Bass, Berry & Sims attorney Chris Lazarini provided insight on the case of Schilling Livestock, Inc. vs. Umpqua Bank in which the plaintiff filed suit against a broker/dealer and bank alleging fraud, breach of fiduciary duty, and other claims. Plaintiffs sought vacatur after the arbitration panel dismissed all claims; upon review the court denied the vacatur request finding no improprieties in the manner in which the arbitration was conducted. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Schilling Livestock, Inc. vs. Umpqua Bank, No. 14-54 (D. Mont., 12/1/15)
*Judicial review of arbitration awards is highly deferential, and a party challenging an award faces a high hurdle.
**Arbitrators are not bound by the rules of civil procedure and may liberally receive evidence and allow parties to argue theories not pled, so long as there is no prejudice to the opposing party.
In 2005, Plaintiffs entered into a Section 1031 exchange through a dual employee of a broker/dealer and Sterling Bank (n/k/a Umpqua Bank). After the exchanged property lost substantial value, Plaintiffs commenced arbitration against the broker/dealer, alleging fraud, breach of fiduciary duty, and other claims. Sterling consented to its joinder in the matter, even though it did not have to arbitrate. Plaintiffs settled with the broker/dealer before the final hearing. After a full hearing, the arbitration panel dismissed all claims against Sterling (FINRA ID #11-03733 (Helena, 6/3/14)). Plaintiffs sought vacatur, claiming arbitrator misconduct and that the Award was procured by undue means and fraud.
Plaintiffs argued that the panel was guilty of misconduct in allowing Sterling's expert to opine that, under the Gramm-Leach-Bliley Act's ("GLBA") networking exception, the bank did not owe broker/dealer type duties to Plaintiffs. The Court rejects this argument, finding that arbitrators are not bound by the rules of civil procedure and may liberally receive evidence. The Court also notes that Plaintiffs opened the door to interpreting the GLBA by having their own expert opine that Sterling stood in the shoes of the broker/dealer and owed Plaintiffs duties as if it were a broker/dealer.
Plaintiffs next argued that the Award was procured by undue means because Sterling failed to assert the GLBA networking exception as an affirmative defense. The Court finds several reasons to reject the argument. First, the defense does not have to be pled affirmatively, even if the rules of civil procedure apply. Second, the Court finds no evidence that Sterling knew of, and intentionally withheld, the defense when it answered. Third, Sterling reserved the right to assert any defenses that became apparent during discovery. Finally, the Court finds no prejudice to Plaintiffs. Plaintiffs knew of the defense before it was raised, having themselves produced documents in discovery that referenced it, and were given, but elected to reject, the opportunity to submit post-hearing briefs on the issue.
Finally, Plaintiffs argued the Award was procured by fraud, claiming that Sterling's expert gave false testimony. Reviewing the transcript, the Court disagrees, concluding the problem, if any existed, was not in the expert's testimony but was instead in the ambiguous nature of the questions posed by Plaintiffs' counsel and in Plaintiffs' subsequent attempt to stretch the meaning of what was said into a falsehood. Not persuaded that Plaintiffs had carried their substantial burden, the Court denies the vacatur petition.