Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Arbitrability Is Question for Court in Case Alleging Fraud Regarding Agreement Between Parties

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The Court of Appeals of Maryland recently held that the question of arbitrability was for a court, not an arbitrator, to decide where the plaintiffs alleged that the defendants had fraudulently induced them to enter agreements they did not understand contained arbitration clauses.

Several Maryland residents obtained structured settlements to compensate them for injuries allegedly caused by their purported exposure to lead-based paint. Access Funding, LLC and Assoc, LLC (collectively the “Factoring Companies”) entered into agreements with those residents whereby the Factoring Companies paid them a discounted lump sum and the residents assigned their rights to periodic future payments to the Factoring Companies. The agreements contained arbitration clauses that stated “[o]nce your transaction has closed any claim or dispute . . . shall be resolved by mandatory binding arbitration.” Under Maryland law, the agreements were contingent on court approval, which the parties obtained.

The residents subsequently filed a putative class action complaint alleging, among other things, that the Factoring Companies engaged in fraud and other misconduct in inducing them to execute the agreements. To make a procedurally complex story much more simple, the Factoring Companies moved to compel arbitration. The Maryland trial court granted the motion to compel, reasoning that arbitrability was for the arbitrator to decide, but Maryland’s intermediate appellate court reversed. The Court of Appeals of Maryland reviewed the case and agreed with the intermediate appellate court that the motion to compel should have been denied.

The court held that “the question of whether a valid arbitration agreement exists is a question for the court to determine” where a plaintiff alleges that the “approval of the transfer of their structured settlement payment rights was procured through fraud and deceit” and the plaintiff denies “the existence of a valid agreement to arbitrate.” The court explained, “a plaintiff’s alleged inability to understand the terms of an arbitration clause in a written agreement, on the ground that the other party procured the agreement through fraud and deceit, places the existence of a valid agreement to arbitrate at issue and raises an issue to be decided by the court, not the arbitrator.” In this case, the court explained that the plaintiffs allegedly suffered from cognitive deficiencies and had pleaded that the Factoring Companies and other defendants had colluded to “interfere with their ability to obtain independent professional advice and sought to prevent them from fully understanding and appreciating the agreement’s provision with respect to binding arbitration.” The court found these allegations sufficient to place the existence of a valid agreement in question.

Alternatively, the court also held that because “the plain language of the arbitration clause expressly conditions arbitration on closure of the transaction” the plaintiffs “challenge[d] the existence of an agreement to arbitrate, which is an issue for the court” not the arbitrator.

Of note, the court also explained that the Maryland Uniform Arbitration Act, which governed the arbitration issues in this case, was meant to mirror the FAA.

Access Funding, LLC, et al. v. Chrystal Linton, et al., No. 5, September Term 2022 (Ct. App. Md. Dec. 1, 2022).

 

Tenth Circuit Affirms Refusal to Vacate Confirmation Despite Foreign Court’s Annulment of Underlying Arbitration Award

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The Tenth Circuit recently affirmed a district court’s decision not to vacate a confirmation award even though the underlying arbitration award had been annulled by a Bolivian court following the confirmation. The Tenth Circuit agreed that public policy considerations, including concerns about encouraging endless litigation, rendered the district court’s decision not to vacate the confirmation as within that court’s discretion.

Compañía de Inversiones Mercantiles S.A. (CIMSA) and Grupo Cementos de Chihuahua S.A.B. de C.V. (GCC) entered into a shareholder agreement in which GCC purchased shares of a Bolivian company from CIMSA. The shareholder agreement included an arbitration clause and provided that CIMSA had a right of first refusal if GCC sought to sell its shares. CIMSA attempted to exercise that right when GCC moved to sell shares, but GCC purportedly claimed that CIMSA’s right was invalid and sold the shares to a third party. The sale triggered lengthy arbitration and court proceedings. In short, an arbitral tribunal in Bolivia awarded CIMSA approximately $34 million in damages plus $2 million in costs and fees, all subject to 6% interest. GCC moved to annul the award in Bolivia but lost. CIMSA then obtained an order from the U. S. District Court for the District of Colorado confirming the award. The Tenth Circuit affirmed that award. GCC then persuaded a different panel of the Bolivian court that had ruled against it to annul the arbitral award. With that annulment in hand, GCC moved to vacate the district court’s confirmation order. The district court denied GCC’s motion. GCC appealed that decision to the Tenth Circuit, which affirmed.

GCC initially  argued that a U. S. court cannot confirm an arbitral award that has been annulled by the primary jurisdiction. The Tenth Circuit disagreed, noting:

[W]hen a court has been asked to vacate an order confirming an arbitral award that has later been annulled, it may balance against comity considerations (1) whether the annulment is repugnant to U.S. public policy or (2) whether giving effect to the annulment would undermine U.S. public policy.

GCC nevertheless argued that the district court erred by considering in conjunction with that analysis not only whether the orders of the Bolivian court were repugnant to U.S. public policy, but “whether giving effect to those orders through vacatur of its Confirmation Judgment would offend U.S. public policy.” The Tenth Circuit disagreed, explaining that the district court properly considered whether giving effect to orders would violate public policy (and holding that it would because doing so would “encourage ‘proceedings without end’”) in addition to the question of whether the orders themselves were repugnant to U.S. public policy. The Tenth Circuit held that the district court did not abuse its discretion in concluding “that (1) giving effect to the [] Bolivian orders [annulling the arbitral award] would offend U.S. public policy and (2) GCC acted inequitably in the United States and Bolivian proceedings[:]”

The interests of the finality of judgments, respecting parties’ contractual expectations, and the U. S. policy favoring arbitral dispute resolution support the district court’s conclusion that vacatur of its Confirmation Judgment would violate U.S. public policy. These considerations correspondingly support the district court’s decision against extending comity to the [relevant] Bolivian orders.

The Tenth Circuit also rejected GCC’s arguments that the district court erred by ordering GCC to turnover property held abroad by third parties, and other challenges to turnover orders.

Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., No. 21-1196 (10th Cir. Jan. 10, 2023)

SDNY Rejects Cross-Petition To Vacate Arbitration Award, Rejecting Claims of Manifest Disregard of Law and “Evident Partiality”

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Recognizing arbitration awards are subject to “very limited review” and should be confirmed, “so long as there is a ‘barely colorable justification’ for the outcome that the arbitrator reached,” the U.S. District Court for the Southern District of New York affirmed the arbitration award in favor of the petitioners, Telecom Business Solution, LLC, LATAM Towers, LLC, and AMLQ Holdings (Cay) Ltd., and denied the respondents, Terra Towers Corp., TBS Management, S.A., and DT Holdings, Inc.’s cross-petition to vacate that award.

The petitioners and respondent, Terra Towers Corp., entered into a shareholders agreement to co-own and operate a business engaged in the operation of telecommunications towers in Central and South America (Company). Terra was the majority shareholder of the Company, and the petitioners were the minority shareholders. The shareholders agreement provided that after five years, the petitioners could unilaterally initiate a sale of the Company, which it did two weeks after the expiration of the five-year period. Terra rejected the sale proposed by the petitioners and sought to buy out the petitioners’ shares of stock in the Company. The petitioners then commenced an arbitration alleging that Terra breached the shareholders agreement “by obstructing their proposed sale of the Company.” The petitioners sought damages from the respondents or specific performance. The petitioners and respondents each appointed one arbitrator who then appointed a third arbitrator to act as chair of the panel. Phase one of the arbitration was limited to the petitioners’ claim for specific performance related to the sale of the Company. After a hearing, the panel issued a First Partial Final Award (FPFA) ordering a sale of the Company. Further disputes developed between the parties after the entry of the FPFA, resulting in the entry by the panel of interim relief, including an injunction. The respondents claimed to the ICDR that there was “‘justifiable doubt’ about their party-appointed arbitrator’s impartiality.” After further submissions on the issue, the ICDR’s International Administrative Review Council denied the respondents’ challenge.

The petitioners filed a petition to confirm the FPFA, and the respondents sought “to vacate the FPFA, asserting that the panel violated “‘fundamental fairness’ by refusing to provide them with ‘a fair opportunity to be heard’ … that the Panel acted in ‘manifest disregard of the law’ … by granting specific performance to Petitioners,” and that there was “evident partiality” by two of the three arbitrators in favor of the petitioners. After noting the grounds on which an arbitration award may be set aside, the court rejected all of the respondents’ arguments and granted the petition to confirm the FPFA. The court found “[n]either the Panel’s decision to phase the arbitration nor the Panel’s denial of discovery in Phase 1 of the Arbitration constituted misconduct that rendered the Arbitration fundamentally unfair.”  The court also rejected the respondents’ contention that the FPFA issued was in “manifest disregard of the law,” finding a court’s review under this standard is “severely limited” and a “doctrine of last resort” limited to “rare instances where some egregious impropriety on the part of the arbitrators is apparent.” Finally, the court rejected the respondents’ claim of evident partiality concluding the “ICDR already has carefully reviewed and rejected all of Respondents’ evidence of a purported disqualifying conflict.”

Telecom Business Solution, LLC et al. v. Terra Towers Corp., et al., No. 22-cv-1761 (SDNY, Jan. 18, 2023)

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

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Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 2022)

Ninth Circuit Dismisses Appeal of Denial of Motion to Compel Arbitration as Moot After the Complaint Was Amended While the Appeal Was Pending

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The plaintiff’s original complaint relied on a certain purchase agreement (PA) that included an arbitration clause. While the appeal was pending, the lower court permitted the plaintiff to amend the complaint to no longer rely on the PA for its claims. As a result, the plaintiff contended that the appeal was moot since there was no longer a basis to invoke the arbitration clause. The appellants, however, challenged the lower court’s ruling permitting an amendment to the pleading during the appeal, and further argued that the amended complaint still relied on the PA.

The Ninth Circuit held that a “plaintiff is master of the complaint and an appeal seeking review of collateral orders does not deprive the trial court of jurisdiction over other proceedings in the case.” (Citing Ninth Circuit precedent and noting that the U.S. Supreme Court has granted a petition for a writ of certiorari to resolve the split in the circuits on whether an appeal of the denial of a motion to compel arbitration “oust[s] a district court’s jurisdiction to proceed with litigation pending appeal” or instead, whether “the district court retain[s] discretion to proceed with litigation while the appeal is pending.”)

The Ninth Circuit then concluded that the amended complaint did not rely on the PA, and, in any event, the plaintiff stipulated that he had abandoned any claim under the PA. The court therefore dismissed the appeal as moot.

Matter of Giga Watt, Inc., Case No. 22-35104 (9th Cir. Dec. 23, 2022).