Humitech Development Corp. v. Perlman
Dallas Court of Appeals, No. 05-12-00857-CV (February 27, 2014)
Justices O’Neill, Myers (Opinion), and Brown
Dallas Court of Appeals, No. 05-12-00857-CV (February 27, 2014)
Justices O’Neill, Myers (Opinion), and Brown
In a decision more significant for its procedural aspects than its merits, the Dallas Court of Appeals affirmed confirmation of an arbitration award and turned back an argument that the district judge should have been disqualified, but reversed an award of sanctions against the losing party’s counsel. Having found the arbitration to be governed by the Texas Arbitration Act, the Court rejected appellants’ statutory arguments that the arbitrator had “exceeded [his] powers” by not following the procedural rules of the arbitration body and by not properly applying the substantive law of the State of Texas. But then the Court went on to review the various common-law grounds urged by appellants for vacating the award—e.g., manifest disregard of the law, gross mistake, and violation of public policy. The Court noted that the United States Supreme Court in Hall Street had “cast doubt upon the continued viability of these common-law grounds,” but held that “Hall Street indicates that Texas’s common-law grounds for vacating an arbitration award [governed by the TAA] would not be pre-empted the [Federal Arbitration Act].”
Appellee Perlman agreed to supply sorbite, a raw material used in filters installed in food freezers, to Humitech International Group (“HIG”). At around the same time, Perlman agreed to pay Comu, HIG’s CEO, $500,000 if he brought Perlman a buyer willing to pay $2
million or more for certain of Perlman’s sorbite mining claims. In 2003, to reduce its sorbite costs, HIG decided to buy the claims itself and created a subsidiary, Humitech Development Corporation (“HDC”), for that purpose. The deal—which contained an arbitration agreement—was done, and Perlman paid Comu the $500,000 as previously promised. When things went badly for HIG and HDC thereafter, HDC brought a claim against Perlman and others in arbitration, alleging fraud, commercial bribery, and the like, regarding the $500,000 payment. The arbitrator rejected HDC’s arguments. The two sides filed competing claims in the district court for confirmation and for vacatur of the arbitration award. The district court found HDC’s primary witness “not credible and unworthy of belief,” confirmed the award, and imposed a sanction of $10,000 on HDC’s counsel. This appeal followed.
The Court quickly disposed of HDC’s threshold argument, that the $500,000 constituted “commercial bribery,” because, based on his determination of the witnesses’ credibility, the arbitrator had found there was no fraud or illegal kickback. It then moved on to a detailed examination of arbitration law. Because the arbitration agreement did not specify whether it was governed by the FAA or TAA, it was held to be subject to both.
The Court first examined HDC’s statutory arguments. HDC contended the arbitrator “exceeded [his] powers” by (a) not enforcing the arbitration body’s rules about the exchange of documents before trial and the exclusion of evidence not so exchanged, and (b) not following the substantive law of Texas, specified as the governing law, in finding there was no commercial bribery. The appeals court rejected both arguments, finding that those alleged lapses would at most constitute “errors of law or fact [that] do not constitute the exceeding of powers,” quoting Nafta Traders.
The Court then turned to HDC’s common-law grounds for vacating the award. As noted,
although it acknowledged that Hall Street had “cast doubt upon” such grounds, it found Hall Street had not held them to be preempted by the FAA where the TAA applied. Then, observing that “[t]he Supreme Court of Texas has not yet ruled on whether the common-law grounds of manifest disregard, gross mistake, and public policy survive under the TAA,” the Court of Appeals proceeded to review appellants’ arguments on the merits, ultimately rejecting all of them. Both manifest disregard and gross mistake require more than mere mistakes of fact or law, no matter how egregious. They imply bad faith or a failure to exercise honest judgment, i.e., “the arbitrator, knowing the law and recognizing that the law required a particular result, simply disregarded the law.” HDC failed to prove that level of misconduct here. Similarly, having already disposed of HDC’s commercial bribery arguments, the Court found no violation of public policy.
HDC also argued that the trial judge should have been disqualified because of her bias in favor of arbitration, as evidenced by her own practice prior to taking the bench, including a pro-arbitration seminar paper she co-wrote with her husband several years before becoming a judge, and because her husband’s current law practice involved arbitration. The Court of Appeals carefully examined but rejected all these arguments, finding no disqualifying interest and no abuse of discretion in the refusal to disqualify.
The Court did, however, reverse a $10,000 sanction that the trial court had imposed upon HDC’s counsel under TEX. CIV. PRAC. & REM. CODE § 10.001(3), based on its conclusion that certain allegations in the petition to vacate the arbitration award lacked evidentiary support. The Court found the factual assertions in question were supported by the record, and ruled that the legal contentions based on those assertions were not a proper basis for sanctions under § 10.001(3). So, the Court vacated the sanctions award, but remanded for the trial court to
consider other grounds urged by appellees but not previously ruled on by the trial court.
