190 So. 3d 895
Ala.2015Background
- Municipal Workers Compensation Fund (the Fund) alleged Morgan Asset Management (MAM) and Morgan Keegan recommended unsuitable, overconcentrated investments causing >$15M losses and filed a FINRA arbitration in 2009 asserting fiduciary, fraud, negligence, and securities claims.
- FINRA arbitrator-selection rules require continuing, broad disclosure and a conflicts check; parties received disclosure reports and selected a three‑arbitrator panel (Julavits, Dewitt, Kunis).
- After award favoring defendants (August 1, 2012) and entry of judgment (Sept. 14, 2012), the Fund moved to vacate alleging two arbitrators (Julavits and Kunis) failed to disclose material conflicts: Julavits was a defendant in recent state litigation alleging similar claims; Kunis’s firm (Maxim) had substantial business ties with Morgan Keegan and counsel (co‑underwriting, co‑defendant filings, and prior representation).
- The trial court found both arbitrators violated FINRA disclosure obligations but denied vacatur, concluding nondisclosure did not amount to "evident partiality" because proving bias would require speculation.
- On appeal, the Alabama Supreme Court reviewed admissibility of exhibits proffered by the Fund, applied the "reasonable impression of partiality" standard for § 10(a)(2), and analyzed whether constructive knowledge (duty to investigate) can supply the requisite knowledge for evident partiality.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Admissibility of exhibit evidence offered to support vacatur | Exhibits (court filings, prospectuses, underwriting lists) are authentic or judicially noticeable and were timely disclosed; trial court may consider them | Many exhibits were unauthenticated web prints or hearsay and should have been struck | Court parsed admissibility: some exhibits (Callawassie papers, underwriting list Exhibit M, many underwriting-related docs) could be considered; certain items (Hagman order, Antietam motion, promotional/hearsay pieces) were inadmissible |
| Whether arbitrators violated FINRA disclosure duties | Fund: Julavits and Kunis failed to disclose litigation and business ties that FINRA rules require be disclosed | Defendants: nondisclosures were remote, trivial, or unknown to arbitrators; lack of actual knowledge precludes evident partiality | Court agreed both failed to disclose facts required by FINRA and that failures violated the rules |
| Standard for "evident partiality" under 9 U.S.C. § 10(a)(2) in nondisclosure cases | Fund: adopt majority view that a reasonable impression of partiality can exist even if arbitrator lacked actual knowledge when arbitrator had a duty to investigate (constructive knowledge) | Defendants: some circuits require actual knowledge; lack of actual knowledge defeats evident partiality | Court adopted the "reasonable‑impression‑of‑partiality" test and held constructive knowledge (failure to investigate when duty existed) can support evident partiality (following Schmitz) |
| Application to facts; whether vacatur warranted | Fund: Kunis’s failure to run/perform conflict check and nondisclosure of Maxim’s substantial ties to Morgan Keegan/Greenberg Traurig created direct, definite, and demonstrable impression of bias | Defendants: relationships were distant, no evidence Kunis knew, and thus no reasonable impression of partiality | Court held Kunis had constructive knowledge (duty under FINRA to check) and nondisclosure produced evident partiality; vacatur required. Because evident partiality found as to Kunis, vacatur of the arbitration award is warranted |
Key Cases Cited
- Waverlee Homes, Inc. v. McMichael, 855 So.2d 493 (Ala. 2003) (adopting the reasonable‑impression‑of‑partiality standard for § 10(a)(2) nondisclosure cases)
- Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (U.S. 1968) (nondisclosure of arbitrator’s business ties can warrant vacatur)
- Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994) (arbitrator’s duty to investigate; constructive knowledge can create reasonable impression of partiality)
- Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., Inc., 146 F.3d 1309 (11th Cir. 1998) (Eleventh Circuit’s approach requiring actual knowledge in some contexts; discussed and distinguished)
- Lifecare Int’l, Inc. v. CD Medical, Inc., 68 F.3d 429 (11th Cir. 1995) (analysis on actual knowledge and evident partiality cited by defendants)
- Schmitz‑related federal authorities surveyed in Waverlee and Lexington Insurance decisions (collected to explain split in circuits and support Alabama’s adoption of Schmitz approach)
Outcome: The Alabama Supreme Court reversed the trial court, held Kunis’s nondisclosure (given his constructive knowledge/duty to investigate under FINRA rules) created evident partiality under 9 U.S.C. § 10(a)(2), and remanded for proceedings consistent with vacatur of the arbitration award.