Arbitration / Court Decisions

COURTS ARE OBLIGED TO DEFER TO ARBITRATOR’S FACTUAL FINDINGS EVEN WHEN EVALUATING AN AWARD FOR VIOLATION OF PUBLIC POLICY

June 23, 2008 by Carlton Fields

In a published opinion issued on June 16, the Ninth Circuit reversed a district court that had vacated an arbitral award as contrary to public policy. The circumstances leading to the arbitration stemmed from a “no-match” letter sent by the Social Security Administration to the plaintiff, Aramark, indicating that information for 48 of Aramark’s employees did not match the Administration’s database. Suspecting immigration violations, Aramark gave the employees three days to prove they had begun an application for a new Social Security card, and fired 33 of the employees who did not timely comply. The defendant labor union filed a grievance on behalf of the employees, alleging violations of the governing collective bargaining agreement. The arbitrator ruled for the union, and awarded back pay and reinstatement to the employees. Thereafter, Aramark successfully moved in district court to vacate the arbitration award on public policy grounds, arguing that the “no-match” letter put it on constructive notice that it was employing illegal workers, and that the award would force it to violate immigration law. On appeal, however, the Ninth Circuit independently determined that Aramark had not established constructive knowledge of immigration law violations and that, in any event, it was obliged to defer to the arbitrator’s factual findings. It reversed the district court’s judgment and confirmed the award. Aramark Facility Services v. Service Employees International Union, Local 1877, AFL CIO CLC, No. 06-56662 (9th Cir. June 16, 2008).

This post written by Brian Perryman.

COURT REVIEWS ARBITRAL AWARD UNDER BOTH NEW YORK CONVENTION AND FAA RULES

June 19, 2008 by Carlton Fields

In 1990, Anthony LaPine, founder of a California disk drive company called LaPine Technology Corporation (“LTC”), filed an arbitration proceeding against Kyocera, a Japanese corporation, and Prudential accusing them of destroying the value of LTC. The arbitration was stayed pending the resolution of a related arbitration. Shortly after the arbitration resumed in 2007, the arbitration panel dismissed all of LaPine’s claims, concluding that his fraud claims were barred by the statute of limitations, he lacked standing to raise the contract and corporate mismanagement claims, and, as an additional basis for dismissal, that his claims were barred by the doctrines of waiver and estoppel. LaPine brought this action against Kyocera asking the court to vacate the arbitration award.

The Court denied LaPine’s request and confirmed the arbitration award. Having concluded that the arbitration agreement and arbitral award fell under the New York Convention, the Court addressed the heart of the parties’ dispute, namely whether the grounds for review enumerated in Article V of the Convention were exclusive, or whether the award could also be reviewed under the standards set forth in the FAA. The court concluded (in the absence of guidance from the Ninth Circuit) that the appropriate standard of review was under both Article V of the Convention and the FAA. The court analyzed LaPine’s arguments under both sets of rules, but found no grounds to overturn the panel’s award. LaPine v. Kyocera Corp., No. C 07-06132 (USDC N.D. Cal. May 23, 2008).

This post written by Lynn Hawkins.

BANKRUPTCY COURT DISMISSES FRAUD CLAIMS AGAINST ALPHASTAR’S FORMER SHAREHOLDERS, DIRECTORS AND OFFICERS

June 18, 2008 by Carlton Fields

AlphaStar Insurance Group Ltd. (“AlphaStar”) (f/k/a Stirling Cooke Brown Holdings Ltd) was a group of companies which provided, among other services, reinsurance brokerage and intermediary services through companies in London, Bermuda and the United States. The companies collapsed and eventually declared bankruptcy, largely as a result of their involvement in the personal accident reinsurance market. Richard E. O'Connell, the chapter 7 trustee (the “Trustee”), commenced this proceeding against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs. Goldman Sachs essentially controlled AlphaStar prior to its 1997 initial public offering. By 1999, special investigations revealed that the activities of the companies “were run or had been run by or associated with unsavory, dishonest people who had engaged in questionable transactions,” and that the businesses “were rife with fraud; its subsidiaries had made material misrepresentations to counterparties, who were thus entitled to rescind their contractual obligations; most of AlphaStar’s assets were impaired; its businesses were no longer viable; it could not afford to defend against the recent onslaught of litigation claims and it ‘faced a probable loss of staggering proportions.’” Prior management was terminated, but the litigation exposure arising out of their activities matured into a series of lawsuits and arbitrations with disastrous results. The thrust of the allegations in the Trustee's Amended Complaint was that the defendants, in light of these problems, used fraudulent and other improper means to continue AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. Another words, the Amended Complaint contended that the defendants should have pulled the plug instead of attempting to clean up the companies. The defendants moved to dismiss the Amended Complaint with prejudice.

The court concluded that the efforts to shift the losses of the companies to third parties was unsupported by any evidence, and that the claims were based upon information that allegedly was concealed by the defendants, but which the public knew. “In the end, his conscious misbehavior claim is impermissibly based on 20/20 hindsight, as he candidly admitted.” Motions to dismiss were granted, except that the motions to dismiss the avoidance claims were denied, and the motion to dismiss the contract claim was granted, but with leave to replead. In dismissing the trustee’s fraud based claims, the Court concluded that the Amended Complaint did not allege facts that gave rise to a strong inference of fraudulent intent, and that the motives alleged by the Trustee were insufficient as a matter of law, and failed to identify specific information that would support the inference of conscious misbehavior. The Court also dismissed the breach of fiduciary duty cause of action concluding that, under Bermuda law, no fiduciary duty existed. In re AlphaStar Ins. Group Ltd., No. 03-17903 (Bankr. S.D.N.Y., Feb. 19, 2008).

This post written by Lynn Hawkins.

COURT OF APPEAL DECLINES TO ADDRESS WHETHER MANIFEST DISREGARD OF LAW DOCTRINE SURVIVES HALL STREET V. MATTEL

June 16, 2008 by Carlton Fields

In Rogers v. KBR Technical Services Inc., No. 08-20036 (5th Cir. June 9, 2008), the Fifth Circuit was presented with the applicability of the manifest disregard of law standard for vacating arbitration awards after the Supreme Court’s decision of Hall Street Associates v. Mattel (see March 28, 2008 post on Mattel, and the Special Focus posting of April 28, 2008 relating to the future of the manifest disregard of law doctrine after the Mattel decision). The court declined to rule on the issue, instead confirming the award on other grounds. This pro se case involved a claim for benefits by Rogers, an employee of Halliburton, arising out of his provision of services in Afghanistan. His lawsuit was stayed pending arbitration pursuant to a process contained in his employment agreement.

After an award was issued in his favor in the amount of only $252.84, Rogers moved to vacate the award, Halliburton moved to confirm, and after the award was confirmed, Rogers filed a FRCP 59 post-trial motion to alter or amend the final judgment. Some of the bases for the Rule 59 motion alleged that the arbitrator had manifestly disregarded the law, raising the issue of whether the manifest disregard of law doctrine survived Mattel. The court confirmed the arbitration award, finding that the arbitrator’s decision could be reasonably inferred from the provisions of the employment agreement. The court held that “because we affirm the district court and hold that the arbitration award is confirmed, there is no need in the instant case to determine whether those non-statutory grounds for vacatur of an arbitration award remain good law after Mattel.” The court essentially rejected the substance of the manifest disregard arguments on the basis that the actions of the arbitrator were rationally based upon the specific provisions of the employment agreement and the rules applicable to the arbitration.

Since the briefs are not available on PACER or Westlaw in this unreported, pro se case, it is not possible to determine the extent to which the continuing viability of the manifest disregard of law doctrine was briefed. The Mattel decision was issued after the Appellant filed his initial brief, but prior to the opposition and reply briefs being filed. It is unlikely that the Appellee would have raised the issue, and if the issue was raised for the first time in Appellant’s reply brief, the court likely would have permitted a supplemental response from the Appellee. According to the docket sheet, no supplemental briefing was submitted, and the case was decided less than four months after the briefing notice was issued, without oral argument.

Although not addressing the issue of the impact of Mattel on the manifest disregard of law doctrine, this decision does indicate that Mattel brings into question the continued viability of the manifest disregard of law doctrine. Expect further developments in this area.

This post written by Rollie Goss.

ARBITRATION AWARD CONFIRMED WHEN PETITION TO VACATE DENIED

June 12, 2008 by Carlton Fields

In Sanluis Developments, LLC v. CCP Sanluis, LLC, Case No. 06-11531 (USDC S.D.N.Y. Je. 3, 2008), the court held that under the Federal Arbitration Act, when a party moves to dismiss a motion to vacate an arbitration award, the court may, sua sponte, treat the motion to dismiss as a motion to confirm the award, and deny vacation and instead confirm the award.

This post written by Rollie Goss.