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Fifth Circuit Affirms $18.3M Arbitration Award Same Day as Oral Arguments

 

In his 15 years of practice, not much fazes Chris Hamilton anymore in the everyday trenches of high stakes litigation.

“We have death matches all the time,” he said.

However, an affirmation of an $18.3 million arbitration award that he won for a bankruptcy trustee last week in the U.S. Court of Appeals for the Fifth Circuit proved anything but ordinary.

And it was because of the message conveyed by the judges at oral arguments: they thought the appeal was a complete waste of time, and they had no reservations about telling Hamilton’s courtroom opponents just that.

“I’d be embarrassed to take the position you’re taking in this case,” Circuit Judge Jerry Smith told Hamilton’s opposing counsel, Thompson Coe partner Kevin Risley, during Wednesday’s oral arguments. “I would be absolutely embarrassed for you and your law firm that you think it’s appropriate to retry this case after you agreed to arbitration.”

The Fifth Circuit panel, which also included Judges Patrick Higginbotham and Stephen Higgonson, issued a one-page ruling the same day affirming the arbitration award.

It was the second time last week for Judge Smith to surface in headlines for making scathing comments toward someone (the first time, it was directed to a Houston federal judge).

Hamilton represents the bankruptcy estate of Primcogent Solutions, a Dallas-based company that won an $18.3 million arbitration award after a panel found that it was fraudulently lured into acquiring the assets of another Dallas company, Santa Barbara Medical Innovations (SBMI). The assets included the distribution rights to the Zerona laser, a medical laser machine billed as a noninvasive alternative to liposuction.

Primcogent argued during the 2016 arbitration before Judges Ted Akin, Glen Ashworth and David Kelton that SBMI made negligent misrepresentations about its contractual relationships that were key to its revenues.

Because the relationships were not as strong as purported, Primcogent fell deep into the red after completing the SBMI acquisition. Primcogent ultimately had to file for Chapter 7 bankruptcy to liquidate its business.

A federal court in Fort Worth affirmed the arbitration award last January, and SBMI appealed the district court’s final judgment last May.

Risley, SBMI’s appellate lawyer, said in an email that the arbitration panel exceeded its authority for two reasons: 1) it awarded more than $18 million in damages despite a contractual damage cap of $250,000, and 2) the panel allowed claims to be asserted for the first time long after the 18-month period allowed in the contract.

“By awarding relief that the parties contractually agreed would not be allowed, the panel exceeded its authority, which is a ground for vacating an arbitration award under section 10 of the Federal Arbitration Act,” Risley said.

When Risley brought up section 10 during oral argument, the Fifth Circuit remained unconvinced, acknowledging how narrow the rule is based on caselaw precedent.

“Section 10 is all you have, is my point,” Judge Higginbotham told Risley. “And unfortunately, that doesn’t help you very much.”

Judge Smith told Risley that his side had “completely undermined the whole concept of arbitration,” stating that the arbitrators had the authority to rule the way they did because his client “handed it to them” by entering an arbitration agreement in the first place.

“You got popped for $16 million in damages, and you’re doing everything you can to pull your client out of the ditch, but it isn’t going to work.” Judge Smith said. “Whether arbitration is a good idea or not, we have the Federal Arbitration Act. This case was completely tried before the arbitrators. It went through the federal district court, who did a good job, and now you’re drawing it out further by causing the other side a lot of expenses as well as your client… to redo a decision that you agreed these arbitrators had a right to make.”

Hamilton is also fighting SBMI’s insurance company, Carolina Casualty, in a Florida court since the Jacksonville-based insurer denied SBMI coverage for the judgment.

He said he viewed the appeal of the arbitration as “a broader pattern of their delay in bad faith tactics with this litigation.”

“They basically engaged in scorched earth tactics that are both an affront to the arbitration process and to the basic idea of commercial insurance,” Hamilton said.  “Filing this type of meritless appeal is the sort of thing that’s admissible and presentable in front of the jury when we seek treble damages.”

Asked why he believed the Fifth Circuit granted oral argument for the appeal in the first place, Hamilton suspected the court did so in order to give the appellant a piece of their mind.

“And that writing a lengthy opinion was going to add to the delay in the process and fundamentally adds unfairness to the appellee, and trustee who had already obtained an arbitration award,” he added.