Wake Forest Law Review

By Ali Fenno

On November 22, 2016, the Fourth Circuit issued a published opinion in the civil case of UBS Financial Services, Inc. v. Padussis. In UBS Financial, the Fourth Circuit addressed whether an arbitration award of over $900,000 to Gary Padussis (“Padussis”) could be vacated or modified in light of Padussis’s insolvency and UBS Financial Services’ (“UBSFS”) lack of participation in the selection of the arbitrators. In affirming the district court, the Fourth Circuit held that there was no basis for overturning the arbitrators’ award and that UBSFS’s motion should be dismissed in its entirety.

Facts of the Case and Procedural History

Padussis began working for UBSFS in 2009, bringing with him a team of financial advisors and an established list of clients. As part of his initial compensation, UBSFS granted Padussis a $2.7 million loan, for which he signed a promissory note that provided the balance of the loan would become fully due in the event he ended his employment with UBSFS. Also executed by Padussis was a Letter of Understanding describing his compensation and a Financial Advisor Team Agreement that governed the operations of his team. Each agreement entered into by the parties provided that any dispute would be subject to arbitration before the Financial Industry Regulatory Authority (“FINRA”).

Two years later, Padussis resigned from UBSFS on the grounds that it had ruined his team of financial advisors and cost him valuable clients. When he did not pay the $1.6 million remaining balance on the promissory note, USBS initiated arbitration proceedings.  Padussis responded with counterclaims alleging that UBSFS’s interference with his team of financial advisors and clients amounted to tortious conduct and a breach of contractual duties.

Pursuant to the FINRA Code of Arbitration Procedure for Industry Disputes (the “FINRA Code”), the Director of FINRA Dispute Resolution (the “Director”) mailed a list of potential arbitrators to Padussis and USBFS on August 21, 2013. Each party was then supposed to indicate their preferences by striking four arbitrators from the list and ranking the remaining ones. The lists were to be returned to the Director within 20 days of their being sent so he could then select a three-person arbitration panel based on those rankings. Padussis returned his list of preferences within the proscribed time, but USBFS did not, allegedly because it never received the list from the Director.

On September 11, UBSFS received a letter, dated September 3, reminding the parties to return their list of preferences by the September 10 deadline. It then filed a motion to extend the deadline. Padussis opposed the motion, claiming that UBSFS had notified him in mid-August that it was transferring to new counsel and that the list of preferences had not yet been sent. Padussis argued that this transfer of counsel caused confusion over who was sending the list and was the reason the list was never sent.

Although FINRA Rule 13207(c) allows a Director to extend the Code’s deadlines for good cause, FINRA’s Regional Director, acting for the Director as consistent with FINRA Rule 13100(k), denied UBSFS’s motion. The Director affirmed the denial, finding that UBSFS did not have good cause to extend the deadline because the list of arbitrators and a courtesy reminder of the deadline were both timely mailed, and FINRA did not receive any mail returned as undeliverable. Accordingly, FINRA proceeded with the arbitration process and selected a three-person panel of arbitrators based off of Padussis’s list of preferences.

UBSFS challenged the composition of the panel based on his lack of participation in the selection of the arbitrators, but his challenge was denied. Then, on October 27, 2014, the panel issued its final decision, awarding UBSFS $1,683,262 for the balance on the promissory note and Padussis $932,887 for damages UBSFS caused to his business.

However, faced with a statutory lien and the prospect of bankruptcy, Padussis admitted that he could not pay the full $932,887, leaving UBSFS in a position of owing Padussis over $900,000. UBSFS subsequently filed the present action to vacate the award on the grounds that UBSFS did not participate in the arbitrator selection process. It argued in the alternative that the award should be offset because of Padussis’s admission of being unable to pay the award owed to UBSFS.

The district court declined to vacate the arbitration award and to impose an offset, and UBSFS appealed.

Narrow Standard of Review

The Fourth Circuit first established the extremely narrow scope of judicial review of an arbitration award. It noted that an arbitration award should only be modified if it is one of the limited circumstances listed in the Federal Arbitration Act, or if under common law, it “fails to draw its essence from the contract” or “evidence a manifest disregard of the law.” The court emphasized that in reviewing an arbitration award, whether an arbitrator did their job “well, or correctly, or reasonably,” is not the concern. Instead, courts should ask whether the arbitrators exceeded their powers because they did not meet certain thresholds of arbitrability such as not being appointed according to the parties’ agreement. Deference should be given to arbitrators on questions outside those thresholds that regard the merits of the case or procedural questions.

The court found support for this narrow scope in public policies that focus on using arbitration as a tool to avoid the costs and delays of litigation. It noted that parties entering into agreements to arbitration do so in the hope of avoiding “a protracted set of legal proceedings.” Narrowing the judicial review of arbitration awards furthers this intent.

Rightful Appointment of Arbitrators

The Fourth Circuit next addressed UBSFS’s claim that the arbitrators were not selected according to the parties’ agreement. It first confirmed that, pursuant to Section 5 of the Federal Arbitration Act, arbitration awards will be vacated where the arbitrators’ appointment violates the parties’ contract. It then noted that here, UBSFS and Padussis agreed that all disputes would be subject to arbitration before FINRA and thus subject to the FINRA Code.

However, the Fourth Circuit rejected UBSFS’s claim that the rules for selecting arbitrators were not followed. The court listed every step FINRA and the Director took in selecting the panel and noted that not a single requirement was skipped. And even though UBSFS did not get to participate in the selection of the arbitrators, the court found that this outcome was explicitly allowed in FINRA Rule 13404(d), which requires a Director to appoint arbitrators without a party’s input when the list of arbitrators is not returned.

Because FINRA clearly followed the FINRA Code’s rules for selecting arbitrators, the Court decided that the issue raised by UBSFS was instead whether FINRA properly applied the rules when it found that UBSFS did not have good cause to extend the deadline for submitting its list of preferences. But the Fourth Circuit concluded that this constituted a procedural question, and relying on the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., affirmed that such a “procedural question[] which grow[s] out of the dispute and bear[s] on its final disposition [is] presumptively not for the judge, but for the arbitrator, to decide.” The court also noted that the power to determine whether good cause existed was explicitly given to FINRA in FINRA Rule 13412. Furthermore, the court reasoned that arbitrators would be more expert about the issue because it concerned, as stated in Dockser v. Schwartzberg, “the written rules governing the parties’ proceeding.” Accordingly, the Court refused to question FINRA’s decision that there was not good cause for extending the deadline for returning the list of preferences.

Refusal to Reduce the Award

The court next addressed UBSFS’s request for the arbitral award to be offset based on Padussis’s admission of being unable to pay his portion of the award. The court first noted that complying with UBSFS’s request would result in a net profit for UBSFS and thus eliminate any damages he might owe to Padussis. It also found that the offset would constitute a modification of the arbitration award because the agreement explicitly denied “any and all relief not specifically addressed” in the arbitrators’ final decision, which never mentioned the possibility of an offset.

Pursuant to the Federal Arbitration Act, a court may modify an award if it will effectuate the intent of the arbitrators. Here, the court concluded that this modification would not effectuate the intent of the arbitrators because the award never mentioned an offset and there is no other evidence in the record suggesting such an intention. UBSFS contended that the offset of the award would reflect the intent of the arbitrators because it would provide a “simple, fair result” without changing the arbitrators’ valuation decision. But the court rejected this claim, reasoning that UBSFS should have determined the arbitrators’ intent by asking for an offset during the arbitration proceedings. Accordingly, because evidence in the record and the arbitration award did not indicate that the intent of the arbitrators would be effectuated by an offset, the Fourth Circuit chose to not impose an offset on these grounds.

UBSFS last claimed that the offset should be imposed regardless of the arbitrators’ actual intent and that the court should recognize a presumption favoring an offset. The court disagreed, reasoning that such an action would put a “judicial gloss” on the arbitration award. A judicial gloss on this award would be impermissible because the award explicitly limited itself to the relief specifically rendered in the arbitrators’ final decision.

Accordingly, because the intent of the arbitrators would not be effectuated by the offset, and because a presumption of an offset would directly conflict with the arbitrator’s final decision, the court held that granting an offset in this case would be inappropriate.

Conclusion

The Fourth Circuit concluded that UBSFS simply did not want to abide by a result it did not like. Because UBSFS had agreed to arbitration, the dispute was within the scope of that agreement, and the rules for arbitration were selected in the agreement and then followed, the court could find no reason to vacate or modify the award. Accordingly, it affirmed the district court’s decision to deny UBSFS’s motion in its entirety.

construction

By Taylor Anderson

On March 28, 2016, the Fourth Circuit issued its published opinion regarding the civil case Del Webb Communities, Inc. v. Carlson. Appellant PulteGroup, Inc. and its subsidiary Del Webb Communities, Inc. (together, “Pulte”) appealed the district court’s denial of its partial summary judgment motion and dismissal of its Petition compelling bilateral arbitration. On appeal, Pulte contends that the district court erred in concluding that whether an arbitration clause permits class arbitration is a procedural question for the arbitrator to decide. Instead, Pulte argued that this question is one of arbitrability; therefore, the court is to determine the answer to that question. For the reasons that follow, the Fourth Circuit reversed, vacated, and remanded the district court’s conclusions.

Sales Agreement for Hilton Head, South Carolina House

Respondents Roger and Mary Jo Carlson (together, “Carlsons”) signed a sales agreement with Pulte for the purchase of a lot and construction of a home in Hilton Head, South Carolina. The agreement contained an arbitration clause which stated, “Any controversy or claim arising out of or relating to this Agreement or Your purchase of the Property shall be finally settled by arbitration . . . . Any party to this Agreement may bring action . . . to compel arbitration . . . .”

After they noticed several construction defects in their new home, the Carlsons brought suit against Pulte. The Carlsons later amended their complaint to add class-action allegations because their lawsuit was one of approximately 140 like cases pending against Pulte. The Carlsons contended that the question of class-arbitration was a procedural question and therefore the arbitrator would decide whether class arbitration was appropriate and contemplated under the sales agreement. Pulte filed a petition in federal court arguing that whether the sales agreement authorized class arbitration was a question of arbitrability for the court to determine—not a procedural question for the arbitrator. Later, Pulte filed a motion for partial summary judgment, which was the subject of the appeal, as to whether class arbitration was appropriate was a question for the arbitrator or the court to decide.

The federal district court dismissed Pulte’s Petition and denied Pulte’s motion for partial summary judgment. The district court reasoned that whether the arbitration clause permits class arbitration is a simple contract interpretation issue. Since the question “concerns the procedural arbitration mechanisms available to the Carlsons,” the threshold inquiry is a question for the arbitrator rather than for the court. This appeal followed.

Initial Subject Matter Jurisdiction Issue

As an initial matter, the Fourth Circuit addressed the Carlsons’ contention that the district court never had subject matter jurisdiction over Pulte’s Petition and partial motion for summary judgment. Although the Carlsons asserted several arguments as to why the district court did not have subject matter jurisdiction, the Fourth Circuit easily found subject matter jurisdiction based on diversity because both the amount-in-controversy and the complete diversity requirements were met in this case. The Carlsons’ claim was $75,000 plus treble damages and attorneys’ fees, which satisfied the “statutory floor.” Additionally, the Carlsons are South Carolina citizens and the Pulte parties are Michigan and Arizona citizens, making the parties completely diverse.

Class Arbitration Question is One of “Arbitrability”

The Fourth Circuit started out by stating its holding: the question of whether an arbitration clause permits class arbitration is a gateway question of arbitrability for the court to decide. First, the Fourth Circuit cited United States Supreme Court precedent stating that in determining the contractual nature of arbitration agreements, the court should be careful to avoid forcing parties to resolve their disputes through means not intended at the time of contract formation.

Next, the Fourth Circuit defined a “procedural” question in the context of arbitration. Procedural questions arise once the obligation to arbitrate a matter is established, and may include such issues as the application of statutes of limitations, notice requirements, laches, and estoppel. The Fourth Circuit, backed by Supreme Court precedent, explained that these are questions for the arbitrator because the questions do not present any legal challenge to the arbitrator’s underlying power and the parties would likely expect that an arbitrator would decide procedural questions.

Questions of arbitrability, on the other hand, are completely different. The Fourth Circuit stated that “[w]hen the answer to a question ‘determine[s] whether the underlying controversy will proceed to arbitration on the merits,’ that question necessarily falls within the ‘narrow circumstance[s]’ of arbitrable issues for the court to decide.” In this case, the question of whether class arbitration was allowed under the agreement went directly to whether the arbitrator was granted the power to hear class arbitration. That is, whether the agreement indicated that the controversy can proceed to arbitration at all. Because the parties were not explicit in the agreement that the arbitrator would decide whether their agreement authorizes class arbitration, a court is to decide whether class arbitration is allowed under the agreement. For this reason, the Fourth Circuit held that the district court erred in concluding that the question was a procedural one for the arbitrator.

Judgment Reversed, Vacated, and Remanded

The Fourth Circuit held that the parties did not unmistakably provide that the arbitrator had the power to decide whether their agreement authorizes class arbitration, and for that reason, the district court erred in concluding that the question was a procedural one for the arbitrator. Therefore, the Fourth Circuit reversed the district court’s order denying Pulte’s motion for partial summary judgment, vacated the judgment dismissing the Petition, and remanded the case for further proceedings.

mining

By Daniel Stratton

On March 8, 2016, the  Fourth Circuit issued a published opinion in the civil case Peabody Holding Company, LLC v. United Mine Workers of America, vacating the district court’s decision. The Fourth Circuit held that under the complete arbitration rule, an arbitrator handling a labor dispute between Peabody Holding and United Mine Workers of America should have been allowed to finish resolving both the liability and remedial phases of the dispute before the matter was moved to federal court.

United Mine Workers and Peabody Coal Company Enter into Job Opportunity Agreement

In 2007, the United Mine Workers of America and Peabody Coal company entered into a Memorandum of Understanding Regarding  Job Opportunities (“Jobs MOU”). Peabody Coal signed the agreement on behalf of itself and its parent company, Peabody Holding. The purpose of the Jobs MOU was to require non-unionized companies within the Peabody corporation to give preference to coal miners who either worked for or were laid off by Peabody Coal with regards to hiring treatment. The Jobs MOU included an arbitration clause that required all disputes involving the MOU to be submitted to an arbitrator, whose decisions would be final and binding.

That same year, Peabody Energy Corp., the ultimate corporate parent of Peabody Holding,  Peabody Coal, and another company, Black Beauty Coal Company, began a process to spinoff part of its mining operation into a new entity known as Patriot Coal Corporation. Peabody Coal was spun off into Patriot. All of the Peabody subsidiaries that became part of Patriot had been signatories to the Jobs MOU. The only subsidiary that had been a signer to the Jobs MOU that was not spun off into Patriot was Black Beauty. At the completion of the spinoff, Peabody Coal had no corporate relationship with Peabody Holding or Black Beauty.

In 2008, Black Beauty hired United Minerals Company to assist with mining operations on Black Beauty’s property. Both United Minerals Company and Black Beauty were non-unionized. Shortly after United Minerals Company began working with Black Beauty, the United Mine Workers of America sent a letter to Peabody Energy and Peabody Holding explaining that Peabody Holding and Black beauty were still bound by the Jobs MOU. Peabody disagreed, arguing that after Peabody Coal had been spun off, the rest of the Peabody corporate family no longer had any obligation under the Jobs MOU.

Peabody initially argued that this dispute with United Mine Workers was not arbitrable, an argument that the Fourth Circuit rejected in 2012. After being sent back to arbitration, the union and Peabody agreed to bifurcate the dispute into separate liability and remedy phases. The arbitrator ruled that the Jobs MOU remained in effect despite the fact that Peabody Coal had no corporate relationship with Peabody Holding. The arbitrator declined to rule on whether or not Black Beauty was actually exempt from the Jobs MOU, deferring its decision on that question until the remedy stage.

Peabody and United Mine Workers Take Their Dispute to the Courts

Peabody sought to vacate the arbitrator’s decision, filing an declaratory judgment action in the U.S. District Court for the Eastern District of Virginia. At the same time, the United Mine Workers filed a counterclaim to enforce the decision by the arbitrator.  Under Section 301 of the Labor Management Relations Act (“LMRA”), some courts viewed their jurisdiction as being limited to “review of final arbitration awards,” while others believed that Section 301 provided “sweeping jurisdiction.” The district court ultimately declined to weigh in on that debate, instead noting that because the liability portion of the arbitration was finished, it was final and therefore reviewable. The district court found in favor of the union, holding that the arbitrator was right to find the Jobs MOU still valid. Peabody and its subsidiaries appealed the district court’s decision. After the parties briefed the appeal, the Fourth Circuit asked for additional briefing on whether the arbitrator’s decision was even properly before the circuit, because the arbitration was not yet complete.

The Limits and Scope of the Complete Arbitration Rule

Under Section 301 of LMRA, federal district courts have jurisdiction over suits involving contract violations between employers and unions. The Supreme Court has long held that Section 301 can be used to seek enforcement of an arbitration award made under a collective bargaining agreement’s arbitration clause. As a threshold matter however, a court must determine that the award is final and binding. Many courts have held this to mean that an arbitrator must have ruled on both liability and remedies before the decision can be reviewable.

Some judicial decision viewed the complete arbitration rule as a restriction on federal jurisdiction. Other decisions had focused on Section 301’s broad language, and have viewed the complete arbitration rule to be “only a prudential limitation on judicial involvement” in an arbitrated labor dispute.

The Fourth Circuit Finds that the Arbitration Decision was sent to the Courts Too Soon

The Fourth Circuit noted that several courts which view the complete arbitration rule in jurisdictional terms still concede that there are exceptions to the rule in extreme cases. Based on this, the Fourth Circuit noted that this necessarily meant that the complete arbitration rule only constituted a prudential limitation. The Court also noted many policy rationales for the complete arbitration rule were the same as those used for strictly jurisdictional relatives. Like the rules that require a district court to enter a final judgment or order before an appellate court can review the case, the complete arbitration rule promotes the same goals of preventing “piecemeal litigation and repeated appeals.” Applying the complete arbitration rule also helps prevent a party from using courts to delay the arbitration, the Fourth Circuit noted.

In terms of actually applying the complete arbitration rule, the Fourth Circuit noted that the application was straightforward. Generally, when an arbitrator decides liability and “reserves jurisdiction to decide remedial questions” later, a federal court should wait to review until all questions have been resolved.  The Court was unpersuaded by Peabody’s arguments that the liability phase was final and thus reviewable. The Fourth Circuit noted that such a division was sensible and common. Just because the parties decided to split their dispute did not change the fact that they agreed to submit the entire dispute to the arbitrator.

The Fourth Circuit also quickly dismissed Peabody’s arguments that reviewing the liability portion now would promote efficiency. Such efficiency arguments could potentially be applied to virtually any case, the court noted, before explaining that by waiting until after the remedy portion was resolved the court was actually promoting efficiency. This was because the parties could still reach a settlement at some point, making a review of the liability portion moot. The Fourth Circuit concluded by explaining that arbitration is a matter of contract, and as such the parties should be able to design an arbitral process that best suits the needs of the parties.

The Fourth Circuit Remands the Case Back to the Arbitrator

The Fourth Circuit ultimately held that the arbitrator’s decision had been prematurely sent to the courts, and remanded the case back to the district court to remand the case back to the arbitrator to continue the arbitration.

By Anthony Biraglia

In the civil case of Chorley Enterprises v. Dickey’s Barbecue Restaurants, Inc., the Fourth Circuit vacated a Maryland district court’s decision to hold a jury trial on a purportedly ambiguous contract provision, rather than compel arbitration, in a franchise dispute between two sets of plaintiffs and Dickey’s Barbecue Restaurants (“Dickey’s”). The Court determined that it could resolve the purported ambiguity in the contract provision as a matter of law, and found that the “clear and unambiguous language” of the provisions mandated that Dickey’s common law claims be arbitrated, while the plaintiff’s Maryland Franchise Law claims go forward in Maryland district court. In a published opinion released on August 5, 2015, the Court stated that the Federal Arbitration Act (“FAA”) requires this result despite the inefficiency of piecemeal litigation in multiple forums.

Arbitration or Litigation? Pre-Trial Maneuvering

Both sets of plaintiffs (collectively “Franchisees”) were franchisees operating Dickey’s restaurants in Maryland. The first set of plaintiffs, Matthew Chorley, Carla Chorley, and Chorley Enterprises (collectively “Chorleys”), were involved in a dispute with Dickey’s over the franchise’s management. Dickey’s brought arbitration proceedings, alleging common law breach of contract claims for the franchise and development agreements between Dickey’s and the Chorleys. In turn, the Chorleys brought suit in federal court seeking to enjoin arbitration and declare the arbitration provision unenforceable. The Chorley’s also claimed that Dickey’s fraudulently misrepresented start-up and operating costs in violation of the Maryland Franchise Regulation and Disclosure Law (“Maryland Franchise Law”). Dickey’s filed a similar set of claims against the second set of plaintiffs, Justin Trouard and Jessica Shelton (collectively “Trouard and Shelton”). Trouard and Shelton responded in the same fashion as the Chorleys by filing suit in Maryland district court. Dickey’s filed motions to compel arbitration in both matters. The district court consolidated these two cases to decide the pre-trial motions because the provisions in question were virtually identical.

The Franchisees agreed to similar contracts with Dickey’s that included several forum selection provisions, two of which were at issue here. The first was an arbitration provision (“the Arbitration Clause”) in which the parties agreed to arbitrate all claims arising out of the agreement at the American Arbitration Association nearest to Dickey’s headquarters in Texas. The second was a state specific provision (“the Maryland Clause”) that created an exception to arbitration provision with regard to claims under the Maryland Franchise Law. The agreement provided that the Franchisees could file such claims in any competent court in Maryland. In the district court, both the Franchisees and Dickey’s presented an all-or-nothing argument. The Franchisees argued that the Maryland Clause fundamentally conflicted with the Arbitration Clause such that the Arbitration Clause was void, whereas Dickey’s argued that the Maryland Clause merely preserved the right to bring a Maryland Franchise Law claim in either arbitration or in court.

The district court found both the Franchisees’ and Dickey’s arguments to be plausible. Thus, it ordered a jury trial to determine which, if any, issues the parties agreed to arbitrate. The parties filed interlocutory appeals challenging the denial of their motions.

The FAA Requires Arbitration of Claims that Parties Agree to Arbitrate

Section 2 of the FAA provides that arbitration clauses may only be invalidated on “such grounds as exist at law or in equity for the revocation of any contract.” Courts will compel arbitration under § 4 of the FAA if (i) the parties have entered into valid agreement to arbitrate and (ii) the dispute in question falls within the scope of the agreement. If a federal court finds both of these elements, it must enforce the agreement as written. To make these findings, the Court applied Maryland contract law, which required it to look at the intent of the parties to determine whether the agreement was valid with respect to the Arbitration Clause.

The Fourth Circuit found that the Franchisees and Dickey’s intended to arbitrate Dickey’s common law claims. The claims arose out of the relationship between the parties, and thus were within the scope of the Arbitration Clause. Because the Court found the intent to arbitrate, which was evidence of a valid agreement, and the claims were within the scope of the agreement, the Court compelled arbitration on Dickey’s common law claims. In doing so, the Court rejected the Franchisees’ claim that an adverse arbitration decision would be prejudicial to their Maryland Franchise Law claims, as well as a claim that the Maryland Clause trumped the entire Arbitration Clause. Supreme Court precedent instructed that the FAA requires piecemeal litigation in cases where some claims were subject to arbitration and some were not.

On the other hand, the Court agreed with the Franchisees that the Maryland clause trumped as it pertains to Maryland Franchise Law claims. The agreement provided that the Franchisees could bring Maryland Franchise Law claims in Maryland courts notwithstanding the Arbitration Clause. The Court determined that the plain language of the agreement provided that Maryland Franchise Law claims should go forward in the Maryland district court.

Dickey’s also argued that the FAA preempted the Maryland Clause. The Court rejected this argument on the basis that the FAA preemption upon which Dickey’s relied applied to state law that prevented arbitration of certain claims rather than contractual provisions.

Vacated and Remanded

Because the FAA requires claims that can be arbitrated to be arbitrated even if there are other related claims that may not be arbitrated, the Court vacated the district court’s decision to order a jury trial to resolve an ambiguous contract provision and decided the dispute as a matter of law. The Court remanded to the district court the issue of whether the stay the proceedings in that court pending arbitration.

DSC03602-B

By Eric Jones

On July 6, 2015, the Fourth Circuit issued a published opinion in the civil case Jones v. Dancel.  Several plaintiffs, representing a class of individuals who utilized a credit management and debt reduction service, appealed to the Circuit asking that an arbitration award be reversed.  Because the arbitrator had not manifestly disregarded the law, the award was affirmed.

 

The Dispute and Arbitration

Laverne Jones, Stacey Jones, and Kerry Ness (collectively, the Plaintiffs) separately entered into contracts with Genus Credit Management (Genus) for the purposes of debt management and credit counseling.  Under those contracts, Genus was authorized to seek reductions in the Plaintiffs’ owed debts.  Although Genus held itself out as a non-profit organization providing debt management services free of charge, Genus accepted voluntary contributions from both debtors and creditors.  Pursuant to an arbitration clause in their contracts, the Plaintiffs initiated an arbitration action alleging individual and class claims against several original defendants alleging violations of the Credit Repair Organizations Act (CROA or the Act), the Racketeer Influenced and Corrupt Organizations Act, the Maryland Consumer Protection Act (MCPA), the Maryland Debt Management Services Act, and Maryland common law on matters of fraud and breach of fiduciary duty.  After certifying the class for the Plaintiffs’ CROA and MCPA claims, many of the original defendants entered into settle agreements with the class.  These settlements included $2.6 million in attorneys’ fees, and were approved by the arbitrator.  Amerix Corporation, Amerix’s founder Bernaldo Dancel, and several of Amerix’s affiliates (collectively, the Defendants) remained in arbitration.

Plaintiffs specifically alleged that the Defendants had violated CROA by making untrue or mislead statements, and by unlawfully billing consumers for debt management services.  After extensive hearings, however, the arbitrator found that the Defendants had violated CROA only in failing to make certain disclosures to consumers which are mandated under CROA, including a document summarizing their right to accurate information in certain credit reports.  CROA’s damages provision, 15 U.S.C. § 1679g(a)(1)(B), actual damages include “any amount paid by the person to the credit repair organization.”  In interpreting this provision, the arbitrator found that it contemplated payments on a quid pro quo basis, where the payment was in exchange a defined credit repair service.  The arbitrator then reasoned that the Plaintiff’s voluntary contributions were not “amount[s] paid” under CROA, primarily because a significant percentage of class members had not made any voluntary contributions.  Accordingly, the arbitrator denied any actual damages.

As to CROA’s punitive damages provision, 15 U.S.C. § 1679g(a)(2), the arbitrator awarded Plaintiffs $1,948,264 for failing to provide the required disclosures.  This amount was intended to serve as a powerful deterrent to the Defendants.

Finally, as to attorneys’ fees, the arbitrator found that the Plaintiffs had failed to account separately for time spent on the successful and unsuccessful claims, to substantiate proposed lodestar billing rates, and had submitted time and expense entries that were otherwise “defective.”  The arbitrator then concluded that the $2.6 million already received from settlements more than covered the amounts payable, and declined to award additional fees.  The district court affirmed the arbitrator based on the limited standard of review applicable to arbitration awards, and the Plaintiffs filed a timely appeal.

 

The Arbitrator Did Not Manifestly Disregard the Law as to Actual Damages

As explained by the Fourth Circuit, a court may vacate an arbitration award only when the disputed legal principle is clearly defined and not subject to reasonable debate, and the arbitrator refused to apply that principle.  The Plaintiff’s first argument was that their voluntary contributions to Genus constituted “payment” under CROA, and that the arbitrator had manifestly disregarded CROA by finding that they were outside the scope of the Act.  The Circuit disagreed, holding that the definition of “payment” under CROA was well within the scope of reasonable debate, largely because the Act defined a “credit repair organization” as somebody who provided credit repair services “in return for the payment of money.”  Thus, given the absence of any binding precedence on the exact meaning of the term, the arbitrator’s finding that the voluntary contributions were not “payment” was not a clear disregard for established law.  The Circuit explained that other arbitrators may have come to the opposite conclusion, but that the appropriate standard of was limited and thus they could not “pass judgment on the strength of the arbitrator’s chosen rationale.”

 

The Refusal to Award Attorneys’ Fees Did Not Violate CROA

In 15 U.S.C. § 1679g(a)(3), CROA directs that in the case of any successful action under the Act, plaintiffs may recover actual damages as well as “the costs of the action, together with reasonable attorneys’ fees.”  On appeal, the Plaintiffs argued that the arbitrator had thus manifestly disregarded CROA by refusing to award additional attorneys’ fees.  The Fourth Circuit noted, however, that the arbitrator declined to award attorneys’ fees because they were not “reasonable,” and thus were not within the mandate of CROA.  The arbitrator identified several deficiencies with the Plaintiff’s fee requests, including “counsel’s use of “block billing” practices, quotation of unjustified billing rates, and submission of time entries that failed to segregate successful claims from unsuccessful claims.”  The arbitrator also highlighted other improper requests for questionable litigation fees, including “bills from costly restaurants” and excessive travel and lodging costs.  The arbitrator thus did not refuse to heed CROA, but instead found that the fee request in its entirety could be disregarded.  Rather than do so, the arbitrator decided to set off the established amount with the already received fees, and declined to award additional fees.  As explained by the Fourth Circuit, the arbitrator acted well within the law, and thus this argument failed as well.

 

The Fourth Circuit Affirmed the Arbitrator’s Award

Because the arbitrator’s reasoning and ruling did not indicate a manifest disregard for CROA, the Fourth Circuit affirmed the district court’s denial of the Plaintiff’s motion to vacate in part the final award.  As of October 28, 2015, the Plaintiffs have filed a petition for certiorari to the Supreme Court of the United States, which awaits response.

file000195499258

By Eric Jones

On May 29, 2015, the Fourth Circuit issued a published opinion in the civil case Dillon v. BMO Harris Bank.  The Circuit Court held that the district court erred when it denied appellant’s renewed motion to compel arbitration pursuant to loan agreements that the plaintiff had signed.  Thus, the Fourth Circuit vacated and remanded to the district court for further proceedings.

The Automated Clearing House Network and Payday Lenders

In 2013, James Dillon obtained loans from several online lenders that carried interest rates which substantially exceed the maximum allowable rates under North Carolina State law.  The defendants, BMO Harris Bank, N.A., Generations Federal Credit Union, and Bay Cities Bank (the “Banks”) operated as Originating Depository Financial Institutions (“ODFIs”) in connection with the loans.  Dillon alleges that in doing so they provided the payday lenders with access to the Automated Clearing House (the “ACH”) network, a system to enable secure electronic payments.  When payments were due under Dillon’s loans, the lenders initiated payment transactions through the ACH network.  The Banks then entered the transactions into the ACH network.  Soon after, a central clearing facility transferred funds directly from Dillon’s account to those of the lenders.  In this way, Dillon alleges that the payday lenders were able to establish loans in states where those loans are illegal and unenforceable.

The Motions to Compel Arbitration

Dillon filed a putative class action against the Banks alleging that by operating as OFDIs for payday lenders, they were complicit and necessary parties to the lenders’ unlawful practices.  The Banks filed initial motions to compel arbitration, pointing to clauses in the loan agreements stating that any claims arising from those loans would be submitted to arbitration.  To these motions, the Banks attached the loan agreements themselves bearing Dillon’s name.  In opposition, Dillon argued that the Banks had failed to offer proof that the attached loan agreements had been authenticated.  The Banks argued that because Dillon used the same loan agreements in his complaint, the pleadings themselves established the authenticity of the agreements and the arbitration clause.  Nevertheless, the district court denied the motion to compel arbitration, finding that the Banks had failed to provide authenticating evidence.

To cure the deficiency, the Banks obtained declarations from the lenders purporting to authenticate the loan agreements and filed renewed motions to compel arbitration.  Dillon opposed, arguing that the district court had already ruled on the motion to compel arbitration, and thus the law of the case doctrine should bar reconsideration.  The district court agreed, and the Banks filed a timely interlocutory appeal.

The Federal Arbitration Act and Interlocutory Appeals

The Fourth Circuit began by explaining the history of the Federal Arbitration Act (FAA) and the requirement that courts rigorously enforce agreements to arbitrate.  Section 16(a)(1)(A) of the FAA provides for immediate appeal from an order refusing a stay in any litigation that is referable to arbitration, and § 16(a)(1)(B) provides for immediate appeal for any order denying a petition to compel arbitration.  The Banks argued that the district court’s denial of the renewed motion to compel arbitration and stay the proceedings thus allows immediate appeal.  Dillon, in opposition, argued that the district court’s order denied reconsideration of the motion to compel arbitration, and thus fell outside of the FAA.  The Fourth Circuit, looking to the title of the motions and the clear intention to seek enforcement of an arbitration clause, held that valid jurisdiction existed over the appeal.

The District Court Erred by Interpreting the Renewed Motions as Motions for Reconsideration

Although the district court did not explain why it considered the renewed motions to be motions for reconsideration, the Circuit Court found two potential reasons.  The Fourth Circuit held that neither were convincing.  First, the district court could have believed that the Banks were allowed only one opportunity to invoke the FAA’s enforcement mechanisms.  Alternatively, the district court could have relied on the law of the case doctrine, believing that both motions invoked the same issues.  The Circuit Court addressed each of these in turn.

First, the Fourth Circuit could find no authority which limited a party’s access to FAA’s enforcement mechanisms unless the party is found to be in default.  A party is found to be in default, and thus barred from compelling arbitration or staying the proceedings, only if they have utilized the litigation machinery so substantially that to subsequently permit arbitration would prejudice the party opposing the stay.  Because the district court did not find that the Banks were in default, the order could not have rested upon these grounds.

Second, the Fourth Circuit held that the initial motions to compel arbitration and the renewed motions raised different issues, and thus were not barred by the rule of the case doctrine.  In their initial motions, the Banks argued that the loan agreements were substantially authenticated.  When the district court disagreed, the Banks did not challenge that ruling in their renewed motions.  Rather, they attempted to cure the evidentiary deficiencies that the district court relied on in denying the initial motion.  Thus, the law of the case doctrine did not bar the renewed motions.

The Fourth Circuit Vacated and Remanded for Further Proceedings

Because the district court erred in its interpretation of the Banks’ renewed motions to compel arbitration, the Fourth Circuit vacated the court’s order and remanded for further proceedings.

By Chad M. Zimlich

On Monday, March 16, 2015, the Fourth Circuit in Moses v. CashCall, Inc., a published civil opinion, considered an appeal from a district court affirmation of a bankruptcy court decision from the Eastern District of North Carolina.

The appeal centered around whether claims for declaratory relief and for monetary damages asserted by Oteria Moses, a resident of Goldsboro, North Carolina, against CashCall, Inc. were subject to arbitration. The bankruptcy court retained jurisdiction over both claims, denying CashCall’s motions to compel arbitration. With respect to the claim of monetary damages, the bankruptcy court also made recommended findings of fact and conclusions of law. The district court affirmed the bankruptcy court’s decision.

On appeal, the Fourth Circuit held that that the district court did not err in affirming the bankruptcy court’s exercise of discretion to retain in bankruptcy Moses’ first claim for declaratory relief. However, the majority of the Court found that the district court erred in retaining in bankruptcy Moses’ claim for damages under the North Carolina Debt Collection Act and denying CashCall’s motion to compel arbitration of that claim. As to this part of the holding, the judges were split three ways, Judges Gregory and Davis for concurring in a judgment reversing the issue of arbitration for the money damages, and Judge Niemeyer dissenting.

A Question of Where the Case Belongs: Bankruptcy or Arbitration

The issue that the Fourth Circuit was confronted with was whether it was appropriate for either of Moses’ claims to be submitted to arbitration, or if one or both claims required the use of the bankruptcy court system. The question may seem simple, however, there were two distinct inquiries regarding each claim centered on the jurisdiction that the bankruptcy court had.

Loan Sharking By Western Sky

Facing financial difficulties, Moses signed a Western Sky Consumer Loan Agreement (“Loan Agreement”) on May 10, 2012, and agreeing to pay Western Sky, or any subsequent holder of the debt, $1,500 plus 149% interest. Pursuant to the agreement, Western Sky gave Moses $1,000, and retained $500 as a “prepaid finance charge/origination fee.” The Loan Agreement stated that the annual percentage rate for the loan was 233.10%, with the amount of all scheduled totaling $4,893.14. North Carolina law limits interest rates to a maximum of 16%. The Loan Agreement also gave Western Sky’s address as being in South Dakota and stated that the agreement was subject to the Indian Commerce Clause of the Constitution. Additionally, Western Sky was not licensed to make loans in North Carolina.

The Loan Agreement provided that any disputes relating to it were to be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation.” Lastly, the Loan Agreement stated that the arbitration could take place either on tribal land or within 30 miles of Moses’ residence, but in either case the Cheyenne River Sioux Tribe would retain sovereign status or immunity.

Three days after signing the Loan Agreement, Moses received a notice from Western Sky that the Agreement had been sold to WS Funding, LLC, a subsidiary of CashCall, Inc., and would be serviced by CashCall. Three months later Moses filed a Chapter 13 bankruptcy petition in the Eastern District of North Carolina. One week later, CashCall filed a proof of claim in the bankruptcy proceeding, asserting that Moses owed it $1,929.02. Moses objected on the basis the loan was not enforceable in North Carolina, both because of the unlicensed lending and the 16% limit. Moses also filed an adversary proceeding against CashCall seeking a declaratory judgment that the loan was void under North Carolina law, as well as damages against CashCall for its illegal debt collection.

After the bankruptcy court approved Moses’ bankruptcy plan, CashCall filed simultaneous motions to withdraw it’s claims, or, in the alternative, to compel Moses to arbitrate pursuant to the Loan Agreement. Because Moses had already filed an adversary proceeding against CashCall, CashCall could not withdraw its proof of claim without court approval. Moses objected to CashCall’s motion to withdraw its proof of claim. She contended that CashCall, which had 118 similar claims in the Eastern District of North Carolina, sought to withdraw its proof of claim in her case only after she had challenged its practices. The purpose of the withdrawal, Moses argued, was simply an attempt by CashCall to divest the bankruptcy court of jurisdiction.

The bankruptcy court denied CashCall’s motion to dismiss the complaint or to stay and compel arbitration, concluding that Moses’ claim for a declaratory judgment that CashCall’s loan was void was a “core” bankruptcy claim. As to Moses’ second claim, which sought damages, the court concluded that the claim was non-core, over which it could only recommend findings of fact and conclusions of law for a decision by the district court. The bankruptcy court also denied CashCall’s motion to withdraw its proof of claim, finding that the withdrawal would prejudice Moses by removing the court’s jurisdiction over the other causes of action. CashCall filed interlocutory appeals on both counts to the district court. The district court affirmed the bankruptcy court’s orders.

Whether a Claim is Statutorily or Constitutionally Core, and Tensions Between the FAA and Bankruptcy Code

The rule iterated by the Fourth Circuit was the basis of this decision hinges on whether or not the claim in question was constitutionally core according to the Supreme Court’s decision in Stern v. Marshall. The Court there held that “Article III of the Constitution prohibits bankruptcy courts from issuing final orders regarding statutorily core claims unless they ‘stem[] from the bankruptcy itself or would necessarily be resolved in the claims allowance process.’” That means that, should the claim be based in a statute but raise no constitutional questions, it should be treated as statutorily non-core and the district court is given de novo review, making it the court of first impression.

However, a further issue was the tension between the Federal Arbitration Act (“FAA”), which favors the use of arbitration and grants the decision to arbitrate to the court of first impression, and the Bankruptcy Code, which gives the bankruptcy courts their jurisdiction and lays out a completely separate purpose intended by Congress.

The Claim of a Declaratory Judgment Belonged to the Bankruptcy Court

The Court first noted that previous courts that have considered agreements similar to the Loan Agreement, specifically the Eleventh and Seventh Circuits and the District of South Dakota, have “found that the Cheyenne River Sioux Tribe has no laws or facilities for arbitration and that the arbitration procedure specified is a ‘sham from stem to stern.’” The Fourth Circuit agreed and found that the Loan Agreement was clearly illegal under North Carolina law due to the extreme interest rate, however that did not negate the fact that the agreement specified that Indian tribal law would apply and that any dispute under the agreement would be resolved by the Sioux Tribe’s arbitration.

However, while arbitration agreements should normally be enforced, in this case the Court found that the fundamental public policy present in the Bankruptcy Code was in direct conflict with a decision to arbitrate. Meaning that, should it be declared that the Loan Agreement was illegal this would have a direct and substantial impact on Moses’ Chapter 13 bankruptcy proceedings. Therefore, as the bankruptcy court had first impression for this claim, its denial of arbitration was not a violation of its discretion.

The Problem of the Claim of Damages and a Flurry of Opinions

Moses’ claim for damages was based on the North Carolina Debt Collection Act, and the majority’s opinion found no inherent conflict between the Bankruptcy Code and the effect that arbitration would have on Moses’ bankruptcy proceeding. However, even the two-judge majority split in their reasoning for this conclusion.

Judge Gregory relied on the Ninth Circuit’s opinion in Ackerman v. Eber in stating that bankruptcy courts generally have no discretion in refusing to arbitrate a claim that is found to not be constitutionally core. His concurrence went on to state that, while the claims shared a common question, the claim of damages did not pose an inherent conflict with the reorganization of Moses’ estate under the Chapter 13 bankruptcy proceeding. Additionally, Judge Gregory saw no issue with conflicting results, as the arbitrator’s order would be subject to enforcement by the district court. In this case, any conflicts that may arise would not be “inherent” and “sufficient” to the point that they overrode the presumption in favor of arbitration.

Judge Davis relied on a previous Fourth Circuit decision from 2005, In re White Mountain Mining Co., L.L.C., which spoke indirectly on the subject. Judge Davis’ opinion, while reflecting on the “odiousness” of CashCall’s practices and perhaps faulty arbitration procedures, emphasized the fact that the non-core claim of damages that Moses had in this case would in no way be frustrated by arbitration itself, and therefore the lack of direct conflict required deference to the FAA.

Judge Niemeyer’s dissent argued that the district court’s exercise of discretion to retain the damages claim presented the same question as the declaratory judgment. So in this view, if the loan agreement were invalid, separating the two claims would be inefficient and create issues of collateral estoppel. Therefore, the district court had not abused its discretion.

Bankruptcy Court May Keep Declaratory Judgment But Must Lose Damages Claim

The Fourth Circuit concluded that resolution of Moses’ claim for a declaratory judgment could directly impact the claims against her estate, and arbitration with the Cheyenne River Sioux Tribe would “significantly interfere” with the bankruptcy reorganization. Therefore, the district court was not in error in upholding the bankruptcy court’s decision. However, the money damages sought were not in direct conflict with the Bankruptcy Code and its procedures for Moses under Chapter 13, and the question of damages was one for an arbitrator and not the bankruptcy court.

metro

By Ashley Escoe

In Fraternal Order of Police v. WMATA, a published civil opinion released on March 10, 2015, the Fourth Circuit reversed a district court’s order of summary judgment for the appellee, the Fraternal Order of Police (FOP), holding that the appellant, the Washington Metropolitan Area Transit Authority (WMATA), complied with the arbitration award.

Officers Allege That Termination Violates Arbitration Award

This labor dispute arose when the WMATA fired two of its police officers for a second time, after an arbitration award required WMATA to rehire them. WMATA fired Mark Spencer and Sherman Benton initially for making untruthful statements during investigations into their alleged improper conduct. The FOP, the bargaining agent for officers, filed grievances for the two officers culminating in arbitration. The Board of Arbitration determined that a lengthy suspension was more appropriate than termination and ordered WMATA to rehire the officers.

When the two officers were fired, they lost their Maryland certification to work as police officers. Once reinstated, they had to apply for recertification with the Maryland Commission before resuming their police duties. The Maryland Commission denied the officers recertification. Because the two officers were not recertified, WMATA fired them a second time. The FOP filed this action in federal court, contending that WMATA violated the decision of the Arbitration Board. The district court held that WMATA failed to comply with the arbitration order and instructed WMATA to rehire Benton and Spencer.

Fourth Circuit Follows Seventh and Third Circuits

The decision in this case turns on whether firing the two officers the second time, when they were denied recertification, constitutes a violation of the arbitration order. There is no Fourth Circuit authority that addresses this issue directly. Therefore, the Court looked to the Seventh and Third Circuits, which had decided cases with similar facts. The Seventh Circuit in Chrysler Motors Corp. v. International Union, Allied Industrial Workers and the Third Circuit in United Food & Commercial Workers Union Local 1776 v. Excel Corp. held that an employee cannot challenge a second termination by seeking to enforce an arbitration award where an employee was terminated, ordered to be reinstated after arbitration, then fired again for independent reasons.

Second Termination was Based on Independent Grounds

The Fourth Circuit Found that that WMATA fired the officers the second time on independent grounds not related to the first termination. The reasons for the second termination, that the Maryland Commission denied recertification, was distinct from firing the officers for disciplinary infractions and was also never before the Arbitration Board.

The Court noted that WMATA provided the Maryland Commission with derogatory information seeking to discourage the officers’ recertification. While the Court does not condone that behavior, it concluded that it did not have jurisdiction to consider if WMATA’s actions violated the “just cause” provision of the collective bargaining agreement between the officers and WMATA. That issue, according to the agreement, must be settled by arbitration.

Summary Judgment Reversed

The Fourth Circuit held that the WMATA’s choice to fire the two officers after their recertification was denied, did not violate the arbitration award, reversing the district court’s order of summary judgment for the FOP.