Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., No. 05-08-00739-CV (Tex.App.- Dallas Aug.
25, 2009)
File: 080739F - From documents transmitted: 08/25/2009
AFFIRM as MODIFIED and Opinion Filed August 25, 2009
In The
Court of Appeals
Fifth District of Texas at Dallas
............................
No. 05-08-00739-CV
............................
ANCOR HOLDINGS, LLC, Appellant/Cross-Appellee
V.
PETERSON, GOLDMAN & VILLANI, INC., Appellee/Cross-Appellant
.............................................................
On Appeal from the 160th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 04-00836-H
.............................................................
OPINION
Before Justices Moseley, O'Neill, and Murphy
Opinion By Justice Murphy
Ancor Holdings, LLC appeals the trial court's judgment
confirming an arbitration award under the Federal Arbitration Act (FAA)
in favor of appellee, Peterson, Goldman & Villani, Inc. (PGV). In five
issues, Ancor argues the arbitration award should be vacated because the
arbitrator manifestly disregarded the law, exceeded her powers, and
reached an award full of gross error, showing a failure to exercise
honest judgment.
PGV also filed a cross-appeal asserting the trial court
erred when it (1) modified the arbitration award to exclude PGV's award
for its share of the arbitration costs and (2) denied PGV's request to
modify the name of appellant. We conclude the trial court erred by
excluding PGV's award for one-half the arbitration costs and therefore
modify the judgment of the trial court to reinstate PGV's award.
We affirm the trial court's judgment as modified.
BACKGROUND
This dispute arises from PGV's action to enforce a guaranty
agreement against Ancor. PGV was the successor-in-interest to a
Continuing and Unconditional Guaranty (Guaranty) by Ancor and in favor
of Bank of America, N.A. (Bank). The Guaranty related to $2,200,000 in
promissory notes payable to the Bank by OpenPoint Systems, Inc., the
successor-by-merger to three entities in which Ancor was the controlling
shareholder. PGV purchased the promissory notes and Guaranty from the
Bank in March 2003.
The Guaranty provided that it was “continuing and unlimited as
to the amount,” except as set forth in this limitation:
As of the date of any default under this Guaranty or under any Loan
Documents . . . between [OpenPoint] and the [Bank], to the extent the
Bank resorts to [Ancor] for payment, this Guaranty is limited to an
amount equal to the difference between (a) $1,643,000.00 and (b) the sum
of (i) [OpenPoint's] reported total of accounts receivable as reported
by [OpenPoint] to the Bank as of the date of such default (ii) the total
value of [OpenPoint's] inventory as reported by [OpenPoint] to the Bank
as of the date of such default and (iii) the total value of
[OpenPoint's] net fixed assets as reported by [OpenPoint] to the Bank as
of the date of such default; provided that Bank has a perfected, first
priority lien, that is not subject to any claims of preference in any
bankruptcy or insolvency proceeding, in such accounts receivable,
inventory and fixed assets as of the date of such default.
(Emphasis in original). According to Ancor, the essential purpose of the
Guaranty was to protect the Bank against further deterioration in the
value of the Bank's collateral position. At the time the parties signed
the Guaranty, the Bank's collateral had a reported value of $1,643,000.
Therefore, Ancor believed it would be liable only for the difference
between $1,643,000 and the reported value of the collateral at the time
of a default.
The parties signed the Guaranty on March 7, 2000. One month
later, the Bank recorded new UCC-1 financing statements on certain
OpenPoint collateral to perfect its first priority lien status. See
Footnote 1 At the time the parties negotiated the Guaranty, Ancor's
representatives assumed the Bank held a perfected security interest in
the OpenPoint collateral. On May 16, 2000, two months after Ancor and
the Bank executed the Guaranty and just over a month after the Bank
filed new financing statements, OpenPoint filed for bankruptcy
protection under Chapter 7 of the United States Bankruptcy Code, an
event of default under the Guaranty.
During the bankruptcy proceedings, the bankruptcy trustee
questioned the Bank's first priority lien status on the OpenPoint
collateral. Two years later, in May 2002, the bankruptcy trustee filed
an adversary proceeding against the Bank, alleging that the financing
statements filed in the month preceding the bankruptcy filing should be
avoided as a preference. The Bank alleged various defenses in its answer
to the preference claim, and the bankruptcy trustee settled with PGV in
April 2003 for $120,000. The bankruptcy court approved the settlement
and ordered that PGV's remaining claim in excess of the settlement
amount be subordinated to the claims of the general unsecured creditors
for any future distributions from the bankruptcy estate. PGV received no
further distributions from the bankruptcy estate.
On February 2, 2004, PGV filed suit seeking to enforce the
Guaranty against Ancor. PGV asserted that because the bankruptcy trustee
filed a preference claim, Ancor could not invoke the limitations formula
provided in the Guaranty and was therefore liable for the full amount
owed under the promissory notes. The trial court thereafter referred the
case to arbitration pursuant to the parties' joint motion under the
Guaranty's arbitration clause. During the course of the
arbitration proceedings, the arbitrator issued six interim orders and
findings. The first Interim Order and Findings addressed the extent of
Ancor's liability under the Guaranty. Applying the rules of contract
construction, the arbitrator determined the pertinent language of the
Guaranty was unambiguous, as urged by both parties. The arbitrator
concluded the filing of a preference claim in the OpenPoint bankruptcy
proceedings was enough to negate the limitation provision in the
Guaranty, rendering Ancor liable for the full amount due under the
promissory notes.
After Ancor asked for reconsideration of the first order, the
arbitrator issued a Second Interim Order and Findings. In her second
order, the arbitrator acknowledged Ancor's arguments regarding the
language and meaning of the Guaranty, specifically noting that
“[c]ontrary to its initial stipulation in these proceedings that the
pertinent Guaranty language is unambiguous, Ancor now contends that the
language is ambiguous . . . .” After considering Ancor's claim of
ambiguity, the arbitrator determined that “[w]hen the language of the
Guaranty is read as a whole in light of the circumstances present when
the Guaranty was entered, and in accordance with governing contract
interpretation rules, one reasonable meaning emerges.” Based on the
phrase “subject to any claims of preference . . . as of the date of such
default,” the arbitrator concluded the Guaranty reflected the parties'
intention that the limitation language be vitiated such that “the Bank
recover its right to a full Guaranty, where its lien is subject to any
claim of preference . . . .” (Emphasis in original). The arbitrator
upheld her first decision.
Following the second order, PGV filed an amended petition and
moved for summary judgment on the amount owed by Ancor. In response,
Ancor filed an amended answer and a counterclaim for reformation of the
Guaranty. On its reformation claim, Ancor asserted mutual mistake. It
requested reformation to reflect the Bank's and Ancor's mutual intent
for a “limited” guaranty. Acknowledging that Ancor's newly asserted
affirmative defenses and counterclaim for reformation altered the nature
of the proceedings and required additional discovery, the arbitrator
allowed Ancor to proceed on the new defenses and counterclaim. After
extensive briefing, the arbitrator concluded Ancor's reformation claim
was not time-barred. See Footnote 2
Following an evidentiary hearing on the reformation issue, the
arbitrator issued the Sixth Interim Order and Findings partially
granting Ancor's request. She concluded Ancor's liability was capped
under the formula paragraph at the maximum of $1,643,000. The arbitrator
reformed the Guaranty “consistent with the intent of the parties,” using
language proposed by Ancor, as follows:
This Guaranty is continuing and unlimited as to the amount, except as
set forth below . . . .
As of the date of any default under this Guaranty or any Loan Documents
. . . between [OpenPoint] and the Bank, to the extent the Bank resorts
to [Ancor] for payment, this Guaranty is limited to an amount equal to
the difference between (a) $1,643,000.00 and (b) the sum of [i]
[OpenPoint's] reported total of accounts receivable as reported by
[OpenPoint] to the Bank as of the date of such default (ii) the total
value of [OpenPoint's] inventory as reported by [OpenPoint] to the Bank
as of the date of such default and (iii) the value of [OpenPoint's] net
fixed assets as reported by [OpenPoint] to the Bank as of the date of
such default; provided that the guaranty amount of $1,643,000 will
only be reduced by the value of those items of collateral (accounts
receivable, inventory and/or net fixed assets) in which the Bank holds a
perfected first priority lien as of the date of any default, and which
has not been made the subject of a claim of preference in any bankruptcy
or insolvency proceeding.
(Emphasis in original). The arbitrator found by clear and convincing
evidence that “a slight change” was warranted to conform the agreement
to the actual terms reached among the representatives of Ancor and the
Bank. She upheld the reformation in her “Clarification of Sixth Interim
Order and Findings.”
Thereafter, the arbitrator entered the Final Award, providing a
detailed analysis of her findings and rationale. Importantly, she
discussed the “perfected, first priority lien” language and concluded
from the evidence that the first priority lien requirement was an
“agreed term.” She further emphasized that all parties were
sophisticated businessmen and understood the value of the collateral was
meaningless unless the Bank had the ability to collect. Applying the
$1,643,000 damage cap formula, the arbitrator calculated and awarded PGV
$829,764 in principal under the Guaranty plus interest, costs, and
attorneys' fees. Without specifying an amount, the arbitrator also
awarded PGV its share of the arbitration costs.
The parties' cross-motions to confirm and vacate the arbitration
award followed. After hearing arguments, the trial court signed a
judgment confirming the award in favor of PGV, but excluding PGV's
arbitration costs because PGV presented no evidence of its costs.
Thereafter, the trial court modified the judgment to fix a typographical
error as to the commencement date for prejudgment interest. The trial
court also denied PGV's requests to reinstate the arbitrator's award of
costs and to modify the name of appellant from Ancor Holdings, LLC to
Ancor Holdings, LP. Both parties appealed.
ANALYSIS
Ancor raises five issues on appeal asserting the trial court
erred by not vacating the arbitration award. Ancor's issues essentially
attack the award in three respects: (1) the arbitrator manifestly
disregarded the law (issues one and five); (2) the arbitrator exceeded
her powers by allowing PGV to arbitrate its issues that were barred and
by rendering a decision that violates the essence of the Guaranty
(issues two and three); and (3) the arbitration award is tainted with
gross mistake, implying a failure to exercise honest judgment (issue
four). In its cross-appeal, PGV contends the trial court erred when it
excluded the arbitrator's award of costs and denied PGV's request to
modify Ancor's name. We begin with Ancor's issues.
Standard of Review
The parties agree the FAA applies to this case. See 9 U.S.C. §§
1-16 (2009). We review de novo a trial court's confirmation of an
arbitration award under the FAA based on the entire record. Myer v.
Americo Life, Inc., 232 S.W.3d 401, 407 (Tex. App.-Dallas 2007, no
pet.); Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105
S.W.3d 244, 250 (Tex. App.-Houston [14th Dist.] 2003, pet. denied). An
arbitration award is treated the same as the judgment of a court of last
resort. Bailey & Williams v. Westfall, 727 S.W.2d 86, 90 (Tex.
App.-Dallas 1987, writ ref'd n.r.e.); see also Quinn v. Nafta Traders,
Inc., 257 S.W.3d 795, 798 (Tex. App.-Dallas 2008, pet. granted). All
reasonable presumptions are indulged to uphold the arbitrator's
decision, and none is indulged against it. Bailey, 727 S.W.2d at 90; see
also CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002).
An arbitration award is presumed valid and entitled to great
deference. Myer, 232 S.W.3d at 407-08; Crossmark, Inc. v. Hazar, 124
S.W.3d 422, 429 (Tex. App.-Dallas 2004, pet. denied). When reviewing an
arbitration award, we may not substitute our judgment merely because we
would have reached a different decision. Bailey, 727 S.W.2d at 90; see
also CVN Group, Inc., 95 S.W.3d at 238. Judicial review of an
arbitration award adds expense and delay and thereby diminishes the
benefits of arbitration as an efficient, economical system for resolving
disputes. CVN Group, Inc., 95 S.W.3d at 238; Crossmark, 124 S.W.3d at
429. Accordingly, our review of the arbitration award is
“extraordinarily narrow.” Myer, 232 S.W.3d at 408; see also Statewide
Remodeling, Inc. v. Williams, 244 S.W.3d 564, 568 (Tex. App.-Dallas
2008, no pet.); Tanox,105 S.W.3d at 250. Importantly, our review is so
limited that we may not vacate an award even if it is based upon a
mistake in law or fact. Crossmark, 124 S.W.3d at 429 (citing Anzilotti
v. Gene D. Liggin, Inc., 899 S.W.2d 264, 266 (Tex. App.-Houston [14th
Dist.] 1995, no writ)). Because of the deference given to arbitration
awards, judicial scrutiny focuses on the integrity of the process, not
the propriety of the result. TUCO Inc. v. Burlington N. R.R. Co., 912
S.W.2d 311, 315 (Tex. App.-Amarillo 1995), modified on other grounds,
960 S.W.2d 629 (Tex. 1997).
Vacatur under the FAA
Under the terms of the FAA, an arbitration award must be
confirmed unless it is vacated, modified, or corrected under one of the
limited grounds set forth in sections 10 and 11 of the Act. See 9 U.S.C.
§§ 9-11. Section 10(a) permits a court to vacate an arbitration award -
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators,
or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, 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; or
(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.
Id. § 10(a). Although the courts have recognized certain common law
exceptions for vacating an arbitration award, See Footnote 3 the
United States Supreme Court recently held that the grounds listed in the
statute are the exclusive grounds for vacating an arbitration award
under the FAA. Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct.
1396, 1403 (2008) (holding that statutory grounds for vacating or for
modifying or correcting arbitration award are exclusive grounds for
expedited vacatur and modification of award pursuant to FAA); see also
Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 350 (5th Cir. 2009)
(concluding Hall Street restricts grounds for vacatur to those set forth
in section 10).
Of the issues Ancor presents for review, only two - that the
arbitrator exceeded her powers by ignoring the law and by rendering an
award that violates the essence of the Guaranty - arguably fall within
the statutory grounds for vacatur under the FAA. See 9 U.S.C. §
10(a)(4). Ancor's remaining grounds - that the arbitrator manifestly
disregarded the law and committed gross mistake implying a failure to
exercise honest judgment - are common law grounds for vacating an
arbitration award. See Crossmark, 124 S.W.3d at 430 n.6; Tanox, 105
S.W.3d at 252. The parties dispute whether the Supreme Court's decision
in Hall Street forecloses our review based on Ancor's non- statutory
grounds. We conclude it does.
In Hall Street, the parties to the underlying lease dispute
agreed to submit an indemnification claim to arbitration. Hall St., 128
S. Ct. at 1400. The arbitration agreement, which was negotiated by the
parties and approved by the district court, required the court to
“vacate, modify or correct any award: (i) where the arbitrator's
findings of facts are not supported by substantial evidence, or (ii)
where the arbitrator's conclusions of law are erroneous.” Id. at
1400-01. These contractually agreed grounds deviated from those
prescribed in the FAA, and the Supreme Court granted review to determine
“whether the grounds for vacatur and modification provided by §§ 10 and
11 of the FAA are exclusive.” Id. at 1401.
Reviewing the purpose and text of the FAA, the Supreme Court
held that sections 10 and 11 “provide the FAA's exclusive grounds for
expedited vacatur and modification.” Id. at 1403. In so holding, the
Supreme Court expressly rejected the argument that its use of the phrase
“manifest disregard of the law” in Wilko v. Swan, 346 U.S. 427 (1953),
expanded the grounds for vacatur beyond those listed in section 10. Hall
St., 128 S. Ct. at 1403. The Supreme Court instructed that the text of
the FAA “compels a reading of the §§ 10 and 11 categories as exclusive”
because even assuming these sections could be supplemented, “it would
stretch basic interpretive principles to expand the stated grounds to
the point of evidentiary and legal review generally.” Id. at 1404. The
Supreme Court further explained:
[I]t makes more sense to see the three provisions, §§ 9-11, as
substantiating a national policy favoring arbitration with just the
limited review needed to maintain arbitration's essential virtue of
resolving disputes straightaway. Any other reading opens the door to the
full-bore legal and evidentiary appeals that can “rende[r] informal
arbitration merely a prelude to a more cumbersome and time-consuming
judicial review process,” and bring arbitration theory to grief in
post-arbitration process.
Id. at 1405 (quoting Kyocera Corp. v. Prudential-Bache Trade Servs.,
Inc., 341 F.3d 987, 998 (9th Cir. 2003)) (internal citations omitted).
The Supreme Court also noted that expanding sections 10 and 11 is
inconsistent with the language of section 9, which directs a court to
grant an order confirming an arbitration award “unless the award is
vacated, modified, or corrected as prescribed in sections 10 and 11 of
this title.” Id. (quoting 9 U.S.C. § 9). The Supreme Court emphasized
that this language “carries no hint of flexibility.” Id.
Following Hall Street, the Fifth Circuit, in Citigroup Global
Markets, Inc. v. Bacon, overruled its precedent holding that
non-statutory grounds may support vacatur of an arbitration award under
the FAA. 562 F.3d at 358. Ancor urges us to disregard Citigroup and
argues the Supreme Court “has not expressly ruled that 'manifest
disregard' is no longer a valid ground for vacating an arbitrator's
award.” We disagree. We find the analysis and holding in Citigroup
persuasive and conclude the Supreme Court made clear that sections 10
and 11 are the exclusive grounds for vacating and modifying an
arbitration award under the FAA. See Hall St., 128 S. Ct. at 1403. Thus,
our review of an arbitration award under the FAA is limited to the
statutory grounds. See Footnote 4
We note that, in Hall Street, the Supreme Court suggested the
possibility that a “more searching review based on authority outside the
statute” could serve as bases for vacating or modifying arbitration
awards. Hall St., 128 S. Ct. at 1406. See Footnote 5 This case,
however, does not open the door to that possibility. Here, the parties
pursued arbitration according to the terms of the Guaranty, which
expressly invoked the FAA. The only arguments made in the trial court
and on appeal address the FAA. Accordingly, we do not consider the
viability of non-statutory grounds here and express no opinion that
non-statutory grounds for vacating or modifying an arbitration award
could be considered in other contexts.
Because manifest disregard of the law and gross mistake are not
grounds for vacating an arbitration award under the FAA, Ancor has not
demonstrated trial court error as to those grounds. We overrule Ancor's
first, fourth, and fifth issues.
Section 10(a)(4)
Ancor's second and third issues fall within section 10(a)(4) of
the FAA, which states that an arbitration award may be vacated “where
the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Ancor's
argument for vacatur under section 10(a)(4) has two parts. First, Ancor
complains the arbitrator exceeded her powers by allowing PGV to
arbitrate issues that were precluded by res judicata or collateral
estoppel. Second, Ancor contends the arbitrator exceeded her powers by
reaching a decision that does not draw its essence from the intended
purpose of the Guaranty.
Arbitrator Authority
“An arbitrator's authority is limited to disposition of matters
expressly covered by the agreement or implied by necessity.” Quinn, 257
S.W.3d at 799. Arbitrators, therefore, exceed their powers when they
decide matters not properly before them. Id.; see also Gulf Oil Corp. v.
Guidry, 160 Tex. 139, 327 S.W.2d 406, 408 (1959). For example, an
arbitrator exceeds her powers by allocating an award of costs between
the parties when the arbitration agreement specifically requires the
arbitrator to designate a non-prevailing party to bear the costs of both
sides. See Townes Telecomms., Inc. v. Travis, Wolff & Co., L.L.P., No.
05-08-00079-CV, 2009 WL 1844330, at *3 (Tex. App.-Dallas June 29, 2009,
pet. filed).
Our inquiry under section 10(a)(4) is whether the arbitrator had
the authority, based on the arbitration clause and the parties'
submissions, to reach a certain issue, not whether the arbitrator
correctly decided the issue. Executone Info. Sys., Inc. v. Davis, 26
F.3d 1314, 1323 (5th Cir. 1994); see also DiRussa v. Dean Witter
Reynolds Inc., 121 F.3d 818, 824 (2d Cir. 1997). The award must be
derived in some way from the wording and purpose of the agreement, and
we look to the result reached to determine whether the award is
rationally inferable from the contract. Anderman/Smith Operating Co. v.
Tenn. Gas Pipeline Co., 918 F.2d 1215, 1219 n.3 (5th Cir. 1990). We may
not vacate an arbitration award for errors in interpretation or
application of the law or facts. Crossmark, 124 S.W.3d at 429.
Although Ancor's first argument is couched in terms of whether
the arbitrator exceeded her powers, Ancor's argument is actually a
complaint that the arbitrator committed an error of law by rejecting
Ancor's assertion that PGV's claims were barred by res judicata or
collateral estoppel. A complaint that the arbitrator decided the issue
incorrectly or made mistakes of law, however, is not a complaint that
the arbitrator exceeded her powers. See Pheng Invs., Inc. v. Rodriguez,
196 S.W.3d 322, 329 (Tex. App.-Fort Worth 2006, no pet.) (op. on reh'g).
Moreover, after examining the Guaranty, the parties' submissions, the
arbitrator's interim orders, and the final award, there is no doubt the
arbitrator responded to the issues submitted by the parties and that the
arbitration award falls within the scope of the Guaranty. Paragraph 17
of the Guaranty requires “ANY CONTROVERSY OR CLAIM” arising out of the
Guaranty to be determined by binding arbitration. Because Ancor has not
established that the arbitrator decided a matter not properly before
her, we cannot conclude the arbitrator exceeded her powers under section
10(a)(4) of the FAA. See 9 U.S.C. § 10(a)(4); see also Quinn, 257 S.W.3d
at 799. We overrule Ancor's second issue.
Essence of the Contract
The other strand of Ancor's argument under section 10(a)(4) is
that the arbitration award does not “draw its essence” from the intended
purpose of the Guaranty. Ancor contends the arbitrator exceeded her
powers by rendering a decision that violates the Guaranty's purpose.
An arbitrator's award is “legitimate only so long as it draws
its essence” from the underlying contract. United Steelworkers of Am. v.
Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960). The “essence” test
was developed as part of section 10(a)(4), allowing vacatur where the
arbitrator exceeds her contractual authority. See id.; Executone, 26
F.3d at 1324-25; Delta Queen Steamboat Co. v. Dist. 2 Marine Eng'rs
Beneficial Ass'n, 889 F.2d 599, 602, 604 (5th Cir. 1989) (vacating the
arbitrator's award because the arbitrator exceeded the express
provisions of his contractual mandate).
To draw its essence from the Guaranty, the arbitrator's award
“'must have a basis that is at least rationally inferable, if not
obviously drawn, from the letter or purpose of the [Guaranty].'”
Executone, 26 F.3d at 1325 (quoting Bhd. of R.R. Trainmen v. Cent. of
Ga. Ry. Co., 415 F.2d 403, 412 (5th Cir. 1969)). “'[T]he award must, in
some logical way, be derived from the wording or purpose of the
contract.'” Id. The arbitrator may not ignore the plain language of the
Guaranty in her interpretation. See United Paperworkers Int'l Union,
AFL-CIO v, Misco, Inc., 484 U.S. 29, 37 (1987). Because the parties also
authorize the arbitrator to give meaning to the language of the
agreement, we should not reject an award on the ground that an
arbitrator misread the contract. Id. at 37-38. Thus, “improvident, even
silly” interpretations by arbitrators usually survive judicial
challenges. Id. at 39; accord Perry Homes v. Cull, 258 S.W.3d 580, 607
(Tex. 2008) (“If arbitrators simply misinterpret a contractual clause .
. . that type of error is not one which will justify setting aside an
award.”).
Our inquiry here is not one of contract interpretation. Rather,
we look to whether the arbitrator's award “was so unfounded in reason
and fact, so unconnected with the wording and purpose of the [Guaranty]
as to 'manifest an infidelity to the obligation of the arbitrator'” such
that the arbitrator failed to interpret the Guaranty at all. Bhd. of
R.R. Trainmen, 415 F.2d at 415 (quoting Enter. Wheel, 363 U.S. at 597);
see also Misco, Inc., 484 U.S. at 38 (“[A]s long as the arbitrator is
even arguably construing or applying the contract and acting within the
scope of his authority, that a court is convinced he committed serious
error does not suffice to overturn his decision.”); Wise v. Wachovia
Secs., LLC, 450 F.3d 265, 269 (7th Cir. 2006); Perry Homes, 258 S.W.3d
at 607. Even if we disagree with the arbitrator's decision here, we must
uphold confirmation of the award if the arbitrator's decision is
rationally inferable from the Guaranty. Misco, Inc., 484 U.S. at 38;
Anderman/Smith, 918 F.2d at 1219 n.3.
Ancor's position is that the arbitrator's resulting decision,
which was based on her interpretation and eventual reformation of the
Guaranty, “was never the parties' deal.” Ancor argues that the only deal
it struck with the Bank was to protect the Bank against further
deterioration in the value of the Bank's collateral position. Ancor
maintains that the intent behind the agreement was for Ancor to assume
“limited” liability, as detailed in the formulaic limitation found in
the Guaranty. Ancor complains that the Guaranty's intent was not, as the
arbitrator found, for Ancor to be exposed to full liability in the event
the Bank held an unperfected lien on its collateral.
It is clear from the arbitrator's interim orders and final award
that she went through the process of interpreting the Guaranty and that
she considered the wealth of evidence presented to her. Our question now
is to determine whether the arbitrator's liability finding and ultimate
award of damages is rationally inferable from the Guaranty. We conclude
it is.
In the first and second interim orders, the arbitrator assessed
the limitation paragraph in the Guaranty. She concluded that this
paragraph had one reasonable meaning:
First, the Bank would have a continuing and unlimited Guaranty from
Ancor for all amounts due under the loan agreement between the Bank and
[OpenPoint]. Second, in the event of any default, Ancor's liability
would be limited according to the formula described in the Guaranty;
however, Ancor's liability would only be limited if the Bank had a
'perfected first priority lien, that [was] not subject to any claims of
preference in any bankruptcy or insolvency proceeding . . . as of the
date of such default.'
(Emphasis in original). Applying that limitation, she concluded the
language at issue reflects the intention that “the Bank recover its
right to a full Guaranty, where its lien is subject to any claim of
preference . . . .” (Emphasis in original). Thus, the arbitrator opined
that under the plain meaning of the Guaranty, “the limiting language was
to be vitiated under any circumstance where the Bank was subject to a
claim of preference as of the date of default, whether that claim had
already been filed in court, or whether the facts which give rise to the
claim merely exist, but have not yet been reduced to writing.” The
arbitrator rejected Ancor's argument - that the Guaranty's limitation
paragraph cannot be negated just because a preference claim was filed -
stating that Ancor's argument and interpretation of the Guaranty would
effectively reform the agreement. At that time, no party had sought
reformation.
The arbitrator reconsidered the interpretation of the Guaranty
in the sixth interim order and the later clarification and reformed the
Guaranty to provide a cap on Ancor's liability. Based on the evidence
and argument presented on the issue of reformation, the arbitrator found
that the evidence tended to show two things: (1) Ancor was only willing
to ensure no further deterioration of the Bank's collateral position as
it existed at the time the Guaranty was signed, meaning the Bank and
Ancor intended that Ancor's obligations under the Guaranty would be
capped at $1,643,000, and that cap would be reduced by the value of
accounts receivable, inventory, and net fixed assets as reported by
OpenPoint to the Bank as of the date of any default; and (2) the Bank
and Ancor agreed that the Bank was to have a perfected first priority
lien in any collateral included in any calculation to reduce the
$1,643,000 cap. “Thus, reported collateral values may be deducted,
except where the Trustee filed a claim of preference against said
collateral.” Significant to this decision was the fact that Ancor's
representative testified they agreed the Bank should be able to collect
on the collateral in the event of any default.
The arbitrator also considered the inclusion of the “perfected,
first priority lien status” in the reformed Guaranty. She concluded the
addition of this phrase was warranted and reasoned that “[w]ithout a
perfected first priority lien on collateral, the Bank would not have the
legal right to seize and sell the collateral in the event of a
bankruptcy.” Further, despite Ancor's contention that it was only
willing to “insure the bank no further deterioration in [the Bank's]
collateral position,” the arbitrator looked to what “collateral
position” meant in terms of the Guaranty and stated that “[c]ollateral
position . . . includes not only the valuation of the collateral, but
also the priority lien status to be able to collect on the collateral.”
Because the Bank should be able to collect on the collateral, the
arbitrator concluded that the “perfected, first priority lien” provision
was an “enforceable term within the reformed Guaranty.” Looking to the
evidence related to the reported values of OpenPoint's accounts
receivable, inventory, and net fixed assets, the arbitrator applied the
limitation formula in the reformed Guaranty and, after deducting the
collateral that was challenged by the trustee, the arbitrator awarded
PGV $829,764 under the Guaranty.
By including an arbitration clause in the Guaranty, the parties
agreed to submit any disputes arising out of the Guaranty to an
arbitrator rather than a judge. Misco, Inc., 484 U.S. at 37-38. They
also agreed to accept “whatever reasonable uncertainties” might arise
from the process. Babcock & Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225,
235 (Tex. App.-Houston [14th Dist.] 1993, writ denied). Thus, it is the
arbitrator's “view of the facts and of the meaning of the contract that
they have agreed to accept.” Misco, Inc., 484 U.S. at 37-38. Here, the
arbitrator determined that under the reformed Guaranty, Ancor is liable
to PGV for an amount equal to the difference between the $1,643,000 cap
and the reported value of the collateral at the time of the default in
which the Bank held a perfected first priority lien as of the date of
the default and which has not been challenged by the trustee.
We conclude the arbitrator could rationally determine that the
presence of the “perfected, first lien priority” language meant that
Ancor could be liable for an amount up to the agreed cap where the lien
is subject to any claim of preference in a bankruptcy or insolvency
proceeding as of the date of default. It appears to this Court that the
arbitrator properly performed her obligation to interpret and reform the
Guaranty. The mere fact that the arbitrator did not adopt the
interpretation of the Guaranty urged by Ancor and rejected certain
proposals in reforming the Guaranty does not equate to overstepping or
exceeding her authority. Even if the arbitrator made a mistake in the
application of the law, as urged by Ancor, such a mistake is not a
ground for vacating an arbitration award. We therefore conclude the
arbitrator's decision and award of damages are rationally inferable from
the Guaranty. We overrule Ancor's third issue.
PGV's Cross-Appeal
Arbitration Costs
PGV asserts two issues in its cross-appeal. In its first issue,
PGV complains the trial court erred when it omitted PGV's share of the
arbitration costs as awarded. The arbitrator's award provides that
“[u]nder the terms of the Guaranty, Ancor is liable to pay PGV's share
of the arbitration costs.” The arbitrator did not award a specific
amount of costs, but she undeniably based her decision on paragraph 14
of the Guaranty. Without a request to do so by either party, the trial
court modified PGV's award, stating that “[a]lthough the Arbitrator's
Final Award awarded PGV its share of the total costs of the arbitration
proceeding, PGV presented no evidence of these costs, and this relief is
therefore denied.” The trial court also denied PGV's subsequent motion,
seeking reinstatement of the award.
PGV argues the trial court's modification of the award was
improper because it did not confirm the award as written. We agree. The
Guaranty authorizes the arbitrator to determine “ANY CONTROVERSY OR
CLAIM” and provides that the arbitration shall be “BINDING.” The record
shows that the arbitrator considered the issue of arbitration costs as
evidenced by the final award and that she applied the specific Guaranty
provision in awarding those costs. The record further shows that neither
party filed a motion to modify the arbitration award to exclude PGV's
award for arbitration costs from the final judgment as required by
section 11 of the FAA. See 9 U.S.C. § 11 (allowing the trial court to
modify or correct an arbitration award on limited grounds “upon the
application of any party”). Ancor's post-arbitration motion only asked
the trial court to vacate the entire award under section 10(a) of the
FAA and on other common law grounds.
When parties submit a matter to arbitration, a trial court is
generally without authority to modify the arbitrator's award. Kosty v.
S. Shore Harbour Cmty. Assoc., Inc., 226 S.W.3d 459, 465 (Tex.
App.-Houston [1st Dist.] 2006, pet. denied) (holding trial court erred
by adding attorney's fees to award); Int'l Bank of Commerce-Brownsville
v. Int'l Energy Dev. Corp., 981 S.W.2d 38, 54-55 (Tex. App.-Corpus
Christi 1998, pet. denied) (holding trial court erred by adjusting post-
judgment interest rate and by awarding additional attorney's fees);
Monday v. Cox, 881 S.W.2d 381, 384 (Tex. App.-San Antonio 1994, writ
denied) (holding trial court erred in setting aside arbitrator's award
for attorney's fees). The FAA requires the trial court to confirm the
arbitration award unless grounds are offered to vacate, modify, or
correct the award. 9 U.S.C. §§ 9, 11. Here, no grounds were offered to
omit PGV's share of the arbitration costs. That the award did not
include a specific amount of the arbitration costs does not preclude
confirmation of the arbitrator's decision. Cf. Tex. Civ. Prac. & Rem.
Code Ann. § 31.007(a) (Vernon 2008) (“[I]t shall not be necessary for
any of the parties to present a record of court costs to the court in
connection with the entry of a judgment.”).
We conclude the trial court had no authority to exclude PGV's
award for arbitration costs from the final judgment. The trial court
therefore abused its discretion in denying PGV's motion to modify the
final judgment to reinstate the costs expressly awarded by the
arbitrator. We modify the trial court's judgment to conform with the
arbitrator's award to PGV for its share of the total arbitration costs.
We sustain PGV's first cross-issue.
Modification of Appellant's Name
In its second issue, PGV complains that the trial court erred
when it denied PGV's request to modify the name of appellant. According
to PGV, after the trial court signed the final judgment confirming the
arbitration award, it discovered Ancor had merged with Ancor Holdings,
LP. PGV believed Ancor Holdings, LP was the surviving entity of the
merger and assumed Ancor's liabilities. PGV asked the trial court to
modify its judgment to correctly list the defendant as “Ancor Holdings,
LP,” instead of “Ancor Holdings, LLC.” PGV argues this is a simple case
of misnomer - PGV sued the correct defendant, just under the wrong name.
The trial court, however, denied PGV's request to substitute Ancor
Holdings, LP as the judgment debtor in place of Ancor.
We conclude the trial court committed no error in denying PGV's
request to modify appellant's name. We also refuse PGV's request to
include Ancor Holdings, LP as a judgment debtor. We are presented with
two separate, distinct legal entities: Ancor Holdings, LLC and Ancor
Holdings, LP. Only Ancor Holdings, LLC was sued, was served with
process, and appeared in this suit. A judgment “shall not be rendered
against one who was neither named nor served as a party defendant.”
Werner v. Colwell, 909 S.W.2d 866, 869-70 (Tex. 1995) (citing Tex. R.
Civ. P. 124); accord Mapco, Inc. v. Carter, 817 S.W.2d 686, 688 (Tex.
1991) (per curiam) (trial court erred by entering judgment against
entity never made a party); Fuqua v. Taylor, 683 S.W.2d 735, 738 (Tex.
App.-Dallas 1984, writ ref'd n.r.e) (“Judgment may not be granted in
favor of a party not named in the suit as a plaintiff or a defendant.”).
Moreover, a party does not waive the service of process requirement by
merely appearing as a witness in the case. See Werner, 909 S.W.2d at
870.
The Texas Rules of Civil Procedure require the judgment to
“conform to the pleadings,” and “entry of the judgment shall contain the
full names of the parties, as stated in the pleadings, for and against
whom the judgment is rendered.” Tex. R. Civ. P. 301, 306. Our statutes
of limitation and rules of practice afford plaintiffs ample time and
many means of figuring out the proper identity of the parties sued.
Thomas v. Cactus Drilling Corp. of Tex., 405 S.W.2d 214, 216 (Tex. Civ.
App.-Austin 1966, no writ). We may not disregard those rules to reach
the requested result. Accordingly, we overrule PGV's second cross-issue.
CONCLUSION
We conclude the statutory grounds are the exclusive grounds for
vacating or modifying an arbitration award under the FAA. Because Ancor
has failed to establish any statutory grounds for vacating the
arbitration award, it must be confirmed. In addition, because the trial
court erred in omitting PGV's award for its share of the arbitration
costs from the judgment, we modify the trial court's judgment to conform
with the arbitrator's award in that regard. We affirm the trial court's
judgment as modified.
MARY MURPHY
JUSTICE
080739F.P05
-------------------
Footnote 1
The Bank had previously recorded UCC-1 financing statements for this
collateral. Those documents, however, were in the name of OpenPoint's
predecessors, Farris Point of Sale, Inc., ABS, Inc., and Hospitality
POS, Inc. The three entities merged in February 1999 and changed their
name to OpenPoint. At the time the parties negotiated the Guaranty, the
Bank had not filed new financing statements under the OpenPoint name.
-------------------
Footnote 2
The arbitrator's Third, Fourth, and Fifth Interim Orders and Findings
addressed the statute of limitations issue. In her third order, she
concluded Ancor's reformation counterclaim was not barred by the statute
of limitations. PGV moved for reconsideration of the limitations issue,
and in response, the arbitrator issued the fourth order, upholding the
decision that the reformation counterclaim was not time-barred. PGV then
moved for reconsideration or clarification of the fourth order. The
arbitrator issued the fifth order addressing the issue for the third
time.
-------------------
Footnote 3
“The common law grounds to set aside an arbitration award include
fraud, misconduct, or gross mistake that implies bad faith and failure
to exercise honest judgment.” Crossmark, 124 S.W.3d at 430 n.6; accord
Graham-Rutledge & Co. v. Nadia Corp., 281 S.W.3d 683, 688 (Tex.
App.-Dallas 2009, no pet.); GJR Mgmt. Holdings, L.P. v. Jack Raus, Ltd.,
126 S.W.3d 257, 263 (Tex. App.-San Antonio 2003, pet. denied); see also
Kergosien v. Ocean Energy, Inc., 390 F.3d 346, 353 (5th Cir. 2004)
(“Besides the four statutory grounds, manifest disregard of the law and
contrary to public policy are the only nonstatutory bases recognized by
this circuit for vacatur of an arbitration award.”), impliedly overruled
by Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009);
Tanox, 105 S.W.3d at 252 (“'Manifest disregard of the law' is a
judicially created ground for vacating arbitration awards.”) (quoting
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421
(6th Cir. 1995)).
-------------------
Footnote 4
Indeed, this Court has previously stated that under the FAA, attacks
on arbitration awards are limited to the grounds set forth in sections
10 and 11. See, e.g., Roehrs v. FSI Holdings, Inc., 246 S.W.3d 796,
805-06 (Tex. App.-Dallas 2008, pet. denied) (“'Under the FAA, the
validity of an arbitration award is subject to attack only on grounds
listed in sections 10 and 11 of the Act.'”) (quoting Thomas James
Assocs., Inc. v. Owens, 1 S.W.3d 315, 319-20 (Tex. App.-Dallas 1999, no
pet.)); Antenna Prods. Corp. v. Cosenza, No. 05-05-00701-CV, 2006 WL
1452102, at *2 (Tex. App.-Dallas May 26, 2006, no pet.) (mem. op.)
(rejecting appellant's non-statutory grounds for vacating arbitration
award because these grounds not listed in section 10 of FAA). In the
wake of Hall Street, several Texas courts agree. See, e.g., Allstyle
Coil Co., L.P. v. Carreon, No. 01-07-00790- CV, 2009 WL 1270411, at *2
(Tex. App.-Houston [1st Dist.] May 7, 2009, no pet.) (holding that
non-statutory grounds for vacatur are “no longer legally recognized
grounds for vacating an arbitration award”); Cameron Int'l Corp. v.
Vetco Gray Inc., No. 14-07-00656-CV, 2009 WL 838177, at *8 (Tex.
App.-Houston [14th Dist.] Mar. 31, 2009, no pet. h.) (mem. op.)
(following suggestion of Hall Street and declining to accept appellant's
request for legal and factual sufficiency review of arbitration award);
Chandler v. Ford Motor Credit Co., LLC, No. 04-08-00100-CV, 2009 WL
538401, at *3 (Tex. App.-San Antonio Mar. 4, 2009, no pet. h.) (mem.
op.) (adopting Hall Street and holding that appellants failed to
demonstrate statutory basis for vacating arbitration award); see also
Saipem Am. v. Wellington Underwriting Agencies Ltd., No. 08-20247, 2009
WL 1616122, at *2 (5th Cir. June 9, 2009) (per curiam) (holding that
court may vacate arbitration award only if statutory ground supports
vacatur); Nat'l Resort Mgmt. Corp. v. Cortez, No. 08-10805, 2009 WL
890622, at *1 (5th Cir. Mar. 31, 2009) (per curiam) (“The number of
grounds for challenging an arbitration award has been substantially
reduced in light of [Hall Street] and [Citigroup].”); Ascension
Orthopedics, Inc. v. Curasan, A.G., Civil Action No. H-07-4033, 2008 WL
2074058, at *2 (S.D. Tex. May 14, 2008) (mem.) (stating Supreme Court's
Hall Street decision “is unequivocal that the grounds upon which vacatur
may be based as listed in § 10 are exclusive”); In re Poly-America,L.P.,
262 S.W.3d 337, 362 (Tex. 2008) (Brister, J., dissenting) (“Both federal
and state law require courts to enforce an arbitrator's decision, no
matter what it is, with very few exceptions. The allowable exceptions
concern extrinsic or procedural matters like corruption, fraud, or
refusing to hear evidence; they do not include (as the Supreme Court
just held) disregarding the law, even if a legal error is 'manifest.'”);
Xtria L.L.C. v. Int'l Ins. Alliance Inc., 286 S.W.3d 583, 594 (Tex.
App.-Texarkana 2009, pet. filed) (stating this Court has based past
application of manifest disregard standard on Fifth Circuit precedent
and opining, though not deciding, that this Court would follow
Citigroup).
-------------------
Footnote 5
Specifically, the Supreme Court stated: “The FAA is not the only way
into court for parties wanting review of arbitration awards: they may
contemplate enforcement under state statutory or common law, for
example, where judicial review of different scope is arguable.” Id.
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File Date[08/25/2009]