Arbitration / Court Decisions

DISTRICT COURT DISMISSES BREACH OF DUTY OF UTMOST GOOD FAITH CLAIMS UNRELATED TO BREACH OF CONTRACT IN REINSURANCE DISPUTE

July 7, 2015 by John Pitblado

The Middle District of Florida recently granted in part and denied in part plaintiff Stewart Title Guaranty Company’s (“Stewart Title”) motion to dismiss defendant First American Title Insurance Company’s (“First American”) counterclaim for breach of the utmost duty of good faith. As noted in a prior post, this case involves disputes regarding reinsurance agreements that First American entered into with Old Republic National Title Insurance Company (“Old Republic”) and Stewart Title. In these agreements, Old Republic and Stewart Title agreed to assume part of First American’s contractual liability under a title insurance policy.

When mechanic’s liens were discovered on the property at issue, First American negotiated a $41 million settlement of the claim before turning to Old Republic and Stewart Title to pay their proportionate share of that sum. While Old Republic paid under its reservation of rights, Stewart Title chose not to pay, and instead, sued First American for rescission, reformation, declaratory judgment, and negligence. First American countersued Stewart Title for breach of contract, breach of the utmost duty of good faith, and declaratory judgment.

Stewart Title moved to dismiss First American’s counterclaim for breach of the utmost duty of good faith on the same bases as a prior dismissal granted in favor of Old Republic. First American contended that Stewart Title’s breach of the reinsurance agreement differed from Old Republic’s alleged breach in that Stewart Title did not pay under its reservation of rights. First American’s counterclaim alleged that Stewart Title breached the utmost duty of good faith in the following four ways: (1) failing to pay the claim as required under the insurance contract; (2) engaging in delay tactics; (3) using First American’s documents against it in support of its allegations and preemptively filing suit against First American; and (4) accusing First American of making misrepresentations and omissions. While the district court held that the first two claims necessarily could be tied to breach of the reinsurance contract, the latter two claims could not and, consequently, the latter two were dismissed.

Old Republic Nat. Title Ins. Co. v. First American Title Ins. Co., No. 8:15-cv-126-T-30EAJ, 2015 WL 1530611 (USDC M.D. Fla. June 8, 2015)

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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SIXTH CIRCUIT DENIES ADDITIONAL ATTORNEYS’ FEES FOR POST-ARBITRATION CONFIRMATION PROCEEDING, FINDING THEM BEYOND THE SCOPE OF PARTIES’ AGREEMENT

July 6, 2015 by John Pitblado

The Sixth Circuit affirmed the district court’s denial of a motion for attorneys’ fees and enhancement of fees resulting from post-arbitration confirmation proceedings. The issue before the court was whether the agreement between Crossville Medical Oncology and Glenwood Systems permitted the court to award the additional attorneys’ fees.

Crossville Medical Oncology and its single shareholder Dr. Tabor sued Glenwood Systems for breach of contract. The agreement was determined to have an enforceable arbitration clause, and following arbitration, Dr. Tabor was found to have signed the agreement in his individual capacity and to have breached. After an interlocutory appeal regarding Dr. Tabor’s personal consent to arbitration, the district court entered a judgment confirming the arbitration award. Glenwood moved for attorneys’ fees resulting from the post-arbitration litigation proceedings, which the district court denied for lack of authority.

The appellate court affirmed, finding that neither the Federal Arbitration Act nor the parties’ agreement authorized the court to grant attorneys’ fees for post-arbitration confirmation proceedings. The court reasoned that it could only award attorneys’ fees if it was authorized by statute or by the specific language of the parties’ agreement. While the agreement subjected “[a]ny dispute arising out of or in connection with” the agreement to arbitration and provided for attorneys’ fees for the prevailing party, the only jurisdiction given to the courts in the agreement was to “enter [the award] as a judgment.” The court construed the agreement to authorize “an arbitrator to award attorneys’ fees and costs during arbitration,” but merely authorized “the district court to enter the award as a judgment.” The court distinguished the case from others in which parties’ broad agreements contemplated fees for the prevailing party in “any action at law or in equity,” emphasizing that this agreement included attorneys’ fees from arbitration in the “award” to be entered as a judgment by the court, thereby limiting the court’s authority to award any additional attorneys’ fees.

The appellate court similarly rejected a bad-faith argument for additional attorneys’ fees, but remanded the case to the district court on the issue of prejudgment interest, finding the lower court’s short, handwritten opinion devoid of analysis relevant to the appropriateness of that interest. Crossville Med. Oncology, P.C. v. Glenwood Sys., LLC, No. 14-5444 (6th Cir. May 1, 2015).

This post written by Rollie Goss.

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FIFTH CIRCUIT WEIGHS IN ON ARBITRABILITY OF ISSUES THAT COULD HAVE BEEN DECIDED BY THE COURT

July 2, 2015 by Carlton Fields

In the recent unpublished opinion, the United States Court of Appeals for the Fifth Circuit confirmed that if an issue is voluntarily submitted to an arbitrator, then the arbitrator can decide the issue, even if it is one that should have been left to the court. After the arbitrator found for the defendant, Heritage Actions, on the basis that there was no meetings of the minds and therefore the contract was unenforceable and should be rescinded, the plaintiffs, OMG, L.P. and Greg Martin, attempted to have the award vacated in federal district court. The district court agreed with OMG and vacated the award on the basis that “a court was the proper decision-maker as to the contract formation issues in this case, not the arbitrator.” The Fifth Circuit reversed, pointing out that if the parties agree, they may arbitrate issues that are not part of the arbitration agreement. While OMG argued that the issue of the contract’s validity had not been submitted to the arbitrator either by the arbitration contract or by agreement, the Fifth Circuit found that both parties actively put forth arguments during the arbitration on whether there had been a meeting of the minds and whether the contracts should be rescinded. At no time during the arbitration did OMG argue that the arbitrator did not have the authority to decide this issue. The remedy OMG should have sought, said the Fifth Circuit, was to have “refused to arbitrate, leaving a court to decide whether the arbitrator could decide the contract formation issue,” i.e., whether there was a meeting of the minds. The district court’s judgment was reversed and the case remanded with instructions to confirm the arbitration award. OMG, L.P. v. Heritage Actions, Inc., No. 14-10403 (5th Cir. May 8, 2015).

This post written by Barry Weissman.

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EIGHTH CIRCUIT UPHOLDS ARBITRATION AGREEMENT IN ABSENCE OF ACTUAL PROOF OF UNCONSCIONABILITY DUE TO COST

June 30, 2015 by Carlton Fields

The Eighth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Missouri which rejected the contention that an arbitration agreement was unconscionable, and unenforceable under the Federal Arbitration Act, because (1) the prohibitively high costs associated with an individual arbitration proceeding prevented plaintiffs from pursuing their claims; and (2) it included a waiver of punitive damages and attorneys’ fees. In this case, a class of cleaning business franchisees sued a franchisor and related companies for RICO violations. Plaintiffs also contended that some defendants were non-signatories and therefore could not enforce the arbitration agreement. In response, defendants moved to compel individual arbitration citing the arbitration provision language in the respective franchise agreements.

Plaintiffs supported their claims with several figures including average loss per plaintiff, a range of individual filing fees, average daily fees for arbitrators in four cities, and a likely hearing length of three days. Altogether, plaintiffs asserted that their individual arbitration costs would exceed their respective damages. Ultimately, the court found that plaintiffs’ proof was insufficient because (1) the arbitrations would not take place in any of the four cities for which daily fees were provided and (2) plaintiffs did not submit individual affidavits demonstrating their inability to afford arbitration costs. The court emphasized that rather than a hypothetical inability to pay, plaintiffs must provide specific evidence of their individual inability to pay the actual arbitration fees likely to be incurred in order to overcome the federal policy favoring arbitration. The court also rejected plaintiffs’ claim that even if enforceable, the arbitration agreement prohibited non-signatories from compelling arbitration. The court also held that the arbitration agreement language was broad enough to include various non-signatory third parties, and deemed them capable of enforcing the arbitration provision. Torres v. Simpatico, Inc., No. 14-1567 (8th Cir. Mar. 25, 2015).

This post written by Rollie Goss.

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FIFTH CIRCUIT AFFIRMS INTERPRETATION OF TWO AGREEMENTS AND DENIAL OF MOTION TO COMPEL ARBITRATION

June 25, 2015 by Carlton Fields

The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.