Opposition Brief — Remmey v. PaineWebber, Inc.

No. 94-916

In The

OFFICE OF TRE SiaRK

Supreme Court of the United States

October Term 1994

KATHRYN THOMPSON REMMEY and

ERNEST M. REMMEY, Executors

of the Estate of LOUISE REMMEY, Deceased,

Petitioners,

Vv.

PAINEWEBBER INCORPORATED

and ARNOLD MARKS,

Respondents.

Petition For Writ of Certiorari

To The United States Court Of Appeals

For The Fourth Circuit

BRIEF IN OPPOSITION

MACK SPERLING*

BROOKS, PIERCE, McLENDON,

HUMPHREY & LEONARD, L.L.P.

Suite 2000 Renaissance Plaza

230 North Elm Street (27401)

Post Office Box 26000

Greensboro, North Carolina 27420

Telephone: 910/271-3125

Attorney for Respondents

*Counsel of Record

TABLE OF CONTENTS

Page

Res OF Gs PE sce bee eaineds ii

STATEMENT OF THE CASE AND FACTS ....... 2

REASONS FOR DENYING CERTIORARI ........ +

I. The Petition Is Premised On The Unfounded

Argument That Arbitration Awards Are To Be

Closely Scrutinized By The Federal Courts .... 4

Il. Petitioners Did Not Meet The High Standard,

Which Prevails Uniformly Throughout The

Circuits, Necessary To Establish “Evident

Partiality” In THe Award . ic wee ees 7

A. “Evident Partiality” Is Established By

An Arbitrator’s Financial Interest In

The Arbitration Or A Relationship

With One Of The Parties ........... 8

B. The Minor Disciplinary History Of

Arbitrator Johnson Is Not “Evident

REO ARS ee ere 9

Ill. The Complaint That Arbitrators Lewis And

Schwimmer Were Not Properly Qualified To

Be Arbitrators Is Without Merit........... 13

CRM Ce Shea ees C6 ES Swe oka. 15

TABLE OF AUTHORITIES

Page

CASES

Affiliated Ute Citizens v. United States,

ee of POR ee aw re wa 7

Apperson v. Fleet Carrier Corp.,

879 F.2d 1344 (6th Cir. 1989); ;

cert. denied 493 U.S. 809 (1980 ......... 7,9

Atlantic Shores Resort Joint Venture v. Martin,

731 F. Supp. 1279 (D.S.C. 1990) ........ 11

Burchell v. Marsh, 58 U.S. 344 (1855) ........... 5

Commonwealth Coatings Corp. v. Continental

Casualty Co., 393 U.S. 145 (1968) ..... 8, 15

Herrin v. Milton M. Stewart, Inc. , 558 So.2d 863

GE Te 6 kk ERENCE ea 9

Merit Insurance Co. v. Leatherby Insurance Co. ,

714 F.2d 673 (7th Cir.),

cert. denied, 464 U.S. 1009 (1983) ........ 7

Middlesex Mutual Insurance Co. v. Levine,

675 F.2d 1197 (1ith Cir. 1982)........... 7

Morelite Const. Corp. v. New York City

District Council Carpenters Benefit Fund,

748 F.26 79 (24 Cis. 1964) 2. cece wee 7

TABLE OF AUTHORITIES - Continued

Page

Peoples Security Life Insurance Co. v. Monumental

Life Insurance Co., 991 F.2d 141

CG SUE Ss hd och obo bo oe aes 8, 11

Remmey v. PaineWebber, Inc. , 32 F.3d 143

NR Eh. hu ng gos ok, 4 os ees wn 1

Richmond, Fredericksburg & Potomac R.R. Co. v.

Transportation Communications International

Union, 973 F.2d 276 (4th Cir. 1992) ........ 5

Ruffin Woody and Associates, Inc. v. Person County,

92 N.C. App. 129, 374 S.E.2d 165 (1988)

rev. denied, 324 N.C. 337,

ER Bo, rn rr 11

Sanford Home for Adults v. International Federation

of Health Professionals, 665 F. Supp. 312

li win eth he o 9&0, 0 0 0 9

Shearson/American Express v. McMahon,

Oe Bea REE: WO ib oe Pdi views ec eee 4

Toyota of Berkeley v. Automobile Salesmen's Union,

834 F.2d 751 (9th Cir. 1987),

cert. denied, 486 U.S. 1043 (1988) ......... 7

U.S. Bulk Carriers, Inc. v. Arguelles,

ER SE BE fi Gre ow kan 0 ne Wad 0 eo 5

Union Pacific R.R. Co. v. Sheehan,

8 Eo ee er eee 5

iV

TABLE OF AUTHORITIES - Continued

STATUTES

P LEE ob 884 Oe ER eee 2

F Utes GO 6 a be se oy a Wed bee eee 5,6

No. 94-916

In The

Supreme Court of the United States

October Term 1994

KATHRYN THOMPSON REMMEY and

ERNEST M. REMMEY, Executors

of the Estate of LOUISE REMMEY, Deceased,

Petitioners

v.

PAINEWEBBER INCORPORATED

and ARNOLD MARKS,

Respondents.

Petition For Writ of Certiorari

To The United States Court Of Appeals

For The Fourth Circuit

BRIEF IN OPPOSITION TO THE

PETITION FOR WRIT OF CERTIORARI

Respondents PaineWebber Incorporated and Arnold

Marks respectfully submit that a Writ of Certiorari to review

the opinion of the United States Court of Appeals for the

Fourth Circuit in Remmey vy. PaineWebber Inc. , 32 F.3d 143

(4th Cir. 1994), is unnecessary and should not issue for the

reasons set forth below.

STATEMENT OF THE CASE AND FACTS

The issues raised by this Petition concern the integrity

of the three member arbitration panel which heard and

rejected Petitioners’ claims. Petitioners assert that each panel

member was biased or unqualified to serve as an arbitrator

and the award should be vacated under the Federal

Arbitration Act, 9 U.S.C.§1 ef seq.

There are no novel questions here, no new rule of law

and no change in existing law advocated by the Petitioners.

They say only that the courts below did not properly apply

settled law to the facts now before this High Court. Two

courts have already reviewed the facts and considered the

law, however, and the four judges of those two courts have

been in unanimity that there is no basis for disturbing the

decision of the arbitrators. The Petition for Certiorari should

be denied.

The facts in this securities arbitration, which was

conducted under the auspices of the National Association of

Securities Dealers (the “NASD”), were hotly contested.

They were presented in ten hearing sessions over a period of

five days. Petitioners contended that their decedent (Louise

Remmey) was incompetent at the time that she made

investments with the Respondents in certain real estate limited

partnerships. There was substantial countervailing evidence

presented by the Respondents as to the competence of the

decedent and her intentions in making these investments.

Mrs. Remmey was described by her own family as “strong

3

willed” and “independent”. (JA138).' Her friends described

her as a “businesswoman” and “completely lucid”. (JA160).

Her personal physician testified that she was competent to

conduct her financial affairs. (T27 [S7-8]). She followed her

investments closely, and she personally came to the brokerage

firm office once a week. (JA124). She maintained detailed

ledgers of her investments. (JA127, 141). The limited

partnerships in which she decided to invest met her

investment objectives of current income and potential

appreciation of the underlying property. (JA75-76, 171).

Mrs. Remmey signed a statement for each of her

partnership purchases that she had received a prospectus and

that she had knowledge of its contents. (JA92-93, 97).

Investments of his type did not carry in the late 1980's the

negative connotation that they do today. The real estate

limited partnerships in which Mrs. Remmey invested had at

that time a ten year track record of successful syndications.

(JA84, 96). They had been offered by a “leader” in the

business, according to Mrs. Remmey’s own expert witness.

(JA111).

There was conflicting evidence too of the extent of

Mrs. Remmey’s loss. Every one of these partnerships was

continuing to make regular, quarterly payments to Mrs.

Remmey at the time of the arbitration hearing. (JA171).

There was evidence that her account had an overall profit of

$90,000 duririg the time Mr. Marks served as her broker.

Hindsight may have proven that better investments could have

'The references to “JA” are to the Joint Appendix filed

with the Fourth Circuit. The references to “T” are to the

Transcript of the arbitration proceeding.

4

been made, but if that were the test, every bad investment

would be the basis for a claim of fraud.

The arbitrators credited the testimony presented by the

Respondents and found for the broker and the brokerage firm.

They awarded Petitioners nothing on their claims.

Petitioners’ unflagging effort since then to upset the

determination of the arbitrators has been targeted at the

qualifications and character of the arbitrators.

REASONS FOR DENYING CERTIORARI

I,

The Petition Is Premised On The Unfounded Argument

That Arbitration Awards Are To Be Closely Scrutinized

By The Federal Courts.

The standard of review of arbitration awards is an

important concern here. Petitioners advocate that the federal

courts are to engage in searching oversight of the arbitration

process, relying on Shearson/American Express v. McMahon,

482 U.S. 220 (1987). That case does not say (as Petitioners

say it does) that it is the job of the judiciary to supervise the

decisions of arbitrators. What the Court said in that case was

this:

we have indicated that there is no reason to

assume at the outset that arbitrators will not

follow the law; although judicial scrutiny of

arbitration awards necessarily is limited,

such review is sufficient to ensure that

arbitrators comply with the requirements of

the statute.

Id. at 232 (emphasis added).

Review of arbitration awards is indeed limited, as the

Fourth Circuit noted in Richmond, Fredericksburg & Potomac

R.R. Co. v. Transportation Communications Int'l Union, 973

F.2d 276 (4th Cir. 1992):

‘[T)he effectiveness of any pro-arbitration

policy is dependent, in the first instance, on a

limited scope of judicial review of the

arbitrator’s determination.’ U.S. Bulk

Carriers, Inc. v. Arguelles, 400 U.S. 351, 360

(1971)(Harlan, J., concurring). Thus, judicial

review of an arbitration award is ‘among the

narrowest known to the law.’ Union Pac.

R.R. Co. v. Sheehan, 439 U.S. 89, 91 (1978).

‘Every presumption is in favor of the

validity of the award.’ Burchell v. Marsh, 58

U.S. 344, 351 (1855).

973 F.2d at 278 (emphasis added).

The scope of judicial review of the awards of

arbitrators is created and bounded by the terms of 9 U.S.C.

§10(a). The pertinent part of the statute reads as follows:

In any of the following cases the United States

court in and for the district wherein the award

was made may make an order vacating the

award upon application of any party to the

iii. .

6

(1) Wheré the award was

procured by corruption, fraud,

or undue means.

(2) Where there was evi-

dent partiality or corruption in

the arbitrators, or either of

them.

(3) Where the arbitrators

were guilty of misconduct in

refusing to postpone the hear-

ing, upon sufficient cause

shown, or in refusing to hear

evidence pertinent and material

to the controversy; or of any

other misbehavior by which the

rights of any party have been

prejudiced.

(4) | Where the arbitrators

exceeded their powers, or so

imperfectly executed them that

a mutual, final, and definite

award upon the subject matter

submitted was not made.

9 U.S.C. § 10(a).

Petitioners have not bothered to detail in their Petition

the statutory ground for their challenge, but the attack on the

integrity of Arbitrator Johnson is presumably one of “evident

partiality or corruption” under §10(a)(2). The attack upon

Arbitrators Lewis and Schwimmer is not one of partiality, but

7

only that they were not properly qualified to be arbitrators.

That claim does not fit well into the statute, but it is perhaps

a suggestion that “the award was procured by. . .undue

means.” Jd. at §10(a)(1). Both claims are without merit.

I.

Petitioners Did Not Meet The High Standard, Which

Prevails Uniformly Throughout The Circuits,

Necessary To Establish “Evident Partiality”

In The Award.

There is no split among the Circuits, as Petitioners

contend, regarding the standard applicable to determining

whether there has been “evident partiality.” The required

showing is that “a reasonable person would have to conclude

that an arbitrator was partial” to the successful party at the

arbitration. Apperson v. Fleet Carrier Corp., 879 F.2d 1344,

1358 (6th Cir.), cert. denied, 493 U.S. 809 (1989); Morelite

Const. Corp. v. New York City District Council Carpenters

Benefit Fund, 748 F.2d 79 (2d Cir. 1984); Accord Middlesex

Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1201 (11th Cir.

1982)(“reasonable impression of partiality”); Merit Ins. Co.

v. Leatherby Ins. Co. , 714 F.2d 673, 681-82 (7th Cir.), cert.

denied, 464 U.S. 1009 (1983)(circumstances -must be

“powerfully suggestive of bias”); Toyota of Berkeley v.

Automobile Salesmen’s Union, 834 F.2d 751, 756 (9th Cir.

1987), cert. denied, 486 U.S. 1043 (1988)(“a reasonable

impression of partiality.”).”

The reliance of Petitioners on Affiliated Ute Citizens v.

United States, 406 U.S. 128 (1972) to establish the

materiality of the alleged “non-disclosure” of Arbitrator

8

The Fourth Circuit’s ruling was consistent with this

standard. It said in its opinion that “a mere appearance of

bias is insufficient to demonstrate evident partiality... .[An

appellant] must establish specific facts that indicate improper

motives on the part of an arbitrator.” 32 F.3d at 148 (quoting

Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 991

F.2d 141, 146 (4th Cir. 1993)). It is the “specific facts”

indicating improper motive which were never presented by

Petitioners, and which caused them to fall short of the

“reasonable person” standard which prevails throughout the

Circuits.

A.

“Evident Partiality” Is Established By An

Arbitrator’s Financial Interest In The Arbitration

Or A Relationship With One Of The Parties.

Evident partiality typically arises when there is an

arbitrator who has either a financial interest in the arbitration

or a preexisting relationship with one of the parties, or both.

That was the situation confronted by this court in

Commonwealth Coatings Corp. v. Continental Cas. Co., 393

U.S. 145 (1968), where the arbitrator and one of the parties

had "close financial relations that had existed between them

for a period of years." id. at 148.

Johnson is more than curious. Affiliated Ute creates a

presumption of reliance in securities fraud cases that an

omitted fact was “material” for liability purposes. To

Respondent's knowledge, the doctrine has never been applied

in an arbitration case.

9

The factors which courts therefore traditionally

examine in assessing a claim of evident partiality are the

financial interest, the directness of the relationship, and the

timing of the relationship. Sanford Home for Adults v.

International Federation of Health Professionals, 665 F.

Supp. 312, 320 (S.D.N.Y. 1987); Apperson v. Fleet Carrier

Corp., 879 F.2d 1344, 1360 n.21 (6th Cir.), cert. denied,

493 U.S. 809 (1989). These are the only factors which will

establish bias. See, e.g., Herrin v. Milton M. Stewart, Inc.,

558 So.2d 863, 865 (Miss. 1990)(“Personal bias of an

arbitrator cannot be shown by means other than pecuniary

interest or some other actual relationship between the

parties.”).

The problem that has plagued Mrs. Remmey

throughout her tortuous course through the courts below is

that her suggestion of partiality is without any foundation

whatsoever. There is nothing here to cause a reasonable

person to conclude that any arbitrator was partial to the

Respondents.

The Minor Disciplinary History Of

Arbitrator Johnson Is Not “Evident Partiality.”

There are no facts here that any of the arbitrators had

an interest in the outcome of the arbitration. What the

Petitioner contends is the “evident partiality” here is that

Arbitrator Johnson had a record of discipline with the NASD,

and that this was not disclosed to him. There were disciplines,

were of a bookkeeping nature. None involved a customer

complaint like the one at issue in this arbitration.

10

The first violation was sixteen years old. It was

resolved by settlement, apparently without any complaint

being filed. Some transactions at Arbitrator Johnson's firm

had not been booked for a period of four days in 1978. There

were some inaccuracies in ledgers, and some transactions had

not been liquidated in the proper period of time. The firm

was also charged with failing to maintain adequate

supervisory procedures, since four people designated to

perform such functions were no longer with the firm. The

firm replaced its bookkeeping personnel and updated its

supervisory procedures to reflect its then current personnel.

The firm was fined $500. (JA289-91).

The only Complaint ever filed personally against

Arbitrator Johnson (as opposed to the firm for which he

worked) which resulted in any penalty was Complaint No. W-

361, which was filed with the NASD in November 1979.

(JA282-85). This Complaint alleged that (I) Arbitrator

Johnson's firm had failed to comply with the SEC's net

capital rules, (ii) it had failed to report its net capital

deficiency to the proper authority and (iii) it had put a sticker

on “various prospectuses” which obscured the names of some

of the other underwriters for the offering.

This Complaint was also settled. The NASD found

the net capital “violations” to be extremely minor, and to

have lasted all of a day. It found the stickering matter "more

serious", but noted that the recipients of the prospectuses

were primarily longstanding clients of the firm who were

familiar with its business. Arbitrator Johnson and the firm

11

were fined the sum of $1,000, jointly and severally, for these

violations. (JA285).°

Arbitrator Johnson’s “record”, such that it was, had

been “clean” for over twelve years when the arbitration took

place. If these violations established some sort of bias, that

bias was certainly minimized by the remoteness of the

violations. See Ruffin Woody and Associates, Inc. v. Person

County, 92 N.C.App. 129, 141, 374 S.E.2d 165, 172

(1988)(refusing to set aside arbitration award where one

arbitrator had performed services for a party in the 1960's;

work was “remote enough in time to dissipate any partiality.

...”), rev. denied, 324 N.C. 337, 378 S.E.2d 799 (1989).

But what Petitioners have never shown is how these

minor disciplines from the NASD equate to bias on the part

of Arbitrator Johnson. Petitioners point to no facts which

establish that these minor sanctions impaired Arbitrator

Johnson's ability to fairly hear and rule upon the evidence.

In fact, precisely the opposite inference might be warranted

here — that the sanctions made Arbitrator Johnson more

circumspect in judging the conduct of other brokers and

biased him against the Respondents. Either way, however,

the suggestion of bias is only speculation. The law requires

more than that. The party seeking to set aside an arbitration

award must show that the bias is “direct, definite and

capable of demonstration. . . .” Peoples Security Life Ins.

Co. v. Monumental Life Ins. Co. , 991 F.2d 141, 146 (4th Cir.

1993)(emphasis added); Atlantic Shores Resort Joint Venture

v. Martin, 731 F. Supp. 1279 (D.S.C. 1990).

*Another NASD complaint against Arbitrator Johnson's

firm dates back to 1971. It was dismissed. (JA302).

12

There is no argument to be made here that the NASD

Rules required disclosure of these matters. The NASD’s

Code of Arbitration Procedure provides only that a party is

entitled to “the arbitrators’ names and employment histories

for the past ten (10) years” and that further inquiry may be

made. NASD Code §21 (emphasis added). These ancient

matters were not required to be disclosed, but they were

hardly a secret. Petitioners discovered them on their own,

after the arbitration was over, through the NASD’s “Public

Disclosure Program”. This information was readily available

for the asking before the arbitration began, but Petitioners did

not obtain it. It would hardly have involved the “time-

consuming and expensive. . .background check on the

arbitrators” which Petitioners suggest would have been

necessary for them to have requested this information in

advance of the arbitration.

To the extent the Petitioners complain that Arbitrator

Johnson did not disclose these disciplines to the NASD when

he applied to be an arbitrator, that contention is also not a

basis for certiorari. The “concealment” is hardly clear from

the disclosure form, but the NASD was the body which had

meted out the discipline. It surely knew of these disciplines

when it qualified Mr. Johnson as an arbitrator. There was no

evidence presented in the court below that these minor and

dated disciplines disqualified Arbitrator Johnson from being

an arbitrator.

This Court should not grant certiorari to entertain this

after the fact challenge to the award.

13

il.

The Complaint That Arbitrators

Lewis and Schwimmer Were Not

Properly Qualified Is Without Merit.

The challenges raised to Arbitrators Lewis and

Schwimmer have equally little substance. Arbitrator Lewis,

it is suggested, was not properly qualified as a public

arbitrator.‘ The reason is that he “might” have spent more

than 20% of his time since retiring as a Deputy Securities

Commissioner for the State of South Carolina acting as an

expert witness for securities firms. There is nothing to

substantiate that claim. Petitioners brought forward no

evidence to establish the extent of Arbitrator Lewis’ activity

in this arena. But if Arbitrator Lewis had such an affiliation,

he was required to disclose it. Section 23 of the NASD Code

Says in pertinent part that:

(a) Each arbitrator shall be required to

disclose to the Director of Arbitration any

circumstances which might preclude such

arbitrator from rendering an objective and

etxpartial determination. Each arbitrator shall

disclose:

‘The NASD Rules provided that this panel was to be

composed of one arbitrator affiliated with the securities

industry, and two public arbitrators without such an

affiliation. NASD Code §19(a). A person cannot be a public

arbitrator if he “is an attorney, accountant, or other

professional who has devoted twenty (20) percent or more of

his or her professional work effort to securities industry

Clients within the last two years.” Id. at §19(c)(5).

14

* * %

(2) Any existing or past financial,

business, professional, family, or

social relationships that are likely to

affect impartiality or might reasonably

create an appearance of partiality or

bias.

NASD Code §23(a)(2)(emphasis added). Arbitrator Lewis

would have been required to disclose his expert witness

activities if they had occurred. He did not, and the

presumption must be that he was qualified to be a public

arbitrator.

Arbitrator Schwimmer is a target of the Petitioners’

unhappiness with the result they obtained because he may not

have ever completed an arbitrator profile form. Testimony

from the NASD, however, made it clear that Arbitrator

Schwimmer had properly qualified as an arbitrator before

such forms began being used. The NASD’s Director of

Arbitration made it unequivocally clear that the lack of a

completed form did not disqualify Mr. Schwimmer from

service in an Affidavit she signed. (JA366 at 443, 6).

Petitioners argue that Arbitrator Lewis and Arbitrator

Schwimmer could not have been properly qualified as

arbitrators because they did not return a questionnaire to

update their arbitrator profiles. Petitioners contend that this

violated regulations of the Securities and Exchange

Commission, but they point to no such regulations and in fact

there are none. The Director of Arbitration made it clear in

the Affidavit she filed with the District Court that the lack of

a completed questionnaire did not disqualify a person as a

public arbitrator. (JA366 at (3). As the Fourth Circuit noted

15

in its opinion, “appellants’ counsel conceded at oral argument

that no NASD Rule required return of the questionnaire

form.” before an arbitrator could be properly qualified. 32

F.3d at 147. All the NASD Rules say on this subject is that

the Director of Arbitration is charged with appointing panels

of arbitrators “from the existing pool of arbitrators.” NASD

Code §4.

Petitioners have complained long and loudly that they

should have received the NASD’s internal records on the

arbitrators, but there is no requirement in the NASD Rules

that a party to an arbitration be given such unfettered access

to the business history of an arbitrator. Such a requirement

would indeed be contrary to direct precedent from this Court,

which is that an arbitrator “cannot be expected to provide the

parties with his complete and unexpurgated business

biography.” Commonwealth Coatings Corp. v. Continental

Cas. Co., 393 U.S. 145, 151 (1968)(White, J., concurring).

The Petitioners refuse to accept that there are limits on the

information they were entitled to obtain regarding the

arbitrators. The NASD’s Code of Arbitration Procedure

provides only that a party is entitled to “the arbitrators’

names and employment histories for the past ten (10) years”

and that further inquiry may be made. NASD Code §21.

Petitioners simply were not entitled to the information which

they complain was due them.

CONCLUSION

Petitioners claim that the Fourth Circuit’s opinion

“guts the concept of arbitration, which is to provide a

convenient and less expensive way to resolve disputes.” Pet.

at 24. It is Petitioners, however, who have done the gutting.

Their extensive post-arbitration litigation in pursuit of their

16

effort to obtain what the Fourth Circuit referred to as “the

ultimate attempt at a second bite” at the apple (32 F.3d at

147) has eviscerated any of the expediency and convenience

of an arbitration proceeding. Petitioners had their day in

Court (they actually had five of them) and they did not

prevail. This case should end now, and Respondents

respectfully request that the Petition for Certiorari be denied.

Respectfully submitted,

MACK SPERLING*

BROOKS, PIERCE, McLENDON,

HUMPHREY & LEONARD, L.L.P.

Suite 2000 Renaissance Plaza

230 North Elm Street (27401)

Post Office Box 26000

Greensboro, North Carolina 27420

Telephone: 910/271-3125

Attorney for Respondents

*Counsel of Record