In Kingsbury Capital, Inc. vs. Kappel, 2020 WL 5512136 (N.D. IL September 14, 2020), a U.S. District Court in Illinois applied the Illinois Uniform Arbitration Act (IL UAA) and confirmed a Federal Industry Regulatory Authority (FINRA) arbitration while rejecting challenges based on jurisdiction and arbitrator partiality.
Kingsbury Capital, Inc. was a registered broker/dealer with the FINRA. Denise Kappel was a registered representative of Kingsbury. Kappel and Kingsbury had a dispute as to whether Kappel’s compensation agreement entitled her to be paid 70 percent of all the commissions she generated through Kingsbury or only 70 percent of the commissions she generated in her capacity as a Kingsbury registered representative.
The dispute arose after Kappel endeavored to sell a private placement to her clients in Ohio and, pursuant to Ohio law, was first required to register with Division of Securities of the Ohio Department of Commerce. Inasmuch as Kingsbury and its owners were not registered in Ohio, Kappel registered in Ohio through Trask, an Ohio broker/dealer, with Kingsbury’s approval. Kappel’s sale of the private placement was successful, and Trask paid her and Kingsbury cash and warrants, but in an amount lower than the 70 percent that Kappel claimed to be entitled. Kappel terminated her registration with Kingsbury and Trask in December 2014. Thereafter, the owners of Kingsbury sold Kingsbury’s assets to Edward C. Blitz Investment (Blitz), acquired ownership of Blitz, and changed Blitz’s name to Kingsbury (New Kingsbury). In May 2017, Kappel filed a FINRA arbitration against New Kingsbury and its individual owners (together, the New Kingsbury Parties) as well as Trask, seeking to recover her full compensation. Trask settled and made a payment to Kappel, but the New Kingsbury parties fought on. Ultimately, the FINRA panel awarded Kappel $130,000 from them.
The New Kingsbury Parties moved to vacate the award, and Kappel moved to confirm it. The district court analyzed the matter under the IL UAA with guidance from cases interpreting the Federal Arbitration Act (FFA), reasoning that the language of the two acts was essentially the same.
The New Kingsbury Parties moved to vacate the award for lack of jurisdiction, saying they had no arbitration agreement with Kappel. They argued that New Kingsbury was a separate entity from (the now defunct) Kingsbury and had never entered into an arbitration or any other kind of agreement with Kappel. The court noted, however, that after the arbitration was filed, New Kingsbury had signed a FINRA uniform submission agreement in which it agreed to arbitrate the parties’ claims. Given that New Kingsbury had signed the uniform submission agreement without reserving the right to contest jurisdiction, the court held that “the arbitration panel was within its power to issue an award against all of the Kingsbury Parties.”
The New Kingsbury Parties argued that the award should be vacated because the commissions from Kappel’s sale of the private placement in Ohio were generated in her capacity as a representative of Trask, not in her capacity as a Kingsbury representative and therefore were not covered by her compensation agreement. The court rejected this argument deferring to the arbitration panel’s interpretation of the parties’ agreement and stating that the New Kingsbury Parties had not shown that there was any “gross error of law or mistakes of fact on the face of the award.”
The New Kingsbury Parties also argued that the award should be vacated because the chair of the panel had shown evident partiality. They alleged that the chair had yelled at, ridiculed and demeaned counsel for the New Kingsbury Parties. The court noted that partiality must be proven by clear and convincing evidence. It did not comment on the chair’s alleged treatment of counsel for the New Kingsbury Parties, but instead concluded that “Without any evidence that [the chair] had a definite, direct, or demonstrable interest in the outcome of the proceedings, the Court does not find [the] alleged partiality a valid ground for vacating the arbitration award.”
Illinois attorneys have been known to wonder if the outcome of a motion to confirm an arbitration award might depend on whether the FAA or the IL UAA were applied. Though not resolving that question, the Kingsbury decision provides some authority that the outcome should be the same under either statute. The Kingsbury decision also warns that (1) objections to arbitral jurisdiction must be carefully preserved, particularly if one’s client is asked to sign a FINRA uniform submission agreement; and (2) objections based on the arbitrator’s alleged partiality need to be firmly supported by evidence and may require evidence that the arbitrator has a direct interest in the outcome of the case.