Lagstein v. Lloyd's

• Decision Date: 10 June 2010
• Docket Number: No. 07-16094.,07-16094.
• Parties: Zev LAGSTEIN, M.D., Plaintiff-Appellant,v.CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

607 F.3d 634

Zev LAGSTEIN, M.D., Plaintiff-Appellant,v.CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Defendant-Appellee.

No. 07-16094.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 3, 2009.

Filed June 10, 2010.

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Thomas L. Hudson, Osborn Maledon, P.A., Phoenix, AZ, for the plaintiff-appellant.

Evan M. Tager, Mayer Brown LLP, Washington, D.C., for the defendant-appellee.

Appeal from the United States District Court for the District of Nevada, Robert C. Jones, District Judge, Presiding. D.C. No. CV-03-01075 RCJ.

Before: B. FLETCHER, WILLIAM C. CANBY, JR., and SUSAN P. GRABER, Circuit Judges.

CANBY, Circuit Judge:

After developing heart disease and other ailments, Zev Lagstein, M.D., filed with Certain Underwriters at Lloyd's, London (“Lloyd's”) a claim for benefits under a disability policy. After nearly two years passed without a decision on the claim, Lagstein sued Lloyd's in federal court. The case was stayed pending binding arbitration mandated by Lagstein's policy. The majority of a three-member arbitration panel found in favor of Lagstein, awarding him full policy benefits, emotional distress damages, and punitive damages, all of which totaled more than six million dollars. The district court vacated the overall award on the ground of its excessive size and vacated the punitive damages award on the additional ground that the arbitration panel lacked jurisdiction to enter it after the panel had entered its compensatory award. We reverse the district court's vacatur of the awards. We agree, however, with the district court's ruling that Lloyd's did not establish partiality of two of the arbitrators as an additional ground of vacatur.

BACKGROUND

Appellant Lagstein is a cardiologist and disability examiner. In 1999, he obtained an insurance policy from Appellee Lloyd's in which Lloyd's agreed to pay Lagstein $15,000 per month for up to sixty months in the event that Lagstein became unable to practice medicine due to disability. In 2001, Lagstein developed heart disease, as well as severe migraine headaches and other neurological problems. Several physicians who examined Lagstein concluded that he was permanently disabled from practicing medicine. Lagstein then submitted to Lloyd's a claim for benefits under the disability policy.

Because Lagstein had received no benefits or even a decision on his claim by early 2002, he went back to work against the advice of his doctors. Relations between the parties increasingly soured, and each accuses the other of delay and bad faith in the months that followed. In September 2003, still having received no decision on his claim,¹ Lagstein filed a complaint in the United States District Court for the District of Nevada for breach of contract, breach of the covenant of good faith and fair dealing, and unfair trade practices. Upon Lloyd's motion, the district court stayed the lawsuit pending binding arbitration required by Lagstein's policy.

As provided in Lagstein's policy, each party appointed an arbitrator and those two arbitrators appointed a third. Lagstein selected Jerry Carr Whitehead, Lloyd's selected Ralph O. Williams, III, and Whitehead and Williams together appointed Charles Springer. Each of the arbitrators submitted a disclosure statement to the parties setting forth prior relationships with the parties, the parties' attorneys, and those attorneys' law firms.

The initial arbitration hearing was held from July 11 to July 14, 2006, and the panel issued a decision on August 31, 2006. All three arbitrators concluded that Lloyd's breached the insurance contract and acted unreasonably, but the panel split on the amount of damages to be awarded. The majority, formed by Springer and Whitehead, concluded that Lagstein should be awarded the full value of his policy, $900,000, as well as $1,500,000 for emotional distress. The majority also concluded that punitive damages were warranted, but ordered that the amount be determined at a separate hearing.

The dissenting arbitrator, Williams, would have awarded Lagstein only $11,000 under his policy and no emotional distress damages or punitive damages. The disagreement between the majority and the dissent turned on whether the evidence showed that Lagstein remained disabled from practicing medicine after he returned to work, whether Lagstein proffered sufficient evidence of emotional distress, and the significance of delays in Lloyd's handling of the claim that were attributable to Lagstein himself.

The punitive damages hearing was held on November 20 and 21, 2006, over Lloyd's objection that the panel's jurisdiction had ended once it issued the initial award. The same majority of the panel, after explaining the basis for its continued jurisdiction, awarded Lagstein $4,000,000 in punitive damages. Arbitrator Williams again dissented, arguing that the panel lacked jurisdiction to make the award, and that, even if it had jurisdiction, the award appropriately should have been $50,000.

Following the panel's initial award, Lloyd's investigated the backgrounds of arbitrators Springer and Whitehead and discovered their roles in a controversy that had occurred over a decade earlier. In 1993, Whitehead, who at the time was a Nevada trial judge, became involved in an ethics controversy arising from his handling of peremptory strikes entered against him under Nevada's rule for peremptory striking of judges. The Nevada Commission on Judicial Discipline filed a complaint alleging that on several occasions Whitehead, through ex parte contacts, permitted counsel for the non-challenging party to select a replacement judge. Although the Commission's complaint against Whitehead eventually was dropped, the FBI subsequently investigated Whitehead on unspecified charges. Whitehead ultimately signed a non-prosecution agreement conditioned on his retiring from the bench, agreeing not to seek reelection, and agreeing not to serve again in “any state judicial capacity.”

In the meantime, a related controversy erupted over the Commission's procedures and jurisdiction in the Whitehead investigation. These matters were addressed by an increasingly divided Nevada Supreme Court over the course of several decisions.² Arbitrator Springer was a member of the Nevada Supreme Court at the time and consistently sided with Whitehead on these procedural and jurisdictional issues. See, e.g., Whitehead IV, 893 P.2d at 941-65 (Springer, J., concurring).

Lloyd's filed in the district court a motion to vacate the arbitration awards on several grounds, including Springer's and Whitehead's failure to disclose the prior ethics controversy, as well as the majority's decision to hold a separate punitive damages hearing after the issuance of the initial award. Following a hearing on the matter, the district court vacated the awards, concluding that the size of the awards was excessive and in manifest disregard of the law, and that the punitive damages award contravened public policy and exceeded the panel's jurisdiction. The district court concluded, however, that vacatur was not independently warranted by Springer's and Whitehead's non-disclosure of the prior controversy.

Lagstein appeals the district court's vacatur of the arbitration awards. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse.

DISCUSSION

We review de novo the district court's vacatur of an arbitration award. New Regency Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1105 (9th Cir.2007). “Our review is limited by the Federal Arbitration Act (‘FAA’), which ‘enumerates limited grounds on which a federal court may vacate, modify, or correct an arbitral award.’ ” Bosack v. Soward, 586 F.3d 1096, 1102 (9th Cir.2009) (quoting Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 994 (9th Cir.2003) (en banc)) cert. denied, --- U.S. ----, 130 S.Ct. 1522, 176 L.Ed.2d 113 (2010). Section 10(a) of the FAA permits a district court to vacate an arbitration award under only four circumstances:

(1) where the award was procured by corruption, fraud, or undue means;

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

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a). Unless the award is vacated as provided in § 10, or modified as provided in § 11 (not in issue here),³ “confirmation is required even in the face of erroneous findings of fact or misinterpretations of law.” Kyocera, 341 F.3d at 997 (citation and internal quotation marks omitted); see

Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 584, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008) (holding that §§ 10 and 11 “provide the FAA's exclusive grounds for expedited vacatur and modification”).

A

The district court's first ground for vacating the arbitration awards was the awards' total size. As the district court explained, the amount of the awards “shock[ed] the Court's conscience,” suggested bias, was unsupported by the record, manifestly disregarded the law, and contravened public policy. Lagstein argues that none of these reasons justified the awards' vacatur. We agree.

A district court may not vacate an arbitration award simply because the court disagrees with its size. The heart of such disagreement concerns the panel's weighing of the evidence, here, on matters such as the length and severity of Lagstein's disability and the egregiousness of Lloyd's conduct. But § 10 of the FAA “does not sanction judicial review of the merits,” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir.2007), and “[w]hether...