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Arbitration / Court Decisions

COURT REFUSES TO COMPEL ARBITRATION OVER “COLLATERAL” MATTERS IN THE INTERESTS OF JUSTICE AND JUDICIAL ECONOMY

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In a shareholder dispute over the alleged improper termination of a company president, a court recently compelled arbitration of issues central to the case, but retained jurisdiction over a collateral issue related to ownership of corporate shares. The underlying shareholder agreement provided that all parties agreed to arbitrate “any controversy relating to [the] Agreement.” The court held that “all issues and claims raised in the plaintiffs’ complaint, relating to defendant’s performance of his duties as president and his alleged breaches of duty to plaintiffs” related to the shareholder agreement and therefore should be referred to arbitration. With respect to an ancillary dispute as to the status of the company shares of a former shareholder who left the United States, the court decided to retain jurisdiction in “the interests of justice and judicial economy.” The court explained that matters relating to the ownership dispute were collateral to the termination dispute, and that at least one pending issue would continue to involve the court “even were the question of share ownership referred to arbitration.” Boz Export & Import, Inc. v. Karakus, Case No. 8738/11 (N.Y. Sup. Ct. Sept. 15, 2011).

This post written by Michael Wolgin.

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FIFTH CIRCUIT HOLDS CLASS ARBITRATION NOT EQUIVALENT TO CLASS ACTION FOR PURPOSES OF CAFA

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Homeland Insurance Company recently appealed to the Fifth Circuit Court of Appeals a district court’s remand of a class action to Louisiana state court. The action arose when a medical doctor brought a putative class action in Louisiana state court on behalf of Louisiana medical providers against a number of Louisiana and non-Louisiana PPO providers. One defendant agreed to settle, but before the settlement was approved, another defendant removed to federal court under CAFA. The settling defendant moved for (and was granted) remand to state court based on the local controversy exception to the Class Action Fairness Act. Subsequently, another of the defendants (Homeland Insurance) filed the instant motion to appeal the remand.

The Court of Appeals affirmed the remand order under the local controversy exception, finding that (a) at least two-thirds of the class (business entities incorporated in the state) are Louisiana citizens; (b) at least one of the defendants was a “local” defendant; (c) the principal injuries occurred in Louisiana, and (d) no other class action has been filed alleging similar facts against any of the defendants in the prior three years. Two key facts are important to consider. First, the Court of Appeals noted that even inactive corporations are still citizens of the state in which they were incorporated. Second, class arbitration does not count as a class action for purposes of the CAFA local controversy exception. Williams v. Homeland Ins. Co. of New York, No. 11-30646 (5th Cir. Sept. 19, 2011).

This post written by John Black.

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CALIFORNIA COURT OF APPEALS FINDS ARBITRATION PROVISION UNCONSCIONABLE, AVOIDS APPLYING CONCEPCION

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A purchaser filed a putative state class action against a car dealer alleging state law violations related to the sale of automobiles. The car dealer filed a motion to compel arbitration pursuant to a provision in the sales contract, which also contained a class action waiver. The trial court determined that the class action waiver was unenforceable, and, based upon this denial, a “poison pill” clause in the contract went into effect making the entire arbitration provision unenforceable. The trial court’s invalidation of the class arbitration waiver provision arguably could not stand in light of the US Supreme Court’s recent decision in AT&T Mobility LL v. Concepcion, 131 S.Ct. 1740 (2011). However, the Court of Appeals affirmed based upon another ground, that the arbitration provision itself was a product of adhesion and unequal bargaining power and hence unconscionable. The court found that Concepcion preserved the ability of state courts to invalidate entire arbitration provisions on the basis of unconscionability. However, the California “Discover Bank rule” disapproved by the Supreme Court in Concepcion was premised on a conclusion that the class arbitration waiver was the product of adhesion, and the Supreme Court found that justification insufficient to overcome the objectives of the Federal Arbitration Act. The Sanchez court’s invalidation of the entire arbitration provision on the same ground may raise a question as to whether this decision is consistent with the principles articulated by the Supreme Court in Concepcion. Sanchez v. Valencia Holding Co., LLC, No. BC433634 (Cal. Ct. App. Oct. 24, 2011). The Court of Appeals granted a petition for rehearing and issued a modified opinion affirming the lower court’s decision. In the new opinion, the Court of Appeals emphasized that unconscionability itself survived the Concepcion ruling, and that here, the unconscionability permeated the entire agreement with numerous unconscionable clauses. Again, the Court of Appeals took pains to limit the scope of the Supreme Court’s Concepcion opinion. Sanchez v. Valencia Holding Co., LLC, B228027 (Cal. Ct. App. Nov. 23, 2011).

This post written by John Black.

CLAIM BY CEDENT’S POLICYHOLDER AGAINST REINSURER DISMISSED

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A court has granted a motion for judgment on the pleadings, under the theory that an underlying policyholder lacks a cause of action against its insurer’s reinsurer. National Indemnity Company (“NICO”) was brought in as a third party to insurance coverage litigation between Canal Insurance Company, its insured, Montello, Inc., and various other insurers in a declaratory coverage action pertaining to underlying asbestos litigation arising from Montello’s operations. Montello’s claim against NICO was unique, as it was the only reinsurer brought in to the action, and allegedly had in effect a reinsurance agreement with one of the defendants that purportedly had retroactive effect. NICO moved for judgment on the pleadings, arguing that an underlying policyholder has no direct cause of action against its insurer’s reinsurer. The court granted NICO’s motion, finding that the reinsurance agreement did not contain a cut-through provision enabling a direct action, and that neither of the exceptions permitting direct action were applicable. Canal Insurance Co. v. Montello, Inc., No. 10-CV-411 (USDC N.D. Okla. Sept. 26, 2011).

This post written by John Pitblado.

ARBITRATION ROUND-UP

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Manifest Disregard:

Zimmerman Ag and Cattle Co. v. Agro National, LLC, No. CV-11-29 (USDC D. Mont. Nov. 7, 2011) (denying motion to vacate, finding “mere error of law” insufficient to satisfy manifest disregard standard).

Rite Aid New Jersey, Inc. v. United Food Commercial Workers Union, Local 1360, No. 10-3558 (3d Cir. Oct. 26, 2011) (affirming denial of motion to vacate award, no manifest disregard).

New York City Dist. Council of Carpenters Pension Fund v. Star Intercom & Construction, Inc., No. 11 Civ. 03015 (USDC S.D.N.Y. Oct. 27, 2011) (granting motion to confirm arbitrator decision of default judgment against respondent, where arbitrator did not “dispense his own brand of justice,” no basis for vacatur).

Activant Solutions, Inc. v. Notoco Industries, LLC, No. C-11-02436 (USDC N.D. Cal. Oct. 26, 2011) (granting petition to confirm, no manifest disregard for arbitrator’s refusal to modify award).

Conflict of Laws:

Southern Pioneer Life Insurance Co. v. Thomas, No. 11-426 (Ark. Nov. 17, 2011) (affirming denial of motion to compel arbitration, holding FAA preempted by McCarran-Ferguson Act vis-à-vis Arkansas statute precluding arbitration of claims under insurance contracts).

Evident Partiality:

In re Wal-Mart Wage and Hour Employment Practices Litigation, No. 2:06-CV-00225-PMP-PAL (USDC D. Nev. Oct. 11, 2011) (granting motion to confirm, finding no “evident partiality” where arbitrator raised ethical issues pertaining to respondent’s counsel).

Patrizzi & Co. Auctioneers SA v. SDG Corp., No. 11-C-3589 (USDC N.D. Ill. Oct. 25, 2011) (granting motion to confirm, no “evident partiality” in allowing one party to submit evidence not on pretrial list and not the other party).

Exceeding Arbitrator’s Authority:

Verve Communications Pvt Ltd. v. Software Int’l, Inc., No. 11-1280 (USDC D.N.J. Nov. 9, 2011) (denying motion to vacate, arbitrator did not exceed authority by closing discovery period over objection and making award).

Choice Hotels Int’l v. Savannah Shakti Corp., No. DKC-11-0438 (USDC D. Md. Oct. 25, 2011) (granting motion for default, arbitrator’s default award on contract claims did not exceed scope of submission).

Class Arbitration:

Southern Communications Services, Inc. v. Thomas, 1:10-CV-2975-AT (USDC N.D. Ga. Nov. 3, 2011) (denying motion to vacate award holding class arbitration allowable, and granting class certification).

Scope of Arbitration:

Shah v. Santander Consumer USA, Inc. d/b/a Drive Financial Services, LP, No. 3:11-CV-00096 (USDC D. Conn. Nov. 16, 2011) (motion to compel arbitration granted, finding statutory claims “collateral matters” that implicate rights created under the contract).

Stay Pending Appeal / Appellate Jurisdiction:

Weingarten Realty Investors v. Miller, No. 11-20676 (5th Cir. Nov. 1, 2011) (affirming district court ruling denying stay of proceedings during pendency of appeal of decision denying motion to compel arbitration).

TransAmerica Life Insurance Co. v. Rapid Settlements, Ltd., No. 01-11-00240-CV (Tex. Ct. App. Nov. 10, 2011) (dismissing appeal for lack of jurisdiction, trial court order regarding offset to previously entered judgment non-appealable).

This post written by John Pitblado.