How a Mediator’s Failure to Disclose a Prior Mediation Creates Problems

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Full disclosure

By: Donald L. Swanson

Mediators are always concerned about conflicts of interest and appearances of conflict—and of making sure pertinent details are disclosed before accepting a mediation engagement.

It’s not very often that things work the other way: that a mediator must disclose a mediation before accepting another professional engagement.

But here’s a July 2018 appellate court opinion where that’s what happened: Ploetz v. Morgan Stanley Smith Barney LLC, 894 F.3d 894 (8th Cir. 2018) (Note: the volume and page number in this citation are the same—that is not an error).

How the problem developed

Ann Eleanor Ploetz, as Trustee, claimed that Morgan Stanley Smith Barney, LLC, transferred Trust funds without authorization. The parties agreed to arbitrate the claim.

The arbitration panel consisted of three public arbitrators, but one of them discovered a scheduling conflict six days before the arbitration hearing. So, the parties chose Barry Goldman as the replacement arbitrator.

Goldman filed a report of prior connections with the parties, in which he disclosed these ten items:

he was currently serving as an arbitrator in two other cases that had “Morgan Stanley” as a party;

he had served as an arbitrator in eight closed cases in which a member of the Morgan Stanley family (e.g., Morgan Stanley & Co. or Morgan Stanley DW, Inc.) or the Smith Barney family (e.g., Salomon Smith Barney, Inc., or Smith Barney Inc.) had been a party; and

he had dismissed certain claims against a Morgan Stanley affiliate in another arbitration, in which he served as sole arbitrator;

But Goldman’s report failed to disclose one connection: back in 2014, he served as mediator in the case of Arthur E. Strunk Revocable Trust v. Morgan Stanley Smith Barney LLC.

The arbitration and its fallout

The Ploetz arbitration went forward, with Goldman chairing the arbitration panel. Hearings occurred in Minneapolis in January 2017. And the panel denied Ploetz’s claim—unanimously.

A month later, Ploetz learned of Goldman’s undisclosed mediation in the Strunk case. So, she asked the U.S. District Court in Minnesota to vacate the arbitration award under the Federal Arbitration Act. She argued that Goldman’s nondisclosure of the mediation showed “evident partiality” and “misbehavior” that prejudiced her rights.

The District Court denied the motion, finding no evidence of “partiality” or “misbehavior” or impairment of the fairness of her hearing.

Appeal to the Eighth Circuit

Ploetz appealed to the Eighth Circuit Court of Appeals. The Eighth Circuit affirmed, but it did so “on partially different grounds.” Here is what the Eighth Circuit said:

It is undisputed that, (i) Ploetz and Morgan Stanley intended Goldman to be “impartial in both appearance and in fact,” (ii) Goldman was required to “disclose” any “past service as a mediator for any of the parties in the case,” and (iii) Goldman failed to disclose the Strunk mediation;

Ploetz’s claims of “evident partiality” and “misbehavior” rest entirely on Goldman’s failure to disclose his mediator role in the Strunk case;

The District Court erred in requiring that Ploetz show how Goldman’s actions affected the arbitration award, since the District Court may “assume” prejudice from the parties’ intent that Goldman be “neutral”; and

Nevertheless, the Eighth Circuit affirmed the District Court’s dismissal of Ploetz’s claim because Ploetz did not show that Goldman had “evident partiality”:

She failed to “explain how Goldman’s undisclosed mediation of the Strunk case creates even an impression of possible bias”;

She provided only the following “scant information” about the mediation:

–that it “occurred in or before 2014,” that it was confidential, that it did not succeed, and that Morgan Stanley paid $1,375 for participation in the Strunk mediation— a $500 filing fee and a $875 session fee;

Ploetz faults Morgan Stanley for the lack of detail in evidence about the mediation, but she has the burden of proof on “evident partiality” and did not ask the District Court for discovery thereon.

The Eighth Circuit found nothing in the undisclosed mediation of a years-old, unrelated case that could create an appearance of bias. At most, the evidence presented by Ploetz suggests an occasional failure to strictly follow disclosure rules, which is not an independent ground to vacate the award.

Conclusion

This seems like a simple case that’s easily resolved in favor of the mediator: he disclosed ten of eleven prior connections with one party, and the undisclosed connection is an immaterial error.

But that error had consequences, including federal court litigation at both the district and appellate courts. That’s a lot of litigation and a lot of fees and a lot of effort and uncertainty over a simple matter.

And all of that could have been avoided by a little more effort at the beginning to get the disclosures full and complete. That’s easy to see and to say in retrospect . . . but it’s reality.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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