Dallas COA Affirms Arbitral Award Despite Evident Partiality Claims

The Fifth District Court of Appeals of Texas in Dallas has affirmed a trial court’s order confirming an arbitral award in a dispute between a residential builder and several homeowners. In Meritage Homes of Texas, L.L.C. v. Ruan, No. 05-13-00831-CV (Tex. App. – Dallas, September 16, 2014) a group of individuals who bought newly built homes from Meritage allegedly learned that their houses were smaller than the square footage that was represented to them prior to purchase. As a result, the homeowners sought discovery pursuant to Texas Rule of Civil Procedure 202. Meritage responded by seeking binding arbitration under the terms of the parties’ contracts. After the parties failed to agree on a neutral arbitrator, one was appointed by the trial court.

Despite the terms of the purchase contract, the homeowners and builder agreed to conduct the arbitration without using the services of the American Arbitration Association. Initially, the arbitrator conducted an informal telephone scheduling conference with the parties. About 20 months later, arbitral proceedings were held in the case. Before beginning the arbitration, however, the arbitrator noted that he had conducted other arbitrations with the attorneys for the homeowners since he was initially appointed. He also stated he did not have a relationship with any of the parties. The arbitrator asked if either party to the proceedings objected and counsel for Meritage asked if the prior arbitrations involved square footage issues. When the arbitrator stated they did not, both attorneys for the builder said they had no objections.

Following arbitral proceedings, the arbitrator issued a damages and attorneys’ fees award in favor of the homeowners. The homeowners then filed a motion to confirm the arbitral award with the trial court. After that, an attorney for Meritage asked the arbitrator in writing to disclose the number of arbitrations he conducted with opposing counsel since he was appointed in the case at hand and whether the arbitrator had any other personal or business relationships with them at any time.

About one week later, the arbitrator responded by stating such disclosures were waived when the parties agreed to forego the costs of AAA administration. He also added that the issue was addressed prior to beginning the arbitral proceedings. Despite this, the arbitrator responded that he was involved in three total arbitration proceedings and one mediation with one or more counsel for the homeowners since he was appointed in the parties’ case. The arbitrator also stated he has never served as co-counsel with the lawyers nor does he socialize with them.

Meritage again pressed the arbitrator for additional information related to any past relationships that preceded his appointment. The arbitrator responded by stating he was not answering additional questions unless his staff was compensated for the time it took to respond to such requests. After receiving the arbitrator’s response, the builder apparently stopped pursuing the matter directly with him.

About one month later, Meritage filed a motion to vacate the arbitral award. According to the home builder, the arbitrator demonstrated evident partiality under the Texas Arbitration Act. Meritage argued the award should be vacated because the arbitrator did not fully disclose the extent of his relationship with opposing counsel at the beginning of arbitral proceedings. The company also claimed the arbitrator refused to fully disclose his past business dealings with the attorneys.

In response, the trial court conducted a hearing on the matter. Following the hearing but before the court issued a decision in the case, Meritage submitted more than 300 pages of alleged evidence without leave of the court. In the end, the trial court denied the builder’s motion to vacate and confirmed the arbitration award. The court also denied Meritage’s motion for a new trial.  The company next filed an appeal with Texas’ Fifth District.

On appeal, Meritage claimed the trial court committed error when it confirmed the arbitral award because the arbitrator failed to disclose prior professional relationships with opposing counsel. The builder also claimed the court should have allowed it to conduct additional discovery related to the arbitrator’s alleged evident partiality.

The appeals court first stated that arbitration is strongly favored under both state and federal law. Next, the court said the TAA requires that an arbitral award be vacated where a neutral arbitrator exhibits evident partiality. After that, the Fifth District added that any undisclosed information is normally examined against the information that was disclosed in order to determine whether it was trivial. A neutral arbitrator is not required to disclose trivial information.

With regard to Meritage’s first argument the court held,

At the beginning of the October 10, 2012 arbitration hearing, Faulkner recounted that the case had been “around” for more than a year, and during that time, he had “what, maybe one or two more arbitrations” with appellees’ lawyers. He specifically asked if there were any objections and indicated the case would not proceed if there were (“If — if not, we’re going to proceed.”). Meritage’s counsel said he had “just one quick question” and then asked Faulkner if the arbitrations involved “square footage issues.” When Faulkner said the matters involved foundations, not square footage, both of Meritage’s lawyers said they had no objection to proceeding with the arbitration. Faulkner’s comment with respect to the number of matters was vague, at best, “what, maybe one or two more arbitrations.” The comment, however, was clear as to substance — he had arbitrated cases with the appellees’ attorneys while this case was pending. Once given this information, Meritage’s sole interest was in the subject matter of the arbitrations. Meritage asked no questions about the precise number of arbitrations, when Faulkner was appointed, or the status of the matters. It was only after the arbitrator’s award issued that Meritage asked Faulkner to provide more specific information. Having examined the undisclosed information against what was actually disclosed, we conclude the failure to disclose the one arbitration and one mediation would not yield a reasonable impression of the arbitrator’s partiality to an objective observer.

After examining case law offered by Meritage the Appeals Court continued by stating,

Unlike Alim and Karlseng II, at the arbitration hearing, Faulkner specifically disclosed that appellees’ lawyers had appeared before him in arbitrations and asked if anyone objected. He answered the only question asked of him by Meritage, and the arbitration proceeded. There is nothing in the record to suggest that Faulkner had any long-standing business, social, or personal relationship with the attorneys that he failed to disclose.

Next, the Dallas court addressed the builder’s claim that the trial court should have continued the case in order to allow for additional discovery to be conducted. After stating Meritage failed to preserve its complaint at the trial court level, the court held,

Here, the case had been on file almost three years at the time of the confirmation hearing. More relevant, however, is the fact Meritage had known, at least as early as October 2012, that Faulkner had been the arbitrator in cases in which Lemon and Grisham were also involved. Despite having that information, Meritage did nothing to seek additional information on the subject until Faulkner announced his decision more than two months later. Then, on the day of the hearing on the motion to confirm/motion to vacate, Meritage asked to recess the hearing, if the trial court wanted evidence of prior non-disclosures. Meritage offered no explanation as to why it could not produce the evidence in time for the hearing, and in fact, obtained an affidavit within hours of leaving the hearing. Under these circumstances, we cannot conclude the trial court abused its discretion in failing to grant a continuance. We overrule the second issue.

Because the trial court did not commit error when it rejected Meritage’s claim of evident partiality nor did the court abuse its discretion when it refused to grant a continuance in the case, Fifth District Court of Appeals affirmed the lower court’s decision.

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