Middlesex Mut. Ins. Co. v. Levine

• Decision Date: 10 May 1982
• Docket Number: No. 80-5630,80-5630
• Citation: 675 F.2d 1197
• Parties: MIDDLESEX MUTUAL INSURANCE COMPANY, et al., Plaintiffs-Appellees, v. Stuart LEVINE, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1197

675 F.2d 1197

MIDDLESEX MUTUAL INSURANCE COMPANY, et al., Plaintiffs-Appellees, v. Stuart LEVINE, et al., Defendants-Appellants.

No. 80-5630.

United States Court of Appeals, Eleventh Circuit.

May 10, 1982.

Horton, Perse & Ginsberg, Edward A. Perse, Edward A. Moss, Miami, Fla., for defendants-appellants.

Daniels & Hicks, Mark Hicks, Spencer & Taylor, Arthur H. Taylor, Miami, Fla., for plaintiffs-appellees.

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

Before VANCE, HATCHETT and ANDERSON, Circuit Judges.

PER CURIAM:

This appeal requires the review of a trial court's application of federal and Florida law governing the nature of the requirement of arbitrator impartiality with respect to arbitration hearings and the applicable principles of estoppel. Because we find that the district court properly vacated the arbitration award on the ground of evident partiality of the neutral third arbitrator, we affirm.

FACTS

After suffering serious personal injuries in a 1974 automobile accident, appellant Stuart Levine filed uninsured/underinsured motorist claims with Middlesex Mutual Insurance In August, 1977, the parties selected a panel of three arbitrators with John L. Hartnett acting as the neutral third arbitrator. At the commencement of the arbitration hearing, Hartnett, having been informed that the dispute concerned Middlesex and Patriot, signed the oath of arbitrator impartiality which required him to divulge any prior experiences with any of the parties or their counsel that would reflect on his ability to serve as neutral arbitrator. At the time he took this oath, Hartnett was aware that Hartnett, Inc., a family-owned insurance company, had been entangled in a dispute with Middlesex and Patriot, and that he was under investigation by the Florida Bar concerning a trust account violation involving these insurers. Nevertheless, he failed to disclose his adversary relationship with Middlesex and Patriot. Hartnett and another arbitrator rendered a $1,200,000 award in favor of the claimant.

Company (Middlesex), Patriot General Insurance Company (Patriot) and Allstate Insurance Company (Allstate) demanding arbitration. Middlesex and Patriot refused to arbitrate and filed a declaratory action pursuant to 28 U.S.C. § 2201 against Levine, his company-Gold Coast Leasing Corp., and Allstate regarding the nature and extent of available insurance coverage. The trial court entered an "Agreed Declaratory Judgment" submitting the resolution of Levine's claims to the jurisdiction of the American Arbitration Association (AAA).

Middlesex and Patriot filed a petition to vacate the arbitration award in the United States District Court for the Southern District of Florida pursuant to diversity of citizenship jurisdiction, 28 U.S.C. § 1332, and 28 U.S.C. § 2201, the federal declaratory judgment action statute. Finding that Hartnett had violated his duty to reveal potential bias, the district court vacated the arbitration award without reaching the question of actual corruption, fraud, or partiality.

ISSUES

We must determine whether the trial court erred in holding: (1) that the neutral arbitrator demonstrated evident partiality in failing to disclose his involvement in a dispute between his family-owned insurance company and the insurers who were parties to the arbitration proceeding, and (2) that the insurers had insufficient knowledge of the neutral third arbitrator's background to be estopped from claiming evident partiality after rendition of the award.

I. ARBITRATOR EVIDENT PARTIALITY

In vacating the award for "evident partiality," the district court found that for five years prior to 1975, Hartnett, Inc., had an agency agreement with Middlesex, and that since 1975 Hartnett, Inc., was an agent for Patriot. During this period, Hartnett, a practicing attorney, was a licensed insurance agent with and general counsel to Hartnett, Inc. He also served as Hartnett, Inc.'s, resident agent and one of its directors. Following cancellation of the agency relationship, Middlesex filed suit in May, 1977, against Hartnett, Inc., and William Hartnett (the brother of John L. Hartnett) claiming nonpayment of approximately $22,300 in premiums collected by the agency and owed to Middlesex, and $6,240 in collected premiums owed to Patriot. Although Hartnett did not represent Hartnett, Inc., in the action, as attorney for the firm, he previously had written two letters to Middlesex disputing the amount of unpaid premiums.

In January, 1977, the Florida Bar filed a complaint against Hartnett based upon findings reflecting that he misappropriated trust account funds to make payments to Middlesex and Patriot. In July, 1977, only one month prior to the institution of the subject arbitration hearing, Hartnett responded to interrogatories propounded by the Florida Bar requesting an explanation of the circumstances surrounding the utilization of his trust account checks for these payments. Based upon its findings of fact, which are not disputed, the district court concluded that:

23. At the time John Hartnett took the arbitrator's oath he was aware that he had been seriously entangled in a dispute with Middlesex/Patriot General and had been investigated by The Florida Bar about a trust account violation involving these insurers. Moreover, these were not the kind of dealings which could be considered part of the ordinary course of an arbitrator's private business. Garfield & Co. v. Wiest, 432 Fed. (2d) 849 (2d Cir. 1970).

24. The cumulative effect of the evidence leads to the conclusion that John Hartnett had a duty to reveal his close relation to the family insurance business, the Bar investigation, and the lawsuit against Hartnett, Inc. pursuant to Accident Claims Arbitration Rules, Section 9 effective March 1, 1976. A conclusion that Mr. Hartnett was not actively involved with the business of Hartnett, Inc. from August 1975 to August 1977 is not possible. The opposite conclusion is dictated by the evidence of this case.

25. The similarity between Fla.Stat. 682.13(1) and 9 U.S.C. 10(b) of the United States Arbitration Act suggest similar legislative intent. Thus it is appropriate to vacate an arbitration award where the neutral arbitrator has the appearance of bias although there is no evidence of corruption, fraud, or partiality. Commonwealth Coatings v. Continental Casualty, 393 U.S. 145 (89 S.Ct. 337, 21 L.Ed.2d 301) (1968); Carol City Utilities v. Gaines Construction, (Gaines Construction Co. v. Carol City Utilities, Inc.) 164 So.2d 270 (Fla. 3d Dist.Ct.App.1964).

Both the United States Arbitration Act, 9 U.S.C. § 10(b) (1970), and the Florida Arbitration Code, Fla.Stat. § 682.13(1)(b) (1981), authorize a trial court to vacate an arbitration award in cases of "evident partiality" of an arbitrator. ¹

The Supreme Court in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968), delineated the requirements of impartiality in arbitration proceedings under 9 U.S.C. § 10. The challenged arbitrator had earned about $12,000 in fees over a period of four or five years for consulting services rendered to the prevailing party which included services involved therein. The arbitrator failed to disclose this relationship which also was unknown to the losing party. In his plurality opinion, Mr. Justice Black found that the arbitrator's failure to disclose warranted setting aside the award for evident partiality. He stated that a panel of arbitrators "not only must be unbiased but also must avoid even the appearance of bias" and thus must "disclose to the parties any dealings that might create an impression of possible bias." ² 393 U.S. at 149-50, 89 S.Ct. at 339-40.

In writing for himself and Mr. Justice Marshall, however, Mr. Justice White concurred, stating:

(A)rbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial....

....

... (I)t is enough for present purposes to hold, as the Court does, that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.

393 U.S. at 150, 151-52, 89 S.Ct. at 340-41.

In view of the code of strict morality and fairness which underlies the arbitrator's (T)he law is well settled that arbitrators exercise judicial functions, and are in fact, judicial officers.... It therefore becomes of the utmost importance that ... every possible safeguard should be thrown about the proceedings to insure the utmost fairness and impartiality of those charged with the determination of the rights of the parties.

duty of disclosure, the Florida Supreme Court also has recognized that:

Cassara v. Wofford, 55 So.2d 102, 105 (Fla.1951). The Commonwealth Coatings Court warned that "we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review." 393 U.S. at 149, 89 S.Ct. at 339.

The Commonwealth Coatings holding has been interpreted as "somewhat analogous to a per se rule" or irrebuttable presumption requiring the award to be set aside once it is established that the arbitrator actually knew of, yet failed to disclose potentially prejudicial facts which could impair his judgment. Overseas Private Investment Corp. v. Anaconda Co., 418 F.Supp. 107, 110 (D.D.C.1976); see Gaines Construction Co. v. Carol City Utilities, Inc., 164 So.2d 270, 272 (Fla.Dist.Ct.App.1964) (requiring only a showing of a circumstance tending to bias judgment to disqualify arbitrator).

Prior to the arbitration proceeding in the instant case, Hartnett signed the Arbitrator's Oath of the American Arbitration Association, which provides in pertinent...