JESSICA PARKER VALENTINE AND BRYAN L. PARKER, Appellants,
v.
INTERACTIVE BROKERS LLC, Appellee.
Court of Appeals of Texas, First District, Houston.
On Appeal from the 189th District Court, Harris County, Texas, Trial Court Case No. 2015-24829.
Panel consists of Chief Justice Radack and Justices Jennings and Bland.
MEMORANDUM OPINION
TERRY JENNINGS, Justice.
Appellants, Jessica Parker Valentine and Bryan L. Parker (the "Parkers"), challenge the trial court's order granting the motion of appellee, Interactive Brokers LLC ("IB"), to vacate an arbitration award. In two issues, the Parkers contend that the trial court erred in vacating the award.
Background
In their Second Amended Statement of Claim, the Parkers, pursuant to the rules of the Financial Industry National Regulatory Authority ("FINRA"),[1] initiated arbitration proceedings against IB. The Parkers alleged that they are the sole beneficiaries of the Richard Parker Family Trust (the "trust"), created under the will of their father, Richard Joseph Parker, who is deceased, and intended for their "education, care, support, and maintenance" until they reached the age of 35. Their father named a family friend, Robert W. Dillard, as trustee and placed the following limits on his discretion:
[A] trustee of any trust created in this will shall at all times exercise the judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but to the permanent disposition of their funds considering the probable income therefrom as well as the probable safety of their capital.
In October 2010, Dillard opened at IB, a direct-access, online brokerage firm, a brokerage account titled "Richard Parker Family Trust, Robert Dillard, Trustee." And he deposited $800,000 of the trust's funds into the account. Dillard, on behalf of the trust, signed various agreements with IB and then began engaging in margin trading and other high-risk investments with the trust's funds. By early 2013, when the Parkers discovered the IB account, it had lost $725,779 of its initial $800,000 value.
The Parkers sued Dillard in a separate suit in a Travis County Probate Court, alleging that he had breached his fiduciary duty to them. They also brought the instant suit, alleging that IB had aided and abetted Dillard's breach of fiduciary duty by "offering, approving, and recommending unsuitable trading . . . during the maintenance of the account." They alleged that IB was "aware of Dillard's fiduciary duty as trustee, the scope of his duty, and his breach of that duty."
The Parkers further alleged that IB owed them, as trust beneficiaries, a duty of fair dealing, which it breached by violating certain FINRA rules.[2] Specifically, IB failed to use "reasonable diligence" in the opening and maintenance of their trust account; know the "essential facts" concerning the trust, as its customer; "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities [was] suitable for [its] customer," the trust; and establish, maintain, and enforce written procedures and policies relating to the supervision of the "activities of its registered persons and the business in which the firm engages." And IB had a non-delegable duty to supervise, detect, and prevent violations of its own internal policies and FINRA rules, and to prevent harm to public investors like the Parkers, as "owners" of the trust account.
The Parkers asserted that IB's acts and omissions, involving an extreme degree of risk, were grossly negligent, IB had actual awareness of the risk involved, but proceeded with conscious indifference, and IB had violated the Texas Securities Act.[3]
The Parkers claimed that IB's breaches of duty had caused them a loss of $725,779 and IB had profited $44,807 in commissions, fees, and interest. The Parkers sought restitution of the lost value to the trust, damages based on gains of a suitable portfolio over the same period, and attorney's fees.
In its answer, IB asserted that it was not liable to the Parkers as it did not make recommendations or have any involvement in the trading decisions that Dillard made on behalf of the trust. And IB did not have any discretionary trading authority over the trust's account. IB noted that it, as a direct-access, online brokerage firm, does not provide investment or trading advice. Rather, trades are entered by a customer on a personal computer and transmitted over the internet to IB for execution on various exchanges and market centers. And "[a]ll trading in an IB account is self-directed by the customer." As IB tells its customers on its website and in various agreements and disclosures provided to them at the time of account opening, IB does not recommend or solicit orders, nor does it provide financial, investment, or trading advice, guidance, or recommendations of any kind to its customers.
Further, Dillard, on behalf of the trust, in October 2010, opened an online trading account at IB. In the account application, Dillard listed himself as the trustee and the Parkers as the adult beneficiaries of the trust. He represented that he was a sophisticated investor and the trust had an aggressive, growth-oriented strategy, employing the most aggressive options available: "speculation," "growth" and "trading." Dillard also represented that the trust wanted the ability to trade stocks, options, and commodity futures on margin. And IB fully complied with the applicable FINRA obligations and Texas trust law in allowing Dillard to open the account.
In its Customer Agreement,[4] IB required Dillard to certify that he was the duly appointed trustee and had full authority to act on behalf of the trust in opening the account and engaging in any transactions within the account. And IB required and received documentary proof of Dillard's status as trustee.
IB also required Dillard, on behalf of the trust, to execute a Power of Attorney Agreement, in which he agreed that he would manage the trust's account and IB would not provide any investment advice or
INVESTIGATE OR JUDGE THE COMPETENCE OR INTEGRITY OF THE ADVISOR OR MONITOR THE ACTIONS OF THE ADVISOR. IB WILL NOT REVIEW THE ADVISOR'S RECOMMENDATIONS OR JUDGE THE SUITABILITY OF ANY TRADING OR INVESTMENT RECOMMENDATION OR DECISION OF ADVISOR OR CUSTOMER.
. . . .
IB DOES NOT PROVIDE ADVISORY SERVICES TO IB CUSTOMERS AND WILL NOT PROVIDE INVESTMENT OR TRADING OR TAX ADVICE REGARDING THE ACCOUNT.
IB did not make any recommendations or participate in Dillard's investment decisions and was under no duty to supervise his decisions. As a non-discretionary broker, its only legal and contractual role in regard to the trust's account was to hold its assets and to execute the online orders for securities trades that the trust, through Dillard, sent to IB. And it was not aware of any breaches of fiduciary duty by Dillard.
IB further asserted that Dillard, shortly after funding the account, began a trading strategy that consisted of buying and selling mining company stocks and oil and mineral futures. Initially, this trading strategy yielded significant gains. For example, between October 2010 and February 2011, the trust realized total profits of $473,724. Subsequently, however, the trust suffered significant losses that eliminated its initial gains and resulted in an overall loss of $725,779.
On July 11, 2013, the Parkers sent IB a letter informing it that Dillard had resigned as trustee and they had been appointed as co-trustees. Two weeks later, the Parkers brought the instant suit on behalf of the trust, alleging that IB was responsible for Dillard's trading losses.
In early March 2015, an arbitration hearing was held. On the last day of the four-day hearing, after the close of evidence, counsel for the Parkers informed the arbitration panel that Dillard was filing for bankruptcy and their separate suit against him would be stayed:
[Counsel for the Parkers]: . . . There's one additional fact, and since it came out in the direct and cross of my clients—we rested our case. But yesterday, we learned that [Dillard] informed the probate court that he is filing bankruptcy, which will apply a stay to that suit, so. I know that's not evidence, but since it came up in testimony.
[Counsel for IB]: It didn't come up in testimony. This is now adding to the record. . . .
[Chairman Whittaker]: Well, it's not evidence. It's just, I hate to say, a fact.
[Counsel for IB]: It's— It's—well, I think you hit the nail on the head, Mr. Chairman. It's— we don't know if it's a fact.
[Chairman Whittaker]: Okay. Now, it's—it's something we've heard, but it is not capital R record evidence. So we'll give it whatever effect it might have. I'm not sure how that affects what we're doing here today, whether Mr. Dillard is in bankruptcy or not. I don't see how that affects the decision here.
Subsequently, during closing, counsel for the Parkers argued as follows:
I would like to point something out on the account opening documents. . . . Who's the customer here that [IB] is supposed to know? Well, it's the trust. So they were willing to take the trust's net worth when they took into account what investment objectives they were going to allow. So they're willing to say that it was worth multimillion dollars. Not Mr. Dillard, remember. Mr. Dillard, he just declared bankruptcy. They didn't even ask him. Regardless of whether he declared bankruptcy, they didn't even ask him how much he was worth.
(Emphasis added.) Chairman Whittaker then commented: "I'm sorry to hear you are not going to trial next week, although probably I shouldn't use the word `sorry,' but that's disappointing."
Days after the hearing, IB learned from Dillard's counsel that Dillard had not in fact filed for bankruptcy but had instead agreed to settle the Parkers' suit against him. On March 16, 2015, IB submitted a post-hearing letter to the FINRA case administrator to notify the arbitration panel that Dillard had not in fact filed for bankruptcy, as counsel for the Parkers had asserted at the close of the hearing. In its letter, IB stated:
[O]n the last day of the final hearing in the above-referenced arbitration Claimants' counsel represented that Claimants' Trustee had declared bankruptcy that morning. IB was unable to verify this representation at the time given that we were at the final hearing and were hearing this for the first time.
Since returning from the arbitration, IB has reviewed the public records of bankruptcy filings over the past week and has not seen any indication that Claimants' Trustee had in fact declared bankruptcy. Moreover, IB checked the Travis County Probate Court's online records today and found that Claimants' lawsuit against Mr. Dillard is still listed as active. A screenshot of the Travis County Probate Court online status page for Claimants' case against Mr. Dillard is attached as Exhibit 1.
While this issue has no bearing on IB's position that it cannot be held liable to Claimants for any amount, we still believe it is important to make sure the record is correct in this regard given the representation by Claimants' counsel on the last day of the hearing.
IB attached to its letter a printout from the Travis County Probate Court's website, demonstrating that the Parkers' case against Dillard was still active. On March 17, 2015, the FINRA administrator responded that the Panel "ha[d] determined that [it] will not entertain any post-submission filed by the parties." On March 18, 2015, the Parkers finalized their settlement with Dillard.
On April 27, 2015, the arbitration panel issued an award, ordering that the Parkers recover from IB damages in the amount of $725,779 and attorney's fees of $483,853. The award further states:
OTHER ISSUES CONSIDERED AND DECIDED
. . . .
At the hearing, [the Parkers'] counsel alleged that [Dillard], who [the Parkers] were suing in Texas State Court, had declared bankruptcy the previous day and that the case was stayed pending bankruptcy.
On or about March 16, 2015, [IB] filed a post-hearing submission.
On or about March 17, 2015, the Panel determined it would not consider any post-hearing submissions.
The chairman of the arbitration panel, Whittaker, dissented to the award as follows, in pertinent part:
Because this Award is unsupported by the law or the facts of the case I must dissent.
. . . .
I am also seriously concerned that improper means were used to sway my fellow panelists. Specifically, near the close of the Final Hearing in this matter, and in an apparent attempt to evoke sympathy, [the Parkers] announced that they had just learned that [Dillard] had "declared bankruptcy the previous day" and that the State Court case, which was due to be called for trial the week following the Final Hearing in this arbitration, "was stayed pending bankruptcy." This announcement of [Dillard's] bankruptcy filing influenced the panel and prejudiced [IB].
The Parkers then filed a motion to confirm the arbitration award, asserting that they were entitled to judgment. IB filed a cross-motion to vacate, or, alternatively to modify the award. To its motion, IB attached the affidavit of its general counsel, John J. Nielands; its correspondence with the FINRA case administrator; and its post-hearing letter to the arbitration panel and printout from the Travis County Probate Court's website.
IB, in its motion to vacate, asserted that on the morning of March 6, 2015, the last day of the arbitration hearing, the Parkers announced to the arbitrators that Dillard had informed the Travis County Probate Court that he "is filing for bankruptcy, which will apply a stay to that suit." And they "chose to drop this surprising, last-minute bombshell" just moments before the closing arguments, leaving IB with no opportunity to confirm or refute the assertion. IB argued that "[b]y asserting (incorrectly, as it turn[ed] out) that [Dillard] was filing for bankruptcy, [the Parkers'] counsel apparently intended to signal to the arbitration panel that if [it] did not find IB liable for [their] losses, [they] may go uncompensated because their Probate Court case against Dillard would be stayed and any recovery in [his] bankruptcy would be unlikely." IB further argued that it was entitled to vacatur of the award because the arbitration panel's "refusal to allow IB to correct the record and to prove that the bankruptcy assertion was false gravely prejudiced IB and deprived [it] of a fundamentally fair arbitration."[5]
IB also argued that vacatur was required because the arbitration panel "exceeded its authority" by "re-wr[iting] the terms of the Customer Agreement and the Power of Attorney Agreement, imposing obligations on IB that not only do not exist, but also are expressly disclaimed in the written agreements." Further, the panel exceeded its authority by manifestly disregarding IB's affirmative defense under the Texas Trust Code.[6]
Alternatively, IB moved to modify the arbitration award on the ground that the Parkers had sought recovery from IB, in the arbitration, and from Dillard, in the probate court, for "the same or largely similar damages." IB asserted that "[o]n the very day that [the Parkers'] counsel announced [Dillard's] bankruptcy prior to the conclusion of the arbitration hearing, [the Parkers had] reached a settlement with [Dillard]" and the award "confers a windfall" on the Parkers. IB requested that the award to the Parkers be reduced by the amount that they had recovered against Dillard in the settlement to prevent an "improper double recovery." IB further sought to correct a miscalculation in the award of attorneys' fees to the Parkers.
The trial court held separate hearings on the motion to confirm and the motion to vacate. At the hearing on the motion to confirm, counsel for the Parkers directed the trial court to Chairman Whittaker's remarks in his dissent to the arbitration award and said, "I would like to make clear a few things." After some discussion, counsel explained as follows:
Anyway, back to the record and back to the insinuation that I said something inaccurate. Thursday . . . [m]y opponent in the Probate Court e-mails me, but not only me, he e-mails the probate court coordinator, because we are set for trial the following Monday. And he says, "Counsel, I wanted everyone to know after we were unsuccessful settling at the mediation last Saturday night, [Dillard] met this week with a bankruptcy attorney . . . and that [he] is going to file a Chapter 7 petition on behalf of [Dillard] prior to next week's trial setting. My associate . . . said, "Thanks for the heads-up. Do you know when you actually plan to file? We obviously have to continue preparing for trial until then." And [the] return e-mail [from Dillard's counsel] said "Definitely before Monday morning."
. . . .
With regard to what I said in closing argument, I qualified it. . . . I followed it up when I said, what he quoted, "regardless whether he declared bankruptcy."
The Parkers argued that although the arbitration award, under "Other Issues Considered and Decided," states that Dillard had filed for bankruptcy, the issue was immaterial because it was just another issue that the arbitrators "resolved." The following discussion then took place:
[Counsel for IB]: . . . [I]f this really was immaterial, why did counsel say [to the arbitration panel], Mr. Dillard declared bankruptcy, which was not true. Clearly the implication behind this was to convey to the panel that if the panel's thinking that the [Parkers] are going to get anything from Mr. Dillard, that's wrong. In fact, that very afternoon, they settled. It was clearly a misimpression created that [IB] tried—
THE COURT: Let me just stop right there. Is that true? The day you told the panel that he declared bankruptcy, y'all did a settlement with Dillard?
[Counsel for the Parkers]: Yes, it is, Your Honor.
. . . .
THE COURT: . . . . Did you tell the arbitration—did you ever straighten this misunderstanding out?
[Counsel for the Parkers]: Your Honor, based upon—
THE COURT: Yes or no. Did you ever straighten out the statement that he had filed bankruptcy; telling them that he had not, in fact, and you had made a settlement. Did you of clear that up?
. . . .
[Counsel for the Parkers]: The way you phrased that, no, Your Honor.
. . . .
THE COURT: I'm going to turn this award over, if you haven't figured it out. So you can either work it out or I'm going to let you start over again. I just don't—I don't think you can make a misrepresentation to the Court and not clear it up yourself. It's not the other side—even though the other side did try to let them know, evidently they wouldn't take it, you have an obligation to the Court to correct factual misrepresentations. And not only was it a misrepresentation, but you didn't give them complete information; not only had he not filed bankrupt[cy], you had collected [a settlement] from him. I don't care how you apply it to attorney's fees or whatever. . . . From my perspective, you are just going to have to start over again. . . .
At a subsequent hearing on the motion to vacate, IB argued that it was entitled to vacatur of the arbitration award because the panel had refused to consider its post-hearing submission, establishing that Dillard had not filed for bankruptcy, and documentation from the Travis County Probate Court, establishing that the Parkers' case against him was still active. IB asserted that it had tried to correct a "misrepresentation" that counsel for the Parkers had made to the arbitration panel and "was not allowed to," which "led to a fundamentally unfair award." And "[t]here's only one remedy under the TAA and FAA for what happened here, vacating the award, period."
The trial court explained that "it wasn't so much the action of the arbitrators" that it found troubling, but
that a statement was made in final argument that, oh, by the way, the other defendant is going to file bankruptcy, suggesting that if you don't stick the one that's here, we're not going to get anything; and that to me was a—I mean, wasn't focused on what the arbitrators did. I was focused on what I felt was a misrepresentation to the Panel.
The trial court noted that "there's another provision" in the FAA, under which it could "overturn an award that's procured by fraud" or other undue means.[7]
The Parkers asserted that IB did not move for vacatur on the ground that the award was procured by "fraud and undue means." Rather, it had sought vacatur on the ground that the arbitrators were guilty of misconduct in refusing to hear evidence pertinent and material to the controversy.[8] The Parkers further argued that IB's request for an offset against the settlement was untimely because IB did not raise it in the arbitration.
The trial court explained as follows:
Well, if the general statute is cited and I find that some sort of problem crept in to the—in to the proceedings, I'm inclined—you know, I'm supposed to do the right thing[.] [A]nd as I explained to everybody last time, it strikes me that in this situation the right thing is, comes to me, I'm inclined to vacate it because I just—I have a—that's what my justice bone tells me to do.
The trial court then, without stating the basis of its decision, issued a written order granting IB's motion to vacate, and denying the Parkers' motion to confirm, the arbitration award.
Standard of Review
We review a trial court's decision to vacate or confirm an arbitration award de novo based on a review of the entire record. Port Arthur Steam Energy LP v. Oxbow Calcining LLC, 416 S.W.3d 708, 713 (Tex. App.-Houston [1st Dist.] 2013, pet. denied). An arbitration award is presumed valid and is entitled to great deference. Royce Homes, L.P. v. Bates, 315 S.W.3d 77, 85 (Tex. App.-Houston [1st Dist.] 2010, no pet.). An arbitration award has the same effect as a judgment of a court of last resort, and a reviewing court may not substitute its judgment for that of the arbitrator merely because it would have reached a different result. CVN Grp., Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002); J.J. Gregory Gourmet Servs., Inc. v. Antone's Imp. Co., 927 S.W.2d 31, 33 (Tex. App.-Houston [1st Dist.] 1995, no writ). Every reasonable presumption must be indulged to uphold an arbitrator's decision, and none is indulged against it. City of Baytown v. C.L. Winter, Inc., 886 S.W.2d 515, 518 (Tex. App.-Houston [1st Dist.] 1994, writ denied). Judicial scrutiny of these awards focuses on the integrity of the arbitration process, not on the propriety of the result. Women's Reg'l Healthcare, P.A. v. FemPartners of N. Tex., Inc., 175 S.W.3d 365, 367-68 (Tex. App.-Houston [1st Dist.] 2005, no pet.); Jamison & Harris v. Nat'l Loan Inv'rs, 939 S.W.2d 735, 737 (Tex. App.-Houston [14th Dist.] 1997, writ denied) (alleged errors in application of substantive law by arbitrators during arbitration proceedings not reviewable on motion to vacate award).
Because judicial review "adds expense and delay, thereby diminishing the benefits of arbitration as an efficient, economical system for resolving disputes," review of an arbitration award is "extraordinarily narrow." E. Tex. Salt Water Disposal Co. v. Werline,307 S.W.3d 267, 271 (Tex. 2010); Delgado, 95 S.W.3d at 238; IPCO-G.&C. Joint Venture v. A.B. Chance Co., 65 S.W.3d 252, 255-56 (Tex. App.-Houston [1st Dist.] 2001, pet. denied). Review is limited such that a trial court may not vacate an arbitration award even if it is based upon a mistake of fact or law. Universal Comput. Sys., Inc. v. Dealer Sols., L.L.C., 183 S.W.3d 741, 752 (Tex. App.-Houston [1st Dist.] 2005, pet. denied); J.J. Gregory, 927 S.W.2d at 33.
The parties agree that the Federal Arbitration Act (the "FAA") governs this case. Under the FAA, an arbitration award must be confirmed, unless it is vacated, modified, or corrected on certain limited grounds. See 9 U.S.C. § 9-11; see also Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013) ("Under the FAA, courts may vacate an arbitrator's decision only in very unusual circumstances." (internal quotations omitted)). The Supreme Court has held that the "statutory grounds provided in sections 10 and 11 of the FAA for vacating, modifying, or correcting an arbitration award are the exclusive grounds for vacating an arbitration award." Bates, 315 S.W.3d at 86 (citing Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 584, 128 S. Ct. 1396, 1403 (2008)). Section 10(a) authorizes a court to vacate an arbitration award if:
(1) the award was procured by corruption, fraud, or undue means;
(2) there was evident partiality or corruption in the arbitrators, or either of them;
(3) 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) 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.
9 U.S.C. § 10(a). A party seeking to vacate an arbitration award bears the burden of presenting a complete record that establishes grounds for vacating the award. Statewide Remodeling, Inc. v. Williams, 244 S.W.3d 564, 568 (Tex. App.-Dallas 2008, no pet.). Complaints must have been preserved as if the award were a court judgment on appeal. Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 101 (Tex. 2011).
Arbitration Award
In their second issue, the Parkers argue that the trial court erred in vacating the arbitration award on the ground that the arbitrators were "guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy" because the evidence is a "two-page, post hearing submission by counsel on an issue that the parties and arbitrators agreed was irrelevant" and "the panel followed the governing arbitral rules of procedure when it received the submission but declined to include it in the record as evidence."[9] See 9 U.S.C. § 10(a)(3).
Section 10(a)(3) provides, in pertinent part, that an arbitration award may be vacated "where the arbitrators were guilty of misconduct . . . 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." See id. "To constitute misconduct requiring vacatur of an award, an error in the arbitrator's determination must be one that is not simply an error of law, but which so affects the rights of a party that it may be said that he was deprived of a fair hearing."[10] Rainier DSC 1, L.L.C. v. Rainier Capital Mgmt., L.P., 828 F.3d 362, 364 (5th Cir. 2016); Petrobas Am., Inc. v. Astra Oil Trading NV, No. 01-11-00073-CV, 2012 WL 1068311, at *12 (Tex. App.-Houston [1st Dist] Mar. 29, 2012, no pet.) (mem. op.).
Arbitrators have "broad discretion to make evidentiary decisions" and are not bound by the formal rules of procedure and evidence. Int'l Chem. Workers Union v. Columbian Chems. Co., 331 F.3d 491, 497 (5th Cir. 2003); see also Petrobras Am., Inc., 2012 WL 1068311, at *13; FINRA Rule 10323, 2015 WL 6873720 (arbitrators not bound by rules governing admissibility of evidence). And an arbitrator "is not bound to hear all of the evidence tendered by the parties as long as he gives each of the parties an adequate opportunity to present their evidence and arguments." Babcock & Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225, 234 (Tex. App.-Houston [14th Dist.] 1993, writ denied); see also Petrobas Am., Inc., 2012 WL 1068311, at *13 (fundamental fairness requires each party have adequate opportunity to present its evidence and arguments).
In its motion to vacate the arbitration award, IB argued that it was deprived of a fair hearing because the arbitration panel refused to consider its post-hearing submission regarding the assertion of the Parkers' counsel that Dillard had filed for bankruptcy. The Parkers first argue that the arbitration panel did not err because "FINRA's arbitration rules forbade post-hearing submissions."
Although FINRA rules provide that a panel "will decide when the record is closed" and "[o]nce the record is closed, no further submissions will be accepted from any party," the rules also provide that "in cases in which a hearing is held, the panel will generally close the record at the end of the last hearing session, unless the panel requests, or agrees to accept, additional submissions from any party." See FINRA Rule 12608(a), (c), 2015 WL 6873805 ("Closing the Record"). Further, "[t]he panel may reopen the record on its own initiative or upon motion of any party at any time before the award is rendered, unless prohibited by applicable law." Id. Rule 12609, 2015 WL 6873806 ("Reopening the Record").
The Parkers next argue that the arbitration panel did not err in refusing to consider IB's post-hearing submission because Dillard's bankruptcy status was not "pertinent and material." See 9 U.S.C. § 10(a)(3). A fact or proposition of law is "pertinent" if it "relat[es] to or involv[es] the particular issue at hand." Pertinent, BLACK'S LAW DICTIONARY (10th ed. 2014). It is "material" if it is of such a nature that it would affect a tribunal's decision-making process. See Material, BLACK'S LAW DICTIONARY (10th ed. 2014).
The record shows that the Parkers' counsel, on the last day of the arbitration hearing, just before closing arguments, announced to the arbitration panel that Dillard had informed the Travis County Probate Court that he "is filing for bankruptcy, which will apply a stay to that suit." After IB objected, the chairman of the panel stated that although counsel's statement about Dillard's bankruptcy was "not capital R record evidence," it was "a fact" and the panel "will give it whatever effect it might have." Thus, the panel, although acknowledging that counsel's assertion about Dillard's bankruptcy was "not evidence" in the case, and noting that it was "not certain" what effect it would have, indicated that it did plan to consider it in rendering its award.[11] See FINRA Rule 10323, 2015 WL 6873720 (FINRA arbitrators not bound by rules governing admissibility of evidence); Int'l Chem. Workers Union, 331 F.3d at 497 (arbitrators have "broad discretion to make evidentiary decisions"). The panel did not, as the Parkers assert, "rule" that the statement was "irrelevant." And later, during closing arguments, counsel for the Parkers asserted that Dillard had "just declared bankruptcy." Chairman Whittaker then commented: "I'm sorry to hear you are not going to trial next week, although probably I shouldn't use the word `sorry,' but that's disappointing."
In his affidavit attached to IB's motion to vacate, IB's counsel, Nielands, testified that after the close of the arbitration hearing, he learned from Dillard's attorney that Dillard had not in fact declared bankruptcy, but had reached a settlement agreement with the Parkers. The Parkers' case against Dillard in the probate court was still active, pending final approval of the settlement. And Neilands confirmed with the Travis County Probate Court that the case was still active and had not been stayed.
On March 16, 2015, IB filed a post-hearing submission, informing the panel that Dillard had not declared bankruptcy. To its letter, IB attached a printout of the Travis County Probate Court's website. The next day, the administrator informed IB that the panel "ha[d] determined that [it] will not entertain any post-hearing submission." The day after, the Parkers finalized their settlement with Dillard. And it is undisputed that the Parkers' counsel did not thereafter correct his earlier assertions to the panel that Dillard had filed for for bankruptcy.
One month later, the arbitration panel issued an award against IB and in favor of the Parkers for the entire amount that Dillard had lost while trading through IB, $725,779. And the panel, in its award, expressly stated that it did "consider[] and decide[]" the issue of Dillard's bankruptcy:
OTHER ISSUES CONSIDERED AND DECIDED
. . . .
At the hearing, [the Parkers'] counsel alleged that [Dillard], who [the Parkers] were suing in Texas State Court, had declared bankruptcy the previous day and that the case was stayed pending bankruptcy.
The panel further expressly stated that it did not consider IB's post-hearing submission about Dillard's bankruptcy. Rather, the panel had "determined that it would not consider any post-hearing submissions."
Once the panel decided at the hearing that it would consider the assertion of the Parkers' counsel that Dillard had filed for bankruptcy, IB's evidence that Dillard had not in fact filed for bankruptcy became pertinent and material, and IB was entitled to be heard on the issue. See 9 U.S.C. § 10(a)(3); Rainier DSC 1, L.L.C., 828 F.3d at 364; see alsoFINRA Rule 12609, 2015 WL 6873806 (panel may reopen record on its own initiative or upon motion of any party at any time before award rendered).
Fundamental fairness requires that each party have an adequate opportunity to present its evidence and its arguments. Babcock & Wilcox Co., 863 S.W.2d at 234; see also Petrobas Am., Inc., 2012 WL 1068311, at *13. "The arbitrator must then determine the truth respecting material matters in controversy, as he believes it to be, based upon a full and fair consideration of the entire evidence and after he has accorded each witness and each piece of documentary evidence, the weight, if any, to which he honestly believes it to be entitled." Hoteles Condado Beach, La Concha & Convention Ctr. v. Union De Tronquistas Local 901, 763 F.2d 34, 39 (1st Cir. 1985). Because the panel, in its award, expressly stated that it determined that it would not consider IB's post-hearing submission, we do not presume, as the Parkers' posit, that the panel considered IB's submission.
In Gulf Coast Industrial Workers Union v. Exxon Co., USA, the United States Court of Appeals for the Fifth Circuit affirmed a trial court's vacatur of an arbitration award on the ground that the arbitrator had refused to hear evidence. 70 F.3d 847, 848 (5th Cir. 1995). There, after a narcotics-detection dog alerted on an employee's car and the narcotics agent found marijuana inside the car, the employer ordered the employee to submit to drug testing. Id. at 848. After the employee refused, the employer terminated his employment. Id. at 849. The employee's union then submitted to arbitration the issue of whether the employer had just cause for the termination. Id. At the arbitration hearing, the agent testified concerning the marijuana found inside the car. Id. The employer then attempted to introduce testimony to establish the Substance Analysis Report ("SAR"), which confirmed the agent's testimony, as a business record. Id. The arbitrator, however, informed the employer that the SAR did not need to be established because it was already in evidence. Id.
Subsequently, the arbitrator ruled that the employer did not have reasonable cause to order the employee to submit to drug testing, and he ordered that the employee be reinstated with back pay because the employer did not prove that the substance found in the employee's car was marijuana. Id. The arbitrator stated that the SAR did not establish that the substance found in the employee's car was marijuana because it constituted hearsay and "did not even have the status of a business record." Id.
The Fifth Circuit noted that, in reviewing a district court's vacatur of an arbitration award, "we posit the same question addressed by the district court: whether the arbitration proceedings were fundamentally unfair." Id. at 850. There, not only had the arbitrator refused to consider the SAR, but he used the failure to present it as a predicate for ignoring the test results. Id. The court held that "[s]uch misconduct falls squarely within the scope of Section 10, and is grounds for vacatur." Id.
Here, the arbitration panel, in its award, expressly stated that it considered the assertion that Dillard had filed for bankruptcy—a fact that was interjected into the arbitration proceedings by the Parkers' counsel and not cured, even after the Parkers finalized their settlement with Dillard. The panel then, after refusing to consider IB's evidence to rebut the assertion of the Parkers' counsel about Dillard's bankruptcy, "considered and decided" the issue of Dillard's bankruptcy in awarding the Parkers damages against IB in the entire amount of Dillard's losses at IB. See id.
We conclude that IB has shown that it did not receive a full and fair hearing as a result of the panel's denial of its request to present evidence about the assertion of the Parkers' counsel that Dillard had filed for bankruptcy. Thus, we hold that IB has established that it is entitled to vacatur of the arbitration award. See 9 U.S.C. 10(a)(3).
Accordingly, we further hold that the trial court did not err in vacating the arbitration award.
We overrule the Parkers' second issue.
Having held that the trial court did not err in vacating the arbitration award on the ground that the arbitration panel refused to hear evidence pertinent and material to the controversy, we do not reach the Parkers' first issue, in which they argue that the trial court erred in vacating the arbitration award on the ground of "corruption, fraud, or undue means."
Conclusion
We affirm the order of the trial court.
[1] The IB Customer Agreement, discussed below, required that the parties submit their disputes to arbitration, "in accordance with the rules then prevailing of any one of the following: (a) The American Arbitration Association; (b) The Financial Industry Regulatory Authority; or (c) any other exchange of which IB is a member, as the true claimant-in-interest may elect." In 2007, the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD") were consolidated, and the NYSE transferred its member regulatory services to the NASD, which then changed its name to the Financial Industry Regulatory Authority ("FINRA"). See Fin. Indus. Regulatory Auth., Inc. v. Fiero, 882 N.E.2d 879, 880 n.* (N.Y. 2008); In re H&R Block Fin. Advisors, Inc., 262 S.W.3d 896, 900 (Tex. App.-Houston [14th Dist.] 2008, no pet.).
[2] See FINRA Rule 2090 ("Know Your Customer"), Rule 2111 ("Suitability"), Rule 3110 ("Supervision"), available at https://www.finra.org/arbitration-and-mediation/code-arbitration-procedure.
[3] See TEX. REV. CIV. STAT. ANN. art. 581-33(A)(2) (Vernon 2010) (person who offers or sells security by means of untrue statement of material fact or omission is liable to person buying security).
[4] The Parkers brought their claims under the arbitration provision contained in the Customer Agreement, which provides, in pertinent part, as follows:
Customer agrees that any controversy, dispute, claim, or grievance between IB, any IB affiliate or any of their shareholders, officers, directors employees, associates, or agents, on the one hand, and Customer . . . arising out of, or relating to, this Agreement, or any account(s) established hereunder in which securities may be traded; any transactions therein; any transactions between IB and Customer; any provision of the Customer Agreement or any other agreement between IB and Customer; or any breach of such transactions or agreements, shall be resolved by arbitration, in accordance with the rules then prevailing of any one of the following: (a) The American Arbitration Association; (b) The Financial Industry Regulatory Authority; or (c) any other exchange of which IB is a member, as the true claimant-in-interest may elect. . . . The award of the arbitrators, or a majority of them, shall be final, and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction.
[5] See 9 U.S.C. § 10(a)(3), (4); TEX. CIV. PRAC. & REM. CODE ANN. § 171.088(a)(3)(A), (C) (Vernon 2011).
[6] See TEX. PROP. CODE ANN. § 114.081(a) (Vernon 2014) ("A person who deals with a trustee in good faith and for fair value actually received by the trust is not liable to the trustee or the beneficiaries of the trust if the trustee has exceeded [his] authority in dealing with the person."); Id. § 114.081(b) ("A person other than a beneficiary is not required to inquire into the extent of the trustee's powers or the propriety of the exercise of those powers if the person: (1) deals with the trustee in good faith; and (2) obtains . . . a certification of trust. . . .").
[7] See 9 U.S.C. § 10(a)(1).
[8] See 9 U.S.C. § 10(a)(3).
[9] The Parkers assert that the trial court, as discussed above, actually vacated the arbitration award on the ground that it was procured by "fraud, corruption, or undue means," and not on the ground that the arbitration panel "refus[ed] to hear evidence pertinent and material to the controversy." See 9 U.S.C. § 10(a)(1) (procured by undue means), (a)(3) (refusal to hear evidence). The record shows, however, that trial court did not, in its written order vacating the arbitration award, state a basis for its ruling. A trial court's comments during a hearing do not constitute written findings and conclusions. In re Doe, 78 S.W.3d 338, 340 (Tex. 2002); Larry F. Smith, Inc. v. The Weber Co., 110 S.W.3d 611, 615 (Tex. App.-Dallas 2003, pet. denied).
[10] The Parkers assert that a "clear and convincing" standard applies to IB's challenge to the arbitration award on the basis of a refusal to hear evidence. A party alleging that an arbitration award was procured through "corruption, fraud, or undue means" must demonstrate that the improper behavior was established by clear and convincing evidence. See 9 U.S.C. § 10(a)(1); Petrobras Am., Inc. v. Astra Oil Trading NV, No. 01-11-00073-CV, 2012 WL 1068311, at *18 (Tex. App.-Houston [1st Dist.] Mar. 29, 2012, no pet.) (mem. op.); Las Palmas Med. Ctr. v. Moore, 349 S.W.3d 57, 67 (Tex. App.-El Paso 2010, pet. denied); Henry v. Halliburton Energy Servs., Inc.,100 S.W.3d 505, 510 (Tex. App.-Dallas 2003, pet. denied).
[11] See U.S. Gov't v. Marks, 949 S.W.2d 320, 326-27 (Tex. 1997) ("While it is true that an attorney's unsworn statements are not evidence, it is not true . . . that they have no special significance. . . . Reliance on counsel's statements is justified by Rule 3.03 of the Texas Disciplinary Rules of Professional Conduct, which forbids a lawyer from making a false statement of material fact to a tribunal. . . ." (citing TEX. DISCIPLINARY R. PROF'L CONDUCT 3.03, reprinted in TEX. GOV'T CODE ANN., tit. 2, subtit. G app. A (Vernon 2013) (TEX. STATE BAR R. art. X, § 9)).
