Arbitration Process Issues

BANKRUPTCY COURT GRANTS MF GLOBAL HOLDINGS’ MOTION TO RECONSIDER DECISION TO COMPEL ARBITRATION IN BERMUDA, BUT REACHES SAME RESULT

October 16, 2017 by Rob DiUbaldo

On September 6, 2017, the Bankruptcy Court for the Southern District of New York issued the latest order in the ongoing coverage battle between MF Global Holdings (“MF Global”) and Allied World Assurance Company regarding the former’s bankruptcy. The decision stemmed from MF Global’s motion to reconsider the court’s August 24, 2017 order compelling arbitration in Bermuda. While the court initially granted the motion to reconsider, it reached the same result and granted Allied World’s motion to compel arbitration.

MF Global’s request for reconsideration was based on the court’s alleged failure to address its argument that the global bankruptcy plan explicitly retained jurisdiction over adversary proceedings, a provision which should have superseded the underlying insurance contract’s arbitration provision which formed the basis of the court’s decision to compel arbitration. The court noted that while its decision mentioned the argument, it did not address the merits of the argument, so the court granted the motion to reconsider.

On reconsideration, the court was unpersuaded by MF Global’s argument that the bankruptcy court retained jurisdiction pursuant to the global bankruptcy plan. In a short opinion, the court distinguished the principal authority upon which MF Global relied: Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304 F.3d 753 (7th Cir. 2002). That case addressed an adversary proceeding that commenced before the bankruptcy plan and a plan provision which retained jurisdiction over pending adversary proceedings. Here, the adversary proceeding was not filed until after the plan was confirmed, and, the court concluded, the plan language retaining jurisdiction of pending adversary proceedings should not be interpreted to supersede the contractual arbitration provision in the pre-petition contract without explicit instruction in the plan as to that interpretation. Furthermore, Allied World had not waived its right to demand arbitration at any point in the proceedings.

Thus, even though the court granted MF Global’s motion to reconsider, it ultimately reached the same conclusion and granted Allied World’s motion to compel arbitration and denied MF Global’s motion to stay the arbitration.

In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Sept. 6, 2017).

This post written by Thaddeus Ewald .

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PROCEDURAL ARBITRABILITY QUESTIONS ARE FOR THE ARBITRATOR, NOT THE JUDGE, UNLIKE SUBSTANTIVE ARBITRABILITY QUESTIONS

October 12, 2017 by John Pitblado

Allegations of failure to follow the contractually-required dispute resolution procedure raise “procedural questions,” which must be asked of the arbitrator. In contrast, “substantive arbitrability questions,” also referred to as “gateway questions” of arbitrability, are for the court to decide. Questions of substantive arbitrability address two issues: whether the parties have a valid arbitration agreement, and whether the issue is within the scope of the arbitration agreement.

In determining whether an issue is within the scope of a valid arbitration agreement, the court must initially decide whether the arbitration clause is “broad” or “narrow.” Clauses that provide for arbitrating “any claim arising out of or relating to the contract” are considered broad as a matter of law. When answering questions of scope, courts “must liberally construe a valid arbitration clause, ‘resolving doubts in favor of arbitration. . . .” As a result, even where claims sound in tort, rather than contract, they will be determined to be within the scope of a broad arbitration clause if the claims “touch matters covered by the arbitration clause.”

Finding that plaintiff’s claims against defendant were within the scope of the parties’ agreement, and that questions raised about arbitrability were procedural, and thus for the arbitrator to decide, the Court granted defendant’s motion to compel arbitration.

Dlorah, Inc. v. KLE Constr., Inc., Civ. 16-5102-JLV (W.D.S.D. July 17, 2017).

This post written by Benjamin E. Stearns.

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NINTH CIRCUIT ALLOWS CLASS ARBITRATION TO PROCEED DESPITE ABSENCE OF EXPRESS REFERENCE TO CLASS ARBITRATION

October 9, 2017 by John Pitblado

Lamps Plus appealed an order permitting class arbitration of claims related to a data breach of personal identifying information of its employees, alleging negligence, breach of contract, invasion of privacy, and other claims. The district court previously found that the arbitration agreement was ambiguous as to class arbitration and denied Lamps Plus’s motion to compel bilateral arbitration, allowing class-wide arbitration to proceed.

On appeal, the Ninth Circuit affirmed, all the while acknowledging the Supreme Court’s finding in Stolt-Nielsen that under the Federal Arbitration Act, a party may not be compelled to submit to class arbitration unless “there is a contractual basis for concluding that the party agreed to do so.” However, the Court went on to find that the lack of an express reference to class arbitration was “not the ‘silence’ contemplated in Stolt-Nielsen.” As such, the Court construed the language “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” as to authorize class arbitration and further found that its interpretation of that clause “require[d] no act of interpretive acrobatics” and was “the most reasonable” interpretation possible.

Varela v. Lamps Plus, Inc., No. 16-56085 (9th Cir. Aug. 3, 2017).

This post written by Gail Jankowski.

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ALABAMA FEDERAL COURT FINDS CEDENT DID NOT WAIVE ARBITRATION, AND ORDERS REINSURANCE DISPUTE TO BE ARBITRATED

October 4, 2017 by Michael Wolgin

Alabama Municipal Insurance Corp. (“AMIC”), an Alabama non-profit public insurer, brought suit in Alabama federal court against Munich Reinsurance America Inc. (“Munich Re”), alleging breach of a reinsurance contract for failing to fully reimburse a settlement of flood claims asserted against an insured city. Munich Re answered, denying liability under the reinsurance contract alleged in the complaint, and stated that another reinsurance contract (Agreement No. 1236-0009, endorsed by Agreement No. 1236-0009-E003) applied to the claims. After the parties submitted their Rule 26(f) report and a Scheduling Order was entered by the court, AMIC amended its complaint without opposition from Munich Re, asserting a claim under another reinsurance contract, Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003. Munich Re answered the Amended Complaint and AMIC noticed the depositions of two Munich Re employees. AMIC then filed a Motion to Stay Pending Arbitration under Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003. Thereafter, the depositions of the two Munich re employees took place.

Both parties agreed that Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003 referenced in the Amended Complaint contains an arbitration clause. However, Munich Re contended that AMIC’s claim in the case is not subject to arbitration because that agreement is not applicable to the claims. The Alabama federal court found that the only claim brought in the case was under a contract which contains an arbitration clause, and thus is subject to arbitration. Munich Re, however, claimed that AMIC had waived its right to arbitrate. In response, the court held that AMIC had not waived the right to arbitrate. The court found that the actions taken toward litigation prior to filing the Amended Complaint should not be considered a waiver of the right to arbitrate, as the Amended Complaint was the first time that AMIC had alleged a breach of a reinsurance contract which contained an arbitration clause. Thus, the Alabama federal court granted the motion to stay pending arbitration. Alabama Municipal Ins. Corp. v. Munich Reinsurance America Inc., Case No. 2:16-CV-948-WHA-SRW (USDC M.D. Ala. Sept. 7, 2017).

This post written by Jeanne Kohler.

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EIGHTH CIRCUIT HOLDS THAT A MOTION TO DISMISS BASED ON AN ARBITRATION CLAUSE IS NOT A CHALLENGE TO THE COURT’S JURISDICTION

October 3, 2017 by Michael Wolgin

A municipality sued the company that constructed its water treatment facility, in connection with contaminants found in the water supply. The parties had entered into a series of agreements which contained choice of law and arbitration clauses governing the resolution of any disputes. The company filed a motion to dismiss for lack of jurisdiction based on the contracts’ forum selection and arbitration clauses, and the court construed the motion as falling under Rule 12(b)(1). The court then found that the contracts were inconsistent and ambiguous, and considered extrinsic evidence. The court ultimately granted the motion to dismiss and directed the parties to proceed to arbitration.

On appeal, the Eighth Circuit found that the district court erred by analyzing the motion to dismiss as a 12(b)(1) challenge to its jurisdiction. The court explained that the U.S. Supreme Court has held that “federal venue laws, not forum-selection clauses, govern the propriety of venue under Rule 12(b)(3). The same logic applies where, as here, a party seeks to enforce an arbitration agreement under Rule 12(b)(1). Just as a forum-selection clause has no bearing on the issue of whether venue is ‘wrong’ or ‘improper,’ an arbitration agreement has no relevance to the question of whether a given case satisfies constitutional or statutory definitions of jurisdiction.” The Eighth Circuit found that summary judgment standards should apply on remand because the parties submitted, and the district court considered, matters outside the pleadings. City of Benkelman, Nebraska v. Baseline Engineering Corp., et al., Case No. 16-1949 (8th Cir. Aug. 11, 2017).

This post written by Nora A. Valenza-Frost.

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