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Credit Suisse Securities (USA) LLC v. Carlson

United States District Court, S.D. Texas, Houston Division

January 2, 2020

Credit Suisse Securities (USA) LLC, Petitioner,
Neal David Carlson, Respondent.


          Gray H. Miller Senior United States District Judge

         Pending before the court are (1) a petition to confirm an arbitration award (Dkt. 1) filed by petitioner Credit Suisse Securities (USA) LLC (“CSS”); and (2) a motion to vacate an arbitration award (Dkt. 9) filed by respondent Neal David Carlson. Having considered the petition, motion, responses, replies, and applicable law, the court is of the opinion that the motion to vacate (Dkt. 9) should be DENIED and the petition to confirm (Dkt. 1) should be GRANTED.

         I. Background

         On April 15, 2019, a three-arbitrator panel in a FINRA Dispute Resolution (“FINRA”) arbitration between Carlson and CSS rendered an award in favor of CSS. Dkt. 1; Dkt. 1-1 (award). Carlson alleged in the arbitration that CSS made false representations to induce him into joining its wealth management division and failed to disclose that CSS was in the process of eliminating the division Carlson joined. Dkt. 1-1. CSS made a counterclaim for breach of contract, among other claims, alleging that Carlson was obligated to pay the outstanding balance of a promissary note he had entered into with CSS when he took the position. Id. The panel denied Carlson's claims and found that he was liable to CSS for the remaining balance of the promissary note together with interest. Id.

         The presiding chairperson in the FINRA arbitration was Brian James Tagtmeier. Id. Tagtmeier had represented to the parties that he had no professional relationships with any of the parties, counsel, or arbitrators, “no matter how remote.”[1] Dkt. 15; Dkt. 13-20 (oath of arbitrator). It appears that this was true at the time the arbitration was filed and Tagtmeier was selected in March of 2017. See Dkt. 14-2. However, the arbitration did not occur until March of 2019. See Id. On December 17, 2018, Tagtmeier filed a notice of appearance in a case captioned Hestia Complete Home Services d/b/a Hestia Home Services v. Daniel Bonville and Christine Parisien. Dkt.3-4. Tagtmeier's appearance was on behalf of the plaintiff, Hestia Home Services. Id. The defendants, Bonville and Parisien, were represented by Courtney E. Palm of Hoover Slovacek, LLP. See Id. On December 31, 2018, Carlson's team electronically filed a notice with the FINRA[2] arbitration panel that they were changing firms and that Hoover Slovacek, LLP would now be representing Carlson. Dkt. 13-19 (Meyer Aff.). Three days later, on January 3, 2019, Tagtmeier filed a motion to reconsider in Hestia in which he requests that the court vacate an order granting summary judgment in Hoover Slovacek's client's favor. Dkt. 13-5. On February 27, 2019, Tagtmeier was listed as counsel for the plaintiff in an agreed motion for continuance (signed by another attorney) that was filed in Hestia, which represented his agreement with opposing counsel at Hoover Slovacek, and he also signed several orders to appear in the arbitration that had been requested by Hoover Slovacek attorneys. Dkts. 13-7, 13-8. When the arbitration began on March 4, 2019, Tagtmeier announced he had no new disclosures. Dkt. 13-19. The Hestia case was still ongoing. Id.

         Carlson argues that the court should vacate the arbitration award because Tagtmeier failed to disclose his ongoing representation of an adversary to an client of Carlson's counsel's firm, which Carlson contends is ground for vacatur under the Federal Arbitration Act (“FAA”). Dkt. 13. He additionally argues that some of Tagtmeier's evidentiary rulings are evidence of his partiality and that they are also independent grounds for vacatur. Id.

         CSS argues that the court should confirm the award, as the parties agreed to final and binding arbitration and Carlson cannot meet the heavy burden of satisfying the extraordinarily narrow statutory grounds necessary for vacatur. Dkt. 14. CSS asserts that Carlson's evidence of partiality is remote, uncertain, or speculative and fails to show clearly evident bias. Id. CSS further argues that none of Carlson's evidentiary arguments exhibits misconduct by Tagtmeier or the panel. Id.

         II. Legal Standard

         The FAA reflects “a liberal federal policy favoring arbitration . . . and the fundamental principle that arbitration is a matter of contract. AT&T Mobility v. Concepcion, 563 U.S. 333, 339, 131 S.Ct. 1740 (2011). If a party seeks confirmation of an arbitration award within one year of it being awarded, “the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of [the FAA].” 9 U.S.C. § 9. Carlson requests vacatur under subsections 10(a)(2) and 10(a)(3). Subsection 10(a)(2) permits vacatur “where there is evident partiality or corruption in the arbitrators, or either of them, ” and subsection 10(a)(3) permits vacatur “where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or any other misbehavior by which the rights of any party have been prejudiced.” 9 U.S.C. § 10(a)(2)-(3).

         The Fifth Circuit, in considering the statutory language of subsection 10(a)(2), noted that it “seems to require upholding arbitral awards unless bias was clearly evident in the decisionmakers.” Positive Software Sols., Inc. v. New Century Mortg. Corp., 476 F.3d 278, 281 (5th Cir. 2007). After considering the terms of the subsection and relevant U.S. Supreme Court caselaw, the Fifth Circuit determined that “nondisclosure alone does not require vacatur of an arbitral award for evident partiality”; instead, the “arbitrator's failure to disclose must involve a significant compromising connection to the parties.” Id. at 282-83. The “award may not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties to the proceeding.” Id. at 283. The court concluded that neither the FAA nor the U.S. Supreme Court “countenances vacatur of FAA arbitral awards for nondisclosure by an arbitrator unless it creates a concrete, not speculative impression of bias.” Id. at 286.

         The arguments Carlson makes under subsection 10(a)(3) relate to alleged failure by the arbitrators to hear pertinent evidence or other misbehavior. In analyzing these claims, the court must be mindful that “arbitration resolves disputes without confinement to many of the procedural and evidentiary strictures that protect the integrity of formal trials.” Forsythe Int'l, S.A. v. Gibbs Oil Co. of Tex., 915 F.2d 1017, 1022 (5th Cir. 1990). While an arbitration panel is not required to hear all evidence offered, it “‘must give each of the parties to the dispute an adequate opportunity to present its evidence and arguments.'” Id. at 1023 (quoting Hoteles Condado Beach v. Union de Tronquistas Local 901, 763 F.2d 34, 39 (1st Cir. 1985)). However, arbitrators “‘need not follow all the niceties observed by the federal courts'”; they simply must “‘grant the parties a fundamentally fair hearing.'” Totem Marine Tug & Barge, Inc. v. N. Am. Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979) (quoting Bell Aerospace Co. v. Div. of Textron, Inc. v. Local 516, UAW, 500 F.2d 921, 923 (2d Cir. 1974)); see also Laws v. Morgan Stanley Dean Witter, 452 F.3d 398, 399 (5th Cir. 2006) (“‘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.'” (quoting El Dorado Sch. Dist. No. 15 v. Cont'l Cas. Co., 247 F.3d 843, 848 (8th Cir. 2001))). “Arbitrators have broad discretion to make evidentiary decisions.” Int'l Chem. Workers Union v. Columbian Chems. Co., 331 F.3d 491, 497 (5th Cir. 2003).

         III. Analysis

         A. Subsection 10(a)(2) - Evident Partiality

         Carlson's arguments primarily center around his allegations of evident partiality, so the court will begin its analysis there. The court must determine in accordance with Positive Software Solutions whether the undisclosed connection was “a significant compromising connection to the parties” that created a “concrete, not speculative impression of bias” or if it was “a trivial or insubstantial prior relationship.” It is clear that unlike the relationship in Positive Software Solutions, this relationship was not a prior relationship. The arbitrator had a professional relationship as an adversary with the firm representing one of the parties while the arbitration was ongoing. The court, however, must determine whether the relationship otherwise meets the Positive Software Solutions standard by determining if it was significant and created a concrete impression of bias.

         Carlson, relying on Texas state caselaw, including Burlington Northern Railroad Co. v. Tuco Inc., 960 S.W.2d 629 (Tex. 1997), and on the U.S. Supreme Court case, Commonwealth Coatings Corp. v. Continental Casualty Co., argues that the court need only determine if there was a “reasonable impression of bias.” Dkt. 17. However, in Positive Software Solutions, the Fifth Circuit, in an en banc opinion, determined that the “reasonable impression of bias” standard in Commonwealth Coatings must be read “holistically” and “interpreted practically rather than with utmost rigor” as a majority of the Commonwealth Coatings Court did not endorse the “appearance of bias” standard that was set forth in the plurality opinion.[3] Positive Software Sols., 476 F.3d at 282-83 (relying on reasoning in cases from the Sixth, Fourth, Second, Seventh, Tenth, and Eleventh Circuits). The Fifth Circuit's practical and holistic interpretation requires a showing of “a significant compromising connection” and “a concrete, not speculative impression of bias” in a failure to disclose case. Id. at 283, 286.

         CSS thus attempts to minimize Tagtmeier's connection to the parties, noting that Tagtmeier “briefly represented a party in a Texas state court action, where the attorney for the adverse party in that action happened to be a partner at the law firm that Carlson's counsel joined two months prior to the arbitration hearings.” Dkt. 14 at 7. It also points out that for the first twenty-two months of the proceedings, there was “no conflict whatsoever, ” as Carlson's counsel was at a different firm. Id. at 8. CSS contends that there is no reason to believe that Tagtmeier even saw and registered in his mind that Carlson's counsel had changed firms and that counsel was now at his opposing counsel's firm in the Hestia lawsuit or even that he had an obligation to disclose “such a tenuous circumstance.” Id. at 9-10. CSS deems the connection with Carlson's counsel's new firm to be an “insubstantial connection from which to infer partiality.” Id. It points out that in Positive Software Solutions the Fifth Circuit clearly stated that the standard is not the mere appearance of bias and argues that Carlson must produce “‘“specific facts that indicate improper motives on the part of the arbitrator.”'” Id. at 8 (quoting Vantage Deep Water Co. v. Petrobras Am. Inc., No. 4:18-CV-02246, 2019 WL 2161037, at *4 (S.D. Tex. May 17, 2019) (Bennett, J.) (quoting Thomas Kinkade Co. v. White, 711 F.3d 719, 724 (6th Cir. 2013)).

         The Fifth Circuit has required, post-Positive Software Solutions, that the party requesting vacatur “‘must produce specific facts from which a reasonable person would have to conclude that the arbitrator was partial to'” the other party. Cooper v. WestEnd Capital Mgmt., L.L.C., 832 F.3d 534, 545 (5th Cir. 2016) (quoting Householder Grp. v. Caughran, 354 Fed.Appx. 848, 852 (5th Cir. 2009)). It also requires the alleged partiality be “‘direct, definite, and capable of demonstration rather than remote, uncertain, or speculative.'” Id. (quoting Householder Grp., 354 Fed.Appx. at 852).

         Here, Carlson arguably has shown that the undisclosed and ongoing relationship with Carlson's counsel's new firm creates an appearance of bias, which would be sufficient to vacate the award under the dissent in Positive Solutions or under the Texas cases cited by Carlson, but it is not sufficient to show that a reasonable person “would have to conclude that the arbitrator was partial.” Cooper, 832 F.3d at 545. The facts that Carlson contend support a finding of evident partiality are (1) Tagtmeier was representing a client in the Hestia lawsuit who sought to recover at least $25, 000; (2) the adverse party in the Hestia lawsuit-represented by Carlson's counsel's firm, Hoover Slovacek-sought at least $25, 000 in fees and anticipated an additional $50, 000 in fees if it proceeded to trial and $20, 000 for an appeal; (3) Tagtmeier wrote a motion to reconsider an order granting partial summary judgment in Hestia on January 3, 2019, which was three days after Carlson's counsel told the arbitration panel they had joined Hoover Slovacek; (4) Tagtmeier signed several orders in the arbitration on February 27, 2019 that had been requested by Hoover Slovacek; (5) on the same day, an agreed motion for continuance bearing Tagtmeier's signature block and signed by a Hoover Slovacek attorney was filed in Hestia; and (6) Carlson's legal team made an argument regarding the Sherman Antitrust Act during the arbitration hearing, and Tagtmeier's opposing counsel in Hestia primarily practices antitrust and employment law, which could have led Tagtmeier to conclude that his opposing counsel developed this theory for the arbitration even though she was not listed counsel. Dkt. 13. Carlson further contends that Tagtmeier's adverse evidentiary rulings demonstrate evident partiality, including (1) the denial of Carlson's motion to compel material discovery; (2) the refusal to permit Carlson's experts to testify that the alleged promissory note was not a loan and confining their testimony to tax treatment of the funds; and (3) the refusal to permit CSS's Vice President of Human Resources (“HRVP”) to testify about a Department of Justice publication (“DOJ Publication”) directed at human resources professionals. Id.

         CSS argues that Carlson's allegations of partiality are remote and speculative and that the facts Carlson outlines as supporting improper motives do not meet the Positive Software Solutions standard. Dkt. 14. CSS agrees that Tagtmeier filed a notice of appearance in the Hestia matter on December 17, 2018, which was before the arbitration hearing, and that the lawyer for the defendants in that matter, Courtney Palm, worked for Hoover Slovacek. Id. It concedes that Tagtmeier filed a motion for reconsideration or new trial in Hestia three days after Carlson's counsel filed a notice of substitution indicating that they were now with the Hoover Slovacek firm, but CSS argues that these facts do not provide reason to conclude that Tagtmeier even saw and registered that Carlson's counsel had changed firms, made the connection it was the same firm as his adversary in Hestia, or, even if he did, thought that such a “tenuous circumstance” obligated him to disclose the connection. Id. It also points out that Tagtmeier was only brought into the Hestia matter on December 17, so there is no reason to speculate that he harbored ill will or enmity towards opposing counsel in the Hestia case. Id. As far as the motion for continuance being filed on the same day that Tagtmeier signed some orders in the arbitration, CSS argues that the motion was filed by opposing counsel in Hestia and signed by Tagtmeier's co-counsel, not Tagtmeier, and there is “no reason to speculate that Tagtmeier at that point even pieced together in his mind that his opposing counsel in Hestia was at the same firm as Carlson's counsel. Id. CSS asserts that the speculation that Tagtmeier may have thought his opposing counsel in Hestia came up with the Sherman Antitrust argument is ...

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