Narayan v. Association of Apartment Owners of Kapalua Bay Condominium.

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Electronically Filed
Supreme Court
SCAP-16-0000588
15-JUN-2017
10:05 AM
IN THE SUPREME COURT OF THE STATE OF HAWAII
KRISHNA NARAYAN; SHERRIE NARAYAN; VIRENDRA NATH; NANCY MAKOWSKI;
SIMON YOO; SUMIYO SAKAGUCHI; STEPHEN XIANG PANG; FAYE WU LIU;
MASSY MEHDIPOUR, individually and as Trustee for Massy Mehdipour
Trust dated June 21, 2006; G. NICHOLAS SMITH; TRISTINE SMITH;
CLIFFORD W. CHAFFEE; BRADLEY CHAFFEE, individually and as
Trustee of the Charles V. Chaffee BRC Stock Trust dated 12/1/99
and The Clifford W. Chaffee BRC Stock Trust dated 1/4/98; GARY
S. ANDERSON; RONALD W. LORENZ and RENEE Y. LORENZ,
Plaintiffs-Appellants,
vs.
ASSOCIATION OF APARTMENT OWNERS OF KAPALUA BAY CONDOMINIUM;
CATHY ROSS; ROBERT PARSONS; and ANDREW MITCHELL,
Defendants-Appellees.
SCAP-16-0000588
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CAAP-16-0000588; S.P. NO. 16-1-0043 RAN)
JUNE 15, 2017
RECKTENWALD, C.J., McKENNA, POLLACK, AND WILSON, JJ., AND
CIRCUIT JUDGE KUBO, IN PLACE OF NAKAYAMA, J., RECUSED
OPINION OF THE COURT BY McKENNA, J.
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I. Introduction
This is the third opinion in a series of recent decisions
addressing an arbitrator’s statutory disclosure requirements and
vacatur on the basis of evident partiality based on Hawaii
Revised Statutes (“HRS”) §§ 658A–12 and -23 (Supp. 2001); see
Noel Madamba Contracting LLC v. Romero, 137 Hawaii 1, 364 P.3d
518 (2015); Nordic PCL Const., Inc. v. LPIHGC, LLC, 136 Hawaii
29, 358 P.3d 1 (2015). Nordic and Madamba established standards
for evaluating claims of evident partiality. Here, we clarify
the scope of relationships that require disclosure.
Krishna Narayan, Sherrie Narayan, Virendra Nath, Nancy
Makowski, Simon Yoo, Sumiyo Sakaguchi, Stephen Xiang Pang, Faye
Wu Liu, Massy Mehdipour, G. Nicholas Smith, Tristine Smith,
Clifford W. Chaffee, Bradley Chaffee, Gary S. Anderson, and
Ronald W. Lorenz (collectively, “Appellants”), appeal from an
August 15, 2016 final judgment of the Circuit Court of the First
Circuit (“circuit court”),1 based upon its findings of fact,
conclusions of law, and order confirming an arbitration award in
favor of the Respondents, Association of Apartment Owners of
Kapalua Bay Condominium, Cathy Ross, Robert Parsons, and Andrew
Mitchell (collectively, the “AOAO”).
1
The Honorable Rhonda A. Nishimura presided.
2
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This case concerns a dispute over financial issues that
arose during construction of the Kapalua Bay Condominium project
(the “Project”). Appellants are a group of individual
condominium owners in the Kapalua Bay Condominium. Previously,
Appellants and several other condominium owners sued the
Project’s developers and management companies regarding
financial problems that arose during construction (the
“Developer Action”). See Narayan v. Ritz-Carlton Dev. Co.,
Inc., 135 Hawaii 327, 350 P.3d 995 (2015).2 The present matter
arose from the Appellants’ challenge of the AOAO’s vote to
convert the residential community into a hotel. The dispute was
submitted to arbitration. The issues on appeal relate to the
adequacy of the neutral arbitrator’s disclosures in the
arbitration. The circuit court concluded that the undisclosed
relationships did not constitute “evident partiality” requiring
vacatur. We affirm.
2
At issue before this court in the Developer Action was whether the
condominium owners had entered into a valid agreement to arbitrate. This
court concluded that the condominium owners did not unambiguously assent to
arbitration and, therefore, the purported agreement to arbitrate was
unenforceable. See Narayan, 135 Hawaii at 335, 350 P.3d at 1003. On January
11, 2016, the United States Supreme Court vacated this court’s judgment and
remanded the case for further consideration in light of DIRECTV, Inc. v.
Imburgia, 136 S. Ct. 463 (2015). See Ritz-Carlton Dev. Co. v. Narayan, 136
S. Ct. 800 (2016). The parties have recently filed supplemental briefs and
the remanded action is pending disposition.
3
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II. Background
A. Arbitration Proceedings
1. Initial Disclosures and Pre-arbitration Motions
The matter was originally submitted to the American
Arbitration Association but, by agreement of the parties, was
referred to Dispute Prevention & Resolution, Inc. (“DPR”) on
July 24, 2014. The parties selected the Honorable Victoria
Marks (ret.) to serve as the neutral arbitrator (the
“Arbitrator”) on August 1, 2014.3 After her selection, DPR
provided the parties with the following disclosures on her
behalf:
I am not familiar with any of the parties.
Both Mr. Cox and Ms. Luke appeared before me when I was on
the bench.[4]
I served as an arbitrator in a case where Mr. Cox
represented one of the parties. That case was resolved
before the arbitration hearing.
My husband, Robert A. Marks, is a lawyer who is Of Counsel
at Price Okamoto Himeno & Lum. I do not know the identity
of all of my husband’s clients. Similarly, I am not aware
of all the cases he is working on and what lawyers he may
be working with or opposing. I do not believe that he
3
In some arbitrations with more than one arbitrator, arbitrators are
appointed by parties without an expectation of neutrality. It is not
uncommon in commercial arbitrations with three arbitrators for each party to
appoint one non-neutral arbitrator each; the two non-neutral arbitrators then
appoint a neutral arbitrator by agreement. See Daiichi Hawaii Real Estate
Corp. v. Lichter, 103 Hawaii 325, 343-44, 82 P.3d 411, 429-30 (2003). See
generally, Seth H. Lieberman, Something’s Rotten in the State of Party-
Appointed Arbitration: Healing ADR’s Black Eye That is “Nonneutral
Neutrals,” 5 Cardozo J. of Conflict Resol. 215 (2004) for a discussion of the
differences between neutral arbitrators and non-neutral party-appointed
arbitrators.
4
Joachim P. Cox, Esq., represents the Appellants and Michele-Lynn Luke,
Esq., represents the AOAO.
4
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currently has any cases with any of the lawyers in this
matter. Similarly, I do not believe that he is familiar
with any of the parties or their principals.
I am on the Board of the following organizations: 1) The
Mediation Center of the Pacific; 2) The Hawaii Women’s
Legal Foundation; 3) The American Judicature Society-Hawaii
Chapter; 4) United Cerebral Palsy Association of Hawaii;
and 5) The Hawaii Soccer Association. The first 3
organizations are law related and lawyers from various
firms in Honolulu [–] large firms to solo practitioners –
sit on these boards. In addition, the board members change
from year-to-year.
I am also a social golf member of MidPacific [sic] Country
Club. I am not familiar with all of the members of this
club.
Counsel and the parties should inform the arbitrator and
each other of any additional information that a reasonable
person would consider likely to affect the impartiality of
the arbitrator.
I believe that I can be a fair and impartial arbitrator in
this matter.
The parties submitted their expert disclosures and reports in
March and September 2015. The witness lists were submitted in
October 2015.
On September 15, 2015, one month before the arbitration
hearing started, Appellants moved to exclude the AOAO’s expert
on condominium governance, Philip Nerney, Esq. (“Nerney”).
Appellants argued, inter alia, that Nerney was providing
improper and unfounded legal conclusions on liability. The
Arbitrator granted this motion in part and denied it in part,
and precluded Nerney from testifying regarding any party’s
intent and damages, but he was allowed to testify on condominium
governance issues.
5
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2. Arbitration Hearing
The arbitration hearing was conducted in several sessions
from October 19, 2015 through November 12, 2015.
The AOAO’s expert on damages, Richard Stellmacher
(“Stellmacher”), testified at the hearing. Among other things,
Stellmacher testified that he originally visited the Project
when an attorney for the Developer Action briefly retained him.
He misidentified the attorney during his oral testimony and
subsequently submitted a declaration5 clarifying that he “had
been retained by [a]ttorney Lex Smith [(“Smith”)], on behalf of
his clients, which included certain Marriott entities, involved
in other litigation.”6 The declaration also stated that
Stellmacher “contacted Mr. Smith” to confirm that his work was
terminated shortly after he visited the property and that he was
not provided any work product related to the matter. Over
Appellants’ hearsay objection, the Arbitrator admitted the
declaration into evidence.
5
Stellmacher orally identified John Sopuch (“Sopuch”) of the Starn
O’Toole Marcus & Fisher law firm. Appellants moved to strike Stellmacher’s
expert opinions because his involvement with Sopuch in this matter would have
created a conflict with one of the plaintiffs named in the arbitration. The
AOAO submitted Stellmacher’s declaration in response to this motion. The
declaration clarified that Stellmacher had named Sopuch by mistake, with the
confusion caused by the fact that Sopuch hired Stellmacher’s firm in
connection with a separate matter, and that he had not been retained by
Sopuch or by the Starn O’Toole firm in connection with the Project.
6
Smith is an attorney with the Kobayashi Sugita & Goda law firm, which
served as counsel in the Developer Action to the original developers of the
Project.
6
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On January 7, 2016, the Arbitrator issued her final
arbitration award in favor of the AOAO.
3. Post-award Disclosure Demands
On January 13, 2016, Appellants requested that DPR provide
updated disclosures “pursuant to DPR Arbitration Rule 9A and HRS
§ 658A-12” relating to the AOAO, counsel for the AOAO, in-house
counsel for the AOAO, and the AOAO’s witnesses and experts. DPR
responded that it would not provide a substantive response to
Appellants’ request as “neither the applicable DPR Arbitration
Rules nor the relevant provisions of the Uniform Arbitration
Statute (HRS Chapter 658A) provide for a post arbitration award
disclosure process[.]” On February 3, 2016, Appellants sought
additional disclosures regarding the Arbitrator’s relationship
with the Kobayashi Sugita & Goda (“KSG”) law firm. DPR
responded once again that it would not provide a post-
arbitration disclosure.
B. Circuit Court Proceedings
1. Motion to Confirm, Motion to Vacate, and Discovery
In the meantime, the AOAO filed a special proceeding in the
circuit court to confirm the arbitration award. Before filing
their memorandum in opposition, Appellants filed a Notice of
Taking Deposition upon Written Questions of AOAO counsel Robert
C. Kessner, Esq., and his law firm; the AOAO’s in-house counsel,
Peter Horovitz, Esq.; and the AOAO’s expert witness, Nerney.
7
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Appellants also filed a Notice of Taking Deposition upon Written
Questions of KSG, the law firm that briefly retained Stellmacher
for the Developer Action but did not represent the AOAO and had
no direct involvement in the arbitration proceedings.7
Appellants also moved to vacate the award on grounds of
evident partiality due to the Arbitrator’s refusal to provide
post-award supplementary disclosures. Appellants alleged that
the AOAO’s position had no basis in law or the applicable
bylaws, that the Arbitrator “oddly adopted [the AOAO’s]
unsupported interpretation of the law,” and that “the
Arbitrator’s findings fly in the face of the law.” Appellants
stated that they demanded post-award disclosures because they
7
Discovery from an arbitrator or arbitration organization pursuant to
HRS § 658A-14 (Supp. 2001) is discussed in the text, infra. With respect to
court rules governing discovery, according to Hawaii Rules of Civil Procedure
(“HRCP”) Rule 81(g) (2006), Chapter V of the HRCP relating to depositions and
discovery (HRCP Rules 26 through 37) is applicable to HRCP Rule 81(a)(5)
(2006) “[a]pplications to a circuit court under chapter 658 [sic] relating to
arbitration, and proceedings thereon prior to judgment.” Rule 81(g)(1) also
provides:
the court may by order direct that said Chapter V shall not
be applicable to the proceeding if the court for good cause
finds that the application thereof would not be feasible or
would work an injustice[.]
Although the propriety of post-award discovery is not raised as an issue on
appeal, we note that HRCP Rule 81(g)(1)allows a court to prohibit or restrict
discovery in court proceedings relating to arbitration if allowing discovery
“would work an injustice.” Cases restricting post-award discovery include
Midwest Generation EME, LLC v. Continuum Chem. Corp., 768 F. Supp. 2d 939,
943 (N.D. Ill. 2010) (“Post-award discovery is rare, and courts have been
extremely reluctant to allow it. It is often a ‘tactic’ employed by
disgruntled or suspicious parties who, having lost the arbitration, are
anxious for another go at it.”) (footnote omitted); and Provost v.
Intrafusion Holding Corp., 926 F. Supp. 2d 532, 537 n.4 (D. Del. 2013)
(“Courts have been understandably hesitant to grant extensive discovery in
cases alleging arbitrator bias where the complaining party has not presented
clear evidence of any impropriety.”).
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were “surprised” by the arbitration award, although they
acknowledged they had no reason to believe that the Arbitrator
may be partial to the AOAO during the course of the arbitration.
Yet, Appellants argued, “the Arbitrator’s disregard for the law
. . . now coupled with the Arbitrator’s refusal to provide
appropriate disclosures, calls into question whether there are
undisclosed relationships with [the AOAO], [the AOAO’s]
counselor or [the AOAO’s] witnesses which arose during the
course of the arbitration and — to a reasonable person — may
have compromised the Arbitrator’s neutrality.” Appellants
requested that the court continue the hearing given the lack of
evidence and grant Appellants’ Motion to Compel Production of
Records from DPR (“Motion to Compel”), which had been filed
earlier.
DPR filed a memorandum in opposition to Appellants’ Motion
to Compel, arguing that it was both procedurally and
substantively flawed. The AOAO also filed a memorandum in
opposition, arguing that further disclosures by the Arbitrator
should not be compelled because Appellants failed to make a
prima facie showing that a ground for vacating the arbitration
award exists, in accord with HRS § 658A-14(d).8
8
HRS § 658A-14(d)(Supp. 2001) provides:
In a judicial, administrative, or similar proceeding, an
arbitrator or representative of an arbitration organization
(continued. . .)
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Appellants filed a reply memorandum, arguing that they had
made a prima facie showing of evidence to support a motion to
vacate with regard to the KSG law firm. Appellants argued that
the relationship rose to the level of evident partiality because
KSG had an “extensive relationship” with the Arbitrator.
Appellants argued that despite KSG’s lack of direct connection
with the parties to the case, KSG was relevant because
Stellmacher’s declaration allegedly involved “hearsay testimony”
by Smith of KSG.9 Appellants also argued that a ruling in their
favor would have “had severe repercussions to KSG’s client” in
the Developer Action, and that “a reasonable person could infer
that a defense verdict in this arbitration would help the
Arbitrator to garner KSG’s recommendation to serve in the
Developer Action, should it be ordered to arbitration. . . .”
Appellants also alleged that Nerney, the AOAO’s expert witness,
(continued. . .)
is not competent to testify, and shall not be required to
produce records as to any statement, conduct, decision, or
ruling occurring during the arbitration proceeding, to the
same extent as a judge of a court of this State acting in a
judicial capacity. This subsection does not apply:
....
(2) [t]o a hearing on a motion to vacate an award under
section 658A-23(a)(1) or (2) if the movant establishes
prima facie that a ground for vacating the award exists.
(Emphasis added.)
9
Stellmacher’s declaration stated that his “firm records” showed that he
was retained by Smith, and that he then contacted Smith to confirm that his
work was shortly terminated after his visit to the property. Appellants
claimed that when this testimony from Mr. Stellmacher and Mr. Smith was
admitted, “KSG became . . . a witness.”
10
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had evaded service and had not yet responded to written
deposition questions regarding a potential relationship with the
Arbitrator, yet because he “is an attorney, and condominium
governing documents often contain arbitration clauses, it is
reasonably plausible to anticipate that Mr. Nerney had or has a
professional relationship that should have been disclosed.”
Nerney was thereafter deposed upon written interrogatories.
Nerney testified that the Arbitrator served as a mediator or
arbitrator on two cases in which he appeared as an attorney.
First, he testified that in 2013, he represented a party in a
matter in which the Arbitrator was selected as an arbitrator.
Second, he testified that on April 9, 2015, he represented an
association of apartment owners regarding a request for a
reasonable accommodation in a half-day mediation with the
Arbitrator, but the matter was ultimately not resolved by
mediation.
Appellants then moved to compel the Arbitrator to respond
to the deposition upon written questions pursuant to a showing
of prima facie evidence. The circuit court granted Appellants’
motion, and the Arbitrator was deposed upon written questions.
She testified, among other things, that she found in favor of
Nerney’s client on a summary judgment motion in a prior
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arbitration,10 and that Stellmacher had testified as a witness in
a prior arbitration at some point in time between January 1,
2011 and July 24, 2014.
2. Supplemental Memorandum in Support of Appellants’
Motion to Vacate
After months of discovery, Appellants submitted a
supplemental memorandum in support of their Motion to Vacate.
Appellants asserted that the Arbitrator had failed to comply
with the disclosure requirements of HRS § 658A-12(b) by failing
to disclose facts learned by the Arbitrator after accepting
appointment that a reasonable person would consider likely to
affect the impartiality of the Arbitrator. Appellants claimed
that the following disclosures were not provided:
(1) the Arbitrator recently presided over an arbitration
involving [the AOAO’s] damages expert;
(2) [The AOAO’s] expert on condominium governance, Philip
Nerney, Esq. —- on whom the Arbitrator primarily relied in
rendering her award —- had a mediation before the
Arbitrator while the above-captioned matter was pending and
a prior arbitration in which the Arbitrator found in Mr.
Nerney’s client’s favor on a motion for summary judgment;
and
(3) the law firm of a hearsay witness had an extensive
relationship with the Arbitrator, including at least two
mediations during the pendency of this arbitration and two
referrals to the Arbitrator.
Following the completion of briefing, the court held a hearing
on the motion to confirm the arbitration award and the motion to
vacate. The circuit court found in favor of the AOAO, denied
10
The Arbitrator testified that Nerney was counsel to a party in a matter
in which she presided as an arbitrator at some point between January 1, 2011
and July 24, 2014.
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the motion to vacate, and granted the motion to confirm the
arbitration award. The court found that the Arbitrator complied
with her duty to make a “reasonable inquiry” into possible
conflicts and that none of the relationships challenged by
Appellants rose to a level that would require disclosure. The
court’s relevant conclusions were as follows:
8. At the outset, the Arbitrator complied with her
duty to make a “reasonable inquiry” upon being informed of
the parties’ proposed witnesses (lay and expert) in
September and October, 2015, prior to commencement of the
arbitration proceedings. In other words, as it pertains to
Stellmacher, the KSG law firm, and Mr. Nerney, none of
these “relationships” or “facts” are such “that a
reasonable person would consider likely to affect [the
Arbitrator’s] impartiality,” necessitating their
disclosure.
9. None of these “facts” or “relationships” rise to
the level of “evident partiality.” Compare with Madamba,
where the court held that failure by the arbitrator during
the pendency of the arbitration proceedings to disclose his
prospective relationship with the Cades Schutte law firm
(counsel for respondent Romero) where there existed a
“concrete possibility” that the Cades Schutte law firm
would be handling his personal retirement accounts,
constituted undisclosed facts showing a “reasonable
impression of partiality,” sufficient to support vacatur.
10. The facts are undisputed that as between the
Arbitrator and Stellmacher, the only association or dealing
was that of Stellmacher having testified as a witness in a
prior arbitration, for which [the Arbitrator] served as the
arbitrator at some point in time between January 1, 2011
and July 24, 2014. Moreover, as noted by the Madamba
court, in adopting Justice Black’s reasoning in
Commonwealth Coatings Corp. v. Continental Casualty Co.,
393 U.S. 145, 89 S. Ct. 337, 21 L.Ed.2d. 301 (1968), it
would be incumbent upon the arbitrator to disclose to the
parties any dealings that might create an impression of
possible bias. The association between the Arbitrator and
Stellmacher was not substantive in nature. The dealings
between the Arbitrator and Stellmacher do not create an
impression of possible bias.
11. The facts are undisputed that as between the
Arbitrator and the KSG law firm, their association occurred
sometime between January 1, 2011 and January 7, 2016, as
[the Arbitrator] had been selected as an arbitrator on five
(5) matters in which the KSG law firm represented a party
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and also served as a mediator on three (3) matters in which
the KSG law firm represented a party. The association
between the Arbitrator and the KSG law firm was not
substantive in nature. The dealings between the Arbitrator
and the KSG law firm do not create an impression of
possible bias.
12. The facts are undisputed that 1) as between the
Arbitrator and Mr. Nerney, their association occurred when
Mr. Nerney appeared as counsel for a party before the
Arbitrator sometime prior to July 25, 2014 (more than two
years before the subject arbitration) and the arbitration
was decided on a summary judgment motion in favor of Mr.
Nerney’s client, and 2) sometime in or around April 9,
2015, Mr. Nerney represented an apartment association
(owner requested reasonable accommodation) in a half-day
mediation before the Arbitrator but was not successful.
The association between the Arbitrator and Mr. Nerney was
not substantive in nature. The dealings between the
Arbitrator and Mr. Nerney do not create an impression of
possible bias.
The circuit court then entered final judgment.
C. The Appeal and Application for Transfer
Appellants appealed from the circuit court’s final judgment
confirming the arbitration award. Appellants raised the
following four points of error on appeal:
A. The Circuit Court erred in concluding, as a matter of
law that under HRS section 658A-12(b), the Arbitrator need
not disclose any ongoing or past instances in which she
served as a neutral and (1) a non-attorney witness appeared
before her in another matter, or (2) attorney witnesses,
one of whom appeared as an expert witness in the subject
arbitration and the other of whom was a hearsay lay
witness, retained her services on behalf of a client in
other matters.
B. The Circuit Court erred in finding that the
Arbitrator’s service as an arbitrator in 2013 in a matter
in which Mr. Nerney represented a party occurred “more than
two years before the subject arbitration,” given that the
parties initiated the subject arbitration on July 24, 2014.
C. The Circuit Court impermissibly raised the standard for
evident partiality for nondisclosures by (1) focusing on
the “substantive nature” of the relationships in
determining whether it creates a reasonable impression of
bias, even though the Hawaii Supreme Court has rejected a
standard that evaluates the substantiality of a
relationship or interest as being overly narrow and (2)
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separately finding that the relationships do not “rise[] to
the level of evident partiality” after determining that the
relationships at issue need not be disclosed.
D. The Circuit Court erred in finding that the Arbitrator
made a “reasonable inquiry” into whether any relationships
or interactions with the parties’ witnesses needed to be
disclosed, given that the Arbitrator admitted – during post
arbitration discovery – that until recently, she did not
maintain a list of the witnesses that appeared before her
and that, with respect to at least one witness, discovery
of his prior appearance before her required “considerable
research” after-the-fact.
This court accepted a transfer of this case from the
Intermediate Court of Appeals (“ICA”).
III. Questions on Appeal
The points of error raised by Appellants are reframed and
addressed in this decision as follows:
1. Whether the “substantive nature” of a relationship is
relevant to a determination that facts would demonstrate a
reasonable impression of partiality.
2. Whether an arbitrator has a duty to disclose:
A. Prior occasions in which a person appearing on a
witness list appeared before the arbitrator as a lay
or expert witness in unrelated matters.
B. Prior dealings with a law firm not involved in
the present arbitration, where the law firm
previously retained an expert witness appearing on a
witness list.
C. Prior dealings with a person appearing on a
witness list where that person served as party
counsel before the arbitrator in a prior arbitration
or mediation.
3. Whether it was clearly erroneous for the circuit court
to conclude that such undisclosed relationships did not
create a reasonable impression of partiality.
IV. Standards of Review
Judicial review of an arbitration award is limited to the
statutory grounds for confirmation, vacatur, modification, and
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correction. See HRS § 658A-28(a)(3)-(5) (Supp. 2001). Review
of a motion to vacate an arbitration award “does not involve
review of an arbitrator’s findings of fact or conclusions of
law.” Nordic, 136 Hawaii at 42, 358 P.3d at 14. “Rather, it
involves review of a circuit court’s factual findings and
conclusions of law as to whether the statutorily outlined
grounds for vacatur exist.” Id.
We review a circuit court’s findings of fact under the
clearly erroneous standard. Madamba, 137 Hawaii at 8, 364 P.3d
at 525. A finding of fact is clearly erroneous when either “the
record lacks substantial evidence to support the finding,” or,
evidence exists to support the finding, but we are left with
“the definite and firm conviction in reviewing the entire
evidence that a mistake has been committed.” Id. (quoting
Nordic, 136 Hawaii at 41, 358 P.3d at 13). We review a circuit
court’s conclusions of law de novo under the right/wrong
standard. Nordic, 136 Hawaii at 41, 358 P.3d at 13 (quoting
Daiichi, 103 Hawaii at 336, 82 P.3d at 422). Where a conclusion
of law presents a mixed question of law and fact, we review this
conclusion under the clearly erroneous standard. Madamba, 137
Hawaii at 8, 364 P.3d at 525 (citing Estate of Klink ex rel.
Klink v. State, 113 Hawaii 332, 351, 152 P.3d 504, 523 (2007)).
A mixed question of law and fact is a conclusion “dependent upon
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the facts and circumstances of the particular case.” Price v.
Zoning Bd. of Appeals, 77 Hawaii 168, 172, 883 P.2d 629, 633
(1994).
We review a circuit court’s rulings on a motion to vacate
for evident partiality under the “clearly erroneous standard”
where the court’s challenged conclusion was based on “a mixed
question of law and fact.” Madamba, 137 Hawaii at 9, 364 P.3d
at 526. In this case, we review the court’s conclusion that the
arbitrator’s contacts with the AOAO’s witnesses and an unrelated
law firm would not give a reasonable person the impression of
partiality.
V. Discussion
A. Standards for Vacatur under HRS § 658A-23(a)(2)
Judicial review of a motion to vacate an arbitration award
“is confined to the strictest possible limits.” Nordic, 136
Hawaii at 41, 358 P.3d at 13 (quoting Daiichi, 103 Hawaii at
337, 82 P.3d at 423). An arbitration award may be vacated only
upon the grounds specified in HRS § 658A-23.11 Pursuant to HRS
11
HRS § 658A-23(a) outlines the grounds for vacatur of an arbitration
award as follows:
Vacating award. (a) Upon motion to the court by a party
to an arbitration proceeding, the court shall vacate an
award made in the arbitration proceeding if:
(1) The award was procured by corruption, fraud, or
other undue means;
(2) There was:
(continued. . .)
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§ 658A-23(a)(2)(A), the court must vacate an arbitration award
if there was evident partiality by an arbitrator appointed to
serve as a neutral. Madamba, 137 Hawaii at 3, 364 P.3d at 520.
Evident partiality may be found in two situations: when an
arbitrator fails to make necessary disclosures to the parties,
or when additional facts show actual bias or improper motive,
even if the arbitrator makes the necessary disclosures. See
Valrose Maui, Inc. v. Maclyn Morris, Inc., 105 F. Supp. 2d 1118,
1124 (D. Haw. 2000); see also Schmitz v. Zilveti, 20 F.3d 1043,
1045-47 (9th Cir. 1994) (distinguishing the evident partiality
standards applied in “nondisclosure” cases and “actual bias”
cases). This court’s recent decisions in Nordic and Madamba
(continued. . .)
(A) Evident partiality by an arbitrator
appointed as a neutral arbitrator;
(B) Corruption by an arbitrator; or
(C) Misconduct by an arbitrator prejudicing
the rights of a party to the arbitration
proceeding;
(3) An arbitrator refused to postpone the hearing upon
showing of sufficient cause for postponement, refused to
consider evidence material to the controversy, or otherwise
conducted the hearing contrary to section 658A-15, so as to
prejudice substantially the rights of a party to the
arbitration proceeding;
(4) An arbitrator exceeded the arbitrator’s powers;
(5) There was no agreement to arbitrate, unless the person
participated in the arbitration proceeding without raising
the objection under section 658A-15(c) not later than the
beginning of the arbitration hearing; or
(6) The arbitration was conducted without proper notice of
the initiation of an arbitration as required in section
658A-9 so as to prejudice substantially the rights of a
party to the arbitration proceeding.
. . . .
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have addressed the evident partiality standard in nondisclosure
cases.
In a nondisclosure case, evident partiality is found where
“undisclosed facts demonstrate a reasonable impression of
partiality.” Madamba, 137 Hawaii at 10, 364 P.3d at 527
(quoting Nordic, 136 Hawaii at 51, 358 P.3d at 23). Under this
standard, a finding of evident partiality “is not dependent on a
showing that the arbitrator was actually biased, but instead
stems from the nondisclosure itself.” Id. (emphasis added).
The evident partiality standard for nondisclosure cases thus
reflects the latter part of the rule that “any tribunal
permitted by law to try cases and controversies not only must be
unbiased but also must avoid even the appearance of bias.”
Commonwealth Coatings, 393 U.S. at 150 (emphasis added).12
In Nordic, we analyzed the relationship between “evident
partiality” and the statutory disclosure requirements found in
HRS § 658A-12 (Supp. 2001), which codify an arbitrator’s duty to
12
In both actual bias and nondisclosure cases, facts necessarily exist
that create a “reasonable impression of partiality.” In nondisclosure cases,
the fact that these facts were not disclosed is enough to find evident
partiality. In “actual bias” cases, where the fact of nondisclosure is not
present, parties must prove specific facts, beyond those disclosed,
indicating bias. Thus, if an arbitrator meets the disclosure requirement,
the party seeking to establish evident partiality faces a higher burden of
proof. See Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir. 1996)
(distinguishing the burden of proof in nondisclosure cases as at a lower
threshold than actual bias cases).
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disclose facts that may create an appearance of bias. In
relevant part, this standard provides:
§ 658A-12 Disclosure by arbitrator. (a) Before accepting
appointment, an individual who is requested to serve as an
arbitrator, after making a reasonable inquiry, shall
disclose to all parties to the agreement to arbitrate and
arbitration proceeding and to any other arbitrators any
known facts that a reasonable person would consider likely
to affect the impartiality of the arbitrator in the
arbitration proceeding, including:
(1) A financial or personal interest in the outcome of the
arbitration proceeding; and
(2) An existing or past relationship with any of the
parties to the agreement to arbitrate or the arbitration
proceeding, their counsel or representatives, a witness, or
another arbitrator.
(b) An arbitrator has a continuing obligation to disclose
to all parties to the agreement to arbitrate and
arbitration proceeding and to any other arbitrators any
facts that the arbitrator learns after accepting
appointment which a reasonable person would consider likely
to affect the impartiality of the arbitrator.
HRS § 658A-12(a)-(b) (emphases added).
Pursuant to HRS §§ 658A-12(a) and (b), “arbitrators must at
the outset disclose, then continually disclose throughout the
course of an arbitration proceeding, any known facts that a
reasonable person would consider likely to affect the
arbitrator’s impartiality.” Nordic, 136 Hawaii at 47, 358 P.3d
at 19. Phrased in other ways, an arbitrator must disclose facts
that reasonably “create an impression of possible bias,”
Commonwealth Coatings, 393 U.S. at 149, or that demonstrate a
“reasonable impression of partiality.” Schmitz, 20 F.3d at 1046
(citation omitted).
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In addition to codifying the arbitrator’s disclosure
obligations, HRS § 658A-12(a) provides that “an arbitrator must
make a reasonable inquiry before accepting appointment” as to
any potential conflicts that must be disclosed. Nordic, 136
Hawaii at 45, 358 P.3d at 17. In Nordic, we cited the
Commentary to the Uniform Arbitration Act (“UAA”) (2001)
(hereinafter “Commentary”) to further explain this standard.
The Commentary stated that the extent of an arbitrator’s inquiry
into potential conflicts “may depend upon the circumstances of
the situation and the custom in a particular industry.” 136
Hawaii at 45, 358 P.3d at 17 (quoting Nat’l Conference of
Comm’rs on Unif. State Laws, Uniform Arbitration Act (Last
Revisions Completed Year 2000) 48 (Dec. 13, 2000),
http://www.uniformlaws.org/shared/docs/arbitration/arbitration_f
inal_00.pdf).
An arbitrator’s duty to disclose “known facts” thus relates
to facts already known or discovered upon reasonable inquiry.
“[W]hat constitutes a reasonable inquiry varies depending on the
circumstances, and whether the duty of reasonable inquiry has
been violated is a question of fact.” Nordic, 136 Hawaii at 45,
358 P.3d at 17. If an arbitrator violates the duty of
reasonable inquiry and thus fails to acquire “known” facts that
would otherwise need to be disclosed, such would result in the
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same outcome as when an arbitrator knows such facts but fails to
disclose them. Thus, an arbitrator’s lack of knowledge of
specific facts is only a defense for nondisclosure if the
arbitrator had conducted a reasonable inquiry.
In Nordic, construing prior case law, we determined that a
neutral arbitrator’s violation of statutory disclosure
requirements under HRS § 658A-12(a) or (b) “constitutes ‘evident
partiality’ as a matter of law.” 136 Hawaii at 50, 358 P.3d at
22. We rejected the notion that after determining that an
arbitrator failed to meet disclosure obligations, “there must
also be a separate finding that the arbitrator acted with
‘evident partiality’ or bias before an award can be vacated.”
Id. We do not require a separate finding regarding actual bias
because our case law recognizes evident partiality not only
“when there is actual bias on the part of the arbitrator, but
also when undisclosed facts demonstrate a ‘reasonable impression
of partiality.’” 136 Hawaii at 51, 358 P.3d at 23 (quoting
Daiichi, 103 Hawaii at 339-40, 82 P.3d at 425-26).
Since HRS § 658A-12 “explicitly adopted a requirement to
disclose facts a reasonable person would find likely to affect
an arbitrator’s impartiality,” and evident partiality under HRS
§ 658A-23 exists “when undisclosed facts demonstrate a
reasonable impression of partiality,” we found that a failure to
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meet the disclosure obligations under § 658A-12 constituted
“evident partiality” as a matter of law under § 658A-23(a)(2).
Nordic, 136 Hawaii at 51, 358 P.3d at 23.13
In Madamba, we held that a finding of evident partiality
based on a violation of HRS § 658A-12(a) or (b) by a neutral
arbitrator requires the court to vacate the arbitration award
pursuant to HRS § 658A-23(a)(2)(A). 137 Hawaii at 16, 364 P.3d
at 533. We recognized the permissive language of HRS § 658A-
12(d) but found the following:
The function of the ‘may’ language . . . is to provide
reference to the different circumstances that require
vacatur under HRS § 658A-23(a)(2), i.e., a neutral
arbitrator’s evident partiality, and any arbitrator’s
corruption or misconduct. For example, if a non-neutral
arbitrator fails to make a disclosure required under HRS
§ 658A-12(a) or (b), although the award would not be
vacated based on evident partiality — as evident partiality
only applies to neutral arbitrators — it could be vacated
based on the corruption and misconduct provisions in HRS
§ 658A-23(a)(2).
13
Compare HRS § 658A-12(e), which provides that “[a]n arbitrator
appointed as a neutral arbitrator who does not disclose a known, direct, and
material interest in the outcome of the arbitration proceeding or a known,
existing, and substantial relationship with a party is presumed to act with
evident partiality under section 658A-23(b)(2).” In Nordic, we did not hold
that non-disclosure of facts a reasonable person would find likely to affect
an arbitrator’s impartiality would require immediate vacatur of the
arbitration award. We cited HRS § 658A-12(d), which provides that “[i]f the
arbitrator did not disclose a fact as required by subsection (a) or (b), upon
timely objection by a party, the court under section 658A-23(a)(2) may vacate
an award.” 136 Hawaii at 53, 358 P.3d at 25 (emphasis in original). This
standard was viewed as being “permissive in nature” and granting courts
“wider latitude in deciding whether to vacate an award” for failure to meet
the disclosure requirements. Id. (citing Commentary, supra, at 50). We thus
stated that the circuit court “has discretion under HRS § 658A-12(d) to
decide whether or not to grant the motion to vacate.” Id. Our opinion in
Madamba clarified this on the basis of statutory language in HRS § 658A-
23(a)(2) as applied to an arbitrator appointed as a neutral arbitrator.
Madamba, 137 Hawaii at 16, 364 P.3d at 533.
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Id. (citation and footnote omitted). We also noted that the
Commentary “takes into account the fact that jurisdictions have
developed different views regarding what constitutes evident
partiality,” so the standard for evident partiality due to
nondisclosure will differ among jurisdictions that have adopted
the UAA. 137 Hawaii at 16 n.20, 364 P.3d at 533 n.20. “[O]ur
standard for evident partiality based on a failure to disclose
is equivalent to the standard laid out in HRS § 658A-12’s
disclosure provisions. Accordingly, in this context, once
evident partiality [as to a neutral arbitrator] is established,
the arbitration award must be vacated.” Id.
Based on the standards outlined in Nordic and clarified in
Madamba, an arbitrator’s compliance with the disclosure
requirements set forth in §§ 658A-12(a) and (b) is paramount to
the validity of an arbitration award. See Kay v. Kaiser Found.
Health Plan, Inc., 119 Hawaii 219, 229, 194 P.3d 1181, 1191
(App. 2008) (framing the disclosure obligation as “the sine qua
non” of our review). In this case, we clarify the scope of the
arbitrator’s disclosure requirements as well as contextualize
the reasonable person standard in light of the undisclosed facts
revealed through post-award discovery.
B. Framework for Evaluating Nondisclosure Claims
As established in Nordic, an arbitrator’s failure to
disclose facts as required under HRS § 658A-12(a) or (b)
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constitutes evident partiality as a matter of law, and pursuant
to Madamba, the circuit court does not have discretion to
determine whether to vacate an award once evident partiality is
established as to a neutral arbitrator. However, the circuit
court plays an essential fact-finding role in determining
whether the party challenging the award has met its “burden of
proving facts which would establish a reasonable impression of
partiality,” Nordic, 136 Hawaii at 51, 358 P.3d at 24, which
constitutes “evident partiality.” The “fundamental standard” of
the disclosure obligation “is an objective one: disclosure is
required of facts that a reasonable person would consider likely
to affect the arbitrator’s impartiality in the arbitration
proceeding.” 136 Hawaii at 47, 358 P.3d at 19 (quoting
Commentary at 47-48). It is thus the circuit court’s role to
determine whether the undisclosed facts meet this objective
standard.
Although we do not venture to pre-determine a set of
relationships that will automatically require disclosure, we
recognize that patterns have emerged. Such patterns may be
traced to the United States Supreme Court’s seminal decision in
Commonwealth Coatings, 393 U.S. 145. In that case, a party to
the arbitration was one of the arbitrator’s long-time customers
in his construction consulting business. 393 U.S. at 146. The
Court found that this business relationship required disclosure,
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and that its nondisclosure constituted evident partiality
warranting vacatur of the arbitration award. 393 U.S. at 150.
Justice White and Justice Marshall concurred in the
judgment but clarified that “arbitrators are not automatically
disqualified by a business relationship with the parties before
them if both parties are informed of the relationship in
advance, or if they are unaware of the facts but the
relationship is trivial.” 393 U.S. at 150 (White, J.,
concurring). Although other jurisdictions have interpreted it
otherwise, Justice White’s concurrence did not contradict or
limit the principle adopted by the Court that a failure to
fulfill disclosure obligations would result in a finding of
evident partiality warranting vacatur. See Schmitz, 20 F.3d at
1045. Justice White’s concurrence thus did not reject the
majority’s evident partiality standard, but clarified its
parameters — namely, that “more than trivial” relationships
“must be disclosed.” Commonwealth Coatings, 393 U.S. at 152.
This standard is aligned with HRS § 658A-12(a), which does not
require the disclosure of de minimis interests or relationships,
see Nordic, 136 Hawaii at 47, 358 P.3d at 19 (quoting Commentary
at 47-48), and Ninth Circuit case law, which does not require
the disclosure of “long past, attenuated, or insubstantial
connections between a party and an arbitrator.” New Regency
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Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1110
(9th Cir. 2007).14
Patterns emerging in case law have evolved through court
efforts to identify undisclosed relationships that are “more
than trivial” and thus require vacatur due to evident
partiality, and those that are “too insubstantial to warrant
vacating an award.” Commonwealth Coatings, 393 U.S. at 152
(White, J., concurring) (emphasis added). Courts will weigh
factors in a case-by-case approach to determine how a reasonable
person would objectively perceive the relationship and its
potential impact on the arbitration proceeding. In Madamba, for
14
We note that there is a split of opinion regarding the meaning and the
weight of Justice White’s concurrence in Commonwealth Coatings, where many
jurisdictions characterize Justice Black’s majority opinion as a “plurality
opinion” and see a conflict between this opinion and Justice White’s
concurrence. See, e.g., Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d
640, 644 n.5 (6th Cir. 2005) (stating that “a majority of” the Commonwealth
Coatings Court “did not endorse the ‘appearance of bias’ standard set forth
in the plurality opinion”); Morelite Constr. Corp. v. N.Y. City Dist. Council
Carpenters Benefit Funds, 748 F.2d 79, 83 n.3 (2d Cir. 1984) (stating that
the two opinions are “impossible to reconcile”). We disagree with this
characterization of Justice White’s concurring opinion. Justice White,
joined by Justice Marshall, specifically stated that he was “glad to join”
the Court’s “majority opinion” and sought only to make “additional remarks.”
Commonwealth Coatings, 393 U.S. at 150, 151 n.* (White, J., concurring).
“Among these additional remarks, Justice White said that arbitrators are not
held to the partiality standard applicable to judges and that ‘trivial’ or
‘remote’ relationships need not be disclosed.” Schmitz, 20 F.3d at 1045.
Justice White’s concurrence does not mention the “appearance of bias”
standard or imply that it is inappropriate, and both opinions emphasize the
need for an arbitrator’s full disclosure. Commonwealth Coatings, 393 U.S. at
151. Thus, Justice White did not reject the majority’s standard, but more
specifically defined the parameters of the disclosure requirement. We stated
in Madamba that we follow “Justice Black’s reasoning,” in contrast with
courts that apply “a more stringent definition of evident partiality” based
on Justice White’s concurrence. 137 Hawaii at 10 n.15, 364 P.3d at 527 n.15.
We clarify here that our adoption of “Justice Black’s reasoning” does not
mean we must reject Justice White’s concurrence, as we interpret the
concurrence as complementary to, rather than conflicting with, the majority
opinion.
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example, this court analyzed the “substantive nature” of the
relationship at issue to determine whether it would give a
reasonable impression of partiality. 137 Hawaii at 13, 364 P.3d
at 530. See also In Re Sussex, 781 F.3d 1065, 1074-75 (9th Cir.
2015) (discussing the “substantive” nature of the arbitrator’s
interest). Determining whether a relationship is “substantive”
may involve the consideration of several factors, including but
not limited to the directness of the connection (or the degrees
of separation) between the arbitrator and either party, as well
as the type of connection or activity at issue, and its timing
relative to the arbitration proceedings.
1. Connection between the Arbitrator and a Party
As a threshold matter, any analysis of arbitrator
disclosure requirements is undergirded by the timing issues
further expounded in subsection (3) below. This is a necessary
corollary consideration of the requirement that the undisclosed
relationship between the arbitrator and a party be one that a
reasonable person would consider likely to affect the
arbitrator’s impartiality. The more direct an undisclosed
connection between the arbitrator and a party, the more likely
that it will create a reasonable impression of partiality. As
such, a current direct relationship between an arbitrator and “a
party, its counsel, principal, or agent” will almost always
require disclosure. Valrose, 105 F. Supp. 2d at 1124.
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For example, in Valrose, the United States District Court
for the District of Hawaii vacated an arbitration award where
the arbitrator failed to disclose an ex parte discussion with
one of the party’s counsel about serving as a mediator in an
unrelated case. 105 F. Supp. 2d at 1120, 1125. Given the
arbitrator’s direct interaction with a party attorney about a
matter that would result in a pecuniary benefit to the
arbitrator, the court found that the nondisclosure of this
discussion — and nondisclosure of the arbitrator’s eventual
appointment as a mediator in the matter — “was clearly a serious
failing” and required vacatur of the award. 105 F. Supp. 2d at
1124.
Disclosure is also typically required when there is a
recent or current relationship between an arbitrator’s law firm
or business and a party, its counsel, principal, or agent. See,
e.g., New Regency, 501 F.3d 1101 (vacating an arbitration award
where the arbitrator, who was an executive for a film company,
did not disclose that her company was in negotiations with an
executive of one of the parties to finance and co-produce a
movie); Schmitz, 20 F.3d 1043 (vacating an arbitration award
where the arbitrator did not disclose that his law firm
represented the parent corporation of a party). Disclosure may
also be required even when it is the arbitrator’s employer that
has the relationship. See Olson v. Merrill Lynch, Pierce,
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Fenner & Smith, Inc., 51 F.3d 157 (8th Cir. 1995) (vacating an
award where an arbitrator disclosed that he was an employee of a
company, but did not disclose his high-ranking position or the
fact that the company had an ongoing business relationship with
one of the parties).
The more “attenuated” and less direct the connections
between a party and an arbitrator, the less likely it will be
that the relationship will require disclosure, even if those
relationships are current. New Regency, 501 F.3d at 1110. In
United States Wrestling Fed’n v. Wrestling Div. of AAU, Inc., a
party sought vacatur because an arbitrator did not disclose that
his law firm had a relationship with Northwestern University.
605 F.2d 313, 315-16 (7th Cir. 1979). Northwestern was neither
a party to the arbitration nor directly related to one of the
parties, but instead was one of the 860 other members of the
NCAA, a founder of one of the parties to the arbitration. 605
F.2d at 315. This “tenuous chain” was too “remote, uncertain,
and speculative to require the arbitration award to be set
aside.” 605 F.2d at 320.
2. Type of Connection or Activity
Certain types of relationships will also weigh more heavily
toward disclosure than others. In Madamba, we recognized that
attorney-client relationships carry “heightened import.” 137
Hawaii at 14, 364 P.3d at 531. Such recent, current, or
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prospective relationships will almost always require disclosure.
See id. (requiring disclosure of an arbitrator’s prospective
attorney-client relationship with one of the party counsel’s law
firms, despite the fact that the arbitrator did not plan to
interact with the firm “besides paying legal bills”); Beebe Med.
Ctr., Inc. v. InSight Health Servs. Corp., 751 A.2d 426, 431
(Del. Ch. 1999) (requiring disclosure of an attorney-client
relationship between the arbitrator and the law firm
representing a party); Schmitz, 20 F.3d at 1049 (requiring
disclosure of an attorney-client relationship between the
arbitrator’s law firm and a party’s parent company); HSMV Corp
v. ADI Ltd., 72 F. Supp. 2d 1122, 1130 (C.D. Cal. 1999)
(requiring disclosure of an attorney-client relationship between
an arbitrator’s law firm and a party’s owner); Houston Vill.
Builders, Inc. v. Falbaum, 105 S.W.3d 28, 34 (Tex. App. 2003)
(requiring disclosure of an attorney-client relationship between
the arbitrator and a trade association of which parties to the
arbitration were members); but see Peabody v. Rotan Mosle, Inc.,
677 F. Supp. 1135, 1138 (M.D. Fla. 1987) (not requiring
disclosure of attorney-client relationship between the
arbitrator’s former law partner’s brother and an expert witness,
as this relationship was “thrice removed” from the arbitrator
and thus too attenuated).
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Business relationships and financial dealings will also
tend to weigh in favor of disclosure, depending on the weight of
other considerations, including the regularity and recency of
the dealings, the length of the relationship, and the extent of
pecuniary interest involved. The best-known example of the kind
of business relationship requiring disclosure is in the seminal
case, Commonwealth Coatings, 393 U.S. 145. As noted in this
case, a party to the arbitration was one of the arbitrator’s
regular customers in his construction consulting business. In
weighing the import of this relationship, the Court acknowledged
that it was “in a sense sporadic in that the arbitrator’s
services were used only from time to time at irregular
intervals,” and that “there had been no dealings between them
for about a year immediately preceding the arbitration.” 393
U.S. at 146. “Nevertheless, the [party’s] patronage was
repeated and significant, involving fees of about $12,000[15]
over a period of four or five years,” and it involved “the
rendering of services on the very projects involved in this
lawsuit.” Id. The Court found that these dealings “might
create an impression of possible bias” and would thus require
disclosure. 393 U.S. at 149.
Where the relationship involves an exchange of money or
other consideration, it is likely to require disclosure,
15
Adjusted for inflation, this would amount to over $85,000 today.
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particularly if the exchange was recent or ongoing during the
arbitration. See, e.g., Britz, Inc. v. Alfa-Laval Food & Dairy
Co., 40 Cal. Rptr. 2d 700, 707 (Cal. App. 1995). In Britz, the
arbitrator failed to disclose that he was employed by one of the
party counsel’s law firms as an expert witness in a separate
matter. Id. Nondisclosure of this fact was sufficient to
warrant vacatur for evident partiality, as it established “a
current monetary connection.” Id. Similar circumstances were
present in Wheeler v. St. Joseph Hosp., where the court vacated
an award because an arbitrator failed to disclose that he served
as an expert witness for a party attorney’s law firm during the
pendency of the arbitration. 133 Cal. Rptr. 775 (Cal. App.
1976).
Even if the relationship does not involve financial
benefits flowing to the arbitrator, certain exchanges could
nonetheless be reasonably perceived as a means for one party to
gain favor. In Kay, the arbitrator did not disclose that she
had directly solicited and received a $450 donation from one of
the parties on behalf of a non-profit medical association during
the pendency of the arbitration. 119 Hawaii 219, 194 P.3d 1181.
The ICA noted that there was no evidence that the arbitrator
received a direct financial benefit from her work, but that it
was “a significant professional activity that brought her public
recognition and enhanced her reputation in the medical
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profession.” 119 Hawaii at 229-30, 194 P.3d at 1191-92. The
ICA thus held that the arbitrator needed to disclose that she
solicited and received money from the party during the
arbitration, regardless of the charitable purposes of her
activities. 119 Hawaii at 230, 194 P.3d at 1192.
In accord with this principle, a relationship is less
likely to create a reasonable impression of partiality if it was
one in which “[t]here was nothing that one could do to curry
favor with the other.” Apusento Garden (Guam) Inc. v. Superior
Court of Guam, 94 F.3d 1346, 1352 (9th Cir. 1996) (quoting
Lozano v. Maryland Cas. Co., 850 F.2d 1470 (11th Cir. 1988),
cert. denied, 489 U.S. 1018 (1989)). In Apusento, for example,
the arbitrator and a party’s expert witness were limited
partners in a partnership that owned an apartment complex in
Hawaii. 94 F.3d at 1348. The court characterized the
arbitrator and expert witness as “passive investors in a limited
partnership” which “was unrelated to the subject of the
arbitration.” 94 F.3d at 1353. According to the court, this
type of financial relationship did not require disclosure,
particularly because it was not the kind where either person
could “curry favor” with the other. Id.
This situation was paralleled in Lozano, where a neutral
arbitrator and a party-appointed arbitrator were both investors
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in two limited partnerships. 850 F.2d at 1471. Although each
partnership respectively consisted of seven and nine limited
partners, neither the neutral arbitrator nor the party-appointed
arbitrator had control over the partnership activities. The
court compared this financial relationship with “two individuals
buying the same issue of corporate stock or investing in the
same mutual fund” and did not require disclosure. Id.16
3. Timing of the Connection or Activity
Finally, as noted in the previous sections, relationships
that are not “distant in time, but rather ongoing during the
arbitration” will weigh most heavily in favor of disclosure,
while relationships that are “long past” will not. New Regency,
501 F.3d at 1110; see Lagstein v. Certain Underwriters at
Lloyd’s, London, 607 F.3d 634, 646 (9th Cir. 2010) (rejecting
the need for disclosure of a relationship between a neutral and
party-appointed arbitrator where the connection “occurred more
than a decade before the arbitration”).
16
In some circumstances, personal and familial relationships may also be
necessary to disclose. In Morelite, one of the parties to the arbitration
was a local union, and the arbitrator failed to disclose that his father was
the vice-president of the international union to which the local union
belonged. 748 F.2d at 81. The court found that this relationship required
disclosure based on its “strong feeling that sons are more often than not
loyal to their fathers, partial to their fathers, and biased on behalf of
their fathers.” 748 F.2d at 84. In other cases, however, familial
relationships have not required disclosure. See Ruhe v. Masimo Corp., 640
Fed. App’x 685 (9th Cir. 2016) (reversing a finding that a “reasonable
impression of bias” existed where an arbitrator’s brother represented a
competitor to one of the parties and had suffered two contentious litigation
losses to that party).
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Prospective or future relationships will weigh in favor of
disclosure where there is a “concrete possibility” of such a
relationship. Madamba, 137 Hawaii at 12, 13, 364 P.3d at 529,
530 (citing Sussex, 781 F.3d at 1074). Concrete possibilities
of a future relationship have been demonstrated through evidence
of negotiations, communications, or other facts showing that
steps were taken to further the potential relationship during
the course of the arbitration. See Madamba, 137 Hawaii at 15,
364 P.3d at 532 (noting that the party’s law firm had received
the arbitrator’s files during the course of the arbitration);
New Regency, 501 F.3d at 1110 (acknowledging that the
negotiations were ongoing throughout the arbitration); Valrose,
105 F. Supp. 2d at 1124 (concerning discussions between the
arbitrator and party counsel about mediating in an unrelated
action).
Unless a party can show a “concrete possibility” of such a
relationship occurring through direct evidence, allegations of
future interests or relationships are often too contingent and
speculative to require disclosure. See Sussex, 781 F.3d at
1074-75. In Sussex, the arbitrator did not disclose to the
parties that he had started an investment firm for litigation
financing. Id. One party seeking his removal successfully
argued to the district court that this suggested that the
arbitrator had a financial interest in the outcome, “because a
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victory and large financial award for Sussex would help [the
arbitrator] promote his company, which was designed to generate
profits from funding large, potentially profitable litigations.”
781 F.3d at 1070. The Ninth Circuit rejected this “theory”
based on its “speculative nature,” noting that the arbitrator
did not have a relationship with either party, and his potential
ability to profit from the award “can best be described as
‘attenuated’ and ‘insubstantial.’” 781 F.3d at 1074-75 (quoting
New Regency, 501 F.3d at 1110).
C. Application of Disclosure Standards to This Case
1. The Arbitrator’s Connection with Stellmacher
We first analyze Appellants’ contention that the circuit
court erred in concluding that the Arbitrator did not need to
disclose “ongoing or past instances in which she served as a
neutral and . . . a non-attorney witness appeared before her in
another matter.” Under the applicable standards of review, we
hold that it was not clearly erroneous for the circuit court to
find that the Arbitrator’s connection with Stellmacher did not
give a reasonable impression of partiality.
The mere fact that an arbitrator has observed a witness in
a prior proceeding and therefore may have “had an opportunity to
evaluate the person and form an opinion as to the person’s
credibility[,]” without more, is not a “relationship” that
requires disclosure. Thus, it was not clearly erroneous for the
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circuit court to conclude that the Arbitrator’s undisclosed
“relationship” with Stellmacher did not constitute evident
partiality.
2. The Arbitrator’s Connection with KSG
We next address Appellants’ contention that the circuit
court erred in concluding that the Arbitrator did not need to
disclose “ongoing or past instances in which she served as a
neutral and . . . attorney witnesses, one of whom appeared as an
expert witness in the subject arbitration and the other of whom
was a hearsay lay witness, retained her services on behalf of a
client in other matters.” At the outset, we note that
Appellants’ claim of error focuses not on the Arbitrator’s
relationship with the alleged “hearsay witness,” Smith, but
Smith’s law firm, KSG, which had retained the Arbitrator in
other unrelated matters.17
Under the applicable standard of review, we hold that it
was not clearly erroneous for the circuit court to conclude that
the Arbitrator’s relationship with KSG did not constitute
evident partiality. Appellants argued that the Arbitrator
needed to disclose her relationship with KSG because:
17
As noted earlier, Smith’s only connection to the arbitration was
through Stellmacher’s post-arbitration declaration summarizing his
conversation with Smith regarding who had retained him in the Developer
action, which confirmed that Stellmacher’s assignment on behalf of the
Developer had been terminated shortly after he visited the Property and that
he had received no work product or other documents from Smith or KSG. Smith
was not a witness in the arbitration proceeding and it is unclear how
Appellants’ allegations make him a “hearsay witness.”
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(1) KSG is representing certain of the original developer
entities that are adverse to [Appellants] in the Developer
Action; (2) the Arbitrator relied on Mr. Smith’s[ —- a KSG
attorney’s -- ]hearsay testimony in rejecting [Appellants’]
request for Mr. Stellmacher’s entire file. . . and (3)
defendants in the Developer Action have continued to press
for arbitration, appealing the Hawaii Supreme Court’s
ruling that the arbitration clause is unenforceable to the
United States Supreme Court.
Appellants claimed that the “most disconcerting” aspect of
the Arbitrator’s nondisclosures regarding KSG was the status of
the Developer Action. According to Appellants, “the
Arbitrator’s decision, had it been appropriately in
[Appellants’] favor, may have had repercussions to KSG’s client
in the ‘still ongoing’ Developer Action inasmuch as [Appellants]
here challenged the settlement agreement between KSG’s clients
and [the AOAO].” According to Appellants, the relationship
between the Arbitrator and KSG would allow a reasonable person
to “infer that a defense verdict in this arbitration would help
the Arbitrator to garner KSG’s recommendation to serve in the
Developer Action, should it be ordered to arbitration, i.e.,
that there is a ‘reasonable impression of partiality.’”
The Arbitrator’s employment by KSG in unrelated matters
does not have a sufficient nexus to this arbitration to require
a holding that the circuit court clearly erred. There is no
actual direct connection between KSG and the parties, counsel,
witnesses, and Arbitrator in this arbitration. In addition, KSG
represents the Developer in the separate Developer Action, which
is adverse to Appellants, but the theory that a positive outcome
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for the AOAO would lead to a future appointment for the
Arbitrator in the Developer Action is “contingent, attenuated,
and merely potential.” Sussex, 781 F.3d at 1075. The same
could be said with respect to Appellants if the Arbitrator had
ruled in their favor.
Under the facts presented, we hold that the circuit court
did not clearly err in ruling that the Arbitrator’s duty of
disclosure did not include her retention by KSG in other
matters. Vacatur cannot be required “simply because an
arbitrator failed to disclose a matter of some interest to a
party.” Lagstein, 607 F.3d at 646.
3. The Arbitrator’s Connection with Nerney
Finally, we address whether it was clearly erroneous for
the circuit court to conclude that there was no reasonable
impression of partiality arising from the Arbitrator’s
connections with Nerney, an expert witness in this arbitration
who served as party counsel before the Arbitrator in an
unrelated half-day mediation in 2015 and an unrelated
arbitration in 2013. Appellants argue that an objective
observer may reasonably believe that the Arbitrator, seeing a
potential for future business with Mr. Nerney as both an
attorney and expert witness, may have been inclined to favor Mr.
Nerney by ruling in the AOAO’s favor and adopting Mr. Nerney’s
legal rationale.
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Appellants argue that the Arbitrator’s relationship with a
witness must be disclosed, in part, because “these types of
disclosures are no different than those asked of potential
jurors in voir dire to determine potential biases.” The mere
fact that Nerney, an expert witness in this case, had been an
attorney in two cases where he appeared before the Arbitrator,
without more, is not a “relationship” that creates a reasonable
impression of partiality. It was therefore not clearly
erroneous for the circuit court to conclude that the
Arbitrator’s undisclosed contacts with Nerney did not give a
reasonable impression of partiality.
VI. Conclusion
Because the circuit court did not clearly err in holding
that the Arbitrator’s undisclosed connections with Stellmacher,
KSG, and Nerney did not constitute evident partiality, we affirm
the circuit court’s final judgment.
Joachim P. Cox, /s/ Mark E. Recktenwald
Robert K. Fricke, and
Kamala S. Haake /s/ Sabrina S. McKenna
for appellants
/s/ Richard W. Pollack
Michele-Lynn E. Luke
for appellees /s/ Michael D. Wilson
/s/ Edward H. Kubo, Jr.
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