern, 33 S.W.3d 741, 745, n. 3 (Tenn. 2000)(quoting Huntington
Nat’l Bank v. Hooker, 840 S.W.2d 916, 921-22 (Tenn. Ct. App.1991)). Noting
the disfavor of judgments pursuant to Rule 54.02 which result in piecemeal
appellate review, in In re Adoption of A.B.K. this Court held that the trial
court’s entry of final judgment pursuant to Rule 54.02 was not appropriate in
an action to terminate parental rights and for adoption where, regardless of
how we determined the issues raised on appeal, the matter would likely be
brought before this Court again. In re Adoption of A.B.K., No.
E2001-02199-COA-R3-CV, 2002 WL 1042183, (Tenn. Ct. App. May 23,
2002) (no perm. app. filed).
Id.
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We have held that “[i]n permitting and indeed encouraging arbitration of disputes, the
legislature sought to facilitate and promote a quicker, more cost effective, less cumbersome,
yet binding means of dispute resolution.” T.R. Mills Contractors, Inc. v. WRH Enterprises,
LLC, 93 S.W.3d 861, 868 (Tenn. Ct. App. 2002). As the current case demonstrates, neither
arbitration nor the review of an arbitration decision are necessarily quick, inexpensive, or
simple. With respect to appellate review, the Smythe I court noted that the applicable FAA
section is
a pro-arbitration statute designed to prevent the appellate aspect of the
litigation process from impeding the expeditious disposition of an arbitration.
Its inherent acknowledgment is that arbitration is a form of dispute resolution
designed to save the parties time, money, and effort by substituting for the
litigation process the advantages of speed, simplicity, and economy associated
with arbitration. Its theme is that judicial involvement in the process should
be kept to the barest minimum to avoid undermining those goals.
Smythe I, 401 S.W.3d at 609 (quoting David D. Seigel, Practice Commentary: Appeals from
Arbitrability Determinations, 9 U.S.C.A. § 16, at 7470). In order to encourage the
expeditious disposition of appeals and in the interest of judicial economy, the “finality”
requirements contained in Rule 3 generally must be met with respect to the adjudication of
all grounds asserted for vacatur before we assume jurisdiction over a trial court order
vacating an arbitration award and remanding it to be re-arbitrated.2
Pursuant to Rule 2 of the Tennessee Rules of Civil Procedure, however, we may
suspend the finality requirements of Rule 3 for good cause in extenuating circumstances.
Bayberry Assoc. v. Jones, 783 S.W.3d 553, 559 (Tenn. 1990); Williams v. Tennessee
Farmers Reassurance Co., No. M2010-01689-COA-R3-CV, 2011 WL 1842893, at *4-6
(Tenn. Ct. App. May 12, 2011)(stating: “[t]his Court will suspend the finality requirements
of Rule 3 of the Tennessee Rules of Appellate Procedure only in the most extenuating
circumstances, where justice so demands.”). In light of the tortured history of this case, the
prolonged pendency of the matter in this Court, and the trial court’s previous orders refusing
to stay enforcement of its order to re-arbitrate pending appellate review, we conclude that
justice and judicial economy are best served by considering the merits of the issue presented
for our review. We accordingly turn to whether the trial court erred by vacating the FINRA
arbitration award on the ground of evident partiality as provided by Tennessee Code
Annotated § 29-5-313(a)(1)(B) and 9 U.S.C. § 10(a)(2).
2
Section 29-5-319(a)(5) provides that an appeal may be taken from an order vacating an arbitration
award without directing a re-hearing. Under Smythe I, an appeal may also be taken from an order vacating
an award and directing a re-hearing pursuant to § 29-5-319(a)(3).
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Applicable Standard
In their memorandum in support of their October 2010 counter-petition, Claimants
submitted that “[t]he overwhelming weight of authority recognizes the principle that
arbitrator recusal is required to avoid even the appearance of bias.” As we recently observed
in Smythe II, however,
[f]or the purpose of cases governed by the FAA, the courts will find evident
partiality only where a reasonable person could only conclude that an arbitrator
was partial to one of the parties. Andersons, Inc. v. Horton Farms, Inc., 166
F.3d 308, 328–329 (6th Cir.1998)(quoting Apperson v. Fleet Carrier Corp.,
879 F.2d 1344, 1358 (6th Cir.1989) (adopting standard announced in Morelite
Const. Corp. v. New York City District Council Carpenters Benefit Funds, 748
F.2d 79, 84 (2d Cir.1984))). Although this standard does not require proof of
actual bias, it “requires a showing greater than an ‘appearance of bias[.]’” Id.
(quoting id. at 1358)). Although it is an objective standard, it is “less exacting
than the one governing judges.” Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d
673, 682 (7th Cir.1983)(cert. denied 464 U.S. 1009, 104 S. Ct. 529 (1983));
mandate amended by 728 F.2d 943 (7th Cir.1984). Additionally, as noted
above, “ “the party seeking invalidation must demonstrate more than an
amorphous institutional predisposition toward the other side; a lesser showing
would be tantamount to an “appearance of bias” standard”” that the Sixth
Circuit has rejected. Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640,
645 (6th Cir.2005)(quoting Andersons, Inc., 166 F.3d at 329)). In Bronstein,
we adopted the standard set-forth by the Sixth Circuit. Bronstein, 2014 WL
1314843, at *3.
Smythe II, 2014 WL 2462853, at * 4. There is no dispute that this matter is governed by the
substantive provisions of the FAA. We accordingly turn to whether Claimants carried their
heavy burden to demonstrate that a reasonable person would have to conclude that Mr. Lacy
was biased against them in this matter and that he acted with improper motivation.
Evident Partiality
The TUAA requires a reviewing court to vacate an arbitration award upon proof of
evident partiality on the part of an arbitrator. Tenn. Code Ann. § 29-5-313; Pugh’s Lawn
Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252, 259 (Tenn. 2010). As we observed
in Smythe II,
the party challenging the arbitrators’ decision must show that a reasonable
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person would have to conclude that an arbitrator was partial to the other party
to the arbitration. Bronstein v. Morgan Keegan & Co., No. W2011-01391-
COA-R3-CV, 2014 WL 1314843, at *3, (Tenn. Ct. App. April 1, 2014)
(quoting Uhl v. Komatsu Forklift Co., 512 F.3d 294, 306 (6th Cir.
2008)(quoting Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir.
1989) (quoting Morelite Constr. Corp. v. New York City Dist. Council
Carpenters Benefit Funds, 748 F.2d 79, 84 (2d Cir.1984)), cert. denied, 495
U.S. 947, 110 S. Ct. 2206, 109 L. Ed. 2d 533 (1990); see also Nationwide IV,
429 F.3d at 645; Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626
(6th Cir.2002) (“ Nationwide II ”)). The challenging party is required to
establish specific facts that indicate improper motives on the part of the
arbitrator. Id. (quoting id. (quoting Andersons, Inc. v. Horton Farms, Inc., 166
F.3d 308, 329 (6th Cir.1998) (internal quotation marks omitted) (quoting
Consolidated Coal Co. v. Local 1643, United Mine Workers, 48 F.3d 125, 129
(4th Cir.1995)))). The alleged partiality must be direct, definite, and capable
of demonstration, Id. (quoting Nationwide v. Home, 278 F.3d at 626 (quoting
Andersons, 166 F.3d at 329)), and an amorphous institutional predisposition
toward the other side is not sufficient because that would simply be the
appearance-of-bias standard that [the Sixth Circuit] [has] previously rejected.
Id. (quoting Uhl, 512 F.3d at 307 (quoting Consolidated Coal, 48 F.3d at
129)).
Smythe II, 2014 WL 2462853, at *3 (internal quotation marks omitted). As in Smythe and
Bronstein, the question here is whether the party challenging the arbitration award carried
its heavy burden to demonstrate specific facts indicating that the arbitrator acted with
improper motivation. Id. (citations omitted). ““[T]he showing required to avoid
confirmation” of an arbitration award “is very high.”” Id. (quoting STMicroelectronics, N.V.
v. Credit Suisse Securities (USA), LLC, 648 F.3d 68, 74 (2nd Cir. 2011)(quoting D.H. Blair
& Co. v. Gottdiener, 462 F.3d 95, 110 (2nd Cir.2006))). “Although actual bias is difficult
to demonstrate, evident partiality requires specific, definite proof that is ‘powerfully
suggestive of bias.’” Id. at *8 (quoting Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673,
681 (7th Cir. 1983)).
In their counter-petition to vacate the arbitration award, Claimants referenced a
number of acts on the part of Mr. Lacy and the panel which they alleged demonstrate
misconduct, evident partiality, and imperfectly executed powers. In their brief, Claimants
assert that Mr. Lacy’s failure to disclose his prior business relationship with Mr. Scales
before the commencement of the proceedings in violation of FINRA Rule 12405, his
“angr[y] react[ion] to [Claimants’] suggestion” that the relationship should have been
previously disclosed, and his “obstinate[] refus[al] to recuse himself” demonstrate evident
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partiality on his part. They contend that, “[c]aught by surprise, [they] had no opportunity to
assess the severity of the previously undisclosed conflict of interest” until after the first day
of the proceedings had concluded, and that this conflict was demonstrated by Mr. Lacy’s
“aggressive cross-examination” of Claimants’ first witness, Lee Piovarcy (Mr. Piovarcy), a
Memphis attorney who serves as Trustee of the Michael Starnes Charitable Remainder Trust.
Claimants submit that Mr. Lacy “parrot[ed] Morgan Keegan’s asserted defenses . . . and
challenged [Mr.] Piovarcy’s credibility and competence.” Claimants also assert that, despite
“downplaying” his relationship with Mr. Scales “to avoid a challenge for bias[,]” Mr. Lacy
engaged in an ex parte communication with Mr. Scales on the day of the proceedings.
Claimants submit that Mr. Scales and Mr. Lacy appeared “jovial, seemed very familiar, and
recalled mutual acquaintances at Dean Witter.” They assert that, “[c]ontrary to [Mr.] Lacy’s
‘guarantee’ that he wouldn’t know [Mr.] Scales from Adam if there were only two men to
choose from, their ex parte conversation demonstrated overt affinity and evident partiality.”
We begin our discussion of this issue by noting that it is undisputed that the FINRA
rules require prospective arbitrators to disclose prior and present relationships with other
participants in the proceedings and that this duty is an on-going one. It is also undisputed
that Mr. Lacy did not disclose his previous relationship with Mr. Scales before the first day
of the proceedings. Mr. Lacy and Morgan Keegan describe this relationship as a superficial,
professional acquaintanceship that the two men had while they were employed by Dean
Witter in different cities more than twenty years ago. Claimants characterize the relationship
between Mr. Lacy and Mr. Scales as one that had continued over more than twenty years.
Upon review of the transcript of the arbitration proceedings, we find that the
exchanges between Mr. Lacy and Mr. Scales demonstrate that the two men knew each other
briefly some twenty years earlier when Mr. Lacy was a manager with Dean Witter in
Birmingham and Mr. Scales was a manager in Memphis. Mr. Lacy stated on the first day of
the proceedings that the “only connection” the two men had was that they were employed by
the same company in the same region. Mr. Scales confirmed this characterization, stating
that the two men worked in the same region in the late 1980's, that they “may have had one
or two regional meetings where there were 100 people in the meeting for a day and a half,
two and a half days in Atlanta or New York.” Mr. Scales stated that managers within a
region did not have regular or frequent contact unless they formed a personal friendship at
meetings, and that he and Mr. Lacy did not form such a friendship. There is nothing in the
record to demonstrate that the relationship between the two men was on-going, that they had
engaged in a social relationship or friendship, or that they had either a social or professional
relationship - or even professional contact - in the intervening twenty years.
Claimants rely on an affidavit of Judy Ann Tidwell (Ms. Tidwell), an assistant in the
office of Claimants’ counsel, in support of their assertion that alleged ex parte
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communication between Mr. Lacy and Mr. Scales demonstrates evident partiality on Mr.
Lacy’s part. In her affidavit, Ms. Tidwell stated that on August 17, 2010, when she returned
after lunch to the conference room where the arbitration proceedings were held, Mr. Scales
and Mr. Lacy were engaged in a conversation that “seemed very friendly and familiar.” Ms.
Tidwell stated that Mr. Scales and Mr. Lacy “were having a conversation about
acquaintances that they each remembered from the days when they had worked together,
specifically people that each recalled from Dean Witter.” The record contains neither
evidence nor allegation that Mr. Lacy and Mr. Scales discussed any matter relating to
Claimants, Morgan Keegan, the matters subject to arbitration, or the arbitration proceedings.
Upon review of the transcript of the arbitration proceedings, we cannot agree with
Claimants’ characterization of Mr. Lacy’s questioning of Mr. Piovarcy as “hostile.” Mr.
Piovarcy was questioned by all members of the panel, counsel for Morgan Keegan and
counsel for Claimants. The transcript does not reflect that Mr. Lacy’s questions were
“aggressive” or indicative of bias or prejudice.
As noted above, Mr. Lacy was the non-public arbitrator in this case. We have noted
that “‘[t]he most sought-after’ arbitrators ‘are those who are prominent and experienced
members of the specific business community in which the dispute to be arbitrated arose.’”
Smythe II, 2014 WL 2462853, at *6 (quoting STMicroelectronics, N.V. v. Credit Suisse
Securities (USA) LLC, 648 F.3d 68, 77 (2nd Cir.2011)). ““[S]ome degree of overlapping
representation and interest inevitably results.”” Id. (quoting Nationwide Mut. Ins. Co. v.
Home Ins. Co., 429 F.3d 640, 646 (6th Cir.2005) (quoting Int’l Produce, Inc. v.
A/SRosshavet, 638 F.2d 548, 552 (2nd Cir.1981))). Further,
to disqualify any arbitrator who had professional dealings with one of the
parties (to say nothing of a social acquaintanceship) would make it impossible,
in some circumstances, to find a qualified arbitrator at all. Mindful of the
trade-off between expertise and impartiality, and cognizant of the voluntary
nature of submitting to arbitration, we read Section 10(b) as requiring a
showing of something more than the mere “appearance of bias” to vacate an
arbitration award. To do otherwise would be to render this efficient means of
dispute resolution ineffective in many commercial settings.
Id. (quoting Morelite Const. Corp. v. New York City Dist. Council Carpenters Benefit Funds,
748 F.2d 79, 83–84 (2nd Cir.1984)(footnote omitted)). There is nothing in this record to
demonstrate that Mr. Lacy and Mr. Scales relationship was anything other than a brief,
casual, professional acquaintanceship that occurred more than twenty years ago.
Additionally, small-talk not related to the matter and the exchange of pleasantries among
panel members and arbitration participants during breaks in the proceedings do not indicate
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bias or evident partiality. See Greer v. Delgrolice, No. 1 CA-CV 13-0122, 2014 WL
2157026, at *1 (Ariz. Ct. App. May 20, 2014); Arora v. TD Ameritrade, Inc., No. CV 10-
01216 CW, 2010 WL 2925178, at *6 (N. D. Cal. July 26, 2010). The record does not
indicate that improper ex parte communication took place in this case. There is no evidence
that Mr. Lacy had a financial interest in the outcome of the proceedings, either direct or
indirect. Claimants have failed to carry their heavy burden to demonstrate evident partiality
on the part of Mr. Lacy. We accordingly reverse vacatur of the arbitration award on the
ground of evident partiality.
Holding
In light of the foregoing, the trial court’s judgment vacating the FINRA arbitration
award on the ground of evident partiality is reversed. We decline to address Claimants’
arguments that vacatur is justified on the grounds of misconduct and the exceeding of powers
by the panel as requiring an advisory opinion where the issues have not been adjudicated by
the trial court. This matter is remanded to the trial court for further proceedings consistent
with this Opinion. Costs on appeal are taxed to the appellees, Michael S. Starnes, Laura M.
Starnes f/k/a Laura Ann Murchison, the Michael S. Starnes Charitable Remainder Trust, and
TCX, Inc.
_________________________________
DAVID R. FARMER, JUDGE
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