File: 061432F - From documents
part, REVERSE and REMAND in part; Opinion issued February 26,
Court of Appeals
District of Texas at Dallas
KIERAN McGRATH, ARDELLA SIMACEK, MICHAEL FLOWER,
THOMAS HAZELTON, AND RICK HOBBS, Appellants
FSI HOLDINGS, INC.,
On Appeal from the 160th Judicial District
Trial Court Cause No.
Moseley, FitzGerald, and Mazzant
Appellee FSI Holdings,
Inc. (“FSI”) arbitrated a dispute with appellants. A three-arbitrator panel awarded FSI roughly $576,000 against appellants
Roehrs and McGrath, awarded FSI nothing on its claims against the other four
appellants, and awarded no attorneys' fees. FSI then sought judicial
confirmation of its award, which the trial court granted. Appellants Roehrs and
McGrath complain about the entry of judgment against them. The other appellants
complain that the trial court did not award them their attorneys' fees despite
their prevailing in the arbitration. We affirm in part, reverse in part, and
remand for further proceedings.
I. Background and
arises from a dispute over control of a company called Fiber Systems
International, Inc. Appellants owned a minority
of the shares in that company; a company called CCR, Ltd. owned a majority. The
dispute resulted in litigation, which in turn was settled by means of a Stock
Purchase Agreement. By that Agreement, appellants agreed to sell their shares in
Fiber Systems International, Inc. to CCR, Ltd. and Michael Roehrs. Those
purchasers later assigned all their rights under the Agreement to appellee FSI.
The Agreement contained a mandatory arbitration clause.
marked a cease-fire instead of a lasting peace, and less than a year later FSI demanded arbitration with the American
Arbitration Association (“AAA”). In its arbitration demand, FSI accused
appellants of breaching warranties and representations contained in the
Agreement, and it sought damages totaling about $1.15 million. The parties then
skirmished over the make-up of the arbitration panel. The Agreement called for
each side to appoint one arbitrator to the panel, and for the two
party-appointed arbitrators to appoint the third. At first, FSI selected John A.
Chalk, and appellants selected Mark A. Shank. FSI asked the AAA to disqualify
Shank, which the AAA eventually did over appellants' protest. Appellants then
selected Judge Karen Willcutts as their party-appointed arbitrator and objected
to Chalk. The AAA disqualified Chalk, and FSI replaced him with Richard
Faulkner. A third arbitrator, Mike Tabor, was duly appointed, and the dispute
was arbitrated over the course of several days.
The arbitration ended in
a split decision. The panel unanimously concluded that FSI had not established its claims against appellants Simacek, Flower,
Hazelton, and Hobbs, and it ordered that FSI take nothing on its claims against
them. A majority of the panel found that FSI had established its
breach-of-warranty claim against appellants Roehrs and McGrath, and it awarded
FSI $576,118 against those two parties jointly and severally. Judge Willcutts
dissented from this part of the award, opining that FSI had failed to prove its
damages and that it should take nothing. The panel majority further found that
each side had incurred exactly the same amount of attorneys' fees and expenses
($612,000). It ruled that each side was entitled to recover half of its fees and
expenses to reflect the parties' “relative success on the merits,” and that the
resulting awards should be offset so that no one recovered any fees or expenses.
Judge Willcutts would have awarded appellants all of their fees and costs.
Simacek, Flower, Hazelton, and Hobbs filed a motion with the AAA asking the
panel to reconsider its award and to award them their attorneys' fees and
expenses, but the panel unanimously denied their motion.
FSI filed this lawsuit
against appellants Daniel Roehrs and Kieran McGrath to confirm its arbitration award against them. They answered and
counterclaimed for vacatur of the arbitration award on the ground that the
arbitration panel exceeded its powers or was unlawfully assembled. FSI then
amended to join appellants Simacek, Flower, Hazelton, and Hobbs (the “prevailing
defendants”). It still sought confirmation of the award against Roehrs and
McGrath, but it prayed alternatively for vacatur of the entire award, including
the take-nothing award in favor of the prevailing defendants, in the event
Roehrs and McGrath succeeded in their counterclaim. The prevailing defendants
answered and counterclaimed for the attorneys' fees and expenses that they had
incurred in the arbitration. They styled their counterclaim as one for
modification or, in the alternative, partial vacatur of the arbitration
FSI filed a “Motion to
Confirm, Motion for Summary Judgment, No Evidence Motion for Summary Judgment, and Brief in Support” in which it addressed
all of the counterclaims that appellants had then pleaded. Appellants filed
their own competing motions for summary judgment, one by Roehrs and McGrath and
one by the prevailing defendants. Roehrs and McGrath amended their pleadings to
assert fraud, misconduct, and misbehavior as additional grounds for vacatur. FSI
then filed a supplemental motion to confirm and for summary judgment. All
parties filed responses. After two hearings, the trial court granted FSI's
motion and supplemental motion, denied appellants' motions, and confirmed the
arbitration award in its entirety. The court later signed a final judgment
awarding FSI $576,118 against Roehrs and McGrath jointly and severally. In
keeping with the arbitration award, the court awarded no attorneys' fees to any
Roehrs, McGrath, and the
prevailing defendants appealed. FSI filed a notice of conditional cross-appeal.
Roehrs and McGrath raise essentially two issues. First, they contend that the trial court erred by refusing to vacate the
arbitration award based on the AAA's disqualification of appellants' initial
chosen arbitrator. Second, they contend that the trial court erred by refusing
to vacate the arbitration award based on fraud or misconduct by FSI's chosen
The prevailing defendants
raise essentially one issue. They contend that the trial court erred by refusing to modify or vacate the portion of
the award denying them recovery of their attorneys' fees and expenses incurred
in defending the arbitration.
FSI argues principally
that the judgment should be affirmed, but it asserts two alternative positions in the event of reversal. First, it
contends that a reversal of the judgment against Roehrs and McGrath should
result in the vacating of the entire arbitration award, including the part of
the award dealing with the prevailing defendants, and a rearbitration of the
entire case. Second, it contends that a reversal of the judgment only as to the
prevailing defendants should result in the vacating of the award as to
attorneys' fees and rearbitration of that issue rather than rendition of the
amount of fees and expenses requested by the prevailing defendants.
Appellants argue that the
Federal Arbitration Act and the Texas Arbitration Act apply concurrently to the issues raised in this case. FSI argues that
the TAA alone applies, based on a choice-of-law clause in the Stock Purchase
Agreement. That clause provides, “This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without giving
effect to its ruled [sic] governing conflict of laws.” Whether the FAA applies
in the face of a general choice-of-law clause such as this one presents a
“particularly thorny question of contract construction.” Note, An Unnecessary
Choice of Law: Volt, Mastrobuono, and Federal Arbitration Act
Preemption, 115 Harv. L. Rev. 2250, 2250 (2002).
The FAA generally governs
the enforceability of an arbitration agreement when the transaction involves interstate commerce. 9 U.S.C.A. §§ 1-2
(West 1999); Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 269-70
(Tex. 1992) (orig. proceeding). FSI does not dispute that the Agreement involves
interstate commerce, but it contends that the parties' general choice-of-law
clause trumps the FAA and requires application of the TAA. Some authorities
support FSI's position. E.g., Ruedemann v. Energy Operators, Inc.,
198 F. Supp. 2d 894, 896-97 (S.D. Tex. 2002). But the Texas Supreme Court has
held that a choice-of-law clause will not be construed to select the TAA to the
exclusion of the FAA unless the clause “specifically exclude[s] the application
of federal law.” In re L & L Kempwood Assocs., L.P., 9
S.W.3d 125, 127-28 (Tex. 1999) (per curiam). A general choice-of-law clause such
as the one in the Agreement does not satisfy this standard. Dewey v.
Wegner, 138 S.W.3d 591, 596 & n.5 (Tex. App.-Houston [14th Dist.] 2004,
no pet.). Accordingly, we apply the FAA, while recognizing that the TAA also
applies to the extent it is consistent with the FAA. In re D. Wilson Constr.
Co., 196 S.W.3d 774, 779-80 (Tex. 2006).
On issues of federal law,
such as the proper interpretation of the FAA, we must follow the decisions of the United States Supreme Court and the
Texas Supreme Court; the decisions of other federal courts, by contrast, may be
persuasive but are not binding on us. Penrod Drilling Corp. v. Williams,
868 S.W.2d 294, 296 (Tex. 1993).
The parties also dispute
the proper standard of review. Appellants contend that the summary-judgment standard applies to all issues because FSI sought
enforcement of the arbitration award by means of a motion for summary judgment.
FSI asserts that their motions automatically shifted the burden of proof onto
appellants Roehrs and McGrath as to all of their counterclaims asserting grounds
for vacating the award. We conclude that the summary-judgment standard of review
does apply to the matters raised in appellants' issues.
Procedures for obtaining confirmation of an arbitration
relating to the confirmation of arbitration awards in Texas courts are governed by Texas law even if the FAA supplies the
substantive rules of decision. Hamm v. Millennium Income Fund, L.L.C.,
178 S.W.3d 256, 260 n.3 (Tex. App.-Houston [1st Dist.] 2005, pet. denied). Under
the TAA, the trial court shall confirm an arbitration award on application of a
party unless grounds are offered for vacating, modifying, or correcting the
award. Tex. Civ. Prac. & Rem. Code Ann. § 171.087 (Vernon 2005). In
similar language, the statute provides that the trial court shall vacate or
modify an arbitration award on application if proper grounds are present.
Id. §§ 171.088(a), 171.091(a). If the court does not vacate or
modify the award, it shall confirm the award. Id. §§ 171.088(c),
171.091(c). A party seeking to modify or vacate an arbitration award bears the
ultimate burden of proving the grounds for modification or vacatur. E.g.,
Eurocapital Group, Ltd. v. Goldman Sachs & Co., 17 S.W.3d 426, 429
(Tex. App.-Houston [1st Dist.] 2000, no pet.); see also Mariner Fin.
Group, Inc. v. Bossley, 79 S.W.3d 30, 35 (Tex. 2002) (indicating that losing
party bears ultimate burden of proving arbitrator's partiality as a ground of
vacatur); Hamm, 178 S.W.3d at 268 (likening grounds for vacatur to
affirmative defenses under Texas Rule of Civil Procedure 94).
provides that each application made under its authority-apparently including not only applications for confirmation but also
applications for vacatur and modification-shall be heard by the court “in the
manner and with the notice required by law or court rule for making and hearing
a motion filed in a pending civil action in a district court.” Tex. Civ. Prac.
& Rem. Code Ann. § 171.093. The purpose of this provision is to
expedite judicial treatment of matters pertaining to arbitration. Crossmark,
Inc. v. Hazar, 124 S.W.3d 422, 430 (Tex. App.-Dallas 2004, pet. denied).
There is, however, no single “manner” for making and hearing a motion in a civil
case in Texas. The burdens of proof vary considerably, as does the
permissibility of live and affidavit testimony in support and opposition.
Compare, e.g., Tex. R. Civ. P. 120a (special appearance)
with Tex. R. Civ. P. 166a (summary judgment). It is clear,
however, that if a party seeking confirmation of an arbitration award seeks to
dispose of its opponent's grounds for vacatur by means of a summary- judgment
motion, the usual summary-judgment burdens apply. See, e.g.,
Crossmark, Inc., 124 S.W.3d at 430 (“[I]f a party chooses to follow
summary judgment procedure rather than the simple motion procedure authorized by
the [TAA], it assumes the traditional burdens and requirements of summary
judgment practice.”). In Mariner Financial Group, for example, the
supreme court reversed the confirmation of an award because the prevailing
parties had sought confirmation via a traditional motion for summary judgment
and failed to conclusively disprove the “evident partiality” of the arbitrator.
79 S.W.3d at 35. FSI's motions
do not clearly identify any issues as to which it sought “confirmation of the
award” as opposed to “summary judgment.” After review, we believe that the only
fair reading of FSI's motions is that FSI sought summary judgment as to all
grounds for vacatur and modification of the arbitration award asserted by
Roehrs, McGrath, and the prevailing defendants. All of appellants' issues
concern the trial court's rejection of their grounds for vacatur and
modification. Accordingly, we will apply the summary-judgment standard of review
to appellants' issues.
The final procedural
wrinkle is that FSI's motions clearly invoke the no-evidence provisions of Texas Rule of Civil Procedure 166a(i) without
identifying the specific elements of appellants' counterclaims as to which there
is no evidence. This defect may be raised for the first time on appeal,
Crocker v. Paulyne's Nursing Home, Inc., 95 S.W.3d 416, 419 (Tex.
App.-Dallas 2002, no pet.), but because appellants do not raise this defect as
an issue on appeal, we may not consider it, Selz v. Friendly Chevrolet,
Ltd., 152 S.W.3d 833, 838 (Tex. App.-Dallas 2005, no pet.). Accordingly, we
will construe FSI's motions as presenting no-evidence challenges to all of
appellants' counterclaims that are specifically mentioned in those
Summary-judgment standard of
Our standard of review
for summary judgments is de novo. Tex. Mun. Power Agency v. Pub. Util. Comm'n, 51 Tex. Sup. Ct. J. 216,
221 (Dec. 14, 2007). We consider all grounds presented in the summary-judgment
motion and affirm if any ground is meritorious. Sefzik v. City of
McKinney, 198 S.W.3d 884, 890 (Tex. App.-Dallas 2006, no
The trial court properly
grants a no-evidence motion for summary judgment if, after adequate time for discovery, the moving party asserts that there is
no evidence of one or more specified elements of a claim or defense on which the
adverse party would have the burden of proof at trial and the respondent
produces no summary-judgment evidence raising a genuine issue of material fact
on those elements. LMB, Ltd. v. Moreno, 201 S.W.3d 686, 688 (Tex. 2006)
(per curiam). We review the evidence in the light most favorable to the party
against whom the summary judgment was rendered, crediting evidence favorable to
that party if reasonable jurors could and disregarding contrary evidence unless
reasonable jurors could not. Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572,
582 (Tex. 2006) (applying the standards announced in City of Keller v.
Wilson, 168 S.W.3d 802 (Tex. 2005), to a no-evidence summary judgment). The
scope of our review includes both the evidence presented by the movant and the
evidence presented by the respondent. Paragon Gen. Contractors, Inc. v. Larco
Constr., Inc., 227 S.W.3d 876, 881 (Tex. App.-Dallas 2007, no
The trial court properly
grants a traditional motion for summary judgment if the movant conclusively disproves an essential element of its opponent's
claim. Henson v. Sw. Airlines Co., 180 S.W.3d 841, 843 (Tex. App.-Dallas
2005, pet. denied). Like the trial court, we must consider the evidence in the
light most favorable to the nonmovant and resolve all doubts in the nonmovant's
favor. W. Invs., Inc. v. Urena, 162 S.W.3d 547, 550 (Tex.
under § 10(a)(4) of the FAA
“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.”
Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315, 319-20 (Tex.
App.-Dallas 1999, no pet.). A court may vacate an arbitration award “where the
arbitrators exceeded their powers.” 9 U.S.C.A. § 10(a)(4) (West Supp.
2007). One way that a panel of arbitrators can exceed its powers under the FAA
is by failing to follow the parties' agreement regarding the composition of the
panel. For example, a panel of two arbitrators exceeds its powers by deciding a
case if the parties' agreement requires arbitration before a panel of at least
three arbitrators. Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830,
831-32 (11th Cir. 1991).
Roehrs and McGrath argue
that the arbitrators exceeded their powers in this case because the panel was not constituted in accordance with the
arbitration agreement. They contend that the Agreement gave them an exclusive
right to select one of the three arbitrators, and that the AAA had no power to
disqualify their selected arbitrator on grounds of partiality. Thus, they argue,
the AAA's disqualification of their selection, Mark Shank, violated the terms of
the arbitration agreement and deprived the panel as later constituted of any
authority to render a binding award against them. Alternatively, they argue that
the AAA misapplied its own rules regarding disqualification of arbitrators for
partiality. We reject their contentions and affirm FSI's traditional summary
judgment on this counterclaim based on two conclusions. First, the evidence
conclusively establishes that appellants did agree to abide by the AAA's
standards regarding the impartiality of party-selected arbitrators. Second, the
evidence establishes that the AAA's disqualification of Shank was not so
irrational or in such manifest disregard of its own rules as to permit vacatur
under the FAA.
Roehrs and McGrath adequately preserved
We briefly address an
argument by FSI that Roehrs and McGrath waived error by failing to object to the composition of the arbitration panel at the
time of the arbitration hearing. A party that learns of a basis for objecting to
an arbitrator must promptly object in the arbitration proceeding to avoid
waiving the complaint. Burlington N.R.R. Co. v. TUCO, Inc., 960 S.W.2d
629, 637 n.9 (Tex. 1997); Kendall Builders, Inc. v. Chesson, 149 S.W.3d
796, 804 (Tex. App.-Austin 2004, pet. denied). In this case, although Roehrs and
McGrath did not object to Shank's disqualification at the commencement of the
arbitration hearing, they did oppose his disqualification earlier when FSI
objected to Shank's service. The AAA set a deadline for appellants to respond to
FSI's objection, and appellants responded in writing within the deadline. When
the AAA disqualified Shank, appellants protested that decision in writing,
reurging their grounds for opposing Shank's removal and advising that they were
proceeding with the arbitration only under protest. And, as Roehrs and McGrath
point out, the chairman of the arbitration panel directed the parties at the
very beginning of the hearing to make any objections to the arbitrators or the
panel directly to the AAA-the same body that had already ruled on their
circumstances, we conclude that Roehrs and McGrath objected to Shank's removal in a manner sufficient to preserve any
The parties agreed to the AAA's rules requiring
party-appointed arbitrators to be neutral.
whether the arbitration panel was constituted in accordance with the parties' contract, we must first ascertain the terms of
Roehrs and McGrath rely
solely on the terms of the Stock Purchase Agreement, which provides, “The arbitration panel shall consist of three
(3) arbitrators, one of whom shall be appointed by each party hereto . . . . The
two arbitrators thus appointed shall choose the third arbitrator[.]” The
Agreement also provides that the AAA's commercial arbitration rules will apply
“to the extent such AAA Rules are not inconsistent with this Agreement.” Roehrs
and McGrath contend that the Agreement gave each side an “exclusive right” to
appoint one of the arbitrators and that the disqualification provisions of the
AAA's commercial arbitration rules are therefore inconsistent with the
arbitrator-selection procedures set forth in the Agreement. Specifically,
Section R-12 of the commercial arbitration rules of the AAA provides, “Where the
parties have agreed that each party is to name one arbitrator, the arbitrators
so named must meet the standards of Section R-17 with respect to impartiality
and independence unless the parties have specifically agreed pursuant to Section
R-17(a) that the party-appointed arbitrators are to be non-neutral and need not
meet those standards.” Section R-17 provides generally that arbitrators are
subject to disqualification by the AAA for “partiality,” but it goes on to
provide that “[t]he parties may agree in writing, however, that arbitrators
directly appointed by a party pursuant to Section R-12 shall be nonneutral, in
which case such arbitrators need not be impartial or independent and shall not
be subject to disqualification for partiality or lack of
But these provisions are
not the end of the story. FSI contended in its motion that during the arbitration the parties specifically agreed that the
party-appointed arbitrators would act as neutrals and be subject to the AAA's
rules regarding impartiality. FSI supported its argument with a letter that the
AAA sent both sides on July 7, 2004. The letter recites that both sides had
participated in a conference call that day in which they discussed several
items. The letter lists the items that were discussed, including the following:
“Claimant will name its party-appointed arbitrator by July 12, 2004. This will
confirm the parties have agreed the party-appointed arbitrators shall be neutral
and therefore subject to impartiality standards in accordance with the Rules.”
In their summary- judgment response, Roehrs and McGrath did not address FSI's
contention that the parties expressly agreed to abide by the AAA's rules
regarding arbitrator impartiality after the arbitration was underway. Nor did
they attempt to rebut FSI's evidence of that agreement.
summary-judgment evidence further corroborates the existence of the agreement referred to in the July 7, 2004 letter. For
example, after the parties made their selections, the AAA sent another letter to
both sides advising them that the AAA had appointed Chalk and Shank “to serve as
neutral party-appointed arbitrators.” This further confirms that the parties had
agreed to the AAA's requirements concerning the neutrality and impartiality of
arbitrators. A few days later, FSI objected to Shank's appointment based on
facts that allegedly “create[d] at least the appearance of impropriety.”
Appellants' response to FSI's objection was grounded entirely in their
interpretation of the AAA's commercial arbitration rules and not in the parties'
supposedly exclusive right to select any arbitrator they desired. At most,
appellants argued generally that their right to select a particular arbitrator
“should not be lightly disregarded.” This is not the same as asserting that the
parties' rights under the Agreement were exclusive and absolute or that the AAA
lacked the power to disqualify an arbitrator under its own rules. Only later,
after the AAA had already disqualified Shank, did appellants argue that the
Agreement did not give the AAA the right to remove a party- appointed
Parties to an arbitration
agreement can later agree to modify its provisions regarding the composition of the arbitration panel. See Frere
v. Orthofix, Inc., No. 99-CIV-4049, 2002 WL 1543857, at *5 (S.D.N.Y. July
15, 2002) (enforcing parties' agreement to proceed with one arbitrator instead
of three as specified in their contract), aff'd, 92 F. App'x 832 (2d Cir.
2004). We conclude that the evidence conclusively establishes that the parties
agreed to abide by the AAA's rules and standards for impartiality as to the
party-appointed arbitrators and that this agreement superseded any contrary
provisions in the Agreement. See Footnote 1
Thus, we need not decide whether the terms of the Agreement entitled Roehrs and
McGrath to appoint Shank despite the AAA's rules. The fact that the parties'
express agreement to the AAA's rules concerning partiality was oral does not
deprive it of effect. “[A] written agreement not required by law to be in
writing may be modified by a later oral agreement, even though it provides that
it can be modified only in writing.” Double Diamond, Inc. v. Hilco Elec.
Co-op., Inc., 127 S.W.3d 260, 267 (Tex. App.-Waco 2003, no pet.);
accord Group Hosp. Servs., Inc. v. One & Two Brookriver Ctr.,
704 S.W.2d 886, 890 (Tex. App.-Dallas 1986, no writ). Although the FAA requires
the agreement to arbitrate to be in writing, 9 U.S.C.A. § 2 (West 1999), it
expressly contemplates that the method of selecting the arbitrators need not be
in writing, see 9 U.S.C. § 5 (West 1999) (requiring contractual
method of selecting the arbitrator to be followed if a method is specified and
providing for court appointment if not). In this case, the evidence established
that the parties agreed that the AAA's impartiality standards applied to the
parties' chosen arbitrators. Roehrs and McGrath's contention to the contrary is
The AAA was entitled to apply its impartiality standards
as it did.
McGrath argue in the alternative that the AAA violated its own rules when it sustained FSI's objection and disqualified
Shank. Specifically, they argue (1) that FSI failed to invoke any valid ground
for disqualification in its objection to Shank and (2) that FSI's objection was
not supported by any evidence. Accordingly, they contend, the panel was
improperly constituted and “exceeded its authority” by deciding this
The AAA's rules provide
that the AAA will decide whether an arbitrator is disqualified under its rules and that the AAA's disqualification decision
“shall be conclusive.” Several courts have said that an arbitral body's
interpretation of its own rules must be given substantial deference.
E.g., York Research Corp. v. Landgarten, 927 F.2d 119, 123 (2d
Cir. 1991); Stroh Container Co. v. Delphi Indus., Inc., 783 F.2d 743,
748-49 (8th Cir. 1986); see also Am. Realty Trust, Inc. v. JDN Real
Estate-McKinney, L.P., 74 S.W.3d 527, 531 (Tex. App.-Dallas 2002, pet.
denied) (“'[P]rocedural' questions concerning the dispute and bearing on its
final disposition are left to the arbitrator.”); Bulko v. Morgan Stanley DW
Inc., 450 F.3d 622, 626 (5th Cir. 2006) (“In the absence of a specific
agreement to the contrary, determining [an arbitrator's] qualifications and
eligibility is a matter left to the NASD.”). For example, the Houston Fourteenth
Court of Appeals has held that the sufficiency of pleadings in an arbitration is
a procedural matter for the arbitrators to decide. Kline v. O'Quinn, 874
S.W.2d 776, 782-83 (Tex. App.-Houston [14th Dist.] 1994, writ
It is not clear that the
FAA authorizes vacatur of an arbitration award based on the AAA's allegedly erroneous disqualification of an arbitrator for
partiality under its own procedural rules. The FAA authorizes vacatur for
“evident partiality” of arbitrators, 9 U.S.C.A. § 10(a)(2) (West Supp.
2007), but not for an arbitral body's disqualification of an arbitrator under
its own rules and standards. We agree with the Eighth Circuit that vacatur based
on a procedural error requires, at the very least, a showing that the AAA
manifestly disregarded its own rules. See Stroh, 783 F.2d at 749
(opining that the appropriate standard is even more lenient than the
manifest-disregard standard but finding that the AAA's decision passed muster
under that standard). Following Stroh, we conclude that the evidence
establishes that the AAA did not so manifestly disregard its own rules as to
permit vacatur of the award. First, under the parties' agreement and the AAA
rules, the sufficiency of FSI's objection to a proposed arbitrator was a
procedural matter for the AAA to decide. See Kline, 874 S.W.2d at
782-83 (deferring to arbitrators' interpretation of arbitration pleading
requirements). Likewise, the AAA's decision on the merits of FSI's objection to
Shank was not so irrational that we may substitute our judgment for the AAA's.
Shank's disclosure revealed that he knew one of Roehrs and McGrath's attorneys
through many professional activities and that he had worked on judicial
campaigns for that same attorney's wife. Whether we would agree, or whether the
evidence would be sufficient to support a finding of “evident partiality” under
the FAA, we cannot say the AAA's decision to disqualify Shank under its
“partiality or lack of independence” standard constitutes a manifest disregard
for its own rules.
Roehrs and McGrath rely
on an opinion from the Seventh Circuit for the proposition that the AAA's violation of its own rules can be the basis
for vacating an arbitration award. Health Servs. Mgmt. Corp. v. Hughes,
975 F.2d 1253 (7th Cir. 1992). In that case, two arbitrators disclosed to the
AAA that they had past relationships with one of the arbitrating parties,
Charles Hughes. Id. at 1255. In violation of its own mandatory rule, the
AAA did not forward those disclosures to the parties, but Hughes's opponent,
HSM, eventually learned about those past relationships directly from the
arbitrators themselves. Id. HSM did not object to the two arbitrators'
continuing to serve on the case, but after it lost the arbitration it went to
federal court to try to set the award aside. Id. at 1255-56. The district
court confirmed the award, and the Seventh Circuit affirmed, holding that HSM
had waived any error arising from the AAA's failure to forward the arbitrators'
disclosures to HSM. Id. at 1260-64. It is true that the Seventh Circuit
opined in dicta that the AAA's failure would have justified vacatur if HSM had
preserved error. Id. at 1260. But the context makes it clear that the
AAA's failure would have justified vacatur because that failure to disclose
violated the “evident partiality” standard of § 10 of the FAA as
interpreted by the Supreme Court in Commonwealth Coatings Corp. v.
Continental Casualty Co., 393 U.S. 145 (1968), and not merely because the
failure to disclose violated AAA rules. See generally Health Servs.
Mgmt. Corp., 975 F.2d at 1260. The instant case does not involve an
arbitrator who actually served despite “evident partiality,” so Health
Services is inapposite.
The parties agreed that
their chosen arbitrators would be subject to the AAA's standards concerning impartiality. The AAA's interpretation and
enforcement of its own standards is entitled to great judicial deference. The
trial court correctly granted FSI's motion for summary judgment and denied
Roehrs and McGrath's motion for summary judgment as to Roehrs and McGrath's
counterclaim seeking vacatur on the ground that the arbitrators exceeded their
powers by proceeding without Shank as a panel member.
§§ 10(a)(1) and 10(a)(3)
Roehrs and McGrath
contend that the trial court should not have confirmed the award because arbitrator Faulkner failed to disclose the fact
that he is not licensed to practice law in Texas. They contend that Faulkner
thereby committed fraud, misconduct, or misbehavior justifying vacatur under the
The evidence shows that
Faulkner included his CV in his disclosures to the parties in the arbitration. That CV lists a Dallas office address, shows
that Faulkner has a J.D. and an LL.M., and describes him as
“Attorney-Mediator-Arbitrator-Dispute Board Chairman.” It also recites that he
is a “Former Trial Judge - Tarrant County, Texas” and states that from 1991 to
the present he has been a “Municipal Judge-State Magistrate-State of Texas.” On
page five, under the heading “Private Practice,” the CV lists the law firm of
Richard D. Faulkner & Associates, P.C., followed by this description: “Civil
practice with an emphasis in business litigation and arbitration, construction
and maritime creditors litigation and maritime personal injury litigation.
General Counsel to Frye Engineering and to F. & H. General Services Company,
(commercial electrical contractors).” This item does not state, however, that
Faulkner is currently working as part of that firm, and we note that this firm
name does not appear on the first page of his CV with his business address.
Under “Bar Admissions,” the CV lists eight federal courts (including all four
federal district courts in Texas) and the Supreme Court of the State of
Louisiana, but it does not list the Texas Supreme Court.
FSI did not attack all grounds relating to
outset, Roehrs and McGrath contend that the judgment must be reversed because FSI's motions attacked only their
counterclaim for vacatur based on fraud and not their counterclaim for vacatur
based on alleged misconduct and misbehavior. The leading case is Chessher v.
Southwestern Bell Telephone Co., in which the supreme court held that the
trial court cannot grant summary judgment on a cause of action not addressed in
the summary-judgment motion. 658 S.W.2d 563, 564 (Tex. 1983) (per curiam). We
agree with Roehrs and McGrath, noting that we must still address the merits of
this appeal as to the issues that were properly presented in the trial court.
Bandera Elec. Coop., Inc. v. Gilchrist, 946 S.W.2d 336, 337 (Tex. 1997);
Gen. Mills Rests., Inc. v. Tex. Wings, Inc., 12 S.W.3d 827, 836 (Tex.
App.-Dallas 2000, no pet.).
Fraud, misconduct, and
misbehavior are separate grounds for vacatur under the FAA. 9 U.S.C.A. §§ 10(a)(1), 10(a)(3) (West Supp. 2007). The
elements of fraud under the FAA are (1) fraud, which must be proved by clear and
convincing evidence, (2) that the fraud was not discoverable upon the exercise
of due diligence before or during the arbitration, and (3) that the fraud
materially related to an issue in the arbitration. Henry v. Halliburton
Energy Servs., Inc., 100 S.W.3d 505, 510 (Tex. App.-Dallas 2003, pet.
denied). The statute seems to limit “misconduct” to cases in which an arbitrator
denies a postponement of the hearing or refuses to hear material evidence, but
“misbehavior” is a catch-all for other procedural irregularities such as an
arbitrator's running afoul of his or her own rules in conducting the arbitration
or receiving evidence ex parte. Totem Marine Tug & Barge, Inc. v. N. Am.
Towing, Inc., 607 F.2d 649, 652-53 (5th Cir. 1979); Weinberg v.
Silber, 140 F. Supp. 2d 712, 720 (N.D. Tex. 2001), aff'd, 57 F. App'x
211 (5th Cir. 2003).
FSI argues that Roehrs
and McGrath's pleadings were not adequate to raise misconduct and misbehavior as grounds for vacatur. We disagree. In their
live pleading, Roehrs and McGrath pleaded that the award should be vacated
“because the rights of [appellants] were prejudiced by misconduct and willful
misbehavior by Faulkner.” They then pleaded that Faulkner “represented and held
himself out as an attorney licensed and practicing in Texas.” They concluded,
“Because of Faulkner's misconduct and willful misbehavior, the award was
obtained by and tainted with fraud.” FSI did not specially except. We conclude
that, under our liberal pleading rules, Roehrs and McGrath adequately pleaded
all three grounds for vacatur.
FSI also argues that its
supplemental motion was sufficient to shift the burden of proof to Roehrs and McGrath on their issues of misconduct and
misbehavior, even though FSI did not mention either ground in that motion. FSI's
theory is that a motion to confirm an arbitration award automatically shifts the
burden of proof on all grounds for vacatur to the responding party, even if the
moving party also references the summary-judgment rule. We disagree. We have
recognized that a party may invoke the summary-judgment rule as its route to
confirmation of an arbitration award, thereby triggering all summary-judgment
burdens and deadlines. Crossmark, Inc., 124 S.W.3d at 430. Moreover, FSI
clearly opted to proceed under the summary-judgment rule as to Roehrs and
McGrath's fraud ground: “FSI respectfully requests that the Court . . . grant
FSI summary judgment on Defendants' fraud claim and confirm the arbitration
award.” Although FSI's supplemental motion also included a prayer seeking
confirmation of the arbitration award, which could be construed as an implicit
request for judgment against Roehrs and McGrath on their counterclaims based on
misconduct and misbehavior, it did not discuss those counterclaims or state any
grounds for dismissing them. Viewing FSI's supplemental motion as a whole, we
conclude that it did not present any grounds for summary judgment, either
traditional or no-evidence, on those counterclaims. Chessher requires
reversal. 658 S.W.2d at 564.
FSI also argues that the
grounds of misconduct and misbehavior are barred by the TAA, which requires a party to apply for vacatur not later than 90
days after the date of delivery of a copy of the award to the applicant. Again,
FSI asserted this ground in the trial court only as to Roehrs and McGrath's
counterclaim that the award was procured by fraud. The ground cannot justify the
trial court's granting of judgment against Roehrs and McGrath on their
counterclaims of misconduct and misbehavior.
We must reverse the
summary judgment and remand for further proceedings on Roehrs and McGrath's vacatur counterclaims for misconduct and misbehavior
by Faulkner. Roehrs and McGrath did not move for summary judgment on these
counterclaims, so we need say nothing further about them.
Roehrs and McGrath adduced no evidence of
We agree with FSI that
the trial court properly granted a no-evidence summary judgment against Roehrs and McGrath on the issue of fraud. The FAA does
not define “fraud” as that term is used in § 10(a)(1), and we find little
case law interpreting it. The Fifth Circuit has held that fraud under the FAA
“requires a showing of bad faith during the arbitration proceedings, such as
bribery, undisclosed bias of an arbitrator, or willfully destroying or
withholding evidence.” In re Arbitration Between Trans Chem. Ltd. and China
Nat'l Mach. Imp. & Exp. Corp., 978 F. Supp. 266, 304 (S.D. Tex. 1997),
aff'd and adopted in pertinent part, 161 F.3d 314 (5th Cir. 1998). That
court held that a party's late production of evidence to the other side does not
constitute fraud, at least when there is no showing that the evidence was
intentionally or recklessly withheld. Id. As an example of fraud, the
Eleventh Circuit held in one case that an expert witness's perjury in falsifying
his credentials during the arbitration constituted fraud warranting partial
vacatur of the resulting award. Bonar v. Dean Witter Reynolds, Inc., 835
F.2d 1378, 1383-84 (11th Cir. 1988). In the Henry v. Halliburton Energy
Services case, we cited In re Arbitration for the elements of fraud
under the FAA, holding that Halliburton's shredding of documents that were
unrelated to Henry's claim could not justify vacatur because the shredding was
not materially related to any issue in the arbitration. 100 S.W.3d at
Roehrs and McGrath point
to no evidence that Faulkner or FSI acted in bad faith with respect to the CV in question, nor does the CV rise to the
level of misconduct equivalent to bribery, undisclosed bias, or destruction of
evidence. Nowhere in the CV does Faulkner state that he is licensed to practice
law in Texas. Viewing the entire CV as a whole, as we must under City of
Keller v Wilson, 168 S.W.3d 802, 811-12 (Tex. 2005), we do not even believe
it is misleading. Only one reasonable inference arises from a CV containing a
list of “bar admissions” that consists of eight federal courts and the Supreme
Court of Louisiana-the author of the CV is not admitted to practice in any state
courts except those of Louisiana. A CV is not an occasion for humility, so the
maxim inclusio unius est exclusio alterius appropriately applies to
Faulkner's list of bar admissions.
The trial court properly
concluded that Roehrs and McGrath's evidence did not raise a genuine issue of material fact that Faulkner committed fraud in
connection with his CV.
The trial court erred by
confirming the arbitration award against Roehrs and McGrath because FSI's motions to confirm and for summary judgment did not
address all grounds for vacatur that Roehrs and McGrath pleaded. The trial court
correctly granted summary judgment in favor of FSI on Roehrs and McGrath's
counterclaim that the arbitration award was procured by fraud, but we must
reverse the judgment and remand for further proceedings as to their
counterclaims based on misconduct and misbehavior.
defendants' request for their arbitration attorneys'
The prevailing defendants
(appellants Simacek, Flower, Hazelton, and Hobbs) complain about the trial court's refusal to grant them any relief on
their complaint that the arbitration award did not award them their attorneys'
fees, even though they prevailed on the merits in the arbitration. They argue
that the court should have modified the award pursuant to its powers under
§ 11(a) of the FAA and alternatively that the court should have vacated the
award in part because the arbitration panel exceeded its authority. We reject
the prevailing defendants' arguments and conclude that the trial court properly
granted FSI's motion for summary judgment and denied the prevailing defendants'
motion for summary judgment.
The prevailing defendants adduced no evidence of “an
evident miscalculation of figures.”
authorizes the court to modify or correct an arbitration award if there
is “an evident miscalculation of figures” in the
award. 9 U.S.C.A. § 11(a) (West 1999). Construing the parallel provision in
the TAA, we have held that “[a] court may not overturn an award based upon
'evident miscalculation of numbers' unless the mistake is clear, concise, and
conclusive from the record.” Crossmark, Inc., 124 S.W.3d at 436.
Moreover, “'[m]iscalculation' implies inadvertence or an error caused by
oversight.” Id. One federal court of appeals has indicated that a
miscalculation of figures is “evident” only if it appears on the face of the
arbitration award itself. Apex Plumbing Supply, Inc. v. U.S. Supply Co.,
Inc., 142 F.3d 188, 194 (4th Cir. 1998). For example, a calculation of
interest based on the wrong number of months has been held to be an “evident
miscalculation of figures.” Ehrich v. A.G. Edwards & Sons, Inc., 675
F. Supp. 559, 565-66 (D.S.D. 1987).
In this case, the
arbitrators did not commit any miscalculation with respect to their refusal to award attorneys' fees to either side. They
found that each side's attorneys' fees and expenses amounted to $612,000. They
awarded each side half of its fees and expenses to reflect the parties'
“relative success on the merits,” and they offset the resulting awards against
each other to result in take-nothing awards for each side. The prevailing
defendants filed a motion for reconsideration on the issue of fees and expenses,
but the panel unanimously denied their motion. There is simply no way to
categorize the arbitrators' reasoned decision to deny the prevailing defendants
an award of fees as the result of an error caused by inadvertence or oversight.
Crossmark, Inc., 124 S.W.3d at 436. The prevailing defendants adduced no
evidence of an “evident miscalculation of figures,” so the trial court correctly
refused to modify the arbitration award under § 11(a) of the FAA.
prevailing defendants adduced no evidence that the denial of fees should be
The prevailing defendants
argue in the alternative that the arbitrators' failure to award them their attorneys' fees and expenses exceeded the
panel's authority, justifying vacatur under § 10(a)(4) of the FAA. They
argue that the arbitrators erred by disregarding the terms of the Agreement,
which provided that the arbitrators “shall be instructed . . . to allocate all
costs and expenses of such arbitration (including legal and accounting fees and
expenses of the respective parties) to the parties in the proportions that
reflect their relative success on the merits (including the successful assertion
of any defense).”
Although couched in terms
of whether the arbitrators “exceeded their powers,” the prevailing defendants' argument actually amounts to a
contention that the arbitrators committed an error of law by refusing to award
them their fees and expenses. When it comes to claims of substantive errors of
this sort, federal courts agree that an award may be set aside under the FAA
only for “manifest disregard of the law,” which is a “severely limited” standard
of review. Bear, Stearns & Co., Inc. v. 1109580 Ontario, Inc., 409
F.3d 87, 90 (2d Cir. 2005). A mere error of law will not suffice; rather, the
arbitrators must have appreciated the existence of the applicable legal
principle but decided to ignore or disregard it. Brabham v. A.G. Edwards
& Sons, Inc., 376 F.3d 377, 381-82 (5th Cir. 2004). Some courts have
expressed the test in terms of whether the award “draws its essence” from the
contract. Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314, 1320 (5th
Cir. 1994). This test is also very deferential; the award may not be set aside
if it is “rationally inferable” from the letter or the purpose of the contract.
Id. at 1325.
The prevailing defendants
seek rendition of an award of attorneys' fees and expenses in their favor totaling $408,000, which they calculate strictly
as their per-capita share of the $612,000 in defense costs that the arbitrators
found that their side incurred in the arbitration. The Agreement, however, does
not require the arbitrators to award attorneys' fees on a per-capita basis.
Rather, the Agreement calls for an allocation of fees and expenses to the
parties in proportion to their relative success on the merits, which the
arbitrators reasonably could have read to require each party to prove his or her
own actual attorneys' fees and expenses in the arbitration as a prerequisite for
recovery. The prevailing defendants, however, point to no evidence from the
arbitration demonstrating what each of them separately paid in attorneys' fees
and expenses. Nor have they rebutted FSI's assertion in its appellate brief that
the prevailing defendants adduced no evidence in the arbitration that their
side's fees were equally borne by all six members (the prevailing defendants,
plus Roehrs and McGrath). It was their responsibility to point out such evidence
if it exists; it is not our duty to sift through the 2,800-page arbitration
transcript. Hakemy Bros., Ltd. v. State Bank & Trust Co., Dallas, 189
S.W.3d 920, 927-28 (Tex. App.-Dallas 2006, pet. denied).
It was not
plainly irrational for the arbitrators to assess attorneys' fees and
expenses on a per- side basis if that is how
each side proved up its fees. FSI won roughly half of the amount it sought from
the opposing side in the arbitration, and the arbitrators found that each side
spent the same amount in fees and expenses. Under these circumstances, there is
no evidence that the arbitrators manifestly disregarded the law or the Agreement
by offsetting the awards of fees and expenses against each other on a per-side
basis and awarding zero fees and expenses. Consequently, the trial court
correctly granted summary judgment for FSI and against the prevailing
The trial court correctly
granted summary judgment against appellants Simacek, Flower, Hazelton, and Hobbs on their counterclaim. The trial court also
correctly rejected as a matter of law the counterclaims by appellants Roehrs and
McGrath that the arbitrators exceeded their authority by proceeding without
Shank and that the award was procured by fraud. However, the trial court erred
by granting summary judgment on Roehrs and McGrath's counterclaim based on
alleged misconduct or misbehavior by arbitrator Faulkner, so we reverse and
remand as that counterclaim only. Given this disposition, we need not address
the issues raised by FSI in its conditional cross- appeal.
we reverse the judgment of the trial court in part and remand for further proceedings on appellants Roehrs and McGrath's
counterclaim based on alleged misconduct or misbehavior by arbitrator Faulkner.
We affirm the remainder of the trial court's judgment.
Although the statement in the July 7, 2004 letter from the AAA that we rely on
in reaching this conclusion is hearsay, hearsay
that is admitted without objection is not denied probative value merely because
it is hearsay. Tex. R. Evid. 802.