Reinsurance Focus

In Hejamadi v. Midland Funding LLC, the U.S. District Court for the District of New Jersey, on remand from the Third Circuit Court of Appeals, addressed whether the defendants waived their rights to compel arbitration of the plaintiffs’ putative class action claims alleging violations of the Fair Debt Collection Practices Act (FDCPA).

The court’s opinion notes that the case involved a lengthy procedural history set forth in two prior opinions and in the Third Circuit’s decision remanding the matter to the district court. In sum, in 2017, the defendants purchased various credit card accounts from Citibank and then filed a debt collection action against plaintiff Shanthi Hejamadi, who in turn filed a counterclaim against the defendants pursuant to the FDCPA. The defendants dismissed the collection claim, removed the remaining counterclaim to federal court, and moved to compel arbitration under the mandatory arbitration and class action waiver provisions in the plaintiff’s original credit card agreements with Citibank. After amendments to the class action complaint, the court denied the motion to compel arbitration without prejudice and ordered limited discovery on the arbitrability issue. The defendants renewed their motion to compel arbitration, which was granted by the court on March 31, 2022. The court found that the defendants “had the right to arbitrate plaintiff’s claims … and had not waived that right.” The court based its opinion on Third Circuit precedent at that time, which focused on analyzing prejudice to the party opposing arbitration in analyzing a motion to compel like the one before the court.

The plaintiffs appealed the court’s March 31 opinion and while the appeal was pending, the U.S Supreme Court issued its opinion in Morgan v. Sundance Inc., 596 U.S. 411 (2022), which, as noted by the district court, held that “whether a party waived a contractual right to arbitrate is decided by the same standard as waiver of any other contractual right” and that “there are no arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the Federal Arbitration Act’s policy favoring arbitration.” The Third Circuit remanded the plaintiffs’ pending appeal of the order compelling arbitration to the district court to address the waiver issue now governed by the decision in Morgan.

On remand, the district court noted that Morgan “rejected the case law of various circuits, including the Third Circuit, that conditioned arbitration waiver on a showing of prejudice” and that the Third Circuit’s test in determining whether a party waived its right to arbitrate will now focus “on the actions of the party seeking to arbitrate, rather than the effects of those actions on the party opposing arbitration.” Applying this new standard to the defendants’ renewed motion to compel arbitration in the Hejamadi action, the court noted that the “waiver inquiry — whether a party has intentionally relinquished or abandoned its rights to arbitrate — is informed by the circumstances and context of each case.” After a thorough review of the record, the court found that the defendants’ conduct did not establish a waiver of their right to arbitrate and ordered that the parties proceed to arbitration.

Hejamadi v. Midland Funding LLC, No. 2:18-cv-13203 (D.N.J. June 25, 2024).

The plaintiff sued the trustee of his retirement plan, his former employer, and others for breach of fiduciary duties in connection with the plan’s purchase of shares of the employer’s parent company for more than fair market value. The plan was a defined contribution plan, with a separate individual account for each participant. The complaint sought relief under section 502(a)(2) of ERISA, including restoration of plan-wide losses, surcharge, accounting, constructive trust, disgorgement of profits, and other equitable relief.

The defendants moved to compel arbitration under the FAA on an individual basis, relying on plan provisions that required participants to resolve any legal claims solely in their “individual capacity and not in a representative capacity” and that prohibited participants from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to” other participants or beneficiaries. The defendants argued that compelling individual arbitration would not limit any substantive rights or remedies that the plaintiff “could personally achieve under ERISA section 502(a)(2),” as the plaintiff could only ever have recovered losses within his individual plan account.

The district court disagreed with the defendants and denied the motion, and a divided panel of the Second Circuit affirmed. The Second Circuit found, over a dissenting judge, that the above provisions were unenforceable because, as the Third, Seventh, and Tenth Circuits found in analogous cases, the provisions would prevent the plaintiff from pursuing remedies under section 502(a)(2) that were, by their nature, plan-wide. Analyzing U.S. Supreme Court precedent, the court explained that “the Section 502(a)(2) vehicle for enforcing Section 409(a) provides for only plan-wide remedies.” If the arbitration provisions prevented the plaintiff from pursuing the statutory plan-wide remedies, then it effectively prevented him from vindicating his substantive statutory rights under ERISA. Consequently, the above plan provisions (and the arbitration agreement as a whole) were unenforceable.

In reaching its decision, the court distinguished Supreme Court rulings, including Epic Systems, Italian Colors, Concepcion, and Gilmer, which enforced arbitration agreements containing a waiver of aggregated actions involving statutory rights. This case was different, the court explained, as precluding a representative action would deprive the plaintiff of the “full range” of statutory substantive rights and remedies. Drawing from another recent Supreme Court case, Viking River Cruises, the court highlighted a “qualitative difference” between waivers of collective action procedures, and waivers that purport to preclude a party from arbitrating in a representational capacity on behalf of a single absent principal (the plan). The court also observed that there would be “no legal way to provide many of the equitable remedies allowed by statute and sought by [the plaintiff] without impacting the accounts of other plan participants and beneficiaries or binding the Plan Administrator and Trustee vis-à-vis other participants.” The court affirmed the denial of the motion to compel arbitration.

Cedeno v. Sasson, No. 21-2891 (2d Cir. May 1, 2024).

In Sacramento Drilling Inc. v National Casualty Co., the U.S. District Court for the District of Oregon addressed an amended motion to compel arbitration brought by defendant National Casualty Co. seeking to limit arbitration to only certain claims.

The underlying matter involved claims related to alleged losses incurred by plaintiff Sacramento Drilling (a subcontractor) for furnishing labor and materials for defendant White Construction (the general contractor) associated with the construction of two projects. The agreement between Sacramento and White included a mandatory arbitration clause that “mediation and binding arbitration shall be the sole methods of dispute resolution for any dispute arising out of this Subcontract or Subcontractor’s performance of the Subcontract Work.” Sacramento’s equipment accidentally severed an overhead electrical line, and a dispute arose regarding the amount that Sacramento was due for its work after deductions were taken by White for the damages caused by Sacramento. National Casualty had issued insurance policies for the projects naming Sacramento and White as additional insureds, and Sacramento tendered the claim for the loss to National Casualty, which denied a portion of the alleged loss. The insurance policies also contained a mandatory arbitration provision covering all differences arising out of the insurance policies. Sacramento’s state court lawsuit against White, National Casualty, and others was removed by National Casualty to federal court and the parties then filed a joint motion for a stay, which included an agreement that the case should be stayed pending the arbitration between Sacramento, White, and National Casualty. The district court granted the joint motion.

Prior to the arbitration, National Casualty filed an amended motion seeking to limit the arbitration to the contract claims under the insurance policy only. The district court denied the motion, finding that National Casualty’s effort to limit the claims did not present questions of arbitrability that are reserved for judicial determination. The court noted that none of the parties disputed the validity of the arbitration clauses at issue and that the arbitrability of the dispute had already been established in connection with the initial joint motion. Rather, the amended motion involved procedural questions including “how the parties have agreed to arbitrate, not whether the parties agreed to arbitrate.” The court ruled that these types of issues are for the arbitrator to decide and denied National Casualty’s motion.

Sacramento Drilling Inc. v National Casualty Co., No. 3:23-cv-00889 (D. Or. June 20, 2024)