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Brendan Gooley

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).

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).