Gianelli Money Purchase Plan and Trust v. ADM Investor Services, Inc., 97-2586

• Citation: 146 F.3d 1309
• Decision Date: 22 July 1998
• Docket Number: No. 97-2586,97-2586
• Parties: 11 Fla. L. Weekly Fed. C 1597 GIANELLI MONEY PURCHASE PLAN AND TRUST, Penelope Gianelli, Trustee, Plaintiffs-Appellees, v. ADM INVESTOR SERVICES, INC., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1309

146 F.3d 1309

11 Fla. L. Weekly Fed. C 1597

GIANELLI MONEY PURCHASE PLAN AND TRUST, Penelope Gianelli, Trustee, Plaintiffs-Appellees, v. ADM INVESTOR SERVICES, INC., Defendant-Appellant.

No. 97-2586.

United States Court of Appeals, Eleventh Circuit.

July 22, 1998.

Thomas M. Knepper, Knepper & Gladney, Chicago, IL, for Defendant-Appellant.

William M. Rishoi, Philip J. Synderburn, Winter Park, FL, for Plaintiffs-Appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before CARNES and HULL, Circuit Judges, and HENDERSON, Senior Circuit Judge.

CARNES, Circuit Judge:

ADM Investor Services, Inc. ("ADM") appeals the district court's order vacating an arbitration award in its favor. The district court concluded that the arbitrator had displayed "evident partiality" because of past business contacts between his employer and ADM's corporate representative at the arbitration. Because we hold that an arbitrator cannot be guilty of "evident partiality" absent actual knowledge of a real or potential conflict, we conclude that the district court erred in vacating the arbitration award. Accordingly, we reverse the district court's order and remand with instructions to grant ADM's cross-petition for confirmation of the arbitration award.

I. BACKGROUND

ADM is a futures commission merchant licensed with the Commodity Futures Trading Commission ("CFTC"). Basic Commodities, Inc. ("Basic") is also registered with the CFTC. In 1992, ADM and Basic entered into an agreement under which ADM executed commodities trades for customers brought in by Basic. The agreement contained an indemnity provision requiring Basic to indemnify and hold ADM harmless for any damages it incurred because of losses suffered by Basic clients. Basic president Kent C. Kelley ("Kelley") executed this agreement on behalf of Basic, and also personally guaranteed Basic's contractual undertakings.

One of the clients that Basic brought to ADM was the Gianelli Money Purchase Plan and Trust, Penelope Gianelli, Trustee ("Gianelli"). Gianelli lost approximately $100,000 from November 1994 through July 1995 as a result of its investments in the futures markets. Gianelli claims that Kelley's mismanagement of its account caused these losses. In an attempt to recoup its losses, Gianelli filed a claim against ADM with the American Arbitration Association ("AAA"). It sought to hold ADM liable on an agency theory, asserting that it was liable for the wrongdoings and mismanagement of Kelley, Basic's president.

The parties jointly selected Keith Houck ("Houck") as sole arbitrator. Houck has served as office manager for the law firm of Gray, Harris & Robinson ("Gray Harris") since 1990. Immediately prior to the arbitration hearings, Gianelli discovered that Gray Harris had represented Kelley in a 1992 securities case, the Neilson case. When Gianelli asked about this, Houck asserted that he was unaware of the case, while Kelley asserted (falsely) that Gray Harris's representation of him was an isolated incident. In addition, Houck signed an Arbitrator's Oath which stated that he had nothing to disclose. After receiving these assurances, Gianelli accepted Houck as the sole arbitrator. Houck conducted the arbitration hearings on January 25 and 26, 1996. Kelley was present throughout the hearing, and the district court found that Kelley was ADM's corporate representative at the "mediation." The proceedings were not recorded. On February 7, 1996, Houck rendered an award in favor of ADM, finding it not liable to Gianelli.

Gianelli contends that, after Houck rendered the decision in favor of ADM, it discovered Kelley had frequent contact with Gray Harris. In particular, Gray Harris helped Kelley form three companies and represented two others in 1976; the firm also represented Kelley as an individual from 1977 to 1986. On May 2, 1996, Gianelli filed this petition to vacate the arbitration award, contending that Houck, as an employee of Gray Harris, had displayed partiality to ADM. ADM subsequently filed a cross-petition to confirm the arbitration award. The matter was referred to a magistrate judge, who, after hearing oral argument, issued a Report and Recommendation recommending that the district judge grant Gianelli's petition to vacate the arbitration award. The district court adopted that Report and Recommendation in its entirety, and vacated the arbitration award. ADM appeals.

II. STANDARD OF REVIEW

We have previously held that we review an order vacating an arbitration award de novo. See Robbins v. Day, 954 F.2d 679, 681 (11th Cir.1992). We justified that standard of review, which is more stringent than the abuse of discretion standard under which we reviewed orders confirming arbitration awards, by relying on the federal policy favoring arbitration and limited review of arbitral awards. See id. at 682. Since we issued our decision in Robbins, however, the Supreme Court has provided additional instruction about the proper standard that courts of appeals must use to review orders confirming or vacating arbitration awards. Of course, "[w]here prior panel precedent conflicts with a subsequent Supreme Court decision, we follow the Supreme Court decision." Cottrell v. Caldwell, 85 F.3d 1480, 1485 (11th Cir.1996); accord e.g., Lufkin v. McCallum, 956 F.2d 1104, 1107 (11th Cir.1992).

In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995), the Court indicated that where the district court has confirmed an arbitration award, the appellate court must review the district court's factual findings for clear error and its holdings of law de novo. Several other courts of appeals have concluded that First Options mandates the same standard whether the order being reviewed confirms or vacates the arbitration award. See, e.g., Wackenhut Corp. v. Amalgamated Local 515, 126 F.3d 29, 31 (2d Cir.1997) ("We review a district court decision upholding or vacating an arbitration award de novo on questions of law and for clearly erroneous findings of fact."); Barnes v. Logan, 122 F.3d 820, 821 (9th Cir.1997) ("Appellate courts review the confirmation or vacation of an arbitration award like any other district court decision ... accepting findings of fact that are not 'clearly erroneous' but deciding questions of law de novo.") (internal quotes omitted), cert. denied, --- U.S. ----, 118 S.Ct. 1385, 140 L.Ed.2d 645 (1998); Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 135 (6th Cir.1996) ("When reviewing a district court's decision to vacate or confirm an arbitration award, we review findings of fact for clear error and questions of law de novo.").

We also conclude that First Options requires us to apply the same standard of review to orders vacating arbitration awards as we apply to orders confirming arbitration awards. Three considerations that the Supreme Court identified in First Options compel that conclusion. First, the Court stated that "it is undesirable to make the law more complicated by proliferating review standards without good reasons." First Options, 514 U.S. at 947, 115 S.Ct. at 1926. Second, the Court indicated that the policy considerations that work to create a presumption of validity for arbitration awards cannot be the basis for a two-tiered review system, depending on whether the district court confirmed or vacated the award. Specifically, the Court stated,"[T]he reviewing attitude that a court of appeals takes toward a district court decision should depend upon the respective institutional advantages of trial and appellate courts, not upon what standard of review will more likely produce a particular substantive result." See id. (internal quotes omitted). That statement directly undercuts our position in Robbins that the policy favoring confirmation of arbitration awards justifies different standards of review depending on whether we are reviewing an order confirming or vacating an arbitration award. See Robbins, 954 F.2d at 682.

Finally, the Supreme Court stated that the policy giving arbitrators considerable leeway in their decision making does not mean that reviewing courts should give additional deference to district courts when they confirm arbitration awards. See First Options, 514 U.S. at 947, 115 S.Ct. at 1926. We cannot hold orders vacating an arbitration award to a stricter standard, because doing so would accord greater deference to orders confirming awards, and First Options prohibits that. Our Robbins decision and any others providing a dual standard of review for arbitration orders must yield to First Options. Accordingly, orders vacating arbitration awards, like orders confirming them, are to be reviewed for clear error with respect to factual findings and de novo with respect to the district court's legal conclusions.

III. DISCUSSION

The Federal Arbitration Act ("FAA") provides that a federal district court can vacate an arbitration award, but only in extremely narrow circumstances. See 9 U.S.C. § 10. One of the grounds the FAA expressly sanctions as a basis for vacating an arbitration award is partiality on the part of the arbitrators:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration--

(2) Where there was evident partiality or corruption in the arbitrators, or either of them.

9 U.S.C. § 10(a). The district court relied on that ground--evident partiality, not corruption--in vacating the arbitration award in this case. Specifically, it concluded that Kelley's frequent business contacts with Gray Harris, Houck's employer, would lead a reasonable person to conclude that Houck "was tainted with evident partiality."

We begin our analysis by noting that the purpose of the Federal Arbitration Act was "to relieve congestion in the courts and to provide parties with an alternative method for dispute...