Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-alnd-2_13-cv-01630/USCOURTS-alnd-2_13-cv-01630-4/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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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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FILED

 2015 May-28 AM 10:35

U.S. DISTRICT COURT

N.D. OF ALABAMA

Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 1 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 2 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 4 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 5 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 6 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 7 of 14
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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Case 2:13-cv-01630-AKK Document 43 Filed 05/28/15 Page 8 of 14
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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