Interesting article from Lowenstein Sandler about the interplay between the freedom to contract and the public policy considerations in setting statute of limitation accrual dates, and whether New York is losing out to Deleware as the better place to do business.
Court Affirms Decision Compelling Arbitration at Location Other than as Agreed to
In a case between Northrop Grumman and the Republic of Venezuela, the courts were faced with the issue of compelling arbitration in a venue other than the one the parties had agreed to. The Fifth Circuit affirmed the lower court’s decision to compel arbitration in a venue other than Venezuela.
As relevant to this discussion, the facts involved an agreement between the parties, entered into before Hugo Chavez came to power, that called for the arbitration of any disputes in Caracas, Venezuela. Some time later, in the face of a dispute and believing that it would not get a fair shake in Venezuela, Northrop Grumman sought to compel arbitration in another location. Finding arbitration in Venezuela to be impractical due to the political situation, the arbitration proceeded in Brazil. There, Northrop Grumman was awarded $128 million.
In granting Northrop Grumman’s motion to enforce that award, the court rejected Venezuela’s argument that venue was improperly changed. Its appeal followed.
New York Court of Appeals Rules Corporate Convertible Loans May Be Subject to Usury Laws
From Sidley, an issue that can impact complex loans and investments. This case addresses whether the conversion price in a convertible option can be considered interest and run afoul of New York’s criminal usury laws.
Adar Bays, LLC v. GeneSYS ID, Inc.
ERISA Claims Are Not Employment Related and Not Subject to Arbitration
Plaintiff Cooper worked for a company (“DST”) which offered a profit sharing plain in which Cooper participated. The plan had two pools of funds, one which included contributions of the employee, which were partially matched by DST, and a profit sharing account (the “PSA”), to which only DST contributed. DST’s employees were automatically enrolled in the PSA and were obligate to keep those funds in the account for so long as they remained employees.
DST hired an advisor, Ruane Cunniff & Goldfarb, to manage the PSA funds, with complete investment discretion, but overseen by DST. The PSA was covered by ERISA regulations which required periodic disclosure of summary descriptions of the employees’ rights thereunder. These descriptions made no mention of arbitration in event of any dispute. DST employees also received investment information and updates about the PSA investments.
All of the employees received a handbook which included that all employment related disputes were to be adjudicated in arbitration. That provision excluded, among other things, ERISA relate claims.
Court Sends Question of Arbitrability to Arbitrators
“Questions of arbitrability” cover the scope of a dispute and address whether “parties are bound by a given arbitration clause,” and if an agreement to arbitrate “applies to a particular controversy.” The question of whether a matter is required to be arbitrated or whether a party is obligated to arbitrate a dispute, “is generally an issue for judicial determination.” However, “when the parties’ agreement specifically incorporates by reference the rules of” the arbitration panel and states that “all disputes” are to be decided by arbitration, “courts will leave the question of arbitrability to the arbitrators.” In this case, AAA was the denominated panel, and the parties’ agreement provided that any controversy or claim arising out of or relative to the agreement was to be submitted to the AAA. As such, the court determined that the questions or “issues of arbitrability” were for the arbitrators to decide.
Bromberg & Liebowitz v O’Brien
Court Modifies Arbitration Agreement Striking Unconscionable Provisions
We have discussed cases where the costs of arbitrating a dispute were so prohibitive that the First Department voided the arbitration agreement.
In a recent Federal decision out of Texas, a court modified an arbitration agreement’s cost and venue provisions, relieving a party from some of the costs she would otherwise have been obligated to pay.
As part of her employment, plaintiff agreed to arbitrate any claims arising from her employ. She commenced suit against her employer alleging wage and labor claims. The employer sought to compel arbitration. There was no dispute that the employee signed an arbitration agreement that covered her asserted claims. Instead, the employee argued that the agreement was unenforceable because it’s cost-splitting and venue provisions rendered it “substantively unconscionable.” The employer countered that the provisions were reasonable but if they were not, the court could sever those provisions while still compelling arbitration.
Court Refuses to Disqualify “Wing” Arbitrators
After an extensive selection process to select arbitrators, and 10 hearings over 19 months, defendant sought an injunction to stay the continuation of an AAA arbitration and to disqualify the remaining two arbitrators. At a point prior to that, the panel chair disclosed that his daughter-in-law was an attorney working for the same firm that was representing plaintiff. Not seeing a conflict, the other panel members supported the chair’s efforts to stay on the panel. After defendant objected, the AAA removed the chair from the panel, but not the “wing” arbitrators.
Defendant sought to disqualify those two remaining panel members because they did not agree to disqualify the chair and were thus “compromised by their improper participation” in the chair’s disclosure process and efforts to stay on the panel, which purportedly demonstrated their impartiality against defendant. It appears from the decision that defendant was not just complaining about the chair’s discussion with the other two arbitrators about the conflict and his resignation, but their knowledge that defendant challenged their partiality, all of which rendered them unfit to continue as arbitrators.
After noting that the AAA had the final say about disqualification of arbitrators, and did not bar the type of discussion of which defendant complained, the court held that defendant was not entitled to the injunction finding “neither the appearance [of] nor ‘probable partiality.’” Reiterating the reluctance of courts to interfere in a pending arbitration, especially as AAA rules and procedure were on point to the issues of which defendant complained, the court rejected defendant’s argument that the disqualified arbitrator somehow poisoned the remaining two. The court underscored its opinion of defendant’s application by pointing out that defendant’s concern about the remaining arbitrators’ opinion of defendant was entirely of its own making in that until the lawsuit was filed those two arbitrators were not aware that defendant was challenging their role as the remaining arbitrators. The court closed its opinion by rejecting the remaining claims of bias asserted by defendant and reminding defendant that it could object to the panel’s decision in court.
W-9 Form Not Required to Enforce Settlement Agreement
Two years after commencing a personal injury accident, plaintiff settled. After counter executing the settlement documents, plaintiff’s counsel returned them to defendant’s counsel with a blank form W-9 for the payee’s information. The W-9 was never returned.
When the settlement payment was not paid in 21 days, under CPLR 5003-a, plaintiff’s counsel filed a judgment. Defendant moved to vacate the default, claiming that the IRS required the W-9 and the judgment was therefore improper. After the W-9 and settlement proceeds were exchanged, plaintiff still opposed vacatur. The lower court vacated.
Disagreeing with the First Department based on the underlying claims in this action, the Second Department held that because the W-9 was neither a release nor a stipulation of discontinuance discussed in CPLR 5003-a as the trigger for the deadline for a settling party to pay, the judgment was proper. Once plaintiff satisfied CPLR 5003-a, the clock began to tick, even without the W-9. “Granting settling defendants the unilateral right to withhold payment in these circumstances would significantly undercut the statutory goal of CPLR 5003-a to ensure the prompt payment of settlement proceeds upon tender of the statutorily prescribed documents. Accordingly, the defendants’ failure to timely pay the sum due under the settlement agreement entitled the plaintiff to enter judgment including interest, costs, and disbursements pursuant to CPLR 5003-a (e).”
Nonarbitrable Claims Inextricably Interwoven with Arbitrable Issues Required to Be Arbitrated
A client sued its law firm for malpractice. The law firm commenced an arbitration addressed to its unpaid fees, as required by the parties’ retainer agreement. The client sought to stay the arbitration pending the outcome of the lawsuit while the law firm attempted to stay the lawsuit pending the outcome of the arbitration.
Finding that no question existed as to the arbitrable nature of the legal fees, the lawsuit would be stayed while the arbitration progressed because “where ‘arbitrable and nonarbitrable claims are inextricably interwoven, the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where . . . the determination of issues in arbitration may well dispose of nonarbitrable matters.’” The court then addressed the fact that no arbitration agreement was ever signed addressed to the client’s malpractice claims, stating “[t]o the extent plaintiff argues that it cannot be forced to arbitrate its malpractice claim because it did not explicitly agree to do so, both the First and Second Departments have clearly found that a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where, as here, the determination of the arbitrable unpaid fees claim may dispose of the nonarbitrable malpractice claim.”
Protostorm, Inc. v. Foley & Lardner LLP
Fiduciary Relationship Supporting Constructive Trust Claim Not Undermined by Unclean Hands
Plaintiff borrowed more than a million dollars from defendant, in addition to using his funds, to form an LLC with which to buy a property. The LLC was in defendant’s name, however, pending plaintiff’s ability to obtain credit to hold the property on his own. When the time came for defendant to transfer the LLC and property to plaintiff, he refused, denying that there was any agreement between them. Defendant tried to explain away the loan proceeds and other indicia of plaintiff’s ownership and control. The lower court found that defendant’s notes that the funds he provided to plaintiff were loans led to the imposition of a constructive trust.
The Second Department affirmed. After finding that the arrangement was not defeated by the statute of frauds, because the parties’ conduct would be “extraordinary” absent their unwritten agreement, it refused to find that plaintiff’s conduct in seeking to avoid his creditors—which led to the arrangement in the first place—could be seen as unclean hands to defeat his claims. Because defendant assisted plaintiff and was not harmed by whatever conduct was alleged to be plaintiff’s unclean hands, the relief to defendant would be denied because: “‘relief is denied under the ‘clean hands’ doctrine, ‘not as a protection to defendant, but as a disability to the plaintiff’ and as a matter of public policy in order to protect the integrity of the court.’” In other words, generally speaking, the clean hands doctrine is a defect in a plaintiff’s claim; it is not a defense for the defendant.
Last, the court found the existence of a fiduciary relationship between the parties. While ordinary business relationships, including that of lender-borrower, do not usually rise to a fiduciary relationship, the details of the general relationship in this case satisfied the court that the parties had a “confidential or fiduciary” relationship.