Opinion by Justice MYERS.
Humitech Development Corporation (HDC) appeals the trial court's judgment confirming an arbitration award in favor of Alan Perlman, Michael Perlman, Ann Perlman, David Perlman, Michelle Perlman Berke, Beth Perlman Dreifach, Harry Sher, and Betty Sher. HDC's counsel, Emil Lippe, Jr., appeals the trial court's order imposing a $10,000 sanction against him. Appellants bring seven issues on appeal, contending (1) the arbitration proceeding was governed by Texas law; (2) the arbitrator exceeded his authority; (3) the arbitrator manifestly disregarded Texas
In 1983, appellee Alan Perlman staked claims (in his own name and in the names of the other appellees, his family members) on land controlled by the federal Bureau of Land Management in southern California to mine Sorbite, a type of diatomaceous earth found only in that area that is the raw material used in filters installed in food freezers. Humitech International Group (HIG) used Sorbite in the filters it manufactured and sold. In 2001, Perlman agreed with C.J. Comu, HIG's CEO, chairman of the board of directors, and majority stock owner, to pay Comu $500,000 if Comu brought Perlman a buyer of the mining claims for $2 million. Also in 2001, Perlman contracted with HIG to supply HIG with its needs for Sorbite. In 2003, HIG decided to buy appellees' interest in the mining claims to reduce its costs for Sorbite. Perlman, representing appellees, and Comu, representing HIG, agreed on a price of $2 million
HIG created appellant HDC to purchase appellees' claims. The purchase was funded by an unaffiliated company, King Louie Mining, owned by Ronald Katz. King Louie Mining loaned the purchase price to HIG, and King Louie Mining took the shares of HDC as security for the loan to HIG. When Perlman received the purchase price, he paid Comu $500,000 as he had promised.
HIG, HDC, and their affiliates' filter business faltered. In 2006, HIG defaulted on its debt to King Louie Mining, and King Louie Mining foreclosed on the shares of HDC. Katz and King Louie Mining then controlled HDC.
When Katz learned of the $500,000 payment to Comu, HDC brought a claim in arbitration against appellees for numerous causes of action, including for fraud incident to Perlman's payment of $500,000 to Comu. HDC sought rescission of the purchase agreement and return of the purchase price or, alternatively, damages in
The arbitration award discusses HDC's fraud claim concerning the $500,000 payment to Comu as follows:
HDC, represented by Emil Lippe, Jr., then filed this suit to vacate the arbitration award, and appellees filed a petition to confirm the arbitration award. The petition to vacate the arbitration award alleged the statutory ground that the arbitrator exceeded his powers and the common-law grounds that the arbitrator acted in manifest disregard of the law, and that the final award contained gross error and violated public policy. The trial court denied the request to vacate the arbitration award and ordered the arbitration award confirmed. The trial court also imposed a sanction of $10,000 on Lippe because the factual allegations in three paragraphs of HDC's original petition to vacate the arbitration award lacked evidentiary support.
Many of appellants' arguments concern whether Perlman's payment to Comu was an illegal commercial bribe. Appellants cite section 32.43 of the Texas Penal Code, which defines commercial bribery as follows:
TEX. PENAL CODE ANN. § 32.43(b), (c) (West 2011).
Appellants state in their brief, "It is, therefore, crystal clear that Appellees' conduct was illegal under Texas law. The arbitrator exceeded his powers by finding such conduct acceptable." However, the arbitrator's determination that there was no fraud in the form of an illegal kickback was based on the arbitrator's determination of the credibility of the witnesses and the weight of the evidence, to which the reviewing courts must give due deference. See Quinn v. Nafta Traders, Inc., 360 S.W.3d 713, 722 (Tex.App.-Dallas 2012, pet. denied). Therefore, it was not "crystal clear that Appellees' conduct was illegal under Texas law," and the arbitrator made no finding that illegal conduct was "acceptable."
Arbitration of disputes is strongly favored under Texas law. Prudential Secs. Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex. 1995) (per curiam). We review a trial court's decision to vacate or confirm an arbitration award de novo, based on review of the entire record. Cambridge Legacy Group, Inc. v. Jain, 407 S.W.3d 443, 447 (Tex.App.-Dallas 2013, pet. denied). "[A]n award of arbitrators upon matters submitted to them is given the same effect as the judgment of a court of last resort. All reasonable presumptions are indulged in favor of the award, and none against it." CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex.2002) (quoting City of San Antonio v. McKenzie Constr. Co., 136 Tex. 315, 150 S.W.2d 989, 996 (1941)). The award is presumed valid, and it is entitled to great deference. Cambridge Legacy Group, 407 S.W.3d at 447. The award is conclusive on the parties as to all matters of fact and law; in other words, we may not vacate an award even if it is based upon a mistake of fact or law. Id. at 448; Centex/Vestal v. Friendship W. Baptist Church, 314 S.W.3d 677, 683 (Tex.App.-Dallas 2010, pet. denied). We may not substitute our judgment for that of the arbitrators merely because we would have reached a different decision. Cambridge Legacy Group, 407 S.W.3d at 447.
In their first issue, appellants contend the trial court erred by determining the Federal Arbitration Act (FAA) applied and not the Texas General Arbitration Act (TAA). See 9 U.S.C. §§ 1-16; TEX. CIV. PRAC. & REM.CODE ANN. §§ 171.001-.098
In Texas, a written arbitration agreement in a transaction involving commerce that does not specify that federal law or the law of another state applies is subject to both Texas and federal law.
In Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008), the Supreme Court indicated that state statutes or common-law provisions permitting review of an arbitration award beyond that authorized by the FAA would not be preempted by the FAA:
Id. at 590, 128 S.Ct. 1396. Thus, Hall Street indicates that Texas's common-law grounds for vacating an arbitration award — gross error, manifest disregard of the law, and violation of public policy — would not be preempted by the FAA.
Although we agree with appellants that the TAA applies in this case, the trial court also made that determination. Because appellants have not shown the trial court erred, we overrule appellants' first issue.
In their second issue, appellants contend the arbitrator exceeded his powers by (a) committing a procedural error under the arbitration body's rules and (b) failing to apply Texas law properly.
Unless the party challenging the award offers grounds for vacating, modifying, or correcting an arbitration award, the
Arbitrators derive their authority from the arbitration agreement, which limits their authority to deciding the matters submitted therein either expressly or by necessary implication. Centex/Vestal, 314 S.W.3d at 684. Arbitrators exceed their powers when they decide matters not properly before them. Id.; Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., 294 S.W.3d 818, 829 (Tex.App.-Dallas 2009, no pet.). Arbitrators may also exceed their powers when the arbitration award is not rationally inferable from the parties' agreement. Ancor Holdings, 294 S.W.3d at 830. Unless the arbitration agreement expressly provides otherwise, errors of fact or law do not constitute the exceeding of powers when those errors do not concern whether an issue to be decided was properly before the arbitrators or whether the arbitration award was rationally inferable from the parties' agreement.
In Nafta Traders, the supreme court determined that the parties' agreement could restrict the arbitrator's authority to make mistakes of law and could provide that the decision be reviewable like a trial court decision. Nafta Traders, 339 S.W.3d at 101 ("The TAA, as we have construed it, permits parties to agree to expanded review, or to a corresponding limit on the arbitrator's authority, as in this case...."). In that case, the arbitration agreement stated, "The arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law." The supreme court concluded this arbitration agreement meant that the arbitrator lacked the power to make a reversible error of law and gave the courts the authority to review the arbitrator's decision for errors of law under the courts' authority to determine whether the arbitrator exceeded its powers. Id. However, the court stated that absent such a clear agreement, "the default under the TAA, and the only course permitted by the FAA, is restricted judicial review." Id.
Appellants argue that the arbitrator exceeded his powers because he did not enforce the arbitration body's rule requiring the parties to exchange documents before trial. Appellants assert that the arbitrator admitted documents offered by appellees over appellants' objection that the documents had not been exchanged as
The arbitrator's failure to follow a procedural rule concerning the admission of evidence did not deprive the arbitrator of authority to hear the case or result in an award not contemplated by the parties' contract. Consequently, the arbitrator's admission of this evidence did not constitute an exceeding of the arbitrator's powers under section 171.088(a)(3)(A).
Appellants state in their brief, "Under Texas law, the failure to follow the arbitrator's own rules and guidelines constitutes grounds for vacating an arbitration award," and cite Pettus v. Pettus in support of this statement. See Pettus v. Pettus, 237 S.W.3d 405 (Tex.App.-Fort Worth 2007 pet. denied). Pettus, however, does not support this statement when the violated rules or guidelines do not affect the arbitrator's authority to hear the case.
In Pettus, the parties were going through a divorce proceeding. Pettus, 237 S.W.3d at 408. The parties agreed to temporary orders for the management of their jointly owned businesses during the divorce proceeding. The agreed orders required that certain disputes in the management of the businesses be arbitrated, including whether and how much severance pay should be paid to the businesses' employees who were terminated during the divorce proceeding. The arbitrators established a rule that for those arbitrations, the parties were to invite the employees to be parties to the arbitration provided that the employees agreed to be bound by the arbitrators' decision. Pettus, 237 S.W.3d at 410. Subsequently, the trial court ordered that these procedures be "strictly followed" in any arbitration over severance pay. Id. at 413. A dispute arose over the severance pay for terminated employees, but the parties did not invite the employees to participate in the arbitration. Id. at 410, 413, 419. The arbitrators proceeded to hear the case without requiring the parties to invite the employees to become parties in the arbitration and be bound by the arbitration. Id. at 413, 419. The arbitrators awarded the employees $438,500 in severance pay. Id. at 413. The trial court vacated the arbitration award to the employees because the arbitrators did not direct the parties to comply with the trial court's order to invite the employees before hearing the case. Id. at 415, 419. The court of appeals observed that arbitrators "exceed their powers when they decide matters not properly before them." Id. at 419 (citing Pheng Invs., 196 S.W.3d at 329). The court of appeals affirmed the vacating of the arbitration award because the arbitrators failed to follow their own declared procedure (which the trial court had ordered be strictly followed) that the parties invite the employees to participate in the arbitration. Id. at 420. Although the court of appeals does not further explain its reasoning, it appears the court of appeals considered the arbitrators lacked the power to hear the severance-pay arbitration until the divorcing parties invited the employees to participate in the arbitration. Therefore, because the parties had not invited the employees to participate, the arbitrators had no authority to hear the severance-pay arbitration, and they exceeded their powers by doing so. Pettus
Appellants also argue the arbitrator exceeded his powers by ruling that HDC take nothing on its claim. Appellants assert that the arbitrator exceeded his powers because he was required to follow the substantive law of Texas, "the undisputed evidence established that Appellees were guilty of commercial bribery, and the decision of the arbitrator has vindicated such behavior...."
Appellants argue the arbitration agreement restricted the arbitrator's powers to following Texas law correctly, meaning the arbitrator had no authority to make a mistake of law. We disagree. Appellants' argument is based on the "Governing Law" law provision of the parties' contract:
(Capitalization of all letters omitted.) This provision was the governing-law provision of the entire contract and was in a separate provision from the arbitration provision. The governing-law provision did not purport to restrict the arbitrator's authority to any extent that it was not otherwise restricted by Texas law. This provision does not alter the "default" restricted judicial review of the arbitration award. See Nafta Traders, 339 S.W.3d at 101.
Even if the arbitrator failed to follow Texas substantive law in determining whether appellees committed fraud in the form of commercial bribery, that does not mean the arbitrator lacked the authority to determine the issue or that the arbitration award was not rationally inferable from the parties' agreement. It would mean only that the arbitrator made a mistake of fact or law, which does not constitute the arbitrator exceeding his powers under section 171.088(a)(3)(A). See Pheng, 196 S.W.3d at 329 ("A mistake of fact or law in the application of substantive law is insufficient to vacate an arbitration award."). We conclude appellants have not shown the arbitrator exceeded his powers. We overrule appellants' second issue.
In their third issue, appellants contend the arbitrator manifestly disregarded Texas law or committed a gross mistake in entering his award. In their fourth issue, appellants contend the arbitration award violated public policy.
Under the TAA, the courts have traditionally permitted certain common-law, non-statutory grounds for vacating an arbitration award, including manifest disregard of the law, gross mistake, and an award that violates public policy. The Supreme Court's decision in Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008), has cast doubt upon the continued viability of these common-law grounds. See Townes Telecomms., Inc. v. Travis, Wolff & Co., L.L.P., 291 S.W.3d 490, 493 n. 1 (Tex.App.-Dallas 2009, pet. denied). The 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. We will consider appellants' arguments concerning these grounds.
Manifest disregard is a "very narrow" or "extremely limited" standard of review. Xtria L.L.C. v. Int'l Ins. Alliance Inc., 286 S.W.3d 583, 594 (Tex.App.-Texarkana 2009, pet. denied) ("very narrow" standard); Home Owners Mgmt. Enters., Inc. v. Dean, 230 S.W.3d 766, 768-69 (Tex.App.-Dallas 2007, no pet.) ("extremely limited" standard). It is more than error or misunderstanding of the law. Xtria L.L.C., 286 S.W.3d at 594; Home Owners, 230 S.W.3d at 768. The disregarding of the law is "manifest" if it was "obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator." Xtria L.L.C., 286 S.W.3d at 594; Myer v. Americo Life, Inc., 232 S.W.3d 401, 411. The term "disregard" implies that the arbitrator "appreciate[d] the existence of a clearly governing principle but decided to ignore or pay no attention to it." Myer, 232 S.W.3d at 411. "In other words, the issue is not whether the arbitrator correctly interpreted the law, but whether the arbitrator, knowing the law and recognizing that the law required a particular result, simply disregarded the law." Xtria L.L.C., 286 S.W.3d at 594; see Pheng Invs., Inc. v. Rodriquez, 196 S.W.3d 322, 332 (Tex.App.-Fort Worth 2006, no pet.) ("Under this standard, the arbitrator clearly recognizes the law but chooses to ignore it or refuses to apply it correctly."). It is appellants' burden to demonstrate that the arbitrator manifestly disregarded the law. Xtria L.L.C., 286 S.W.3d at 594; Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105 S.W.3d 244, 253 (Tex.App.-Houston [14th Dist.] 2003, pet. denied).
Gross mistake is conceptually analogous to manifest disregard. See Int'l Bank of Commerce v. Int'l Energy Dev. Corp., 981 S.W.2d 38, 48 (Tex.App.-Corpus Christi 1998, pet. denied). A gross mistake is a mistake that implies bad faith or a failure to exercise honest judgment and results in a decision that is arbitrary and capricious. Xtria L.L.C., 286 S.W.3d at 598; Werline v. E. Tex. Salt Water Disposal Co., 209 S.W.3d 888, 898 (Tex.App.-Texarkana 2006), aff'd, 307 S.W.3d 267, 268 (Tex.2010); Teleometrics Int'l, Inc. v. Hall, 922 S.W.2d 189, 193 (Tex.App.-Houston [1st Dist.] 1995, writ denied). "A judgment rendered after honest consideration given to conflicting claims, no matter how erroneous, is not arbitrary or capricious." Xtria L.L.C., 286 S.W.3d at 598.
The doctrines of manifest disregard and gross mistake do not extend to mere mistakes of fact or law. Judicial review of an arbitration award "is so limited that even a mistake of fact or law by the arbitrator in the application of substantive law is not a proper ground for vacating an award." Centex/Vestal, 314 S.W.3d at 683; Xtria L.L.C., 286 S.W.3d at 591; Universal Computer Sys., Inc. v. Dealer Solutions, L.L.C., 183 S.W.3d 741, 752 (Tex.App.-Houston [1st Dist.] 2005, pet. denied).
Appellants argue,
The record shows that the arbitrator, after hearing all the evidence, determining the credibility of the witnesses, and weighing the conflicting evidence, found that Perlman's $500,000 payment to Comu was a finder's fee and not a fraudulent kickback. Nothing in the record shows the arbitrator's decision was arbitrary or capricious. We conclude appellants have failed to show the arbitration award was the result of manifest disregard of the law or gross mistake. We overrule appellants' third issue.
In their fourth issue, appellants contend the arbitrator's award was made in violation of a clearly defined public policy against kickbacks and bribes. "[A]n arbitration award cannot be set aside on public policy grounds except in an extraordinary case in which the award clearly violates carefully articulated, fundamental policy." CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 239 (Tex.2002). Appellants assert that "[c]ommercial bribery and kickbacks are violative of Texas public policy." However, the arbitrator did not find that any kickback or commercial bribery occurred. Instead, the arbitrator determined that appellees did not defraud HDC by paying Comu a finder's fee. Because the arbitrator found there was no fraudulent kickback or bribe, the finder's fee paid to Comu did not violate Texas public policy. We overrule appellants' fourth issue.
In their fifth issue, appellants contend the trial court erred by confirming the arbitration award because (1) the trial court believed the FAA applied and therefore the trial court applied the wrong standard to determining whether the arbitration award should be vacated; and (2) appellees did not present any affirmative evidentiary support for the award.
The trial court's initial order on the applications for confirmation or vacation of the arbitration award applied only the FAA. Subsequently, the trial court sent the parties a letter stating the TAA applied but that the outcome of the case remained the same. However, even if the trial court did apply only the FAA to the determination of whether the arbitration award should be vacated or confirmed, the trial court's determination is reviewed de novo on appeal. Cambridge Legacy Group, 407 S.W.3d at 447. As discussed above, even applying the common-law grounds of manifest disregard of the law, gross error, and public policy under Texas law for vacating an arbitration award, appellants failed to show the arbitration award should be vacated. Accordingly, any error by the trial court's applying the FAA and not the TAA did not "probably cause[] the rendition of an improper judgment" and is not reversible. See TEX. R.APP. P. 44.1(a)(1).
Although appellants state in this issue that the trial court erred by confirming the arbitration award because appellees did not present any affirmative evidentiary support for the confirmation of the award, appellants do not present in
We overrule appellants' fifth issue.
In their sixth issue, appellants contend the trial judge should have been recused or disqualified.
The grounds for disqualification of a judge are: (1) the judge served as a lawyer in the matter in controversy, or another lawyer with whom the judge practiced at that time served as a lawyer on the matter in controversy; (2) the judge knows that the judge has an interest in the subject matter in controversy; and (3) either party is related to the judge by affinity or consanguinity within the third degree. TEX. CONST. art. V, § 11; TEX.R. CIV. P. 18b(a). Grounds for recusal include that the judge's impartiality might reasonably be questioned, the judge has a personal bias or prejudice concerning the subject matter or a party, or the judge or the judge's spouse has an interest that could be substantially affected by the outcome of the proceeding. See TEX.R. CIV. P. 18b(b)(1), (2), (6), (7)(B). "The test for recusal under rule [18b(b)] is `whether a reasonable member of the public at large, knowing all the facts in the public domain concerning the judge's conduct, would have a reasonable doubt that the judge is actually impartial.'" Hansen v. JP Morgan Chase Bank, NA, 346 S.W.3d 769, 776 (Tex.App.-Dallas 2011, no pet.) (quoting Sears v. Olivarez, 28 S.W.3d 611, 615 (Tex. App.-Corpus Christi 2000, order) (en banc) (internal quotations and citations omitted)).
On May 5, 2010, almost three months after the trial court signed the order confirming the arbitration award, appellants filed "Plaintiff's Emergency Motion to Disqualify Judge and Vacate Order Confirming Arbitration Award."
We review an order denying a motion to recuse for an abuse of discretion. Hansen v. JP Morgan Chase Bank, NA, 346 S.W.3d 769, 776 (Tex.App.-Dallas 2011, no pet.). "A trial court abuses its discretion if it acts in an arbitrary or unreasonable manner without reference to any guiding rules or principles." Walker v. Gutierrez, 111 S.W.3d 56, 62 (Tex.2003). Judge McCraw did not make findings of fact and conclusions of law in support of his ruling. Accordingly, we imply all findings necessary to support the ruling. See In re Williams, 328 S.W.3d 103, 112 (Tex. App.-Corpus Christi 2010, orig. proceeding [mand. denied]). The trial court's decision must be affirmed if it can be upheld on any legal theory that finds support in the evidence. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex.1990) (per curiam); In re Williams, 328 S.W.3d at 112 (citing Worford).
At the hearing on the motion to disqualify, appellants asserted that statements in a paper authored by the trial judge and her husband that they presented at an employment law seminar in 2001 demonstrated the trial judge's bias in favor of arbitration. The paper was written before the trial judge took the bench and nine years before the rulings in this case.
Appellants pointed Judge McCraw to the statement in the paper, "Arbitrators always listen to the case.... Arbitrators will hear all claims and give everyone a full and fair opportunity to present their case." Appellants also stated that the judge "has written complaining of `perverse' appellate decisions that are `anti-arbitration,' complaining of `serious and numerous defects of the court system.'" The paper does contain those quotations, but appellants have taken them out of context.
In the motion to disqualify, appellants asserted the trial judge stated in the paper that "`anti-arbitration' decisions of a United States Court of Appeals are `perverse.'" The quotation comes from the introduction of the paper, where the judge and her husband wrote:
(Emphasis added.) The article did not state, as appellants' argument in the motion to disqualify and in their brief on appeal imply, that the Ninth Circuit's "perverse anti-arbitration decisions" were "perverse" because they held arbitration did not apply in those cases. Instead, the article stated that the Ninth Circuit's line of opinions were "perverse" because they were contrary to the decisions of the other circuits and the Supreme Court.
After the introductory section, the paper described "The Deficiencies of Litigation" and then "The Advantages of Arbitration." On the deficiencies of litigation, the paper stated,
The paper then compared these shortcomings of traditional litigation to what the authors perceived as the advantages of arbitration:
(Emphasis added.)
Appellants assert that the trial judge's statements about litigation and arbitration before she took the bench "are especially troubling to a party seeking to overturn an arbitrator's decision." We disagree. Many of the criticisms of litigation and praises of arbitration discussed in the article have long been recognized in Texas judicial opinions. See, e.g., In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998) ("There is no adequate remedy by appeal for denial of the right to arbitrate, because the very purpose of arbitration is to avoid the time and expense of a trial and appeal."); Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 272-73 (Tex. 1992) ("Absent mandamus relief, Anglin would be deprived of the benefits of the arbitration clause it contracted for, and the purpose of providing a rapid, inexpensive alternative to traditional litigation would be defeated."); Temple v. Riverland Co., 228 S.W. 605, 609 (Tex.Civ.App.-Amarillo 1921, no writ) ("Arbitration is an arrangement for taking and abiding by the judgment of selected persons in some disputed matter, instead of carrying it to the established tribunals of justice; and is intended to avoid the formalities, the delay, the expense, and vexation of ordinary litigation.") (quoting In re Curtis, 64 Conn. 501, 30 A. 769, 770 (1894)).
Appellants argue that the statements, "Arbitrators always listen to the case.... The arbitrators will hear all claims and
We conclude that Judge McCraw could have found that a reasonable member of the public would not have had a reasonable doubt concerning the trial judge's impartiality based on her statements in the paper.
Appellants presented evidence that the trial judge, before she took the bench, was an officer and director of certain business entities promoting arbitration and other forms of alternate dispute resolution. One document showed she remained a director of one of the businesses after she took the bench, but her husband testified she had no interest in any of the businesses and was not otherwise involved in them. The judge's husband testified that the charters of all but one of the entities had been forfeited. He also testified that, although much of his practice involved arbitration, he had no interest in the outcome of this case. He also testified that the trial judge had no interest, marital or otherwise, in his income from his law practice.
Based on the evidence before him, Judge McCraw could have found that neither the trial judge nor her husband had a financial interest in the subject matter of the case or any interest that would be substantially affected by the outcome of the case. Judge McCraw could have found that a reasonable member of the public would not have had a reasonable doubt concerning the trial judge's impartiality based on her professional background and her husband's practice.
We conclude that Judge McCraw did not abuse his discretion by denying appellants' motion to disqualify the trial judge. We overrule appellants' sixth issue.
In the seventh issue, Emil Lippe, Jr. contends the trial court erred by imposing a sanction of $10,000 against him. We review an order imposing a sanction for an abuse of discretion. Low v. Henry, 221 S.W.3d 609, 614 (Tex.2007). We may reverse the trial court's ruling only if the trial court acted without reference to any guiding rules or principles making the ruling arbitrary or unreasonable. Id. An order imposing a sanction is appropriate if there is a direct nexus between the improper conduct and the sanction imposed. Id. In general, courts presume that pleadings are filed in good faith. Id. The party seeking sanctions has the burden of overcoming this presumption of good faith. Id.
Section 10.002 of the Texas Civil Practice & Remedies Code permits a party to "make a motion for sanctions, describing the specific conduct violating section
Section 10.001(2) requires that "each claim, defense or other legal contention in the pleading or motion is warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." CIV. PRAC. § 10.001(2). Section 10.001(3) requires that "each allegation or other factual contention in the pleading or motion has evidentiary support or, for a specifically identified allegation or factual contention, is likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Id. § 10.001(3).
Appellees moved for sanctions on the grounds that HDC's original petition to vacate the arbitration award violated section 10.001(2) and (3). Appellees alleged that appellants presented no grounds for vacating the arbitration award because (1) HDC's grounds of gross mistake, manifest disregard of the law, and public policy were not permissible grounds for vacating an arbitration award under the FAA, and the FAA clearly applied in this case; (2) appellants' allegations that the arbitrator did not hear all of HDC's evidence was factually groundless; and (3) HDC's "pleading purporting to attack the Award because the Arbitrator failed to be convinced by HDC's witness and evidence, is groundless." The trial court agreed with appellees' first allegation and issued an order on February 8, 2010 stating the FAA applied and preempted any Texas law that would yield a different result than would be reached under federal law. Following the issuance of the supreme court's opinion in Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex.2011), the trial court sent a letter to the parties stating it vacated its previous order and now ruled that the TAA applied to this case. The court subsequently issued the sanctions order on appeal, which found that three paragraphs in HDC's original petition to vacate the arbitration award lacked evidentiary support.
The trial court's order states the trial court imposed the sanction because it found that three paragraphs in HDC's original petition signed by Lippe violated section 10.001(3), which requires that "each allegation or other factual contention in the pleading or motion has evidentiary support or, for a specifically identified allegation or factual contention, is likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." CIV. PRAC. § 10.001(3). The court found that paragraphs 85, 91, and 92 did not meet this requirement because they "do not have and have never had evidentiary support." The court also found that Lippe "failed to make a reasonable inquiry into the facts supporting the factual allegations of paragraphs 85, 91 and 92 and that had he done so, he would have ascertained that the factual allegations of paragraphs 85, 91 and 92 did not
Paragraphs 85, 91, and 92 of the July 23, 2009 petition to vacate the arbitration award alleged:
The "factual contention[s]" in these paragraphs are that the arbitrator disregarded evidence, made a decision, made "findings both of fact and law," and denied HDC relief. These contentions are supported by the record and are undisputed. The remaining allegations in the three paragraphs, that the arbitrator's actions were arbitrary and that he violated public policy, manifestly disregarded the law, and committed gross error, are legal contentions. The imposition of sanctions for unwarranted legal contentions is governed by section 10.001(2), not 10.001(3). The trial court's order states in two places that Lippe violated section 10.001(3), and it states in three places that the allegations in those paragraphs lacked evidentiary support. The order does not state that Lippe violated section 10.001(2) or that the claims were unwarranted by existing law or a nonfrivolous argument for extension, modification, or reversal of existing law. That the legal contentions may be unwarranted based on the alleged facts of the case is not a violation of section 10.001(3). See Gomer v. Davis, 419 S.W.3d 470, 482, (Tex.App.-Houston [1st Dist.] 2013, no pet.).
Appellees presented three grounds in their motion for sanctions: (1) the FAA preempted appellants' state-law grounds for vacating the arbitration award because the transaction involved interstate commerce; (2) appellants' allegation that the arbitrator did not hear all of HDC's evidence was factually groundless; and (3) HDC's "pleading purporting to attack the Award because the Arbitrator failed to be convinced by HDC's witness and evidence, is groundless." Because the trial court did not expressly rule on the grounds in appellees' motion for sanctions, we decline to review the motion in this appeal, and we remand appellees' motion for sanctions to the trial court.
We sustain appellants' seventh issue.
We affirm the trial court's judgment confirming the arbitration award, but we reverse the trial court's order imposing a $10,000 sanction on Emil Lippe, Jr., and we remand the cause to the trial court for further proceedings on appellees' motion for sanctions.
Gomer, at 419 S.W.3d at 482.
