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Brendan Gooley

First Circuit Affirms Confirmation of FINRA Award Over Claim That Arbitration Panel Should Have Held Investment Firm Liable Under Doctrine of Respondeat Superior

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The First Circuit has affirmed the confirmation of a FINRA award over an appellant’s claim that the arbitrators erred by, among other things, not holding an investment firm liable under the doctrine of respondeat superior. The court held that the evidence supported the arbitrators’ finding and that the appellant had not come close to satisfying the “manifest disregard” standard.

Kenneth Ebbe invested his pension and 401(k) with Richard Cody. Cody told Ebbe that the distributions Ebbe was receiving were interest only and that his account’s balance remained around $500,000. The distributions were actually significantly reducing Ebbe’s principal.

FINRA’s appeals panel suspended Cody. Cody therefore transferred Ebbe’s account to his wife, who worked as an investment adviser at Concorde Investment Services LLC. Cody nevertheless continued to meet with Ebbe regarding his account. Ebbe received monthly statements that accurately reflected that his account balance was declining, but Cody told Ebbe that those statements did not include all of Ebbe’s investments. After his suspension ended, Cody joined Concorde as an investor. Both he and his wife were eventually terminated after Concorde discovered that Cody had contacted customers during his suspension.

Ebbe eventually discovered that his account had no value and filed for arbitration with FINRA against the Codys, Concorde, and others. The Codys did not appear. During the four-day hearing, Ebbe’s expert testified that Cody committed defalcations and that Concorde had a duty to reasonably supervise the Codys, but did not opine that Concorde had violated that duty and admitted there was no evidence that Cody’s wife had made any misrepresentation to Ebbe.

Concorde presented evidence that it had hired Cody’s wife after a diligent background check, that it supervised her, and that it had complied with all industry rules.

The arbitration panel found that the Codys were jointly and severally liable for $286,000 in damages but denied Ebbe’s remaining claims, including the claims against Concorde.

Ebbe moved to confirm in part and vacate in part the award. Concorde and another defendant moved to confirm it. The district court confirmed the award and Ebbe appealed.

The First Circuit rejected Ebbe’s claims, including his principal claim that the panel had committed manifest disregard for the law and that Concorde should be liable as well under the doctrine of respondeat superior. The court noted that arbitrators are not required to explain their awards and that a party is hard pressed to satisfy the demanding standard for manifest disregard. The court also noted that the evidence supported the arbitrator’s finding in favor of Concorde and that the award against the Codys could have been nothing more than a default judgment.

Ebbe v. Concorde Investment Services, LLC, No. 19-1819 (1st Cir. Mar. 24, 2020).

Eleventh Circuit Affirms Confirmation of Arbitration Award Over Claims of Fraud, AAA Rule-Breaking, and Lack of Jurisdiction

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The Eleventh Circuit recently affirmed the confirmation of an arbitration award in a dispute involving a contract to obtain signatures for a Florida solar energy ballot initiative over claims that the prevailing party engaged in fraud, violated AAA rules, and that the arbitrator lacked jurisdiction to add attorneys’ fees to his award months after the arbitration hearing.

PCI Consultants Inc. contracts with entities and organizations to obtain signatures for petitions for ballot initiatives in exchange for a fee. In 2015, PCI contracted with Floridians for Solar Choice Inc. and Solar Alliance for Clean Energy Inc. (together, the Solar parties) to obtain signatures to support a proposed ballot initiative for a solar energy amendment to the Florida Constitution. A dispute arose regarding payment. The Solar parties believed they paid PCI what it was due, but PCI withheld 217,000 signed petitions due to purported nonpayment. The dispute concerned additional expenses for a different ballot initiative concerning medical marijuana. PCI claimed the Solar parties agreed to share expenses with the medical marijuana campaign while the Solar parties disputed that they agreed to cover those expenses.

Floridians for Solar Choice sued alleging various claims in a U.S. District Court in Florida and moved to compel arbitration. The court granted that motion, and Solar Alliance subsequently appeared in the arbitration. After a three-day hearing, the single arbitrator who heard the dispute ruled in favor of the Solar parties and awarded $1,271,250 in damages. Several months later, the arbitrator also tacked on interest, costs, and fees for a total award of approximately $2,015,900.

The district court confirmed the award over PCI’s motion to vacate, agreeing that the award of interest, costs, and fees was proper. PCI appealed to the Eleventh Circuit.

On appeal, PCI claimed (1) the Solar parties committed fraud during the arbitration proceedings by altering their damages analysis; (2) the Solar parties violated AAA rules that PCI claimed required the appointment of three arbitrators rather than one; and (3) the arbitrator lacked jurisdiction to award fees months after the arbitration hearing.

The Eleventh Circuit rejected all of PCI’s claims and affirmed the award’s confirmation.

First, PCI claimed that the Solar parties committed fraud by increasing their claimed damages in their post-hearing brief. The Eleventh Circuit disagreed, noting that the requirements of the test it applied for the FAA’s fraud exception were not satisfied. The court noted that PCI cited no case holding that “a change in damages theory constitutes ‘fraud’ or ‘undue means’ under” the FAA’s fraud exception. The Solar parties’ post-hearing demand for more than $1,000,000 was supported by the record even though they initially sought less than $500,000. (The Solar parties apparently initially sought partial reimbursement for the per-signature fee of the 217,000 withheld petitions, but later successfully argued they were entitled to full reimbursement for those petitions.)

Second, the court rejected PCI’s contention that it was entitled to a three-arbitrator panel, noting that AAA rules allowed the parties to agree on one or three arbitrators and provided that if the parties were unable to agree and the claim involved more than $1 million, then the matter would be heard by three arbitrators. The facts established that PCI had agreed to a single arbitrator knowing that this case potentially involved more than $1 million. In its statement of claim, Floridians for Solar Choice demanded $500,000 to $1 million-plus punitive damages, and when Solar Alliance was added as a party it sought additional damages. Despite being on notice that the claimed damages exceeded $ million, PCI did not request a three-arbitrator panel and instead stipulated to one arbitrator.

Third, the Eleventh Circuit rejected PCI’s contention that the arbitrator lacked jurisdiction to award fees when he did so several months after the arbitration because the arbitrator lost jurisdiction over the case 30 days after the hearing. The court noted that it has rejected the notion that arbitrators act outside their authority merely because they do not follow the AAA’s rules regarding the time for issuing decisions. It also noted that several other circuits have held that whether an arbitration award was timely is not a jurisdictional issue. In this case, the parties also stipulated that all motions for attorneys’ fees would be resolved after the hearing.

Floridians for Solar Choice, Inc. v. Paparella, No. 18-12907 (11th Cir. Mar. 3, 2020).

Northern District of New York Refuses to Change Credibility Determination Regarding Bench-Trial Testimony by Attorney Involved in Underlying Settlement Negotiations

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The U.S. District Court for the Northern District of New York recently denied an insurer’s attempt to compel the court to change a credibility decision it rendered following a bench trial in reinsurance litigation between Utica Mutual Insurance Co. and Munich Reinsurance America Inc. that we’ve been following closely.

We’ve previously written about this litigation (multiple times, not counting related litigation, which we’ve also written about multiple times). But even with all the hype, a quick overview is in order. Utica issued primary policies to insured Goulds Pumps Inc. that, in the Second Circuit’s words, “had a glaring omission: they did not include aggregate limits of liability.” The results of that omission were potentially catastrophic for Utica because Goulds could potentially select a primary policy to apply to all asbestos claims that would never exhaust or trigger excess policies. Thus, in the underlying litigation, Goulds wisely argued there were no aggregate policy limits while Utica insisted the policies had such limits and that the fact that they did not actually appear in the policies “was a mere ‘scrivener’s error.’” Goulds and Utica ultimately settled the underlying dispute. The settlement agreement provided that the primary policies “have … an aggregate limit of liability.” Utica attorney and vice president Bernard Turi was involved in the settlement negotiations and the drafting of the settlement agreement.

Litigation between Utica and Munich regarding Utica billings to Munich under facultative reinsurance certificates Munich issued to Utica in 1973 followed.

During a ten-day bench trial, Turi testified that during the settlement negotiations with Goulds, Utica did not bargain for Goulds’ agreement that the primary policies had aggregate limits. Turi testified that Goulds agreed that the policies had such limits and always had.

Following the trial, the U.S. District Court for the Northern District of New York ruled in favor of Munich in one case (Utica I) and Utica in another (Utica II). With respect to Turi, the court concluded that Turi’s testimony “that Utica did not bargain for Goulds’ agreement that the primary policies had aggregate limits as part of its settlement with Goulds” was not credible. The court noted that Turi had conceded on cross-examination that “getting Goulds to agree to aggregate limits in the primary policies had value to Utica.”

Utica appealed the court’s ruling against it and filed a Rule 52(b) motion to amend the court’s finding regarding Turi’s credibility regarding settlement negotiations. Utica specifically claimed that the court failed to distinguish between whether the policies “in fact” had aggregate limits, which Utica claimed was not bargained for, and whether Utica nevertheless compromised with Goulds to resolve a disagreement about that fact, which Utica agreed it had.

The court denied Utica’s motion. It noted that Goulds had claimed in the underlying litigation that the policies did not have aggregate limits, that there was an enormous risk to Utica if the court were to accept that position, and that Goulds ultimately agreed in the settlement agreement that the policies had aggregate limits. The court explained that its findings regarding Turi’s credibility was not premised on whether the policies actually had aggregate limits and that the court did not find that Utica had bargained for “the fact” of aggregate limits as Utica claimed the court had. Instead, the court reaffirmed its decision that, under the circumstances, any contention that Utica had not bargained for Goulds’ agreement that the policies contained aggregate limits was not credible. The court noted that the high standard for succeeding on a Rule 52(b) motion was not satisfied and declined to amend its findings of fact.

Munich believed that Utica’s Rule 52(b) motion was so meritless that it sought sanctions, but the court declined to award them, concluding that the standard for sanctions was not met.

Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., No. 6:12-cv-00196, 6:13-cv-00743 (N.D.N.Y. Feb. 27, 2020).

Court Declines to Compel Arbitration Based on Third-Party Agreement

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The U.S. District Court for the Southern District of Florida recently refused to compel arbitration in a putative class action based on an arbitration clause a plaintiff agreed to on a third party’s website he used to book a rental car from the defendant.

Ancizar Marin used Orbitz to book a rental car from rental car company Sixt. During that process, he agreed to Orbitz’s terms of use. Those terms included an arbitration clause that provided: “You and Orbitz agree that any and all Claims will be resolved by binding arbitration, rather than in court.” Marin subsequently picked up and returned his rental car from Sixt. After he returned his car, he received an email claiming that the car had been damaged. Marin filed a putative class action against Sixt claiming violations of Florida’s Deceptive and Unfair Trade Practices Act and Consumer Collection Practices Act. Sixt sought to compel arbitration.

The district court denied Sixt’s motion.

The court explained that Sixt was not a party to the arbitration clause between Orbitz and Marin. The clause said: “You and Orbitz agree …” Nor was Sixt a third-party beneficiary to that agreement. Although Sixt argued that it was a “supplier” under Orbitz’s terms of use and that this rendered it a beneficiary, the court concluded that Sixt was included in a different category of companies that worked with Orbitz (travel services), and that category was not mentioned in the arbitration clause. Therefore, Sixt could not invoke the arbitration clause.

Even if Sixt could invoke the arbitration clause, the clause did not cover the dispute between Marin and Sixt. Rather, it “cover[ed] disputes between Orbitz’s customers and Orbitz.” Marin’s dispute concerned alleged misconduct by Sixt unrelated to Orbitz.

Calderon v. Sixt Rent A Car, LLC, No. 0:19-cv-62408 (S.D. Fla. Feb. 12, 2020).

Southern District of Texas Compels Arbitration Over Insured’s Claim that Arbitration Clause was Unconscionable

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The U.S. District Court for the Southern District of Texas recently compelled arbitration despite an insured’s claim that the operative arbitration clause was unconscionable because it required the arbitration panel to comprise “persons employed or engaged in a senior position in Insurance underwriting or claims.” In a rare decision, the court also compelled arbitration with respect to brokers who created the proposal for the policy at issue even though they were not parties to the arbitration clause because the plaintiff’s claim against the brokers was inherently intertwined with and relied on the policy that was subject to the arbitration agreement.

Four commercial buildings owned by the Bhandara Family Living Trust were damaged during Hurricane Harvey. The buildings were insured by a policy that allocated premiums and liabilities among a number of insurers, including Certain Underwriters at Lloyd’s. The trust made a claim under the policy. When the claim was denied, the trust filed suit against the insurers and brokers who prepared the proposal for the policy in Texas state court. The trust claimed that the insurers had breached the policy, acted in bad faith, and violated the Texas Insurance Code and that the brokers had violated the code by failing to disclose an allegedly unconscionable arbitration clause in the policy. The insurers invoked the arbitration clause, but the trust refused to arbitrate and asserted the clause was unconscionable. The insurers removed the case to federal court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The district court compelled arbitration with respect to the trust’s claims against both the insurers and brokers.

The trust claimed that the arbitration clause was unconscionable and therefore null and void because it provided that “the Arbitration Tribunal shall consist of persons employed or engaged in a senior position in Insurance underwriting or claims.” The trust argued that the clause “guarantee[d] a biased decisionmaker” and that the clause’s invocation of New York law precluded damages permitted by Texas law. The court rejected that argument. It distinguished cases in which the arbitrators had to be selected from a list pre-selected by one side and noted that, in this case, the trust was free to select an arbitrator. The arbitrator would not be inherently biased merely because they were engaged in a senior position in underwriting or claims: The trust was “not limited to employees of insurance companies.” It “could select a broker or agent in a senior position in a business that represents insureds in making claims,” for example.

The trust’s challenge to New York law and the limits that the choice-of-law provision imposed on damages was “collateral to and [did] not call into question the parties’ agreement” to arbitrate. Regardless, the trust was free to make its arguments on that front to the arbitrator.

With respect to the claims against the brokers, the court noted that nonsignatories are rarely allowed to invoke an arbitration clause. However, one situation in which it is appropriate to allow a nonsignatory to do so is when “the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory.” In this case, the trust’s claims against the insurers and brokers were “substantially intertwined.” Indeed, the core claim against the brokers concerned the allegedly unconscionable arbitration clause itself. “Because [the trust’s] claim against the Broker Defendants relie[d] on and presumes the existence of the terms of the Policy, arbitration [was] required” as to that claim.

Bhandara Family Living Trust v. Underwriters at Lloyd’s, London et al., No. 4:19-cv-00968 (S.D. Tx. February 20, 2020).