Reinsurance Focus

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).

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).

A federal judge in the Northern District of Illinois ruled that Chicago derivatives firm DV Trading LLC can force three futures traders to arbitrate claims that it is withholding $1.6 million to defray a $5 million regulatory fine for alleged market manipulation.

In 2016, the Commodity Futures Trading Commission (CFTC) assessed a $5 million monetary penalty against DV to settle allegations that its predecessors’ traders engaged in prohibited wash trading of eurodollar futures contracts between 2013 and 2015. The plaintiffs, who traded futures for DV until August 2016, brought this suit in their individual capacities seeking damages from DV for allegedly violating the anti-fraud, wash trading, and whistleblower retaliation provisions of the Commodity Exchange Act (CEA), and a judgment declaring that the plaintiffs had no obligation to reimburse DV for any portion of the penalty.

DV moved to stay the suit and compel arbitration in 2017, arguing that the claims “arise out of” DV’s holding company’s operating agreement, which calls for the arbitration of employment disputes. The court denied the request in regard to the whistleblower retaliation claim, saying the whistleblower amendment to the CEA “clearly” invalidates an agreement to arbitrate.

After additional briefing, the court denied the motion on the basis that the arbitration agreements were ambiguous, and the traders did not sign them in their individual capacities. But the court noted that the order was without prejudice and that DV could seek to compel arbitration again after discovery.

After limited discovery closed, DV filed a motion to dismiss the CEA and whistleblower claims for lack of standing or, alternatively, to compel arbitration under the doctrines of estoppel and corporate veil piercing.

Although the court considered the CEA claims for estoppel purposes, the court dismissed them for lack of standing, finding that the traders’ companies, rather than the individuals, incurred losses and that the plaintiffs did not have third-party or statutory standing to bring the CEA claims.

Recognizing that under ordinary contract law principles, an arbitration agreement generally cannot bind a non-signatory, the court looked to the limited exceptions to the signatory rule under Illinois contract law and found that the doctrine of direct benefits estoppel applied. The court noted that direct benefits can flow in two ways. First, a party can benefit directly by seeking to sue on the arbitration clause even if it is not a signatory. Second, under certain circumstances, the party may seek to benefit from the agreement containing the arbitration clause.

While the court determined that the plaintiffs did not benefit directly under the operating agreement, because they held an indirect financial stake in the disputed profits as employees and shareholders of their respective companies, the court found that the traders were nonetheless estopped from avoiding the operating agreement’s arbitration clause because the damages the plaintiffs sought from DV’s alleged violations of the CEA’s wash trading and anti-fraud provisions were profits to which they would have been entitled, if at all, through the operating agreement, and thus the plaintiffs sought to benefit directly from the operating agreement. Accordingly, the court granted DV’s motion to compel arbitration as to the declaratory judgment claim.

In addition, because the claim for whistleblower retaliation is nonarbitrable, the court stayed the litigation of this claim pending the outcome of arbitration. The court noted that “the facts alleged in plaintiffs’ whistleblower retaliation claim run a substantial risk of overlapping with facts and issues likely to arise in the arbitration of plaintiffs’ declaratory judgment claim” and that without a stay, the facts surrounding the CFTC’s investigation of DV as well as the interactions between the plaintiffs and DV’s principals will almost certainly be at issue both in this court and in arbitration proceedings.

Elsasser v. DV Trading, LLC, No. 1:17-cv-04825 (N.D. Ill. Mar. 16, 2020).