S.D. of Texas Vacates Arbitral Award Based On Evident Partiality

The Southern District of Texas has held that an affidavit from a party’s attorney may be considered by a court when deciding a motion to vacate an arbitral award based upon evident partiality.

In Dealer Computer Svcs., Inc. v. Michael Motor Co., Inc., No. H-10-2132, (S.D. Tex. December 29, 2010), Dealer Computer Services (Dealer Services) entered into a contract for the purchase of a computer system and service with Michael Motor Company, an automobile dealership located in West Virginia. According to the contract, any disputes between the parties were subject to arbitration “in accordance with the commercial rules of the American Arbitration Association and governed by Michigan law.” Michael Motor was provided with a computer server as part of Dealer Services’ “no-charge replacement program.” Nearly ten years later, Dealer Services informed Michael Motor that a server upgrade was required in order to support a new software release. Michael Motor refused to upgrade and filed a demand for arbitration. A three-party arbitration panel ruled unanimously in favor of Dealer Services who then sought confirmation of the award.

Prior to confirmation, Michael Motor filed a motion to vacate the award after learning the arbitrator selected by Dealer Services, Butner, previously participated in an arbitration panel between Dealer and another automobile dealership, the subject of which was the same clause of a nearly identical contract. Other experts and witnesses were also designated during both arbitrations. According to the court, the arbitrator’s disclosure stated:

I served on panel [sic] of three arbitrators that considered a dispute between Dealer Computer Services, Inc. and another party. I do not believe that my service on that panel creates a conflict with my serving in this case. (Doc. No. 9-13.) Along with the memorandum, Butner submitted to the AAA a response to a questionnaire with “YES” or “NO” checkboxes regarding her impartiality in the case. She also signed certifications about compensation for the arbitration and acceptance of responsibility as arbitrator. (Id. at 2-4.) On the questionnaire, Butner answered “NO” to all questions except “Have any of the party representatives, law firms or parties appeared before you in past arbitration cases?” (to which she answered “YES”) and “Have you, any member of your family, or any close social or business associate ever served as an arbitrator in a proceeding in which any of the identified witnesses or named individual parties gave testimony?” (to which she checked neither box but put a question mark in between the boxes). (Id. at 2.) Butner did not disclose any additional information about the previous arbitration panel on which she served in a case involving DCS.

Michael Motor’s attorney submitted an affidavit to the court in support of his client’s motion to vacate. Dealer Services made a motion to strike his affidavit “because it contains hearsay and statements not based on personal knowledge.” The court denied Dealer Services’ motion stating,

At least one district court has held that the requirements of Federal Rule of Civil Procedure 56—that an affidavit supporting summary judgment be “made on personal knowledge” and “set out facts that would be admissible in evidence”—do not apply in motions to vacate arbitration awards. Gwynn v. Clubine, 302 F. Supp. 2d 151, 159 (W.D.N.Y. 2004). Instead, affidavits in this context need only comply with the requirements of Rule 11(b), which impose a lower standard on all representations to the court. Id. at 159. Thus, affidavits supporting a motion to vacate an arbitration award need not “be based upon personal knowledge, but may be based on a reasonable belief upon inquiry into the relevant circumstances.” Id.

Next, the Southern District reviewed the evident partiality standard upon which a court may vacate an arbitral award under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2). According to the court,

Taken as a whole, Butner’s prior exposure to the legal issues and witnesses involved in the Michael Motor arbitration creates a reasonable impression that she had prejudged at least some of the issues in the arbitration. It would be unreasonable to expect an arbitrator who had already signed an eight-page opinion ruling for a party as to how a contractual provision should be interpreted to change her mind in a subsequent arbitration and rule against that party on the exact same contractual provision. Likewise, it would be unreasonable to expect an arbitrator who had fully adopted the damages theories of an expert witness to then reject the damages theories of that same witness on similar issues in a subsequent arbitration. It is also reasonable to believe that Butner may have considered D’Ambrosio’s and Holendar’s testimony from the Venus Ford Arbitration in evaluating evidence in the Michael Motor Arbitration. Under the “practical” rather than “utmost rigor” standard of Positive Software Solutions, 476 F.3d at 283, these prior connections to DCS and to the issues in the arbitration are not mere technicalities, but strongly suggest that Butner may have prejudged the liability and damages issues in the Michael Motor Arbitration. The Court concludes that Butner’s participation in the Venus Ford Arbitration is “a significant compromising connection” to DCS, and her failure to disclose that participation constitutes “evident partiality.” See id. at 282-83; 9 U.S.C. § 10(a)(2).

The Southern District then distinguished several cases by stating,

The instant case is readily distinguishable from ANR Coal, Nationwide Mutual, and every other case in the Fifth Circuit and elsewhere that DCS has cited or that the Court has found. Butner, a party-appointed neutral arbitrator, failed to disclose that she was personally involved in a prior arbitration that involved the same issues of contractual interpretation and damages calculation, as well as related witnesses. Unlike in ANR Coal and Nationwide Mutual, Butner failed to disclose a connection to DCS that significantly compromised her ability to act impartially. (emphasis in original)

According to the court, the arbitrator’s disclosure was insufficient to place Michael Motor on notice regarding “her potential partiality.”

Although “a party seeking to vacate an arbitration award on the grounds of evident partiality generally must object during the arbitration or else waive such objection,” the court dismissed Dealer Services’ allegations that Michael Motor waived its objections:

Michael Motor could not have been expected, based on Burner’s disclosure, to presume, or even suspect, that Butner’s evident partiality was anywhere near as strong as it turned out to be. Accordingly, Michael Motor did not have sufficient information to object to Butner’s partiality, or to her nondisclosure, at the time. Michael Motor did not waive its objections.

The Southern District of Texas held an affidavit from a party’s attorney may be considered when deciding a motion to vacate an arbitral award based upon evident partiality. The court also ruled that Michael Motor met its burden of proving evident partiality and vacated the arbitration award.

Stay tuned to Disputing for more on this case as Dealer Services filed a notice of appeal with the Fifth Circuit Court of Appeals on January 26, 2011.

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