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FOURTH CIRCUIT COURT OF APPEALS DECIDES ISSUE OF CLASS ARBITRABILITY IS A QUESTION FOR THE COURT, NOT ARBITRATOR

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A South Carolina federal court dismissed a petition to compel class arbitration, reasoning “that whether the arbitration clause permits class arbitration is a simple contractual interpretation issue, and because the question ‘concerns the procedural arbitration mechanisms available to the [respondent]’, the threshold inquiry is a question for the arbitrator rather than for the court.” The Fourth Circuit Court of Appeals reversed the decision, and found the question of whether a sales agreement authorized class arbitration should be determined by the court.  Other circuit courts have similarly held.

Relying on Supreme Court precedent, the Court identified two categories of threshold questions: (1) procedural questions to be decided by the arbitrator and; (2) questions of arbitrability for the court. As to the latter category, whether or not the underlying controversy will proceed to arbitration on the merits is a question of arbitrability for the court to decide.  Moreover, it cautioned that, “courts should not assume that the parties agreed to arbitrate arbitrability absent “clear and unmistakable evidence”.

The Court concluded by noting in class arbitrations, as compared to bilateral arbitrations, there are higher risks for defendants as the result of the limited scope of judicial review. While this is a cost defendants may be willing to accept in bilateral arbitration – since any errors impact only the limited size of the individual dispute – “betting the company” without such review “is a cost of class arbitration that defendants would not lightly accept.”  Lastly, class arbitrations require more procedural formality, and thwart the benefits of arbitration by increasing cost and decreasing the speed of proceedings.  Dell Webb Communities, Inc. v. Roger F. Carlson, No. 15-1385 (4th Cir. Mar. 28, 2016).

This post written by Nora A. Valenza-Frost.
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THIRD CIRCUIT AFFIRMS SUMMARY JUDGMENT OF CAPTIVE REINSURANCE DISPUTE AS BEING TIME-BARRED

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In early January, the Third Circuit Court of Appeals affirmed summary judgment of a putative class action dispute regarding private mortgage insurance and captive reinsurance of the same by M&T. We previously blogged about this case on November 20, 2013, February 4, 2014, and March 17, 2015. The putative class action alleged violations of the Real Estate Settlement Procedures Act – specifically, that M&T violated RESPA’s anti-kickback and fee-splitting provisions. However, the district court entered summary judgment on the grounds that the claims were time-barred, and the Third Circuit affirmed this finding.

Under RESPA, claims are subject to a one-year limitations period. The Third Circuit has previously held that the statute of limitations in RESPA is not jurisdictional and is subject to equitable tolling. The putative class plaintiffs argued for the application of equitable tolling on the grounds of fraudulent concealment. After discovery, the district court found that the putative class plaintiffs failed to show reasonable diligence. The Third Circuit affirmed, finding that where the mortgage documentation included a disclosure and allowed borrowers to opt out of captive reinsurance, the putative class was given notice that this could have happened and should reasonably have begun investigating at that time. During depositions, the putative class plaintiffs confirmed that they were aware of the possibility of captive reinsurance, but none of them investigated it until they were contacted by a law firm years later. Cunningham v. M&T Bank Corp., Case No. 15-1412 (3d Cir. Jan. 12, 2016).

This post written by Zach Ludens.

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ARBITRATOR, NOT COURT, MUST DETERMINE ARBITRABILITY OF DISPUTE UNDER REINSURANCE PARTICIPATION AGREEMENT

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Adopting in part a magistrate judge’s recommendation, a federal court in Maine recently held that the enforceability of an arbitration clause in a reinsurance agreement must be determined by an arbitrator, as opposed to a federal judge. Mountain Valley Property, Inc. and Applied Risk Services, Inc. entered into a reinsurance participation agreement that contained an arbitration clause which provided, among other things, that all disputes between the parties relating “in any way to the execution and delivery, construction, or enforceability” of the agreement be decided by binding arbitration. Applied Risk sought to arbitrate a dispute that arose between the parties. Mountain Valley opposed arbitration on the grounds that the subject clause was invalid under Nebraska law, and argued that the court (and not an arbitrator) should determine the validity of the clause.

Agreeing with the Magistrate Judge’s recommendation, the court found that “[b]y including the ‘enforceability’ of the agreement within the scope of arbitration, the parties clearly and unmistakably agreed to arbitrate the issue of arbitrability.” Therefore, the court held that the parties’ dispute, including the issue concerning the validity of the arbitration clause, must be referred to arbitration, and ordered a stay of the lawsuit. For reasons of judicial economy, the court also ordered a stay of the suit as between Mountain Valley and two other defendants that were not signatories to the operative agreement, pending the outcome of the arbitration between Mountain Valley and Applied Risk. Mountain Valley Property, Inc. v. Applied Risk Services, Inc., No. 15-cv-00187 (USDC D. Me. Feb. 25, 2016).

This post written by Rob DiUbaldo.

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NEW YORK FEDERAL COURT CONSIDERS PROCEDURAL ATTACKS TO ARBITRATION CONFIRMATION PROCEEDINGS

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Late last month, a federal district court in New York tackled procedural challenges to an arbitration confirmation proceeding. The arbitration arose from a dispute between an insurer and its reinsurer over the amount due to the insurer following a claim. Following an arbitration in which the insurer was awarded over $1 million by the arbitrator, the reinsurer tried to procedurally attack the court’s ability to confirm the arbitration award, arguing that the court lacked subject-matter jurisdiction to hear the confirmation proceeding because: 1) the amount in controversy requirement for diversity jurisdiction was not met; 2) there was no controversy remaining; and 3) the arbitration agreement does not include consent to a confirmation proceeding.

As to the amount in controversy requirement for diversity jurisdiction, the court followed the “demand approach,” in which the amount demanded in the arbitration serves as the amount in controversy; thus, it found no merit in the argument. Regarding the mootness argument, the court found that there was still a dispute until the court had confirmed the award; thus, there was no merit in this argument either. Finally, the court found that because the Federal Arbitration Act allows confirmation, any parties that include an arbitration provision implicitly agree to confirmation of the same. National Casualty Co. v. Resolute Reinsurance Co., Case No. 15-cv-09440-DLC (USDC S.D.N.Y. Mar. 24, 2016).

This post written by Zach Ludens.

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NINTH CIRCUIT DISMISSES INTERLOCUTORY APPEAL OF ORDER DENYING MOTION TO STAY UNDER FEDERAL ARBITRATION ACT FOR LACK OF JURISDICTION

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Western Security Bank brought an action in the United States District Court for the District of Montana against certain doctors seeking to enforce commercial loan guaranties. The doctors asserted that a non-party, Meridian Surgical Partners, fraudulently induced them to guarantee the loan, and moved to stay the lawsuit pending the outcome of their separate arbitration with Meridian. The doctors based their motion, in part, on Section 3 of the Federal Arbitration Act, which provides that a court may stay an action where an issue involved is referable to arbitration pursuant to a written agreement. Significantly, however, the doctors did not actually seek to compel Western Security to arbitrate its claims against them.

After the district court denied the motion to stay, the doctors filed an interlocutory appeal under Section 16 of the Act, which permits an appeal “from…an order…refusing a stay of any action under section 3.” Relying on precedent from other federal circuit courts, the U.S. Court of Appeals for the Ninth Circuit dismissed the appeal for lack of jurisdiction. Specifically, the circuit court found that in order to invoke appellate jurisdiction under § 16(a), a party must “either move to compel arbitration and stay litigation explicitly under the FAA, or must make it plainly apparent that he seeks only the remedies provided for by the FAA—namely, arbitration rather than any judicial determination.” The court held that while the doctors styled their motion as one brought under Section 3, the motion plainly did not seek relief under the Act, as the doctors made clear they did not seek to compel Western Security to arbitrate any of the claims brought against them in the district court. Western Security Bank v. Winzenreid, No. 15-cv-35617 (9th Cir. Mar. 14, 2016).

This post written by Rob DiUbaldo.

See our disclaimer.