It is a holiday week, so there has not been much happening in the federal judicial system. Therefore, in addition to the usual case summaries, today’s Highlights will also include some SCOTUS action.
Enforcement of assigned arbitration clause
By now, the case law is well-established that the assignee of a contract may enforce an arbitration clause contained therein. It is easy to forget, however, that such an assignee must, first, prove that it actually holds the contract. Smith v. Cavalry Portfolio Services, LLC., 2020 U.S. Dist. LEXIS 242373 (N.D. Ill. Dec. 26, 2020) is a reminder of the importance of proving (or contesting) that basic element in an application to compel arbitration.
Smith, like so many assignee cases, arises out of a defaulted credit card debt. Smith opened a consumer credit account with Citibank. His Citibank contract included an arbitration agreement. Calvary Portfolio, which claimed it bought the account, commenced collection action through one of its subsidiaries and obtained a state court judgment. Those efforts included correspondence which Smith claimed violated the Fair Debt Collection Practices Act; he brought this action for damages thereunder. Cavalry moved to compel arbitration pursuant to the credit agreement. In response Smith asserted five defenses of which the court, Kennelly, J., rejects all but one. He holds, first, that a statutory claim, such as the FDCPA, can be subject to arbitration; second, the arbitration clause survives the merger of the debt into the judgment; and, third, it is irrelevant whether the arbitration agreement was based on a written or oral contract. However. he finds that Calvary failed to prove it actually holds the contract and its attendant arbitration clause, i.e., they did not establish a chain of title. According to the opinion, defendants submitted an affidavit from a Cavalry employee describing the process of transmitting accounts, a bill of sale referencing the assignment of a batch of contracts, and a document identifying Smith’s account. However, the court finds that none of those documents specifically identifies Smith’s account as being included in the assigned contracts. Therefore, Judge Kennelly denies the motion to compel, but does so without prejudice to renewal “if the defendants provide the complete and properly-authenticated documentation that establishes their ability to enforce the arbitration agreement.”
These title issues are reminiscent of problems that faced mortgagees foreclosing on syndicated loans after the 2008 banking collapse. They require those seeking to enforce arbitration clauses in consumer and other assigned contracts to be attentive to each step of the assignment process and present those opposing arbitration a great opportunity to poke holes in the process. However, they also provide judges an opportunity and responsibility to think carefully about how stringent a proof they are going to require to establish an assignment and whether they will rely upon secondary evidence based on normal business practices.
State prohibitions on arbitration; unconscionability
Delisle Sales Group, LLC v. House of Wu, LLC, 2020 U.S. Dist. LEXIS 242618 (D. Conn. Dec. 28, 2020) reaffirms the principle that the Federal Arbitration Act displaces state laws prohibiting arbitration. In opposing Defendant’s motion to dismiss by reason of the parties’ arbitration agreement, Delisle points to Connecticut’s sales commission statute, which authorizes a “civil action” for failure to pay commissions. Since that act voids any contract provision that purports to waive rights under the statute, plaintiff claimed the contract’s arbitration provision was invalid. Without extensive discussion, but citing to AT&T Mobility, LLC v. Conception, 563 U.S. 333 (2011) and Kindred Nursing Centers LP v. Clark. 137 S. Ct. 421 (2017), the court, Shea, J., holds that, even assuming that the statute applies to the parties’ relationship, the plaintiff must pursue a recovery thereunder in arbitration. The court also addresses Plaintiff’s claim that the contract is unconscionable. Applying both Florida and Connecticut law to avoid choice of law issues, Judge Shea holds that one challenging a contract as unconscionable must establish both procedural and substantive unconscionability. Finding that Plaintiff made no claim of procedural unconscionability, the court rejects Delisle’s argument. In dictum, the court also opines that “the plain terms of the arbitration agreement are fair and reasonable.” He specifically leaves the validity of the choice of law provision – which could affect Delisle’s ability to collect multiple damages – to the arbitrator.
Fraudulent arbitration awards
Quamina v. U.S. Bank, N.A. 2020 U.S. Dist. LEXIS 243097 (S.D. Fla. Dec. 24, 2020) is one more case in which a debtor, fighting a foreclosure, participated in what the court characterizes as a “fake arbitration award scheme.” Citing a number of other cases in which these “mere pieces of paper” are presented for confirmation, the court, Ruiz J., dismisses with prejudice this attempt to confirm an “award” of $2,179,652.12, stating that the “arbitration award was procured by fraud and this case is a sham.” This case and several that I have included in earlier “ADR Highlights” do not break any new ground. However, I continue to cite them in hopes that some desperate debtor, before spending his or her money on a purported “Arbitration Award,” will evaluate the worth of proceedings before HMP and similar entities.
Arbitration on appeal
Since it is a slow day for opinions, here is a look at the arbitration cases pending before SCOTUS. If you have any of these issues sitting on your desk, you may want to look at these petitions. Along with all the relevant briefing, they can be found in the excellent Scotus Blog at Scotusblog.com
Henry Schein, Inc. v. Archer and White Sales, Inc., Dkt. No. 19-963 was argued on December 8, 2020. In this second appearance of the case, the Court is considering whether a carve-out of certain classes of disputes from arbitration negates the clear and unmistakable proof of intent needed to send gateway issues to the arbitrator. The transcript and recording of oral argument are available at Scotus Blog. Also, the Strict Scrutiny podcast discussed the case on its December 28th broadcast.
Petition for cert. set for conference
GE Capital Retail Bank v. Belton, Dkt. No. 20-481 has been distributed for conference on January 8, 2021. Respondent has waived its briefing. According to the petitioner, the case raises the issue of whether the Second Circuit erred in holding that the Bankruptcy Code implicitly repeals the Federal Arbitration Act and, therefore, that a claim that the bank breached Belton’s discharge is not arbitrable. The opinion below is at 961 F. 3d 612 (2nd Cir. 2020).
Petitions for cert. filed –
Servotronics, Inc. v. Rolls-Royce, LLC., Dkt. No. 20-794 seeks to resolve the important Circuit split over whether 28 U.S.C. §1782 authorizes discovery in the U.S. for use in private foreign commercial arbitrations. The Fourth and Sixth Circuits say yes; the Second, Fifth and Seventh Circuits, no. The response to the petition is due January 11, 2021. The opinion below is at 975 F.3d 689 (7th Cir. 2020).
Piersing v. Domino’s Pizza Franchising, LLC, Dkt. 20-695 asks the Court to address the issue which it specifically declined to hear in Schein. Does the parties’ adoption of arbitral rules, in this case those of the American Arbitration Association, which specifically empower the arbitrator to determine arbitrability demonstrate a “clear and manifest” intention to delegate that gateway issue? The opinion below is found at 962 F.3d 842 (6th Cir. 2020). Both parties have filed their briefs on the petition for cert.
Amazon.com, Inc. v. Rittman, Dkt. No. 20-622 raises a Circuit split on the scope of the exemption of “any other class of workers engaged in foreign or interstate commerce” from the Federal Arbitration Act. The case arises from a class action brought by a driver who used her own vehicle to make intrastate delivery of Amazon goods across the “last mile.” In the opinion below, 971 F. 3d 904 (9th Cir. 2020), the Court of Appeals held that the drivers were exempt from coverage under the FAA because Amazon’s goods crossed state lines, even if the drivers did not. Petitioner argues that a Circuit split exists because the First Circuit takes the same position as the Ninth, while the Fifth, Seventh, and Eleventh Circuits look to the activities of the workers themselves. The Third and Eighth Circuits, Petitioner claims, fall somewhere between those positions. Interestingly, the Seventh Circuit case to which Petitioner refers was written by then Circuit Judge, now Justice, Barrett. Respondent’s brief is due January 13, 2021. The conservative Washington Legal Foundation and Civil Justice Association of California have filed amici briefs, so the Justices will probably give the petition a close look.
I will be enjoying lots of sports and junk food on New Year’s Day and the courts are closed. Therefore, there will be no “ADR Highlights” until Monday. Please celebrate this New Year’s Eve safely. Remember, with the advent of vaccines, we should have the chance to mingle more freely in 2021. But please take care this year, so you and your loved ones can ring in 2022.
See you Monday.
David A. Reif