Saturday, April 27, 2019

FYI: SCOTUS Holds Ambiguous Agreement Not Enough for Classwide Arbitration

In a 5-4 decision, the Supreme Court of the United States ("SCOTUS") recently held that under the Federal Arbitration Act ("FAA"), an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.

 

Accordingly, the contrary ruling of the Ninth Circuit was reversed and the matter was remanded to the trial court for further proceedings.

 

A copy of the opinion is available at:  Link to Opinion

 

The defendant company ("Company") sells light fixtures and related products.  In 2016, a hacker impersonating a Company official tricked a Company employee into disclosing tax information of approximately 1,300 other employees, after which a fraudulent tax return was filed in the name of one of the employees ("Plaintiff"). 

 

The Plaintiff had signed an arbitration agreement when he started work at the Company, but after the data breach, he sued the Company in federal district court in California, bringing state and federal claims on behalf of a putative class of employees whose tax information had been compromised. 

 

The Company moved to compel arbitration on an individual rather than classwide basis, and to dismiss the lawsuit.  The district court granted the motion to compel arbitration and dismissing the Plaintiff's claims without prejudice, but rejected the Company's request for individual arbitration, and instead authorized arbitration on a classwide basis.

 

The Company appealed to the Ninth Circuit arguing that the court erred in compelling class arbitration.

 

The Ninth Circuit affirmed.  In so ruling, the Ninth Circuit acknowledged that the SCOTUS decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010) prohibits forcing a party "to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so," and that the Plaintiff's agreement "include[d] no express mention of class proceedings." 

 

However, the Ninth Circuit reasoned that although the agreement did not expressly refer to class arbitration, it was not the "silence" contemplated in Stolt-Nielsen because there the parties had stipulated that their agreement was silent about class arbitration.  Because there was no such stipulation in this case, the Ninth Circuit concluded that Stolt-Nielsen was not controlling. 

 

The Ninth Circuit next determined that the agreement was ambiguous on the issue of class arbitration, and therefore followed California law to construe the ambiguity against the drafter, which rule "applies with peculiar force in the case of a contract of adhesion" such as the one at issue.

 

The Company then petitioned for a writ of certiorari, which the SCOTUS granted.

 

The SCOTUS first analyzed whether it had jurisdiction under section 16 of the FAA, which governs appellate review of arbitration orders. The Plaintiff argued that the Ninth Circuit lacked statutory jurisdiction because section 16 permits appeal from orders denying motions to compel arbitration, § 16(a)1)(B), but not orders granting such motions, § 16(b)(2). 

 

However, the Company relied on section 16(a)(3), which provides that an appeal may be taken from "a final decision with respect to an arbitration that is subject to this title."  The SCOTUS explained that it had previously held that an order both compelling arbitration and dismissing the underlying claims is "final" within the meaning of section 16(a)(3).  Therefore, the Court had jurisdiction.

 

Turning to the interpretation of the parties' agreement, the majority noted that the Ninth Circuit applied California law to conclude that the parties' agreement was ambiguous on the availability of class arbitration, and therefore "[f]ollowing our normal practice, we defer to the Ninth Circuit's interpretation and application of state law and thus accept that the agreement should be regarded as ambiguous."

 

Thus, the SCOTUS "face[d] the question whether, consistent with the FAA, and ambiguous agreement can provide the necessary 'contractual basis' for compelling class arbitration."

 

The Court held "that it cannot – a conclusion that follows directly from our decision in Stolt-Nielsen." 

 

In reaching its conclusion, the majority noted class arbitration is not only markedly different from the "traditional individualized arbitration" contemplated by the FAA, but also that it "undermines the most important benefits of that familiar form of arbitration."

 

"The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis."

 

After exploring the differences between class and individual arbitration, the majority stated that "[b]ecause of these 'crucial differences' between individual and class arbitration, Stolt-Nielsen explained that there is 'reason to doubt the parties' mutual consent to resolve disputes through class arbitration." 

 

For that reason, the SCOTUS "held that courts may not infer consent to participate in class arbitration absent an affirmative 'contractual basis for concluding that the party agreed to do so," and "[s]ilence is not enough."

 

Following its reasoning in Stolt-Nielsen, the Court explained "[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to 'sacrifice[] the principal advantage of arbitration."

 

The Ninth Circuit and dissenting Justices reached a contrary conclusion based on California's rule that ambiguity in a contract should be construed against the drafter. 

 

However, the majority explained that the "rule applies 'only as a last resort,'" and "the reach of the canon construing contract language against the drafter must have limits, no matter who the drafter is." 

 

Further, "[c]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA."

 

And, the general rule that ambiguity in a contract should be construed against the drafter "cannot be applied to impose class arbitration in the absence of the parties' consent."

 

The SCOTUS therefore held that "[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis," and the rule that ambiguity in a contract should be construed against the drafter "cannot substitute for the requisite affirmative 'contractual basis for concluding that the part[ies] agreed to [class arbitration]".

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Monday, April 22, 2019

FYI: 9th Cir Holds That Citizenship of Bank Acting as Trustee Generally Controls for Diversity Purposes

The U.S. Court of Appeals for the Ninth Circuit held that the Supreme Court of the United States' decision in Americold Realty Trust v. ConAgra Foods, Inc. did not upset the Supreme Court's prior holding in Navarro Ass'n v. Lee, and that "when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes."

 

Accordingly, the Ninth Circuit held that the trial court properly exercised its jurisdiction over the matter where the bank - acting as trustee - was sued in its own name, and along with the other named defendants, was of diverse citizenship with the plaintiff. 

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff borrower ("Borrower") took out a loan, and the loan was later securitized and the deed of trust was assigned to the bank ("Bank"), which acted as trustee for a trust ("Trust").  The Trust was governed by a pooling and servicing agreement, which provided that all "right, title and interest" in the Trust were conveyed to the Bank "for the use and benefit of the Certificateholders," and the Bank was given the power to hold the Trust's assets, sue in its own name, transact the Trust's business, terminate servicers, and engage in other necessary activities.

 

In her complaint, the Borrower asserted various causes of action under California law, including wrongful foreclosure.  The Borrower named, among others, the Bank.

 

The defendants removed the matter to the trial court based on diversity jurisdiction.  The notice of removal specifically stated that it was filed on behalf of, among others, the Bank as trustee for the Trust.  The notice further stated that the Bank was incorrectly sued in its name only, without referencing the Trust.

 

The notice asserted that the Bank was a national banking association organized under the laws of the United States, with its main office in Virginia, and was therefore a citizen of Virginia for diversity purposes.

Because no defendant was, like the Borrower, a citizen of California, the notice concluded that diversity jurisdiction was established and removal was proper.

 

The trial court agreed and the matter remained in federal court.  The trial court subsequently granted summary judgment in favor of the defendants. 

 

The Borrower appealed.  On appeal, she did not contest the trial court's summary judgment decision, but instead only challenged the court's subject matter jurisdiction over the action.

 

As you may recall, federal subject matter jurisdiction – specifically, diversity jurisdiction – exists where an action is between "citizens of different states," and the "matter in controversy exceeds the sum or value of $75,000."  It requires "complete diversity" of citizenship, meaning that "the citizenship of each plaintiff is diverse from the citizenship of each defendant." 

 

The Borrower argued that the defendants failed to establish diversity jurisdiction because, following Americold, they were required to demonstrate the citizenship of the Trust's investors, and could not simply rely on the citizenship of the Bank as its trustee.

 

In addressing the argument, the Ninth Circuit first discussed two other pertinent Supreme Court decisions, Navarro and Carden v. Arkoma Associates. 

 

The Ninth Circuit explained that in Navarro, the Supreme Court reaffirmed that "a trustee is a real party to the controversy for purposes of diversity jurisdiction when he possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others." 

 

However, in Carden, the Supreme Court held that "diversity jurisdiction in a suit by or against the [limited partnership] entity depends on the citizenship of 'all the members.'"  The Supreme Court further explained that Navarro was consistent with that rule because it "did not involve the question whether a party that is an artificial entity other than a corporation can be considered a 'citizen' of a State, but the quite separate question whether the parties that were undoubted 'citizens' . . . were the real parties to the controversy." 

 

The Ninth Circuit noted that although other "[c]ourts applying Navarro and Carden to the question of a trust's citizenship for diversity purposes have reached different conclusions," in 2006 it had held in Johnson v. Columbia Props. Anchorage, LP that a "[a] trust has the citizenship of its trustee or trustees." 

 

However, in 2016 the Supreme Court decided Americold, in which it addressed "how to determine the citizenship of a 'real estate investment trust.'"  In analyzing the issue, the Supreme Court noted that under the applicable state law, a "real estate investment trust" was not a corporation, but instead "an 'unincorporated business trust or association' in which property is held and managed 'for the benefit and profit of any person who may become a shareholder.'"

 

Thus, the Supreme Court determined that the real estate investment trust's "shareholders appear[ed] to be in the same positions as the shareholders of a joint-stock company or the partners of a limited partnership – both of whom we viewed as members of their relevant entities," and "therefore conclude[d] that for purposes of diversity jurisdiction, [the real estate investment trust's] members include its shareholders."

 

However, the Supreme Court expressly stated that it was not overturning Novarro, but instead distinguished it noting that "Navarro had nothing to do with the citizenship of [a] trust," rather it "reaffirmed a separate rule that when a trustee files a lawsuit in her name, her jurisdictional citizenship is the State to which she belongs."

 

In applying Americold to its case, the Ninth Circuit stated that "[a]lthough [the Borrower] suggests that Americold constituted a sea change in how courts determine the citizenship of a trust, we do not find the decision to be quite so momentous.  Indeed, the Court clearly articulated that which we already knew: 'when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes.'"

 

The Ninth Circuit ruled that because the Borrower sued the Bank in its own name, and did not mention the Trust either in the caption or in the complaint's list of defendants, "Americold holds that, because [the Bank] as trustee was 'sued in [its] own name, [its] citizenship is all that matters for diversity purposes.'"

 

Accordingly, "[t]he parties were . . . completely diverse, and the trial court properly exercised diversity jurisdiction in over the action."

 

After reaching its ruling, the Ninth Circuit noted in dicta that there was potential conflict between its decision in Johnson that "[a] trust has the citizenship of its trustee or trustees" and Americold where the Supreme Court concluded that the citizenship of nontraditional trusts should be determined based on their members, not trustees.

 

After discussing the differences between "traditional trusts" and other artificial entities to which states have applied the "'trust' label," the Ninth Circuit concluded that "Johnson remains good law when applied to what Americold labelled traditional trusts." 

 

Moreover, "in such a case, as Navarro held, the trustee is the real party in interest, and so its citizenship, not the citizenships of the trust's beneficiaries, controls the diversity analysis." 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments