Morgan Keegan & Co. v. Smythe

Decision Date14 November 2011
Docket NumberW2010-01339-COA-R3-CV
CourtTennessee Court of Appeals
PartiesMORGAN KEEGAN & COMPANY, INC. v. WILLIAM HAMILTON SMYTHE, III, Individually; WILLIAM H. SMYTHE, IV, TRUST U/A/DTD 12/29/87, WILLIAM H. SMYTHE, III, TRUSTEE; AND SMYTHE CHILDREN'S TRUST #2 FBO KATHERINE S. THINNES U/A/DTD 12/29/87

January 19, 2011 Session1

An Appeal from the Chancery Court for Shelby County

No. CH092353 Walter L. Evans, Chancellor

This appeal involves a trial court's order vacating an arbitration award. The parties engaged in arbitration over a dispute in which the respondent investors asserted that the petitioner investment company mismanaged their funds. The investors prevailed and received a substantial arbitration award against the investment company. The investment company filed a petition in the trial court to vacate the arbitration award, alleging partiality and bias on the part of two members of the arbitration panel. After a hearing, the trial court entered an order vacating the arbitration award and remanding the matter to the regulatory authority for a rehearing before another panel of arbitrators. The respondent investors now appeal. We dismiss the appeal for lack of appellate jurisdiction.

Tenn. R. App. P. 3 Appeal as of Right; Appeal Dismissed for Lack of Jurisdiction

HOLLY M. KIRBY, J., delivered the opinion of the Court, in which DAVID R. FARMER, J., and J. STEVEN STAFFORD, J., joined.

Christopher S. Campbell and Laura S. Martin, Memphis, Tennessee; Jef Feibelman, David E. Goodman, and Mary C. Hamm, Memphis, Tennessee; and Dale Ledbetter, Fort Lauderdale, Florida, for the Respondent/Appellants, William Hamilton Smythe, III, et al.

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

OPINION

FACTS AND PROCEEDINGS BELOW

For a number of years, Respondent/Appellant William Hamilton Smythe, III ("Smythe"), had multiple investment accounts at Petitioner/Appellee Morgan Keegan & Company ("Morgan Keegan") for himself and as trustee for members of his family.2 In the contracts that Smythe signed when the investment accounts at Morgan Keegan were opened, Smythe agreed to arbitrate any disputes in accordance with the Financial Industry Regulatory Authority ("FINRA") procedures.

Over time, Smythe came to believe that Morgan Keegan had improperly invested his accounts in several funds, specifically with respect to the RMK family of funds ("the Fund") managed by James L. Kelsoe. After sustaining significant losses in the accounts, on April 30, 2008, Smythe, individually and as trustee of the funds at issue (collectively "Smythe"), filed a claim with the FINRA to initiate an arbitration proceeding against Morgan Keegan. In the claim, Smythe alleged that Morgan Keegan had engaged in improper investment activity related to the Fund. On August 4, 2008, Morgan Keegan filed its response to the Smythe claim.

In connection with the arbitration proceedings, pursuant to FINRA rules, Smythe and Morgan Keegan each received a list of potential arbitrators. Both parties were given the opportunity to strike arbitrators from the list. They ranked the remainder and returned to FINRA the ranked list of arbitrators. Both parties' lists included an arbitrator by the name of Eugene R. Katz ("Katz").

After that, in accordance with FINRA rules, FINRA created a separate combined ranked list of arbitrators from the lists provided by Smythe and Morgan Keegan, deleting arbitrators who had been struck by either party. FINRA then "appointed an arbitration Panel based on the parties' consolidated lists." The panel of arbitrators appointed for the Smythe case included Katz. It also included Marion R. Allen, who later withdrew and was replaced by Michael S. Hill ("Hill"). The final Panel ("Panel") for the Smythe case was comprised of Spencer Buchanan ("Buchanan"), Katz, and Hill. Katz and Hill were also on the panel of arbitrators in unrelated cases against Morgan Keegan arising from the same Fund. Each Panel member submitted an arbitrator disclosure report that was provided to the parties.

After the other Morgan Keegan cases on which Katz and Hill had served as arbitrators were resolved unfavorably to Morgan Keegan, Morgan Keegan objected to Katz and Hill remaining as members of the Smythe Panel. On October 2, 2009, Morgan Keegan filed a motion for the recusal of arbitrator Katz, alleging that he was no longer "independent and neutral" because of, inter alia, his involvement in the other arbitration cases against Morgan Keegan and a connection to another claimant against Morgan Keegan arising out of the same Fund. On October 12, 2009, Morgan Keegan filed a motion for the recusal of arbitrator Hill based on his participation as an arbitrator in the other Morgan Keegan case. Arbitrators Katz and Hill both declined to recuse themselves from the Panel.

The matter of the removal of Katz and Hill from the Smythe Panel was then submitted to the Director of Arbitration ("the Director") for consideration under FINRA Rule 12410(a)(1).3 On October 29, 2009, the Director denied the motions to remove Katz and Hill.

The arbitration hearing on the Smythe claim was conducted from November 2 through November 6, 2009, before the Panel. On November 11, 2009, the Panel issued an award in favor of Smythe, finding that Morgan Keegan was liable to Smythe in the amount of$697,000 in compensatory damages, plus prejudgment interest, $20,000 in witness fees, and $195,160 in attorney fees pursuant to Tennessee Code Annotated § 48-2-121.

Unhappy with the Panel's ruling, on November 25, 2009, Morgan Keegan filed the instant Petition and Application of Vacatur in the trial court below, pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10(a), and the Tennessee Uniform Arbitration Act ("TUAA"), Tennessee Code Annotated § 29-5-313(a). These statutes provide that an arbitration award may be vacated upon a showing of "evident partiality" in one or more of the arbitrators who participated in the decision.4 Morgan Keegan asked the trial court to vacate the arbitration award based on these statutes "because there was evident partiality or corruption in the arbitrators [Katz and Hill] or either of them," and "because the arbitrators were guilty of misbehavior by which the rights of Morgan Keegan have been prejudiced." The petition alleged that arbitrators Katz and Hill were not impartial because, among other things, (1) both had previously sat as arbitrators on cases in which the arbitration panel held against Morgan Keegan, based on the same investments or the same fund manager, (2) Katz had an indirect financial interest in the outcome, and (3) Hill had previously rendered a judgment for punitive damages in a claim related to investments in the same Fund. On this basis, Morgan Keegan requested that the trial court vacate the arbitration award and remand the case to FINRA for a "new arbitration hearing before a neutral and unbiased panel." Smythe filed a response and a memorandum of law in which he objected to the petition of vacatur and requested that the award rendered by FINRA be confirmed.

The parties submitted briefs and exhibits to the trial court. On February 25, 2010, the trial court heard arguments on Morgan Keegan's motion to vacate. At the conclusion of the hearing, the trial court granted Morgan Keegan's motion and remanded the case to FINRA for a new hearing. The trial court stated:

The Court has reviewed and considered each of the areas of concern that has been raised by the Petitioners in the cause and the Court is of the opinion that a reasonable person under the facts of the case that have been presented would conclude that Mr. Hill and Mr. Katz could not be perceived as being impartial and fair and would be predisposed to view any facts in the light most damaging to the Petitioners because of their previous hearings and conclusions and other matters involving Morgan Keegan.
And the Court is of the opinion that the arbitration award, which may be confirmed on rehearing was nevertheless filled with an air of partiality to the extent that the Court cannot conclude that a reasonable person could reasonably hear and make a fair determination of the facts in the case and that the process was the result of evident partiality on the part of Mr. Hill and Mr. Katz and that the process should be replayed.
So the Court is vacating the arbitrators' award and referring the matter back to FINRA for a new hearing.

On March 16, 2010, the trial court entered an Order Granting Motion for Vacatur and Remanding Case to FINRA for New Hearing. The written order incorporated the trial court's oral ruling and stated specifically that "the Court finds that pursuant to 9 U.S.C. § 10(a)(2) and Tenn. Code Ann. § 29-5-313(a)(2) there was evident partiality by Arbitrator Katz and Arbitrator Hill." Smythe now appeals, challenging the trial court's decision to vacate the arbitration award and remand to FINRA.

ISSUES ON APPEAL AND STANDARD OF REVIEW

On appeal, Smythe raises the following issues:

1. Whether the evidence presented by Morgan Keegan demonstrated evident partiality of Arbitrator Eugene Katz?
2. Whether the evidence presented by Morgan Keegan demonstrated evident partiality of Arbitrator Michael Hill?
3. Whether the court below erred in finding that a reasonable person would have to conclude that Arbitrators Eugene Katz and Michael Hill were evidently partial to Smythe?
4. Whether the decision of the FINRA Director of Arbitration not to remove Arbitrators Katz and Hill from the Panel was fair to Morgan Keegan?

Morgan Keegan asserts that the issue on appeal is simply whether the trial court, in vacating the arbitration award, correctly found "that a reasonable person would find that two of the three FINRA arbitrators were evidently partial based on the facts and totality of the circumstances."

As a threshold matter, we must consider whether this Court has subject matter jurisdiction to hear this appeal....

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