Rob DiUbaldo

LOUISIANA LOSES BID TO VACATE DENIAL OF RECONSIDERATION OF ARBITRAL DECISION IN FEMA ASSISTANCE DISPUTE

February 21, 2018 by Rob DiUbaldo

FEMA denied a request by the Louisiana Department of Natural Resources (“LDNR”) for assistance restoring barrier islands following Hurricanes Rita and Katrina. LDNR appealed the decision via arbitration, but the arbitral panel upheld FEMA’s denial and dismissed the arbitration entirely. LDNR moved for reconsideration on the grounds the panel did not provide LDNR an opportunity for oral presentation and did not have all the available evidence at the time it made its decision. The panel denied reconsideration because LDNR failed to indicate any new evidence it intended to produce or prove that any such evidence would be material and change the arbitral outcome.

In a lawsuit, LDNR sought vacatur of the panel’s denial of reconsideration—not the underlying arbitral award. The district court refused to vacate the decision and LDNR appealed. The Fifth Circuit declined to disturb the district court’s decision. Because LDNR did not challenge the arbitral panel’s merits decision, the court narrowly reviewed the denial of reconsideration for whether the panel deprived LDNR of a fair hearing. The court concluded that LDNR failed to show the arbitral panel refused to hear any of its evidence, failed to claim any of that evidence was even material, and failed to demonstrate any prejudice as a result.

La. Dep’t of Natural Res. v. Fed. Emergency Mgmt. Agency, No. 17-30140 (5th Cir. Jan. 29, 2018).

This post written by Thaddeus Ewald .

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SECOND CIRCUIT REBUFFS ATTEMPT TO ADDRESS IN FEDERAL COURT ACTION RELIEF PREVIOUSLY DENIED IN STATE COURT SUIT

February 20, 2018 by Rob DiUbaldo

The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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GENTLEMEN’S CLUB CANNOT COMPEL ARBITRATION WHERE IT ACTIVELY LITIGATED MERITS OF DISPUTE

February 19, 2018 by Rob DiUbaldo

The Fourth Circuit upheld a district court’s decision refusing to compel arbitration in a labor dispute between a gentlemen’s club (“Crazy Horse”) and a putative class of entertainers because of Crazy Horse’s extensive merits-based litigation conduct. Plaintiff Degidio, an entertainer at Crazy Horse, sued the club under the FLSA and South Carolina labor laws for allegedly misclassifying entertainers as independent contractors rather than employees.

Crazy Horse answered the complaint, participated in discovery, filed several merits-based motions for summary judgment, opposed Degidio’s motions for certification of class and collective actions, and repeatedly moved to certify state law questions to the South Carolina Supreme Court. In the midst of this conduct and without informing the court, Crazy Horse began entering into arbitration agreements with its new entertainers. Three years after the litigation had commenced, Crazy Horse moved to compel arbitration against a handful of plaintiffs who had recently joined the suit. The district court declined to enforce the arbitral agreements.

On appeal, the Fourth Circuit affirmed. Under the Federal Arbitration Act (“FAA”), a party waives its right to compel arbitration when it has “so substantially utilized the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” The court emphasized that Crazy Horse engaged in substantive litigation maneuvers for over three years, including extensive and substantive motions practice that indicated it was hoping for a favorable ruling on the merits. More, those same issues Crazy Horse pursued in court would need to be reargued before an arbitrator if the court were to compel arbitration. Thus, the court concluded the “only possible purpose” of the arbitration agreements was to grant Crazy Horse another “bite at the apple” if it lost on the merits in court.

Crazy Horse argued it could not have moved for arbitration earlier because the entertainers with whom it had entered arbitration agreements had only recently joined the case. The court rejected this argument because Crazy Horse failed to notify the court of the agreements as they occurred, thereby avoiding court supervision, and because compelling arbitration here would give perverse incentives to parties to delay the motion to compel arbitration as long as possible. The court also denounced Crazy Horse’s conduct in entering the arbitration agreements because they gave false impressions and the secretive manner in which Crazy Horse implied it sought to avoid the court’s supervisory role.

Degidio v. Crazy Horse Saloon & Rest. Inc., No. 17-1145 (4th Cir. Jan. 18, 2018).

This post written by Thaddeus Ewald .

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CALIFORNIA COURT CONSIDERS ENFORCEABILITY OF ARBITRATION CLAUSE IN REINSURANCE RELATED AGREEMENT APPLYING NEBRASKA LAW

February 1, 2018 by Rob DiUbaldo

In a case involving a reinsurance participation agreement (RPA), a California trial court has examined the interplay between two seemingly irreconcilable contract provisions: one that provided for the arbitration of any disputes thereunder, and another that chose Nebraska law for purposes of construction, pursuant to which agreements to arbitrate disputes implicating certain insurance contracts are invalid.

Plaintiffs were a set of affiliated companies that entered into a series of agreements with defendants, including a set of workers’ compensation insurance policies, a reinsurance treaty, and the RPA. The RPA (1) provided that any disputes would be arbitrated and delegated issues of arbitrability to the arbitrator, and (2) provided that it should be construed in accordance with Nebraska law. Plaintiffs filed suit seeking a declaration that the RPA was void and unenforceable, and defendants moved to compel arbitration. Plaintiffs argued that the arbitration provision was unenforceable under Nebraska Revised Statute § 25-2602.01(f)(4), which prohibits agreements to arbitrate future disputes regarding “any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.”

Under the McCarran Ferguson Act, a state law may prohibit arbitration otherwise required by the FAA (known as “reverse preemption”) if that statute “regulates the business of insurance.” The court determined that § 25-2602.01(f)(4) regulates the business of insurance and thus reverse preempts the FAA. The court went on to note that while parties may generally agree to delegate the power to determine issues of arbitrability to the arbitrator, if the very validity of the agreement to arbitrate is challenged, the court must consider this challenge before compelling arbitration. Finding that plaintiffs had made such a challenge, the court found that it was required to determine whether the RPA was the type of agreement covered by § 25-2602.01(f)(4).

Defendants argued that the RPA was an investment contract, not an insurance policy, and thus not covered by § 25-2602.01(f)(4), but the court disagreed, finding that the RPA was sufficiently related to the relevant workers’ compensation policies to merit such coverage. As such, it was the kind of agreement for which § 25-2602.01(f)(4) prohibits arbitration agreements, and the court denied defendants’ motion to compel arbitration. Parties drafting insurance-related contracts containing arbitration provisions would thus be well advised to consider the impact of applicable state laws on the enforceability of such provisions.

Milmar Food Group II, LLC et al. v. Applied Underwriters, Inc. et al., EF003101-2017 (Orange Cty. Sup. Ct. Dec. 5, 2017)

This post written by Jason Brost.

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COURT REFUSES TO RECONSIDER ARBITRATOR’S FACTUAL DETERMINATIONS

January 12, 2018 by Rob DiUbaldo

In a case emphasizing the deference courts give to factual findings of arbitrators, a magistrate judge in the Eastern District of New York has confirmed an arbitration award granting damages and attorneys’ fees to a company that repossessed a leased car when the leasee fell behind on his payments.

The case arose out of the lease of a car by plaintiff Kevin Love and his wife Maria. After the Loves failed to make timely payments on the lease, defendant BMW Financial Services repossessed the car, sold it at auction, and sought payment of a deficiency balance. Mr. Love sued BMW in state court, where he asserted Fair Credit Reporting Act, tort, and contract claims. BMW removed the case to federal court, then successfully moved to compel arbitration per the terms of the lease agreement. The arbitrator entered an award in favor of BMW, rejecting all of Mr. Love’s claims and awarding BMW $34,826.64 in damages plus interest and $50,000 in attorneys’ fees. BMW then moved in federal court to confirm the award and sought its fees incurred in connection with that proceeding, and Mr. Love cross-moved to vacate the award.

The court confirmed the award, emphasizing that courts in the Second Circuit will not vacate an arbitration award except in narrowly-defined circumstances described in the Federal Arbitration Act or if the court finds that it was rendered in “‘manifest disregard’ of the law or the terms of the parties’ agreement.” The court further emphasized that manifest disregard of the evidence is not a grounds for vacatur within the Second Circuit. Thus, the court rejected Mr. Love’s claim that the arbitration award was too large because the arbitrator failed to properly account for the time that the car was not available to Mr. Love, finding that it had no power to review such a factual finding. The court likewise rejected Mr. Love’s argument that the arbitrator’s decision dismissing his FCRA claim should be vacated, as this was also based on a non-reviewable finding of fact. The court also found that because the plain language of the lease provided for attorneys’ fees incurred in connection with a default on the lease, BMW was entitled to recover the $12,690.02 in attorneys’ fees it incurred in seeking to have the award confirmed and responding to Mr. Love’s motion for vacatur.

Love v. BMW Financial Services NA, LLC, No. 15-cv-0124 (E.D.N.Y. Dec. 5, 2017)

This post written by Jason Brost.

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