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ARBITRATION & EVIDENCE - MUNICIPAL WORKERS' COMPENSATION FUND, INC. V. MORGAN KEEGAN & CO., INC.

Municipal Workers’ Compensation Fund, Inc. v. Morgan Keegan & Co., Inc., [Ms. 1120532, Apr. 3, 2015] __ So. 3d __ (Ala. 2015). The arbitration rules of the Financial Industry Regulatory Authority (“FINRA”) require strict disclosure by prospective and serving arbitrators of matters that might demonstrate or give an appearance of partiality or bias. The Supreme Court holds that two of the three arbitrators did not disclose matters that should have been disclosed under the FINRA arbitration procedures.

The Jefferson County circuit court declined to set aside the arbitration decision, but the Supreme Court reverses. The Fund, claimant below, argued on appeal that an arbitration decision denying relief should be set aside because of evident partiality, bias, or fraud by two of the three arbitrators.

Respondent Morgan Keegan argued for affirmance on the ground that documents submitted in support of the claim to show bias were not properly authenticated and contained hearsay. The Court first holds that the declaration of one of the Fund’s attorneys was not sufficient to authenticate the 40 exhibits constituting over 3,000 pages that were attached to her declaration. She did not assert that she had personal knowledge sufficient to authenticate the documents.

The Court next holds that some of the documents could nevertheless have been considered because they were papers from litigation against one of the arbitrators, and the trial court “could have properly considered the ... papers ... to take judicial notice of the South Carolina litigation for the limited purpose of concluding that the litigation occurred and that Julavits was named as a third-party defendant in that litigation.” The Court also rules that it could consider certain documents supposedly printed from the Web despite the inadequacy of the declaration supposedly authenticating it, because of “other ‘distinctive characteristics’ that, when considered in light of the circumstances, support a finding that the exhibits are what the Fund claims they are.”

On the merits, the trial court denied the motion to vacate the arbitration award because, although the arbitrators failed to make full disclosure, “there can be no reasonable impression of bias that is definite, direct, and capable of demonstration.” The Supreme Court reverses, finding that the evidence supported a finding of “evident partiality” as set forth in 9 U.S.C. § 10(a)(2) as a basis for vacating an arbitration award. The Court holds that the standard for determining whether evident partiality exists is whether there is a “reasonable impression of partiality.” The Court draws a distinction between “non-disclosure cases” and “actual bias” cases. An arbitrator’s non-disclosure of facts showing a potential conflict of interest creates evident partiality even when no actual bias is present. In a long analysis, the Court applies the rule that a prospective arbitrator has a duty to investigate potential conflicts and that constructive knowledge of such a conflict is sufficient in a failure-to-disclose case, rejecting the Eleventh Circuit’s rule that only if the party has actual knowledge of the conflict can there be evident partiality. Part of the reasoning is that if the potential arbitrator makes an investigation and discloses the potential conflict at the outset, the parties can judge whether the potential conflict is sufficient reason to reject the arbitrator, preventing the courts from having to intervene in the arbitration process after the fact when the party learns of the potential conflict and seeks to vacate the award. Finally, the Court returns to the FINRA rules, which impose “a stringent and ongoing duty to disclose potential conflicts” and which in fact require the potential arbitrator to make a reasonable effort to learn of and disclose any circumstances that might preclude him from rendering an objective and impartial determination. One arbitrator, Eric Kunis, was a partner in the Maxim Group, and he would have discovered his firm’s contacts with Morgan Keegan if he had made even a cursory conflict check, so his “failure to disclose this relationship resulted in a reasonable impression of partiality.” The Court pretermitted whether the fund demonstrated evident partiality as to the other arbitrator, William Julavits. “A finding of evident partiality in one arbitrator generally requires vacatur of the arbitration award.”

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