Fidelity Federal Bank,FSB v. Durga Ma Corp.

Citations: 386 F.3d 1306; 2004 WL 2415045Docket: Nos. 02-56381, 02-56548

Court: Court of Appeals for the Ninth Circuit; October 29, 2004; Federal Appellate Court

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Fidelity Federal Bank, FSB appeals two district court orders related to an arbitration award in favor of Durga Ma Corporation arising from a breach of contract claim. The first appeal, No. 02-56548, challenges the order that confirmed the arbitration award under the Federal Arbitration Act (FAA), while the second, No. 02-56381, contests the denial of Fidelity's motion to vacate the award due to alleged evident partiality of the arbitrator appointed by Durga Ma. Fidelity asserts that the arbitrator failed to disclose family and business ties with Durga Ma's attorneys, despite agreeing to act neutrally. The appeals are consolidated, and the court affirms the lower court's decisions, concluding that Fidelity waived its right to seek vacatur based on the arbitrator's evident partiality since it had constructive notice of the arbitrator's potential connections but did not raise objections until after an interim award was issued. The underlying dispute stems from a Private Label Credit Card Marketing and Origination Agreement between Fidelity and Durga Ma, which included a binding arbitration clause specifying arbitration procedures and venue. Both parties selected their arbitrators, and a neutral arbitrator was later appointed, with all parties consenting to their neutrality. Throughout the arbitration process, neither party requested disclosure statements from the arbitrators or raised objections to the lack of such disclosures.

In July and September 2001, a three-member arbitration panel conducted hearings over seven days, ultimately issuing a unanimous interim award on September 27, 2001, in favor of Durga Ma, awarding $2.3 million in damages while deferring the decision on attorneys' fees and costs. Durga Ma’s counsel subsequently requested attorneys' fees, submitting time records that indicated communications between Arbitrator Leib and Durga Ma’s attorneys, Egerman & Brown, raising concerns of potential ex parte communications. Fidelity objected to further proceedings, seeking discovery on the relationships and communications involving Arbitrator Leib and the Durga Ma attorneys. It was revealed that Arbitrator Leib had familial ties to the Egerman family, having been married to Mark Egerman’s sister, and that he and Mark had previously collaborated on a federal case. Fidelity's motion to vacate the arbitration award was based on Leib's alleged partiality due to these undisclosed relationships, although no actual bias was claimed. The arbitration panel denied Fidelity's motion, asserting a lack of jurisdiction, and subsequently issued a final award on February 22, 2002, granting Durga Ma additional fees and costs. Fidelity's motion to vacate the award was denied by the district court without detailed findings, while Durga Ma's motion to confirm the award was granted. Fidelity appealed both orders, which have been consolidated for review.

Fidelity seeks to vacate an arbitration award, alleging that Arbitrator Leib exhibited evident partiality by not disclosing his personal and professional relationships with attorneys from Durga Ma during the arbitration. Durga Ma contends that Fidelity waived its right to challenge the award, as it was aware of potential connections but did not object until after an interim award was issued. Durga Ma also argues that Leib was not a neutral arbitrator and that even if he had a duty to disclose, the relationships in question were too remote to imply evident partiality. The court reviews the district court’s decision to confirm or vacate the award de novo and agrees that Fidelity waived its challenge to vacate the award. It does not address whether Leib was neutral or displayed evident partiality, focusing instead on the waiver issue. Fidelity asserts that federal law governs the appeal, while Durga Ma argues for California law. The court concludes that federal law applies, aligning with precedent that favors the Federal Arbitration Act (FAA) unless there is clear intent to incorporate state law. The arbitration clause is interpreted to select state substantive law and federal procedural law, reaffirming the FAA's relevance to issues of arbitrator disclosure and bias. The FAA permits vacating an award for evident partiality, defined as a reasonable impression of bias from undisclosed facts. However, the court does not evaluate whether Leib’s relationships imply partiality, as it determines Fidelity waived its right to vacate on those grounds.

Parties agreed to a process for arbitrator appointment where each selected their own arbitrator, who in turn chose a neutral third arbitrator. Fidelity was aware that Arbitrator Leib, appointed by Durga Ma as a non-neutral arbitrator, may have connections to Durga Ma or its attorneys. Despite this awareness, there was no exchange of disclosure statements regarding potential conflicts, and Fidelity did not request one from Leib or object to the lack of disclosures until after an interim award favored Durga Ma. The key issue is whether Fidelity waived its right to challenge the arbitration award due to evident partiality by not raising objections before the award was issued, despite having constructive knowledge of potential bias. Federal courts vary on this issue; some hold that a failure to object does not waive the right to challenge unless the party had actual knowledge of the conflict, while others find that a party waives the right if it knew or should have known of the partiality but did not object. The document suggests that applying the waiver doctrine in cases of constructive knowledge aligns with the policy favoring the finality of arbitration awards, as it promotes efficiency and reduces litigation costs. No evidence of actual bias was presented, supporting the fairness of the arbitration outcome.

The district court affirmed the arbitration award in case No. 02-56548 and denied Fidelity’s motion to vacate the award in No. 02-56381. The arbitration was initially administered by the AAA, but Durga Ma terminated its involvement with Fidelity's consent, citing inefficiencies. A key issue arose regarding whether the arbitrators, who agreed to act "neutrally," retained their roles as party-appointed arbitrators, affecting disclosure requirements. The district court did not make findings on this distinction. Prior communications included discussions about arbitrator appointments, ethics, and logistical arrangements, with some interactions among arbitrators remaining casual and unrelated to the case. The court ultimately denied the motion to vacate and confirmed the arbitration award after reviewing submissions and oral arguments from both parties. The court referenced the case Sovak, which discussed arbitration governance under federal versus state law, establishing that the FAA governs waiver rights related to arbitration, with the presumption that federal law applies unless it directly conflicts with arbitrability issues. Durga Ma argued that in this case, the preference for federal law did not apply, citing Volt Info. Sci. Inc. v. Board of Trs. of the Leland Stanford Junior Univ. to support that federal policy ensures enforceability of private arbitration agreements rather than favoring specific procedural rules. Despite this, the court interpreted the parties' agreement as indicating an intention to utilize federal procedural rules for arbitration, regardless of the presumption issue.