Arbitration and Replevin in Secured Credit Agreements

Security agreements--in which Debtor grants Creditor a security interest in goods as collateral--often include arbitration clauses, which can lead to interesting clashes between arbitration and the important creditor's remedy of replevin. When Debtor defaults, Creditor can get a court to issue a Writ of Replevin instructing the sheriff to take the collateral from Debtor and give possession of it to Creditor so Creditor may then hold a foreclosure sale of it. Suppose though, that Debtor appears in court and argues that the court may not issue a writ of replevin because the security agreement requires arbitration of disputes and Debtor asserts the existence of a dispute with Creditor--such as a dispute about the amount of money Debtor owes or whether Creditor is acting in a commercially reasonable manner.

Creditors typically want a writ of replevin quickly and will not want such a writ delayed by having to arbitrate something first. So Creditor may rely on an old case like Lease Plan Fleet Corp. v. Johnson Transp., Inc., 67 Misc. 2d 822, 823, 324 N.Y.S.2d 928, 929–30 (Sup. Ct. 1971), which stated: “After the vehicles are replevied the replevin action may be stayed pending the determination of the arbitrator. It has been held that an agreement to arbitrate will not preclude a party to the agreement from obtaining a warrant of attachment. Similarly, the agreement to arbitrate should not preclude the petitioner from replevying the leased vehicles pursuant to CPLR 7102.”

Or Creditor may have drafted the security agreement to carve-out replevin actions from the agreement to arbitrate. For instance the following clause might be interpreted to include not just Creditor's self-help repossession, but also a replevin action:

“Dispute” does not include any repossession of the Vehicle upon Your default and any exercise of the power of sale of the Vehicle under this Contract or any individual action by You to prevent Us from using any such remedy, so long as such individual action does not involve a request for monetary relief of any kind. 

Gillette v. Serv. Intelligence LLC, No. 19-C-275, 2019 WL 5268570, at *1 (E.D. Wis. Oct. 17, 2019). 

Such a carve-out was enforced in Hamilton v. Ford Motor Credit Co., 99 Ark.App. 124 (Ct. App.

 2007), which affirmed a trial court's grant of replevin and denial of the debtor's motion to compel arbitration:

The trial court did not err when it denied the Hamiltons’ request to arbitrate the issue of replevin. This is true because the arbitration clause specifically, and unambiguously, provides that FMC does not give up the ‘‘[r]ight to enforce the security interest in the vehicle, whether by repossession or through a court of law.’’ In its replevin request, FMC is simply enforcing its security interest in the vehicle by seeking to repossess the vehicle.

But even if the arbitration agreement carves out replevin actions, Debtor may still be able to prevent a writ of replevin until arbitration occurs. That is because many creditors--perhaps unknowingly--draft arbitration agreements sending to arbitrators the question whether an arbitrable dispute exists. Creditors do this when they agree to arbitrate under the Commercial Rules of the American Arbitration Association or similar rules of JAMS.   

  

See, e.g., Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir.2005) (“[W]hen . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.”); Citifinancial, Inc. v. Newton, 359 F.Supp.2d 545, 549–52 (S.D.Miss.2005) (holding that by agreeing to be bound by procedural rules of AAA, including rule giving arbitrator power to rule on his or her own jurisdiction, defendant agreed to arbitrate questions of jurisdiction before arbitrator); Sleeper Farms v. Agway, Inc., 211 F.Supp.2d 197, 200–03 (D.Me.2002)(since the AAA rules constitute “a clear and unmistakable delegation of scope-determining authority to an arbitrator,” the court “refers this dispute” to the arbitrator “to determine * * * what issues * * * are covered by the arbitration clause.”)

See also JAMS Comprehensive Arbitration Rules and Procedures, Rule 11(c) (“Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.”), available at http://www.jamsadr.com/rules-comprehensive-arbitration/#Rule 11; Monex Deposit Co. v. Gilliam, 616 F.Supp.2d 1023, 1025 (C.D.Cal.2009) (granting motion to compel arbitration and noting that agreement “incorporates JAMS Rules providing that the arbitrator decides scope and validity disputes with respect to particular claims.”); Greenspan v. Ladt, LLC, 111 Cal.Rptr.3d 468, 494–95 (Ct.App.2010)(“LADT interprets the concluding language of Rule 11(c) to mean the arbitrator makes an initial decision on arbitrability, and, later, the courts independently make the final decision. Not so. For one thing, LADT’s interpretation would conflict with JAMS Rule 11(a), which provides that “[t]he resolution of the issue by the Arbitrator shall be final.” * * * [T]he arbitrator decides arbitrability issues at the outset, and his decision is final.”)

These holdings are perhaps strengthened by the Supreme Court's unanimous 2019 opinion in Henry Schein, Inc. v. Archer & White Sales, Inc., which held that if an arbitration agreement (or the rules it incorporates) sends to arbitrators (rather than judges) the issue of which disputes the parties agreed to arbitrate, then a court cannot refuse to enforce that agreement by finding "wholly groundless" the argument that the particular dispute is covered by the arbitration agreement.

Thanks to terrific Secured Transactions casebook authors Lynn LoPucki and Bob Lawless for getting me to think about these issues, on which my thoughts are still evolving.

 

Supreme Court of Canada Refuses to Enforce Uber Contract Requiring Arbitration in Holland

A Canadian Uber driver, Heller, brought a class action against Uber, actually several Uber entities, alleging violations of Canada’s Employment Standards Act. According to the motion judge in the Ontario Superior Court of Justice, Uber “[d]rivers in Ontario do not enter into contracts with Uber Technologies Inc. [incorporated in Delaware] or Uber Canada Inc. The Drivers rather create an internet account and a contractual relationship with Uber B.V. and with Rasier Operations B.V. and, or Uber Portier B.V.” Each of those Uber entities is incorporated under the laws of the Netherlands. Uber’s form contract for drivers says it shall be governed by the laws of the Netherlands, and that any dispute not resolved in mediation:

“shall be exclusively and finally resolved by arbitration under the Rules of Arbitration of the International Chamber of Commerce (“ICC Arbitration Rules”) …. The Place of the arbitration shall be Amsterdam, The Netherlands.” 

The motion judge granted Uber’s motion to stay the class proceedings in favor of arbitration in the Netherlands, relying on Canada’s International Commercial Arbitration Act, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  

The Court of Appeal of Ontario set aside the lower court’s order, and allowed Heller to litigate, rather than arbitrate, the class action. The Court of Appeal emphasized that the ICC’s “up-front administrative/filing-related costs for a driver to participate in the mediation-arbitration process in the Netherlands prescribed in the Arbitration Clause is US$14,500. As an UberEATS driver, the appellant earns about $20,800-$31,200 per year, before taxes and expenses.” The Court of Appeal held that the arbitration agreement “constitutes a contracting out of the Employment Standards Act “ which permits a driver to make a complaint the Ministry of Labour regarding the actions of Uber and their possible violation of the requirements of the ESA.” The arbitration agreement “deprives [the driver] of the right to have an ESO investigate his complaint.” The Court of Appeal noted that the driver “has not, in fact, chosen to make a complaint under the ESA but rather has commenced this proposed class action”, but held that this did not under the court’s conclusion that the arbitration agreement impermissibly contracted out of the ESA.

As an independent ground for denying enforcement to the arbitration clause, the Court of Appeal held the clause unconscionable.

The Supreme Court of Canada agreed with the Court of Appeal that the arbitration clause is unenforceable: “This is an arbitration agreement that makes it impossible for one party to arbitrate. It is a classic case of unconscionability.” The Supreme Court’s opinion contains a lengthy discussion of the unconscionability doctrine, featuring some differences of opinion among the justices.

Earlier Canadian cases include Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801, and Seidel v. TELUS Communications Inc., [2011] 1 S.C.R. 531. 

Supreme Court Permits Non-signatory to Enforce International Commercial Arbitration Agreement

The US Supreme Court recently permitted a party that did not sign an arbitration agreement to enforce it in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC.

With contracts including arbitration clauses, ThyssenKrupp hired F.L. Industries to perform construction on ThyssenKrupp’s Alabama steel plant. F.L. Industries then subcontracted with GE Energy to provide motors for the project. Later, ThyssenKrupp sold the plant to Outokumpu Stainless USA, LLC. Outokumpu alleged breach by GE Energy because the motors failed. Outokumpu and its insurers sued GE Energy in Alabama state court.

GE Energy removed the case to federal court under 9 U.S.C. § 205, which allows removal if a case “relates to an arbitration agreement . . . falling under the Convention” on the Recognition and Enforcement of Foreign Arbitral Awards, aka the New York Convention.

GE Energy then moved to dismiss the case and compel arbitration, relying on the arbitration clauses in ThyssenKrupp’s contracts with F. L. Industries. The district court granted the motion, but the Eleventh Circuit reversed, holding that the New York Convention only requires courts to enforce an arbitration agreement if asked to do so by the parties that actually signed the agreement, but GE Energy (a nonsignatory) was not such a party. The Eleventh Circuit stated: “GE Energy is undeniably not a signatory to the Contracts . . . [p]rivate parties—here Outokumpu and Fives—cannot contract around the Convention’s requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration. Accordingly, we hold that, to compel arbitration, the Convention requires that the arbitration agreement be signed by the parties before the Court or their privities.” 902 F.3d 1316, 1326 (11th Cir. 2018) (citations omitted).

The US Supreme Court rejected the Eleventh Circuit’s interpretation of the New York Convention, and unanimously held that the Convention does not conflict with domestic equitable estoppel doctrines that sometimes permit the enforcement of arbitration agreements by non-signatories.  The Supreme Court held that these domestic state-law principles apply to an international arbitration agreement under the domestic (Chapter 1) portion of the Federal Arbitration Act because Chapter 1 applies to actions that are governed by the Convention as long as Chapter 1 does not conflict with the Convention. The Court concluded that Chapter 1’s allowance of equitable estoppel did not conflict with the Convention because the Convention is silent on enforcement by a non-signatory. A wide variety of courts have interpreted FAA Chapter 1 to allow enforcement of arbitration agreements through various state-law  principles like “assumption, piercing the corporate veil, alter ego . . .” In Arthur Andersen LLP v. Carlisle, the Supreme Court held Chapter 1 allows “a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement.” 556 U.S. 624, 631–32 (2009). Equitable estoppel “allows a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the non-signatory.”

Justice Thomas’s opinion for the Court in GE Energy reasoned that the New York Convention’s silence on these doctrines for non-signatories to enforce arbitration agreements is dispositive because nothing in the Convention can be read to otherwise prohibit the application of these domestic doctrines. The Court went on to find that nothing in the Convention suggests that it prevents contracting states from applying domestic law that permits non-signatories to enforce arbitration agreements in additional circumstances.

The Supreme Court remanded the issue of whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that interpretation to the Court of Appeals.

Further commentary on this GE Energy Power case is available in The National Law Review, The American Bar Association, Willamette University College of Law, Jurist, JD Supra, and Lexology.

Symposium on Labor and Employment Arbitration

Jaime Fell and everyone at #PennStateLaw organized this symposium as well as any I’ve seen. I learned a ton from Mark Gough’s data, and the abilities of each of the other speakers--Jill Gross, Rick Bales, and Ted St. Antoine—to draw on their experiences in the trenches of arbitration as well as their broader perspectives as prolific scholars.

9:30 AM — Professor Theodore J. St. Antoine's Presentation on "Making Arbitration a Fair and Accessible Remedial Process"

10:00 AM — Professor Stephen Ware's Presentation on "Labor Arbitration's Differences"

10:30 AM — Professor Richard Bales' Presentation on "What Makes a 'Reasoned' Arbitration Award?"

11:15 AM — Lunch

12:00 PM — Professor Jill I. Gross' Presentation on "The Final Frontier: Are Class Action Waivers in Arbitration Clauses in Broker-Dealer Employment Agreements Enforceable?"

12:30 PM — Professor Mark Gough's Presentation on "Employment Disputes in Mandatory Arbitration and Civil Litigation: Comparing Outcomes and Stakeholder Perceptions."

My New Arbitration Book

Hot off the presses, a thoroughly updated Arbitration casebook by Stephen Ware and Alan Scott Rau:

Available from Amazon, this book discusses arbitration law and practice clearly and reliably, with engaging context ranging from partisan political battles to a Justin Bieber tweet. Balanced and comprehensive, the book covers major types of arbitration in the United States―commercial (including securities and trade associations), labor, employment, consumer, insurance, medical, and religious―as well as important types of international arbitration, such as commercial, maritime, investment, and sports. A carefully constructed teaching tool, Arbitration intersperses contemporary disputes―involving Uber’s app, Donald Trump’s confidentiality agreement, Jay-Z’s impact on arbitrator diversity, and the relationship between gender and biology―among:

• All the major Supreme Court cases from 1953 through 2019;
• Current case law on evolving topics, such as delegation clauses, contracts formed by clicking links on cell phones, and substitutes for the class actions limited by Concepcion;
• The full text of the Federal Arbitration Act, New York Convention, and Panama Convention;
• Chapters divided into short, coherent sections suitable for a single class session; and
• “Questions to Review and Synthesize” after the reading for each class session.