Brendan Gooley

Sixth Circuit Holds That District Court Erred by Not Analyzing Whether Non-Signatory Consented to Arbitration

September 22, 2022 by Brendan Gooley

The Sixth Circuit Court of Appeals recently vacated and remanded an order concluding that a party was not bound by an arbitration award after concluding that the district court failed to consider whether that party may have consented to arbitration through its actions even though it was not a signatory to the collective bargaining agreement that contained the arbitration clause.

Greenhouse Holdings LLC did business as Clearview Glass and Glazing in Kentucky. Greenhouse also owned 90% of Clearview Glass and Glazing Contractors of Tennessee LLC. The International Union of Painters and Allied Trades District Council 91 filed a grievance against “Clearview Glass” alleging that it violated a collective bargaining agreement the union had. It was unclear whether “Clearview Glass” meant Greenhouse (based on its trade name Clearview Kentucky), Clearview Tennessee, or both. The union argued that Greenhouse was bound by the collective bargaining agreement and an arbitration clause therein. Greenhouse disputed that. The arbitrator apparently sided with the union and issued an order that affected Clearview Kentucky (i.e., Greenhouse). Greenhouse challenged that award.

The district court vacated the arbitrator’s award “to the extent it applies to Greenhouse.” The district court “held that Greenhouse wasn’t a party to the [collective bargaining agreement] and thus the arbitrator acted outside his authority to the extent the award applied to Greenhouse.”

The Third Circuit vacated the district court’s decision. It held that the district court “didn’t address this threshold question” of whether Greenhouse had consented to arbitration even though it did not sign the collective bargaining agreement that contained the arbitration clause. The Third Circuit explained that “an agreement to arbitrate need not be in writing” and that courts “may infer agreement when a party willingly participates in [an] arbitration without objecting to the arbitrator’s jurisdiction.”

The Third Circuit further explained that whether a party has consented to arbitration it otherwise may not have agreed to is a fact-intensive inquiry, and it remanded the case to the district court to analyze that question under the facts of the case.

Greenhouse Holdings, LLC v. International Union of Painters & Allied Trades District Council 91, No. 21-6164 (6th Cir. Aug. 8, 2022).

Third Circuit Compels Arbitration Despite Dispute About Whether Assignment of Loan Containing Arbitration Clause Was Lawful

September 20, 2022 by Brendan Gooley

The Third Circuit Court of Appeals recently held that a district court should have granted a motion to compel arbitration even though there was a dispute about the legality of an assignment of a loan agreement that contained the arbitration clause at issue. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.

OneMain Financial Group, a nonbank finance company that issues consumer loans, issued a loan to Benjamin Zirpoli pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. That loan contained an arbitration clause that provided that “You or We have an absolute right to demand that any Claim be submitted to an arbitrator in accordance with this Arbitration Agreement.” “We” was defined to include OneMain’s “assignees.” “Claim” was meanwhile defined to include “anything related to … the arbitrability of any Claim pursuant to this Agreement” and “anything related to … any alleged violation [of a state statute], including without limitation … usury … laws.”

OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that purchases consumer debt. The “CDCA prohibits CDCA licensees from ‘selling contracts to a … corporation not holding a license … without the prior written approval of the Secretary of Banking,’” but Midland apparently “did not possess a CDCA license or request approval from the Department of Banking” to acquire Zirpoli’s account.

Midland sued Zirpoli to collect the debt but later dismissed the suit and then allegedly reported Zirpoli’s delinquent debt to various consumer agencies, which purportedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action alleging that because Midland did not have a CDCA license and did not obtain approval from the Department of Banking, it was not lawfully permitted to purchase his loan or the other CDCA-governed loans it acquired.

Midland moved to compel arbitration. The district court ultimately denied Midland’s motion based on the purported illegality of the transfer from OneMain to Midland.

The Third Circuit (with one judge dissenting) vacated the district court’s decision and remanded the case with instructions to grant Midland’s motion to compel arbitration.

After holding that “party” under section 4 of the Federal Arbitration Act “refers to a party to a litigation” and that it therefore had jurisdiction to consider Midland’s motion on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid arbitration agreement and that agreement applied to OneMain’s assigns, which included Midland. The Third Circuit acknowledged that there was a dispute about the legality of OneMain’s assignment to Midland but explained that its analysis was limited to the threshold question of whether there was a valid agreement to arbitrate in light of the delegation clause delegating issues of arbitrability to the arbitrator and that it was therefore prohibited from analyzing the merits of the dispute regarding whether that agreement should be invalidated because it violated the CDCA.

The Third Circuit alternatively held that even if it considered the merits of Zirpoli’s claim, it would reject his contention that the assignment was invalid. OneMain had “charged-off” Zirpoli’s loan, which meant that the “assignment falls outside of the CDCA’s purview.”

Zirpoli v. Midland Funding, LLC, No. 21-2438 (3d Cir. Sept. 1, 2022).

Second Circuit Concludes Suit to Recover on Defaulted Foreign Bonds Was Untimely

August 31, 2022 by Brendan Gooley

The Second Circuit Court of Appeals recently concluded that a claim to recover on defaulted bonds issued by a foreign sovereign was untimely under New York’s six-year statute of limitation.

Bainbridge Fund Ltd. owned several bonds issued by the Republic of Argentina. Argentina defaulted on those bonds in 2001. In 2016, Bainbridge sued to recover on those bonds. The Southern District of New York concluded that Bainbridge’s suit was barred by New York’s six-year statute of limitation for most breach of contract actions. Bainbridge appealed.

On appeal, Bainbridge argued that (1) a 20-year statute of limitation for recovery of certain bonds applied to its claim and (2) even if the six-year statute of limitations applied, it had been tolled because Argentina had “acknowledged” the debt it owed on the bonds.

The Second Circuit rejected both arguments and affirmed the district court’s dismissal.

First, the Second Circuit held that the 20-year statute did not apply to the bonds issued by Argentina because that statute applied only to bonds issued by “the state of New York or … any person, association or public or private corporation,” and Argentina, a foreign sovereign, was not a “person” or other qualified entity under the statute. The six-year statute therefore applied.

Second, the Second Circuit held that the six-year statute had not been tolled. Although the Second Circuit acknowledged that the statute could be tolled where a debtor makes a written acknowledgement from which a promise to pay may be fairly implied, Argentina had made no such acknowledgement. To the contrary, quarterly financial statements issued by Argentina did not manifest an implied promise to pay defaulted bonds and Argentina had “repeatedly stated that it would not repay bonds not submitted to [an] exchange [program] and that these bonds ‘may remain in default indefinitely.’” Because tolling did not apply, Bainbridge’s claim was time barred.

Bainbridge Fund Ltd. v. Republic of Argentina, Nos. 21-37, 21-38 (2d Cir. June 22, 2022).

Second Circuit Concludes That Nigerian Ruling on Enforcement of Arbitration Award Is Entitled to Comity

August 10, 2022 by Brendan Gooley

The Second Circuit Court of Appeals recently partially refused to enforce a foreign arbitration award on the ground that it was required to give comity to a foreign court decision concerning that award.

Esso Exploration and Production Nigeria Ltd. entered into a contractual agreement with the Nigerian government to develop Nigerian oil fields. The agreement provided that the Nigerian National Petroleum Corp. (NNPC) was entitled to obtain (“lift”) portions of the extracted oil. The agreement also included an arbitration clause requiring arbitration in Nigeria.

A dispute arose regarding whether NNPC was “lifting” more than it was allowed. Esso and NNPC arbitrated that issue in Nigeria and the arbitration panel awarded Esso approximately $1.8 billion plus interest. NNPC challenged that award in Nigerian courts. A Nigerian court set aside part of the award. Esso meanwhile petitioned the U.S. District Court for the Southern District of New York to confirm its arbitration award in full. The district court denied Esso’s petition in full, concluding that it was required to give comity to the Nigerian court decision.

The Second Circuit affirmed in part. It agreed that the district court was required to give comity to the Nigerian court’s decision but noted that the Nigerian court had only set aside the arbitration award in part. There was therefore nothing preventing U.S. courts from enforcing the aspect of the award that Nigerian courts had not vacated.

Esso Exploration & Production Nigeria Ltd. v. Nigerian National Petroleum Corp., No. 19-3159 (2d Cir. July 8, 2022)

Tenth Circuit Affirms Tax Court’s Decision That Captive Insurance Arrangement Did Not Qualify for Tax Exemption

August 8, 2022 by Brendan Gooley

The Tenth Circuit Court of Appeals recently affirmed the tax court’s decision that a captive insurance arrangement that reinsured a number of other captive insurers did not qualify for a tax exemption.

Reserve Mechanical Corp. issued a number of insurance policies to Peak Mechanical Corp. Reserve and Peak had the same owners, and the arrangement was a form of captive insurance. The arrangement may have been an attempt to obtain tax benefits pursuant to a program that allowed both the deductibles and premiums to be exempt from taxation.

To attempt to qualify for that program, Reserve tried to ensure that at least 30% of its premiums came from companies not affiliated with it. It therefore arranged, among other things, through Capstone Associated Services Ltd. to reinsure a number of other captive insurers that worked with Capstone. Capstone also arranged for each captive insurer it worked with to assume a small percentage of risk from coinsuring thousands of vehicle service contracts.

The IRS concluded that this arrangement did not qualify for an exemption and assessed taxes.

The Tenth Circuit affirmed. It agreed with the IRS that Reserve had not satisfied its burden to demonstrate that its purported insurance transactions were truly arrangements for insurance. Although Reserve complied with some, but not all, of the formalities for insurance companies and went through some of the motions associated with pricing insurance premiums, the record reflected that no “experience, expertise, or studies supported the need for Peak to obtain the policies” and the “premiums for [certain] additional insurance were not supported by any study of similar commercially available policies or careful analysis of Peak’s risks of loss.”

With respect to the reinsurance agreements, the Tenth Circuit concluded that those agreements “did not create any meaningful risk for Reserve” and noted that “Reserve did not satisfy even the distribution threshold that Capstone set for it — obtaining 30% of its insurance premiums by insuring unaffiliated risks.”

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, No. 18-9011 (10th Cir. May 13, 2022).