Contract Interpretation

Sixth Circuit Holds That District Court Erred by Not Analyzing Whether Non-Signatory Consented to Arbitration

September 22, 2022 by Brendan Gooley

The Sixth Circuit Court of Appeals recently vacated and remanded an order concluding that a party was not bound by an arbitration award after concluding that the district court failed to consider whether that party may have consented to arbitration through its actions even though it was not a signatory to the collective bargaining agreement that contained the arbitration clause.

Greenhouse Holdings LLC did business as Clearview Glass and Glazing in Kentucky. Greenhouse also owned 90% of Clearview Glass and Glazing Contractors of Tennessee LLC. The International Union of Painters and Allied Trades District Council 91 filed a grievance against “Clearview Glass” alleging that it violated a collective bargaining agreement the union had. It was unclear whether “Clearview Glass” meant Greenhouse (based on its trade name Clearview Kentucky), Clearview Tennessee, or both. The union argued that Greenhouse was bound by the collective bargaining agreement and an arbitration clause therein. Greenhouse disputed that. The arbitrator apparently sided with the union and issued an order that affected Clearview Kentucky (i.e., Greenhouse). Greenhouse challenged that award.

The district court vacated the arbitrator’s award “to the extent it applies to Greenhouse.” The district court “held that Greenhouse wasn’t a party to the [collective bargaining agreement] and thus the arbitrator acted outside his authority to the extent the award applied to Greenhouse.”

The Third Circuit vacated the district court’s decision. It held that the district court “didn’t address this threshold question” of whether Greenhouse had consented to arbitration even though it did not sign the collective bargaining agreement that contained the arbitration clause. The Third Circuit explained that “an agreement to arbitrate need not be in writing” and that courts “may infer agreement when a party willingly participates in [an] arbitration without objecting to the arbitrator’s jurisdiction.”

The Third Circuit further explained that whether a party has consented to arbitration it otherwise may not have agreed to is a fact-intensive inquiry, and it remanded the case to the district court to analyze that question under the facts of the case.

Greenhouse Holdings, LLC v. International Union of Painters & Allied Trades District Council 91, No. 21-6164 (6th Cir. Aug. 8, 2022).

Third Circuit Compels Arbitration Despite Dispute About Whether Assignment of Loan Containing Arbitration Clause Was Lawful

September 20, 2022 by Brendan Gooley

The Third Circuit Court of Appeals recently held that a district court should have granted a motion to compel arbitration even though there was a dispute about the legality of an assignment of a loan agreement that contained the arbitration clause at issue. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.

OneMain Financial Group, a nonbank finance company that issues consumer loans, issued a loan to Benjamin Zirpoli pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. That loan contained an arbitration clause that provided that “You or We have an absolute right to demand that any Claim be submitted to an arbitrator in accordance with this Arbitration Agreement.” “We” was defined to include OneMain’s “assignees.” “Claim” was meanwhile defined to include “anything related to … the arbitrability of any Claim pursuant to this Agreement” and “anything related to … any alleged violation [of a state statute], including without limitation … usury … laws.”

OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that purchases consumer debt. The “CDCA prohibits CDCA licensees from ‘selling contracts to a … corporation not holding a license … without the prior written approval of the Secretary of Banking,’” but Midland apparently “did not possess a CDCA license or request approval from the Department of Banking” to acquire Zirpoli’s account.

Midland sued Zirpoli to collect the debt but later dismissed the suit and then allegedly reported Zirpoli’s delinquent debt to various consumer agencies, which purportedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action alleging that because Midland did not have a CDCA license and did not obtain approval from the Department of Banking, it was not lawfully permitted to purchase his loan or the other CDCA-governed loans it acquired.

Midland moved to compel arbitration. The district court ultimately denied Midland’s motion based on the purported illegality of the transfer from OneMain to Midland.

The Third Circuit (with one judge dissenting) vacated the district court’s decision and remanded the case with instructions to grant Midland’s motion to compel arbitration.

After holding that “party” under section 4 of the Federal Arbitration Act “refers to a party to a litigation” and that it therefore had jurisdiction to consider Midland’s motion on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid arbitration agreement and that agreement applied to OneMain’s assigns, which included Midland. The Third Circuit acknowledged that there was a dispute about the legality of OneMain’s assignment to Midland but explained that its analysis was limited to the threshold question of whether there was a valid agreement to arbitrate in light of the delegation clause delegating issues of arbitrability to the arbitrator and that it was therefore prohibited from analyzing the merits of the dispute regarding whether that agreement should be invalidated because it violated the CDCA.

The Third Circuit alternatively held that even if it considered the merits of Zirpoli’s claim, it would reject his contention that the assignment was invalid. OneMain had “charged-off” Zirpoli’s loan, which meant that the “assignment falls outside of the CDCA’s purview.”

Zirpoli v. Midland Funding, LLC, No. 21-2438 (3d Cir. Sept. 1, 2022).

SDNY Compels Arbitration Pursuant to ADR Provision in Contract Governing Disputed Commercial Transaction

September 13, 2022 by Kenneth Cesta

Applying the Federal Arbitration Act and recognizing that it “reflects a liberal federal policy favoring arbitration agreements,” the U.S. District Court for the Southern District of New York granted the defendant’s motion to compel arbitration, finding that the arbitration provision at issue was as expansive as similar clauses that the Second Circuit has previously described as the “paradigm of a broad clause establishing a presumption of arbitrability.”

Plaintiff Kuehne + Nagel Inc., a logistics service provider that arranges the transportation of freight, and defendant Baker Hughes were parties to a global air freight transportation contract, which included an alternative dispute resolution provision that applied “[i]n the event of any dispute between the Parties hereto arising from or relating to this contract.” After a shipment of cargo was seized by customs authorities at its destination in Brazil, Baker sent a demand letter to Kuehne to commence the claim process so Baker could be compensated for its losses. Efforts to mediate the dispute were unsuccessful and Kuehne filed an action in federal court seeking, among other relief, a declaratory judgment that the agreement did not apply to the claims at issue with Baker. Baker then moved to compel arbitration, contending that the ADR provision requires the submission of all disputes concerning the agreement to arbitration. Kuehne raised several arguments in opposition to the motion, including: (i) the issue of arbitrability should be decided by the court; (ii) the language “either party may refer the dispute to arbitration” means that the ADR provision is not mandatory; and (iii) the agreement did not apply to the transportation services at issue in the case.

The court rejected Kuehne’s arguments, finding that the ADR provision was expansive and that because the claims at issue “touch matters covered by” the agreement, the underlying dispute fell within the scope of the agreement’s ADR provision. The court also found that the agreement incorporated procedural rules that expressly empowered the arbitrator to determine the issue of arbitrability and concluded that although the agreement did not expressly address the matter, the parties intended to delegate the question of arbitrability to the arbitrator. Finally, the court noted the “overwhelming balance of authority in this Circuit and elsewhere” confirms that, absent language that an arbitration provision is intended to trigger “permissive” arbitration, provisions that state either party “may” refer the dispute to arbitration trigger mandatory arbitration. The court then concluded that the arbitration clause of the ADR provision of the agreement was mandatory and that the merits of Kuehne’s claims must be decided by the arbitrator. The court granted Baker’s motion to compel arbitration but denied its motion to dismiss, deciding instead to stay the case.

Kuehne + Nagel Inc. v. Baker Hughes, No. 1:21-cv-08470 (S.D.N.Y. June 23, 2022).

Seller Wins “Battle” to Apply FAA Over VUAA to Arbitration Dispute, but Loses “War” Over Award Confirmation

September 7, 2022 by Benjamin Stearns

The case involved a seller of a 91% interest in a Virginia-based government contractor that provides overseas staffing and logistics support to government agencies. The parties’ sale contract contained a choice-of-law provision that stated the agreement “shall be governed by and construed in accordance with the internal laws of the Commonwealth of Virginia without giving effect to any choice or conflict of law provision or rule.” The contract also included an arbitration provision applicable to disputes related to any adjustment payments after the closing of the sale. The parties ultimately could not agree on the amount of a post-closing adjustment payment and proceeded to arbitration. The arbitrator awarded the buyer approximately $3.1 million, after which the parties filed cross-motions to confirm and to vacate the arbitration award. In support of its motion to vacate, the seller included an argument that the award was in “manifest disregard” of the applicable law.

The federal district court first noted that “manifest disregard” is recognized by the Fourth Circuit as a valid basis under federal arbitration common law to vacate an arbitration award, but it is not under Virginia law. As a result, the court was required to determine whether the contract’s general choice-of-law provision selecting Virginia law resulted in the application of the Virginia Uniform Arbitration Act to the parties’ dispute. Again relying specifically on controlling Fourth Circuit precedent, the court found that “a contract’s general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce.” Rather, the parties “may displace the FAA only by specifying that state law should apply specifically to arbitration proceedings.” Neither party disputed that the contract involved interstate commerce. As such, the contract’s choice-of-law provision was sufficient to invoke Virginia law for issues of contract interpretation, but not for purposes of displacing the FAA, because the agreement did not specifically address the law that would govern arbitration disputes.

Having won the argument that federal arbitration law applied to the parties’ dispute regarding confirmation or vacatur of the arbitration award, the seller then lost its argument that the arbitrator “manifestly disregarded” the applicable law. The court noted that, under federal arbitration law, a party moving to vacate an arbitration award faces a “heavy burden” and that the scope of a federal court’s review of an arbitration award is “among the narrowest known at law.” The court’s review is limited to “whether the arbitrators did the job they were told to do — not whether they did it well, or correctly, or reasonably, but simply whether they did it.” Pursuant to Fourth Circuit precedent, an arbitrator’s determination is not in manifest disregard and must be upheld “so long as it draws its essence from the agreement.” An award “fails to draw its essence from the agreement only when the result is not rationally inferable from the contract.”

After analyzing the seller’s claim, the court found that, “[d]istilled to its essence, the Seller’s argument does nothing more than challenge the arbitrator’s interpretation of applicable law.” As this argument was “plainly insufficient” to support a claim of “manifest disregard” of the law, the court confirmed the arbitration award.

Vogel v. Gracias Juan, LLC, No. 1:21-cv-01355 (E.D. Va. Aug. 9, 2022).

Tenth Circuit Affirms Tax Court’s Decision That Captive Insurance Arrangement Did Not Qualify for Tax Exemption

August 8, 2022 by Brendan Gooley

The Tenth Circuit Court of Appeals recently affirmed the tax court’s decision that a captive insurance arrangement that reinsured a number of other captive insurers did not qualify for a tax exemption.

Reserve Mechanical Corp. issued a number of insurance policies to Peak Mechanical Corp. Reserve and Peak had the same owners, and the arrangement was a form of captive insurance. The arrangement may have been an attempt to obtain tax benefits pursuant to a program that allowed both the deductibles and premiums to be exempt from taxation.

To attempt to qualify for that program, Reserve tried to ensure that at least 30% of its premiums came from companies not affiliated with it. It therefore arranged, among other things, through Capstone Associated Services Ltd. to reinsure a number of other captive insurers that worked with Capstone. Capstone also arranged for each captive insurer it worked with to assume a small percentage of risk from coinsuring thousands of vehicle service contracts.

The IRS concluded that this arrangement did not qualify for an exemption and assessed taxes.

The Tenth Circuit affirmed. It agreed with the IRS that Reserve had not satisfied its burden to demonstrate that its purported insurance transactions were truly arrangements for insurance. Although Reserve complied with some, but not all, of the formalities for insurance companies and went through some of the motions associated with pricing insurance premiums, the record reflected that no “experience, expertise, or studies supported the need for Peak to obtain the policies” and the “premiums for [certain] additional insurance were not supported by any study of similar commercially available policies or careful analysis of Peak’s risks of loss.”

With respect to the reinsurance agreements, the Tenth Circuit concluded that those agreements “did not create any meaningful risk for Reserve” and noted that “Reserve did not satisfy even the distribution threshold that Capstone set for it — obtaining 30% of its insurance premiums by insuring unaffiliated risks.”

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, No. 18-9011 (10th Cir. May 13, 2022).