Wake Forest Law Review
28Mar

Parties Fail to Construct Arbitration Agreement Properly, Fourth Circuit Steps In

Categories: 4th Cir. Blog Civil Cases
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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.

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14Sep

Examining Rule 2003(e) of the Federal Rules of Bankruptcy Procedure

Categories: 4th Cir. Blog
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piles-of-money

By Taylor Anderson

On April 27, 2015, the Fourth Circuit issued its published opinion regarding the civil case In re Jenkins. The appellant, Matthew Alan Jenkins (“Jenkins”), appealed the decision of the lower courts, arguing that the Bankruptcy Administrator and the Trustee’s (collectively, “the Trustee”) complaint should have been dismissed as untimely. The Fourth Circuit sided with the appellant and applied Rule 2003(e) of the Federal Rules of Bankruptcy Procedure in order to determine when a creditors’ meeting concludes. The Court held that the meeting of the creditors “concluded” on the date the rescheduled meeting ended when counsel for Trustee failed to adjourn the meeting in compliance with Rule 2003(e); however, the Fourth Circuit declined to adopt the bright-line rule that the per se conclusion of the creditors’ meeting is the date that the trustee fails to strictly comply with Rule 2003(e) in adjourning the creditors’ meeting.

Factual Background

On April 11, 2012, Jenkins filed a petition for Chapter 7 bankruptcy relief. The Trustee convened a creditors’ meeting at which Jenkins testified as to disputed proceeds he had received; however Jenkins did not provide all the necessary information that Trustee needed from this meeting. As a result, counsel for the Trustee requested an extension of the deadline to file a complaint objecting to Jenkins’s discharge because another creditors’ meeting was needed. Pursuant to Rule 4004(b) of the Federal Rules of Bankruptcy Procedure, the bankruptcy court granted the Trustee’s request and extended the deadline to “sixty days beyond . . . whenever the 341 [creditors’] meeting is concluded.”

The next creditors’ meeting was scheduled to reconvene on July 11, however Jenkins did not attend this meeting. At a rescheduled creditors’ meeting on July 19, Jenkins appeared by telephone, but he again failed to provide the Trustee with the necessary information on that date, and so, before ending the telephonic meeting, counsel for the Trustee announced that she was “not going to conclude the meeting today.” Counsel further explained, “I am going to talk with the trustee and, if he determines that we can adjourn the meeting, we will file a notice of that, but officially the meeting is continued.” No notice of a continued meeting was ever filed, nor did the meeting ever reconvene.

On September 26, 2012, sixty-nine days after the July 19 creditors’ meeting, the Trustee filed a complaint, objecting to Jenkins’s discharge in bankruptcy. Jenkins asserted that the Trustee’s complaint was “barred by the applicable statute of limitations.” The bankruptcy court found the Trustee’s complaint timely and denied Jenkins a bankruptcy discharge. The district court affirmed, and Jenkins appealed.

Rule 2003 Speaks in Terms That Are Plainly Mandatory

Rule 2003 of the Federal Rules of Bankruptcy Procedure supplies the procedures by which a creditors’ meeting must progress. Specifically, Rule 2003(e) explains how a trustee is to conclude a creditors’ meeting. It provides, in its entirety: “The meeting may be adjourned from time to time by announcement at the meeting of the adjourned date and time. The presiding official shall promptly file a statement specifying the date and time to which the meeting is adjourned.”

Date of Creditors’ Meeting Conclusion

Jenkins asserted that the creditors’ meeting concluded on July 19, 2012, when the Trustee failed to adjourn the meeting to a stated later date and time. The Fourth Circuit agreed, holding that Trustee failed to follow Rule 2003(e)’s clear procedures.

In discussing Rule 2003(e)’s legislative history, the Fourth Circuit mentioned that Rule 2003(e) was amended in 2011 to add the requirement that “[t]he presiding official shall promptly file a statement specifying the date and time to which the meeting is adjourned” in order to prevent indefinite adjournment. To allow Trustee to prevail in this situation would allow him to do precisely what Rule 2003(e) seeks to prevent.

The Fourth Circuit found that Trustee undeniably violated Rule 2003(e). Though Trustee attempted to adjourn the creditors’ meeting on July 19, 2012, he failed either to announce the date and time of the adjourned meeting or to file a statement thereafter containing that information. Because Rule 2003(e) unambiguously requires these actions to effectuate an adjournment, the meeting was never adjourned. The Fourth Circuit said “because the meeting was never adjourned, we hold it was concluded” on July 19, 2012. Because Trustee filed the complaint sixty-nine days after July 19, 2012, this was an untimely filing and thus Trustee’s complaint should not have been considered by the lower court.

Fourth Circuit Declines to Adopt Bright-Line Approach

The Fourth Circuit made clear that it was stopping short of adopting a Rule 2003(e) “bright-line approach.” This approach states that the per se conclusion of the creditors’ meeting is the date that the trustee fails to strictly comply with Rule 2003(e) in adjourning the creditors’ meeting.

The Court discussed an example where a trustee fails to announce at the initial meeting the adjourned date and time, but promptly thereafter files a written notice setting forth that information. The Fourth Circuit stated that although the trustee in that situation is not in strict compliance with Rule 2003(e)’s twin requirements, such an action may not warrant an automatic declaration of the meeting’s conclusion as the date of the improperly adjourned meeting.

Judgment Reversed and Remanded

Because the Trustee did not comply with any part of Rule 2003(e), the judgment of the district court was reversed and the case was remanded for further proceedings.

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