Arbitration / Court Decisions

COURT AFFIRMS RULING DENYING MOTION TO COMPEL ARBITRATION ON THE BASIS THAT CONTRACT WAS INVALIDATED BY FRAUD

February 6, 2017 by Rob DiUbaldo

The Ninth Circuit, in an unpublished opinion, has found that a contract, and therefore an arbitration clause within it, was unenforceable due to fraud in the inception, despite the fact that both parties had ample opportunity to review the contract in its entirety. This result was required, the court found, because, assuming the allegations of the complaint to be true, the plaintiff did not know that by signing the contract it was agreeing to be a victim of defendants’ scheme.

In the complaint, plaintiff alleged that it was misled into agreeing to a consulting agreement that the defendants used as part of a wide-ranging scheme of fraud, involving forging financial documents, destroying plaintiff’s relationships with clients and creditors, and falsely representing that an employee of one of the defendants had been hired for a non-existent position in order to get plaintiff to issue paychecks for that position. The dissent argued that such fraudulent conduct in the performance of the agreement did not constitute fraud in the inception because plaintiff did not allege that plaintiff signed the contract based on a misunderstanding of its contents or that the arbitration clause was fraudulently induced. The majority disagreed, however, citing a California Court of Appeals decision for the proposition that it was enough that defendants, as the party drafting the contract, drafted the contract “‘in such a way as to not apprise’ the other party of its intentions.” DKS, Inc. v. Corporate Business Solutions, Inc., 15-16589 (9th Cir. Jan. 17, 2017)

This post written by Jason Brost.

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COURT APPLIES THE “LOOK THROUGH” APPROACH TO FAA SECTION 10 PETITIONS IN DETERMINING SUBJECT MATTER JURISDICTION

February 1, 2017 by Michael Wolgin

Plaintiffs, members of the Harman family, sold their family farm and sought investment advice from defendant Wilson-Davis. The Harmans claimed they were damaged after making certain investments due to forged financial statements by Wilson-Davis, and that Wilson-Davis spoliated evidence pertaining to those investments. At arbitration, the panel found no liability against Wilson-Davis. The Harmans then sought to vacate the panel’s award.

The court considered whether it had subject matter jurisdiction, and whether there were sufficient grounds to vacate the award under either public policy grounds or section 10 of the FAA. Regarding subject matter jurisdiction, the court analyzed whether it could “look through” the face of the petition to vacate the award, and find jurisdiction based on whether federal-law claims were raised in the underlying arbitration. (There is a split among the federal circuits as to whether a court may look through a section 10 petition to vacate an award in order to find federal question jurisdiction; the Supreme Court previously applied “look through” only under section 4.) The Tenth Circuit, in which the district court in this matter is located, has not yet addressed the issue. The court here sided with the Second Circuit, and not the opposing view of the Third and Seventh Circuits, holding that applying the “look through” approach to the entire FAA was the only logical construction of the law, notwithstanding differences in statutory language between sections 4 and 10. The court, however, denied the Harmans’ petition because it found no public policy or statutory grounds supporting vacatur. Harman v. Wilson-Davis & Co., Case No. 2:2016-cv-00229-CW (USDC D. Utah Jan. 6, 2017).

This post written by Gail Jankowski.

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COURT AFFIRMS DISMISSAL OF CEDENT’S CLAIMS ASSERTING REINSURANCE PREMIUM FRAUD SCHEME, BASED ON EXPIRATION OF LIMITATIONS PERIOD

January 31, 2017 by Michael Wolgin

The appellant (Guarantee Trust) had forwarded reinsurance premiums to the reinsurer to be held in a custodial account for the payment of claims. Guarantee Trust initially sued Kribbs, the founder of the reinsurer, alleging that he acted in concert with an employee inside Guarantee Trust’s organization to improperly obtain the funds from the account for Kribbs’ own use. During depositions (six years after filing suit), Guarantee Trust discovered the identity of two of its own employees, whom Guarantee Trust named in its re-filed action after having voluntarily dismissed the initial complaint. To address the running of the statute of limitations, Guarantee Trust argued that the limitations period was tolled due to fraudulent concealment. The trial court, however, dismissed Guarantee Trust’s claims, finding that Guarantee Trust provided no reason why it could not have discovered its claims against the two employees sooner through reasonable diligence.

On appeal, the court addressed the tolling issue under both the discovery rule and fraudulent concealment, and affirmed the circuit court’s decision. The court found it was significant that Guarantee Trust knew at the time it filed its original complaint that one of its own employees was involved in the alleged wrongdoing, and that Guarantee Trust had been provided in 2008 with discovery responses disclosing a short list of potential witnesses that included the two employees later addressed at depositions. The court concluded that the trial court correctly determined that Guarantee Trust failed the “reasonable diligence” test. The Court also found no fraudulent concealment during discovery that would toll the statute of limitations. Guarantee Trust Life Ins. Co. v. Kribbs, Case No. 15 L 11262, (Ill. App. Ct. Dec. 29, 2016).

This post written by Gail Jankowski.

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FIFTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION AGAINST NON-SIGNATORY TO ARBITRATION AGREEMENT

January 30, 2017 by Michael Wolgin

The appeal arose from a consolidated case, originally three separate class actions, resulting from the alleged underfunding of Singing River Health System’s pension plan and KPMG’s alleged failure to detect that underfunding due to allegedly faulty auditing. The plaintiff from one of these class actions (Lowe) brought claims against KPMG but did not expressly rely upon KPMG’s engagement letters with Singing River – which included arbitration clauses. KPMG argued that, notwithstanding that the members of the Lowe class were not signatories to the engagement letters, the Lowe claims implicitly relied on the engagement letters because the letters “defined the scope of KPMG’s contractual role.” Therefore, KPMG argued, “equitable estoppel compel[led] the submission of Lowe’s claims to arbitration.”

Both the district court and the Fifth Circuit disagreed with KPMG’s argument. The Fifth Circuit explained, “the present case is based on tort rather than contract law. While it might well be easier for Lowe to pursue her claims based on the Engagement Letters, the standard for showing ‘direct dependence’ is what she pled, not what she might have pled … “ And, because Lowe’s tort claims were not “directly dependent” on the engagement letters, the Fifth Circuit found that KPMG’s motion was properly denied. The Court did go on to note, however, that if Lowe “later attempts to claim a remedy under the Engagement Letters, KPMG can seek relief including a renewed request for arbitration.” Thomas Jones, et al. v. Singing River Health Services Foundation, et al., Case No. 16-60263 (5th Cir. Jan. 5, 2017).

This post written by Brooke L. French.

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FIFTH CIRCUIT FOLLOWS PRECEDENT IN UPHOLDING EMPLOYMENT AGREEMENT CONTAINING CLASS ACTION WAIVERS

January 26, 2017 by John Pitblado

Relying on D.R. Horton Inc. v. NLRB and Murphy Oil, USA v. NRLB, the Fifth Circuit found the NLRB’s decision that Citibank violated the National Labor Relations Act by requiring employees to sign an arbitration agreement containing collective/class action waiver was erroneous and reversed the Board’s decision.

As noted earlier this week, the Supreme Court will hear oral argument on this issue.

Citigroup Tech. Inc., et al. v. NLRB, No. 15-60856 (USCA 5th Cir., Dec. 8, 2016)

This post written by Nora A. Valenza-Frost.

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