Christina Gallo

Minnesota District Court Grants Stay of Entire Action Pending Appeal of Order Denying Motion to Compel Arbitration

June 16, 2021 by Christina Gallo

This case arose from an interpleader action in the federal district court in Minnesota. Benchmark Insurance Co. appointed Sunz Insurance Co. to underwrite and issue large-scale deductible workers’ compensation insurance policies. The policies required the insured to post sufficient cash or cash-equivalent collateral to secure the insured’s obligations for claims within the deductible. Benchmark and Sunz entered into a reinsurance contract that required Benchmark to cede to Sunz all premiums and losses on the policies that Sunz issued on Benchmark’s behalf. Sunz thereafter informed Benchmark that Benchmark was holding too much deductible collateral and demanded it be released to Sunz. Benchmark calculated it was holding approximately $20.5 million in excess collateral of a number of its insureds.

On June 3, 2020, the district court ordered Benchmark to deposit those interpleader funds with the court’s registry. Most of the insureds named in the interpleader complaint disclaimed their interest in the funds, and the funds were subsequently withdrawn by Sunz. Certain insureds who did not disclaim their interests filed counterclaims against Benchmark, some of which also filed cross-claims against Sunz for breach of contract, asserting that the program agreements between each cross-claimant and Sunz were superseded by the insurance policies issued by Sunz to the cross-claimants and thus excluded the program agreement from application. The program agreements each required any dispute arising out of the program agreement to be submitted to binding arbitration.

In July 2020, Sunz moved to dismiss the cross-claims, or in the alternative, to compel arbitration. On February 23, 2021, the district court denied Sunz’s motion. Sunz appealed the portion of the February 23 order denying the motion to compel arbitration to the Eighth Circuit and moved before the district court to stay the entire action pending the appeal. Cross-claimants conceded that the matter should be partially stayed but that the district court should allow the parties to litigate whether the cross-claimants were entitled to the interpleaded funds.

In determining whether to grant a stay, the district court conducted a balancing test of the following four factors:

Whether the stay applicant has made a showing that it is likely to succeed on the merits;
Whether the applicant will be irreparably injured absent a stay;
Whether issuance of the stay will substantially injure the other parties interested in the proceeding;
Where the public interest lies.

The district court found that the factors weighed in favor of a stay, particularly because allowing the parties to litigate the issue of entitlement to the interpleaded funds risked inconsistent rulings and potential costs that should not be expended while the Eight Circuit resolved the issue of whether such issues will be arbitrated.

Benchmark Insurance Co. v. Sunz Insurance Co., No. 0:20-cv-00908 (D. Minn. May 12, 2021).

D.C. Circuit Affirms Award of Fees

June 14, 2021 by Christina Gallo

This case arose out of an employment dispute between Preeminent Protective Services Inc., which provides security services in and around the District of Columbia, and the Service Employees International Union Local 32BJ. When Preeminent took over a contract, it refused to hire two guards who had previously worked there. The union claimed the refusal violated a collective bargaining agreement.

The union filed a petition to compel arbitration of that claim in federal court in the District of Columbia. In May 2018, the district court granted summary judgment to the union and ordered the parties to arbitrate. After Preeminent stalled the arbitration for more than a year, the district court held Preeminent in contempt for failing to comply, and awarded $51,000 in costs and attorneys’ fees to the union based on a “lodestar” figure, reflecting the number of hours worked by each union lawyer multiplied by a reasonable hourly rate for each lawyer.

Preeminent appealed all three orders of the district court: the motion to compel arbitration, the contempt order, and attorneys’ fees. However, the D.C. Circuit lacked jurisdiction to review the arbitration and contempt orders, which were final decisions not timely appealed. On appeal, Preeminent raised three challenges to the fee award.

First, Preeminent argued it was impermissibly punitive to use prevailing market rates as opposed to actual rates. The D.C. Circuit rejected that argument, noting that the court has repeatedly upheld the use of prevailing market rates in determining appropriate awards under statutory fee-shifting provisions.

Second, Preeminent claimed that the district court miscalculated the prevailing market rates. The D.C. Circuit again rejected that argument, finding that although the union’s attorneys charged discounted rates, they were nevertheless worthy of market rates given their experience and credentials.

Finally, Preeminent argued the district court should have lowered the award to account for Preeminent’s inability to pay. The D.C. Circuit rejected that argument based on contradicting evidence that showed Preeminent had active contracts worth more than $2.5 million.

The D.C. Circuit therefore affirmed the district court’s fee award on the merits.

Service Employees International Union Local 32BJ v. Preeminent Protective Services Inc., No. 19-9157 (D.C. Cir. May 18, 2021).

English High Court Blocks Financial Services Group From Bringing Excess Insurance Claim Against UK Reinsurers in South Africa Where Courts of England and Wales Had Exclusive Jurisdiction Under Excess Layer Reinsurance Contracts

May 20, 2021 by Christina Gallo

After paying out more than $21 million in settlements for its mishandling of a collective investment scheme that collapsed in 2009, financial services group ABSA filed suit in South Africa against its reinsurers to enforce reinsurance contracts that purportedly provided compensation for the settlement of lawsuits and arbitration.

The U.K.-based reinsurers claimed that the proceedings brought against them in South Africa by ABSA were in breach of the reinsurance contracts, which provided that the courts of England and Wales should have exclusive jurisdiction.

The reinsurers applied for an interim anti-suit injunction. An interim anti-suit injunction restraining ABSA from pursuing the South African proceedings was granted until the return date. On the return date, Nicholas Vineall QC, sitting as a judge at the High Court, addressed what, if any, anti-suit injunction was appropriate — mainly whether he should continue, or vary, or decline to continue, the interim injunction.

Finding no strong reasons for refusing to restrain the South African proceedings on the excess layers, the High Court judge held he would keep in place the anti-suit injunction preventing a claim from being brought in South Africa under the excess layers, reasoning that the excess layer coverage was governed by an exclusive jurisdiction clause that required disputes to be litigated in the courts of England and Wales. However, the High Court judge refused to continue the injunction preventing a South African proceeding over the primary layer of reinsurance, as that primary layer of coverage had no such exclusive jurisdiction clause.

Recognizing that the end result was not ideal because it leaves most of the parties involved in two sets of proceedings, the High Court judge reasoned that its decision “reflects the different wording of the agreements which the parties entered into,” and “[t]he result does give effect to and enforce those agreements.”

Axis Corporate Capital UK II Ltd. v. ABSA Group Ltd., No. CL-2020-000871, [2021] EWHC 861 (Comm), in the High Court of Justice, Business and Property Courts of England and Wales, Commercial Court (Apr. 13, 2021).

Party Opposing Confirmation of Non-Domestic Arbitration Award Subject to Convention May Also Assert FAA Defenses If Award Rendered in the U.S. or Under U.S. Arbitral Law

May 18, 2021 by Christina Gallo

In 2006, Goldgroup and DynaResource entered into a contract relating to a gold mining operation in Mexico, which contained a dispute resolution provision requiring that the disputes be submitted to binding arbitration in Denver, Colorado, under the rules of the American Arbitration Association (AAA). Goldgroup initiated arbitration in Denver, but DynaResource refused to participate, relying on a Mexico City court’s ruling in 2015 that the arbitration agreement was unenforceable because Goldgroup had waived its right to arbitration by submitting to the jurisdiction of Mexico courts in prior disputes.

In 2016, the arbitrator ruled in Goldgroup’s favor and awarded it monetary and equitable relief. The arbitrator also found that the arbitration clause was valid and enforceable, that Goldgroup had not waived its right to arbitrate by participating in any other lawsuits, and that DynaResource engaged in forum shopping by asking the Mexico City court to rule on the arbitrability of Goldgroup’s claims.

Goldgroup then sought confirmation of the non-domestic arbitration award in the Colorado district court. DynaResource opposed recognition of the award under the Inter-American Convention on International Commercial Arbitration (the Convention) and moved to vacate the award under the Federal Arbitration Act (FAA), arguing that the award should not be confirmed because the arbitrator exceeded the scope of his authority by ruling on the issue of whether Goldgroup had waived its right to arbitrate and whether the Mexico City court’s ruling effectively annulled the subsequent award issued in the arbitration. The district court confirmed the award and entered final judgment against DynaResource. After unsuccessfully moving to alter or amend the judgment, DynaResource appealed.

On appeal, DynaResource argued that the district court erred in holding that waiver was a question for the court without making a factual determination as to whether Goldgroup in fact waived its right to arbitration. Goldgroup contended that DynaResource did not raise the issue with the district court and thus failed to preserve it. The Tenth Circuit Court of Appeals agreed, finding that the district court was not required to decide whether Goldgroup waived its right to arbitrate because the issue was not properly before it, and DynaResource had not preserved the issue for the appellate court’s review.

In addition, Goldgroup argued that even if DynaResource had preserved the issue, waiver is not available as a defense to confirmation of the award because FAA defenses, such as waiver, do not provide grounds for vacating an award subject to the Convention.

On an issue of first impression, the Tenth Circuit addressed whether the FAA’s vacatur standards apply when a U.S. court is considering the confirmation of a non-domestic arbitration award subject to the Convention and rendered in the United States or under U.S. arbitral law.

The Tenth Circuit rejected Goldgroup’s argument, holding that the Convention’s defenses for opposing the confirmation of a non-domestic arbitration award are not exclusive and that a party may also assert FAA defenses to oppose confirmation if the non-domestic arbitration award was rendered in the United States or under U.S. arbitral law.

Despite its holding that DynaResource could seek vacatur under the FAA, the Tenth Circuit rejected DynaResource’s argument under the FAA that the arbitrator exceeded his authority by ruling on the issue of arbitrability, finding that the contracting parties manifested a clear intent to arbitrate the issue of arbitrability by incorporating the AAA rules into their arbitration agreement. Moreover, the circuit court found DynaResource failed to show that any alleged error by the arbitrator in ruling on the waiver issue warranted vacatur.

The circuit court also rejected DynaResource’s argument under the Convention that the Mexico City court’s ruling effectively annulled the subsequent arbitration award, holding that the defense does not apply preemptively to awards not yet rendered. The circuit court also found the defense was inapplicable because the Mexico City court improperly applied Mexican law rather than U.S. law, where the arbitration was pending. Therefore, the Tenth Circuit affirmed confirmation of the award.

Goldgroup Resources, Inc. v. DynaResource de Mexico, S.A. de C.V., No. 20-1143 (10th Cir. Apr. 16, 2021).

No “Meeting of the Minds” Where Material Terms of Arbitration Agreement Were Changed After Party Electronically Signed Document

April 27, 2021 by Christina Gallo

This action concerned a dispute between the plaintiffs, two individual investors, and the defendants, a financial planning adviser and her firm. After the plaintiffs’ investments did not work out as they had hoped, the plaintiffs filed suit against the defendants in the Western District of North Carolina for state law contract and fraud claims.

The defendants moved to compel arbitration under the asset management agreement that the plaintiffs executed when they hired the defendants to manage their investments, which required the parties to arbitrate any dispute that may arise between the parties concerning any transaction or the construction, performance, or breach of the agreement. The defendants also moved to dismiss for lack of personal jurisdiction, to transfer venue, and to dismiss for failure to state a claim, but all motions, including the arbitration motion, were denied by the district court. Notably, the district court denied the defendants’ motion to compel, as the parties submitted different versions of the asset management agreement and therefore had not formed an agreement to arbitrate.

The Fourth Circuit affirmed the district court’s order, holding that the parties did not form an agreement to arbitrate. Calling it a “very simple contract dispute,” the circuit court relied on general principles of contract formation and found there was no “meeting of the minds,” and therefore no contract, because both parties did not agree to the same terms. The circuit court noted that the two versions of the agreement submitted to the district court differed as to a number of terms, including one that added an extra account to be managed and designated how it was to be managed. The circuit court found there was no evidence in the record to establish that the plaintiffs were ever informed of, let alone reviewed, such changes.

Because the designation of which accounts were to be managed and how they were to be managed would be of paramount importance for any couple turning over its hard-earned savings to a financial firm for management, the circuit court found that the fact that the defendants did not bother to solicit this information from the plaintiffs after they submitted the signed form through DocuSign, a commonly used online platform for signing and transmitting documents, was fatal to the formation of the contract.

The circuit court noted that while the defendants (a sophisticated certified financial professional and her firm) changing the terms of an agreement after a customer signs it does not add to the impression of fairness that one hopes to get from a financial institution managing an individual investor’s portfolio, what happened here was at best “sloppy” on the part of the defendants and precluded formation of a contract.

Rowland v. Sandy Morris Financial & Estate Planning Services LLC, No. 20-1187 (4th Cir. Apr. 7, 2021)