Keegan v. Smythe, No. W2010–01339–SC–R11–CV.

CourtSupreme Court of Tennessee
Writing for the CourtWILLIAM C. KOCH
Citation401 S.W.3d 595
PartiesMORGAN KEEGAN & COMPANY, INC. v. William Hamilton SMYTHE III et al.
Docket NumberNo. W2010–01339–SC–R11–CV.
Decision Date25 April 2013

401 S.W.3d 595

MORGAN KEEGAN & COMPANY, INC.
v.
William Hamilton SMYTHE III et al.

No. W2010–01339–SC–R11–CV.

Supreme Court of Tennessee,
at Jackson.

Nov. 8, 2012 Session at Memphis.
April 25, 2013.


[401 S.W.3d 598]


Jef Feibelman, David E. Goodman, Jr., and Mary C. Hamm; Christopher S. Campbell, and Laura S. Martin, Memphis, Tennessee; Dale Ledbetter, Fort Lauderdale, Florida, for the appellants, William Hamilton Smythe III, William H. Smythe IV Trust, and Smythe Children's Trust.

John S. Golwen, William G. Whitman, and Annie T. Christoff, Memphis, Tennessee, for the appellee, Morgan Keegan & Company, Inc.


OPINION
WILLIAM C. KOCH, JR., J., delivered the opinion of the Court, in which GARY R. WADE, C. J., CORNELIA A. CLARK, and SHARON G. LEE, JJ., joined. JANICE M. HOLDER, J., not participating.

WILLIAM C. KOCH, JR., J.

This case requires us to decide whether Tennessee's appellate courts possess subject matter jurisdiction to review a trial court's order that vacates an arbitration award and remands the dispute to a new arbitration panel without expressly declining to confirm the award. An investor pursued a claim against an investment company over losses he incurred due to the failure of some of the company's bond funds. After a Financial Industry Regulatory Authority arbitration panel ruled in the investor's favor, the investment company petitioned the Chancery Court for Shelby County to vacate the award based on its belief that two members of the arbitration panel were biased. The trial court, without expressly declining to confirm the award, vacated the award and remanded the case for a second arbitration before a new panel. The investor appealed. The Court of Appeals, on its own motion, dismissed the appeal on the ground that it lacked subject matter jurisdiction. Morgan Keegan & Co. v. Smythe, No. W2010–01339–COA–R3–CV, 2011 WL 5517036, at *8 (Tenn.Ct.App. Nov. 14, 2011). We granted the investor's application for permission to appeal and now reverse the judgment of the Court of Appeals because the trial court's order is, in fact, an appealable order “denying confirmation of an award” under Tenn.Code Ann. § 29–5–319(a)(3) (2012).

I.

The sole issue in this case focuses on the subject matter jurisdiction of the Court of Appeals. Even though we are not concerned with the merits of the underlying substantive dispute between the parties, we provide the following facts in order to frame the jurisdictional discussion.

William Smythe III owned various investment accounts at Morgan Keegan & Company, Inc. (“Morgan Keegan”), including several accounts for which he served as trustee for other members of his family. The documents creating these accounts contained provisions requiring that disputes between Mr. Smythe and Morgan

[401 S.W.3d 599]

Keegan be resolved using arbitration procedures established by the Financial Industry Regulatory Authority (“FINRA”).1

A portion of Mr. Smythe's portfolio included investments in Morgan Keegan's “Regions Morgan Keegan” (“RMK”) family of funds. These funds invested in “junk bonds”—below investment grade securities that offered the potential of high rates of return but with a higher degree of risk. According to expert testimony presented during the arbitration proceeding, these funds “collapsed spectacularly in 2007,” thus living up to their name and costing investors billions of dollars. The failure of its RMK funds has generated a substantial amount of litigation for Morgan Keegan.2

On April 30, 2008, Mr. Smythe initiated a FINRA arbitration proceeding against Morgan Keegan. This procedure was conducted in accordance with FINRA's Code of Arbitration Procedure for Customer Disputes (“FINRA Code”).3 A crucial step in the process was the selection of the members of the arbitration panel. 4 For disputes exceeding $100,000, the panel is composed of three members: a “non-public” arbitrator, a public arbitrator, and a chairperson who is an experienced public arbitrator.5 Non-public arbitrators are industry insiders with professional experience in securities, commodities, or futures.6 Public arbitrators are persons who lack recent professional experience in the investments industry and who have no immediate family members in that industry.7

FINRA supplies each party with a list of ten randomly generated arbitrators for each position on the panel.8 Each party may strike up to four potential arbitrators from each list, and each party must rank the remaining arbitrators in order of preference.9 FINRA then combines the ranked arbitrator lists and populates the panel with the highest-ranked available arbitrator from the combined list.10

In order to assist the parties in their decisions regarding the exclusion of potential arbitrators and in ranking the remaining arbiters, the FINRA Code requires disclosure of biographical information for each potential arbitrator, including potential conflicts of interest and other relevant disclosures. 11 The dispute in this case centers

[401 S.W.3d 600]

on the alleged failure of two arbitrators to disclose potential conflicts of interest under FINRA Code § 12405(a) and to recuse themselves under FINRA Code § 12406 or FINRA's failure to remove them under FINRA Code § 12407.

After Mr. Smythe filed his arbitration claim against Morgan Keegan, both parties participated in the arbitrator selection procedure. A three-arbitrator panel was assembled on October 2, 2008; however, FINRA replaced the chairperson of the panel on February 19, 2009. On August 10, 2009, the non-public member of the panel supplemented his disclosure report to Mr. Smythe and Morgan Keegan. This information enabled Morgan Keegan to discover that this panel member was a broker for a firm that was also suing Morgan Keegan over the RMK funds and that the firm was being represented by the same lawyer who was representing Mr. Smythe.

In October 2009, Morgan Keegan requested that the non-public arbitrator recuse himself and alternatively asked FINRA's director to remove this arbitrator from the panel. By this time, the non-public arbitrator had served on two other FINRA arbitration panels involving Morgan Keegan's RMK funds that had awarded damages against Morgan Keegan. In both of these proceedings, the non-public arbitrator had heard expert testimony to the effect that the RMK funds were fundamentally flawed and unfit for any investor. Thus, by the time Mr. Smythe's claim was ready to be heard, the non-public arbitrator had already received damaging information about the RMK funds in two previous arbitrations and had ruled against Morgan Keegan in both. Morgan Keegan's requests for recusal and removal of the non-public arbitrator were denied.

Morgan Keegan also objected to the panel's chairperson. The chairperson had previously chaired an arbitration proceeding involving RMK funds in which the panel made the rare move of imposing punitive damages against Morgan Keegan. This was the only arbitration involving RMK funds that resulted in a punitive damages award. Morgan Keegan's request for the removal of the chairperson was also denied.

The FINRA arbitration regarding Mr. Smythe's complaint against Morgan Keegan was conducted from November 2 through November 6, 2009. On November 11, 2009, the arbitration panel awarded Mr. Smythe $697,000 in compensatory damages, as well as $195,160 in attorneys' fees and $20,000 in witness fees.

On November 25, 2009, Morgan Keegan filed a petition in the Chancery Court for Shelby County, asserting that the arbitration award to Mr. Smythe should be vacated because of the “evident partiality” of the non-public arbitrator and the chairperson of the arbitration panel.12 Mr. Smythe did not file a petition to confirm the award, as permitted by Tenn.Code Ann. § 29–5–312 (2012). However, on February 11, 2010, he filed a written response to Morgan

[401 S.W.3d 601]

Keegan's petition in which he requested not only that the trial court deny Morgan Keegan's petition, but also “that the Award, rendered on November 11, 2009, by FINRA Dispute Resolution be confirmed in accordance with Tenn.Code Ann. § 29–5–313(a).” 13 During oral argument before the trial court on February 25, 2010, Mr. Smythe's attorney again urged that the “award for the Smythes ... should be upheld.”

The trial court ruled from the bench at the conclusion of the February 25, 2010 hearing. The trial court concluded that the non-public arbitrator was “draped with the cloak of bias and prejudice” against Morgan Keegan and that “a reasonable person” would conclude that the panel's chairperson and the non-public arbitrator would be unfairly “predisposed to view any acts in the light most damaging to [Morgan Keegan] because of their previous hearing and conclusions [in] other matters involving Morgan Keegan.” Thus, the trial court held that “the process should be replayed.”

The trial court confirmed its bench ruling in a written order filed on March 16, 2010. The order, drafted by Morgan Keegan's lawyer and approved by Mr. Smythe's counsel, found that “there was evident partiality” by the non-public arbitrator and the chairperson of the panel and that the award in Mr. Smythe's favor “should be and is vacated and is remanded back to FINRA for a new hearing for all of those specific reasons that [Morgan Keegan] raised as constituting bias and prejudice, all of which this Court hereby finds and adopts.”

Mr. Smythe appealed. On March 24, 2011, the Court of Appeals, on its own motion and apparently without additional briefing, filed an opinion dismissing the appeal on the ground that the court lacked subject matter jurisdiction under the Tennessee Uniform Arbitration Act 14 to adjudicate Mr. Smythe's appeal.15 Mr. Smythe filed a petition for rehearing, arguing that the appeal provisions of the Federal Arbitration Act 16 preempted inconsistent appeal provisions in the Tennessee Uniform Arbitration Act and that the Federal Arbitration Act provided a broader basis for jurisdiction than the Tennessee Uniform Arbitration Act....

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66 practice notes
  • Mid-South Maint. Inc. v. Paychex Inc., No. W2014-02329-COA-R3-CV
    • United States
    • Court of Appeals of Tennessee
    • August 14, 2015
    ...in the FAA as "encompass[ing] 'the broadest permissible exercise of Congress' Commerce Clause power.'" Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 604 (Tenn. 2013) (quoting Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S.Ct. 2037, 156 L.Ed.2d 46 (2003) (per curiam)). Under these ......
  • Harvey ex rel. Gladden v. Cumberland Trust & Inv. Co., No. E2015-00941-SC-R11-CV
    • United States
    • Supreme Court of Tennessee
    • October 20, 2017
    ...agreements, notwithstanding any state substantive or procedural policies to the contrary"); Morgan Keegan & Co., Inc. v. Smythe, 401 S.W.3d 595, 603 (Tenn. 2013) (describing arbitration agreements in private contracts as "now favored in Tennessee both by statute and existing caselaw"). Cert......
  • Ala. Psychiatric Servs., P.C. v. Lazenby, 1170856
    • United States
    • Supreme Court of Alabama
    • June 21, 2019
    ...450, 748 S.E.2d 221, 226-27 (2013). Many other state courts have reached a similar conclusion. See, e.g., Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 605-607 (Tenn. 2013) (collecting cases). Particularly relevant here, other state courts have concluded that state procedural rules allowin......
  • Berent v. CMH Homes, Inc., No. E2013-01214-SC-R11-CV.
    • United States
    • Supreme Court of Tennessee
    • June 5, 2015
    ...thus the boundaries of the preemption doctrine are prescribed by United States Supreme Court precedent.”Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 605 (Tenn.2013) (citing Leggett v. Duke Energy Corp., 308 S.W.3d 843, 852–54 (Tenn.2010) ). Here, the Sellers argue that our ruling in Taylo......
  • Request a trial to view additional results
65 cases
  • Mid-South Maint. Inc. v. Paychex Inc., No. W2014-02329-COA-R3-CV
    • United States
    • Court of Appeals of Tennessee
    • August 14, 2015
    ...in the FAA as "encompass[ing] 'the broadest permissible exercise of Congress' Commerce Clause power.'" Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 604 (Tenn. 2013) (quoting Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S.Ct. 2037, 156 L.Ed.2d 46 (2003) (per curiam)). Under these ......
  • Harvey ex rel. Gladden v. Cumberland Trust & Inv. Co., No. E2015-00941-SC-R11-CV
    • United States
    • Supreme Court of Tennessee
    • October 20, 2017
    ...agreements, notwithstanding any state substantive or procedural policies to the contrary"); Morgan Keegan & Co., Inc. v. Smythe, 401 S.W.3d 595, 603 (Tenn. 2013) (describing arbitration agreements in private contracts as "now favored in Tennessee both by statute and existing caselaw"). Cert......
  • Ala. Psychiatric Servs., P.C. v. Lazenby, 1170856
    • United States
    • Supreme Court of Alabama
    • June 21, 2019
    ...450, 748 S.E.2d 221, 226-27 (2013). Many other state courts have reached a similar conclusion. See, e.g., Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 605-607 (Tenn. 2013) (collecting cases). Particularly relevant here, other state courts have concluded that state procedural rules allowin......
  • Berent v. CMH Homes, Inc., No. E2013-01214-SC-R11-CV.
    • United States
    • Supreme Court of Tennessee
    • June 5, 2015
    ...thus the boundaries of the preemption doctrine are prescribed by United States Supreme Court precedent.”Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 605 (Tenn.2013) (citing Leggett v. Duke Energy Corp., 308 S.W.3d 843, 852–54 (Tenn.2010) ). Here, the Sellers argue that our ruling in Taylo......
  • Request a trial to view additional results

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