Morgan Keegan & Co. v. Starnes
| Decision Date | 20 June 2014 |
| Docket Number | No. W2012-00687-COA-R3-CV,W2012-00687-COA-R3-CV |
| Court | Tennessee Court of Appeals |
| Parties | MORGAN KEEGAN & COMPANY, INC. v. MICHAEL STARNES, et al. |
Direct Appeal from the Chancery Court for Shelby County
Walter L. Evans, Chancellor
The trial court vacated an arbitration award in favor of Petitioner/Appellant Morgan Keegan & Company, Inc., on the basis of "evident partiality" and remanded the matter for re-arbitration before a different panel. We reverse and remand for further proceedings consistent with this Opinion.
and Remanded
Michael A. Brady, Annie T. Christoff and Shepherd D. Tate, Memphis, Tennessee, and Peter S. Fruin, Birmingham, Alabama, for the appellant, Morgan Keegan & Company, Inc.
John James Heflin, III, Memphis , Tennessee, for the appellees, Michael S. Starnes, Laura M. Starnes f/k/a Laura Ann Murchison, The Michael S. Starnes Charitable Remainder Trust and TCX, Inc.
OPINIONThe only issue presented by this appeal is whether the trial court erred by vacating an arbitration award in favor of Morgan Keegan & Company, Inc. ("Morgan Keegan") on the ground of evident partiality under the Federal Arbitration Act ("FAA") pursuant to 9 U.S.C. § 10(a)(2) and the Tennessee Uniform Arbitration Act ("TUAA") pursuant to Tennessee Code Annotated § 29-5-313(a)(1)(B)(2012). The background facts relevant to our disposition of this issue are largely undisputed. Respondents/Appellees Michael S. Starnes, Laura M. Starnes f/k/a Laura Ann Murchison, the Michael S. Starnes Charitable Remainder Trust, and TCX, Inc., (collectively, "Claimants") owned investment accounts at MorganKeegan.1 A portion of Claimants' portfolio included investments in the Regions Morgan Keegan Funds ("the RMK Funds"). The documents governing Claimants' accounts provided for dispute resolution by the Financial Industry Regulatory Authority ("FINRA"), the independent, non-governmental organization of the financial industry which conducts virtually all securities-related arbitration and mediation in the United States. Morgan Keegan & Co. v. Smythe, No. W2010-01339-COA-R3-CV, 2014 WL 2462853, at *1 n.1 ().
In December 2008, Claimants filed an arbitration proceeding against Morgan Keegan following the collapse of the RMK Funds. In their statement of claim, Claimants asserted claims of misrepresentation and omissions, breach of fiduciary duty, unsuitable investments, violation of Section 11 of the Securities Act as codified at 15 U.S.C. § 77k, violation of Section 12 of the Securities Act as codified at 15 U.S.C. § 77l, violation of Section 15 of the Securities Act of 1933, breach of the Securities Act of 1934, breach of the Tennessee Securities Act, fraud, negligence, failure of supervision, breach of contract, vicarious liability, and violation of the FINRA Rules. Claimants sought compensatory damages in excess of $7 million, interest, and costs, and "reserve[d] the right to seek punitive damages." Claimants also filed state court actions against individual agents and advisors.
As provided by the FINRA rules governing disputes in excess of $100,000, a three-member arbitration panel consisting of two public arbitrators and a non-public arbitrator with extensive industry experience was selected and approved by the parties for arbitration of claims against Morgan Keegan. The panel ultimately agreed upon by the parties was composed of Elliott Zachary Seff (Mr. Seff), Public Arbitrator and Chair; Austin O'Toole (Mr. O'Toole), Public Arbitrator; and William Lacy (Mr. Lacy), the non-public arbitrator. As required by the FINRA rules, the panel members filed disclosures including biographical information, potential conflicts, and other relevant information. Following a somewhat tortured discovery process, scheduling difficulties, and two continuances, arbitration proceedings commenced on Monday, August 16, 2010. At the outset of the proceedings, Mr. Lacy recognized one of Morgan Keegan's expert witnesses, Steve Scales (Mr. Scales), and disclosed that he and Mr. Scales both worked at Dean Witter approximately twenty years earlier. A brief exchange ensued between Mr. Lacy and Mr. Scales confirming that Mr. Lacy was the Dean Witter manager in Birmingham while Mr. Scales was the manager in Memphis in the late 1980's. A more lengthy discussion ensued regarding whether Claimants' state court actions impacted the arbitration proceedings, openingstatements were made by counsel, and examination of Claimants' first witness commenced.
When the proceedings recommenced on August 17, 2010, Claimants filed a motion to remove Mr. Lacy from the panel and requested that the proceedings be adjourned until a new panel could be assembled. Claimants alternatively requested a stay of the proceedings to permit them to seek injunctive relief in Tennessee State courts. Morgan Keegan opposed Claimants' motion and offered to release Mr. Scales as a witness and to replace him with another expert witness. Claimants rejected this offer and, apparently while the panel was in recess to consider their motion to recuse, filed a motion to stay the matter. Claimants' motions were denied. A lengthy and at times heated discussion ensued regarding whether recusal of Mr. Lacy was warranted, proper procedure under FINRA rules, and whether Mr. Seff's authority included "ordering" Claimants to participate in further proceedings while the matter was under review. Mr. Seff "warn[ed]" Claimants' counsel, "on behalf of the parties and FINRA, [that] the failure to proceed could result in the imposition of sanctions" under FINRA rules. Counsel for Claimants refused to proceed further; refused to permit further examination of Claimants' witness; refused the panel's offer to temporarily adjourn at the end of the week; and informed the panel that he and Claimants would not participate the next day. Claimants did not appear when the proceedings resumed on August 18 and Morgan Keegan presented its case. On September 20, 2010, the panel denied Claimants' claims in their entirety and awarded Morgan Keegan attorneys' fees in the amount of $235,578.10 and costs in the amount of $29,720.74.
On September 21, 2010, Morgan Keegan filed a petition to confirm the arbitration award in the Chancery Court for Shelby County. Claimants filed an answer in opposition to Morgan Keegan's petition and counter-petitioned for vacatur on the grounds of misconduct and evident partiality on the part of Mr. Lacy and the panel under the Federal Arbitration Act as codified at 9 U.S.C. § 10(a)(2), (3) and Tennessee Code Annotated § 29-5-313(a). They also asserted that the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final, and definite award was not made under 9 U.S.C. § 10(a)(4) and Tennessee Code Annotated § 29-5-313(a)(1)(C). Following protracted proceedings in the trial court, the matter was heard on January 5, 2012. On January 19, 2012, the parties again appeared before the trial court to address the status of the matter in light of the court's oral ruling that Morgan Keegan's motion to confirm would be held in abeyance pending re-arbitration. Morgan Keegan urged the court to reconsider this ruling, asserting that, "by implication and for all practical effects," the trial court had denied its motion to confirm the arbitration award. By order entered January 19, 2012, the trial court granted Claimants' counter-petition for vacatur on the ground of evident partiality and remanded the matter for a new hearing before a different FINRA arbitration panel. The trial court also held Morgan Keegan's motion to confirm the arbitration award "in abeyance" pending the outcome of re-arbitration before a different panel.
Morgan Keegan filed a notice of appeal to this Court on February 17, 2012. On the same day, Morgan Keegan also filed a motion for interlocutory appeal in light of that part of the trial court's order holding its motion to confirm in abeyance pending re-arbitration. In April 2012, Claimants filed a motion to dismiss Morgan Keegan's appeal on the ground that the trial court's judgment was not final where it held Morgan's Keegan's motion to confirm in abeyance. In its response, Morgan Keegan urged this Court to deny Claimants' motion, asserting the trial court's order was final and appealable. By order entered July 30, 2012, we denied Claimants' motion to dismiss and held the matter in abeyance pending the Tennessee Supreme Court's judgment in Morgan Keegan & Co. v. William Hamilton Smythe, III, No. W2011-01339-SC-R11. By order entered January 24, 2013, we stayed the trial court proceedings and specifically stayed operation of the trial court's judgment remanding the matter for re-arbitration. The supreme court filed its judgment in Morgan Keegan v. Smythe on April 25, 2013. On October 7, 2013, Morgan Keegan moved to lift the stay of its appeal and to dismiss its motion for interlocutory appeal. In its motion, Morgan Keegan asserted that the trial court's judgment must be considered final under Morgan Keegan v. Smythe. In their response, Claimants expressed no objection to dismissal of Morgan Keegan's interlocutory appeal and to the lifting of the stay imposed on Morgan Keegan's Rule 3 appeal. We granted Morgan Keegan's motion by order entered October 8, 2013, and oral argument was heard on April 23, 2014.
The FINRA rules and applicable statutory framework governing this matter were recently examined by the supreme court in Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595 (Tenn. 2013), and we find it unnecessary to engage in that examination here. It is well-settled that "courts should play only a limited role in reviewing the decisions...
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