Merit Ins. Co. v. Leatherby Ins. Co.

• Citation: 714 F.2d 673
• Decision Date: 12 September 1983
• Docket Number: No. 82-2885,82-2885
• Parties: MERIT INSURANCE COMPANY, Plaintiff-Appellant, v. LEATHERBY INSURANCE COMPANY a/k/a Western Employers Insurance Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 673

714 F.2d 673

MERIT INSURANCE COMPANY, Plaintiff-Appellant, v. LEATHERBY INSURANCE COMPANY a/k/a Western Employers Insurance Company, Defendant-Appellee.

No. 82-2885.

United States Court of Appeals Seventh Circuit.

Argued May 31, 1983.

Decided July 12, 1983.

As Amended Aug. 18, 1983.

Rehearing and Rehearing En Banc Denied Sept. 12, 1983.

Thomas P. Sullivan, Barry Sullivan, Chicago, Ill., for plaintiff-appellant.

Mitchell S. Rieger, Schiff, Hardin & Wiate, Chicago, Ill., for defendant-appellee.

Before CUMMINGS, Chief Judge, POSNER, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.

POSNER, Circuit Judge.

This appeal from an order under Rule 60(b) of the Federal Rules of Civil Procedure setting aside an arbitration award requires us to decide whether the failure of one of the arbitrators to disclose a prior business relationship with a principal of one of the parties to the arbitration justified the district court in using its powers under Rule 60(b) and the United States Arbitration Act, 9 U.S.C. §§ 1 et seq., to set aside the award.

In 1972 Merit Insurance Company made a contract with Leatherby Insurance Company to reinsure claims under certain insurance policies that Leatherby had issued. Merit later sued Leatherby in federal district court for fraud in inducing the contract. Jurisdiction was based on diversity of citizenship. Leatherby moved the court for an order under 9 U.S.C. § 4 directing the parties to arbitrate their dispute in accordance with the arbitration clause in the contract, and in 1977 the district court entered such an order. See Merit Ins. Co. v. Leatherby Ins. Co., 581 F.2d 137, 139 (7th Cir.1978), and for collateral litigation Merit Ins. Co. v. Colao, 603 F.2d 654 (7th Cir.1979).

The arbitration was conducted under the auspices of the American Arbitration Association. Each party appointed one arbitrator and together the parties appointed from a list formulated by the AAA the third or "neutral" arbitrator, a Chicago lawyer named Jack Clifford. At the first meeting of the arbitration panel the panel agreed that the other two arbitrators would also be neutrals, rather than representatives of the parties that had appointed them.

After an arbitration that lasted three years and produced a hearing transcript of 16,000 pages, the panel on December 1, 1980, unanimously awarded Merit $10,675,000 on its claim. Merit petitioned the district court to confirm the award under 9 U.S.C. § 9. Leatherby opposed confirmation in part on the ground that the arbitrators had been biased, as indicated by certain evidentiary rulings in Merit's favor and by a comment the arbitrator appointed by Merit had made in the course of the proceedings. No charge of bias was leveled against Clifford specifically. The district judge rejected all of Leatherby's arguments and on November 19, 1981, confirmed the award. A month later he rejected Leatherby's first motion under Rule 60(b) to set it aside. Leatherby appealed to this court from both the order confirming the award and the order denying the Rule 60(b) motion. On May 12, 1982, while the appeal was pending, Leatherby filed a second Rule 60(b) motion, this one based on Leatherby's alleged discovery the previous month that Clifford had once worked under Merit's president and principal stockholder, Jerome Stern, at Cosmopolitan Insurance Company. The appeal was dismissed on Leatherby's motion, and an evidentiary hearing on its new charge of bias was held in the district court at the end of August. On November 4, 1982, in an oral opinion, the court granted Leatherby's Rule 60(b) motion and set aside the arbitration award, and Merit has appealed under 28 U.S.C. § 1291. See University Life Ins. Co. of America v. Unimarc Ltd., 699 F.2d 846, 848 (7th Cir.1983).

The hearing in the district court brought out the following facts. The chairman of the board of Cosmopolitan had hired Clifford late in 1960 to be head of the claims department. At the same time Stern had been promoted to executive vice-president of the company. As the vice-president in charge of the claims department Clifford reported to Stern. This relationship lasted till the beginning of 1963 when Stern left Cosmopolitan to enter private practice. Clifford left Cosmopolitan shortly afterward. Clifford and Stern both testified that they had had little professional contact while at Cosmopolitan and no social contacts then or since. Clifford had been promised substantial autonomy by the chairman of the board when he took over the claims department, and Stern--who had no background in claims evaluation and was preoccupied with corporate acquisitions and other matters unrelated to Clifford's responsibilities--gave Clifford a loose rein. Their principal contact came in meetings held at intervals of several months between Stern and the department heads who reported to him. They also had occasional brief discussions over specific claims; once Clifford was asked to review the claims reserves of an insurance company that Cosmopolitan was thinking of buying; and, on orders from above, Stern once required all of his subordinates, including Clifford, to take lie-detector tests. After Clifford and Stern entered private practice they spoke to each other on the phone on one or two occasions but these contacts were of no significance, and until the arbitration the two men had not met face to face since 1963. Rotheiser, a vice-president of Merit, was also employed at Cosmopolitan during Clifford's tenure, but he was the head of a separate department and according to both his testimony and Clifford's they had no dealings with one another.

The foregoing account is drawn in large part from the testimony of Clifford himself, of whom the district judge stated, "I do not find Mr. Clifford to be a credible witness." But read in context this statement principally refers not to Clifford's testimony about his time at Cosmopolitan--testimony corroborated by Stern and Rotheiser, whom the district judge did not find to be incredible and who were not contradicted by any other witness--but to Clifford's explanation of why he omitted to mention his affiliation with Cosmopolitan either when he filled out the forms that the American Arbitration Association requires from its prospective arbitrators or when he first saw Stern at the arbitration hearing. In 1975 the AAA had sent Clifford a "panel data sheet" which contained a space headed, "My prior occupational affiliations have been ...." All that Clifford listed in this space (having listed private practice as his current occupation) was his job as claims manager for Firemen's Fund American Insurance Companies from 1949 to 1960. Clifford testified that he had not mentioned Cosmopolitan in part because he was not interested in doing the kind of arbitration for which his experience there would have been relevant. The judge disbelieved this because it was the same kind of work Clifford had done at Firemen's Fund. (The judge made no comment on Clifford's other, and more plausible, explanation for not mentioning his work for Cosmopolitan: it was not a useful reference. Since the company had been liquidated, getting an evaluation of Clifford's work for the company would have been difficult.) But the judge could not have believed that the purpose of the omission was to prevent Clifford from being disqualified as an arbitrator, for the Merit-Leatherby arbitration was still two years in the future when Clifford mailed back the form. The judge conjectured, rather, that Clifford had been embarrassed to broadcast his relationship with Cosmopolitan, because after he had left it the company had gone broke, which resulted, in the district judge's words, in "an explosion in the industry." But when Clifford filled out another panel data sheet at the AAA's request three years later, he again omitted any reference to his work at Cosmopolitan; and when the arbitration began and Clifford recognized Stern and realized that the president of Merit and the former executive vice-president of Cosmopolitan were one and the same, he had said nothing.

Leatherby argues that by failing at each of these junctures to disclose his former relationship with Stern, Clifford violated the ethical norms applicable to arbitrators, and that the only effective sanction for such a violation is to set aside the arbitration award. It also argues that Clifford did more than just fail to disclose his former relationship with Stern, that he tried to put Leatherby off the scent by calling Stern "Mr. Stern" rather than calling him by his first name; but there is no evidence that Clifford was doing anything other than maintaining the decorum of the arbitration proceeding.

The panel data sheet that the American Arbitration Association requires prospective arbitrators to fill out does not indicate that the information sought is for the purpose of determining whether grounds for disqualification exist, so no significance can be attached to Clifford's initial omission of his job history with Cosmopolitan. But section 18 of the AAA's Commercial Arbitration Rules requires the neutral arbitrator to "disclose to the AAA any circumstances likely to affect his impartiality, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their counsel." And Canon IIA of the Code of Ethics for Arbitrators in Commercial Disputes (jointly adopted by the American Arbitration Association and the American Bar Association) requires arbitrators to disclose "any existing or past financial, business, professional, family or social relationships which are likely to affect impartiality or which might reasonably create an appearance of partiality or bias." The requirement of disclosure is a continuing one, so the fact that Clifford's failure to disclose his relationship with Cosmopolitan in his first panel data sheet was innocent could not excuse his later failure to...