Brendan Gooley

Court Compels Arbitration Based on Clause Incorporated Into Guaranty Agreement

October 10, 2019 by Brendan Gooley

The U.S. District Court for the District of the Virgin Islands recently compelled arbitration after concluding that a personal guaranty incorporated an arbitration agreement from an underlying contract and rejecting various arguments to the contrary.

Solar Leasing Inc. signed a leasing agreement with Dun-Run Holdings to install solar panels at a golf course in the Virgin Islands. William Hutchinson, a principal at Dun-Run, guaranteed Dun-Run’s obligations in a personal guaranty. The leasing agreement contained an arbitration provision, but the personal guaranty did not. The personal guaranty did, however, provide that Hutchinson guaranteed the “performance of any and all financial obligations of the Lessee to the Lessor … subject to the terms and conditions contained in the … Leasing Agreement.”

Solar Leasing subsequently sought to bring suit claiming that Hutchinson, in his capacity as a principal at Dun-Run, had breached the leasing agreement’s terms by, among other things, selling the golf course. Hutchinson sought to compel arbitration under the terms of the leasing agreement. Solar Leasing opposed, arguing that the personal guaranty, which it was seeking to enforce, did not contain an arbitration provision, that even if the leasing agreement’s arbitration clause was incorporated into the personal guaranty, it was not enforceable, and that a condition precedent to arbitration had not been met because the parties were required to first engage in informal efforts to resolve their dispute and then proceed to mediation before arbitration.

The district court sided with Hutchinson and compelled arbitration. The plain language of the personal guaranty incorporated the arbitration provision from the leasing agreement. The personal guaranty did not incorporate only the financial obligations as Solar Leasing suggested. The limitation regarding financial obligations “only describe[d] what [was] being guaranteed, not how th[e] guaranty may be enforced.”

The leasing agreement, meanwhile, clearly articulated a desire to arbitrate by stating that a dispute regarding the leasing agreement would be “resolved by binding arbitration.” Although the leasing agreement did not delineate the process for selecting arbitrators, that was not fatal.

The dispute in the instant case was within the scope of the leasing agreement’s arbitration clause because all of the alleged breaches that Solar Leasing complained of were financial in nature. Even if that was not the case, however, the language was at best for Solar Leasing ambiguous and the court was required to resolve that ambiguity in favor of arbitration.

Solar Leasing, Inc. v. Hutchinson, No. 3:17-cv-00076 (D.V.I. Sept. 20, 2019).

Second Circuit Confirms Arbitration Awards That Are (Literally) Out of This World

October 8, 2019 by Brendan Gooley

Arbitration over whether a South Korean company or a Bermuda company headquartered in Hong Kong owns a geostationary satellite in light of an order from a South Korean regulatory agency can be complicated. The Second Circuit recently affirmed a decision confirming an arbitration award adjudicating ownership of the satellite in question and awarding damages related to a party’s failure to obtain regulatory approvals necessary to complete the sale over claims that the arbitration panel exceeded its power, disregarded the law, and violated public policy.

KT Corp., a Korean company, agreed to sell a satellite to ABS Holdings Ltd., a Bermuda company headquartered in Hong Kong. The companies signed a purchase agreement to convey the title to the satellite and an operations agreement under which KT agreed to operate the satellite on behalf of ABS. Both agreements contained New York choice-of-law provisions and mandatory arbitration clauses. The purchase agreement required KT to obtain and maintain all necessary licenses and authorizations for the sale and the continued operation of the satellite.

The sale was completed and title to the satellite was transferred.

Nearly two years later, a South Korean regulatory agency issued an order declaring the purchase agreement null and void because KT had failed to obtain a required export permit. The agency canceled KT’s permission to use certain frequencies to operate the satellite.

KT and ABS arbitrated who held title to the satellite and whether KT had violated the purchase agreement before a panel of the International Chamber of Commerce. In two awards, the panel concluded that ABS held title to the satellite because title had lawfully passed when the conditions precedent to the purchase agreement were completed when there was no requirement that KT obtain an export permit. And even if that was not the case, the panel concluded, the regulatory order had no effect because it was issued retroactively without notice to the parties in violation of New York law, and KT breached its obligations by failing to obtain all the approvals necessary for the continued operation of the satellite (even though an export permit may not have been required for the sale of the satellite, one was necessary to maintain the satellite’s operations).

KT petitioned the Southern District of New York to vacate the award, and ABS petitioned the court to confirm it. The district court granted ABS’ petition and confirmed the panel’s award.

The Second Circuit affirmed. KT argued that the panel had exceeded its authority and that the award disregarded the law and violated public policy. KT claimed that the panel’s conclusion that the regulatory order was without effect violated due process principles. The court disagreed, noting that KT had not challenged the order, its counsel had questioned its validity, and the panel did not rest on the validity of the order; the panel referenced the propriety of the order as an alternate basis for its primary conclusion that title to the satellite properly changed hands. The court also rejected KT’s argument that the panel had disregarded New York contract law. Regarding public policy, although the court recognized that it is the public policy of the United States to enforce foreign judgments that are not repugnant to U.S. policy, it was unclear whether that public policy extended to foreign regulatory orders, and it was not even clear that the regulatory order in this case was enforceable under South Korean law according to KT’s expert.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300 (2d Cir. Sept. 12, 2019).

Southern District Concludes That Invocation of AAA’s Rules Subjects Arbitrability Questions to Arbitrator, Rejects Waiver Claim

September 19, 2019 by Brendan Gooley

The Southern District of New York declined to decide arbitrability questions after the arbitration agreement at issue incorporated the rules of the American Arbitration Association, which include a rule that arbitrators determine their own jurisdiction. The court also rejected a claim that the defendant waived its right to seek arbitration. It therefore compelled arbitration.

Policy Administration Solutions Inc. (PAS) licensed underwriting software for use by insurers. The software was licensed to a subsidiary eventually acquired by QBE Holdings Inc. That subsidiary, Clarendon Insurance Group Inc., entered into a license agreement with PAS to use the software. The license agreement contained an arbitration clause. Clarendon and PAS subsequently entered into a confidentiality agreement. The confidentiality agreement did not contain an arbitration clause and provided that it superseded any prior agreements regarding confidential information received under the confidentiality agreement. PAS claimed that QBE’s subsidiaries made unauthorized changes to its software. PAS ultimately brought suit alleging, among other things, violations of the Copyright Act. PAS moved for a preliminary injunction and a temporary restraining order, and the defendants moved to dismiss PAS’ claims. The district court denied both parties’ motions (it denied the motion to dismiss without prejudice) and stayed proceedings pending the resolution of state court proceedings regarding an arbitration award related to other agreements between the parties. QBE sought to initiate arbitration after the stay was lifted.

PAS opposed arbitration. The court concluded, however, that the license agreement’s arbitration clause left the question of arbitrability to the arbitrator. The arbitration clause incorporated the rules of the American Arbitration Association, one of which provided that the arbitrator had “the power to rule on his or her own jurisdiction.” PAS argued, however, that the license agreement’s arbitration agreement was not operative because the confidentiality agreement superseded the license agreement. The court explained that this presented a question of arbitrability, which, as the court had already noted, was a question for the arbitrator. The court also rejected PAS’ contention that its claims did not relate at all to the license agreement and were instead solely related to the confidentiality agreement. PAS’ reading of the license agreement’s arbitration clause was too narrow and was yet another arbitrability question for the arbitrator to address in any event.

The court also rejected PAS’ argument that QBE had waived its right to seek arbitration by litigating the dispute in federal court. The parties had been in active litigation for 14 months, which the court found to be “well within the range of delays that have not resulted in waiver.” Merely filing a motion to dismiss did not waive the right to seek arbitration, and after the stay had been lifted QBE promptly announced its intention to seek to compel arbitration. Although PAS had asserted that it spent $70,000 litigating the federal action, it was not clear how much of that was due to PAS’ own decision to seek a preliminary injunction.

The court therefore granted QBE’s motion to compel arbitration.

Policy Admin. Sols., Inc. v. QBE Holdings, Inc., No. 7:15-cv-02473 (S.D.N.Y. Aug. 30, 2019).

Court Concludes That Bankruptcy Discharge Does Not Affect Arbitration Clause

September 17, 2019 by Brendan Gooley

The Eastern District of Pennsylvania recently granted a creditor’s request to compel arbitration over a plaintiff’s argument that the arbitration agreement he had signed was void as a result of a bankruptcy court discharging the loan that was governed by the agreement. The court held that the bankruptcy ruling discharged the plaintiff’s debt obligations, not his other obligations under the agreement such as his obligation to arbitrate claims related to the agreement.

Soldon Winton entered into a loan agreement with OneMain Financial Group LLC. That agreement contained an arbitration clause. Winton subsequently filed for bankruptcy, and the bankruptcy court discharged Winton’s debt to OneMain. Winton allegedly discovered that his credit report still included an outstanding debt to OneMain. He therefore brought suit against OneMain, Trans Union LLC, and other defendants for violations of the Fair Credit Reporting Act.

OneMain responded by moving to compel arbitration under the agreement. Winton opposed OneMain’s motion. Although there was no dispute that Winton’s claim was within the scope of the arbitration agreement, Winton claimed that the bankruptcy ruling discharged all of his obligations under the agreement. Winton also sought to avoid arbitration on several other grounds or, in the alternative, to require OneMain to cover all of the costs of the arbitration.

The district court rejected Winton’s arguments. It held that the bankruptcy court had discharged Winton’s debt obligations, not his other obligations, including his obligation to arbitrate disputes related to the loan agreement. The court also rejected Winton’s arguments that it would be unfair to require him to pursue his claims in two different forums (in arbitration against OneMain and in court against the other defendants). Finally, the court denied without prejudice Winton’s request that OneMain bear the costs of arbitration. Among other issues, the arbitration agreement allowed Winton to request that OneMain bear Winton’s costs. Winton had apparently not done so, and the court determined that he should do so before seeking judicial relief.

Winton v. Trans Union, LLC, No. 2:18-cv-05587 (E.D. Pa. Aug. 27, 2019).

SDNY Denies Class Certification in Action Alleging Rate Regulation Violations

August 28, 2019 by Brendan Gooley

The Southern District of New York denied class certification to a group of plaintiffs seeking to collectively sue a group of insurers over purported regulatory approval violations regarding workers’ compensation policies. The court concluded that class adjudication was not the superior method of litigation, in part because of the significant recovery purportedly available to each of the approximately 220 members of the prospective class.

A number of New York employers filed a putative class action alleging that several insurers from whom they purchased workers’ compensation policies had violated New York law requiring regulatory approval of, among other things, rates. Specifically, the plaintiffs claimed that the insurers sold them guaranteed cost policies that were properly approved by New York’s Department of Financial Services but later entered into “reinsurance participation agreements” with the plaintiffs that were not approved by the Department and that effectively converted the guaranteed cost policies to “quasi retrospective rating plans.” In essence, the plaintiffs alleged that the insurers converted the plans from fixed premium plans to variable premium plans that created the possibility that the employers would have to pay more for coverage.

The plaintiffs sought to certify a class of New York employers who were charged more for premiums as a result of the “reinsurance participation agreements.” The putative class purportedly encompassed some 220 class members collectively owed $62 million. Approximately a dozen of those class members had already initiated their own actions. In addition, the defendant insurers noted that all of the putative class members had agreed to forum-selection clauses agreeing to litigate disputes regarding the policies in Nebraska and/or class action waivers.

The district court denied class certification after concluding that the plaintiffs had failed to establish that a class action was the superior method of litigation under Rule 23(b)(3).

Under the first factor considered under Rule 23(b)(3) — whether class members have a strong interest in individually controlling the litigation — the court concluded that the individual plaintiffs had a strong interest in individually litigating this case. The value of the case per plaintiff was high ($62 million for 220 plaintiffs), and several of the plaintiffs had already initiated individual litigation. This was not a prototypical class action in which individual litigation was precluded because the cost of litigation far exceeded the value to individual plaintiffs.

Turning to the second factor — whether members of the class had already brought suit — the court reiterated that a dozen plaintiffs were pursuing individual actions and arbitrations.

With respect to the third factor — the desirability of concentrating the litigation in a particular forum — the court noted that there was some appeal to concentrating the litigation in New York because the plaintiffs were New York businesses, but the existence of Nebraska forum-selection clauses and class action waivers precluded a finding that New York was desirable.

Finally, the court concluded that the fourth factor — the manageability of a class action — weighed against certification because of the 12 individual actions, the class action waivers, and the forum-selection clauses. The court would be required to make individual determinations as to which individual actions to enjoin and which plaintiffs could remain part of the class.

In closing, the court once again emphasized that the significant potential recovery available to each plaintiff rendered a class action unnecessary in light of the above factors.

The court therefore denied the plaintiffs’ motion to certify their class.

Nat’l Convention Servs., LLC v. Applied Underwriters Captive Risk Assurance Co., No. 1:15-cv-07063 (S.D.N.Y. July 27, 2019).