Brendan Gooley

Fourth Circuit Vacates and Remands Denial of Motion to Stay Case Pending Arbitration After District Court Refuses to Consider Evidence Beyond the Pleadings

October 21, 2020 by Brendan Gooley

The Fourth Circuit recently vacated and remanded an order denying a motion to stay proceedings pending arbitration after concluding that the district court erroneously failed to consider evidence beyond the pleadings because the motion to stay was part of a motion to dismiss.

Brenda C. Noe sued City National Bank of West Virginia on behalf of a putative class of similarly situated plaintiffs claiming that the bank’s fee practices violated contractual provisions and the West Virginia Consumer Credit and Protection Act, among other things.

The bank filed a motion to dismiss and, in the alternative, moved to stay the action pending referral to arbitration. The district court found it possible that a subsequent agreement altered Noe’s original agreement with the bank such that an agreement to arbitrate was eliminated. The district court then “refused to consider the bank’s evidence calling that elimination into question because the court believed the question was unfit for resolution on a motion to dismiss.”

The bank appealed and the Fourth Circuit vacated and remanded. After determining that it had jurisdiction over the appeal (the circuit court concluded that the bank’s alternative request to stay the case pending arbitration “equated to a motion seeking enforcement of a purported arbitration agreement,” the denial of which conferred appellate jurisdiction), the court concluded “that the district court should have treated the bank’s motion as a motion to stay the litigation and compel arbitration” and that, had the district court done so, it could have considered the bank’s evidence and held a hearing to consider any unresolved questions of fact regarding arbitration.

The Fourth Circuit therefore vacated the district court’s decision denying the bank’s alternative motion to stay and remanded for a determination as to whether the case should be referred to arbitration and, if necessary, a hearing to resolve any related questions of material fact.

Brenda C. Noe v. City National Bank of West Virginia, No. 20-1230 (4h Cir. Sept. 17, 2020)

Eastern District of California Grants Partial Summary Judgment to Plaintiffs in Reinsurance Mortgage Kickback Class Action; Reinsurer May Still Prevail

October 19, 2020 by Brendan Gooley

The Eastern District of California recently granted partial summary judgment to a class of plaintiffs suing a reinsurer and related entities with respect to a reinsurance arrangement regarding private mortgage insurance that allegedly involved illicit kickbacks. The reinsurer and its related entities may still prevail, however, because the court concluded it could not rule on whether or not the reinsurer and its related entities were entitled to a safe harbor that negates liability.

Home buyers who cannot put down 20% of the purchase price on their house are generally required to purchase private mortgage insurance (PMI) from a mortgage insurer (MI). Mortgage lenders usually direct home purchasers (borrowers) to one of the lender’s preferred MIs.

MIs began transferring some of the risk they took on through PMI by obtaining reinsurance. Mortgage lenders, in turn, created affiliate reinsurers that provided reinsurance to MIs. Through captive reinsurance agreements (CRAs), the MIs allegedly purchased reinsurance from the reinsurers affiliated with the lenders in exchange for PMI referrals from those lenders.

For example, PHH Mortgage Corporation (“PHH Mortgage”), a lender, owns Atrium Insurance Corporation (“Atrium”), a reinsurer that has agreements with MIs to which PHH Mortgage refers a great deal of its borrowers in order for the borrowers to obtain PMI. The MIs then cede a portion of the premiums obtained from PMI to Atrium through captive reinsurance agreements.

The potential problem with that arrangement is that the Real Estate Settlement Procedures Act (RESPA) prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise [in relation to the referral of] a real estate settlement service involving a federal related mortgage loan.” RESPA also contains a safe harbor that provides that it does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

A class of plaintiffs sued PHH Mortgage, Atrium, and related entities claiming that the arrangement PHH Mortgage had with Atrium and certain MIs violated RESPA by effectuating kickbacks on mortgage loans. The parties eventually cross-moved for summary judgment.

After addressing Daubert motions, the court granted in part the plaintiffs’ motion for summary judgment and denied the defendants’ motion for summary judgment, finding that the plaintiffs had established a prima facie case of a RESPA violation based on the reinsurance arrangement. They concluded that a genuine issue of fact existed as to whether the defendants were protected by RESPA’s safe harbor. Specifically, the court concluded that plaintiffs had satisfied the three elements of a prima facie case: (1) because the “MIs ceded a percentage of their PMI premiums to Atrium pursuant to the CRAs, and those ceded premiums constituted a payment or thing of value,” the requirement that a payment or exchange of a thing of value was satisfied; (2) “payments were made pursuant to an agreement to refer real estate settlement services” involving federally-related mortgage loans because substantial evidence established that “PHH had a practice of referring PMI business to MIs that had agreed to CRAs with Atrium, and that the captive MIs ceded premiums to Atrium pursuant to the CRAs”; (3) a referral occurred because it was “undisputed that PHH directed the vast majority of its borrowers who needed PMI to one of the four captive MIs” and “at no point during the class period did PHH direct less than 80% of its retail PMI business to the captive MIs” (i.e., the ones that obtained reinsurance from Atrium).

The court then turned to RESPA’s safe harbor, which required it to determine whether the MI’s “payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer?” The answer to that question turned on whether the payments to Atrium were “more than the reasonable market value of the reinsurance” obtained. The court found that, although there was “substantial evidence” supporting the plaintiffs’ theory that “no real risk was transferred, and thus, Atrium did not provide actual reinsurance services” (there was evidence that Atrium procured substantial profits and that its dividends far surpassed its reinsurance claims, though the court noted that was not necessarily determinative), there also was evidence that Atrium suffered losses during several book years and thus that the reinsurance agreements had actually transferred real risk to Atrium. Thus, the court concluded that there was “a sufficiently genuine dispute . . . that the court [could not] resolve on summary judgment [as to] whether Atrium provided actual reinsurance services to the captive MIs.” PHH Mortgage and Atrium may, therefore, still prevail in this class action.

The court also rejected the defendants’ defenses regarding compliance with governing law and the filed rate doctrine, standing arguments, and their motion for class decertification.

Efrain Munoz et al. v. PHH Mortgage Corp. et al., No. 1:08-cv-00759-DAD-BAM (E.D. Cal. August 12, 2020).

Court Rejects Claim Based on Interpretation of Clause in Private Purchase and Sale Agreement of Shares and Other Matters

September 30, 2020 by Brendan Gooley

The United States Bankruptcy Court for the District of Puerto Rico recently rejected a defendant’s arguments that a clause in a Private Purchase and Sale Agreement of Shares and Other Matters was invalid under Supreme Court case law but nevertheless agreed with the defendant’s interpretation of the clause and therefore dismissed the claim against it.

National Promoters and Services, Inc. (“NAPRO”) entered into a Private Purchase and Sale Agreement of Shares and Other Matters (“the Agreement”) with Aseguradora Ancon, S.A. (“Ancon”). Pursuant to the Agreement, Ancon bought certain shares of National Life Insurance Company (“NALIC”) from NAPRO for approximately $2.5 million.

A clause in the agreement (“Clause Four”) provided in part that $300,000 of the purchase price would be deposited in an escrow account “which shall be reserved for nine (9) months in order to guarantee those obligations not reflected in the financial statements as of September 30, 2011, caused to National Life Insurance Company (hereinafter NALIC) by the officers and/or directors of said entity.” Clause Four further provided: “After such nine (9) month period has passed, to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall be returned to NAPRO.”

Ancon did not fund the escrow fund “because it determined the action unnecessary considering their financial strength and also found that there were claims, risks and unknown losses caused by NALIC that surpassed $300,000.” NAPRO subsequently sued Ancon. Ancon defended in part by claiming that Clause Four was not valid under the Supreme Court’s decision in Bangor Punta Operations, Inc. v. Bangor & A.R. Co., 417 U.S. 703 (1974). Bangor Punta was a shareholder derivative action in which the Supreme Court “held that a shareholder may not complain of acts of corporate mismanagement if it acquired its shares from those that participated in the alleged wrongful transactions.” That holding was based on equitable considerations and the fact that the buying party was trying “to recoup a large part of the price they agreed to pay for their shares” and “reap a profit from wrongs done to others.”

The United States Bankruptcy Court for the District of Puerto Rico rejected Ancon’s argument and held that Bangor Punta was inapposite. “Unlike Bangor Punta, in the instant adversary proceeding, Ancon is the defendant to a recovery of monies action based upon a private stock purchase agreement regarding the sale of NALIC stock by NAPRO.” The action was based on an alleged breach of Clause Four and “there [was] no windfall for Ancon for damages sustained by other premised on a shareholder derivative action lawsuit for corporate mismanagement . . . .”

The court also concluded that Ancon’s reliance on the Supreme Court of Puerto Rico’s decision in Multinational Life Insurance Company v. Carlos Benitez Rivera; Edgardo Van Rhyn Soler, et als., 193 D.P.R. 67 (2015), which applied the Supreme Court’s decision in Bangor Punta, was inapplicable because that case was also based on a different factual scenario.

Because Clause Four was not invalid under Bangor Punta and its progeny, the court turned to interpreting that clause. Applying Puerto Rican law regarding the interpretation of contracts. the court concluded: “The reference in [Clause Four] ‘. . . to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall not be returned to NAPRO’ refers to the balance of the obligations being consumed, not to the actual payment of the obligations which could be anytime in the future depending on the nature and terms of the obligation.” As a result, the court denied NAPRO’s “request for the defendant to pay the retained amount of $300,000 and orders the dismissal of the complaint.”

In re National Promoters and Services Inc., No. 13-00049-ESL (D.P.R. July 2, 2020)

Supreme Court of Mississippi Enforces Arbitration Agreement

September 28, 2020 by Brendan Gooley

The Supreme Court of Mississippi has reversed and remanded a trial court’s refusal to enforce an arbitration agreement after rejecting the plaintiff’s arguments against arbitration. The Court also instructed the trial court to try to determine which arbitration agreement applied and, if that could not be determined, to look to the FAA to determine the specific terms of the arbitration.

Bettye Turner invested approximately $2 million with David Carrick, an investment broker employed by Morgan Stanley Smith Barney. Carrick subsequently moved to Stern, Agee & Leech, Inc. To facilitate the transfer of Turner’s funds to the new brokerage, Turner signed an account application. That referenced a client account agreement, which the account application stated (in bold, capital letters) “contained in numbered paragraph 22, a pre-dispute arbitration clause requiring all disputes under this agreement to be settled by binding arbitration.” Carrick subsequently left Stern, Agee & Leech, Inc. and joined Stifle, Nicolaus & Company, Inc. (“Stifel”). Turner (through her daughters) subsequently sued Stifel for mismanagement in Mississippi state court. Stifel moved to compel arbitration. The trial court denied that motion.

On appeal, the Supreme Court of Mississippi reversed and remanded. Contrary to the trial court’s conclusion that there was “no contract, [and] thus no agreement to arbitrate” because the a agreement was “‘confusing and conflicting.'” The Supreme Court concluded that the “parties entered into a valid and enforceable arbitration agreement in the account application.” The account agreement itself, the Court held, was “sufficient to indicate the unambiguous intent of the parties to arbitrate.” The Court also rejected Turner’s argument that Stifel could not enforce the agreement because it was not a party to it. Turner alleged, the Court explained, that Stifel was a successor in interest to Stern, Agee & Leech, Inc., and Stifel could therefore invoke arbitration. Finally, the Court also rejected Turner’s argument that the provision was invalid because the account application referred to the arbitration clause as being in paragraph 22 of the account agreement, even though the arbitration clause was in paragraph 19 of one of the two account agreements in existence at that time. The Court remanded the case, however, for a determination regarding which of the two arbitration clauses contained in the two account agreements applied and, if that could not be determined, to apply the FAA to determine the specifics of arbitration.

David Chadwick Carrick et al. v. Bettye M. Turner et al., No. 2019-CA-00617-SCT (Miss. July 30, 2020)

Eleventh Circuit Affirms Denial of Motion to Arbitrate Where Appellant Was Not a Party to Arbitration Agreement

August 20, 2020 by Brendan Gooley

The Eleventh Circuit Court of Appeals recently affirmed the denial of a motion to arbitrate where the appellants were not parties to the agreements containing arbitration clauses. The court also concluded that equitable estoppel did not apply to stop the plaintiffs from opposing arbitration.

A group of plaintiffs sued Herbalife, a global nutrition company that operates through a direct sales network of thousands of distributors, and some of Herbalife’s top distributors in a putative class action. The plaintiffs, who were also Herbalife distributors, claimed they were tricked into spending thousands of dollars to attend “circle of success” events and invest in their Herbalife distribution business by false promises of financial success from the top distributors.

Herbalife and the top distributors moved to compel arbitration. They cited arbitration clauses in the distributor agreements signed by some of the named plaintiffs and argued that the incorporation of Herbalife’s rules of conduct, which Herbalife amended to include an arbitration agreement, in the remaining distributor agreements rendered all the plaintiffs’ claims subject to arbitration. The district court disagreed and also refused to transfer the case to a different venue.

The top distributors appealed. The Eleventh Circuit affirmed the district court’s denial of their motion to compel arbitration. None of the top distributors were parties to the distributor agreements, which were between the plaintiff distributors and Herbalife. The top distributors therefore could not invoke the arbitration clauses. The court also rejected the argument that the district court should have sent the question of arbitrability to an arbitrator. Threshold questions of arbitrability are only questions for the arbitrator if the parties agree to make them so, and in this case there was no agreement between the plaintiff distributors and the defendant top distributors.

The Eleventh Circuit also rejected the top distributors’ argument that the plaintiffs were equitably estopped from opposing arbitration. The plaintiffs’ complaint did not so much as mention a single term from the distributor agreements, which made it difficult to conclude that the plaintiffs relied on those agreements. The agreements were also not so intertwined with the plaintiffs’ claims, which relied on conduct at best one step removed from the agreements, that equitable estoppel applied. The court also concluded that it did not have jurisdiction to review the district court’s decision not to transfer the case to a different venue.

Lavigne v. Herbalife, Ltd., No. 18-14048 (11th Cir. July 29, 2020).