Contract Interpretation

The Eastern District of Pennsylvania recently granted a creditor’s request to compel arbitration over a plaintiff’s argument that the arbitration agreement he had signed was void as a result of a bankruptcy court discharging the loan that was governed by the agreement. The court held that the bankruptcy ruling discharged the plaintiff’s debt obligations, not his other obligations under the agreement such as his obligation to arbitrate claims related to the agreement.

Soldon Winton entered into a loan agreement with OneMain Financial Group LLC. That agreement contained an arbitration clause. Winton subsequently filed for bankruptcy, and the bankruptcy court discharged Winton’s debt to OneMain. Winton allegedly discovered that his credit report still included an outstanding debt to OneMain. He therefore brought suit against OneMain, Trans Union LLC, and other defendants for violations of the Fair Credit Reporting Act.

OneMain responded by moving to compel arbitration under the agreement. Winton opposed OneMain’s motion. Although there was no dispute that Winton’s claim was within the scope of the arbitration agreement, Winton claimed that the bankruptcy ruling discharged all of his obligations under the agreement. Winton also sought to avoid arbitration on several other grounds or, in the alternative, to require OneMain to cover all of the costs of the arbitration.

The district court rejected Winton’s arguments. It held that the bankruptcy court had discharged Winton’s debt obligations, not his other obligations, including his obligation to arbitrate disputes related to the loan agreement. The court also rejected Winton’s arguments that it would be unfair to require him to pursue his claims in two different forums (in arbitration against OneMain and in court against the other defendants). Finally, the court denied without prejudice Winton’s request that OneMain bear the costs of arbitration. Among other issues, the arbitration agreement allowed Winton to request that OneMain bear Winton’s costs. Winton had apparently not done so, and the court determined that he should do so before seeking judicial relief.

Winton v. Trans Union, LLC, No. 2:18-cv-05587 (E.D. Pa. Aug. 27, 2019).

On remand from the Second Circuit, the Northern District of New York was asked to determine whether Utica Mutual Insurance Co. (the cedent) had a defense obligation under its umbrella policies. If it did, then Utica would be entitled to recover defense costs from Clearwater Insurance Co. (the reinsurer).

The umbrella policies required Utica to defend any occurrence “not covered by the policies listed in the schedule of underlying insurance … but covered by the terms and conditions of this policy.” Both parties argued different interpretations of the meaning of “not covered by.” Finding the language ambiguous, and having not been provided extrinsic evidence allowing the court to resolve the ambiguity as a matter of law, summary judgment was denied and the case set for trial.

Utica Mut. Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-01178 (N.D.N.Y. July 25, 2019).

A Pennsylvania federal district court granted a motion to compel arbitration pursuant to 9 U.S.C. § 4 of the Federal Arbitration Act, over objection by the defendant on severability grounds. The defendant argued that its contract with the plaintiff was void ab initio and thus unenforceable. While the contract contained an arbitration clause, the defendant argued that under Pennsylvania law, an arbitration provision is not severable from the remainder of a void contract, and as such, the arbitration clause at issue was unenforceable. The court disagreed, however, finding the proposition to be “directly at odds” with U.S. Supreme Court precedent. The court noted that the Supreme Court explicitly held in Buckeye that “an arbitration provision is severable from the remainder of the contract” and that “unless the challenge is to the arbitration clause itself,” a challenge to the validity of the contract as a whole must go to the arbitrator in the first instance. Because the defendant here challenged the validity of the contract as a whole, the court granted the plaintiff’s motion to compel arbitration.

Thrivest Specialty Funding, LLC v. Wright, No. 2:18-cv-04764 (E.D. Pa. June 5, 2019)

The Ninth Circuit reversed the District of Montana’s denial of a motion to compel arbitration on the grounds that “the insurer was estopped from asserting contract defenses as a result of its breach of its duty to defend.” The Ninth Circuit held that neither the 2014 Montana Supreme Court decision Tidyman’s Management Services, Inc. v. Davis, 330 P.3d 1139, nor any other Montana case, treats an agreement to arbitrate as a contract defense that an insurer is estopped from asserting as a result of its breach of its duty to defend. Rather, such agreement “establishes how the parties choose to resolve disputes arising out of the contract.” A party successfully compelling arbitration “may nevertheless have any insurance contract defenses arising out of its policy resolved against it by the arbitrator.”

Am. Trucking & Transp. Ins. Co., v. Nelson, No. 18-35414 (9th Cir. June 4, 2019)

Affirming the confirmation of a Chinese arbitral award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Second Circuit held that notice mailed directly to an entity is sufficient to afford it due process pursuant to American standards. The China International Economic and Trade Arbitration Commission sent notice and arbitration materials to the respondent at the address listed in the parties’ contract. When some of these materials were returned, the items were mailed to the respondent’s address on file with the New York Department of State as well as a third address. The documents sent to the latter two addresses were not returned, and service was assumed.

Although the respondent argued it never received notice of the arbitration, which is a defense under Article V(1)(b) of the New York Convention, and submitted a declaration to that effect, the declaration did “not satisfy the ‘heavy’ burden imposed on a party asserting a defense under” the Convention.

Tianjin Port Free Trade Zone Int’l Trade Serv. Co. v. Tiancheng Chempharm, Inc. USA, No. 18-1918 (2d Cir. June 4, 2019)