Wealth Rescue Strategies, Inc et al v. Thompson et al

Filing 53

MEMORANDUM OPINION AND ORDER DENYING 48 MOTION to Vacate arbitration award.(Signed by Judge Gray H. Miller) Parties notified.(rkonieczny)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
WEALTH RESCUE STRATEGIES, INC., et al.,
Plaintiffs,
v.
ROBERT W. THOMPSON , et al.,
Defendants.

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CIVIL ACTION H-08-3107

M EMORANDUM O PINION & O RDER
Pending before the court is an application to vacate an arbitration award rendered against
defendant Robert W. Thompson (“Thompson” or “defendant”). Dkt. 48. Upon consideration of the
application, response, reply, and applicable law, the application is DENIED.
I. BACKGROUND
Thompson and plaintiff Chris Jones (“Jones”), a California resident, were investment advisor
representatives at Walnut Street Securities, Inc., and they entered into a business arrangement in
2005 involving the division of fees from Thompson’s Houston-area customers. Dkt. 48 at 3–4. A
disagreement over fees between Jones and Thompson arose in late 2007, leading to the instant case.
Id. On May 12, 2008, plaintiffs Jones and Wealth Rescue Strategies, Inc. filed their original
complaint against the defendants in the United States District Court for the District of Arizona. Dkt.
2. After the action was transferred to the Southern District of Texas, this court ordered arbitration
of the dispute under the rules of the Financial Industry Regulatory Authority (“FINRA”). Dkts. 28,
44. Defendants then petitioned the FINRA director to set venue in Houston, Texas, and in March
2010 the director left the decision to the arbitral panel because the “issues raised by the parties

require factual determination.” Dkt. 48, Ex. A (letter from FINRA case administrator) at 1. The
arbitral panel ultimately denied defendants’ venue challenge. Dkt. 48 at 7–8.1
From July 23 through 26, 2012, the final arbitration hearing was held before a FINRA panel
in San Diego, California. Dkt. 48 at 2. Defendants called two live witnesses, Thompson and
Brownie Wheless, and produced fifteen affidavits from Texas customers, all of which were admitted.
Dkt. 50 at 3; Dkt. 48 at 8. Two customers testified telephonically in support of their affidavits. Dkt.
48 at 8 n.4.2 Defendants also introduced 150 exhibits and rested. Dkt. 50 at 3. After considering
the pleadings, testimony, and evidence presented at the hearing, the panel decided that Thompson
was solely liable to Jones for $100,000. Dkt. 48, Ex. B (arbitral award) at 3. All other claims and
counterclaims were denied in their entirety. Id. at 3–4.
In September 2012, Thompson filed an application to vacate the arbitration award in this
court, arguing that the panel’s erroneous failure to transfer venue substantially prejudiced his right
to present evidence and cross-examine witnesses. Dkt. 48 at 5. Plaintiffs respond that Thompson
and the other defendants suffered no prejudice from the adverse venue decision, as they had the
opportunity to present all of their witnesses’ testimony, either live or by deposition, and instead
chose to file fifteen affidavits and call five witnesses, three of whom appeared by phone. Dkt. 50
at 6–7. The matter is now ripe for decision.

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Although both sides acknowledge the panel’s denial of transfer to Houston, no party filed a copy of the panel’s
decision, if it was memorialized in a written order, or a transcript of an oral decision.
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Thompson claims in his application that the telephonic testimony was difficult to hear due to technical issues
with the telephone connection and an audio speaker. See Dkt. 48 at 8 n.4. The court accords no weight to this statement,
however, because it is not substantiated by any evidence in the record nor has Thompson shown that he objected to the
allegedly deficient audio quality of the telephonic testimony at the final hearing.

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II. ANALYSIS
A. Governing Law
Thompson moves to vacate the arbitration award under the Texas General Arbitration Act
(“TAA”). Dkt. 48 at 5. A court may vacate an award if the arbitrators “conducted the hearing,
contrary to Section ... 171.047, in a manner that substantially prejudiced the rights of a party.” See
TEX . CIV . PRAC. & REM . CODE § 171.088(a)(3)(D). Section 171.047 provides that a party at the
hearing is entitled to present evidence material to the controversy and cross-examine any witness.
Id. § 171.047. Plaintiffs respond that although Thompson cannot meet the high burden to vacate
an award under the TAA, the Federal Arbitration Act (“FAA”) should govern Thompson’s
application, as the court’s order on the motion to transfer venue was decided under the FAA. Dkt.
50 at 3.
The TAA applies to written arbitration agreements unless the agreement is excluded from
coverage by section 171.002 of the TAA, or the parties agree to proceed under the FAA. See TEX .
CIV . PRAC. & REM . CODE §§ 171.001–.002; see also Volt Info. Scis., Inc. v. Bd. of Trs. of Leland
Stanford Jr. Univ., 489 U.S. 468, 472 (1989) (parties may agree which statute applies to arbitration
proceedings). If an arbitration agreement can be interpreted as invoking both acts, the FAA preempts
a TAA provision to the extent the latter presents an impediment to the enforceability of arbitration
agreements. Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 98–100 (Tex. 2011).
In this case, because neither Thompson nor plaintiffs presented any arguments on the
preemption issue, and because the applicable statutory standards for vacatur under the FAA and TAA
are substantively identical, the court will apply the TAA in its analysis, but also consider common
law governing both statutes. See Judge Gray H. Miller & Emily Buchanan Buckles, Essay,
Reviewing Arbitration Awards in Texas, 45 HOUS. L. REV . 939, 952 (2008) (explaining that the
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enumerated reasons for vacatur under the TAA are “nearly identical” to those contained in § 10 of
the FAA).
B. Standard of Review
Texas law strongly favors arbitration, and review of an arbitral award is “extremely narrow.”
Centex/Vestal v. Friendship W. Baptist Church, 314 S.W.3d 677, 683 (Tex. App.—Dallas 2010, pet.
denied). An arbitration award has the same effect as a judgment of a court of last resort. Id.; see
also CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002). Accordingly, all reasonable
presumptions are indulged in favor of the award and the award is conclusive on the parties as to all
matters of fact and law. CVN Group, 95 S.W.3d at 238. Because of the deference given to
arbitration awards, the court focuses on the integrity of the process, not the propriety of the result.
TUCO Inc. v. Burlington N. R.R. Co., 912 S.W.2d 311, 315 (Tex. App.—Amarillo 1995), modified
and remanded on other grounds, 960 S.W.2d 629 (Tex. 1997). And when a party moves to vacate
an award on grounds that he was prejudiced by an arbitrator’s decision limiting presentation of
evidence or cross-examination of witnesses, vacatur is only warranted when the decision deprives
the party of a fair hearing. See Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan
Gas Bumi Negara, 364 F.3d 274, 301 (5th Cir. 2004) (“A federal court may vacate an arbitrator’s
award only if the arbitrator’s refusal to hear pertinent and material evidence prejudices the rights of
the parties to the arbitration proceedings.”) (internal quotation marks omitted).
C. Application of Law to Facts
First, Thompson argues that the FINRA director and arbitrators apparently “blatantly ignored
[FINRA’s] transfer factors in retaining venue in California.” See Dkt. 48 at 5. However, the three
transfer factors, as listed by Thompson, are not exclusive and contemplate that the ultimate decision
is left to the discretion of the FINRA director. Id. at 5–6 (citing FINRA Rule 13213(a)(1) on venue
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transfers, which states that “In cases involving members only or more than one associated person,
the Director will consider a variety of factors, including ...”). Thompson also failed to provide an
order from the arbitral panel or a transcript regarding the panel’s denial of defendants’ motion. Thus,
even if the court could review the merits of the panel’s decision, such review is impossible when,
like Hamlet without the prince, the court lacks a necessary component—the panel’s analysis.
Nevertheless, assuming that the arbitral panel erred in retaining venue in California, the court cannot
vacate the award absent a showing of substantial prejudice.
Here, Thompson concedes that the panel permitted introduction of witness affidavits to
support his contentions at the final hearing, but he contends that live testimony would have been
more effective. Dkt. 48 at 8. He also claims that because the affidavits were admitted, the arbitrators
permitted plaintiffs to present third-party testimony regarding statements made by persons who were
not available for cross-examination. Id. at 8–9. Thompson argues that he effectively was prevented
from cross-examining certain witnesses and presenting material evidence, substantially prejudicing
his rights. Id. at 9.
As stated above, vacatur of an arbitration award is appropriate in these circumstances only
when the non-prevailing party was denied a fair hearing. Karaha, 364 F.3d at 300–01. Thompson
does not argue that the arbitrators did not admit certain evidence; rather, Thompson argues that live
witness testimony would have had greater force. While that may be true, Thompson has not
demonstrated that the arbitrators did not consider the affidavits or allow witnesses to appear live or
telephonically. Further, regarding the hearsay issue, Thompson has not shown that he objected to
the hearsay testimony or was prevented from calling the declarants of the out-of-court statements.
Accordingly, even if a transfer of venue would have facilitated greater witness participation,

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Thompson has failed to demonstrate that the retention of venue in California substantially prejudiced
his rights, specifically the denial of his right to a fair hearing.
III. CONCLUSION
For the foregoing reasons, Thompson’s application to vacate the arbitration award (Dkt. 48)
is DENIED.
It is so ORDERED.
Signed at Houston, Texas on November 2, 2012.

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Gray H. Miller
United States District Judge

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