Rob DiUbaldo

SIXTH CIRCUIT FINDS IT HAS NO JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION AND ENJOINING STATE COURT PROCEEDINGS

March 21, 2017 by Rob DiUbaldo

The Sixth Circuit has dismissed the appeal of an order granting a motion to compel arbitration and to enjoin certain state court proceedings, finding the order was not appealable because the district court stayed the matter pending arbitration rather than dismissing it.

The case began in state court where the administratrix of an estate brought various claims against a nursing home where the decedent had resided. The nursing home moved in federal court to compel arbitration and enjoin the administratrix from pursuing her claims in state court, which the district court granted.

The Sixth Circuit’s opinion hinged on the district court’s decision to stay the case pursuant to 9 U.S.C. § 3 rather than to dismiss it. The Sixth Circuit noted that, under 9 U.S.C. § 16(b)(1), such an order is not appealable except as provided for in 28 U.S.C. § 1292(b), which allows interlocutory orders to be appealed only if the district court states in writing that the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” As the district court made no such finding, the order was not appealable. Similarly, the Sixth Circuit found that it had no jurisdiction to review the district court’s order enjoining the state court proceeding, which was entered pursuant to the court’s power to direct arbitration provided by 9 U.S.C. § 4, as 9 U.S.C. § 16(b)(2) specifically prohibits appeals of such an interlocutory order.

Brandenburg Health Facilities v. Mattingly, Case No. 16-6161 (6th Cir. Feb. 24, 2017)

This post written by Jason Brost.

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BANKRUPTCY COURT HOLDS BERMUDA INSURERS VIOLATED BARTON DOCTRINE BY SEEKING ANTI-SUIT INJUNCTIONS IN BERMUDA COURTS

March 7, 2017 by Rob DiUbaldo

Two separate courts in the Southern District of New York have recently issued opinions relating to a complicated bankruptcy proceeding following the collapse of MF Global Holdings Ltd. in 2011. The underlying dispute involves MF Global Holdings and MF Global Assigned Assets’ (“Plaintiffs”) attempts to recover insurance proceeds from the defendants (“Bermuda Insurers”) under certain excess errors & omissions policies following a global settlement of MDL litigation in SDNY. In August 2016, the Bankruptcy Court for the Southern District approved the global settlement.

On November 8 2016, the Bermuda Insurers filed an adversary proceeding in the Supreme Court of Bermuda (“the Bermuda action”), obtaining ex parte anti-suit injunctions prohibiting Plaintiffs from prosecuting their insurance claims in the Bankruptcy Court and requiring them to arbitrate such disputes in Bermuda. On November 22—the same day the Bankruptcy Court entered an order to show cause why the Bermuda Insurers should not be held in contempt for filing the Bermuda action—they filed a motion to compel arbitration in the Bankruptcy Court, to which the Plaintiffs were unable to respond because of the Bermuda action’s anti-suit injunctions.

On December 21, 2016, the Bankruptcy Court entered a temporary restraining order barring the Bermuda Insurers from enforcing the Bermuda action’s anti-suit injunctions. On January 12, 2017, the court granted a preliminary injunction extending the TRO’s relief. The Southern District issued an opinion on February 10, 2017 denying the Bermuda Insurers’ motion for leave to appeal the TRO, which it filed shortly after the TRO was initially granted. The district court denied the motion seeking interlocutory appeal of the Bankruptcy Court’s TRO decision, because the subsequent issuance of the preliminary injunction rendered the appeal moot and because of the lack of a fully developed record.

On January 31, 2017, the Bankruptcy Court issued an opinion finding that the Bermuda Insurers violated the Barton Doctrine by initiating the Bermuda action and ordering them to dismiss that proceeding. The Barton Doctrine provides that suits may not be brought against receivers without leave of the receiver’s appointing court. The Bankruptcy Court surveyed case law extending this doctrine to other contexts including, most significantly, bankruptcy proceedings. It held that Plaintiffs were entitled to the protections of the Barton Doctrine by virtue of MF Global Holdings’ role as Plan Administrator, and MF Global Assigned Assets’ role as a company created to retain assets assigned in satisfaction of debtor claims. The court found the Bermuda action was effectively an attempt by the Bermuda Insurers to delay Plaintiffs’ administration of the bankruptcy estate, and as such, ran afoul of the Barton Doctrine. Following the Bankruptcy Court’s order on January 23, the Bermuda Insurers dismissed the Bermuda action.

This post written by Thaddeus Ewald .
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NINTH CIRCUIT REVERSES DISTRICT COURT DECISION ON UNCONSCIONABILITY OF DISPUTE RESOLUTION AGREEMENT, SEVERS PROBLEMATIC PROVISIONS

March 2, 2017 by Rob DiUbaldo

The Ninth Circuit reversed a district court’s finding that a dispute resolution provision (“the Provision”) of an employment agreement was substantively and procedurally unconscionable, upholding the provision as not tainted by illegality and severing the few problematic sections. The dispute arose when Lorrie Poublon claimed her former employer misclassified her as exempt from overtime pay requirements and demanded mediation. After mediation failed, Poublon filed a putative class action complaint, and the employer moved to compel arbitration under the Provision. The federal district court denied the employer’s motion on the grounds that the Provision was procedurally and substantively unconscionable and thus unenforceable.

On appeal, the Ninth Circuit rejected most of Poublon’s arguments that the Provision was unconscionable. First, the court dismissed her contentions regarding procedural unconscionability. Although the employer conceded it was a contract of adhesion, the Provision did not contain sufficient other indications of oppression or surprise to render it procedurally unconscionable.

Second, the court systematically considered each of Poublon’s arguments that specific parts of the Provision was substantively unconscionable. One specific clause—a requirement that employees submit all claims to arbitration, even though the employer maintained a right to seek judicial resolution of certain claims—was classified by the court as substantively unconscionable, on the grounds that the employer waived the argument. The court, however, held that six of the remaining seven challenged parts of the Provision were not substantively unconscionable. The upheld clauses included a waiver of representative claims, a choice of venue, a confidentiality clause, a provision governing sanctions, a provision allegedly granting the employer unilateral rights to modification, and clause limiting discovery. The court also held that the arbitrator, not the court, was the appropriate entity to decide whether the reaffirmation clause rendered the contract unenforceable.

Finally, because the employer waived its argument regarding the enforceability of the judicial carve-out exception in the Provision, the court analyzed whether that made the entire Provision unenforceable. The court found it did not, severing the unconscionable aspect of the Provision, concluding that they did not so taint the contract with illegality to render it unenforceable as a whole and relying in part on language in the Provision allowing for modifications to make it enforceable.

Poublon v. C.H. Robinson Co., No. 15-55143 (9th Cir. Feb. 3, 2017).

This post written by Thaddeus Ewald .

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COURT CONFIRMS ARBITRATION AWARD, REJECTING CLAIM THAT ARBITRATOR EXCEEDED HIS POWERS AND IGNORED THE LAW

March 1, 2017 by Rob DiUbaldo

A court has confirmed an arbitration award of more than $8 million in damages, attorneys’ fees and costs against Sirona Dental Systems, Inc. and Arges Imaging Inc. (collectively “Respondents”) in favor of Petitioners, who were shareholders of Arges before it merged with Sirona. Respondents asked that the award be vacated because the arbitrator had exceeded his powers and acted in manifest disregard for the law, but the court disagreed.

The merger occurred because of Sirona’s desire to acquire a scanner created by Arges called the Apollo. The arbitration involved Petitioners’ claim that Respondents breached the merger agreement. First, Petitioners alleged that Sirona owed them $3 million that the merger agreement said they would earn if the Apollo product met certain criteria. While those criteria were not met, the tribunal awarded Petitioners the full amount sought after finding that Sirona deprived Petitioners the chance to test the Apollo product by the contractual deadline and that the product met the requisite criteria in informal tests.

Second, Petitioners alleged that they should be paid a “Revenue Earn Out” greater than that provided by the merger agreement based on the revenue actually achieved, because Sirona breached its obligation to conduct the business in good faith and exercise commercially reasonable efforts to promote the business. The tribunal agreed that Sirona had breached this duty and awarded Petitioners more than $4 million based on its calculations of what the revenue would have been without this breach.

The court further stated that, when an arbitrator is alleged to have to exceed his powers, the question “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong,” and found that the arbitrator had met this standard. The court also rejected the argument that the arbitrator acted in manifest disregard for the law by awarding damages based on revenue estimates for a new product, despite significant Delaware case law rejecting such awards. The court noted that none of these cases explicitly prohibits such an award and found that Respondents had not shown that the arbitrator ignored the law. Bergheim et al. v. Sirona Dental Systems, Inc., et al., No. 16 CV 1692-LTS (S.D.N.Y. Jan. 24, 2017)

This post written by Jason Brost.

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APPELLATE COURT REJECTS CLAIM OF ARBITRATOR BIAS BASED ON UMPIRE’S SERVICE AS A PARTY ARBITRATOR IN OTHER MATTERS INVOLVING A RETROCESSIONAIRES’ ALLEGED AFFILIATE

February 28, 2017 by Rob DiUbaldo

The Second Circuit has rejected the attempt of a retrocedent, IRB Brasil Reseguros S.A. (“IRB”), to vacate certain arbitration awards against it in favor of its retrocessionaire, National Indemnity Company (“NICO”). IRB argued that vacatur was required because the neutral umpire on a three arbitrator panel accepted a position as party arbitrator on behalf of an alleged affiliate of NICO while the NICO/IRB arbitration was ongoing. Notwithstanding this, the court found that this did not amount to “evident partiality” or any other basis for vacatur of an arbitration award under the Federal Arbitration Act based upon arbitrator misconduct.

IRB and NICO were involved in a series of arbitrations over seven years regarding NICO’s obligations to indemnify IRB for losses it incurred under certain reinsurance contracts that covered losses suffered by large Brazilian company. The three-member arbitration panel was made up of two party-appointed arbitrators and one neutral umpire. In 2012, IRB demanded that the neutral umpire withdraw from the arbitration because he had served as a party-arbitrator for an alleged affiliate of NICO in another matter. The umpire refused to step down and later accepted another appointment as a party-arbitrator for that same purported NICO affiliate. The majority of the arbitration panel in the NICO/IRB matters ultimately issued three awards in NICO’s favor.

The court found that the umpire’s conduct did not demonstrate “evident partiality” under the FAA, which the court, quoting an earlier Second Circuit decision, said exists when “a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” The umpire was not alleged to have a familial, business, or employment relationship with NICO or its alleged affiliate, or a financial interest in the outcome of the arbitrations, and had in fact voted against NICO’s purported affiliate when acting as party arbitrator. The court also rejected IRB’s argument that his conduct constituted “misbehavior” under the FAA because this argument was not raised before the district court. However, the court found that IRB’s arguments were not frivolous and thus rejected NICO’s request for attorneys’ fees and costs. National Indemnity Co. v. IRB Brasilia Reseguros S.A., No. 16-627-cv (2d Cir. Jan. 31, 3017)

This post written by Jason Brost.

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