Antietam Industries, Inc. et al v. Morgan Keegan & Company, Inc.

Filing 49

ORDER adopting in part and rejecting in part 42 Report and Recommendation of the Magistrate Judge. Petitioners' Petition to Confirm Arbitration Award 1 is GRANTED in part and DENIED in part. Morgan Keegan's Motion to Vacate 7 is GR ANTED in part and DENIED in part. Petitioners' Motion for Sanctions 20 is DENIED. Morgan Keegan's Motion to Strike Petitioners' Notice of Filing of Supplemental Authority 35 is DENIED as moot. Petitioners' Request for Judic ial Notice 39 is DENIED as moot. Morgan Keegan's Request for Oral Arguement 47 is DENIED as moot. Within TWENTY-ONE (21) DAYS from the date of this Order, Petitioners shall submit a motion for attorneys' fees and costs incurred pursua nt to the claims made in the underlying arbitration and in defending the motion to vacate in this Court. Along with that motion, Petitioners shall submit a proposed judgment that includes both the arbitration award component and the attorneys' fees component. SEE ORDER FOR COMPLETE DETAILS. Signed by Judge Charlene Edwards Honeywell on 3/25/2013. (BGS)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
ORLANDO DIVISION
ANTIETAM INDUSTRIES, INC.,
WILLIAM WARFEL and JANICE
WARFEL,
Petitioners,
v.

Case No: 6:12-cv-1250-Orl-36TBS

MORGAN KEEGAN & COMPANY,
INC.,
Respondent.
___________________________________
ORDER
This cause comes before the Court on the Report and Recommendation of Magistrate
Judge Thomas B. Smith (Doc. 42). In the Report and Recommendation, Magistrate Judge Smith
recommends that Petitioners Antietam Industries, Inc., William Warfel, and Janice Warfel’s
(collectively, “Petitioners”) Petition to Confirm Arbitration Award (“Petition”) (Doc. 1) be
granted in part and denied in part, and that Respondent Morgan Keegan & Company, Inc.’s
(“Morgan Keegan”) Motion to Vacate Arbitration Award (“Motion to Vacate”) (Doc. 7) be
granted in part and denied in part. See Doc. 42, p. 18. Magistrate Judge Smith also recommends
that Petitioners’ Motion for Sanctions Pursuant to Hercules Steel (“Motion for Sanctions”) (Doc.
20, pp. 21–22) be granted, that Morgan Keegan’s Motion to Strike Petitioners’ Notice of Filing
of Supplemental Authority (Doc. 35) be denied, and that Petitioners’ Request for Judicial Notice
(Doc. 39) be denied as moot. See Doc. 42, p. 18. Morgan Keegan filed Objections to the Report
and Recommendation (Doc. 46), to which Petitioners responded (Doc. 48). As such, this matter
is ripe for review.

I.

BACKGROUND
This action arises from Petitioners’ maintenance of brokerage accounts with Morgan

Keegan, a broker-dealer registered with the U.S. Securities and Exchange Commission and also a
member of the Financial Industry Regulatory Authority (“FINRA”). Doc. 7-2, ¶¶ 3, 8. Morgan
Keegan recommended that Petitioners invest in four closed-end funds serviced by Morgan
Keegan and managed by an affiliate of Morgan Keegan, Morgan Asset Management, Inc. (the
“RMK Funds”). Id. at ¶¶ 10–12. Following Petitioners’ investment in the RMK Funds, the
RMK Funds significantly declined in value during the 2007-2008 financial crisis and Petitioners
sustained losses. Id. at ¶¶ 13, 36. Pursuant to the Morgan Keegan Client Agreements (“Client
Agreements”) requiring the parties to resolve any disputes by arbitration, Petitioners commenced
an arbitration proceeding before FINRA in February 2011 (the “Warfel arbitration”), alleging
that their losses were due to Morgan Keegan’s misrepresentations and lack of disclosure
regarding the risk and speculative nature of the RMK Funds. Id. at ¶¶ 13–36; Doc. 1-2, p. 1;
Doc. 7-8, pp. 2, 4, 6. Specifically, Petitioners claimed that Morgan Keegan represented the
RMK Funds as conservative bond funds, while in reality the RMK Funds were investing in risky
and highly speculative structured products, and that Morgan Keegan continued to misrepresent
and recommend the RMK Funds to Petitioners even after the RMK Funds had significantly
declined in value in 2007. Doc. 7-2, ¶¶ 15, 27.
In July 2011, as part of the arbitrator selection process, Petitioners and Morgan Keegan
had the opportunity to strike and/or rank 30 potential arbitrators from a list provided by FINRA
in accordance with the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA
Rules”). Doc. 43, p. 3, ll. 11–23. To assist with the selection process, the parties received an
Arbitrator Disclosure Report (“ADR”) for each potential arbitrator, including Christopher L.

2

Mass (“Arbitrator Mass”). See Doc. 7-13. ADRs are provided to arbitration parties by FINRA
in order to help the parties make informed decisions during the arbitrator selection process and
include information relating to the arbitrator’s skills, employment, education, training, disclosure
of conflicts, publicly available arbitration awards, and currently assigned arbitration cases.1 The
ADR for Arbitrator Mass, dated as of June 13, 2011, disclosed, among other things, that he was
at that time assigned to Case No. 09-03931 involving Merrill Lynch Pierce Fenner & Smith Inc.
(the “Coffey arbitration”), and that he had issued no publicly available awards. Doc. 7-13, p. 3.
Petitioners and Morgan Keegan both elected to rank Arbitrator Mass rather than strike him. Doc.
43, p. 3, ll. 15–25, p. 4, ll. 1–3. Based on the parties’ rankings, FINRA selected a panel of three
arbitrators, which initially did not include Arbitrator Mass. Doc. 7, p. 3, n.2.
By letter dated June 19, 2012, FINRA informed the parties that one of the arbitrators
selected for the Warfel arbitration had withdrawn from the panel, and that Arbitrator Mass would
replace him. Doc. 7-11. Attached to the letter was a revised ADR for Arbitrator Mass (“Revised
ADR”), dated as of June 18, 2012, which disclosed no publicly available awards and no longer
listed the Coffey arbitration as one of his current arbitrations involving public customers. Doc.
7-12, p. 3. On June 25, 2012, Arbitrator Mass submitted an Oath of Arbitrator affirming that he
had reviewed his Revised ADR, that he had nothing additional to disclose, and that his Revised
ADR was “accurate, current, and up to date.” Doc. 7-9, pp. 4–5.
The Warfel arbitration panel held a hearing on Petitioners’ claims from July 16 through
July 20, 2012, during which Petitioners and Morgan Keegan presented their arguments and
evidence. Doc. 43, p. 6, ll. 4–8. On August 2, 2012, the panel issued a unanimous award finding
Morgan Keegan liable for breach of fiduciary duty, negligence, negligent supervision, fraud, and
1

See FINRA, Arbitrator Disclosure, available at
http://www.finra.org/ArbitrationAndMediation/Arbitrators/Responsibilites/Disclosures/.

3

breach of contract. Doc. 1-2, p. 4. The panel ordered Morgan Keegan to pay Petitioners
compensatory damages in the amount of $100,000 with interest, punitive damages in the amount
of $100,000 with interest, attorneys’ fees “in an amount to be determined by a court of
competent jurisdiction pursuant to Florida Statutes § 57.105,” costs in the amount of $32,735,
and certain other arbitration fees. Id. at 4–5.
On August 14, 2012, Petitioners filed the instant Petition pursuant to the Federal
Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., to confirm the award they received in the Warfel
arbitration. Doc. 1. On August 31, 2012, Morgan Keegan filed the Motion to Vacate, arguing
that the award should be vacated pursuant to 9 U.S.C. §§ 10(a)(2) and 10(a)(3), because
Arbitrator Mass displayed “evident partiality” and “misbehavior” by failing to disclose a dissent
he had written in the Coffey arbitration prior to serving on the Warfel panel. Doc. 7, p. 2. In the
Coffey award, issued October 3, 2011, two of the three panelists found that the respondent
broker-dealer was not liable to the claimants in advising them to hold on to their investments in
Lehman Brothers bonds.2 Doc. 7-14, pp. 3–5. Arbitrator Mass dissented, writing in relevant
part:
While [the investor] was clearly a very knowledgeable and engaged investor, his
investment objective always remained conservative with the goal of preservation
of capital. The Lehman notes satisfied this objective when originally purchased.
They were highly rated and selling at nearly par value. However, on September
12, 2008 the price of the notes had dropped to 80, indicating significantly
increased risk. [The investor] knew this and that is the difficulty of the case for
him. However, it was still incumbent upon [the broker-dealer] to properly explain
the risk [the investor] faced and to allow him to make an informed investment
decision as to hold or sell the security. A broker is not relieved of this
responsibility when managing accounts for sophisticated investors.

2

The Coffey award was subsequently vacated by a California state court in Coffey v. Merrill
Lynch, Pierce, Fenner & Smith Inc., No. BS135308, 2011 WL 4830095 (Cal. Super. Ct. Apr. 3,
2012), allegedly due to the potential bias of an arbitrator other than Arbitrator Mass, and is now
on appeal. Doc. 7, p. 5, n.5.

4

Id. at 4–5. Morgan Keegan’s Motion to Vacate argues that Arbitrator Mass’ dissent in the
Coffey award shows that he had prejudged a central issue in the Warfel arbitration—that Morgan
Keegan owed Petitioners a duty to properly explain the risk of continuing to hold the RMK
Funds even after Petitioners had sustained losses—and therefore the Warfel award should be
vacated. Doc. 7, pp. 1–22.
Morgan Keegan’s Motion to Vacate also contends that the Warfel award should be
vacated in part pursuant to 9 U.S.C. § 10(a)(4) because the arbitrators “exceeded their powers”
by determining that Petitioners were entitled to attorneys’ fees in spite of the fact that the
attorneys’ fees issue had not been submitted to them.3 Id. at pp. 22–25.
On September 19, 2012, in conjunction with their Response in Opposition to Morgan
Keegan’s Motion to Vacate, Petitioners filed the Motion for Sanctions, asserting that Morgan
Keegan should be forced to pay Petitioners’ attorneys’ fees and costs incurred in opposing the
Motion to Vacate, as well as an additional monetary sanction of $500,000, for attacking the
Warfel award without any real legal basis. Doc. 20, pp. 21–22.
On November 30, 2012, Magistrate Judge Smith issued a Report and Recommendation
on the Petition, Morgan Keegan’s Motion to Vacate, and Petitioners’ Motion for Sanctions. Doc.
42. In the Report and Recommendation, Magistrate Judge Smith recommends that: (1) the
Warfel award be vacated with respect to Petitioners’ entitlement to attorneys’ fees because the
arbitrators “exceeded their powers” by deciding an issue not submitted to them; (2) the Warfel
award be confirmed in all other respects because Arbitrator Mass’ failure to disclose his dissent
in the Coffey arbitration did not amount to “evident partiality” or “misbehavior” under 9 U.S.C.
§§ 10(a)(2) and 10(a)(3), respectively; (3) Morgan Keegan be judicially estopped from arguing
3

In this Order, the Court uses the term “attorneys’ fees” to refer to both attorneys’ fees and costs
incurred in bringing the action, unless otherwise indicated.

5

that Arbitrator Mass’ dissent in the Coffey arbitration shows that he prejudged the claims in the
Warfel arbitration, because such an argument is wholly inconsistent with positions Morgan
Keegan has taken in previous cases; and (4) Petitioners’ Motion for Sanctions be granted and
Morgan Keegan be required to pay Petitioners’ reasonable attorneys’ fees and costs incurred in
opposing Morgan Keegan’s Motion to Vacate because Morgan Keegan attacked the Warfel
award without any real legal basis.4 Id. at pp. 16, 18.
II.

STANDARD OF REVIEW
When a party makes a timely and specific objection to a Magistrate Judge’s Report and

Recommendation, the district judge “shall make a de novo determination of those portions of the
report or specified proposed findings or recommendations to which objection is made.” 28
U.S.C. § 636(b)(1)(C); Jeffrey S. v. State Bd. of Educ. of State of Georgia, 896 F.2d 507, 512
(11th Cir. 1990). The district judge may accept, reject, or modify in whole or in part, the Report
and Recommendation of the Magistrate Judge. Fed. R. Civ. P. 72(b)(3). The district judge may
also receive further evidence or recommit the matter to the Magistrate Judge with further
instructions. Id.
III.

DISCUSSION
Morgan Keegan asserts the following objections to Magistrate Judge Smith’s Report and

Recommendation: (1) the entire Warfel award should be vacated because Arbitrator Mass’
failure to disclose his dissent in the Coffey arbitration constituted “evident partiality” and
“misbehavior” under 9 U.S.C. §§ 10(a)(2) and 10(a)(3), respectively; (2) judicial estoppel should
not be applied in this case; and (3) sanctions should not be imposed against Morgan Keegan

4

Magistrate Judge Smith also recommends that Morgan Keegan’s Motion to Strike Petitioners’
Notice of Filing of Supplemental Authority (Doc. 35) be denied and that Petitioners’ Request for
Judicial Notice (Doc. 39) be denied as moot. Doc. 42, p. 18.

6

because it had a real legal basis for attacking the award. Doc. 46. Neither Petitioners nor
Morgan Keegan have objected to the Magistrate Judge’s recommendation that the Warfel award
be vacated with respect to Petitioners’ entitlement to attorneys’ fees.
A.

Vacatur under 9 U.S.C. § 10

Pursuant to the FAA, a party may apply to a district court for an order confirming an
arbitration award, and “the court must grant such an order unless the award is vacated, modified,
or corrected as prescribed” in the statute. 9 U.S.C. § 9. Following the Supreme Court’s decision
in Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the Eleventh Circuit has held
that the only grounds for vacatur of an arbitration award are the four narrow statutory bases set
forth in 9 U.S.C. §§ 10(a)(1)–(4). Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1324
(11th Cir. 2010). The four statutory bases under which a court may vacate an award are:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of
them;
(3) 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 of any other misbehavior by which the rights
of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the subject matter submitted was not
made.
9 U.S.C. § 10(a). Morgan Keegan relies on §§ 10(a)(2)–(4) in seeking to vacate the Warfel
award. “There is a presumption under the FAA that arbitration awards will be confirmed, and
‘federal courts should defer to an arbitrator’s decision whenever possible.’ ” Frazier, 604 F.3d at
1321 (quoting B.L. Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905, 909 (11th Cir.
2006)). “The party challenging the arbitration award bears the burden of asserting sufficient

7

grounds to vacate the award.” Aldred v. Avis Rent-A-Car, 247 F. App’x 167, 169 (11th Cir.
2007) (internal quotations omitted).
1.

Arbitrator Mass Did Not Display “Evident Partiality” Under 9 U.S.C. §
10(a)(2)

Morgan Keegan argues that the Warfel award should be vacated due to “evident
partiality” under 9 U.S.C. § 10(a)(2) because Arbitrator Mass’ failure to disclose his Coffey
dissent suggests that he had already prejudged the central issues in the Warfel arbitration. Doc.
7, p. 17. “ ‘[A]n arbitration award may be vacated due to the ‘evident partiality’ of an arbitrator
only when either (1) an actual conflict exists, or (2) the arbitrator knows of, but fails to disclose,
information which would lead a reasonable person to believe that a potential conflict exists.’ ”
World Bus. Paradise, Inc. v. Suntrust Bank, 403 F. App’x 468, 470 (11th Cir. 2010) (quoting
University Commons-Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d 1331, 1339 (11th
Cir. 2002)). Morgan Keegan does not argue that an actual conflict exists. See Doc. 7, p. 16.
Therefore, Morgan Keegan must show that Arbitrator Mass failed “to disclose those facts that
create a reasonable impression of partiality, or put another way, information which would lead a
reasonable person to believe that a potential conflict exists. The partiality alleged must be direct,
definite and capable of demonstration rather than remote, uncertain and speculative.” University
Commons, 304 F.3d at 1339 (internal citations and quotations omitted).
Importantly, the cases in the Eleventh Circuit—and, to the Court’s knowledge,
elsewhere—addressing “evident impartiality” due to an arbitrator’s non-disclosure have involved
undisclosed relationships that the arbitrator had with a party or a party’s counsel, family, or
others. See, e.g., id. at 1334–35 (arbitrator failed to disclose his business relationship with a
representative of one of the parties and with counsel to both parties); Gianelli Money Purchase
Plan & Trust v. ADM Investor Services, Inc., 146 F.3d 1309, 1310 (11th Cir. 1998) (arbitrator

8

failed to disclose that he had served as counsel to the corporate representative of one of the
parties to the arbitration); Middlesex Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1199 (11th Cir.
1982) (arbitrator failed to disclose that his family-owned insurance company was in adversarial
litigation with one of the parties to the arbitration).
Indeed, the Second Circuit recently stated that “the decisions under § 10(a)(2)’s ‘evident
partiality’ provision have addresse[d] non-disclosure only of facts bearing on partiality—namely,
a relationship with a party, a lawyer, or another arbitrator.” STMicroelectronics, N.V. v. Credit
Suisse Sec. (USA) LLC, 648 F.3d 68, 74 (2d Cir. 2011) (quotations omitted) (emphasis added).
In fact, in STMicroelectronics, the court noted that the appellant, who was seeking vacatur based
on an arbitrator’s alleged predisposition on an issue of law, had abandoned seeking vacatur under
§ 10(a)(2) because vacatur under that subsection of the statute requires non-disclosure of
relationships. Id.
Here, Morgan Keegan has not alleged that Arbitrator Mass had a past or existing
relationship with any party, arbitrator, counsel, family member, or witness, or that he had any
other financial or personal interest in the outcome of the Warfel arbitration. Rather, Morgan
Keegan’s sole basis for the § 10(a)(2) challenge is that Arbitrator Mass’ dissent in the Coffey
arbitration shows that he was predisposed on an issue of law, and that he therefore prejudged the
Warfel arbitration. Morgan Keegan has failed to cite a single case, nor is the Court aware of any,
in which a court has found evident partiality due to an arbitrator’s predisposition on a point of
law, and the Court will not create such a basis for vacatur under § 10(a)(2) now. Arbitration is a
preferred method of dispute resolution, in part, because arbitrators are often experienced in the
industry, even though they may be “precommitted to a particular substantive position.” Merit
Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir. 1983) (Posner, J.); accord University

9

Commons, 304 F.3d at 1340 (“an arbitrator’s experience in an industry, far from requiring a
finding of partiality, is one of the factors that can make arbitration a superior means of resolving
disputes”).
Even if predisposition on an issue of law was a viable ground for vacatur, the Court is not
convinced that Arbitrator Mass was predisposed or that he prejudged the Warfel arbitration. The
Coffey arbitration was a wholly unrelated arbitration with its own set of facts. Moreover,
Arbitrator Mass’ dissent in the Coffey award merely stated that, in those circumstances, the
broker had failed to properly explain the risk that the investor faced in continuing to hold his
investments.5 See Doc. 7-14, p. 4. The mere fact that Arbitrator Mass believed that the broker in
the Coffey arbitration had improperly explained the risk of the Lehman bonds does not mean that
he was predisposed to find that Morgan Keegan was liable in the Warfel arbitration, or that he
had prejudged the case. To the contrary, in his Coffey dissent, Arbitrator Mass declared that, as
a general rule, “[a] broker is not legally liable for making an incorrect investment
recommendation.” Id. The partiality alleged by Morgan Keegan is remote, uncertain, and
speculative rather than direct and definite. In sum, Morgan Keegan has not demonstrated that
Arbitrator Mass failed to disclose information which would lead a reasonable person to believe
that a potential conflict exists. Accordingly, the Court rejects Morgan Keegan’s argument that
the Warfel award should be vacated for “evident partiality” under § 10(a)(2).
2.

Arbitrator Mass Was Not Guilty of “Misbehavior” Under 9 U.S.C. §
10(a)(3)

Morgan Keegan next argues that Arbitrator Mass’ failure to disclose his dissent in the
Coffey arbitration was “misbehavior” which prejudiced Morgan Keegan, entitling it to vacatur
5

The notion that a broker should properly explain the risk of an investment is certainly not a
novel one, as the Eleventh Circuit has recognized that a broker has a fiduciary duty to inform the
investor of the risks involved in purchasing or selling securities. See, e.g., Gochnauer v. A.G.
Edwards & Sons, Inc., 810 F.2d 1042, 1049 (11th Cir. 1987).

10

under 9 U.S.C. § 10(a)(3). Doc. 7, pp. 10–16. Morgan Keegan asserts that it was prejudiced
because, had it been informed of the Coffey dissent, it would have sought Arbitrator Mass’
removal or recusal under FINRA Rules, tailored its presentation of evidence and argument
during the arbitration to address Arbitrator Mass’ dissent in the Coffey arbitration, or accepted
that Arbitrator Mass had prejudged the case and settled with Petitioners. Id. at p. 15.
Vacatur is permitted under § 10(a)(3) “[w]here the arbitrators are 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 of any other misbehavior by which the rights of any
party have been prejudiced[.]” 9 U.S.C. § 10(a)(3) (emphasis added). Decisions in the Eleventh
Circuit addressing vacatur under § 10(a)(3) generally involve the first two prongs—misconduct
in refusing to postpone a hearing or in refusing to hear evidence. See, e.g., Robbins v. Day, 954
F.2d 679, 684 (11th Cir. 1992); Spungin v. GenSpring Family Offices, LLC, No. 11–mc–81287,
2012 WL 3236506, at *4 (S.D. Fla. May 25, 2012); Marshall & Co., Inc. v. Duke, 941 F. Supp.
1207, 1211 (N.D. Ga. 1995). Morgan Keegan, however, seeks vacatur under the third “catchall” prong. Doc. 7, p. 10.
The Second Circuit recently stated in STMicroelectronics that it was unaware of any
cases that have addressed claims of insufficient disclosure under the “other misbehavior” prong.
648 F.3d at 74; see also Stone v. Bear, Stearns & Co., Inc., 872 F. Supp. 2d 435, 449 (E.D. Pa.
2012) (noting the “dearth of case law on failure-to-disclose-type ‘misbehavior’ ”).

In

STMicroelectronics, the Second Circuit considered a broker-dealer’s motion to vacate a
unanimous FINRA arbitration award under the “other misbehavior” prong of § 10(a)(3). 648
F.3d at 74. The broker-dealer alleged that an arbitrator’s ADR did not properly disclose, among
other things, that “he had served as a claimant-side expert witness on an issue very similar to the

11

one that would determine the arbitration.” Id. at 73–74. The court did not reach the “hotly
contested” questions of whether “the ‘other misbehavior’ clause in 9 U.S.C. § 10(a)(3) extends to
insufficient disclosure [and whether] violation of the FINRA rules necessarily constitutes such
‘other misbehavior.’ ” Id. at 76. Instead, the court held that an arbitrator’s failure to disclose his
predisposition on an issue of law could not form the basis for vacatur:
[T]he major premise of [the broker’s] attack on [the arbitrator’s] non-disclosure of
his prior testimony fails. There is no contention here that [the arbitrator] had any
prior knowledge of, or misconception about, the facts of this case. [The broker’s]
argument, rather, is that his testimony suggests he had pre-existing views about
potentially relevant propositions of law. However, “[a] judge’s lack of
predisposition regarding the relevant legal issues in a case has never been thought
a necessary component of equal justice, and with good reason. For one thing, it is
virtually impossible to find a judge who does not have preconceptions about the
law.” Repub. Party of Minn. v. White, 536 U.S. 765, 777, 122 S.Ct. 2528, 153
L.Ed.2d 694 (2002). This is all the more true for arbitrators, “[t]he most soughtafter” of whom “are those who are prominent and experienced members of the
specific business community in which the dispute to be arbitrated arose.” Int’l
Produce, Inc. v. A/S Rosshavet, 638 F.2d 548, 552 (2d Cir. 1981). . . . A party
might like to know . . . information [regarding an arbitrator’s predisposition on an
issue of law] when shopping for arbitrators, but its absence cannot form a ground
for vacating an arbitral award.
STMicroelectronics, 648 F.3d at 77.
This Court agrees with the Second Circuit’s reasoning and holding in STMicroelectronics
and finds it instructive. Arbitrator Mass’ statement in his Coffey dissent that the broker had
failed in its duty to properly explain the risk that the investor faced in continuing to hold his
investments should not serve as a basis for vacatur under § 10(a)(3), even if such information
was not disclosed on his ADR. Holding otherwise would be inconsistent with the fundamental
purposes and nature of arbitration.
Regardless, even if failure to disclose a predisposition of law was a proper basis for
vacatur under § 10(a)(3), the Court has already determined that Morgan Keegan failed to show

12

Arbitrator Mass was predisposed here or that he prejudged the Warfel arbitration. See supra Part
III.A.1.
Morgan Keegan relies heavily on Citigroup Global Markets, Inc. v. Berghorst, No. 1180250-CIV, 2012 WL 5989628 (S.D. Fla. Jan. 20, 2012), for the proposition that an arbitrator’s
failure to disclose can serve as the basis for vacatur under § 10(a)(3), arguing that it is directly on
point.

The Court disagrees with Morgan Keegan’s assertion and finds Berghorst to be

distinguishable. In Berghorst, decided after STMicroelectronics, a broker-dealer challenged a
FINRA arbitration award issued by a 2-1 vote. Id. at *3. The broker-dealer alleged that an
arbitrator had failed to update his responses to an Arbitrator Disclosure Checklist to reflect his
commencement of a concurrent arbitration proceeding against his former employer—Wells
Fargo, a broker-dealer—for trading losses in his individual retirement account, retaliatory
termination, and defamation, as well as a foreclosure proceeding brought by Wells Fargo against
him. Id. at *2. The court observed that “[a]n arbitrator currently embroiled in battles with a
large national bank would be perceived by objective observers as likely to be partial to plaintiffs
embroiled in their own dispute with a large national bank. That is especially true here, given the
highly personal nature of [the arbitrator’s] disputes with Wells Fargo. . . .”6 Id. at *4. Therefore,
the court held that the arbitrator’s lack of disclosure was “misbehavior” under § 10(a)(3) and
vacated the arbitration award. Id. at *5.
Here, however, Arbitrator Mass’ non-disclosure related to his alleged predisposition on
an issue of law, reflected in his dissent in the Coffey arbitration. This non-disclosure pales in
comparison to the non-disclosure in Berghorst, which related to an arbitrator’s failure to disclose

6

Although the quoted portion of Berghorst related to the court’s finding of “evident partiality”
under § 10(a)(2), it was clearly relevant to the court’s finding of “misbehavior” under § 10(a)(3).
See id. at *5.

13

“highly personal…battles [he] was fighting [against another broker-dealer] during the very time
he was serving as an arbitrator. . . .” Id. at *4; see Stone, 872 F. Supp. 2d at 449, n.9
(distinguishing Berghorst, stating that an arbitrator’s “alleged non-disclosure pale[d] in
comparison to the arbitrator’s in Berghorst” due to the Berghorst arbitrator’s failure to disclose
“that he had been waging a heated legal battle against his former employer, Wells
Fargo/Wachovia (a registered broker-dealer), for wrongful termination, among other things”). In
addition, the arbitrator at issue in Berghorst provided the decisive vote in a 2-1 decision, whereas
Petitioners here would have won regardless of Arbitrator Mass’ vote, as the decision was
unanimous. See Stone, 872 F. Supp. 2d at 449, n.9 (also distinguishing Berghorst on this basis).
In any event, the Court has explained that Arbitrator Mass’ failure to disclose his dissent in the
Coffey arbitration is not a sufficient basis for vacatur in this case. Accordingly, Berghorst is
inapposite, and the Court—like the Second Circuit in STMicroelectronics—need not decide as a
general matter whether an arbitrator’s non-disclosure can ever serve as a basis for vacatur under
the “other misbehavior” clause of § 10(a)(3). See STMicroelectronics, 648 F.3d at 76.
Also like the Second Circuit in STMicroelectronics, this Court need not answer the
question of whether a violation of FINRA Rules necessarily constitutes such “other
misbehavior,” because the Court is not convinced that Arbitrator Mass violated any FINRA
Rule. See id. The only FINRA Rules arguably applicable are FINRA Rules 12405(a) and (b):
(a) Before appointing arbitrators to a panel, the Director [of FINRA Dispute
Resolution] will notify the arbitrators of the nature of the dispute and the identity
of the parties. Each potential arbitrator must make a reasonable effort to learn of,
and must disclose to the Director, any circumstances which might preclude the
arbitrator from rendering an objective and impartial determination in the
proceeding, including:
(1) Any direct or indirect financial or personal interest in the outcome of the
arbitration;

14

(2) Any existing or past financial, business, professional, family, social, or other
relationships or circumstances with any party, any party’s representative, or
anyone who the arbitrator is told may be a witness in the proceeding, that are
likely to affect impartiality or might reasonably create an appearance of partiality
or bias;
(3) Any such relationship or circumstances involving members of the arbitrator’s
family or the arbitrator’s current employers, partners, or business associates; and
(4) Any existing or past service as a mediator for any of the parties in the case for
which the arbitrator has been selected.
(b) The obligation to disclose interests, relationships, or circumstances that might
preclude an arbitrator from rendering an objective and impartial determination
described in paragraph (a) is a continuing duty that requires an arbitrator who
accepts appointment to an arbitration proceeding to disclose, at any stage of the
proceeding, any such interests, relationships, or circumstances that arise, or are
recalled or discovered.
Paragraphs (1) through (4) of FINRA Rule 12405(a) are not implicated by Arbitrator Mass’
dissent in the Coffey arbitration. Consistent with the rest of this Order, the Court also finds that
his dissent was not a “circumstance[ ] which might preclude [him] from rendering an objective
and impartial determination in the proceeding.” Therefore, there was no violation of FINRA
Rule 12405(a) and, accordingly, no violation of FINRA Rule 12405(b).
Indeed, Morgan Keegan does not expressly argue that Arbitrator Mass has violated any
FINRA Rule. Rather, Morgan Keegan’s argument focuses on the fact that Arbitrator Mass
submitted his Oath of Arbitrator affirming that his Revised ADR required no further disclosure,
when in fact it failed to disclose that he participated in a publicly available award in the Coffey
arbitration. Doc. 46, pp. 4–6. The Court does not view this as a sufficient basis for vacating the
award in light of Arbitrator Mass’ general compliance with FINRA Rules. Moreover, Arbitrator
Mass’ participation in the Coffey arbitration was disclosed to Morgan Keegan in his initial ADR.
Doc. 7-13, p. 3. Morgan Keegan could have simply accessed FINRA’s Arbitration Awards
Online database, as the Court has done, typed in the case number, and monitored whether an

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award had been issued in the Coffey arbitration.

See FINRA Arbitration Awards Online,

available at http://finraawardsonline.finra.org/. Thus, Arbitrator Mass’ omission of the Coffey
award in his Revised ADR will not serve as a basis for vacatur here.
In sum, Morgan Keegan has not carried its heavy burden of showing that the Warfel
award should be vacated for “misbehavior” under § 10(a)(3), and therefore this objection to the
Magistrate Judge’s Report and Recommendation is rejected.
3.

The Arbitrators “Exceeded Their Powers” Under 9 U.S.C. § 10(a)(4)

In the Report and Recommendation, Magistrate Judge Smith recommends that the portion
of the Warfel award finding that Petitioners are entitled to attorneys’ fees be vacated because the
arbitrators “exceeded their powers” under 9 U.S.C. § 10(a)(4) by deciding an issue not submitted
to them. Doc. 42, pp. 10–13. Neither Petitioners nor Morgan Keegan have objected to this
recommendation and, in any event, the Court agrees.
“[T]he law is well-established that an arbitrator can bind the parties only on issues that
they have agreed to submit to him.” Davis v. Prudential Sec., Inc., 59 F.3d 1186, 1194 (11th Cir.
1995). When arbitrators decide an attorneys’ fees issue not submitted to them, they have
exceeded their powers and vacatur of that portion of the award is proper under § 10(a)(4). Id. at
1195. Here, the Client Agreements, which contained Tennessee choice-of-law clauses, stated
that any expenses, including attorneys’ fees, incurred by Morgan Keegan in defense of an action
brought by Petitioners against Morgan Keegan would be borne solely by Petitioners should
Morgan Keegan prevail. Doc. 7-8, pp. 3, 5, 7. Seeking to take advantage of a Florida statute that
permits a court to convert such a unilateral attorneys’ fees provision into a reciprocal obligation,
Fla. Stat. § 57.105(7), Petitioners asked the Warfel arbitration panel to grant them attorneys’ fees
in their Amended Statement of Claim. Doc. 7-2, ¶ 35. However, Morgan Keegan expressly
reserved its right to seek attorneys’ fees from a court pursuant to the Client Agreements in its

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Answer to Petitioners’ Statement of Claim (“Answer”), maintaining that the attorneys’ fees issue
was not before the arbitration panel. Doc. 7-6, pp. 27–28. Therefore, the arbitrators exceeded
their powers by finding that Petitioners were entitled to attorneys’ fees.
To the extent that Morgan Keegan’s Answer might be construed as waiving this right due
to a statement in its Conclusion that the arbitration panel should grant attorneys’ fees to Morgan
Keegan,7 the Court agrees that any such waiver was subsequently withdrawn during closing
arguments before the panel, where again Morgan Keegan stated that the attorneys’ fees issue was
not before the panel. Doc. 7-6, p. 28; Doc. 7-15, pp. 192–94; see Deitchman v. Bear Stearns Sec.
Corp., No. 07-60465-CIV, 2007 WL 4592238, at *6–7 (S.D. Fla. Dec. 28, 2007) (vacating
arbitration panel’s award of attorneys’ fees where broker initially put the issue of attorneys’ fees
before the panel but later withdrew that issue from consideration). Accordingly, the Court agrees
with Magistrate Judge Smith’s recommendation that the portion of the Warfel award granting
attorneys’ fees should be vacated under § 10(a)(4) and that the issues of entitlement to, and
amount of, attorneys’ fees should be litigated and decided in this Court.
B.

Judicial Estoppel

Magistrate Judge Smith further recommends that Morgan Keegan be judicially estopped
from arguing that Arbitrator Mass was predisposed in favor of Petitioners, because Morgan
Keegan had taken wholly inconsistent positions when opposing challenges to other arbitrators in
previous arbitrations. Doc. 42, pp. 13–16. Under the doctrine of judicial estoppel, “a party is
precluded from asserting a claim in a legal proceeding that is inconsistent with a claim taken by
that party in a previous proceeding. Judicial estoppel is an equitable concept intended to prevent
7

Morgan Keegan claims that this statement was a scrivener’s error. Doc. 7, p. 23, n.19. Aside
from this one statement, Morgan Keegan consistently argued that the attorneys’ fees issue was
not before the arbitration panel. See Doc. 7-6, pp. 27–28; Doc. 7-15, pp. 192–94; Doc. 43, pp.
35, 61–65, 85–86.

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the perversion of the judicial process.” Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285
(11th Cir. 2002). A court may invoke judicial estoppel at its discretion. Id. (citing New
Hampshire v. Maine, 532 U.S. 742, 750 (2001)). Because the Court has determined that the
Warfel award will be confirmed—except with respect to Petitioners’ entitlement to attorneys’
fees—it need not invoke judicial estoppel in this case. Accordingly, the Court declines to adopt
the Magistrate Judge’s recommendation on this point.
C.

Petitioners’ Motion for Sanctions

Finally, the Magistrate Judge recommends that the Court grant Petitioners’ Motion for
Sanctions, proposing that Petitioners be awarded their reasonable attorneys’ fees and costs
incurred in opposing Morgan Keegan’s Motion to Vacate. Doc. 42, pp. 17–18. The Magistrate
Judge stated that sanctions were appropriate under the Eleventh Circuit’s decision in Hercules
Steel because there was no real legal basis for Morgan Keegan’s Motion to Vacate. Id. at 17.
In Hercules Steel, the Eleventh Circuit recognized that a court may impose sanctions “if a
party on the short end of an arbitration award attacks that award in court without any real legal
basis for doing so.” 441 F.3d at 913. Here, however, Morgan Keegan clearly had at least one
real legal basis for attacking the award, as the Court has concluded that the arbitration panel’s
award of attorneys’ fees to Petitioners should be vacated under 9 U.S.C. § 10(a)(4) because the
arbitrators exceeded their powers. Therefore, the Court will not impose sanctions in this case
and declines to adopt the Magistrate Judge’s recommendation on this point. See First Auto. Serv.
Corp., N.M. v. First Colonial Ins. Co., No. 3:07-cv-682, 2010 WL 2431889, *6 (M.D. Fla. June
16, 2010) (declining to impose sanctions where the arbitration panel’s decision to award
attorneys’ fees raised colorable questions of law, even where the challenge to that portion of the
award was not ultimately meritorious).

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IV.

CONCLUSION
After careful consideration of the Report and Recommendation of the Magistrate Judge,

in conjunction with an independent examination of the court file, the Court is of the opinion that
the Magistrate Judge’s Report and Recommendation should be adopted in part and rejected in
part.
Accordingly, it is hereby ORDERED as follows:
1) The Report and Recommendation of the Magistrate Judge (Doc. 42) is
adopted in part and rejected in part as follows:
a. Petitioners’ Petition to Confirm Arbitration Award (Doc. 1) is
GRANTED in part and DENIED in part:
i. The Petition is DENIED to the extent it seeks to confirm the
award of attorneys’ fees and costs.
ii. The Petition is GRANTED in all other respects.
b. Morgan Keegan’s Motion to Vacate (Doc. 7) is GRANTED in part
and DENIED in part:
i. The Motion to Vacate is GRANTED to the extent it seeks to
vacate the award of attorneys’ fees and costs.
ii. The Motion to Vacate is DENIED in all other respects.
c. Petitioners’ Motion for Sanctions (Doc. 20) is DENIED.
d. Morgan Keegan’s Motion to Strike Petitioners’ Notice of Filing of
Supplemental Authority (Doc. 35) is DENIED as moot.
e. Petitioners’ Request for Judicial Notice (Doc. 39) is DENIED as
moot.

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2) Morgan Keegan’s Request for Oral Argument (Doc. 47) is DENIED as moot.
3) Within TWENTY-ONE (21) DAYS from the date of this Order, Petitioners
shall submit a motion for attorneys’ fees and costs incurred pursuant to the
claims made in the underlying arbitration and in defending the motion to
vacate in this Court. Along with that motion, Petitioners shall submit a
proposed judgment that includes both the arbitration award component and the
attorneys’ fees component.
DONE and ORDERED in Orlando, Florida on March 25, 2013.

Copies furnished to:
Counsel of Record
Unrepresented Parties
United States Magistrate Judge Thomas B. Smith

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