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Arbitration / Court Decisions

S.D.N.Y. Affirms Arbitration Award Over Challenge to Impartiality of Arbitrator

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Schuyler Line Navigation Co., LLC (“SLNC”) argued, in part, that the arbitrator’s partiality should be inferred from his previous representation of KPI Bridge Oil, Inc. (“KPI”) and its affiliates, alleged hope for future business from KPI, and the extent of his relationship with KPI and other business relationships. The District Court rejected these arguments, finding that SLNC fell short of demonstrating evidence of partiality or corruption.

SLNC also raised an issue with the arbitrator’s “belated disclosure and the lack of his transparency regarding his prior representation of KPI and its affiliate.” The Second Circuit “has repeatedly cautioned that it is not quick to set aside the results of an arbitration because of an arbitrator’s alleged failure to disclose information. Mere failure to disclose, by itself, is an insufficient ground for vacatur. Rather, the critical question is whether the facts that were not disclosed suggest a material conflict of interest.” The District Court, while noting that the arbitrator’s “behavior may not have been exemplary,” found that the belated disclosure did not give rise to an inference of evident partiality sufficient to vacate the arbitration award.

Schuyler Line Navigation Co., LLC v. KPI Bridge Oil, Inc., 1:20-cv-02772 (S.D.N.Y. Sept. 2, 2020)

Court Rejects Claim Based on Interpretation of Clause in Private Purchase and Sale Agreement of Shares and Other Matters

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The United States Bankruptcy Court for the District of Puerto Rico recently rejected a defendant’s arguments that a clause in a Private Purchase and Sale Agreement of Shares and Other Matters was invalid under Supreme Court case law but nevertheless agreed with the defendant’s interpretation of the clause and therefore dismissed the claim against it.

National Promoters and Services, Inc. (“NAPRO”) entered into a Private Purchase and Sale Agreement of Shares and Other Matters (“the Agreement”) with Aseguradora Ancon, S.A. (“Ancon”). Pursuant to the Agreement, Ancon bought certain shares of National Life Insurance Company (“NALIC”) from NAPRO for approximately $2.5 million.

A clause in the agreement (“Clause Four”) provided in part that $300,000 of the purchase price would be deposited in an escrow account “which shall be reserved for nine (9) months in order to guarantee those obligations not reflected in the financial statements as of September 30, 2011, caused to National Life Insurance Company (hereinafter NALIC) by the officers and/or directors of said entity.” Clause Four further provided: “After such nine (9) month period has passed, to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall be returned to NAPRO.”

Ancon did not fund the escrow fund “because it determined the action unnecessary considering their financial strength and also found that there were claims, risks and unknown losses caused by NALIC that surpassed $300,000.” NAPRO subsequently sued Ancon. Ancon defended in part by claiming that Clause Four was not valid under the Supreme Court’s decision in Bangor Punta Operations, Inc. v. Bangor & A.R. Co., 417 U.S. 703 (1974). Bangor Punta was a shareholder derivative action in which the Supreme Court “held that a shareholder may not complain of acts of corporate mismanagement if it acquired its shares from those that participated in the alleged wrongful transactions.” That holding was based on equitable considerations and the fact that the buying party was trying “to recoup a large part of the price they agreed to pay for their shares” and “reap a profit from wrongs done to others.”

The United States Bankruptcy Court for the District of Puerto Rico rejected Ancon’s argument and held that Bangor Punta was inapposite. “Unlike Bangor Punta, in the instant adversary proceeding, Ancon is the defendant to a recovery of monies action based upon a private stock purchase agreement regarding the sale of NALIC stock by NAPRO.” The action was based on an alleged breach of Clause Four and “there [was] no windfall for Ancon for damages sustained by other premised on a shareholder derivative action lawsuit for corporate mismanagement . . . .”

The court also concluded that Ancon’s reliance on the Supreme Court of Puerto Rico’s decision in Multinational Life Insurance Company v. Carlos Benitez Rivera; Edgardo Van Rhyn Soler, et als., 193 D.P.R. 67 (2015), which applied the Supreme Court’s decision in Bangor Punta, was inapplicable because that case was also based on a different factual scenario.

Because Clause Four was not invalid under Bangor Punta and its progeny, the court turned to interpreting that clause. Applying Puerto Rican law regarding the interpretation of contracts. the court concluded: “The reference in [Clause Four] ‘. . . to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall not be returned to NAPRO’ refers to the balance of the obligations being consumed, not to the actual payment of the obligations which could be anytime in the future depending on the nature and terms of the obligation.” As a result, the court denied NAPRO’s “request for the defendant to pay the retained amount of $300,000 and orders the dismissal of the complaint.”

In re National Promoters and Services Inc., No. 13-00049-ESL (D.P.R. July 2, 2020)

Georgia Court of Appeals Reverses Confirmation of Arbitration Award Finding Arbitrator Ignored Contractual Language

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Interstate National Dealer Services, Inc. (“INDS”) challenged an arbitration award pursuant to OCGA § 9-9-13(b)(3), alleging the arbitrators overstepped their authority, and (5) the arbitrator’s manifest disregard of the law. Here, the arbitrator’s award found that respondent drafted the insurance agreements at issue with explicit authorization to recover certain fees, namely, “warranty claims” and “fees associated with contracts written.” INDS argued that the award ignored the fact the contracts expressly required the parties to utilize pricing structures set out by INDS in the Rate Card. The Court concluded that by rejecting the Rate Card, the arbitrator manifestly disregarded the law. The trial court’s ruling affirming the arbitration award was reversed on appeal.

Adventure Motorsports Reinsurance, Ltd. v. Interstate National Dealer Services Inc., A20A0036 & A20A0037 (Ga. Ct. App. June 25, 2020)

Supreme Court of Mississippi Enforces Arbitration Agreement

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The Supreme Court of Mississippi has reversed and remanded a trial court’s refusal to enforce an arbitration agreement after rejecting the plaintiff’s arguments against arbitration. The Court also instructed the trial court to try to determine which arbitration agreement applied and, if that could not be determined, to look to the FAA to determine the specific terms of the arbitration.

Bettye Turner invested approximately $2 million with David Carrick, an investment broker employed by Morgan Stanley Smith Barney. Carrick subsequently moved to Stern, Agee & Leech, Inc. To facilitate the transfer of Turner’s funds to the new brokerage, Turner signed an account application. That referenced a client account agreement, which the account application stated (in bold, capital letters) “contained in numbered paragraph 22, a pre-dispute arbitration clause requiring all disputes under this agreement to be settled by binding arbitration.” Carrick subsequently left Stern, Agee & Leech, Inc. and joined Stifle, Nicolaus & Company, Inc. (“Stifel”). Turner (through her daughters) subsequently sued Stifel for mismanagement in Mississippi state court. Stifel moved to compel arbitration. The trial court denied that motion.

On appeal, the Supreme Court of Mississippi reversed and remanded. Contrary to the trial court’s conclusion that there was “no contract, [and] thus no agreement to arbitrate” because the a agreement was “‘confusing and conflicting.'” The Supreme Court concluded that the “parties entered into a valid and enforceable arbitration agreement in the account application.” The account agreement itself, the Court held, was “sufficient to indicate the unambiguous intent of the parties to arbitrate.” The Court also rejected Turner’s argument that Stifel could not enforce the agreement because it was not a party to it. Turner alleged, the Court explained, that Stifel was a successor in interest to Stern, Agee & Leech, Inc., and Stifel could therefore invoke arbitration. Finally, the Court also rejected Turner’s argument that the provision was invalid because the account application referred to the arbitration clause as being in paragraph 22 of the account agreement, even though the arbitration clause was in paragraph 19 of one of the two account agreements in existence at that time. The Court remanded the case, however, for a determination regarding which of the two arbitration clauses contained in the two account agreements applied and, if that could not be determined, to apply the FAA to determine the specifics of arbitration.

David Chadwick Carrick et al. v. Bettye M. Turner et al., No. 2019-CA-00617-SCT (Miss. July 30, 2020)

Georgia Supreme Court Finds Mandatory Arbitration Clause in Law Firm Engagement Agreement Is Neither Unconscionable nor Void as Against State Public Policy

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The plaintiff sued its former lawyer and law firm for legal malpractice. The defendants moved to dismiss and compel arbitration based on a mandatory arbitration clause in the parties’ engagement agreement. The trial court denied the motion, finding the arbitration clause was unconscionable, and thus unenforceable, having been entered into in violation of the Georgia Rules of Professional Conduct (GRPC). The appellate court reversed, finding the clause was neither void as against public policy nor unconscionable. Plaintiff appealed to the Supreme Court of Georgia, which granted review of two questions: (1) whether the GRPC requires an attorney to obtain the informed consent of his/her client before including a clause mandating arbitration of legal malpractice claims in the parties’ engagement agreement; and if so, (2) whether failing to obtain that consent renders such a clause unenforceable under Georgia law.

Substantively addressing the second question only, the Court affirmed the decision of the appellate court, finding the first question need not be answered. Specifically, the Court held, even assuming the failure to obtain a prospective client’s informed consent does violate the GRPC, the arbitration clause at issue here would still not be unenforceable. The Court rejected the argument that clauses of this kind violate state public policy, noting that Georgia has a clear public policy in favor of arbitration, and that “[t]here is nothing about attorney-client contracts in general that takes them outside this policy and makes mandatory arbitration of disputes arising under them illegal.” The Court also found Georgia does not have a categorical policy against mandating arbitration of legal malpractice claims. Rather, and contrary to the plaintiff’s argument, the Court held that a contract is void as against public policy, and thus unenforceable, where the agreement itself effectuates illegality, not because the process of entering the contract was allegedly improper. Thus, because the arbitration clause at issue would still be lawful even if the defendants had complied with the GRPC, the Court found the clause is not void as against public policy. In addition, based on the limited record before it, the Court found no basis to conclude the arbitration clause at issue is either procedurally or substantively unconscionable.

Innovative Images, LLC v. James Darren Summerville, et al., Case No. S19G1026 (Ga. Sept. 8, 2020)