NC Business Court On Arbitrability: Clear And Unmistakable

You may have pondered over the question whether a Judge or an Arbitrator decides if a particular dispute is subject to an agreement to arbitrate.

If you have wondered who makes that sort of decision, it's actually not an open question.  The U.S. Supreme Court held twenty years ago that:

[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.

AT&T Techs. v. Commun. Workers of America, 476 U.S. 643, 649 (1986)(emphasis added).

The Business Court addressed what can be "clear and unmistakable" at the end of last week in Gaylor, Inc. v. Vizor, LLC, 2015 NCBC 98.  Plaintiff, a subcontractor on a construction project, was suing the general contractor on the project, Vizor.

The issue before Judge Bledsoe was whether the arbitration should include the resolution of Plaintiff's unfair and deceptive practices claim.  In other words, the question was the "arbitrability" of that claim --whether it should be decided in the Business Court or by the arbitrator.

The subcontract said nothing specifically about the scope of the arbitrator's authority.  It provided that all claims rising out of, or relating to this Agreement or the breach thereof. . . shall be subject to arbitration."  But it also said that "[s]uch arbitration shall be conducted in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect." Op. ¶19.

Rule 9(a) of the Construction Industry Arbitration Rules seems to decide the question.  It says that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement."

This case was decided under the Federal Arbitration Act.  The Fourth Circuit, however, has never ruled on whether the incorporation of the AAA's Construction Industry Rules meets the "clear and unmistakable" standard laid down by the Supreme Court.

Judge Bledsoe neverthelesss boldly went ahead and ruled that the incorporation of the AAA Rules met the "clear and unmistakable" standard.  Actually, it's not so bold of a ruling, because seven federal Circuit Courts had already reached the same conclusion.  See United States ex rel. Beauchamp v. Academi Training Ctr., 2013  U.S.. Dist. LEXIS 46433, at *15-16 (E.D. Va. 2013).

You might be thinking that you don't care much about this decision because you don't handle  construction arbitrations.  But you would be wrong.  The AAA's Commercial Arbitration Rules contain a very similar provision.  It's Rule 7, which says that:

The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

So if you have a question of the arbitrability of a claim. and the arbitration agreement incorporates the AAA Rules, arbitrability is likely to be resolved by the arbitrator.

 

 

Arbitration Compelled Based On Unsigned Arbitration Agreement

If you were thinking that an arbitration agreement needs to be signed in order to get an order compelling arbitration, your world may have been turned on its ear by the Order from the Business Court last week in Morton v. Ivey, McClellan, Gatton & Talcott, LLP, 2013 NCBC 23..

 There's certainly a fair amount of North Carolina authority that an arbitration agreement can't be enforced if it was never signed (noted in 20 of the Order), but Judge Gale held that the Revised Uniform Arbitration Act relaxes this requirement.

The RUAA became effective in 2004, and provides that "[a]n agreement contained in a record to submit to arbitration . . . is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for revoking a contract."  N.C. Gen. Stat. §1-569.6(a).  

A "record" is defined by the Act as "information that is inscribed on a tangible medium."  N.C. Gen. Stat. §1-569.1(6).  The predecessor statute -- the Uniform Arbitration Act -- carried a more stringent standard.  It said that "parties may agree in writing to submit to arbitration . . . or they may include in a written contract a provision for the settlement of arbitration of any controversy. . . . "

Even though the Plaintiffs had never signed the partnership agreement containing the arbitration provision, they had known of the agreement and taken a significant role in drafting it.  Judge Gale found that:

the draft Partnership Agreement circulated by [one of the Plaintiffs] and assented to by [the Defendants], is a sufficient 'record' to satisfy the requirement of § 569.6(a) of the RUAA.

Order 23.

Congratulations to my partners Jeff Oleynik and John Ormand for pulling off this magic trick and getting the Order compelling arbitration.  (And no, that's not Jeff or John in the picture.  Or their rabbit.)

 

 

Arbitration? Motion to Dismiss? Let's Do Both!

For anyone who has agonized over a decision between moving to dismiss or moving to compel arbitration, your strategic torment may be over.  A short but important order from the Business Court yesterday ruled that the two options are not mutually exclusive.

In Triad Group, Inc. v. Wachovia Bank, N.A., a bond swap lawsuit filed in April 2009, Wachovia moved to dismiss the claims of the various nursing center plaintiffs.  This April, Judge Tennille dismissed the punitive damages and Chapter 75 claims, but denied the motion as to all remaining claims.  Soon thereafter, Wachovia moved to stay the case and compel arbitration based on a comprehensive arbitration clause contained in one of the written agreements between the parties, and the Court agreed that the clause was enforceable.

The Plaintiffs' most interesting argument was that Wachovia waived the right to arbitrate by moving to dismiss, which caused the Plaintiffs to incur substantial litigation expense during the year that the lawsuit was pending before the Court.  Judge Tennille rejected that argument:

Although the Court is always concerned about the ever-increasing costs of litigation, the fact that one party may file a motion to dismiss prior to invoking an existing arbitration clause is in and of itself insufficient to warrant denial of enforcement of an otherwise valid arbitration agreement.  It would be bad public policy to discourage parties from filing early motions to test the legal sufficiency of claims.

The Court also noted that the Plaintiffs could have avoided their own litigation expense by moving to compel arbitration themselves before Wachovia moved to dismiss.

Although the Order does not address this point, it is consistent with the growing sentiment of many commentators in the profession that arbitration often is no less expensive than litigation.  If that sentiment is accurate, then the expense of some judicial proceeding before compelling arbitration is less likely to constitute the prejudice that must be shown for a waiver of the right to arbitration.

(The image is the only one I could find from Miller Lite's excellent "Let's Watch Both!" series of commercials circa 1993, featuring amalgamated sports like the Full Contact Golf depicted above).

Full Order

 

Fourth Circuit Affirms $14.9MM Arbitration Award to City of Greensboro

The City of Richmond was kind to the City of Greensboro last week.  After nearly a decade of litigation and arbitration, the Fourth Circuit affirmed the district court's rejection of a challenge to a nearly $15 million arbitration award against the general contractor of a wastewater treatment facility.

The published opinion in MCI Constructors, LLC v. City of Greensboro is the latest round in a dispute arising from a 1996 contract.  That contract delegated to the city manager the role of referee and arbitrator for disputes.  The City terminated MCI for cause, and MCI sought relief from the city manager.  After a hearing in 2002, the city manager ruled that the termination for cause was proper.  At a subsequent hearing in 2003 on the issue of damages, the city manager awarded the City over $13 million.

In 2004, on a challenge by MCI to the arbitration award, the Middle District of North Carolina entered summary judgment in favor of the City.  The Fourth Circuit reversed in 2005, 125 Fed. Appx. 471, holding that the District Court's application of a highly deferential "fraud, bad faith, or gross mistake" standard was inappropriate because applying that standard to the city manager, who "in essence was adjudicating his own performance, rights, and liabilities under the contract," would result in an illusory contract.  Instead, the Fourth Circuit required review under "a standard of objective reasonableness 'based upon good faith and fair play.'"

After the Fourth Circuit's original decision, the parties agreed to re-arbitrate the matter, this time before a panel of three arbitrators.  In 2007, the panel ruled that MCI's termination was for cause.  At the damages hearing in 2008, the panel awarded the City $14,939,004.  In 2009, the Middle District rejected MCI's challenges and confirmed the award.

The Fourth Circuit rejected the three main arguments raised by MCI on appeal.  First, the Fourth Circuit held that the Middle District did not err in certifying the matter as final under Rule 54(b).  MCI's claims against the project engineer, who was not party to the arbitration proceedings, did not affect the arbitration in such a way as to require their adjudication before the arbitration award was confirmed.

Second, the Fourth Circuit held that there were no grounds, either under the FAA or at common law, to justify vacating the award.  The award was not procured by "undue means" despite MCI's arguments about allegedly objectionable conduct by opposing counsel.  "[N]o court has ever suggested that the term 'undue means' should be interpreted to apply to actions of counsel that are merely legally objectionable."  The Court also held that MCI failed to show that the alleged undue means led to the procurement of the award.  Although MCI argued that meeting this standard was impossible because the panel did not issue a reasoned award, the Fourth Circuit was unwilling to waive the causal element out of fear that parties would intentionally reject reasoned awards so as to ease their burden of proof later in judicial challenges to those awards.

The Court also rejected MCI's argument that the panel exceeded the scope of its authority.  "[N]either misinterpretation of a contract nor an error of law constitutes a ground on which an award can be vacated. . . .  As long as the arbitrator[s] [are] even arguably construing or applying the contract, as they were here, their awards will not be disturbed."

The Court likewise dismissed MCI's common-law argument that the award "failed to draw its essence" from the contract -- essentially that the award was "impossible to square" with certain contractual provisions.  In doing so, the Court avoided confronting the issue of whether there even exist any common law grounds to vacate arbitration awards after the Supreme Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

Finally, the Fourth Circuit rejected MCI's claim that the award was invalid because it was not reasoned.  MCI claimed that the arbitration was governed by JAMS Rule 24(h), which requires reasoned awards.  The arbitration agreement, however, allowed the panel to proceed pursuant to JAMS Rules or AAA Complex Commercial Arbitration Rules.  The panel having elected the latter, which do not require a reasoned award unless requested before appointment of the panel, the award remained valid.

The Brooks Pierce attorneys comprising the City's team before the Fourth Circuit included Bill Cary, George House, Mike Meeker, and Joey Ponzi.  A number of others at the firm have contributed to the case over its lengthy lifetime.

Full Opinion

Arbitration Clause Unenforceable Based on Authenticity and Credibility Concerns

Both the North Carolina Uniform Arbitration Act and the Federal Arbitration Act are stacked in favor of the enforcement of arbitration provisions.  That does not mean that a defendant's motion to compel arbitration is a foregone conclusion, as a Business Court decision from Tuesday reminded us.

In Capps v. Blondeau, the Plaintiff inherited a significant estate from her aunt and used the estate to establish two trusts.  At some point over the next several years, she began to suffer from dementia, and her broker allegedly took advantage of the situation.  Plaintiff's guardian sued her broker and his brokerage firm, among others, alleging claims including breach of fiduciary duty, constructive fraud, constructive trust, RICO, and Chapter 75 violations.

At issue as a threshold matter was whether a valid arbitration agreement existed between Plaintiff and the brokerage firm.  (The Court permitted a limited discovery period confined to the validity of the arbitration provision).  This was more than a perfunctory challenge by the Plaintiff for several reasons:

  • There was conflicting testimony concerning whether the purported signature was, in fact, Plaintiff's.  Although Plaintiff testified that the signatures were hers, her testimony overall exhibited aspects of dementia, and she testified that she had never seen the forms before.
  • The brokerage firm was unable to produce the original forms bearing Plaintiff's signature.  It produced electronic copies, but probably did not help its authenticity argument by tendering "specimen" copies of the forms at issue that differed in format and in language with the forms purportedly bearing the Plaintiff's signature.
  • The brokerage firm's document retention procedures (or lack thereof) violated applicable SEC and FINRA regulations.
  • The two affidavits of the broker were rejected by the Court as largely speculative.  In addition, the broker's concurrent federal indictment and guilty plea to investment advisory fraud ruined his credibility and constituted an admission of a party opponent that he lied to and defrauded the Plaintiff.

The Court determined that securities brokerage agreements implicated interstate commerce and therefore triggered the application of the FAA.  Although the FAA requires doubts to be resolved in favor of arbitration, the existence of an agreement to arbitrate is governed by state common law contract formation principles.  

Judge Jolly held that the moving Defendants failed to meet their burden of proving that the parties agreed to arbitrate disputes between them.  The best evidence rule permits the use of electronic scans or specimens to prove the contents of a writing, but "if a party wishes to rely upon
such evidence, it must do better than what has been presented here."  Because the brokerage firm's "record keeping with regard to . . . the contended client agreement[] was sloppy and fragmented at best . . . the documentary evidence submitted by the moving Defendants was so problematic as to be inconclusive."  The only two witnesses with the potential to testify that the Plaintiff signed the agreement were the (mentally incompetent) Plaintiff and the (feloniously incredible) broker, neither of whom the Court was willing to rely upon.

Full Order

North Carolina Court Of Appeals Rulings, Plus One

There weren't any earthshaking decisions yesterday from the North Carolina Court of Appeals, but there are a couple of cases worth a quick mention, one on arbitration and one on discoverability in a medical malpractice case of a letter to a "medical review committee."  There was also a copyright case yesterday from the Fourth Circuit resolving an issue of first impression involving computer software.

Arbitration

In Griessel v. Temas Eye Center, P.C., the Court held that it was not error for the trial court to deny a motion to compel arbitration without making findings of fact.  Findings of fact were required under the North Carolina Uniform Arbitration Act, but the 2-1 majority found in a case of first impression that they are not required under the Revised Uniform Arbitration Act. 

The majority reasoned that since there is only one ground under the RUAA which allows the denial of a motion to compel arbitration (that there is no valid agreement to arbitrate), the court must have made that determination in denying the motion. Judge Steelman disagreed, and said "[i[f one takes the position that the trial court must have logically made the correct decision, then there is little need to have appellate courts."

Discovery And Medical Review Committees

In Woods v. Moses Cone Health System, the issue was whether a plaintiff in a medical malpractice action was entitled to discovery of a letter from the decedent's surgeon to a hospital's peer review committee.  The  Court determined that committee to be a "medical review committee" within the meaning of G.S. §131E-95 of the General Statutes, which provides that the records and materials of such a committee "shall not be subject to discovery or introduction into evidence in any civil action against a hospital."  This protection exists "because of the fear that external access to peer investigations conducted by staff committees stifles candor and inhibits objectivity."

Plaintiff said that since the surgeon had sent the letter to persons who weren't on the committee, the privilege had been waived.  The Court of Appeals said the privilege couldn't be waived by the dissemination of the letter, because the letter was absolutely privileged under the statute. The Court didn't reach an interesting question whether the letter was discoverable because it had been provided to Defendant's expert witnesses.

Copyright 

The Fourth Circuit Court of Appeals ruled in Quantum Systems Integrators, Inc. v. Sprint Nextel Corp. that software stored in a computer's random access memory can be sufficiently fixed to support a claim for copyright infringement, following what it described as the leading case on the issue, MAI Systems  Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). That was a question of first impression in the Fourth Circuit, but the Quantum opinion is unfortunately unpublished.

Plaintiff's Claims Barred By One Satisfaction Rule

A Plaintiff who obtained an Arbitration Award against two members of an LLC lost the right to recover under the Award from the LLC when it settled up with the two LLC members.  The case, decided today by the Business Court, is Essa Commercial Real Estate, Inc. v. Five Trees, LLC.

The facts are complicated, but they boil down to this: Plaintiff got an arbitration award of $325,000 against two members of an LLC (Five Trees).  Plaintiff then sued the LLC and its other members to collect on the Award.  In the meantime, Plaintiff settled its claims against the two members against whom it had obtained the Award.

Under the settlement, the Plaintiff agreed to give up its claims against the two members in exchange for $150,000 and an assignment of the two members' interest in the LLC.  The Plaintiff attempted to preserve its right to pursue the LLC and the other members for the balance by including language in the settlement which said "nothing in this Agreement shall act to release, dispose of, compromise, or otherwise impair the right or ability of [Essa] to seek recovery from Five Trees, its members or members of its members under any theory of law or for recovery of the Arbitration Award."

That didn't work.  The Court held that Plaintiff's claim was barred by the "one satisfaction rule," which says that a party is only entitled to a single recovery for any judgment. Since the Plaintiff had resolved the Arbitration Award, it no longer had any right to seek recovery under the Award.

That was so even though the LLC and the other members weren't released by the settlement agreement. In this respect, the case is similar to a recent Court of Appeals decision, Santoni v. Sundown Cove, LLC, where the Court held that a plaintiff''s settlement with some defendants resulted in a settlement as to all plaintiff's claims, even against non-parties to the settlement.

In an earlier opinion in the Five Trees case, the Business Court ruled that the Arbitration Award had collateral estoppel effect. 

Decisions Last Week From The North Carolina Court Of Appeals

There weren't any opinions from the Court of Appeals last week which would have been considered for the legal equivalent of an Oscar, but three cases are worth an honorable mention.  They involve arbitration, the statutory requirements for contracting with a municipality, and a healthcare law case involving Certificates of Need.

Arbitration

The arbitration case is WHD v. Mayflower Capital, LLC, in which the Court made a rare reference to the Commercial Arbitration Rules of the American Arbitration Association. The Defendant argued that the arbitrator had erred by failing to require the Plaintiff to produce a settlement agreement. The Court disagreed, noting the authority that an arbitrator has under AAA Rule 21 (permitting an arbitrator to direct the production of documents, and authorizing an arbitrator "to resolve any disputes concerning the exchange of information”) and AAA Rule 31 (stating that the parties “shall produce [at the hearing] such evidence as is relevant and material to the dispute.”).

The Court also rejected the Defendant's argument that the arbitrator had made a mistake by permitting the introduction of a criminal conviction of the Defendant which would not have been admissible under the Rules of Evidence.  It said twice in its opinion that “if an arbitrator makes a mistake, either as to law or fact, it is a misfortune of the party, and there is no help for it,” quoting an 1895 Supreme Court decision, Patton v. Garrett, 116 N.C. 848, 21 S.E. 679 (1895).  John Ormand in Brooks Pierce's Raleigh office represented the Plaintiff.

Contracting With Municipalities

The municipality case is National Railroad Museum and Hall of Fame, Inc. v. City of Hamlet.  Hamlet was the home of the National Railroad Museum and Hall of Fame.  According to the Court's opinion, the Museum housed "exhibits, antiques, artifacts, and general materials relating to the development of the railroad industry in North Carolina and the United States as a whole." 

The Museum operated in a building leased from the City, but the parties appeared to have agreed that the building would be torn down and that they would attempt to obtain financing to build a new home for the Museum's artifacts.  When that didn't happen, the Museum sued. 

Blocking the tracks for the Museum was Section 160A-16 of the General Statutes, which requires contracts by or on behalf of a city to be in writing, and which says "a contract made in violation of this section shall be void and unenforceable unless it is expressly ratified by the council."  Although the City Council had adopted a resolution supporting "the depot project," and it had submitted a funding application to the Department of Transportation, the Court of Appeals held that these facts didn't make out either an express contract or a duly ratified agreement.

Certificate of Need

Last, the CON decision is Total Renal Care of NC, LLC v. North Carolina Dept. of Health and Human Services, The Court held that when a party awarded a CON completes the construction of the facility and it becomes fully operational, an appeal challenging the award of the CON is moot.  The Court relied on a 2005 per curiam decision of the North Carolina Supreme Court in Mooresville Hosp. Mgmt. Assocs. v. N.C. Dep't of Health & Human Services, 360 N.C. 156, 622 S.E.2d 621 (2005), and held:

Both parties recognized during the pendency of this appeal that, as in Mooresville,  the appeal could become moot upon the completion of BMA's facility. We must presume that the General Assembly recognized such a possibility in enacting the CON Law. Even if the General Assembly failed to recognize this possibility prior to the Supreme Court's decision in Mooresville, in the more than three years since that case was decided, the General Assembly has not revised the CON Law to provide for a stay of either the construction or operation of a facility for which a CON has been issued pending an appeal from a final agency decision.

So if you are awarded a CON, build fast.  Or at least faster than the Court of Appeals can rule.

American Drywall Construction, Inc. v. Superior Construction Corp., November 19, 2008 (Jolly)(unpublished)

This case enforced an arbitration provision, even though the Plaintiff had never signed the agreements which contained the arbitration provision. 

A Motion to Compel Arbitration was granted, because the Plaintiff had done the work described in the agreements and was seeking payment pursuant to those agreements, it had submitted applications for payment pursuant to the terms of the agreements and accepted some payment, and it had signed an addendum to one of the agreements which referenced the agreement containing the arbitration provision.

Among other things, the Court noted that "much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff's conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause."

Full Opinion

 

Brief in Support of Motion to Compel Arbitration

Arbitration Provision Enforced Even Though It Was Never Signed By Plaintiff

The Plaintiff had never signed the agreements containing the arbitration provisions which the Defendant sought to enforce, but the Business Court on November 19 nevertheless granted a Motion to Compel Arbitration in American Drywall Construction, Inc. v. Superior Construction Corp.,

The Plaintiff was a subcontractor, the Defendant was the general contractor.  The Defendant prepared three written subcontracts -- each of which contained an arbitration provision -- but Plaintiff never signed any of them.

Judge Jolly noted three key facts regarding the unsigned agreements:

First, Plaintiff had undertaken to do the work described in the subcontracts, and it was seeking payment for that work in the lawsuit.

Second, Plaintiff submitted applications for payment referencing the subcontracts. The forms completed by the Plaintiff stated that "this Application for Progress Payment is made in strict accordance with the terms of the Subcontract."

Third, the parties had signed an addendum to one of the subcontracts which said that "all terms and conditions of the Subcontract . . .are incorporated herein and by reference and shall remain in full force and effect."

The Court held:

in this civil action Plaintiff seeks payment for performance of the work done pursuant to the terms of the respective Subcontracts, while at the same time it seeks to deny the enforceability of one of the terms of the Subcontracts.  Much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff's conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause.  In addition, Defendant's argument in favor of the enforceability of the arbitration clause is bolstered by the signed subsequent writings, which specifically relate back to and incorporate the terms of the respective Subcontracts.

Judge Jolly concluded "the facts and circumstances of the dealings between the parties clearly demonstrate that the Subcontracts were intended by the parties to be binding.  The fact that certain of the agreements were not signed does not change this result."

Brief in Support of Motion to Compel Arbitration

Court of Appeals Rulings Today (September 2, 2008)

The North Carolina Court of Appeals ruled today on cases involving the statute of repose applicable to legal malpractice actions, fiduciary duties of trustees, and the waiver of the right to arbitration.

On the fiduciary duty issue, the Court affirmed the decision of the Business Court in Heinitsh v. Wachovia Bank on an obscure point of trust law for which it observed there was "surprisingly little guidance." The trustee in Heinitsh was caught between the income beneficiaries and the remaindermen of a substantial trust over a dispute whether millions of dollars from the sale of property should be categorized as income or principal. During the dispute, the trustee took the disputed funds and invested them in a money market account. The plaintiff, an income beneficiary, argued that the trustee's duties required it to maximize income in her favor, and that the trustee had breached its fiduciary duties by placing the funds in a low-yielding money market account. The Court of Appeals held that "holding the retained funds during the pending litigation was reasonable in light of the circumstances and defendant did not breach its fiduciary duty to plaintiff." The Court suggested, however, that "the better practice may be to interplead the funds. . . ."

The legal malpractice case is Goodman v. Holmes & McLaurin Attorneys at Law. The plaintiff had sued outside the four year statute of statute of repose contained in N.C. Gen. Stat. §1-15(c), but contended that the law firm was equitably estopped from asserting the statute given a lawyer's active conduct in trying to hide the fact of his malpractice.  The Court of Appeals found that conduct of concealment to be "particularly egregious," but held that "this Court has consistently refused to apply equitable doctrines to estop a defendant from asserting a statute of repose defense in the legal malpractice context. . . ."  It found plaintiff's claims therefore to be barred by the statute of repose.

In Gemini Drilling and Foundation, LLC v. National Fire Insurance Co. of Hartford, the Court found that the defendant had waived its right to arbitration. The defendant had filed a motion to compel arbitration, and lost. Instead of taking an immediate interlocutory appeal, which it had the right to do, it participated in discovery and then a bench trial of the claim. The Court held that the purpose of arbitration "would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment."

There's another case from today's opinions, Odell v. Legal Bucks, LLC, which I'll deal with separately. You can find all of the Court of Appeals opinions today here.

The photo of the Court of Appeals building is from Juliet Sperling.

 

Court Of Appeals Cases Today: Arbitrator Immunity, Sanctions, And Work Product Decisions

It was a busy opinion day today in the North Carolina Court of Appeals: there were 44 published opinions, three of which I'm commenting about briefly below.  The three involve a range of issues, including arbitrator immunity, Rule 11 sanctions, and an technical point about subpoenas in state tax refund litigation and also work product privilege.

The arbitrator case, Dalenko v. Collier, addressed an issue of first impression in North Carolina, whether an arbitrator is entitled to judicial immunityPlaintiff, a pro se litigant who had been unsuccessful in an arbitration heard by former Judge Collier, sued him for allegedly being personally interested in the case and biased.  The Court of Appeals held (relying on Burns v. Reed, 500 U.S. 478 (1991)) that whether a private citizen acting as an arbitrator is entitled to judicial immunity depends upon a "functionality test."  It stated:

defendant was sitting as an arbitrator to resolve a dispute pending in the courts of Wake County. Under the functionality test, defendant was entitled to judicial immunity and was immune from the claims asserted in the instant case. Plaintiff's complaint alleges conduct which was clearly within the course and scope of the arbitration proceeding. Plaintiff's claims were barred by arbitrator immunity, and the trial court correctly found them to be frivolous.

The Dalenko case also affirmed an award of Rule 11 sanctions against the Plaintiff, and also found that Plaintiff was collaterally estopped from pursuing her claims against the arbitrator since she had raised those same claims in seeking a vacation of the arbitration award.

In Ward v. Jett Properties, LLC, the Court affirmed the entry of Rule 11 sanctions against a pro se litigant who had sued his landlord for allowing other tenants to play football "within striking distance of his car" and to "dart around" on "metal skooters." To me, the significant point worth noting about Ward is that one of the reasons the Court found the Complaint to be "legally insufficient" for Rule 11 purposes was that it had been dismissed on a Rule 12(b)(6) motion.  The Court held "though the mere fact that a cause of action is dismissed upon a Rule 12(b)(6) motion does not automatically entitle the moving party to have sanctions imposed. . . . it is often indicative that sanctions are proper."  The fact that Ward had filed forty two other lawsuits in the past six years, at least one of which was identical to the one before the Court, was undoubtedly a factor in the affirmance.

Last, the work product case is In the Matter of the Summons Issued to Ernst & Young, LLPIt involves a subpoena issued by the North Carolina Department of Revenue to the accounting firm of Ernst & Young for documents relating to the tax refund lawsuit between the DOR and Wal-Mart.  Wal-Mart intervened and challenged the subpoena. 

Before it got to the work product issue, the Court resolved a threshold issue whether the Rules of Civil Procedure apply to subpoenas issued by the DOR pursuant to N.C. Gen. Stat. § 105-258.  The DOR argued that the Rules didn't apply, the Court of Appeals disagreed and said that they did.  The applicability of the Rules made a difference to Wal-Mart, which was arguing that the Court didn't have subject matter jurisdiction because the DOR hadn't issued a summons and filed a Complaint.  Although Wal-Mart prevailed on its argument about the application of the Rules, the Court denied the Motion to Dismiss because "the statute provides jurisdiction to the Wake County Superior Court upon application by the Secretary of Revenue."

On the work product side of things, the issue was whether some of the documents prepared by E&Y had been done "in anticipation of litigation."  Wal-Mart argued that the documents had been prepared by the accountants specifically for its restructuring, not for tax return purposes and not for purposes of its audit; that it had been billed separately for the work; that the partner who had done the work anticipated that there might be litigation from various tax authorities; and that the documents were not prepared in the ordinary course of business.  The Court found this insufficient to determine the applicability of the privilege, and remanded the case for an in camera review by the trial court.

Essa Commercial Real Estate, Inc. v. Five Trees, LLC, June 13, 2008 (Jolly)(unpublished)

An Arbitration Award was entitled to collateral estoppel effect, even though the Defendants had not been parties to the arbitration.  

The Court compared the claims made in the Arbitration to the claims made in the Amended Complaint, and found them to be identical.  It further determined that the Plaintiff had "a full and fair opporutnity to litigate these issues." 

The Court concluded that "the doctrine of collateral estoppel serves to bar [the Plaintiff] from relitigating the issue of its damages resulting from" [the matters which had been at issue in the Arbitration].

The Court found, however, that the Plaintiff was not barred from seeking to enforce against the Defendants the Award itself, because there were issues about whether the Award had been satisfied.  The Court stated that the settlement of the Award contained "numerous contingencies."  The claims on the Award were therefore not precluded by either res judicata or by the "one-satisfaction doctrine."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Eleanor B. Johnson Limited Partnership v. Ball, February 14, 2008 (Jolly)(unpublished)

The Court found that an arbitration agreement involved commerce so as to implicate the Federal Arbitration Act, and found the arbitration provision to be enforceable. The principal issue, however, was whether the Court had jurisdiction to award provisional relief. In this case, that meant the appointment of a receiver.

The Court found that it had that power, but denied the remedy. It held that "[t]he appointment of a receiver is a harsh and cumbersome remedy, and is arguably outside the permissible interpretation of the Arbitration provision under the FAA." The Court determined, however, that it would grant a limited preliminary injunction.

Full Opinion

Green v. Short, 2007 NCBC 8 (N.C. Super. Mar. 9, 2007)(Diaz)

The Court considered in this case the scope of an arbitrator's authority with regard to disputes involving a North Carolina LLC. It first determined that the interpretation of the arbitration clause before it was subject to the Federal Arbitration Act, because the contract was a "transaction involving commerce."

It held that whether a dispute is subject to arbitration is a question of law for the Court, and that doubts should be resolved in favor of arbitration. Here, the parties to the agreement had agreed to a broad clause, which mandated arbitration on "any controversy or claim arising out of or relating to this Agreement, or to the interpretation, breach of enforcement thereof."

The Court held that a non-signatory to the arbitration agreement was entitled to rely upon it to invoke arbitration, because the claims made by the plaintiff were "intertwined" with the agreement, as every claim made in the complaint flowed from the agreement containing the arbitration clause.

The Court further held that all of the claims made were subject to arbitration, including claims for injunctive relief, for the appointment of a receiver, for the dissolution of the LLC, and for punitive damages. It stated that "[b]y specifically adopting the AAA commercial rules as the default mechanism for arbitration, the parties here bargained to have an arbitrator determine the merits of any request for injunctive relief, including requests for injunctions and the appointment of a receiver."

The Court found that there was no basis for it to retain jurisdiction in order to enter preliminary injunctive relief. The Court noted, among other things, that the AAA Rules provide streamlined procedures for obtaining interim equitable relief.

Full Opinion

State v. Phillip Morris USA, Inc., 2006 NCBC 22 (N.C. Super. Dec. 4, 2006)(Tennille)

The Court granted a Motion to Compel Arbitration of claims arising out of the Master Settlement Agreement between the major tobacco manufacturers and the states. The Court found the language of the arbitration clause, which contained the words "any dispute, controversy or claim arising out of or relating to" be very broad. The Court also noted North Carolina's strong public policy in favor of arbitration, and that the agreement to arbitration had helped to eliminate "any real or imagined home court advantage" and would avoid "the potential influence of state politics and other matters." 22 other states had granted similar motions.

Full Opinion

Polo Ralph Lauren Corp. v. Gulf Insurance Co., 2001 NCBC 3 (N.C. Super. Ct. Jan. 31, 2001)(Tennille)

The Court granted defendant's motion to compel arbitration, noting North Carolina's "strong public policy in support of arbitration." The Court rejected the argument that defendant had waived its right to arbitration by delay and through its pursuit of discovery.

Full Opinion