Confirmation / Vacation of Arbitration Awards

A panel of the Second Circuit has, in an unpublished summary order, emphasized the high bar that must be cleared by a party seeking to vacate an arbitration award.  The matter arose from the decision of a financial advisor not to follow instructions from a client to transfer all assets from a trust for the benefit of their children to one for the benefit of the client’s wife. After the client passed away, Ms. Pfeffer (the deceased client’s wife) sued the advisor before a FINRA arbitration panel, alleging that this failure to follow instructions constituted a breach of fiduciary duty.  The advisor responded that the client’s instructions were not followed due to concerns that he was not competent, a concern supported by the opinion of two physicians.

The panel denied Ms. Pfeffer’s claim, and she moved to vacate the award in federal district court, alleging that this decision “was procured by undue means, evident partiality, and misconduct because the Panel was intimidated by defense counsel and refused to consider relevant evidence.” The district court confirmed the award, and Ms. Pfeffer appealed.  The Second Circuit emphasized that it “does not recognize manifest disregard of the evidence as a proper ground for vacating an arbitration panelʹs award, and will only find a manifest disregard for the law where there is no colorable justification for a panelʹs conclusion.”  Finding no evidence in the transcript of the arbitration proceeding “that the award was produced by undue means, evident partiality, or misconduct,” or that “the Panel failed to abate defense counsel’s abrasive manner . . . [or] was intimidated by him,” the court found no support for the conclusion that the panel had manifestly disregarded the law and affirmed the lower court’s decision confirming the award.

Pfeffer v. Well Fargo Advisors, LLC, et al., No. 17-1819-cv (2d. Cir. Feb. 15, 2018).

This post written by Jason Brost.
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The U.S. District Court for the Northern District of California denied a petitioner’s motion to vacate an arbitration award on the grounds of the award being “irrational and illogical,” erroneous, and that the arbitrator manifestly disregarded the law and engaged in prejudicial misconduct.

The Court found the arbitration award was not irrational or erroneous because the parties’ agreement provided authority for the arbitrator’s decision to order petitioner to pay money to a third-party (which was an affiliate of the respondent). With respect to the argument that the arbitration award was erroneous, the Court noted that “neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award under the [Federal Arbitration Act] statute, which is unambiguous in this regard.”

The Court also found the arbitrator did not manifestly disregard the law, as petitioner did “not cite any clear and established law that prohibits arbitrators from issuing awards that benefit third parties. Moreover, even if there were an applicable law prohibiting arbitration awards to third parties, [petitioner] does not show that the arbitrator ‘recognized’ and ‘ignored’ that law.”

Lastly, the Court found the arbitrator did not engage in prejudicial misconduct or misbehavior, finding that the parties received a fundamentally fair hearing. While petitioner argued that it was prejudiced because it did not have notice of the third-party claims against it for unpaid premiums, the Court noted that petitioner did “not identify any other evidence it would have attempted to introduce, or other arguments it would have made, had it known that the arbitrator contemplated ordering [petitioner] to pay [the third-party] for the outstanding premiums. In essence, [petitioner] takes issue with the arbitrator’s factual findings and legal conclusions, and not the fairness of the proceeding.”

American, Etc., Inc., v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 17-cv-03660-DMR (USDC N.D. Cal. Dec. 28, 2017)

This post written by Nora A. Valenza-Frost.

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This dispute stemmed from a complaint filed by Edmondson, alleging claims under the Federal Odometer Act and the Magnuson-Moss Warranty Act, as well as state law claims for fraud, in relation to her purchase of a used car from Lilliston Ford, Inc. That purchase was made pursuant to a Retail Installment Agreement (the “Agreement”), whereby Edmondson agreed to trade a 2004 Lincoln LS for an $800 credit towards the purchase of a used Ford Focus. Despite Edmondson experiencing problems with the Ford Focus shortly after her purchase, Lilliston refused her attempt to return the car and demanded title to the Lincoln or reimbursement for the $800 credit that Edmonson received for the purchase. The parties progressed to arbitration pursuant to the Agreement, where a AAA arbitrator issued an award dismissing all of Edmondson’s claims and ordering her to vest clear title to the Lincoln to Lilliston within 14 days, or to refund the $800 and remove the Lincoln from Lilliston’s property. The District Court for the District of New Jersey confirmed the award, and this appeal ensued.

On appeal, the Third Circuit affirmed the District Court’s confirmation of the award and attorneys’ fees and costs to Lilliston. Reviewing the legal conclusions de novo and factual findings for clear error, the court found unpersuasive Edmonson’s argument that the arbitration clause was invalid because of Lilliston’s failure to register the arbitration provision with the American Arbitration Association (“AAA”) and because Lilliston had previously stated that it had “severed all ties” with the AAA. In rejecting this argument, the court found irrelevant Lilliston’s ties with the AAA, since the AAA administers arbitrations even where there is no AAA clause between the parties. What is more, the AAA did not require businesses to register arbitration clauses with the AAA until after Edmonson filed her initial complaint. As such, the Third Circuit affirmed. Edmonson v. Lilliston Ford, Inc., Case No. 17-1991 (3d Cir. Jan. 11, 2018).

This post written by Gail Jankowski.

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This case involves an appeal to the Ninth Circuit Court of Appeals by Appellants Schilling Livestock, Inc., Kenneth Schilling and Lesley Schilling (collectively, the “Schillings”), of a Montana federal district court’s order confirming an arbitration award in favor of Appellee Umpqua Bank, FKA Sterling Savings Bank (“Sterling”). On appeal, the Schillings contended that the arbitration award should be vacated on two grounds: 1) that the arbitrators engaged in misconduct by allowing Sterling to rely on an undisclosed defense premised on the Gramm-Leach-Bliley Act (“GLBA”); and 2) that Sterling’s expert falsely testified that Sterling was not liable for fraudulent investment advice due to a networking exception to the GLBA.

The Ninth Circuit held that the Schillings failed to meet the high standard for vacating an arbitration award. First, the Court noted that the Schillings’ assertion that they were deprived of adequate notice of Sterling’s reliance on the GLBA defense was not supported by the record. The Court further noted that the district court correctly found that the Schillings opened the door to Sterling’s introduction of a rebuttal witness concerning the bank’s statutory duties, and that they were afforded an opportunity to submit supplemental briefing on the GLBA defense, but did not do so. Thus, the Court held that the arbitrators did not engage in misconduct in permitting rebuttal expert testimony regarding the GLBA defense, and that the arbitrators’ decision did not deprive the Schillings of a fair hearing. The Ninth Circuit also found that the record did not support the Schillings’ argument that Sterling’s expert falsely testified concerning the GLBA defense. Rather, it noted that the district court found that the expert responded to an ambiguous question and did not otherwise provide false testimony. The Court further noted that the arbitrators’ award did not refer to the expert’s testimony in finding that Sterling was not liable. Thus, the Ninth Circuit held that the Schillings failed to demonstrate by clear and convincing evidence that any fraud or false testimony warranted vacating the arbitration award. Based on the foregoing, the Ninth Circuit affirmed the Montana district court’s order confirming the arbitration award.

Schilling Livestock, Inc. et al v. Umpqua Bank, FKA Sterling Savings Bank, No. 15-35995 (9th Cir. Dec. 28, 2017).

This post written by Jeanne Kohler.
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