Federal Court Puts A Second Fork In Schottenstein FINRA Arbitration and Says It's Done And Done

[B]everley's granddaughter, Alexis Schottenstein ("Alexis"), has stoked the controversy based on her dissatisfaction with her treatment in Beverley's estate plan. [DE 1, p. 3]. Petitioners in this federal action believe that Alexis helped develop Beverley's claims against JP Morgan and themselves. Id. Beverley worked at Wells Fargo from 2009-2013 in its Largo, Florida bank branch. Id. Wells Fargo terminated Alexis in 2013 allegedly due to numerous customers' complaints that Alexis enrolled their respective Wells Fargo accounts in online statement delivery without the customers' knowledge and/or authorization. Id. So Petitioners in this federal action issued the subpoenas to Alexis Schottenstein and Wells Fargo requiring them to appear at the Arbitration, testify and produce documents. 

Beverley (the Claimant in the pending Arbitration) did not oppose Petitioners' Motion for the Alexis Schottenstein Trial Subpoena, but Alexis did object. [DE 20, p. 4]. On or about September 15, 2020, a majority of the Arbitration Panel signed the trial subpoena directed to Alexis. Id. On or about October 8, 2020, Petitioners provided the executed trial subpoena to Alexis Schottenstein's Florida counsel, and counsel advised Petitioners that Alexis would not comply with the Subpoena. Id.

On or about June 24, 2020, Petitioners filed a Motion for Subpoena for the Production of Documents from Wells Fargo Pursuant to the FINRA Code of Arbitration Procedure. [DE 20, p. 5]. Beverley opposed the Motion, but the Arbitration Chairperson deemed the documents Petitioners sought from Wells Fargo to be relevant to Petitioners' defenses, and the Arbitration Chairperson executed a Subpoena for Production to Wells Fargo. Id. On or about July 29, 2020, Petitioners served Wells Fargo with the Wells Fargo Subpoena through its registered agent in Florida. Id. Shortly thereafter, Wells Fargo filed its objections. Id. Petitioners later requested that the Arbitration Panel execute a trial subpoena directed to the records custodian of Wells Fargo. Id. On or about September 23, 2020, the Arbitration Chairperson overruled the Wells Fargo Objections, and a majority of the Arbitration Panel executed a trial subpoena for the testimony and production of documents from the Wells Fargo records custodian. Id. On or about October 8, 2020, Petitioners provided the executed Wells Fargo Trial Subpoena to Wells Fargo's counsel. Id. at p. 6. Wells Fargo's counsel advised Petitioners that Wells Fargo would not comply with the Subpoena. Id. 

SIDE BAR: By way of recap:

• Alexis is Beverley's granddaughter
• Beverley worked at Wells Fargo from 2009-2013
• Wells Fargo terminated Alexis in 2013 
• Avi and Evan Schottenstein issued subpoenas to Alexis and Wells Fargo requiring their appearance at the FINRA arbitration and their production of documents
• Beverley did not oppose the subpoenas
• Alexis opposed the subpoena
• Wells Fargo refused to comply with its subpoena
• By a 2:1 vote, the FINRA arbitrators directed Alexis and Wells Fargo to comply with the subpoenas

(a)The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between -- 

(1) citizens of different States;. . .

Here, Petitioners have conceded that there is not complete diversity of the parties in this subpoena enforcement proceeding because Respondent Alexis Schottenstein and Petitioners Avi and Evan Schottenstein are all citizens of New York. Thus, there is not complete diversity of parties in this federal subpoena enforcement proceeding. Moreover, Petitioners seemingly conceded at the hearing that the amount in controversy in this subpoena enforcement proceeding does not exceed $75,000; at the very least, Petitioners have made no effort to establish the value of the amount in controversy in this federal court proceeding. Instead, Petitioners argue that the relevant inquiry for determination of diversity jurisdiction is the amount in controversy and the state citizenship of the parties in the pending Arbitration, rather than in this federal court subpoena enforcement proceeding. That is, Petitioners argue that this Court should ignore the diversity problems which exist in this federal subpoena enforcement proceeding and instead look through to the Arbitration and determine diversity jurisdiction based on the parties and amount in controversy in the Arbitration. 

The Court rejects Petitioners' argument that the Court should ignore the lack of diversity jurisdiction in this subpoena enforcement proceeding and instead look to the Arbitration to determine diversity jurisdiction. Petitioners suggest that this is a "gray area." [DE 24, p. 2]. However, it is clear that the Arbitration is not before this Court; only the subpoena enforcement action is before this Court. There is an abundance of case law that holds that the relevant inquiry is not whether the parties to the underlying arbitration are diverse, but rather whether the parties to the federal court action are diverse. This case law also holds that courts should determine whether the amount in controversy in the federal court action, and not in the underlying arbitration, exceeds $75,000.  . . .

FINRA Code of Arbitration Procedure for Customer Disputes / Rule 12104: Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case

. . .

(e) At the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.

[T]hey had reached an "oral agreement concerning the amount of a settlement sum to be paid by [R]espondents to [P]etitioner to resolve [the Petition and Motion to Vacate]." Id. at 1. The Stipulated Motion stated that a "written settlement agreement [would] be prepared, revised, agreed upon, and executed by March 24, 2021." Id. The Stipulated Motion further stated that, if "[R]espondents fail[ed] to timely make the settlement payment, the settlement agreement [would] be null and void and [the Parties would] return to their present postures and positions in [the] action." Id. at 1-2. However, if Respondents timely made the settlement payment, Petitioner and Respondents would "stipulate to the voluntary dismissal of [the] proceeding." Id. at 2.

On June 29, 2021, Respondents filed the instant Motion to Enforce, arguing that Petitioner and Respondents settled the case on two occasions - on March 18, 2021, and on May 6, 2021 - and requesting that the Court enforce the purported settlement. See ECF No. [20] at 1. On July 16, 2021, Petitioner filed her Response, arguing that Petitioner and Respondents did not reach a settlement agreement on either date. See generally ECF No. [25]. On July 28, 2021, Respondents filed their Reply. See generally ECF No. [38].

On January 14, 2022, Magistrate Judge Otazo-Reyes issued her R&R, recommending that the Motion to Enforce be denied. See ECF No. [58]. The R&R states that: (1) the Parties did not reach an enforceable, oral settlement agreement on March 6, 2021; (2) the Parties did not reach an enforceable, oral settlement agreement on May 6, 2021; and (3) Mr. Guy Burns' ("Mr. Burns") interactions with Mr. Peter Fruin ("Mr. Fruin") did not bind Petitioner. See id. On January 28, 2022, Respondents filed their Objections, arguing that Magistrate Judge Otazo-Reyes erred because: (1) Mr. Burns did have the authority to bind Petitioner; (2) Mr. Burns did not tell Respondents' Counsel that his authority was limited; (3) Mr. Patrick Lannon ("Mr. Lannon") did authorize the sending of Petitioner's April 30 Settlement Draft; (4) the Court should receive additional evidence on the authority of Petitioner's Counsel; (5) Magistrate Judge Otazo-Reyes did not incorporate case law recognizing Florida's strong policy favoring settlements; (6) the R&R's conclusions on attorney authority will discourage, rather than encourage, settlements; and (7) Respondents' March 19 Settlement Draft did not omit a penalty for non-payment. See generally ECF No. [59]. 

On January 28, 2022, Respondents also filed the instant Motion for Mediation. ECF No. [61]. Respondents request that the Court refer this case to mediation and stay all deadlines while such mediation takes place. See id. at 1. Petitioner opposes the Motion for Mediation, arguing that mediation will serve no legitimate purpose other than to delay the case and force Petitioner to expend additional resources. See ECF No. [62]. On February 18, 2022, Respondents' Reply followed. See ECF No. [63].

Third, the Court is not persuaded by Respondents' contention that the Court should require mediation because Respondent Evan Schottenstein will have to declare bankruptcy if the Court does not require mediation. Petitioner is the master of her case, and she has decided to oppose mediation despite being aware of the risks of an Order confirming the arbitration award. The Court sees no reason to force Petitioner to take an alternative course of action based on Respondents' representation of Petitioner's best interest. As alluded to above, Petitioner may, of course, settle the case outside of mediation and avoid Evan Schottenstein's bankruptcy if she chooses to do so, and court-annexed mediation is not required for further settlement negotiations. 

Lastly, Respondents' argument that Petitioner has too many attorneys is not a proper ground to require mediation. Petitioner is free to choose who will represent her in this case, and the quality and quantity of her legal representation have no bearing on this Court's reasoning. As such, the Motion for Mediation is denied.

[R]espondents fail to meet their burden of establishing that there were no reasonable grounds to refuse an indefinite postponement of the arbitration proceeding. Rather, the record establishes that Petitioner demanded arbitration on July 24, 2019, ECF No. [1] ¶ 4, and the panel scheduled the parties' final evidentiary hearing to begin on October 19, 2020, almost eighteen (18) months after Petitioner first demanded arbitration. Given the lengthy period of time that had already lapsed, the panel likely considered their responsibility to expeditiously resolve the dispute when denying Respondents' request for an indefinite postponement of the proceeding.

In addition, upon review and consideration, it is evident that Respondents' failure to establish subject matter jurisdiction for the subpoenas directed at Alexis Schottenstein and Wells Fargo Bank was part of the reason Respondents were unable to present additional evidence and testimony. As such, Respondents fail to persuade the Court that the panel's refusal to grant an indefinite postponement resulted in the improper foreclosure of material evidence justifying vacatur of the Award.

[T]he documents in question were presented before Petitioner testified. See ECF No. [80-1] at 30-32. Respondents had an opportunity to question Petitioner regarding the black book. See id. at 35-38. The panel had the opportunity to question Cathy Pattap regarding her involvement. See ECF No. [80] at 7; see also ECF No. [80-2] at 2. In addition, Respondents notably fail to set forth any binding legal authority from the Eleventh Circuit establishing that such factors constitute undue means. This Court does not consider such matters to be measures equal in gravity to bribery, corruption, or physical threat to an arbitrator. Given binding Eleventh Circuit precedent, the Court need not consider Respondents' cases from sister circuits.

[H]ere, Respondents do not claim an actual conflict between the arbitrators and the parties themselves. Respondents' arguments are instead based on potential conflicts. However, Arbitrator Solomon's personal lawsuit against Evan Schottenstein's subsequent employer State Farm is not partiality that is direct, definite, and capable of demonstration but rather remote, uncertain, and speculative. In addition, Respondents fail to establish how Arbitrator Scutti's classification as a public arbitrator, his exchange with the FINRA staff, and his prior retention of Petitioner's handwriting expert amount to partiality that is direct, definite, and capable of demonstration. Each allegation appears to set forth remote, uncertain, and speculative partiality.

refused to consider a video recording in which Petitioner stated that she would have invested more in Coatue if she could. See ECF No. [75] at 32-33. Respondents claim that they were prejudiced by the panel's refusal to consider the evidence because it contradicted Petitioner's argument that she had never heard of Coatue. See id. Further, Respondents argue that the panel should have considered a video recording where Petitioner stated that she should have "double" what she had. See id.

[T]he arbitrators ignored the proceedings to sleep, text, talk on their phones or with others in their homes, and leave the camera frame altogether. See id. at 33. Respondents represent that Arbitrator Rich was not present for three (3) hours and was sleeping on fifty-four (54) occasions. Arbitrator Solomon slept for four (4) minutes and was off-camera on twenty-two (22) occasions. Arbitrator Scutti was distracted for twenty-four (24) minutes. Respondents cite Hott v. Mazzocco, 916 F. Supp. 510, 517 (D. Md. 1996), where the court stated that "[m]isconduct sufficient to warrant vacating an award is something patently egregious, such as an arbitrator sleeping during testimony or having ex parte contacts." 

Petitioner responds that the arbitration hearing was almost 146 hours - or 8754 minutes - and that the total time that the arbitrators were purportedly inattentive to the arbitration hearing is exceedingly small compared to the total time for the hearing. See ECF No. [80] at 13. Petitioner also argues that Respondents do not identify any critical fact that the panel missed during their inattentive periods. See id.

[F]urther, as Petitioner correctly points out, the arbitrators in this case were inattentive for a relatively short period of time considering the length of the proceedings, and Respondents fail to identify any critical fact that the arbitrators missed as a result of their purported inattentiveness. In other words, Respondents fail to establish how the alleged misbehavior resulted in prejudice to Respondents.

As a final matter, Respondents request a hearing given the "considerable factual record" and the "complexity of the legal arguments." ECF No. [75] at 35. As evident from the Court's discussion above, the Court has fully addressed the parties' arguments based on its review of the briefings and the record. Further, the Court is not persuaded by Respondents' argument regarding the purported "complexity of the legal arguments." The parties' arguments are clear from the briefings, and the Eleventh Circuit's binding precedent on the issues is well-established. As such, Respondents' request for a hearing is denied.

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