Morgan Keegan & Co., Inc. v. William Hamilton Smythe,et al, 2011 WL 5517036, (Tenn. Ct. App., Nov. 14, 2011), appeal granted, (Tenn. Apr 11, 2012)

In a recent case before the Tennessee Court of Appeals, William Hamilton Smythe, III, individually and as trustee of the William H. Smythe, IV, Trust, and Smythe Children’s Trust # 2 for the benefit of Katherine S. Thinnes (collectively “Smythe”) appealed a state trial court decision that vacated a Financial Industry Regulatory Authority (“FINRA”) arbitration award against the investment firm Morgan Keegan & Co. (“Morgan Keegan”) and remanded the matter to FINRA for a rehearing before another panel of arbitrators.   The appellate court dismissed Smythe’s appeal for lack of appellate jurisdiction.

Case Details

In 2008, Smythe filed a Statement of Claim with FINRA alleging that Morgan Keegan had engaged in improper investment activity which resulted in significant losses to multiple investment accounts that Smythe maintained at Morgan Keegan for himself and as trustee for members of his family.  These losses were specifically related to investments in the RMK family of funds (“the Fund”).

Pursuant to FINRA rules, Smythe and Morgan Keegan each received a list of potential arbitrators and an arbitrator disclosure report (“ADR”) for each arbitrator so that they could strike arbitrators from the list and rank the remaining arbitrators for FINRA consideration.  FINRA appointed a panel of three arbitrators to hear the matter based on the parties’ consolidated lists.  The panel was composed of Spencer Buchanan (“Buchanan”), Eugene Katz (“Katz”) and Michael Hill (“Hill”).  Katz and Hill were also on the panel of arbitrators in unrelated cases against Morgan Keegan arising from the same fund.

Motion for Recusal 

After the unrelated cases were resolved unfavorably for Morgan Keegan, the investment firm filed a motion for the recusal of Katz, alleging that he was no longer “independent and neutral” due to his involvement in the other arbitration cases against Morgan Keegan and his connection to another claimant against Morgan Keegan arising out of the same fund.  Morgan Keegan also filed a motion for the recusal of Hill based on his participation in another Morgan Keegan case.  Both arbitrators declined to recuse themselves from the arbitration panel hearing the Smythe case.

The matter of their removal was then submitted to the Director of Arbitration for consideration under FINRA Rule 12410(a)(1), which provided that “[b]efore the first hearing session begins, the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director’s own initiative.” (This Rule was redesignated as FINRA Rule 12407 in February 2011.)  The Director denied the motions.  Both Katz and Hill served on the arbitration panel which, after four days of hearings, found Morgan Keegan liable to Smythe for $697,000 in compensatory damages plus pre-judgment interest, as well as witness fees and attorneys’ fees pursuant to Tennessee state law.

Motion for Vacatur

Morgan Keegan filed a petition in Tennessee state court to vacate the FINRA arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), and the Tennessee Uniform Arbitration Act (“TUAA”), Tenn. Code Ann. § 29-5-313(a).  The motion for vacatur alleged “evident partiality” or “corruption” in either or both Katz and Hill, and that the arbitrators were guilty of “misbehavior” that prejudiced Morgan Keegan’s rights. Smythe responded to the petition for vacatur but did not file a cross-motion to confirm the arbitration award.

In March 2010, the trial court granted the motion for vacatur and remanded the case to FINRA for new hearing. The court’s written order specifically stated that the court found that, pursuant to 9 U.S.C. § 10(a)(2) and Tenn. Code Ann. § 29–5–313(a)(2), both Katz and Hill demonstrated “evident partiality” sufficient to vacate the arbitration award.

This conclusion was based on an “evident partiality” standard that “a reasonable person under the facts of the case that have been presented would conclude that Mr. Hill and Mr. Katz could not be perceived as being impartial and fair and would be predisposed to view any facts in the light most damaging to [Morgan Keegan] because of their previous hearings and conclusions and other matters involving Morgan Keegan.”  Symthe appealed the trial court ruling.

Determining Subject Matter Jurisdiction

Before considering the issues raised by the parties on appeal, the appellate court considered whether it had subject matter jurisdiction to hear the appeal.  The statutory authority to hear appeals from an arbitration related court order granted to the Court of Appeals of Tennessee by the TUAA, Tenn. Code Ann. § 29-5-319, is different from the statutory authority to hear arbitration related appeals granted by the FAA, 9 U.S.C. § 16.  While the FAA permits courts to hear an appeal from a court order “vacating an award,” 9 U.S.C. § 16(a)(1)(E), the TUAA restricts state courts to hearing appeals from a court order “ vacating an award without directing a re-hearing.” Tenn. Code Ann. § 29-5-319(a)(5).

In the instant case, the court order vacated the arbitration award and remanded the case to FINRA for a new arbitration hearing.  Morgan Keegan argued that the TUAA provision, Tenn. Code Ann. § 29-5-319(a)(5),   infers that an order vacating an arbitration award cannot be appealed if it does direct a rehearing. Symthe argued that the court order was the equivalent of  “[a]n order…denying confirmation of an award” and therefore could be appealed under the TUAA, Tenn. Code Ann. § 29-5-319(a)(3).

Vacating an Arbitration Award

The issue of whether a court order vacating an arbitration award and directing a rehearing can be appealed pursuant to the TUAA was one of first impression.  A recent case in a different jurisdiction summarized decisions from other jurisdictions regarding Uniform Arbitration Act provisions identical to the contested TUAA provision.  Hicks v. UBS Financial Services, Inc., 226 P.3d 762 (Utah Ct.App.2010).

The Hicks court noted a split of authority as to whether an appellate court has jurisdiction over the appeal of an order addressing both a motion to confirm and a motion to vacate.  Id. at 767-68.  Courts that allowed appellate jurisdiction did so based on the reasoning that such an order was a final judgment:  the trial court has resolved all the claims before it by granting the motion to vacate and denying the motion to confirm.  Id. at 768.  However, in the instant case, Smythe never filed a motion to confirm the arbitration award.

Therefore, the appellate court concluded that the court order at issue was neither a final judgment nor equivalent to an order denying confirmation of an arbitration award and, consequently, could not be appealed under the TUAA. However, the appellate court also determined that the FAA applied to the case, and that there was an “overwhelming weight of authority” to support their determination that an order vacating an arbitration award and remanding for a rehearing could be appealed under the FAA.

The Appellate Court

Because the court order could not be appealed under the TUAA and could be appealed under the FAA, the appellate court next considered the choice of law issue. The FAA contains no express pre-emption provision, and does not reflect a Congressional intent to occupy the entire field of arbitration.  Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 477 (1988).  Therefore, the appellate court determined that the critical question to consider was whether the TUAA appeals provision undermines the goals or policies of the FAA.  No Tennessee case law exists to address whether to apply the appeals provisions of the FAA or the TUAA in state court when the result would differ depending on which law applied.

The appellate court adopted the holdings of the majority of jurisdictions that have considered the issue: (1) the state law governing appeals of an arbitration related court order is procedural; and (2) state procedural laws apply in state court unless such laws stand as an obstacle to accomplishing the objectives of the FAA.  The appellate court concurred with recent case law that described the purpose of FAA appeal provisions, 9 U.S.C. § 16, as promoting appeals from court orders that barred arbitration and limiting appeals from court orders that directed arbitration.  Spell v. LaBelle, No. W2003–00821–COA–R3–CV, 2004 WL 892534 (Tenn.Ct.App. Apr.22, 2004). at *2–3 (citing Filanto, S.P.A. v. Chilewich Int’l Corp., 984 F.2d 58, 60 (2d Cir.1993)  (citation omitted)).

Next, the appellate court found that the analogous section of the TUAA, Tenn. Code Ann. § 29-5-319, promoted these objectives.  Therefore, the appellate court determined that the statutory provisions of the TUAA were not pre-empted by the FAA and governed the instant case.  Because the TUAA appeals provisions governed the case, the appellate court did not have subject matter jurisdiction to hear Smythe’s appeal.

The Court’s Decision

Although the Tennessee Rules of Appellate Procedure gave the appellate court the discretion to suspend these rules or to otherwise seek to avoid the effect of the plain language of the TUAA, the court declined to do so and dismissed Smythe’s appeal for lack of subject matter jurisdiction.


Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.