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Archive for the ‘Arbitration’ Category

Northpoint Health Services of Arkansas, LLC v. Wayne Rutherford & Tresa Robinson, Nos. 09-2433 & 09-2435.

Wayne Rutherford and Tresa Robinson, as representatives of Isaac Rutherford and Donna Faye Snow, respectively, brought separate state actions against nursing home facilities in Fayetteville and Springdale, Arkansas, that were operated by Northpoint Health Services of Arkansas, LLC (“Northpoint”) and the nursing home administrators. Prior to being admitted to the Northpoint nursing homes, Rutherford and Snow signed Admission Agreements that provided that (1) all disputes must be resolved by binding arbitration and (2) the agreement to arbitrate was governed by the Federal Arbitration Act (“FAA”).

Northpoint then filed federal actions to compel arbitration under §4 of the FAA and alleged that the parties had diversity jurisdiction. Northpoint did not include the nursing home administrators in their petitions. Rutherford and Robinson did not contest the allegations regarding diversity jurisdiction, and the trial court granted Northpoint’s petitions to compel arbitration. Later, the Supreme Court of the United States held in Vaden v. Discover Bank that, in determining federal question jurisdiction, courts must look at the “underlying substantive controversy.” Relying on Vaden, Rutherford and Robinson moved for the trial court to vacate the orders compelling arbitration because inclusion of the administrators destroyed complete diversity of citizenship of the parties. The trial court granted the motions, concluding that Vaden implicitly overruled prior cases compelling arbitration based on diversity jurisdiction. Northpoint appealed the rulings, and the cases were consolidated on appeal.

The Eighth Circuit Court of Appeals explained that, except to compel arbitration, the FAA grants no court federal jurisdiction. Because of this, most parties seeking to compel arbitration to through a §4 petition, allege an independent basis for federal court jurisdiction—diversity jurisdiction or federal question jurisdiction. Prior to Vaden, all courts adopted the same approach in resolving whether diversity jurisdiction applied. The courts reviewed only the §4 petition to determine if there was complete diversity of citizenship between the parties.

As to federal question jurisdiction, a split in the circuits had developed over whether to “look through” the §4 petition to the underlying case to determine jurisdiction. Vaden adopted the “look through” approach, but limited its holding to federal question jurisdiction cases only.

Because the Vaden court carefully limited its holding to federal question jurisdiction cases, the Northpoint court refused to extend the “look through” approach to diversity jurisdiction cases. Accordingly, the court reversed the orders to vacate the orders compelling arbitration.

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CEI Engineering Associates, Inc. v. Elder Construction Co., No. CA 08-601.

In 2005, Elder Construction Company (“Elder”) contracted with CEI Engineering Associates, Inc. (“CEI”), to perform engineering services related to six construction projects.  Under the contract, the parties agreed to settle all claims regarding “interpretation, application or enforcement” of the contract through binding arbitration. 

In October 2007, Elder sued CEI, alleging negligence, fraud, and breach of contract.  CEI filed a motion to compel arbitration under the parties’ agreement and the Arkansas Uniform Arbitration Act, which the trial court granted as to Elder’s breach-of-contract claims.  Elder later filed an amended complaint that deleted all express references to claims for breach of contract and added a claim for breach of the Arkansas Deceptive Trade Practices Act (“ADTPA”).  The trial court then noted that all of Elder’s claims related to negligence, fraud, or a violation of the ADTPA and, therefore, were not subject to arbitration.

On appeal, CEI argued that Elder’s new claim for a violation of the ADTPA was merely a restatement of its previous breach-of-contract claim.  The Arkansas Court of Appeals stated the following:

[T]he basic distinction between an action in tort and an action in contract is that the purpose of the law of contract is to see that promises are performed, while the law of torts provides redress for various injuries.

The court further noted that  a breach-of-contract action could not be treated as a tort if it consists of a failure to act (nonfeasance) instead of an affirmatively wrongful act (misfeasance).  Tort liability for misfeasance can be extended whenever the conduct creates a foreseeable and unreasonable risk of harm to plaintiff’s interests.  As to Elder’s claim for violation of the ADTPA, the court stated that the claim related to Elder’s assertions that CEI failed to comply with its obligations under the contract and did not come within the purview of the ADTPA.  Consequently, the court held that the trial court erred in not compelling arbitration of the contract claims.

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American Express was sued over the terms of its Blue Cash rewards program, but the case was dismissed because the credit card contracts required each member of the class to enter into arbitration with American Express individually.  On appeal, the Third Circuit Court of Appeals noted there was a question of whether state law would allow waivers of class arbitration.  For a full account of the story, click here.

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Spirtas Co. v. Ins. Co. of the State of Penn., No. 07-1547.

Contracts

A contractor entered into a $2.8 million agreement with a property owner to remove asbestos from the property.  The remediation contract contained an arbitration clause.  The property owner required the contractor to obtain a $2.8 million surety bond for the work.  The contractor contacted Insurance Company of the State of Pennsylvania (“ICSP”) for the bond.  ICSP required the contractor to indemnify it for any expenses and fees related to “executing” the bond, which the contractor did.  The indemnity agreement incorporated the remediation contract by reference.

Work

Once the contractor had finished all of the work required under the remediation contractor, it demanded final payment under the contract of $150,000.  The property owner refused, claiming that the contractor had not properly performed the remediation and had spread asbestos to other, previously uncontaminated areas of the property.  The property owner also submitted a claim against the bond to ICSP for additional work needed at the property to clean up the contamination caused by the contractor.

Arbitration

The contractor initiated arbitration to receive the remaining $150,000 payment.  The property owner counterclaimed for $4 million for expenses related to the clean up and loss of rental income.  The property owner also brought ICSP into the arbitration (after threatening a court order to participate), claiming it owed the property owner $4 million dollars in compensatory damages, as well as $4 million for punitive damages based on bad faith in failing to pay the property owner’s earlier bond claim.

Because the property owner’s claims were well outside the surety bond amount, ICSP retained its own counsel and experts to defend against the property owner’s claims.  The contractor and ICSP were eventually successful in the arbitration.

Lawsuit

Afterwards, ICSP submitted a claim under the indemnity agreement to the contractor for its attorney’s fees and expert witness fees in the arbitration of $800,000.  The contractor refused to pay and initiated a declaratory judgment action.  The trial court held that the contractor had to pay these fees under the indemnity agreement.

Appeal

On appeal, the contractor argued that ICSP did not have to execute on the bond and that its participation in the arbitration had been voluntary.  The Eighth Circuit Court of Appeals disagreed, noting that the contract language requiring reimbursement for “executing” on the bond was unambiguous and required but-for causation only.  The Court explained that ICSP executed the bond because the property owner (1) made a claim against the bond, (2) asserted claims for compensatory and punitive damages against ICSP, and (3) threatened to seek a court order compelling arbitration.  Because of these actions, the court reasoned, ICSP became involved in the arbitration and incurred fees and expenses.  Accordingly, the court ruled that ICSP was entitled to reimbursement.

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Terminix Int’l Co. v. Trivitt, No. CA 08-233

A terminated employee brought a suit against her former employer for defamation and outrage.  The employer moved to compel the case to arbitration based on the arbitration clause included in the employee’s employment contract.  The arbitration clause at issue stated that the arbitration agreement would be governed by the Federal Arbitration Act (“FAA”).

The trial court denied the motion to compel arbitration, holding that the question of arbitration was controlled by the Arkansas Uniform Arbitration Act (“AUAA”) instead of the FAA.  Under the AUAA, claims for defamation and outrage are not arbitrable.

On appeal, the Arkansas Court of Appeals reversed the trial court’s decision.  The court held that the FFA governed the arbitration agreement for two reasons:  (1) the choice of law provision in the arbitration clause and (2) federal law preempted state law because the employment contract related to interstate commerce.

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Koch v. Compucredit Corp., No. 07-1948

Plaintiff sued a group of creditors who took over collections of a defunct bank for violating the Fair Debt Collection Practices Act and the Arkansas Deceptive Trade Practices Act.  The defendant creditors moved to compel arbitration under the arbitration clause of the credit agreement, but the trial court denied the motion.

On appeal, the Eighth Circuit explained that questions of arbitrability require a determination that (1) a valid arbitration agreement existed between the parties and (2) the dispute falls within the scope of the arbitration agreement.  In her complaint, plaintiff alleged that she had settled her debt with the initial collector and, therefore, nothing could be assigned to the defendant collectors.  The Eighth Circuit disagreed, noting that the arbitration clause itself was a remaining interest of the credit agreement.  As such, the arbitration clause could be assigned.

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