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New reinsurance-related and arbitration developments from Carlton Fields

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Alex Silverman

District Court Grants Motion to Compel Arbitration, Finding Arbitration Provision Not Severable From Allegedly Void Contract

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A Pennsylvania federal district court granted a motion to compel arbitration pursuant to 9 U.S.C. § 4 of the Federal Arbitration Act, over objection by the defendant on severability grounds. The defendant argued that its contract with the plaintiff was void ab initio and thus unenforceable. While the contract contained an arbitration clause, the defendant argued that under Pennsylvania law, an arbitration provision is not severable from the remainder of a void contract, and as such, the arbitration clause at issue was unenforceable. The court disagreed, however, finding the proposition to be “directly at odds” with U.S. Supreme Court precedent. The court noted that the Supreme Court explicitly held in Buckeye that “an arbitration provision is severable from the remainder of the contract” and that “unless the challenge is to the arbitration clause itself,” a challenge to the validity of the contract as a whole must go to the arbitrator in the first instance. Because the defendant here challenged the validity of the contract as a whole, the court granted the plaintiff’s motion to compel arbitration.

Thrivest Specialty Funding, LLC v. Wright, No. 2:18-cv-04764 (E.D. Pa. June 5, 2019)

Second Circuit Adopts Standard for Determining Subject-Matter Jurisdiction Over Motions to Confirm Arbitration Awards Under FAA Section 9

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The Second Circuit Court of Appeals recently held as a matter of first impression that a district court properly looked to the substance of an underlying dispute in determining whether it had subject-matter jurisdiction over a motion to confirm an arbitration award pursuant to Section 9 of the Federal Arbitration Act (FAA). The parties are members of the Bobov Hasidic Jewish community in Brooklyn. The petitioners claimed to own trademark rights in the word “Bobov” and commenced arbitration to prevent the respondents from using the mark in connection with a new Hasidic community. The parties agreed to arbitrate before a rabbinical tribunal, which issued an award in the petitioners’ favor. The petitioners sought confirmation of the award in federal district court under Section 9 of the FAA. After concluding that it had subject-matter jurisdiction over the matter, the district court confirmed the award, and the Second Circuit affirmed.

Although the Second Circuit had not previously addressed whether federal courts have subject-matter jurisdiction over motions to confirm under Section 9, it had addressed the issue in the context of a petition to vacate under Section 10. In that case, the court adopted the “look-through” approach used by the U.S. Supreme Court to determine whether a district court had subject-matter jurisdiction over a petition to compel arbitration under Section 4 of the FAA. The Supreme Court instructed district courts to “look through” the petition to the substance of the underlying controversy to assess whether it implicated federal law. The Second Circuit in the current case found no reason not to apply the same standard to a motion to confirm under Section 9. Applying that standard here, it held that because the underlying controversy raised questions of federal trademark law, the district court “unquestionably” had subject-matter jurisdiction over the matter. The court then concluded that the district court properly confirmed the arbitration award, particularly given the extreme deference that courts must afford such awards.

Landau v. Eisenberg, 922 F.3d 495 (2d Cir. 2019)

West Virginia Supreme Court Reverses, Finds “Delegation Clause” in Employment Arbitration Agreement Neither Ambiguous nor Unconscionable

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Petitioners, two Rent-A-Center entities, moved to compel arbitration of a lawsuit by Anita Ellis alleging that Rent-A-Center unlawfully terminated her employment for seeking workers’ compensation benefits. At the time she was hired, Ellis signed an arbitration agreement stating that she agreed to arbitrate any claims arising out of her employment and/or termination. In seeking to compel arbitration, Rent-A-Center specifically relied on a “delegation clause” in the arbitration agreement stating that the arbitrator — not any court — shall have exclusive authority to resolve any challenge to the applicability, enforceability, or formation of the arbitration agreement, including on the grounds that it was void, voidable, ambiguous, unconscionable, or in violation of state law. Ellis argued that the delegation clause was: (1) ambiguous and failed to reflect an unmistakable intent to delegate arbitrability issues to the arbitrator; (2) unconscionable under state common law; and (3) invalid for violating a West Virginia statute. The lower court held that the delegation clause was both procedurally and substantively unconscionable and that there was no mutual agreement to arbitrate. It therefore denied Rent-A-Center’s motion to compel arbitration, but the Supreme Court of West Virginia reversed.

With respect to Ellis’ first argument, the court noted that it had previously considered the exact delegation clause at issue here and held that it clearly and unmistakably expressed an intent to delegate arbitrability issues to the arbitrator. It thus rejected Ellis’ contrary argument. The court next rejected Ellis’ argument that the delegation clause was unconscionable or otherwise invalid under common law contract principles and West Virginia statute. Ellis claimed the provision suffered from various “contract of adhesion” characteristics often associated with procedural unconscionability (e.g., unequal bargaining power, “take-it-or-leave-it” terms, and others). The court disagreed, however, finding the failure to read a contract does not relieve a party of its binding effect. And while an arbitration clause generally will not be deemed “unconscionable” absent proof of both procedural and substantive unconscionability, the court found Ellis failed to prove substantive unconscionability nonetheless. The court noted that in order for it to consider Ellis’ delegation clause challenge, 9 U.S.C. § 2 and the “severability doctrine” required her to specifically object to the delegation clause, rather than the arbitration agreement as a whole. Because Ellis’ “statutory violation” argument was directed to the arbitration agreement as a whole, it could not serve as a basis for invalidating the delegation clause on unconscionability grounds.

Rent-A-Center, Inc. v. Ellis, 827 S.E.2d 605 (W.Va. 2019)

California Court Denies Defendants’ Motions for Summary Judgment, Finding Evidentiary Support for Odyssey Re’s Fraudulent Transfer Claims

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A California district court issued its latest decision arising from Odyssey Reinsurance Company’s ongoing effort to collect a $3.2 million default judgment against insurance agency Cal-Regent, its successor PBIS, and their owners, Richard and Diane Nagby. We have been tracking the case on our blog, previously writing about it here, here, here, here, and here.

In this latest iteration, Claims Technology Services (CTS) and its CEO, David Dostalik, sought summary judgment on four causes of action against them. CTS and Dostalik allegedly conspired with Mr. Nagby to conceal funds that Cal-Regent and PBIS owed Odyssey by transferring them into accounts held by CTS. Dostalik also allegedly released portions of the funds directly to the Nagbys. Odyssey’s fifth and sixth causes of action were against CTS for unlawful transfers under California’s Uniform Fraudulent Transfer Act (UFTA). The seventh was against Dostalik for intentional fraudulent transfers. The 13th was against CTS as a “subsequent transferee” of unlawfully transferred funds. The court denied summary judgment on the fifth, sixth and seventh causes of action, but granted CTS summary judgment on the 13th.

Regarding the avoidable transfer claims, the court found sufficient evidence that Cal-Regent’s assets were fraudulently transferred, and that CTS and Dostalik acted in furtherance of the transfers. As to CTS, the evidence was deemed sufficient to support an avoidable transfer claim under either an intentional or constructive fraud theory. While Dostalik argued he had no involvement in an intentional fraud, the court found the evidence suggested otherwise and thus precluded summary judgment on the seventh cause of action. The court granted CTS summary judgment on the 13th cause of action, however, since Odyssey conceded that discovery produced no evidence that CTS was a “subsequent transferee” of funds derived from a sale of Cal-Regent and PBIS assets.

Odyssey Reinsurance Co. v. Richard Keith Nagby, et al., No. 16-3038, 2019 U.S. Distr. LEXIS 68950 (S.D. Cal. Apr. 22, 2019).

Tenth Circuit Finds No Jurisdiction to Hear Appeal of District Court Stay Order While Motion to Compel Arbitration Is Pending in Parallel Federal Court Proceeding

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The plaintiff sued the defendants (collectively, DAL) in Colorado federal court after they denied his application for a Subway restaurant franchise. Because an arbitration clause in the franchise application required that any arbitration be held in Connecticut, DAL filed a motion to compel arbitration in Connecticut federal court. All proceedings in Colorado were stayed pending that motion. After DAL’s motion was denied, DAL appealed to the U.S. Court of Appeals for the Second Circuit. That appeal is currently pending. Meanwhile, the plaintiff asked the Colorado court to dissolve the stay and resume proceedings. The plaintiff lost that motion and appealed to the U.S. Court of Appeals for the Tenth Circuit. DAL moved to dismiss the appeal for lack of appellate jurisdiction.

The Tenth Circuit granted DAL’s motion, agreeing that the stay order issued in Colorado did not “end the litigation,” and thus was not a “final decision” for purposes of 28 U.S.C. § 1291. While there is an exception for stay orders that effectively put a party out of federal court, the exception was deemed inapplicable here, where one federal court deferred decisional authority to another federal court — the Second Circuit. The court also held that the stay order did not fall within the “small class” of collateral rulings that may be treated as “final” for purposes of appellate jurisdiction. It rejected the plaintiff’s contention that delaying review here until the entry of a final judgment “would imperil a substantial public interest” or “some particular value of a high order.”

Alemayehu v. Gemignani, No. 18-1340 (10th Cir. Apr. 17, 2019)