August 07, 2015 Practice Points

Award Vacated Due to Arbitrator's Failure to Disclose

By James N. Walter, Jr.

In Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., 2015 WL 1524911 (Ala. April 3, 2015), the Alabama Supreme Court vacated an arbitration award when one arbitrator on a three–arbitrator panel failed to disclose his investment firm’s relationship with one of the parties and its counsel.

The Municipal Workers Compensation Fund, Inc. (Fund) hired Morgan Keegan Asset Management, Inc. (MAM) to invest and manage funds. The Fund lost approximately $15 million when the subprime housing market collapsed.

The Fund initiated FINRA arbitration proceedings asserting various claims, including breach of contract, breach of fiduciary duty and violation of state securities laws. The parties selected a panel of three arbitrators based on disclosure reports. One of the arbitrators was a vice president/partner in a “relatively small” investment firm. The arbitrator failed to disclose that his investment firm had been a co-underwriter with MAM on numerous equity and debt issuances and had been co–defendants in a number of lawsuits. The arbitrator also failed to disclose that his investment firm had a past and ongoing attorney–client relationship with MAM’s counsel.

The arbitrators denied the Fund’s claims following a hearing. The lower court refused to vacate the arbitration judgment, and the Fund appealed to the Alabama Supreme Court. Reversing the lower court’s decision, the Alabama Supreme Court held that the Fund established evident partiality on the part of the arbitrator under 9 U.S.C. § 10(a)(2) and was entitled to have award vacated. The Court noted that FINRA rules impose upon the arbitrator the duty to make a reasonable effort to discover business relationships between his investment firm and the parties and their legal counsel. Although the arbitrator lacked actual knowledge of his firm’s business relationship with MAM and its counsel, he had constructive knowledge of that relationship. The Alabama Supreme Court held that the arbitrator’s failure to disclose the relationship resulted in a “reasonable impression of partiality” and required the arbitration award to be vacated. The Court also held that the finding of evident partiality in one arbitrator required vacatur of the arbitration award by the panel.

Municipal Workers Compensation Fund serves as yet another reminder of the importance of conflicts checks and the disclosure of all business relationships between a potential arbitrator’s firm and a party. Although an arbitrator may lack actual knowledge of his or her firm’s relationship with a party or its counsel, the arbitrator may be deemed to have constructive knowledge of that relationship requiring vacatur of an arbitration award.

Keywords: alternative dispute resolution, adr, litigation, disclosure, constructive knowledge, vacatur

James N. Walter, Jr. is with Capell & Howard P.C. in Montgomery, Alabama.


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