Health Services Management Corp. v. Hughes

• Decision Date: 17 September 1992
• Docket Number: No. 91-3380,91-3380
• Citation: 975 F.2d 1253
• Parties: HEALTH SERVICES MANAGEMENT CORP., Petitioner-Appellant, v. Charles HUGHES, d/b/a Charles Hughes & Associates, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1253

975 F.2d 1253

23 Fed.R.Serv.3d 1175

HEALTH SERVICES MANAGEMENT CORP., Petitioner-Appellant, v. Charles HUGHES, d/b/a Charles Hughes & Associates Respondent-Appellee.

No. 91-3380.

United States Court of Appeals Seventh Circuit.

Argued May 27, 1992.

Decided Sept. 17, 1992.

Kenneth J. Heinz (argued), David P. Oetting, Curtis, Oetting, Heinz, Garrett & Soule, Clayton, Mo., for petitioner-appellant.

David A. Rolf (argued), Sorling, Northrup, Hanna, Cullen & Cochran, Springfield, Ill., for respondent-appellee.

Before MANION and KANNE, Circuit Judges, and LEE, District Judge. ¹

WILLIAM C. LEE, District Judge.

This is an appeal from a district court order confirming an arbitration award for Charles Hughes, d/b/a Charles Hughes & Associates and denying an Application to Vacate the Arbitration Award against Health Services Management Corporation.

BACKGROUND

On May 21, 1987, Hughes and the Health Services Management Corporation (hereinafter "HSM") entered into a written agreement whereby Hughes agreed to perform architectural services for HSM for a long-term care facility. Pursuant to the terms of the contract, HSM was to compensate Hughes a set percentage of the construction cost of the facility, with periodic payments to be made in proportion to progress achieved on the project. The contract contained a clause which provided that claims or disputes arising out of the contract were to be decided by arbitration in accordance with the American Arbitration Association (hereinafter "AAA") Construction Industry Arbitration Rules. The clause further provided that a judgment may be entered by a court of competent jurisdiction upon an award made pursuant to the arbitration.

A dispute arose out of the contract, and a demand for arbitration was filed on April 6, 1990. The demand stated that the owner had failed or refused to make payment for work performed by the architect pursuant to the contract. The relief sought was "payment of contract price plus interest as provided therein." Thereafter, the parties proceeded to arbitration. Names of proposed neutral arbitrators were provided by the AAA and the parties selected as neutral arbitrators Messrs. Tobermann, Walton and Feldman, all from Springfield, Illinois. Statements of the claims were provided prior to hearing. A pre-hearing conference was held on September 28, 1990, where counsel for both parties and all three arbitrators were present.

Messrs. Tobermann and Walton had notified AAA that they knew Mr. Hughes at the time their names were included on the list of potential arbitrators. Prior to the September 28th conference, the AAA did not advise counsel for HSM that Messrs. Tobermann and Walton had previous business relationships with Hughes. At the September 28th conference, HSM's counsel did not inquire of the arbitrators as to any potential conflicts of interest. However, on the first day of hearings (January 16, 1991), counsel for HSM asked whether any of the persons who were selected as neutral arbitrators had any conflict of interests with the parties.

Mr. Walton told counsel for HSM that he had communicated to AAA that he knew Mr. Hughes for a number of years as being a local architect in town, and that he had worked in the same office that Walton had worked in approximately 20 years before. Moreover, he reported that he saw Hughes approximately once a year since Hughes had left the architecture firm. Mr. Tobermann told counsel for HSM that he had disclosed in his statement to AAA that Hughes had worked for the firm Tobermann was with one summer several years before, and that he had seen Hughes about twice in the past four or five years at various meetings. Both Tobermann and Walton indicated that they did not believe that their prior relationship with Hughes would have any prejudicial effect in their sitting as arbitrators.

Counsel for HSM indicated that he had not been advised by the St. Louis office of the AAA of these particular disclosures. Following this exchange, Arbitrator Feldman announced that if either party wanted to place any objections on the record, they should do it that time. Counsel for HSM stated that he would have to rely on the statements of Walton and Tobermann that the prior relationship with Hughes would not have a prejudicial effect.

Two days of hearings were held on January 16 and 17, 1991. Thereafter, counsel for HSM confirmed by telephone on January 22, 1991, with the AAA in St. Louis that it had not previously disclosed these relationships. Following that conversation, HSM again proceeded with the arbitration in this matter by participating in a scheduling conference on February 25, 1991, during which time both counsel for HSM and counsel for Hughes were present as well as all three arbitrators. During this scheduling conference, HSM failed to voice any objection to the disclosures by the arbitrators, nor to the nondisclosure by AAA. HSM and Hughes agreed to the scheduling of a third day of arbitration on March 22.

On March 21, 1991, HSM submitted its Motion for New Trial and Memorandum in Support Thereof alleging that HSM had been biased and prejudiced in the proceedings by several events: (1) AAA had failed to advise HSM of the prior relationships that existed between each of the two arbitrators and Hughes; (2) that at one point during the cross-examination of the claimant, Hughes had been directed to a particular section of the contract so as to coach the witness to a particular answer, and; (3) HSM had been prevented from making a motion for a directed verdict or summary judgment and that the Chairman had indicated that the motion would be denied before the other two arbitrators had the opportunity to hear the motion.

On March 22, 1991, the arbitrators overruled HSM's motion and continued to hear the claim. The panel entered their award on April 15, 1991, granting Hughes $11,427 on his claim and denying HSM's claim for damages. Thereafter, on June 14, 1991, HSM filed its Application to Vacate Arbitration Award under 9 U.S.C. § 10 with the United States District Court for the Central District of Illinois, Springfield, Illinois. HSM asserted that the award was procured by undue means, evident partiality, or misbehavior by which the rights of HSM were prejudiced, alleging that (a) the AAA's failure to advise HSM's counsel of the prior relationships between Hughes and Arbitrators Walton or Tobermann was in violation of Rule 19 of the applicable arbitration rules; (b) the evident partiality of the arbitrator; and (c) that the award was contrary to law in that Hughes' claim was grounded in contract, not quantum meruit and that thus, the arbitrators award was erroneously entered in an amount of damages not supported by any claim in the case. HSM's application was not accompanied by any Memorandum of Law and neither did HSM attach any exhibits or copies of the transcript to its application, nor request oral argument.

Thereafter, on June 28, 1991, Hughes filed a Memorandum in Response to HSM's Application and a Motion for Judgment upon the arbitration award. Accompanying said Memorandum in Response were copies of pages 10, 11, 12, 13, 50, and 454-455 of the transcript, a copy of the Award of Arbitrators, and a copy of the Agreement between Hughes and HSM. On July 19, 1991, HSM filed its Response to the Motion for Judgment upon the arbitration award, which included no attached pages but referred to its Application to Vacate Arbitration for reasons why Hughes' Motion for Judgment on Arbitration Award should be denied.

Thereafter, without notice or hearing, pre-trial or scheduling conference, the district judge entered his order on September 13, 1991, denying the Application to Vacate the arbitration award and granting judgment in Hughes' favor. In this Order, the district court erroneously found that HSM did not make any objection after being apprised of Arbitrators Walton and Tobermann's disclosures, when, in fact, HSM did make a written objection on March 21, 1991. Thereafter, HSM filed its Motion to Reconsider Order and Judgment, copies of the transcript of the arbitration hearing, and its written objection it filed with the arbitrators. The only additional pages of the transcript that HSM filed with the court that Hughes had not already submitted were pages 195 and 196, dealing with HSM's allegations that Arbitrator Feldman had improperly directed Hughes to an answer. By Order dated October 4, 1991, filed with the Clerk of the district court on October 7, 1991, the district court denied On appeal, HSM contends that the district court erred in entering its order denying Appellant's Application to Vacate Arbitration Award and granting Appellee's Motion for Judgment on Arbitration Award without granting Appellant process under Rule 16 of the Federal Rules of Civil Procedure. Specifically, HSM argues that the district court should have (a) held a scheduling or pretrial conference; (b) ordered briefs to be filed; or (c) ordered the transcripts of the arbitration hearings to be filed. Further, HSM appeals arguing that the Court erred in denying Appellant's Application to Vacate Arbitration Award and granting Appellee's Motion for Judgment on arbitration award because the transcript and record show that the award was procured by undue means, misbehavior or evident partiality. Finally, HSM alleges that the Court erred in denying its application to vacate and granting Hughes motion for judgment because the arbitration award shows manifest disregard for the law and a lack of fundamental rationality in awarding damages logically attributable solely to quantum meruit when the arbitration proceeding was based solely on the contract.

                the Motion to Reconsider and denied HSM's request for oral argument.   Thereafter, the district court entered a new Order on October 9, denying HSM's Motion to Reconsider
                

DISCUSSION

A. Applicability of Rule 16

Appellant HSM contends that it was effectively denied an opportunity to brief...