Burlington Northern Ry. Co. v. TUCO Inc.
| Decision Date | 04 December 1997 |
| Docket Number | No. 95-1317,95-1317 |
| Parties | 40 Tex. Sup. Ct. J. 701 BURLINGTON NORTHERN RAILROAD COMPANY and the Atchison, Topeka & Santa Fe Railway Company, Petitioners, v. TUCO INC. and Southwestern Public Service Company, Respondents. |
| Court | Texas Supreme Court |
Harry DeLung, Jr., Chicago, IL, Michael A. Hatchell, Tyler, George Whittenburg, Charles G. White, Amarillo, Samuel M. Sipe, Jr., David A. Stein, Washington, DC, for Petitioners.
Donald M. Hunt, Lubbock, Cynthia Keely Timms, Michael J. Boydston, Michael H. Collins, Dallas, Charles R. Watson, Jr., Amarillo, for Respondents.
Under section 171.014 of the Texas Civil Practice and Remedies Code, a court shall vacate an arbitration award if there has been "evident partiality by an arbitrator appointed as a neutral." We hold that a neutral arbitrator selected by the parties or their representatives exhibits evident partiality under this provision if the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator's partiality. Applying this standard in the case before us, we hold that the neutral arbitrator's failure to disclose his acceptance, during the course of the arbitration proceedings, of a substantial referral from the law firm of a non-neutral co-arbitrator established evident partiality as a matter of law. Because the court of appeals determined that a fact issue existed about evident partiality, 912 S.W.2d 311, we modify the judgment of the court of appeals and remand this cause to the trial court with instructions to vacate the arbitration award.
TUCO, Inc., an Amarillo-based company, purchases coal from mines in Wyoming for resale to Southwestern Public Service Company to fuel its electric generating plants in the Texas Panhandle. In 1984, TUCO entered into two 18-year contracts with Burlington Northern Railroad Company and the Atchison, Topeka & Santa Fe Railway Company (collectively, the "Carriers") for transporting coal from Wyoming to Texas. These contracts, which generally contain the same terms, provide for periodic rate adjustments based on changes in the Carriers' "productivity," a measure which is tied to operating costs but which is not precisely defined in the contracts. During a 1990 contractual rate review, the parties disputed the meaning and scope of the term "productivity," and thus could not agree on the proper rate adjustment. TUCO asserts that the difference in the parties' positions amounted to more than $150 million. Under the contracts, TUCO submitted the dispute to arbitration under the Texas General Arbitration Act. See Tex. Civ. Prac. & Rem.Code § 171.001 et seq.
The contracts required each side to select one arbitrator, who in turn would mutually select the third arbitrator. 1 While they prohibit the parties from selecting their own employees as arbitrators, the contracts do not specify whether the two arbitrators that the parties unilaterally selected (the "party arbitrators") would be neutral or would represent the interests of the party appointing them. There is no dispute, however, that the parties intended and understood that the party arbitrators would be aligned with, act as advocates for, and ultimately side with the appointing party. Under this scenario, the third arbitrator would act as the only neutral decisionmaker. 2
As party arbitrators, TUCO appointed Richard Hardy, a retired transportation attorney, while the Carriers selected Emried Cole, an attorney with the Baltimore firm of Venable, Baetjer and Howard ("Venable-Baetjer"). When the parties exchanged lists of potential neutral arbitrators, George Beall, a Baltimore attorney, appeared on both lists. When the party arbitrators interviewed Beall to determine whether he had any potential conflicts, Beall disclosed that Cole's law firm, Venable-Baetjer, had twice previously retained him as an expert witness. TUCO's investigation of these occurrences revealed that they involved a relatively small amount of time and fees and were no longer ongoing. 3 TUCO and Hardy thus concluded that they would not affect Beall's impartiality. In response to the parties' joint request, Beall agreed to serve as the neutral arbitrator in October 1991.
After conducting discovery, TUCO and the Carriers submitted exhibits and sworn witness statements to the arbitrators in January and February 1992. A live hearing was then scheduled for March 23, 1992, solely for the purpose of cross-examining the witnesses based on their written testimony.
The referral which lies at the heart of the present dispute occurred about three weeks before the March arbitration hearing. The Resolution Trust Corporation had asserted a substantial damage claim against Thomas Mullan, Jr., a former director of a failed savings and loan institution. James Wright, a partner at Venable-Baetjer who regularly represented Mullan, could not handle the RTC claim because of a conflict of interest. Wright did, however, meet with Gail Stern, the general counsel of Mullan's family business, to discuss who might serve as litigation counsel. During this meeting, either Wright or Stern suggested Beall. 4 After two other lawyers selected by Stern declined the case, she asked Wright to contact Beall. Wright did so, arranging a meeting between Stern, Beall, himself, and Mullan's son. 5 Based on this meeting, Mullan selected Beall to represent him, apparently on advice from his son and Stern. Although Wright attended the meeting and briefed the other participants on the background of the RTC's claim, he had no authority to determine whether Beall should be hired.
The Mullan case was a substantial piece of federal litigation involving claims in excess of $1 million. Even though his co-arbitrator's law firm was directly involved in the referral, Beall testified that he concluded that the matter was not material to the arbitration proceedings. Therefore, he continued serving on the panel without disclosing the referral to TUCO or Hardy. It is undisputed that Cole also did not know about the referral, and that he had no involvement in its procurement. Similarly, when Wright referred the Mullan case to Beall, he had no knowledge of the arbitration proceedings or that Beall was serving on an arbitration panel with another Venable-Baetjer partner.
At the conclusion of the arbitration hearing on March 27, 1992, Beall ruled for the Carriers. Siding with Cole, he disposed of the major issues in their favor, including the productivity rate adjustments.
About a month later, on April 21, the arbitrators met to decide several lesser issues which were still pending. During the course of this meeting, Hardy overheard Beall remark to Cole that "we've already begun work on the matter you folks were so kind to send over." The record does not disclose Cole's response, if any, to this remark. As noted previously, TUCO does not contend that Cole knew of the Mullan referral prior to this time.
The panel issued its written decision on May 12, 1992. In his dissent, Hardy accused Beall of bias, contending that Beall made up his mind on key issues before hearing or reviewing the relevant evidence. Hardy cited the comment he had overheard regarding the referral, speculating that the referral could have been the source of the alleged bias. While it is not clear whether Hardy told TUCO about the referral prior to issuing his written dissent, it is undisputed that TUCO knew nothing of the referral until after the panel had decided the remaining issues discussed at the April 21 meeting. 6
TUCO filed this suit to set aside the arbitration award, contending that the undisclosed referral rendered Beall evidently partial. 7 TUCO also contended that the arbitrators had exceeded their authority by essentially reforming, rather than simply interpreting, the transportation contracts. After both parties moved for summary judgment, the trial court granted summary judgment for the Carriers upholding the arbitration award.
TUCO appealed to the court of appeals, arguing that Beall was under a duty to disclose the referral and that his failure to do so was "evident partiality" under section 171.014 of the Texas Civil Practice and Remedies Code as a matter of law. That section provides in relevant part:
(a) Upon application of a party, the court shall vacate an award where:
* * * * * *
(2) there was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct or wilful misbehavior of any of the arbitrators prejudicing the rights of any party.
TEX. CIV. PRAC. & REM.CODE § 171.014(a)(2) (emphasis added). Alternatively, TUCO argued that the arbitrators exceeded their authority in deciding the dispute. Thus, TUCO contended, the trial court erred in granting the Carriers' motion for summary judgment and in not granting TUCO's.
The court of appeals concluded that an arbitrator exhibits evident partiality under the statute when the arbitrator fails to disclose any relationship which might reasonably create an appearance of partiality or bias. 912 S.W.2d at 318. Noting that TUCO had been concerned about Beall's past relationship with Venable-Baetjer, and that Beall had essentially thanked Cole for the referral in the midst of the arbitration proceedings, the court of appeals concluded that a fact issue existed about evident partiality under this standard. Id. The court thus reversed the summary judgment for the Carriers on this issue. Id. However, the court did not render judgment for TUCO, instead remanding the cause to the trial court for a trial on evident partiality. Id. The court did not address TUCO's alternative argument that the arbitrators had exceeded their authority. TUCO and the Carriers both applied to this Court for writ of error.
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