Schmitz v. Zilveti

• Decision Date: 05 April 1994
• Docket Number: No. 92-16853,92-16853
• Citation: 20 F.3d 1043
• Parties: Jean SCHMITZ; Leonard Schmitz, Petitioners-Appellants, v. Carlos J. ZILVETI, III; Nicholas S. Meris; Prudential-Bache Securities Inc., aka Prudential Securities, Inc., Respondents-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1043

20 F.3d 1043

Jean SCHMITZ; Leonard Schmitz, Petitioners-Appellants, v. Carlos J. ZILVETI, III; Nicholas S. Meris Prudential-Bache Securities Inc., aka Prudential Securities, Inc., Respondents-Appellees.

No. 92-16853.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 4, 1993.

Decided April 5, 1994.

Appeal from the United States District Court for the District of Hawaii.

Cedric Choi, Honolulu, HI, for petitioners-appellants.

Terry Ross and Dawn M. Schock, Keesal, Young & Logan, Long Beach, CA, for respondents-appellees.

Before: POOLE, WIGGINS, and T.G. NELSON, Circuit Judges.

OPINION

WIGGINS, Circuit Judge:

FACTS AND PRIOR PROCEEDINGS

Pursuant to a contract, Jean and Leonard Schmitz ("Appellants") and Zilveti, Meris, and Prudential-Bache Securities, Inc. ("Pru-Bache") (collectively "Appellees") submitted a dispute to arbitration before the National Association of Securities Dealers ("NASD"). Under the submission agreements, the dispute was to be arbitrated in accordance with the NASD's A Code of Arbitration Procedure (1990) ("NASD Code"). Three arbitrators were chosen: John R. Conrad, Carolyn J. Yamasaki, and Richard G. MacMillan. Conrad, a lawyer, was chosen as chairperson of the arbitration panel.

The NASD Code requires each arbitrator to "disclose to the Director of Arbitration any circumstances which might preclude such arbitrator from rendering an objective and impartial determination." NASD Code Sec. 23(a). Specifically, an arbitrator must disclose (1) "[a]ny direct or indirect financial or personal interest in the outcome"; (2) "any ... financial, business, professional, family, or social relationships that are likely to affect impartiality or might reasonably create an appearance of partiality or bias"; and (3) any personal relationships with any party, its counsel, or witnesses. Id. These relationships must be disclosed whether maintained, presently or previously, by the arbitrators or "members of their families or their current employers, partners, or business associates." Id. The NASD Code also requires arbitrators to make an investigation regarding potential conflicts of interest. NASD Code section 23(b) provides: "Persons who are requested to accept appointment as arbitrators should make a reasonable effort to inform themselves of any interests or relationships described in Paragraph (a) above."

Each arbitrator in this case completed a disclosure form indicating affiliations, if any, with the parties to the arbitration and any other matter he or she believed was required to be disclosed. The parties were given these forms. Neither side objected to any of the three arbitrators. After a hearing, the three arbitrators found unanimously in favor of Appellees. A post-award investigation by Appellants then revealed the following facts: Conrad's law firm represented the parent company of Pru-Bache, Prudential Insurance Co., in at least nineteen cases during a period of 35 years; the most recent representation ended approximately 21 months before this arbitration was submitted. Conrad had reviewed, prior to the hearing, documents stating that Prudential Insurance Co. was the parent company of Pru-Bache. Yet Conrad only ran a conflict check for Pru-Bache. He disclosed prior to the hearing none of the many Prudential Insurance Co. cases his law firm had handled. ¹

Appellants challenged the arbitration award in district court. They alleged that the award should be vacated because Conrad was evidently partial under 9 U.S.C. Sec. 10(a)(2). ² The district court held that a party challenging an arbitration award must prove facts establishing a reasonable impression of evident partiality and that arbitrators are only bound to disclose facts of which they are aware at the time of the hearing. The court then found that because Conrad was unaware of his law firm's conflict at the time of the hearing, Appellants had failed to show facts meeting their burden of proof. On this basis, the district court found that no evident partiality was present. From that decision, Appellants appeal.

DISCUSSION

Appellants question (1) the legal standard employed by the district court and (2) the application of that legal standard to facts. This court reviews both issues de novo. Pullman-Standard v. Swint, 456 U.S. 273, 289 n. 19, 102 S.Ct. 1781, 1790-91 n. 19, 72 L.Ed.2d 66 (1982); Anderson v. United States, 966 F.2d 487, 489 (9th Cir.1992).

I. The Legal Standard

Appellants argue that Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968), requires us to reverse the district court. In Commonwealth Coatings, one arbitrator on a panel of three failed to disclose that he had engaged in periodic and significant business relations with one of the parties to the arbitration over the previous five or six years. Id. at 146, 89 S.Ct. at 338. The arbitrator voted with the panel for an award in favor of the party with whom he had done business. The party that lost the arbitration then challenged the award, asserting that the failure of this arbitrator to disclose his significant business relationship resulted in "evident partiality" under 9 U.S.C. Sec. 10, warranting vacatur of the award.

The district court held that "the arbitrator ... was entirely fair and impartial," id. at 151 n. *, 89 S.Ct. at 340 n. *, and refused to vacate the award. Without disturbing the finding that the arbitrator was not biased, id. at 147-50 & 151 n. *, 89 S.Ct. at 338-40 & 340 n. *, the Supreme Court reversed and vacated the award. The Court held that an arbitrator's nondisclosure of facts showing a potential conflict of interest creates evident partiality warranting vacatur even when no actual bias is present. The Court tried to articulate a standard indicating what facts show evident partiality when not disclosed by an arbitrator. The Court described facts that must be disclosed as those that "might create an impression of possible bias," id. at 149, 89 S.Ct. at 339, those that show the "appearance of bias," id. at 150, 89 S.Ct. at 340, and those that indicate that arbitrators "might reasonably be thought biased against one litigant and favorable to another," id. In support of its analysis, the Court cited Tumey v. Ohio, 273 U.S. 510, 47 S.Ct. 437, 71 L.Ed. 749 (1927), in which a mayor acting as a judge was held to be evidently biased. 393 U.S. at 148, 89 S.Ct. at 339.

The parties in the instant case dispute what legal standard Commonwealth Coatings establishes. Their disagreement is in part fueled by misunderstanding of Justice White's concurrence in Commonwealth Coatings. Justice White wrote a concurring opinion in Commonwealth Coatings, which Justice Marshall joined. Because three other justices dissented, the vote of either Justice White or Justice Marshall was necessary to the formation of a majority voting for reversal. Justice White's concurrence has therefore been given particular weight. See Middlesex Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1200 (11th Cir.1982). Commonwealth Coatings is not a plurality opinion, however. Justice White said he joined in the "majority opinion" but wrote to make "additional remarks." 393 U.S. at 150 & 151 n. *, 89 S.Ct. at 340 n. *. Among these additional remarks, Justice White said that arbitrators are not held to the partiality standard applicable to judges and that "trivial" or "remote" relationships need not be disclosed. 393 U.S. at 150-51, 89 S.Ct. at 340 (White, J., concurring).

The parties also dispute the meaning of our case law discussing Commonwealth Coatings. We have discussed Commonwealth Coatings twice while formulating a substantive standard to apply in adjudicating whether an arbitrator is biased, first in Sheet Metal Wkrs. Int'l Ass'n, Local 420 v. Kinney Air Cond. Co., 756 F.2d 742, 746 (9th Cir.1985), and later in Toyota of Berkeley v. Automobile Salesmen's Union, Local 1095, 834 F.2d 751, 755-56 (9th Cir.1987), cert. denied, 486 U.S. 1043, 108 S.Ct. 2036, 100 L.Ed.2d 620, amended, 856 F.2d 1572 (9th Cir.1988). Both Kinney Air and Toyota of Berkeley involved allegations of actual bias rather than evident partiality created by a failure to disclose facts.

Appellants urge us to employ in this case the "appearance of bias" language from the Commonwealth Coatings majority opinion. Appellants note that the Kinney Air court, when stating that Commonwealth Coatings was a nondisclosure case, cited only to the Commonwealth Coatings majority opinion. See 756 F.2d at 746 (citing only to 393 U.S. at 147-50, 89 S.Ct. at 338-40). According to Appellants, this citation shows that the Ninth Circuit thinks the language in the majority opinion resolved the nondisclosure issue in Commonwealth Coatings. Because that language included the phrase "appearance of bias," Appellants argue that in Kinney Air we adopted by reference the "appearance of bias" standard.

In rebutting Appellants' arguments, Appellees also cite to Kinney Air as well as Toyota of Berkeley. Although these two cases involved allegations of actual bias rather than a failure to disclose a conflict, in these cases the court implied that Commonwealth Coatings established a "reasonable impression of partiality" standard. In Toyota of Berkeley and Kinney Air we employed this standard in analyzing whether actual bias was shown. Toyota of Berkeley, 834 F.2d at 756; Kinney Air, 756 F.2d at 745-46; see also Employers Ins. of Wausau v. National Union Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1488-90 (9th Cir.1991) (also employing the "reasonable impression of partiality" standard in an actual bias case); Sheet Metal Wkrs., Local 162 v. Jason Mfg., Inc., 900 F.2d 1392, 1398 (9th Cir.1990) (same). Despite that Toyota of Berkeley and Kinney Air were actual bias cases, Appellees claim that our analysis in those cases with regard to Commonwealth Coatings forecloses use of another standard here.

Appellees also claim that Justice White's concurring opinion rejects the ...