Friday, September 25, 2009

Vacatur of Arbitration Awards under the FAA after SCOTUS Decision in Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008)

WHAT ARE THE REMAINING VIABLE GROUNDS TO CHALLENGE ENTRY OF JUDGMENT ON ARBITRATION AWARD? In a recent a appeal from an order confirming an arbitration award entered under the FAA, the Dallas Court of Appeals sums up the state of the law on the issue, following recent Supreme Court and Fifth Circuit decisions contrary to common-law grounds for vacating an award based on the arbitrator's manifest disregard of the law: Judicial Confirmation and Vacatur of Arb Awards under the FAA Under the terms of the FAA, an arbitration award must be confirmed unless it is vacated, modified, or corrected under one of the limited grounds set forth in sections 10 and 11 of the Act. See 9 U.S.C. §§ 9-11. Section 10(a) permits a court to vacate an arbitration award -(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.Id. § 10(a). Although the courts have recognized certain common law exceptions for vacating an arbitration award, See Footnote 3 the United States Supreme Court recently held that the grounds listed in the statute are the exclusive grounds for vacating an arbitration award under the FAA. Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1403 (2008) (holding that statutory grounds for vacating or for modifying or correcting arbitration award are exclusive grounds for expedited vacatur and modification of award pursuant to FAA); see also Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 350 (5th Cir. 2009) (concluding Hall Street restricts grounds for vacatur to those set forth in section 10). Of the issues Ancor presents for review, only two - that the arbitrator exceeded her powers by ignoring the law and by rendering an award that violates the essence of the Guaranty - arguably fall within the statutory grounds for vacatur under the FAA. See 9 U.S.C. § 10(a)(4). Ancor's remaining grounds - that the arbitrator manifestly disregarded the law and committed gross mistake implying a failure to exercise honest judgment - are common law grounds for vacating an arbitration award. See Crossmark, 124 S.W.3d at 430 n.6; Tanox, 105 S.W.3d at 252. The parties dispute whether the Supreme Court's decision in Hall Street forecloses our review based on Ancor's non- statutory grounds. We conclude it does. In Hall Street, the parties to the underlying lease dispute agreed to submit an indemnification claim to arbitration. Hall St., 128 S. Ct. at 1400. The arbitration agreement, which was negotiated by the parties and approved by the district court, required the court to “vacate, modify or correct any award: (i) where the arbitrator's findings of facts are not supported by substantial evidence, or (ii) where the arbitrator's conclusions of law are erroneous.” Id. at 1400-01. These contractually agreed grounds deviated from those prescribed in the FAA, and the Supreme Court granted review to determine “whether the grounds for vacatur and modification provided by §§ 10 and 11 of the FAA are exclusive.” Id. at 1401. Reviewing the purpose and text of the FAA, the Supreme Court held that sections 10 and 11 “provide the FAA's exclusive grounds for expedited vacatur and modification.” Id. at 1403. In so holding, the Supreme Court expressly rejected the argument that its use of the phrase “manifest disregard of the law” in Wilko v. Swan, 346 U.S. 427 (1953), expanded the grounds for vacatur beyond those listed in section 10. Hall St., 128 S. Ct. at 1403. The Supreme Court instructed that the text of the FAA “compels a reading of the §§ 10 and 11 categories as exclusive” because even assuming these sections could be supplemented, “it would stretch basic interpretive principles to expand the stated grounds to the point of evidentiary and legal review generally.” Id. at 1404. The Supreme Court further explained:[I]t makes more sense to see the three provisions, §§ 9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can “rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,” and bring arbitration theory to grief in post-arbitration process. Id. at 1405 (quoting Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 998 (9th Cir. 2003)) (internal citations omitted). The Supreme Court also noted that expanding sections 10 and 11 is inconsistent with the language of section 9, which directs a court to grant an order confirming an arbitration award “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” Id. (quoting 9 U.S.C. § 9). The Supreme Court emphasized that this language “carries no hint of flexibility.” Id. Following Hall Street, the Fifth Circuit, in Citigroup Global Markets, Inc. v. Bacon, overruled its precedent holding that non-statutory grounds may support vacatur of an arbitration award under the FAA. 562 F.3d at 358. Ancor urges us to disregard Citigroup and argues the Supreme Court “has not expressly ruled that 'manifest disregard' is no longer a valid ground for vacating an arbitrator's award.” We disagree. We find the analysis and holding in Citigroup persuasive and conclude the Supreme Court made clear that sections 10 and 11 are the exclusive grounds for vacating and modifying an arbitration award under the FAA. See Hall St., 128 S. Ct. at 1403. Thus, our review of an arbitration award under the FAA is limited to the statutory grounds. See Footnote 4 FOOTNOTE 4: Indeed, this Court has previously stated that under the FAA, attacks on arbitration awards are limited to the grounds set forth in sections 10 and 11. See, e.g., Roehrs v. FSI Holdings, Inc., 246 S.W.3d 796, 805-06 (Tex. App.-Dallas 2008, pet. denied) (“'Under the FAA, the validity of an arbitration award is subject to attack only on grounds listed in sections 10 and 11 of the Act.'”) (quoting Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315, 319-20 (Tex. App.-Dallas 1999, no pet.)); Antenna Prods. Corp. v. Cosenza, No. 05-05-00701-CV, 2006 WL 1452102, at *2 (Tex. App.-Dallas May 26, 2006, no pet.) (mem. op.) (rejecting appellant's non-statutory grounds for vacating arbitration award because these grounds not listed in section 10 of FAA). In the wake of Hall Street, several Texas courts agree. See, e.g., Allstyle Coil Co., L.P. v. Carreon, No. 01-07-00790- CV, 2009 WL 1270411, at *2 (Tex. App.-Houston [1st Dist.] May 7, 2009, no pet.) (holding that non-statutory grounds for vacatur are “no longer legally recognized grounds for vacating an arbitration award”); Cameron Int'l Corp. v. Vetco Gray Inc., No. 14-07-00656-CV, 2009 WL 838177, at *8 (Tex. App.-Houston [14th Dist.] Mar. 31, 2009, no pet. h.) (mem. op.) (following suggestion of Hall Street and declining to accept appellant's request for legal and factual sufficiency review of arbitration award); Chandler v. Ford Motor Credit Co., LLC, No. 04-08-00100-CV, 2009 WL 538401, at *3 (Tex. App.-San Antonio Mar. 4, 2009, no pet. h.) (mem. op.) (adopting Hall Street and holding that appellants failed to demonstrate statutory basis for vacating arbitration award); see also Saipem Am. v. Wellington Underwriting Agencies Ltd., No. 08-20247, 2009 WL 1616122, at *2 (5th Cir. June 9, 2009) (per curiam) (holding that court may vacate arbitration award only if statutory ground supports vacatur); Nat'l Resort Mgmt. Corp. v. Cortez, No. 08-10805, 2009 WL 890622, at *1 (5th Cir. Mar. 31, 2009) (per curiam) (“The number of grounds for challenging an arbitration award has been substantially reduced in light of [Hall Street] and [Citigroup].”); Ascension Orthopedics, Inc. v. Curasan, A.G., Civil Action No. H-07-4033, 2008 WL 2074058, at *2 (S.D. Tex. May 14, 2008) (mem.) (stating Supreme Court's Hall Street decision “is unequivocal that the grounds upon which vacatur may be based as listed in § 10 are exclusive”); In re Poly-America,L.P., 262 S.W.3d 337, 362 (Tex. 2008) (Brister, J., dissenting) (“Both federal and state law require courts to enforce an arbitrator's decision, no matter what it is, with very few exceptions. The allowable exceptions concern extrinsic or procedural matters like corruption, fraud, or refusing to hear evidence; they do not include (as the Supreme Court just held) disregarding the law, even if a legal error is 'manifest.'”); Xtria L.L.C. v. Int'l Ins. Alliance Inc., 286 S.W.3d 583, 594 (Tex. App.-Texarkana 2009, pet. filed) (stating this Court has based past application of manifest disregard standard on Fifth Circuit precedent and opining, though not deciding, that this Court would follow Citigroup). We note that, in Hall Street, the Supreme Court suggested the possibility that a “more searching review based on authority outside the statute” could serve as bases for vacating or modifying arbitration awards. Hall St., 128 S. Ct. at 1406. See Footnote 5 FOOTNOTE 5: Specifically, the Supreme Court stated: “The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable.” Id. This case, however, does not open the door to that possibility. Here, the parties pursued arbitration according to the terms of the Guaranty, which expressly invoked the FAA. The only arguments made in the trial court and on appeal address the FAA. Accordingly, we do not consider the viability of non-statutory grounds here and express no opinion that non-statutory grounds for vacating or modifying an arbitration award could be considered in other contexts. Because manifest disregard of the law and gross mistake are not grounds for vacating an arbitration award under the FAA, Ancor has not demonstrated trial court error as to those grounds. We overrule Ancor's first, fourth, and fifth issues. Section 10(a)(4) Ancor's second and third issues fall within section 10(a)(4) of the FAA, which states that an arbitration award may be vacated “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Ancor's argument for vacatur under section 10(a)(4) has two parts. First, Ancor complains the arbitrator exceeded her powers by allowing PGV to arbitrate issues that were precluded by res judicata or collateral estoppel. Second, Ancor contends the arbitrator exceeded her powers by reaching a decision that does not draw its essence from the intended purpose of the Guaranty. Arbitrator Authority “An arbitrator's authority is limited to disposition of matters expressly covered by the agreement or implied by necessity.” Quinn, 257 S.W.3d at 799. Arbitrators, therefore, exceed their powers when they decide matters not properly before them. Id.; see also Gulf Oil Corp. v. Guidry, 160 Tex. 139, 327 S.W.2d 406, 408 (1959). For example, an arbitrator exceeds her powers by allocating an award of costs between the parties when the arbitration agreement specifically requires the arbitrator to designate a non-prevailing party to bear the costs of both sides. See Townes Telecomms., Inc. v. Travis, Wolff & Co., L.L.P., No. 05-08-00079-CV, 2009 WL 1844330, at *3 (Tex. App.-Dallas June 29, 2009, pet. filed). Our inquiry under section 10(a)(4) is whether the arbitrator had the authority, based on the arbitration clause and the parties' submissions, to reach a certain issue, not whether the arbitrator correctly decided the issue. Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314, 1323 (5th Cir. 1994); see also DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 824 (2d Cir. 1997). The award must be derived in some way from the wording and purpose of the agreement, and we look to the result reached to determine whether the award is rationally inferable from the contract. Anderman/Smith Operating Co. v. Tenn. Gas Pipeline Co., 918 F.2d 1215, 1219 n.3 (5th Cir. 1990). We may not vacate an arbitration award for errors in interpretation or application of the law or facts. Crossmark, 124 S.W.3d at 429. Although Ancor's first argument is couched in terms of whether the arbitrator exceeded her powers, Ancor's argument is actually a complaint that the arbitrator committed an error of law by rejecting Ancor's assertion that PGV's claims were barred by res judicata or collateral estoppel. A complaint that the arbitrator decided the issue incorrectly or made mistakes of law, however, is not a complaint that the arbitrator exceeded her powers. See Pheng Invs., Inc. v. Rodriguez, 196 S.W.3d 322, 329 (Tex. App.-Fort Worth 2006, no pet.) (op. on reh'g). Moreover, after examining the Guaranty, the parties' submissions, the arbitrator's interim orders, and the final award, there is no doubt the arbitrator responded to the issues submitted by the parties and that the arbitration award falls within the scope of the Guaranty. Paragraph 17 of the Guaranty requires “ANY CONTROVERSY OR CLAIM” arising out of the Guaranty to be determined by binding arbitration. Because Ancor has not established that the arbitrator decided a matter not properly before her, we cannot conclude the arbitrator exceeded her powers under section 10(a)(4) of the FAA. See 9 U.S.C. § 10(a)(4); see also Quinn, 257 S.W.3d at 799. We overrule Ancor's second issue. SOURCE: Opinion by Justice Mary Murphy in Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., No. 05-08-00739-CV (Tex.App.- Dallas, Aug. 25, 2009)

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