Mendel et al v. Morgan Keegan & Company Inc

Filing 43

MEMORANDUM OPINION Signed by Judge William M Acker, Jr on 5/26/15. (SAC )

FILED
2015 May-28 AM 10:35
U.S. DISTRICT COURT
N.D. OF ALABAMA

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
JAKE MENDEL, etc., et al.,
Plaintiffs,
v.
MORGAN KEEGAN & COMPANY,
INC.,
Defendant.

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CIVIL ACTION NO.
13-AR-1630-S

MEMORANDUM OPINION
On March 20, 2014 this court entered an order in the above
entitled case staying the consideration of cross-motions for
summary judgment filed by plaintiffs, Jake Mendel, etc., et al.
("Mendel Parties") and by defendant, Morgan Keegan Company, Inc.
("Morgan Keegan").

After becoming aware of an appeal pending in

the Supreme Court of Alabama in a case entitled Municipal Workers
Compensation Fund, Inc. v. Morgan Keegan, No. 1120532, this court
concluded that the wisest course was to await the outcome in
Municipal Workers before deciding this case. This court, of
course, could not predict what the Supreme Court of Alabama would
decide on the issues before it in Municipal Workers, but this
court could and did predict that whatever the Supreme Court
ultimately held might very well prove dispositive in the case
before this court. On April 3, 2015 the Supreme Court handed down
a unanimous decision in Municipal Workers, having the effect of
lifting the stay in this court and placing the cross-motions
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under submission.
The instant case arrived in this court on August 30, 2013
when Morgan Keegan removed it from the Circuit Court of Jefferson
County Alabama, where it had been filed on August 2, 2013 by
Mendel Parties as an "appeal" under the provisions of Alabama
Rules of Civil Procedure 71B and 71C of an arbitration award in
which Morgan Keegan had been ordered to pay Mendel Parties the
sum of $279,500.31, which Mendel Parties contended was the
product of “evident partiality” by an arbitrator and was woefully
inadequate to compensate them for the losses they had sustained
as a result of Morgan Keegan's misconduct while acting as their
investment advisor. Alabama Rules 71B and 71C are interesting and
strange. They are also unique and peculiar to Alabama. There is
nothing remotely like them among the Federal Rules of Civil
Procedure. The pertinent provisions are:
Rule 71B. Appeals from arbitration awards.
(a) Who may appeal. Any party to an arbitration may
file a notice of appeal from the award entered as a result
of the arbitration.
(b) When filed. The notice of appeal shall be filed
within thirty (30) days after service of notice of the
arbitration award. Failure to file within thirty (30) days
shall constitute a waiver of the right to review.
(c) Where filed. The notice of appeal shall be filed
with the clerk of the circuit court where the action
underlying the arbitration is pending or if no action is
pending in the circuit court, then in the office of the
clerk of the circuit court of the county where the award is
made.
* * *
(f) Procedure after filing. The clerk of the circuit
court promptly shall enter the award as the final judgment
of the court. Thereafter, as a condition precedent to
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further review by any appellate court, any party opposed to
the award may file, in accordance with Rule 59, a motion to
set aside or vacate the judgment based upon one or more of
the grounds specified in Ala. Code 1975, § 6-6-14, or other
applicable law. The court shall not grant any such motion
until a reasonable time after all parties are served
pursuant to paragraph (e) of this rule. The disposition of
any such motion is subject to civil and appellate rules
applicable to orders and judgments in civil actions.
(g) Appellate review. An appeal may be taken from the
grant or denial of any Rule 59 motion challenging the award
by filing a notice of appeal to the appropriate appellate
court pursuant to Rule 4, Alabama Rules of Appellate
Procedure.
(emphasis added).
Rule 71C. Enforcement of arbitration awards.
(a) Who may enforce. Any party to an arbitration may
seek enforcement of the award entered as a result of the
arbitration.
(b) When filed. If no appeal has been filed pursuant to
Rule 71B within thirty (30) days of service of the notice of
the award, thereby resulting in a waiver of the right to
review, the party seeking enforcement of the award may at
any time thereafter seek enforcement of the award in the
appropriate circuit court as set forth in paragraph (c) of
this rule.
(c) Where filed. The motion for entry of judgment shall
be filed with the clerk of the circuit court where the
action underlying the arbitration is pending or if no action
is pending in the circuit court, then in the office of the
clerk of the circuit court of the county where the award is
made.
(d) What filed. A party seeking enforcement of an award
shall file a motion for entry of judgment, and shall attach
to the motion a copy of the award, signed by the arbitrator,
if there is only one, or by a majority of the arbitrators.
Promptly after receiving Morgan Keegan’s notice of removal,
Mendel Parties filed a motion to remand, contending, inter alia,
that they were required by Rules 71B and 71C to attack the
arbitration award in the Jefferson County Circuit Court and
therefore could not have challenged it in this court. Mendel
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Parties argued a fortiori that because a prerequisite to removal
under 28 U.S.C. § 1441(a) is that the federal court have original
jurisdiction over the controversy, Morgan Keegan’s removal was
improper despite the complete diversity of citizenship and value
of more than $75,000 in controversy that would otherwise have
created jurisdiction under 28 U.S.C. § 1332. This court was faced
with a case of first impression. No Alabama federal court had
previously been asked to decide this jurisdictional question
unique to Alabama.
On October 24, 2013, the court held an in-chambers hearing
on Mendel Parties’ motion to remand and explored in depth with
the parties the problems arising under the procedural
circumstances and under these unique and confusing Alabama rules
for enforcing or attacking an arbitration award. Only after
Morgan Keegan conceded that the law of Alabama, which clearly had
been invoked by the Mendel Parties, would follow the case from
the Jefferson County Circuit Court to this court and would
provide Mendel Parties whatever means Alabama law provides for
attacking the arbitration award, did Mendel Parties give up their
insistence that the case was improperly removed.
At that same oral hearing, Morgan Keegan insisted that the
arbitration award was not supported by the evidence and that the
arbitrators committed gross error in awarding any sum whatsoever
to Mendel Parties. Nevertheless, Morgan Keegan refused the

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court’s somewhat jesting invitation to join Mendel Parties in
their request that the award be set aside and that the
controversy be assigned to a new panel. This, of course, would
have ended this case. While not itself timely invoking Rules 71B
and 71C and thus having waived its right to challenge the award,
Morgan Keegan has not tendered to Mendel Parties the sum of
$279,500.31 awarded it by the arbitrators.
Being convinced that Alabama procedural rules cannot grant
exclusive jurisdiction to Alabama courts over a challenge to an
arbitration award entered in Alabama if the requisites for
federal jurisdiction under 28 U.S.C. § 1332 exist, and being
further convinced that the law of Alabama applies to the review
of an arbitration award arrived at in Alabama, this court denied
Mendel Parties’ motion to remand and entered a foreshortened
scheduling order fixing deadlines for the completion of discovery
and the filing of dispositive motions.
A Rule 56 motion can be granted only if undisputed material
facts entitle the movant to judgment as a matter of law. In this
case the dispute boils down to a hot debate over questions of law
under the Federal Arbitration Act and the Alabama Arbitration
Act, as interpreted by Alabama courts, but the few facts upon
which plaintiffs/movants, Mendel Parties, rely are not in
dispute. Morgan Keegan has made the same arguments to this court
with respect to what must be proven in order to obtain the

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vacatur of an arbitration award that it made to the Supreme Court
of Alabama in Municipal Workers, a case in which it was a party
and in which the Supreme Court flatly disagreed with it. In other
words, as it has turned out, if the Supreme Court of Alabama has
correctly enunciated the controlling principles of Alabama law,
the material undisputed facts in this case lead to the same
conclusion reached by the Supreme Court of Alabama.
Undisputed Material Facts
Morgan Keegan acted as the broker and investment advisor to
Mendel Parties. As such, it invested Mendel Parties' funds in
investment products that produced very substantial losses. This
triggered a claim by Mendel Parties against Morgan Keegan
followed by an application for the arbitration of the claim
pursuant to the arbitration provision in the contract between the
parties. This provision called for the arbitral services of the
Financial Industry Regulatory Authority ("FINRA") and further
provided that FINRA rules would apply. FINRA thereupon furnished
the parties a list of potential arbitrators, including John F.
Allgood. Allgood and two others were chosen as arbitrators.
Allgood was the presider.
The FINRA rules unequivocally require potential arbitrators
to disclose to the parties not only any direct or indirect
individual financial or personal interest in the outcome of the
arbitration, but any existing or past, direct or indirect

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financial, business, professional, family, social or other
relationships with any of the parties. In Allgood's formal
disclosure form, under the section entitled "Employment," he
acknowledged that from September 2001 until the date of his
disclosure, he was “of counsel” to Ford & Harrison LLP, a law
firm. He then answered “No” to the core question "Have you had
any professional or social relationships with any party in this
proceeding or the firm for which they work?".
Allgood did not reveal the fact that Ford & Harrison LLP had
an ongoing professional relationship with Morgan Keegan. Morgan
Keegan is a large and well-known broker and investment advisor
and therefore a good client to have. This court has no problem in
concluding, from an exercise of common sense and its experience,
that a “conflicts” check by Ford & Harrison LLP would easily have
revealed the professional relationship between it and Morgan
Keegan. Morgan Keegan has pointed out that Mendel Parties have
offered no proof that Allgood, who presided over the arbitration
proceeding and who co-authored the arbitral award, was actually
biased in favor of Morgan Keegan or against Mendel Parties, or
even that Allgood actually knew of Ford & Harrison LLP's
professional relationship with Morgan Keegan. Mendel Parties, to
the contrary, have consistently taken the position that actual
knowledge by Allgood is not necessary to their claim of “evident
partiality.”
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Do Mendel Parties Meet the Alabama Standards for Obtaining the
Vacatur of an Arbitration Award?
In their original “appeal” and their motion to vacate,
Mendel Parties expressly invoked 9 U.S.C. § 10(a) (the Federal
Arbitration Act), Ala. Code § 6-6-14 (1975) (the Alabama
Arbitration Act), and the Alabama common law. From that moment to
this, Mendel Parties have contended that Allgood’s nondisclosure
of his law firms's professional relationship with Morgan Keegan
violated the FINRA mandatory rules, which were incorporated into
the arbitration agreement, and constituted conduct that
demonstrated the "evident partiality" under the Federal
Arbitration Act and the Alabama Arbitration Act and automatically
vitiated the arbitration award.
There is no reason for the court to retreat from its earlier
conclusion that the rights and responsibilities of the parties
are dependent upon, and are to be determined by, the law of
Alabama. See MOORE’S FEDERAL PRACTICE (3d ed.), § 107.31[4], which
encapsulates the Erie Doctrine as follows:
[I]f removal is grounded in diversity, the substantive legal
issues are governed by state law.
Likewise, there is no reason to deny that the law of Alabama is
what the Supreme Court of Alabama says it is, whether it is said
unanimously by that court or by a simple majority of its
justices.
The following quotations from Municipal Workers, in which an

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investor attacked an arbitration because the arbitrators had not
revealed prior relationships with Morgan Keegan make quite clear
the law of Alabama as applicable to the facts of the instant
virtually identical case.
From page 46 of the slip opinion:
[T]his Court agrees with the trial court's finding that
arbitrator disclosure is the “cornerstone” of FINRA
arbitration and that the arbitrator has a continuous and
imperative duty to disclose any relationships, experiences,
and background information “that may affect—or even appear
to affect—the arbitrator's ability to be impartial.” We
further agree with the trial court's conclusion that
Julavits and Kunis both failed to disclose certain
information, as discussed in detail above, and that the
failure to disclose this information was contrary to the
FINRA Rules relating to arbitrator disclosure.
From page 47 of the slip opinion:
Because we find dispositive the arguments as they relate to
“evident partiality,” 9 U.S.C. § 10(a)(2), we will address
those arguments first. The Fund argues that the judgment
entered on the arbitration award is due to be vacated
because the failure by Julavits and Kunis to make the
disclosures discussed above created a reasonable impression
of bias constituting an “evident partiality” on the part of
the arbitrators under 9 U.S.C. § 10(a)(2). After thoroughly
surveying caselaw from various federal courts, this Court,
in Waverlee Homes, Inc. v. McMichael, 855 So. 2d 493 (Ala.
2003), adopted the “reasonable impression of partiality” as
the standard for determining whether evident partiality
exists under 9 U.S.C. § 10(a)(2).
From page 48 of the slip opinion:
Justice Murdock, writing for the Court in Lexington
Insurance Co. v. Southern Energy Homes, Inc., 101 So. 3d
1190 (Ala. 2012), aptly explained this Court's adoption in
Waverlee Homes of the "reasonable-impression-of-partiality"
standard and what has become known as "nondisclosure" cases
versus "actual-bias" cases. (emphasis added).
From pages 51 and 52 of the slip opinion:
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“‘The policies of 9 U.S.C. § 10 also support the notion that
the standard for nondisclosure cases should differ from that
used in actual bias cases. In a nondisclosure case, the
integrity of the process by which arbitrators are chosen is
at issue. Showing a “reasonable impression of partiality” is
sufficient in a nondisclosure case because the policy of
section 10(a)(2) instructs that the parties should choose
their arbitrators intelligently. Commonwealth Coatings, 393
U.S. at 151, 89 S.Ct. at 340 (White, J., concurring). The
parties can choose their arbitrators intelligently only when
facts showing potential partiality are disclosed. Whether
the arbitrators' decision itself is faulty is not
necessarily relevant. But in an actual bias determination,
the integrity of the arbitrators' decision is directly at
issue. That a reasonable impression of partiality is present
does not mean the arbitration award was the product of
impropriety.’” [Schmitz], 20 F.3d at 1046–47 (emphasis added
by the Supreme Court of Alabama).
From pages 53 and 54 of the slip opinion:
MAM and Morgan Keegan argue that the Fund has failed to
establish that Kunis was even aware of the facts relating to
the existence of a business relationship and that Kunis's
lack of knowledge relative to the existence of a business
relationship precludes an (sic) finding of a reasonable
impression of impartiality constituting a finding of evident
partiality. The Fund counters with the argument that, where
an arbitrator has a duty to investigate possible conflicts,
the law will impose constructive knowledge of any
undiscovered conflict upon the arbitrator where the
arbitrator does nothing to fulfill his or her duty to inform
himself or herself of possible conflicts. MAM and Morgan
Keegan rely on Gianelli Money Purchase Plan & Trust v. ADM
Investor Services, Inc., 146 F.3d 1309 (11th Cir. 1998), in
support of its position that actual knowledge of a potential
conflict is necessary to establish a “reasonable impression
of impartiality” constituting a finding of “evident
partiality.”
From pages 58 through 61 of the slip opinion:
It appears that the Eleventh Circuit is the only court of
appeals that has "adopted a per se rule that a finding of
evident partiality is precluded by an arbitrator's lack of
'actual knowledge of the information upon which [an] alleged
"conflict" was founded.'" New Regency Prods., Inc. v. Nippon
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Herald Films, Inc., 501 F.3d 1101, 1109 (9th Cir. 2007)
(quoting Gianelli, 146 F.3d at 1313).
In Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994), a
case surveyed by this Court and relied on in part in
Waverlee Homes, an NASD arbitrator failed to disclose in his
arbitrator-disclosure forms that his law firm had
represented the parent company of the prevailing party in
the arbitration on at least 19 occasions during a 35-year
period, with the most recent representation occurring
approximately 21 months before the arbitration. The record
revealed that the arbitrator had run a "conflict check" for
the subsidiary company only, rather than for both the
subsidiary company and the parent company, even though the
arbitrator had reviewed documents that indicated that the
entity participating in the arbitration was a subsidiary of
the parent company. The NASD rules in effect at the time
Schmitz was decided are identical to the FINRA Rules
applicable in this case. The NASD rules were summarized by
the appellate court as follows:
"[A]n arbitrator must disclose (1) '[a]ny direct or
indirect financial or personal interest in the
outcome'; (2) 'any ... financial, business,
professional, family, or social relationships that are
likely to affect impartiality or might reasonably
create an appearance of partiality or bias'; and (3)
any personal relationships with any party, its counsel,
or witnesses. [NASD Code § 23(a)]. These relationships
must be disclosed whether maintained, presently or
previously, by the arbitrators or 'members of their
families or their current employers, partners, or
business associates.' Id. The NASD Code also requires
arbitrators to make an investigation regarding
potential conflicts of interest. NASD Code section
23(b) provides: 'Persons who are requested to accept
appointment as arbitrators should make a reasonable
effort to inform themselves of any interests or
relationships described in Paragraph (a) above.'"
Schmitz, 20 F.3d at 1044.
The losing party to the arbitration sought to have the
arbitration vacated pursuant to 9 U.S.C. § 10(a)(2), arguing
that the arbitrator was "evidently partial." The federal
district court held that a party seeking to vacate an
arbitration award based on "evident partiality" must prove
facts establishing a reasonable impression of evident
partiality and that arbitrators are required to disclose
only those facts of which they are aware at the time of the
hearing. The court then found that because the arbitrator
was unaware of his law firm's conflict at the time of the
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arbitration hearing the movants had failed to meet their
burden of proof. Thus, the district court held that no
"evident partiality" was present. Schmitz, supra.
In reversing the judgment of the district court and
determining that the arbitration award was due to be
vacated, the United States Court of Appeals for the Ninth
Circuit concluded that the arbitrator was "evidently
partial" as a result of his failure to disclose his law
firm's prior representations of the prevailing party's
parent company. In reaching this conclusion, the court
stated that "'evident partiality' is present when
undisclosed facts show a 'reasonable impression of
partiality'" and that "nondisclosure cases [do not] require[
] proof of actual bias in showing 'evident partiality.'"
Schmitz, 20 F.3d at 1046.
From page 65 of the slip opinion:
The Schmitz decision espouses the majority view in the
federal courts in determining whether an “evident
partiality” exists under 9 U.S.C. § 10(a)(2) in the context
of a failure-to-investigate/failure-to-disclose case. See
generally New Regency Productions, supra. We believe the
holding in Schmitz is the better view and conclude that the
“reasonable-impression-of-partiality” standard constituting
an “evident partiality” under 9 U.S.C. § 10(a)(2) may be
satisfied even though an arbitrator lacks actual knowledge
of the facts giving rise to the conflict of interest when
the arbitrator was under a duty to investigate in order to
discover possible conflicts and failed to do so. In such a
situation the arbitrator will be deemed to have constructive
knowledge of the conflict of interest, and the failure to
disclose the conflict may result in a “reasonable impression
of partiality.” Schmitz, 20 F.3d at 1048–49.
There is also no purpose to be served by this court’s
engaging in the same analysis employed by the Supreme Court of
Alabama as it compared the persuasive quality of the rationales
of the Ninth Circuit and of the Eleventh Circuit on the subject
at hand. Neither of these federal appellate courts has the
authority to pronounce the law of Alabama. Not only was Morgan
Keegan an actual party in Municipal Workers, but the facts and
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the legal issues in that case and in this case are
indistinguishable. Municipal Workers simply closes the door on
Morgan Keegan.
Conclusion
Either Morgan Keegan is asking this court to completely
misread Municipal Workers or to ignore it. This court
respectfully declines both of these implicit invitations. The
Municipal Workers opinion is the functional equivalent of the
Supreme Court of Alabama’s responding to a question of
controlling Alabama law certified to that court by this court.
Any lingering doubt about the substantive law of Alabama as
applicable to the undisputed facts in this case evaporated on
April 3. Prior to Municipal Workers, an intellectually honest
argument could be made, and was made, that in Alabama an
arbitration award could not be challenged solely on the basis of
an arbitrator's having failed to disclose a relationship with one
of the parties. It is now clear that a party can successfully
challenge an award without showing actual bias by an arbitrator
and without showing a knowing non-disclosure of a fact that might
call his impartiality into question. The Supreme Court of Alabama
has now firmly joined the courts who find that the purpose of the
Federal Arbitration Act can best be satisfied, not by placing on
a complaining party the heavy burden of demonstrating actual bias
or a knowing nondisclosure, but to place upon applicants for the
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powerful position of arbitrator the relatively light burden of
carefully examining their own backgrounds and revealing all facts
that might cause a party to doubt their impartiality. In other
words arbitrators must ascertain the relevant facts about their
potential impact in the selection procedure in favor of
disclosure. The arbitrator does not pass on his own
qualifications. The parties do.
For these reasons Mendel Parties' motion for summary
judgment will be granted by a separate order and Morgan Keegan’s
motion will be denied.

DONE this 26th day of May, 2015.

_____________________________
WILLIAM M. ACKER, JR.
UNITED STATES DISTRICT JUDGE

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