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Arbitration / Court Decisions

Fifth Circuit Suggests Question of Class Arbitrability Was for Arbitrator Not Court

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The Fifth Circuit has suggested that the question of class arbitrability was for the arbitrator, not the court, based on the language of the arbitration clause at issue. The court ultimately concluded, however, that it did not need to reach that issue because the appellant challenging the arbitrator’s conclusion that class arbitration was available forfeited the argument.

Roy Conrad initiated arbitration against his employer Sun Coast Resources Inc. regarding purported violations of the Fair Labor Standards Act. The arbitrator concluded that the parties’ agreement “clearly provide[d] for collective actions.” Sun Coast moved to vacate that determination, but the district court rejected Sun Coast’s arguments. The Fifth Circuit affirmed.

The court explained that although there was a presumption that class arbitrability is a question for the court, “the arbitration agreement … appear[ed] to assign the question of class arbitrability to the arbitrator rather than to the court.” The arbitration clause covered “any dispute concerning the arbitrability of any such controversy or claim” and incorporated the American Arbitration Association rules for arbitration. Those provisions “strongly indicate[d] that the parties bargained for the arbitrator to decide class arbitrability.”

The Fifth Circuit nevertheless found it unnecessary to decide that issue. Sun Coast had forfeited its argument that the arbitrator invaded the province of the court by failing to raise that argument before the arbitrator and then failing to properly raise it before the district court.

In fact, Sun Coast had “affirmatively agreed that the arbitrator should decide whether collective proceedings were appropriate.”

The court also refused to vacate the arbitrator’s award on the merits. It concluded that the arbitrator interpreted the agreement and focused on the arbitration clause’s text, which was sufficient regardless of whether the arbitrator’s decision was in fact correct.

Sun Coast Resources, Inc. v. Conrad, No. 19-20058 (5th Cir. Apr. 16, 2020).

SDNY Concludes Arbitrators Did Not Exceed Authority in Interpreting Product Pollution Liability Exception to Policy’s Pollution Exclusion

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Petitioner sought to vacate an arbitration award, arguing that the arbitration panel exceeded its authority in interpreting the terms of an insurance policy when it determined that certain claims fell within the policy’s product pollution liability exception to the pollution exclusion. The court found that the petitioner did not demonstrate that the panel manifestly disregarded the terms of the policy: first, the arbitration agreement specifically instructed the panel to interpret the terms of the policy and to determine whether and to what extent the respondent’s losses were excluded by the pollution exclusion or restored by the production pollution liability exception; second, the text of the policy served as the basis for the award, reflecting that the panel did not disregard its terms; and third, the panel explained that the product pollution liability exception only granted coverage for pollution that satisfies the exception’s three requirements, and the court could not review the merits of the panel’s contract interpretation. Accordingly, the award was confirmed.

HDI Global SE v. Phillips 66 Co., No. 1:20-cv-00631 (S.D.N.Y. May 12, 2020).

Pennsylvania Court Finds Respondent’s “Different Reading” of Arbitration Award Need Not Be Raised in a Timely Motion to Vacate, Modify, or Correct

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Middletown Water Joint Venture LLC sought confirmation of an arbitration award finding it had a contractual right to charge the borough of Middletown for certain types of work and enjoining the borough from taking any action to interfere with Middletown Water’s efforts to recover those charges. For its part, the borough did not dispute the award – nor could it, as it did not move to vacate, modify, or correct it within the 30-day limitations period under Pennsylvania law. Rather, it argued that Middletown Water was incorrectly interpreting the award, which, according to the borough, did not require that it forego contract terms allowing the borough to review and approve all imposed charges before Middletown Water can recover them. The court agreed with the borough, finding the award did not address the process by which Middletown Water may recover any charges it imposed under the contract. The court also rejected the argument that the borough’s defense (i.e., its different reading of the award) was the sort that had to be raised in a timely motion to vacate, modify, or correct. As such, the court denied Middletown Water’s petition to enforce the award’s injunction measures, finding any ultimate recovery depended on the borough’s right of approval, which the court found was expressly preserved in the award.

Middletown Water Joint Venture LLC v. Borough of Middletown, No. 1:19-cv-01402 (M.D. Pa. Apr. 13, 2020).

New York Appellate Court Finds Bankruptcy Trustee Not Bound by Arbitration Clause in Bankrupt Company’s Engagement Agreement With Accounting Firm

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A New York appellate court has held that a company’s bankruptcy trustee was not bound by an arbitration agreement entered into by the company and an accounting firm.

In this action, Millennium Lab Holdings Inc. and Millennium Lab Holdings II LLC (Millennium Holdings LLC), pursuant to an engagement letter, retained petitioner KPMG LLP to audit their financial statements for certain time periods. The engagement letter contained a clause requiring the arbitration of “[a]ny dispute or claim arising out of or relating to this Engagement Letter or the services provided hereunder.”

In 2014, Millennium Holdings LLC and Millennium Laboratories LLC (collectively, Millennium) entered into a $1,825,000 credit agreement with various banks. On November 10, 2015, Millennium Holdings LLC and its affiliates filed for Chapter 11 bankruptcy. The bankruptcy court confirmed Millennium’s reorganization plan, which resulted in the creation of the Millennium Lender Claim Trust. Respondent Kirschner, as the bankruptcy trustee, commenced a California action against KPMG asserting claims for negligent and intentional misrepresentation.

KPMG brought an article 75 special proceeding to stay the California action and to compel arbitration. The Supreme Court of New York, New York County, granted the petition “to the extent of compelling arbitration on the issue of arbitrability and staying the California action for 30 days.” The trustee appealed.

The appellate court stated that the trial court should have decided the threshold issue of whether the arbitration provision was binding on the trustee, who did not sign the engagement agreement, but in the interest of judicial economy, the appellate court decided this issue.

Reversing the order of the Supreme Court, the appellate court found that KPMG did not meet its “heavy burden” under the direct benefits theory, as the benefits that the investors whose interests the trustee represents derived from the engagement letters between KPMG and Millennium were “merely indirect.” This was so because, in the California action, the trustee did not invoke the engagement agreement, but asserted solely common law claims, and because Millennium and KPMG did not contemplate that the investors represented by the respondent would benefit from the engagement letter.

Moreover, recognizing that for a non-signatory to be compelled to arbitrate, it must have knowingly exploited the agreement containing the arbitration clause, the appellate court found that there was no indication in the record that the investors had actual knowledge of the engagement letters between KPMG and Millennium.

Accordingly, the appellate court unanimously reversed the order of the Supreme Court, on the law, denied the petition and dismissed the proceeding.

In re KPMG LLP v. Kirschner, No. 11400N, Index No. 655664/18 (N.Y. App. Div. Apr. 16, 2020).

Court Affirms Ruling That Insured Cannot Recover From Captive Reinsurer or Affiliated Insurance Brokerage

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The plaintiffs sued Public Storage seeking insurance coverage after Public Storage allegedly disposed of personal belongings the plaintiffs had in a rented storage unit. The belongings were insured under a policy produced by PSCC Inc., an insurance brokerage affiliated with Public Storage. The coverage was also reinsured by a captive reinsurer affiliated with Public Storage – PS Insurance Company-Hawaii Ltd. The cedent-insurer was sued as well but was ultimately dismissed, after which Public Storage moved for summary judgment. The lower court granted Public Storage’s motion, finding that it could not be liable to the plaintiffs under the policy as neither it nor its affiliates were parties to the contract. The plaintiffs appealed, but the California appellate court affirmed.

Although PSCC is a Public Storage affiliate, and was identified in the insurance policy, the court agreed that it was only identified as a producer, not a principal, and thus could not be contractually liable to the plaintiffs under the policy. And while PS Insurance Co. is also affiliated with Public Storage, the court held that the reinsurance agreement between the cedent-insurer and PS Insurance had no effect on the contract between the cedent and its insureds – the plaintiffs. The court also rejected the plaintiffs’ “alter ego liability” theory, finding no evidence that Public Storage and/or its affiliates were alter egos of the cedent-insurer. Indeed, the court ruled, it is an “essential feature” of reinsurance that it does not alter the terms or conditions of the insurance contract between the cedent and its insured. As such, the lower court order was affirmed.

Cabral v. Public Storage, No. B294798 (Cal. Ct. App. Apr. 10, 2020).