Ann Eleanor Ploetz v. Morgan Stanley Smith Barney

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 17-2405
___________________________
Ann Eleanor Ploetz, as Trustee for the Laudine L. Ploetz, 1985 Trust
lllllllllllllllllllllPlaintiff - Appellant
v.
Morgan Stanley Smith Barney LLC
lllllllllllllllllllllDefendant - Appellee
____________
Appeal from United States District Court
for the District of Minnesota - Minneapolis
____________
Submitted: June 12, 2018
Filed: July 2, 2018
____________
Before WOLLMAN, ARNOLD, and STRAS, Circuit Judges.
____________
ARNOLD, Circuit Judge.
Ann Eleanor Ploetz, the trustee for the Laudine L. Ploetz, 1985 Trust, brought
a claim against Morgan Stanley Smith Barney LLC, with whom the Trust held an
account, alleging that Morgan Stanley had transferred funds from the account without
authorization. The parties submitted the claim to the Financial Industry Regulatory
Authority for arbitration "in accordance with the FINRA By-Laws, Rules, and Code
of Arbitration Procedure." The arbitration panel assigned to the claim originally
consisted of three public arbitrators, including chairperson Brett Olander. But six
days before the arbitration hearing was set to begin, Olander discovered he had a
scheduling conflict. Morgan Stanley asked to postpone the hearing until Olander was
available again, but Ploetz did not want a delay, so the parties used FINRA's "short
list" procedure to pick a new chair. Under that procedure, FINRA sent each party a
random list of three public arbitrators and also the arbitrators' disclosure reports. Each
party could strike one name from their list and rank the remaining names in order of
preference. FINRA then combined the parties' lists and appointed the highest-ranking
arbitrator to be Olander's replacement: The new chairperson was Barry Goldman.
Goldman's disclosure report stated he was currently serving as an arbitrator in
two other cases that had "Morgan Stanley" as a party. His report also revealed he had
served as an arbitrator in eight closed cases in which a member of the Morgan Stanley
family (e.g., Morgan Stanley & Co. or Morgan Stanley DW, Inc.) or the Smith Barney
family (e.g., Salomon Smith Barney, Inc., or Smith Barney Inc.) had been a party. In
the case most recently closed, Goldman, serving as sole arbitrator, had dismissed as
untimely the claims against a Morgan Stanley affiliate. See McCormick v. Morgan
Stanley, 2016 FINRA Arb. LEXIS 655 (2016). But Goldman's report did not disclose
he had once served as a mediator in another case involving Morgan Stanley Smith
Barney LLC. The mediation was unsuccessful, and an arbitration panel (on which
Goldman did not sit) ultimately found that Morgan Stanley owed the claimant
$75,000 in damages. See Arthur E. Strunk Revocable Trust v. Morgan Stanley Smith
Barney LLC, 2014 FINRA Arb. LEXIS 980 (2014).
The arbitration panel in this case, with Goldman as chairperson, held hearings
in Minneapolis, Minnesota, on two consecutive days in January, 2017. Within one
week of the last hearing, the panel unanimously denied Ploetz's claim. The following
month, however, Ploetz learned of Goldman's undisclosed service years earlier in the
-2-
Strunk case. She moved the district court1 to vacate the arbitration award under the
Federal Arbitration Act, see 9 U.S.C. § 10, arguing Goldman had "evident partiality,"
see id. § 10(a)(2), and was guilty of "misbehavior by which [her] rights . . . have been
prejudiced," see id. § 10(a)(3), since he failed to disclose his role in the mediation.
The court denied the motion, holding that Ploetz did not show Goldman had "evident
partiality" since there was "no evidence" that the "mediation with [Morgan Stanley]
had any effect on the resolution of [her] claim." The court further held that Ploetz did
not establish that Goldman was guilty of "misbehavior" either, since she did not assert
that she was "deprived of a fair hearing." Ploetz appeals from the judgment denying
her motion. We affirm, albeit on partially different grounds.
When a district court denies a motion to vacate an arbitration award, we review
its findings of fact for clear error and conclusions of law de novo. Wells Fargo Bank,
N.A. v. WMR e-PIN, LLC, 653 F.3d 702, 710 (8th Cir. 2011). It is undisputed that
Ploetz and Morgan Stanley intended Goldman to be "impartial in both appearance and
in fact." See FINRA Office of Dispute Resolution Arbitrator's Guide 17 (2017). It is
also undisputed that FINRA Rule 12405(a)(4) required Goldman to "disclose" to the
Director of FINRA's Office of Dispute Resolution any "past service as a mediator for
any of the parties in the case" and that he did not do so. Ploetz does not contend that
Goldman ever treated her or her case in a biased or improper manner: Her claims of
"evident partiality" and "misbehavior" rest entirely on Goldman's failure to disclose
that he once mediated the Strunk case, which also involved Morgan Stanley.
The district court held that, to prevail under 9 U.S.C. § 10(a)(2), Ploetz needed
to show not only that Goldman had evident partiality, but that his partiality
prejudicially affected the arbitration award. The court then denied her relief since
there was "no evidence" that Goldman's undisclosed mediation had "any effect" on
1
The Honorable Paul A. Magnuson, United States District Judge for the District
of Minnesota.
-3-
the resolution of her arbitrated claim. But that was error: If an arbitrator was evidently
partial, the district court may "assume" prejudice where as here the parties intended
him to be "neutral." Delta Mine Holding Co. v. AFC Coal Props., 280 F.3d 815,
821–22 (8th Cir. 2001). It is only where the parties agreed they could select interested
arbitrators that a separate showing of prejudice is required to vacate an award under
§ 10(a)(2). See Winfrey v. Simmons Food, Inc., 495 F.3d 549, 551 (8th Cir. 2007).
The parties disagree over the standard the district court should have used to
determine whether there was "evident partiality" in Goldman. See 9 U.S.C. § 10(a)(2).
Their disagreement may stem from the "absence of a consensus on the meaning of
'evident partiality'" amongst federal courts. See Montez v. Prudential Sec., Inc., 260
F.3d 980, 983 (8th Cir. 2001). The Supreme Court has construed the term only once:
In Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968),
it held that there was evident partiality in a "supposedly neutral" arbitrator who did
not disclose that one of the parties to the arbitration was a "repeated and significant"
customer of his consulting business and that he had rendered services to the party "on
the very projects involved in [the arbitration]." See id. at 146. But in reaching that
holding the Court provided little guidance on how to evaluate cases where the
arbitrator's undisclosed relationship reveals a relationship that is more tenuous. Our
own case law reflects the "uncertainty" over the proper interpretation of the term
"evident partiality" that followed the Commonwealth Coatings decision. See Olson
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 51 F.3d 157, 159 (8th Cir. 1995).
Our earliest constructions of the term indicated that evident partiality exists
wherever an undisclosed relationship "creates an impression of possible bias." See id.;
see also PaineWebber Grp., Inc. v. Zinsmeyer Trs. P'ship, 187 F.3d 988, 995 (8th Cir.
1999). We later stated it exists wherever an undisclosed relationship "casts significant
doubt on the arbitrator's impartiality." See Delta Mine Holding, 280 F.3d at 821–22.
More recently, albeit in cases where the parties allowed interested arbitrators, we held
that the relationship must "objectively demonstrate such a degree of partiality that a
-4-
reasonable person could assume that the arbitrator had improper motives." See Dow
Corning Corp. v. Safety Nat'l Cas. Corp., 335 F.3d 742, 750 (8th Cir. 2003); see also
Williams v. NFL, 582 F.3d 863, 885 (8th Cir. 2009). So over time our interpretation
of evident partiality has migrated in the salutary direction of its plain and ordinary
meaning. See Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 251 (2010). We
need not decide which of our constructions of the term binds us as a matter of circuit
precedent, see Mader v. United States, 654 F.3d 794, 800 (8th Cir. 2011) (en banc),
since Ploetz has not shown Goldman had evident partiality under any of them.
Ploetz does not warrant relief from the award under any of our evident-
partiality standards since she does not explain how Goldman's undisclosed mediation
of the Strunk case creates even an impression of possible bias. Ploetz provides us with
scant information about the mediation: It must have occurred in or before 2014, it was
confidential, it did not succeed, and it took place under the auspices of FINRA. Ploetz
tells us that Morgan Stanley paid $1,375 for participation in the Strunk mediation—a
$500 filing fee and a $875 session fee—and that is about all we know. Ploetz faults
Morgan Stanley and FINRA for not providing her with more details about the Strunk
mediation before she filed the motion to vacate, but her limited knowledge about the
Strunk case works against her since she has the burden to prove evident partiality. See
Brown v. Brown-Thill, 762 F.3d 814, 820 (8th Cir. 2014). Ploetz, moreover, did not
ask the district court for discovery into the matter and thus cannot complain that
Morgan Stanley and FINRA did not provide her with more information about the
presumably "private and confidential" mediation. See FINRA Rule 14109(g).
We see nothing in Goldman's undisclosed mediation of a years-old, unrelated
case that could create an appearance of bias. The fact that Morgan Stanley was a party
to the mediation and that it paid $1,375 in fees does not indicate Goldman might have
been biased toward it here: If such meager circumstances could create an impression
of possible bias, Goldman would now be evidently partial toward Ploetz since she
paid $2,700 in session fees and her share of the $1,425 filing fee for the arbitration.
-5-
Since Goldman timely disclosed the ten other cases he arbitrated where a member of
the Morgan Stanley or Smith Barney family was a party, his undisclosed mediation
of the Strunk case represented at most a trivial and inconsequential addition to that
relationship. See Dow Corning Corp., 335 F.3d at 750. So in the end the district court
correctly held that Ploetz did not warrant relief under 9 U.S.C. § 10(a)(2). See Smoky
Hills Wind Project II, LLC v. City of Independence, 889 F.3d 461, 468 (8th Cir.
2018).
Ploetz maintains nonetheless that the district court could have found evident
partiality based on the fact that Goldman did not disclose a party relationship he was
required to disclose under FINRA Rule 12405(a). She reasons that since the parties
submitted her claim to arbitration under the FINRA Rules and since Rule 12405(a)(4)
provides that "past service as a mediator" for a party is a circumstance "which might
preclude the arbitrator from rendering an objective and impartial determination in the
proceeding," the court should not have "substituted its judgment for that of the parties
. . . [and] FINRA" when it held that Goldman's failure to disclose his mediation of the
Strunk case did not show he was evidently partial. Ploetz misreads Rule 12405(a)(4),
however: It does not provide that party mediation always precludes an arbitrator from
being impartial, but only that it "might." FINRA, moreover, does not decide when an
arbitrator's undisclosed relationship with a party evidences partiality under 9 U.S.C.
§ 10(a)(2): Federal law "establishes the standard for vacatur of an arbitration award
by a federal court, not the [FINRA] rules." See Montez, 260 F.3d at 984. So the mere
fact that Goldman's nondisclosure of a past relationship with Morgan Stanley violated
the FINRA Rules governing the arbitration did not provide the court with any basis
to conclude that he was evidently partial. See id. Ploetz in any event does not explain
why Goldman's undisclosed past service as a mediator in the Strunk case would have
precluded him from being impartial here.
Ploetz further maintains that had she known about Goldman's past service as
a mediator, she "could have" used her peremptory challenge to strike him from the list
-6-
of arbitrators who might replace Olander as chairperson. That, of course, is true. But
the test for evident partiality does not turn on what the party seeking vacatur might
have done with the undisclosed information (any new information might cause a party
to strike an arbitrator), but on whether the undisclosed relationship demonstrates that
the arbitrator had evident partiality. Here, it does not.
Ploetz asserts that both Goldman and FINRA (in appointing him) violated other
FINRA Rules and that those violations also showed his evident partiality. She argues,
for example, that Goldman executed his FINRA arbitrator's oath after the arbitration
was over in contravention of FINRA Rule 12403(e)(4). None of the procedural errors
Ploetz alleges indicates evident partiality in Goldman, however. They suggest at most
an occasional failure to follow the FINRA Rules strictly, which is not an independent
ground to vacate the award. See Brown, 762 F.3d at 819.
Ploetz seeks finally to vacate the award on the basis that Goldman was guilty
of "misbehavior by which [her] rights . . . have been prejudiced." See 9 U.S.C. §
10(a)(3). She asserts she warrants relief since Goldman's failure to disclose his past
service as a mediator in the Strunk case prejudiced her disclosure "rights" under the
FINRA Rules. But arbitrator misbehavior that results only in the violation of a party's
rights under a FINRA Rule is not significant enough to merit relief under § 10(a)(3).
Instead, a party seeking to vacate an award "under § 10(a)(3) must show that he was
'deprived of a fair hearing.'" See Brown, 762 F.3d at 820. Ploetz, however, does not
contend the arbitration was not fair: When asked at oral argument whether there were
any irregularities in the arbitral hearings themselves, she said she had not alleged any.
So the district court correctly denied her relief under § 10(a)(3) as well.
Affirmed.
______________________________
-7-