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Brendan Gooley

First Circuit Refuses to Vacate Arbitration Award Following Stock Dispute

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The First Circuit recently denied a corporation’s numerous arguments seeking to vacate an arbitration award in favor of the individual who sold an entity to the corporation. The court’s decision reflected the narrow review of arbitration awards and the uphill battle that litigants face when trying to vacate such awards, even when arbitrators allegedly misinterpret contracts.

IBC Advanced Alloys Corp. purchased Beralcast from Gerald Hoolahan and Gary Mattheson in exchange for cash and IBC stock. When Hoolahan later tried to sell his stock, his brokerage firm told him it had been “unsuccessful in obtaining approval [for the sale] from the issuer.” Hoolahan’s attorney called IBC and was told that IBC had blocked the sale of Hoolahan’s shares because Hoolahan allegedly failed to disclose a claim against a sister company to one of Beralcast’s predecessor companies. Even worse, Hoolahan later learned that IBC had allowed Mattheson to sell his shares. Hoolahan initiated arbitration pursuant to the sale agreement.

The arbitrator ruled in Hoolahan’s favor, concluding that IBC had denied Hoolahan the benefit of the agreement and deliberately breached it. After concluding that IBC acted in bad faith, the arbitrator awarded Hoolahan his costs and fees. Hoolahan moved to confirm the award, while IBC moved to vacate or modify it. The district court confirmed the award and IBC appealed.

The First Circuit affirmed. Noting that review of arbitration awards is exceptionally narrow, the court first rejected IBC’s argument that the award was procured by undue means because it was based on testimony by Hoolahan’s attorney regarding his call to IBC, which IBC claimed violated ethical rules regarding contacting a party represented by counsel. The court explained that the arbitrator concluded that Hoolahan’s attorney’s call did not violate ethical rules because the attorney had credibly testified that he did not know IBC was represented by counsel until the end of the call and noted that the arbitrator’s determination of “ill-will” between IBC and Hoolahan was based on more than the call by Hoolahan’s attorney in any event.

IBC next claimed that the arbitrator acted improperly by not postponing the arbitration hearing when the IBC employee who spoke to Hoolahan’s attorney could not be present and by refusing to accept an affidavit from the employee. The First Circuit rejected that claim as well. The court noted that IBC never asked for a postponement and did not raise that argument before the district court. Nevertheless, applying plain error review to the argument, the court rejected this argument as “border[ing] on the absurd.” The arbitrator did not act improperly by not granting a continuance sua sponte or by allowing an affidavit in lieu of live testimony.

The First Circuit also rejected IBC’s argument that the arbitrator had exceeded his powers by awarding Hoolahan his costs and fees. Under Delaware law, which governed the agreement, costs and fees were appropriate where, as here, the arbitrator made a finding of “bad faith.”

IBC also claimed that the arbitrator misinterpreted the agreement because the agreement noted that IBC disclaimed any obligation to help Hoolahan sell his shares. The court rejected that argument, noting the very narrow scope of its review: “Even if IBC is right that the arbitrator did not correctly interpret the Agreement, he nonetheless interpreted it. And that is enough.”

Finally, the First Circuit also rejected IBC’s arguments regarding the arbitrator’s calculation of damages, concluding that IBC had not shown “manifest disregard of the law.”

The First Circuit awarded costs to Hoolahan.

Hoolahan v. IBC Advanced Alloys Corp., No. 19-1444 (1st Cir. Jan. 17, 2020).

Nebraska Appellate Court Affirms Dismissal for Lack of Personal Jurisdiction in Suit Involving Breach of Reinsurance Participation Agreement

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The Court of Appeals of Nebraska has affirmed the dismissal of a claim under a reinsurance participation agreement based on lack of personal jurisdiction.

Applied Underwriters Captive Risk Assurance Co., an Iowa corporation with its principal place of business in Nebraska, entered into a reinsurance participation agreement with Doyle Signs Inc., an Illinois corporation based in Illinois. The agreement contained a choice-of-law clause and a forum selection clause providing that the agreement would be governed by Nebraska law and that disputes regarding the agreement would be heard by the “courts of Nebraska.” Applied Underwriters later sued in Nebraska state court alleging that Doyle owed it nearly $380,000 under the agreement.

Doyle moved to dismiss for lack of personal jurisdiction claiming it did not have sufficient contacts with Nebraska to be hauled into court there and, in the alternative, that Nebraska was not a reasonably convenient forum. The trial court granted Doyle’s motion and Applied Underwriters appealed.

The Court of Appeals affirmed. It found the case largely on point with its prior decision in Applied Underwriters Captive Risk Assurance Co. v. E.M. Pizza, Inc., 26 Neb. App. 906, 923 N.W.2d 789 (2019). In that case, the court concluded that the defendant had sufficient minimum contacts with Nebraska for specific jurisdiction but that Nebraska was nevertheless not a reasonably convenient forum.

Attempting to distinguish E.M. Pizza, Applied Underwriters argued that Doyle did business in Nebraska and was subject to general personal jurisdiction there. The court rejected that argument. It concluded that Doyle did not have systematic and continuous general business contacts with Nebraska based on the fact that it had bid for and had been awarded eight contracts by corporate offices outside Nebraska to make signs for Nebraska stores when the signs were manufactured outside Nebraska, transported to Nebraska by third parties, and there was no evidence that, among other things, Doyle had any employees in Nebraska, made sales there, or solicited business there.

In the alternative, the court noted that even if Doyle had sufficient minimum contacts with the state, it was not fair or reasonable for Nebraska courts to exercise jurisdiction over Doyle.

The court also rejected Applied Underwriters’ argument that the forum selection clause conferred jurisdiction on Nebraska’s courts, noting that it had rejected a similar argument in E.M. Pizza.

Finally, the court rejected Applied Underwriters’ contention that Doyle did not challenge service upon it, explaining that courts are still entitled to determine whether Nebraska courts are a convenient forum notwithstanding the apparent lack of challenge to service of process.

Applied Underwriters Captive Risk Assurance Co. v. Doyle Signs, Inc., No. A-19-464, 2019 WL 7425406 (Neb. Ct. App. Dec. 20, 2019) (copy of opinion available from Nebraska court website with a subscription).

Court Holds Former Director in Contempt Following Wild Reinsurance Dispute

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Recovering returns from reinsurance commissions can be a costly and time-consuming endeavor, at least when a former director of the agency that received the provisional commissions allegedly engages in a slew of activity to transfer and comingle the funds from the commissions.

Odyssey Reinsurance Co. knows that lesson all too well: Recovering funds from the director of an underwriter has been quite the odyssey for Odyssey Reinsurance Co.

Diana Dostalik and her husband were the officers, directors, managers, and shareholders of Cal-Regent Insurance Services Corp. Cal-Regent underwrote certain risks on behalf of State National Insurance Co. Odyssey Reinsurance Co. reinsured State National. Pursuant to the reinsurance agreements between Odyssey and State National, Cal-Regent received a provisional commission paid in part by Odyssey for the policies it underwrote for State National. The provisional commissions were subsequently adjusted depending on the profitability of the business Cal-Regent underwrote. Thus, Cal-Regent was sometimes required to return portions of the provisional commissions.

In 2013, Ms. Dostalik and her husband allegedly realized that they would be obligated to return a significant portion of the commissions they had received from, among others, Odyssey, due to a settlement in a lawsuit against State National. As a result, Ms. Dostalik and her husband allegedly “embarked on a plan to strip Cal-Regent of assets” by forming Pacific Brokers Insurance Services” and transferring substantially all of Cal-Regents assets to Pacific Brokers.

Odyssey sued in the District of Connecticut. While that suit was pending, Ms. Dostalik and her husband allegedly sold substantially all the assets of Pacific Brokers to AmTrust North America Inc. Ms. Dostalik and her husband then agreed that Ms. Dostalik would receive $2,500,000 from AmTrust’s initial payment to Pacific Brokers as part of the couple’s divorce.

After obtaining a $3,200,000 judgment in the District of Connecticut against Cal-Regent, Odyssey brought suit in the Southern District of California against Pacific Brokers, Cal-Regent, Ms. Dostalik and her former husband, and others in a continued effort to recover the returns it was owed from the provisional commissions it paid to Cal-Regent. The court issued temporary restraining orders and injunctions that, in short, prohibited Ms. Dostalik from transferring, assigning, disposing of, or comingling any of the funds she received from the sale of Pacific Brokers’ assets to AmTrust and ordering Ms. Dostalik to deposit into the court’s registry all the funds she had received from AmTrust.

Ms. Dostalik apparently not only failed to deposit funds into the court’s registry despite having several accounts that consisted of more than 99% funds from AmTrust totaling hundreds of thousands of dollars, but also then comingled AmTrust funds with proceeds from the sale of real estate and continued to engage in efforts to shield the AmTrust funds from the court.

The court, however, had had enough. It held Ms. Dostalik in contempt of several of its temporary restraining orders and gave her 14 days to, among other things, deposit nearly $700,000 in the court registry or ordered that she would “be committed to the custody of the U.S. Marshal.” The court also awarded Odyssey its attorneys’ fees and entered additional injunctions.

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. 2019).

Ninth Circuit Affirms Denial of Motion to Compel Arbitration in Smartphone App Case Based on Obscure “Browsewrap” Arbitration Clause

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The Ninth Circuit recently denied a motion to compel arbitration after concluding that an arbitration agreement “buried” in difficult to access terms for a smartphone app did not put users on constructive notice that they were agreeing to arbitration (and a class action waiver).

Huuuge Inc. operated a smartphone application that allowed users to play casino games. Sean Wilson downloaded and played that app for more than a year. Wilson then filed a putative class action alleging that Huuuge violated the state of Washington’s gambling and consumer protection laws by charging users for chips to play the casino games.

Huuuge moved to compel arbitration. It relied on an arbitration agreement and class action waiver in the terms and conditions for the app. The U.S. District Court for the Western District of Washington denied Huuuge’s motion to compel arbitration.

The Ninth Circuit affirmed on appeal. The court explained that a “user would need Sherlock Holmes’s instincts to discover the [t]erms” containing the arbitration agreement. A user could access the terms in two ways. First, before downloading the app, the user could click on a “more” button in the app store, which took the user to a page that discussed the app. The user would then need to scroll down and see a paragraph that began with: “Read our Terms of Use.” Although a “link” was in that paragraph, the user could not click on it. Instead, the user had to copy and paste it into a web browser to access the terms. Second, after downloading the app, the user could click a “three dot ‘kebob’ menu button in the upper right-hand corner of the home page,” which took them to a pop-up menu. The fifth option down on that menu read: “Terms & Policy.” Clicking on that option opened the terms, including the arbitration agreement.

Users were not required to view or assent to the terms and conditions. Thus, the agreement was a classic “browsewrap” agreement, which does “not require the user to take any affirmative action to assent to the website terms.” (In contrast, a “clickwrap” agreement “require[s] users to affirmatively assent to the terms of use before they can access the website and its services.”)

Applying traditional contract law of the state of Washington, the Ninth Circuit concluded that the manner in which Huuuge displayed the arbitration agreement and class action waiver did not put Wilson on constructive notice that he was agreeing to arbitration and a class action waiver. It explained: “Users are put on constructive notice based on the conspicuousness and placement of the terms and conditions, as well as the content and overall design of the app.” Constructive notice did not exist where terms are “buried” or “in obscure corners,” particularly where scrolling to such areas was not required to use the app. Indeed, the Ninth Circuit noted that “[e]ven where the terms are accessible via a conspicuous hyperlink in close proximity to a button necessary to the function of the website, courts have declined to enforce such agreements.”

Huuuge’s terms were not anywhere close to meeting the constructive notice standard.

The court also rejected Huuuge’s claim that Wilson was on actual notice of the arbitration agreement merely because he was “likely” to have viewed the terms at some point because he played the game so much. The court also concluded that Huuuge had waived its request for discovery regarding actual knowledge, noting that Huuuge chose not to pursue such discovery at the outset, instead moved to compel arbitration, and only then sought discovery (and did so insufficiently in a footnote in its reply brief) after moving to compel arbitration.

Wilson v. Huuuge, Inc., No. 18-36017 (9th Cir. Dec. 20, 2019).

Connecticut Supreme Court to Consider Whether Parties Can Use FAA to Extend Time to Vacate Arbitration Award

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The Connecticut Supreme Court will consider whether the parties to an arbitration agreement can circumvent Connecticut’s 30-day statutory deadline for filing an application to vacate an arbitration award by including in the arbitration agreement a choice-of-law provision stating that the agreement is governed by the Federal Arbitration Act, which contains a three-month time limitation for filing applications to vacate arbitration decisions.

In A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019), the Connecticut Appellate Court affirmed the trial court’s dismissal of a plaintiff’s application to vacate an arbitration award on the ground that the application was untimely because it was filed more than 30 days after the award. Under a Connecticut statute, “[n]o motion to vacate, modify or correct an award may be made after thirty days from the notice of the award to the party to the arbitration who makes the motion.” The appellate court concluded as a matter of law that parties may not circumvent that statute by agreeing to have the FAA’s three-month limitation period apply. Thus, even though the arbitration agreement at issue provided that “[a]ny arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act … and not by any state law concerning arbitration,” Connecticut’s 30-day limitation applied.

A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019).