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Week's Best Posts

SIXTH CIRCUIT FINDS IT HAS NO JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION AND ENJOINING STATE COURT PROCEEDINGS

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The Sixth Circuit has dismissed the appeal of an order granting a motion to compel arbitration and to enjoin certain state court proceedings, finding the order was not appealable because the district court stayed the matter pending arbitration rather than dismissing it.

The case began in state court where the administratrix of an estate brought various claims against a nursing home where the decedent had resided. The nursing home moved in federal court to compel arbitration and enjoin the administratrix from pursuing her claims in state court, which the district court granted.

The Sixth Circuit’s opinion hinged on the district court’s decision to stay the case pursuant to 9 U.S.C. § 3 rather than to dismiss it. The Sixth Circuit noted that, under 9 U.S.C. § 16(b)(1), such an order is not appealable except as provided for in 28 U.S.C. § 1292(b), which allows interlocutory orders to be appealed only if the district court states in writing that the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” As the district court made no such finding, the order was not appealable. Similarly, the Sixth Circuit found that it had no jurisdiction to review the district court’s order enjoining the state court proceeding, which was entered pursuant to the court’s power to direct arbitration provided by 9 U.S.C. § 4, as 9 U.S.C. § 16(b)(2) specifically prohibits appeals of such an interlocutory order.

Brandenburg Health Facilities v. Mattingly, Case No. 16-6161 (6th Cir. Feb. 24, 2017)

This post written by Jason Brost.

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ARBITRAL AWARD SETTLING BUYOUT PRICE IN DIAMOND BUSINESS DISPUTE AFFIRMED OVER ALLEGATIONS OF ARBITRATOR PARTIALITY

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The arbitration award in a dispute between former joint venture partners in a series of international diamond businesses has been confirmed by the Southern District of New York. The decision resolved motions by Julius Klein Diamonds, LLC, related entities, and several members of the Klein family (the “Kleins”) attempting to vacate the arbitration award ordering them to pay a buyout price of $179 million to LGC USA Holdings. The bulk of the Kleins’ substantive arguments challenging the award alleged bias on the part of the third neutral arbitrator selected by the two party-appointed arbitrators. At the outset of the arbitration, the arbitrator at issue disclosed professional relationships with LGC’s owner as well as the arbitrators, but failed to disclose the extent of those relationships or his pending indictment and later conviction on tax fraud charges.

First, applying the standard set forth by the Federal Arbitration Act and applicable case law, the court rejected the Kleins’ substantive challenges to the arbitral award. While the court noted that third arbitrator could have been more forthcoming concerning the scope of his business relationships with the other arbitrators and LGC’s owner, the court found his initial disclosure was sufficient to put the Kleins on inquiry notice. Thus, the court found that their failure to investigate or object until after an unfavorable award waived any such objection. The court also found insufficient admissible evidence to substantiate the assertion that the undisclosed relationship impacted his partiality in any way. Additionally, the court concluded the arbitrator’s failure to disclose his indictment and subsequent conviction for tax fraud issues did not warrant vacatur because the conviction was unrelated to and did not affect the outcome of the arbitration.

The court also rejected the Kleins’ additional substantive challenges that the arbitrators acted with manifest disregard for the law or exceeded their powers in issuing the award. Noting the high degree of deference afforded arbitration awards, the court found the particular arbitral agreement at issue to be broad, covering “[a]ny controversy or claim arising out of or relating to” the agreements. Thus, the arbitrators did not err by ordering a full buyout of the joint ventures at issue. Nor did the arbitrators err by finding the Kleins joint and severally liable with their associated entities, because the family members were personal signatories to the agreement, agreed to allow the arbitrators decide all disputes, and actively and voluntarily participated in the arbitral process.

LGC Holdings, Inc. v. Julius Klein Diamonds, LLC, Case No. 16-5352 (USDC S.D.N.Y. Feb. 28, 2017).

This post written by Thaddeus Ewald .
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NINTH CIRCUIT REAFFIRMS ISKANIAN RULE, REJECTS WAIVER OF REPRESENTATIVE ACTION UNDER PAGA

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Defendants appealed an order from a California federal district court that denied their motion to compel individual arbitration of a former employee’s representative claim under California’s Private Attorney General Act (PAGA). On appeal, the defendants argued that the plaintiff’s arbitration agreement, wherein she agreed to arbitrate all disputes regarding her employment on an individual basis, applied to her PAGA claim as well. The Ninth Circuit affirmed the district court’s order denying defendants’ motion to compel arbitration. The panel reaffirmed the Iskanian rule, which holds that under California law, an employment agreement that compels the waiver of representative claims under the PAGA, is contrary to public policy and therefore unenforceable. Hernandez v. DMSI Staffing, LLC, Case No. 15-15366 (9th Cir. Feb. 16, 2017).

This post written by Gail Jankowski.

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FLORIDA DEPARTMENT OF REVENUE ISSUES ADVISEMENT DETERMINING THAT A REINSURER AND ITS CEDENTS DID NOT HAVE NEXUS IN FLORIDA FOR TAX PURPOSES

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On January 13, 2017, the Florida Department of Revenue issued a Technical Assistance Advisement regarding whether a reinsurer had nexus with the state of Florida that would require it to file a corporate income tax return and whether the Florida activities of the reinsurer’s ceding companies made Florida the location of the reinsurer’s and cedents’ regional home office. As to both questions, the DOR answered in the negative.

First, the DOR concluded that the reinsurer did not have nexus with the state because the reinsurer was not an approved reinsurer registered with the Florida Office of Insurance Regulation, and the reinsurer did not reinsure policies of insurers that were domiciled or commercially domiciled in Florida. Next, the DOR found that the ceding companies did not have a regional home office in Florida because – even though the ceding companies performed in Florida many activities traditionally carried out in a regional home office, such as selling insurance or approving or rejecting coverage, Florida was not the domicile or nerve center of the ceding companies.

Recognizing the term “regional home office” to have no definition, the DOR looked to the Department’s previous definition of the residence of a corporation as (1) a corporation’s domicile, or (2) with respect to diversity jurisdiction, “as the nerve center of the corporation”. The DOR then found that this standard was not met. The ceding companies’ “activities are not performed entirely for three states, or two states and one or more foreign countries … less than 5% of the ceding insurer’s underwriters are located in Florida … all national advertising [ ] is handled outside Florida … [and] the Florida office location only performs activities authorized by the home office.” In reaching this conclusion, the DOR further recognized as important the strict construction of taxing statutes in favor of the taxpayer. Florida Dept. of Revenue Technical Assistance Advisement – 17C1-001 (Jan. 13, 2017).

This post written by Brooke L. French.

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BANKRUPTCY COURT HOLDS BERMUDA INSURERS VIOLATED BARTON DOCTRINE BY SEEKING ANTI-SUIT INJUNCTIONS IN BERMUDA COURTS

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Two separate courts in the Southern District of New York have recently issued opinions relating to a complicated bankruptcy proceeding following the collapse of MF Global Holdings Ltd. in 2011. The underlying dispute involves MF Global Holdings and MF Global Assigned Assets’ (“Plaintiffs”) attempts to recover insurance proceeds from the defendants (“Bermuda Insurers”) under certain excess errors & omissions policies following a global settlement of MDL litigation in SDNY. In August 2016, the Bankruptcy Court for the Southern District approved the global settlement.

On November 8 2016, the Bermuda Insurers filed an adversary proceeding in the Supreme Court of Bermuda (“the Bermuda action”), obtaining ex parte anti-suit injunctions prohibiting Plaintiffs from prosecuting their insurance claims in the Bankruptcy Court and requiring them to arbitrate such disputes in Bermuda. On November 22—the same day the Bankruptcy Court entered an order to show cause why the Bermuda Insurers should not be held in contempt for filing the Bermuda action—they filed a motion to compel arbitration in the Bankruptcy Court, to which the Plaintiffs were unable to respond because of the Bermuda action’s anti-suit injunctions.

On December 21, 2016, the Bankruptcy Court entered a temporary restraining order barring the Bermuda Insurers from enforcing the Bermuda action’s anti-suit injunctions. On January 12, 2017, the court granted a preliminary injunction extending the TRO’s relief. The Southern District issued an opinion on February 10, 2017 denying the Bermuda Insurers’ motion for leave to appeal the TRO, which it filed shortly after the TRO was initially granted. The district court denied the motion seeking interlocutory appeal of the Bankruptcy Court’s TRO decision, because the subsequent issuance of the preliminary injunction rendered the appeal moot and because of the lack of a fully developed record.

On January 31, 2017, the Bankruptcy Court issued an opinion finding that the Bermuda Insurers violated the Barton Doctrine by initiating the Bermuda action and ordering them to dismiss that proceeding. The Barton Doctrine provides that suits may not be brought against receivers without leave of the receiver’s appointing court. The Bankruptcy Court surveyed case law extending this doctrine to other contexts including, most significantly, bankruptcy proceedings. It held that Plaintiffs were entitled to the protections of the Barton Doctrine by virtue of MF Global Holdings’ role as Plan Administrator, and MF Global Assigned Assets’ role as a company created to retain assets assigned in satisfaction of debtor claims. The court found the Bermuda action was effectively an attempt by the Bermuda Insurers to delay Plaintiffs’ administration of the bankruptcy estate, and as such, ran afoul of the Barton Doctrine. Following the Bankruptcy Court’s order on January 23, the Bermuda Insurers dismissed the Bermuda action.

This post written by Thaddeus Ewald .
See our disclaimer.