Articles / Alternative Dispute Resolution
It is well settled law that, except in rare circumstances, when the parties have agreed to arbitrate disputes that arise during the course of their dealings, the courts will honor that agreement and dismiss any law suit that they may file with the courts. Indeed, it is also well settled law that “[b]ecause of the strong federal policy in favor of arbitration, ‘any doubts concerning waiver of arbitrability should be resolved in favor of arbitration.’”
In the case of Messina v. North Central Distributing, Inc. d/b/a Yosemite Home Décor, the question of what acts constitute a waiver was before the US Court of Appeals, 8th Circuit. The Messina Court first reviewed the applicable law, holding
A party waives its right to arbitration if it “(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.” [citation omitted] A party acts inconsistently with its right to arbitrate if it “substantially invokes the litigation machinery before asserting its arbitration right, when, for example, it files a lawsuit on arbitrable claims, engages in extensive discovery, or fails to move to compel arbitration and stay litigation in a timely manner.” (citations omitted). To safeguard its right to arbitration, a party must “do all it could reasonably have been expected to do to make the earliest feasible determination of whether to proceed judicially or by arbitration.” [citation omitted]
Having set out the applicable law, the Court looked at the facts of the Messina case. There, it found that an apparently enforceable arbitration agreement between the parties existed. However, it also found that Messina ignored the arbitration agreement when it filed the complaint, and that defendant failed to raise the existence of the arbitration agreement or move to dismiss the court law suit for several months. Moreover, during the time that the lawsuit was pending, multiple court proceedings occurred, including removing the original lawsuit from state court to Federal Court, and fully briefing and arguing a motion to change venue. The Court concluded that such acts constituted a waiver of the arbitration agreement.
Yosemite only moved to compel arbitration after it lost the motion to transfer venue. The timing of Yosemite’s actions demonstrates that it “ ‘wanted to play heads I win, tails you lose,’ which ‘is the worst possible reason’ for failing to move for arbitration sooner than it did.” [citation omitted] The district court thus did not err in finding that Yosemite acted inconsistently with its right to arbitration. Yosemite’s actions caused Messina prejudice because, as the district court found, he “spent considerable time and money obtaining new counsel, partaking in pretrial hearings, and responding to the transfer motion.” Prejudice from a failure to assert an arbitration right occurs when, for example, “parties use discovery not available in arbitration, when they litigate substantial issues on the merits, or when compelling arbitration would require a duplication of efforts.” [citation omitted] Delay in seeking to compel arbitration “does not itself constitute prejudice.” [citation omitted] Delay can however combine with other factors to support a finding of prejudice. [citation omitted] (district court did not err in finding prejudice when party seeking arbitration caused “substantial delay,” expenses, and potential duplication of efforts when it “failed to object or move to compel arbitration throughout a year of court proceedings”).
The take away: when an arbitration agreement exists and one of the parties ignore the agreement and runs to court, “raise it or lose it.”
The full opinion: Messina v. North Central Distributing, Inc. d/b/a Yosemite Home Décor, US Court of Appeals for the 8th Circuit, No. 15–2323, May 10, 2016
Tina A. Syring, “Employer’s Delay Results in Waiver of Arbitration,” Barnes & Thornburg’s BT Currents, May 14 2016
Effect of Bankruptcy Automatic Stay on Arbitration
This case, In re John Joseph Louis Johnson, III, addresses the question of what, if any, impact does a bankruptcy filing have on an arbitration.
Generally, the filing of a bankruptcy stays an arbitration:
Subject to certain exceptions not applicable here, the filing of a bankruptcy petition triggers an automatic stay that both protects the debtor and “safeguards property of the bankruptcy estate.” [citation omitted]
Among other things, § 362(a) [of the Bankruptcy code] stays:
(1) the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was . . . commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; [and]
. . . .
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.
* * *
The automatic stay applies to arbitration proceedings. [citation omitted] (“[T]he scope of the automatic stay has been held to encompass post-petition proceedings conducted pursuant to an arbitration clause.”). And because the stay is automatic, “the debtor does not have to make any formal request that it be issued or that it apply to a particular proceeding.” [citation omitted]. “Although [non-bankruptcy] court judges generally refrain from proceeding once they are made aware of a bankruptcy filing, the burden is on the creditor not to seek relief . . . in violation of the stay.”
The general question of the effect of a bankruptcy filing on a pending arbitration being well settled law, the Johnson case examined whether a creditor violated the automatic stay by seeking to enforce an arbitration award not against the debtor, but against non-debtor co-defendants. Generally, a bankruptcy stay applies not only to stay actions against the debtor personally, but also to actions against the debtor’s property. Thus, the question whether non-debtor parties to an arbitration are prohibited from continuing their arbitration proceedings when a bankruptcy case has been filed was before the court.
The case has a complicated set of facts, a celebrity debtor, and a multi-million dollar sports contract. Briefly, the debtor, “Jack” Johnson, a NHL hockey player, after several short term contracts with the LA Kings won a $30 million salary multi-year contract.
After receiving the LA Kings’ “jackpot” contract, Johnson and his parents started borrowing against it. One creditor was RFF Family Partnership, LP (“RFF”), who claimed a loan of $1,862,500 and that the borrowers granted RFF a personal lien on certain property, including Johnson’s multimillion-dollar player contract. The loan’s security agreement provided for binding arbitration upon any disputes and/or defaults.
As the Bankruptcy Court summarized the events:
The Debtor asserted counterclaims against RFF in the arbitration, asserting that it was RFF that defrauded him and his co-borrowers. The Debtor also denied that RFF has a perfected security interest in his player contract. Before the arbitration could proceed further, the Debtor filed his bankruptcy petition. Since then, RFF has continued to demonstrate its desire for one thing: the Debtor’s multi-million dollar salary.
* * *
But without seeking relief from the automatic stay or even informing the Debtor of its actions, RFF continued the arbitration proceeding under the pretense of asserting claims against parties related to the Debtor. RFF ultimately obtained an arbitration award containing a finding that it has a perfected security interest in the Debtor’s player contract and other findings that would defeat the Debtor’s claims against RFF. By obtaining these findings and a state court order confirming the arbitration award, RFF attempted to exercise control over the Debtor’s bankruptcy estate—both his salary and his counterclaims—to the detriment of the Debtor and his other creditors. And RFF sought these findings intentionally and with full knowledge of the Debtor’s bankruptcy, in willful violation of the automatic stay.
As noted above in the introductory description of this case, i) a bankruptcy case automatically stays “the commencement or continuation . . . of a judicial, administrative, or other action” against the debtor or his/her/its property; ii) an arbitration proceeding concerning the debtor or his/her/its property is stayed by a bankruptcy, and iii) “because the stay is automatic, ‘the debtor does not have to make any formal request that it be issued or that it apply to a particular proceeding.”
The Johnson court found that RFF’s state court actions were a “willful” violation of the bankruptcy stay and voided the arbitration award and subsequent state court confirmation of the award. The Court also granted Johnson his attorneys fees related to RFF’s actions, and scheduled a hearing to determine whether punitive damages were also appropriate..
As one commentators put it after discussing the case:
Most bankruptcy practitioners when asked whether or not an act contemplated by a creditor might violate the automatic stay are likely to advise their clients, out of an abundance of prudence, that it may be safer to ask for permission than forgiveness. RFF’s counsel did not do so. As a result, RFF proceeded in a course that violated the automatic stay. RFF was standing on thin ice when it proceeded to take the course of action to enforce its rights in the arbitration proceeding without the bankruptcy court granting relief from the stay. It may be worthwhile, therefore, to seek permission rather than forgiveness when confronted with the automatic stay.
The full opinion: In re John Joseph Louis Johnson, III, United States Bankruptcy Court for The Southern District of Ohio, Eastern Division at Columbus, Case No. 14-57104, April 28, 2016
Walter J. Greenhalgh, “Violation of the Automatic Stay Seeking to Enforce Arbitration Award Against Nondebtor: Beware, You May Be on Thin Ice,” Duane Morris Alerts and Updates, May 13, 2016