Toxic Waste . . .

Here's an interesting story about the Morgan Keenan unit of Regions Financial Corp., which is getting repeatedly hammered in FINRA arbitrations for the sale of proprietary high yield bond mutual funds. The claims are based upon failure to disclose that the funds contained "toxic waste," or "risky low-tier tranches of asset backed securities that lacked demand and liquidity." Morgan Keenan has lost 18 of 24 cases and there are hundreds more pending. Sounds like Morgan Keenan is up to its eyeballs in alligators.

Trial Dates in Massachusetts Superior Court ...

I am just back from a pretrial conference in the Massachusetts Superior Court, Middlesex County, Session B. The court gave us a trial date of August 9 . . . 2010. Wow, that is just terrible. My partner has a case in the A Session and recently was given a trial date nearly a year sooner. I understand Suffolk Superior Court has recently been giving out trial dates in October 2009 (I'm not sure what session that was in).

Ouch. A trial date a year and a half from now and it probably will get postponed at least twice beyond that. It will be 2011 before this case goes to trial. That's incredible.

"[A] suit against the United States must start from the . . . assumption that no relief is available."

In a very long opinion, the 9th Circuit recently held that the U.S. District Court for the Central District of California had no jurisdiction to confirm a $93 million arbitration award against the United States. The decision, United States of America v. Park Place Associates, Ltd., is a fascinating read.

To make a long story short, the plaintiff, Park Place Associates, was an investor in a legal card-playing club in California. Unfortunately, and unbeknownst to Park Place, its co-venturer financed its investment in the club with drug money. The U.S. seized the entire club, but later returned Park Place's interest to it as an innocent party.

Nevertheless, the U.S. retained a majority interest in the club and operated it through a series of trustees for a number of years. Park Place thought that the U.S. did a terrible job running the club and sued it for $150 million. Years of litigation followed up and down and around among various courts and arbitration proceedings, with the U.S. screaming sovereign immunity all the way.

Ultimately, Park Place had its "day in court" during a 10-day arbitration proceeding in 2004, after the Federal Circuit Court of Appeals ruled that the U.S. was bound by the partnership agreement between Park Place and its former partner, after stepping into the former partner's shoes, and accordingly had to arbitrate. Although the U.S. participated in various preliminary proceedings, it refused to participate in discovery or the arbitration hearing. Park Place won an arbitration award of over $93 million.

Then things get really weird. Park Place asked the Court of Federal Claims to confirm the arbitration award, but the Court of Claims refused, holding that it did not have jurisdiction to confirm or vacate an arbitration award. Park Place appealed, but the Federal Circuit granted the U.S's motion to dismiss the appeal.

The U.S. asked the U.S. District Court for the Central District of California to vacate the award and the District Court denied the motion, finding no grounds to vacate. The 9th Circuit affirmed that part of its decision.

Some months after the U.S. moved to vacate, and after being rejected in the Court of Claims and Federal Circuit, Park Place moved to confirm in the Central District of California, which granted the Motion.

The 9th Circuit vacated the confirmation of the arbitration award, holding that the Central District of California had no basis for jurisdiction over the U.S.

To try and boil a complicated structure down to a few sentences:

There are limited instances where the U.S. waives its sovereign immunity. The Tucker Act is one such waiver and in it the U.S. agrees to be liable for contracts into which it enters. But the Tucker Act confers exclusive jurisdiction in the Court of Claims.

The Federal Arbitration Act gives federal district courts, but not the Court of Claims, the substantive power to enforce arbitration agreements, but does not create any independent basis for jurisdiction in the district courts.

Another statute, 28 U.S.C. sec. 1345, confers federal subject matter jurisdiction on the federal courts whenever the U.S. commences an action there. But Section 1345 does not apply if the other party commences the action. So, the district court had jurisdiction to decide (and deny) the U.S's motion to vacate, but Section 1345 did not give it jurisdiction to decide (and grant) the motion to confirm.

Park Place had a variety of reasonably plausible other grounds for jurisdiction, but the 9th Circuit did not accept any of them. This apparently leaves Park Place with no court having jurisdiction to affirm its award.

So what is Park Place to do with its $93 million award? Apparently it still has a breach of contract action pending, but stayed, in the Court of Federal Claims, subject to resolution of the arbitration proceedings. So it may be able to go back there and arguing for preclusive effect for its arbitration award. Otherwise, it looks like Park Place may have to appeal to the Supreme Court. I'll look forward to seeing how this one turns out.

5th Circuit Affirms Denial of Motion to Compel Arbitration

Here's a decision worth cheering about.  I actually lost this issue myself in a case where the plaintiff chose to sue in state court, went all the way through discovery, booted doing its discovery in a big way, and then moved to compel arbitration when it realized it was going into trial blind.  I opposed, and a state court judge who shall not be named, grated their motion.  Unbelieveable!

So, this is justice done in my opinion.  Plaintiff filed suit in Texas state court, and the defendant removed to the federal court.  Ten months into the case, after significant discovery and motions to remand and to amend the complaint by the Plaintiff, the Plaintiff moved to compel arbitration.  The district court denied the motion, holding that the Plaintiff had waived her right by invoking judicially process, and that she had prejudiced the defendant by waiting so long to invoke the right to arbitrate.

The 5th Circuit affirmed.  The opinion is Nicholas v. KBR, Inc.

"The decision to file suit typically indicates a 'disinclination' to arbitrate."  The 5th Circuit nevertheless required a showing of prejudice to enforce the waiver, and stated that the waiver issue does not turn on the party's status as plaintiff or defendant.  "[T]he legal standard for waiver is the same regardless of which party is alleged to have waived arbitration."

The 5th Circuit noted that the motion to compel arbitration came on the heels of denial of the motion to remand, which it found "particularly troubling."  I suppose the Plaintiff's apparent hierarchy of desired forums went:  (1) Texas state court; (2) arbitration; (3) federal court.

The court also found that the Plaintiff had inflicted delay and expense on the defendant, which constituted prejudice supporting the denial of her motion to compel arbitration.  

So, a second cheer for Texas and the 5th Circuit on this one.  Arbitration is a great dispute resolution process.  But courts can't let parties game the system and forum shop, only to cry for arbitration after forcing the other side to spend significant sums on traditional court proceedings.  

Arbitration Agreement Provision Stating that Each Party Shall Bear own Attorney's Fees and Split Arbitration Costs Does Not Divest Arbitrators of Authority to Award Sanctions

On April 9, 2009, the Second Circuit Court of Appeals issued its decision in Reliastar Life Insurance Company of New York v. EMC National Life Company, holding that an arbitration agreement that states each party shall bear its own attorney's fees and split the costs of arbitration does not divest the arbitrators of authority to award sanctions against a party the arbitrators determined did not arbitrate in good faith.

The decision includes the customary discussion of the limited scope of review of an arbitration decision, and expressly notes that the court does not review (and was not asked to review) whether the arbitrators were correct that one party acted in bad faith or whether the amount of the sanction was appropriate.  The only question was whether the arbitrators had authority to issue the sanction.  

The court held that the arbitration agreement at issue conferred broad authority on the arbitrators to resolve disputes, and that that broad authority included the inherent equitable power to sanction bad faith conduct.

This was not an easy decision.  The court's decision overruled the district court, which had vacated the award as outside the arbitrators' authority.  Circuit Judge Pooler also dissented, contending that awarding fees and costs contradicted an "express and unambiguous term of the contract."  

Given that the decision on appeal was a 2-1 majority, if we ally the dissent and the district court judge who was vacated, it's really a dead heat.  Perhaps this one should be reviewed en banc. 

Supreme Court Strongly Endorses Arbitration as a Dispute Resolution Process in Holding That Union Members Are Compelled to Arbitrate Age Discrimination Claims

The U.S. Supreme Court issued an important decision this past Wednesday, April 1, 2009.  In Penn Plaza, LLC v. Pyett, the Court held that a negotiated provision in a union contract requiring arbitration of ADEA (age discrimination) claims was enforceable against union members.  The decision strongly endorses arbitration as a way to resolve disputes.

The decision overturned the Second Circuit Court of Appeals, and clarified the existing law under prior Supreme Court decisions.  Before Penn Plaza, the Court's decision in Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974) (a racial discrimination claim), held that arbitration clauses in collective bargaining agreements purporting to require arbitration of causes of action created by "congressional command" were unenforceable.

A more recent decision, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), called Gardner into question, when the Court held that ADEA claims were subject to arbitration, but the case was not decided in the context of a collective bargaining agreement.  In Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998), the question arose whether Gilmer had changed the law such that an arbitration provision in a collective bargaining agreement was enforceable where it purported to apply to an Americans with Disabilities Act claim.  The Court, however, declined to resolve the issue because the collective bargaining contract did not contain a "clear and unmistakable" waiver of the employee's right to a judicial forum.

In holding that a provision requiring arbitration of federally created discrimination claims is enforceable, the Court expressly stated that the Gardner decision was based upon misconceptions about arbitration that have since been corrected.  The Court recognized that arbitrators are "readily capable of handling factual and legal complexities," and that this ability "extends with equal force to discrimination claims under the ADEA."

Moreover, the Court stated that the "recognition that arbitration procedures are more streamlined than federal litigation is not a basis for finding the forum somehow inadequate." The Court recognized arbitration's "relative informality" as one of the "chief reasons" to select it.

All in all, the Penn Plaza decision stands as a ringing endorsement of the virtues of arbitration as a dispute resolution forum in any context.

"FINRA faces blitz of claims"

That's the headline from a front page story in this week's National Law Journal. FINRA is the Financial Industry Regulatory Authority (a merger of the NYSE and NASD). If you have a claim against a broker-dealer, registered investment adviser or the like, chances are you signed an agreement obligating you to arbitrate that claim with FINRA.

Not surprising that claims would surge given the massive market downturn. An up market can cover a lot of sins that become glaring when the market turns down.

Claims are up 90% compared to 2008. The win rate for customers filing claims was 42% last year, up from 37% in 2007.

OCM handles securities arbitration claims. Call us.