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You are here: Home / Archives for Kenneth Cesta

Kenneth Cesta

Second Circuit Holds New York Convention Is “Self-Executing,” Reverses Orders Denying Motion to Compel Arbitration

June 3, 2025 by Kenneth Cesta

In an opinion issued on May 8, 2025, the Second Circuit Court of Appeals addressed two cases: Certain Underwriters at Lloyd’s London v. 3131 Veterans Blvd LLC and Certain Underwriters at Lloyd’s London v. MPIRE Properties LLC. At issue in both cases was an insurance policy issued by surplus lines insurers that included a mandatory arbitration clause covering “all matters in difference between the Insured and the [Insurers] … in relation to this insurance” and directing that the arbitration take place in New York with the arbitration tribunal applying New York law.

The insurance policies at issue in both cases covered commercial property in Louisiana damaged in August 2021 during Hurricane Ida. When their respective claims for damages could not be resolved, the insureds filed suit in Louisiana state court. In response, the insurers filed suit in the Southern District of New York to enjoin the insureds from pursuing their Louisiana state court actions and to compel arbitration under the Federal Arbitration Act (FAA) and the New York Convention. The insureds opposed, arguing Louisiana state insurance law voided the arbitration provisions in their policies because, under the McCarran-Ferguson Act (MFA), that Louisiana law “reverse preempted” the FAA and the New York Convention. The district court in both cases ruled the Louisiana law, which prohibits arbitration — rather than the FAA or New York Convention — is controlling because, under the MFA, the Louisiana law “reverse preempted” the FAA and the New York Convention. The insurers appealed.

The Second Circuit first noted that mandatory arbitration clauses are enforceable under the FAA, and the FAA would ordinarily preempt a state law that seeks to void or limit those clauses. Recognizing an exception to the rule, the court noted that “Congress created an exception to the usual rules of preemption” under the MFA, which provides that “state laws enacted for the purpose of regulating the business of insurance are generally exempt from preemption.” The court rejected the insurers’ argument that the reverse preemption issue should be resolved by the arbitration tribunal, concluding that it “cannot rely on the FAA to hand off to an arbitration tribunal the critical antecedent question of whether the MFA allows Louisiana law to void the arbitration clauses at issue in this case.”

The court then noted that the MFA’s reverse preemption rule does not apply to federal policies, but to acts of Congress, and a state law can reverse preempt a treaty provision under the MFA “only when that treaty provision relies on an ‘Act of Congress’ to take effect — in other words, when the provision is not ‘self-executing.’” With that backdrop, the court then framed the issue in these cases as “whether Article II Section 3 of the New York Convention is self-executing, making it exempt from reverse-preemption under the MFA, or whether it relies on an Act of Congress for its effect, such that it can be reverse-preempted by Louisiana law.” The court then applied applicable precedent and found the New York Convention is self-executing, “with the result that it cannot be reverse preempted by Louisiana law under the MFA.” The court abrogated a prior decision of the Second Circuit to the extent it held Article II Section 3 of the New York Convention is not self-executing and reversed the district court’s decisions to the extent they relied on the abrogated decision, and remanded both cases for further proceedings consistent with its opinion.

Certain Underwriters at Lloyd’s London v. 3131 Veterans Blvd LLC and Certain Underwriters at Lloyd’s London v. Mpire Properties LLC, Nos. 23-1268 and 23-7613 (2d Cir. May 8, 2025).

Filed Under: Arbitration / Court Decisions

Seventh Circuit Affirms Order Compelling Arbitration, Holds Arbitration Agreement Applies to Title VII Claim

March 31, 2025 by Kenneth Cesta

In Retzios v. Epic Systems Corp., the Seventh Circuit Court of Appeals considered an appeal brought by the plaintiff, a former employee of Epic, who was fired after she refused to be vaccinated against COVID-19. The plaintiff’s employment agreement included an agreement to arbitrate “any statutory or common law legal claims … that relate to or arise out of my employment or the termination of my employment.” After she was terminated for refusing the COVID-19 vaccination, she brought an action under Title VII in the district court alleging that Epic was required to accommodate her religious objection to the vaccine. Epic filed a motion to dismiss the action and to compel arbitration based on the mandatory arbitration agreement, which was granted by the district court.

In affirming the order, the Seventh Circuit first noted that the district court should not have dismissed the action but rather should have stayed the matter pursuant to the Federal Arbitration Act, which “calls for a suit referred to arbitration to be stayed rather than dismissed, when a party requests a stay (as Epic did).” The court then rejected each of the arguments raised by the plaintiff on appeal. The court held that the plaintiff’s Title VII claims were subject to the language of the mandatory arbitration clause of the employment agreement, noting that the plaintiff’s “objection to vaccination as a condition of employment relates to that employment, and her objection to being fired arises out of that employment’s termination.”

The court also rejected the plaintiff’s contention that the employment agreement was illusory, noting that the plaintiff received “at least two kinds of compensation in exchange for the promise to arbitrate: the [award of] stock and her ongoing salary.” The court also rejected the plaintiff’s promissory estoppel claim, finding that the plaintiff had not shown any promise made by Epic on which the plaintiff detrimentally relied. The court likewise rejected the plaintiff’s contention that Epic waived its right to arbitrate when it did not request the Equal Employment Opportunity Commission or state unemployment office to dismiss their proceedings, noting that waiver addresses “conduct in litigation” and that there was no evidence of facts that would support a waiver in this action. Finally, the court granted Epic’s motion for sanctions on appeal, noting that requiring Epic to bear legal costs on the appeal would be inappropriate.

Retzios v. Epic Systems Corp., No. 24-1701 (7th Cir. Jan. 24, 2025).

Filed Under: Arbitration / Court Decisions, Contract Formation

Eleventh Circuit Holds Arbitration Agreement Unenforceable Against Spouse of Former Employee

February 17, 2025 by Kenneth Cesta

In Lubin v. Starbucks Corp., the Eleventh Circuit Court of Appeals considered defendant Starbucks’ appeal of an order denying its motion to compel arbitration of the plaintiffs’ lawsuit alleging that Starbucks sent deficient health insurance notices under the Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Plaintiffs Ariel Torres, a former Starbucks employee, and Raphyr Lubin, the husband of a former employee who had obtained spousal benefit plan coverage, filed a class action alleging that Starbucks sent them deficient enrollment notices under ERISA and COBRA. After Starbucks filed its motion to compel, Torres consented to arbitration and agreed that his claims were subject to the mandatory arbitration clause in his employment agreement. Lubin opposed the motion, arguing that his claims were not subject to arbitration since he did not sign an employment or arbitration agreement. The district court denied the motion to compel noting that, since Lubin did not sign an arbitration agreement and was seeking “to enforce his own, statutory right to an adequate COBRA notice,” his claims were not subject to mandatory arbitration.

Starbucks appealed on several grounds. First, Starbucks argued the district court should not have ignored the strong presumption in favor of arbitration. The court rejected this argument, relying on the fact that Lubin did not sign an arbitration agreement and cannot be compelled to arbitrate his own statutory claims when he is not subject to the mandatory arbitration clause his wife signed. Second, Starbucks argued the arbitration agreement included a delegation clause, which granted the arbitrator exclusive jurisdiction to determine whether Lubin’s claims were subject to arbitration. The court rejected this argument, noting that even though parties may agree to grant the arbitrator the authority to determine whether an arbitration agreement is enforceable, there must be “clear and unmistakable evidence that they did so,” which evidence the court concluded was not present here. The court found Lubin cannot be compelled to arbitrate his claims since the language of the arbitration agreement was ambiguous and Lubin is not a party to the agreement.

Starbucks raised three additional arguments that Florida contract law also requires that Lubin submit his claims to arbitration. The court rejected Starbucks’ contention that Lubin should be equitably estopped from avoiding arbitration. The court found equitable estoppel does not apply since Lubin’s claims sought to enforce his own statutory rights to adequate COBRA notice and were not brought under his wife’s employment agreement. The court also rejected Starbucks’ argument that the third-party beneficiary doctrine compels Lubin to arbitrate his claims, finding the doctrine does not apply when, like here, “a third-party beneficiary brings a claim other than to enforce the contract.” Finally, the court rejected the argument that Lubin’s claim is derivative of his wife’s claim, again relying on the fact that Lubin’s claim is based on an independent statutory right to notice. The court affirmed the district court’s order denying Starbucks’ motion to compel arbitration.

Lubin v. Starbucks Corp., No. 21-11215 (11th Cir. Dec. 16, 2024).

 

Filed Under: Arbitration / Court Decisions, Contract Interpretation

Illinois Federal Court Denies Motion to Dismiss Complaint Alleging Breach of Reinsurance Agreement Between Parties

January 27, 2025 by Kenneth Cesta

In PMC Casualty Corp. v. Virginia Surety Co., the U.S. District Court for the Northern District of Illinois, Eastern Division, addressed a motion to dismiss a complaint filed by a party to a reinsurance agreement alleging that payments due to the reinsurer were being improperly withheld.

Defendant Virginia Surety Co. issued contractual liability insurance policies (CLIPs) to nonparty Protect My Car, which sold vehicle service contracts, or extended warranties, to owners of motor vehicles. The CLIPs issued by Virginia Surety were intended to insure Protect My Car’s obligations to vehicle owners under the service contracts. After it issued the CLIPs, Virginia Surety obtained insurance from plaintiff PMC Casualty Corp. to protect it against the risks it assumed under the CLIPs. Virginia Surety and PMC Casualty entered into a reinsurance agreement, which provided that “Virginia Surety ‘ceded,’ and PMC reinsured, 100 percent of the risk of any payments that might have to be made under the vehicle service contracts covered by the CLIPs.” PMC Casualty was required to maintain a trust account to secure its obligations to Virginia Surety, and the reinsurance agreement permitted withdrawal from the trust account for certain specified purposes. The parties then amended the reinsurance agreement and transferred the funds held in the trust account to a “funds withheld account” to be held by Virginia Surety, subject to the same withdrawal restrictions. Relying on a report issued by Virginia Surety, PMC Casualty then submitted a request for payment from the funds withheld account of more than $18 million, which PMC Casualty alleged was due. Virginia Surety declined the payment, alleging that the funds in the account should be used to cover its potential liabilities in a separate state court lawsuit involving another company.

PMC Casualty disputed that Virginia Surety was entitled to withhold the payment and filed a complaint for breach of contract. Virginia Surety moved to dismiss the complaint, arguing that the amounts it may be liable for in the state court action are, at least in part, the same sums that PMC Casualty is seeking, which makes them subject to the reinsurance agreement. PMC Casualty opposed the motion, arguing that the reinsurance agreement does not give Virginia Surety the sole discretion to withhold payment. The court found that the term “amount(s) relevant to the Agreement” is “arguably facially ambiguous, and it is not defined in the reinsurance agreement,” and noted that the interpretation of the agreement “may entail consideration of extrinsic evidence and thus may involve questions of fact.” The court concluded that given the ambiguities and the lack of merit of Virginia Surety’s other arguments, the complaint is not subject to dismissal on a motion to dismiss for failure to state a claim.

PMC Casualty Corp. v. Virginia Surety Co., No. 1:24-cv-07795 (N.D. Ill. Dec. 30, 2024).

Filed Under: Arbitration / Court Decisions, Contract Interpretation, Reinsurance Claims

SDNY Confirms Arbitration Order, Holding Order Was Final and Arbitrator Did Not Exceed Authority

December 3, 2024 by Kenneth Cesta

In Subway Franchise Systems of Canada ULC v. Subway Developments 2000 Inc., the U.S. District Court for the Southern District of New York addressed whether an arbitrator exceeded her authority when ordering that one of the parties to the arbitration must continue making interim payments during the pendency of the arbitration, and whether the arbitrator’s order was final and subject to appeal.

The underlying arbitration involved claims brought by Subway Developments 2000 Inc. against Subway Franchise Systems of Canada ULC alleging that Subway Franchise wrongfully terminated two development-agent agreements between the parties. The development-agent agreements included a mandatory arbitration provision that covered disputes regarding the termination of the agreements. The agreements further provided that any arbitration initiated under the agreements is limited to a determination by the arbitrator of the validity of the termination of the agreement by Subway Franchise, potential reinstatement of Subway Development if the termination is found to be invalid, and for a determination of damages. The agreements also included a provision requiring Subway Franchise to make 50% of the periodic payments due to Subway Development during the pendency of the arbitration until the arbitrator issued a decision. Subway Franchise initially took the position that it was excused from making the required payments but later made the payments either directly to Subway Developments or to Subway Franchise’s attorney trust account. Subway Developments objected and brought the matter to the arbitrator’s attention. After a hearing, the arbitrator issued an order requiring Subway Franchise to resume making the payments required under the development-agent agreements directly to Subway Developments during the pendency of the arbitration. Three months later, the arbitrator entered another order imposing sanctions if Subway Franchise failed to comply with the prior order and denying Subway Franchise’s motion to stay the order.

Subway Franchise then filed a petition in the district court seeking to vacate the arbitrator’s order, contending that the arbitrator exceeded her authority by compelling it to make interim payments directly to Subway Developments during the pendency of the arbitration. Subway Developments opposed the petition, arguing that the arbitrator’s order was not final and thus not subject to appeal, or in the alternative, to confirm the arbitrator’s order. In reviewing the petition, the court noted that the case is governed by the New York Convention since both parties to the proceeding maintained their principal place of business outside the United States and that the domestic provisions of the Federal Arbitration Act (FAA) also applied since the arbitration was being conducted in the United States. The court then addressed whether the arbitrator’s order was final and subject to appeal, concluding that since the order “determines temporary control over the money that would be used to secure any potential judgment” the order is “final for the purpose of judicial review.” The court then addressed Subway Franchise’s petition to vacate the order under section 10(a)(4) of the FAA, which allows a party to seek to vacate an arbitration award when the arbitrator “exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” After a thorough review of applicable case law and the record submitted, the court concluded that Subway Franchise “fails to meet the high standard to demonstrate that the arbitrator exceeded her authority here” and denied Subway Franchise’s petition to vacate the order. The court then addressed Subway Developments’ petition to confirm the arbitration order, concluding that it must confirm the arbitration order under the New York Convention since no grounds exist to vacate the award.

Subway Franchise Systems of Canada, ULC v. Subway Developments 2000, Inc., No. 1:24-cv-00593 (S.D.N.Y. June 21, 2024).

Filed Under: Arbitration / Court Decisions, Confirmation / Vacation of Arbitration Awards

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