FYI: 8th Cir Affirms Denial of Motion to Compel Arbitration in FLSA Case Against Lender

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the denial of a lender's motion to compel arbitration over a suit filed by a former employee under alleging violations of the federal Fair Labor Standards Act ("FLSA").

 

In so doing, the Court held that the former employee's mere review of the company's employee handbook, and arbitration and delegation provisions therein, did not constitute acceptance of the relevant clauses, and without acceptance no valid contracts to arbitrate their disputes or delegate the decision to an arbitrator were formed.

 

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

 

A mortgage lender ("Company") employed an employee ("Employee") between June 2016 and July 2017.  In August 2016 and February 2017, the Employee accessed the computer network accessible by to the Company's employees to click and open various company documents, the Company's Handbook Addendum (the "Handbook").  Clicking the Handbook generated an acknowledgement of review and hyperlink to its full text. 

 

The Handbook includes provisions: (i) that all covered disputes will be settled by binding arbitration and waiving the parties' rights to trial (the "Arbitration Provision") and; (ii) that the arbitrator, and no federal, state or local court or agency possesses exclusive authority to resolve any claim relating to interpretation or enforceability of the arbitration provision (the "Delegation Provision").  The Employee allegedly had no recollection of reviewing the Handbook, and there was no evidence of opening or reviewing its full text.

 

In September 2017, Employee sued Company under the FLSA, alleging that she was not paid for all earned wages and overtime.  The Company moved to compel arbitration pursuant to the Handbook's Arbitration Provision.

 

The trial court denied the Company's motion to compel, holding that the parties did not form an enforceable agreement to arbitrate disputes, because (i) the Handbook could be modified by Company unilaterally and thus did not constitute an offer, and; (ii) even if the Arbitration Provision constituted an offer, mere review of the Handbook did not constitute acceptance.  See e.g., Nebraska Machinery Co. v. Cargotec Solutions, LLC, 762 F.3d 737 (8th Cir. 2014) (party not compelled to proceed to arbitration to prove it never agreed to arbitrate claims).  The instant appeal followed.

 

The issue on appeal before the Eighth Circuit was whether the parties formed a valid contract that binds them to arbitrate their dispute, a burden to be proven by Company as the party seeking to compel arbitration.  See Jackson v. Higher Educ. Loan Auth. of Mo., 497 S.W.3d 283, 287 (Mo. Ct. App. 2016).  Missouri law governs interpretation of the Handbook and relevant clauses, which requires (1) an offer, (2) acceptance, and (3) consideration to form a valid and enforceable contract.  See Baker v. Bristol Care, Inc., 450 S.W.3d 770, 774 (Mo. 2014) (en banc).

 

As you may recall, Missouri recognizes delegation provisions as "an agreement to arbitrate threshold issues concerning the arbitration agreement," placing the "gateway questions of arbitrability" into the hands of an arbitrator—including determining the validity of the arbitration agreement itself.  Soars v. Easter Seals Midwest, 563 S.W.3d 111, 114 (Mo. 2018) (en banc); Jackson at 68-69.  Thus, if the Delegation Provision was declared invalid, the Company's claim to compel arbitration of the arbitrability issues fails.  Conversely, if the Delegation Provision is a valid contract under Missouri law, the appellate court's inquiry ends, and all other questions must go to an arbitrator.  Id. at 70. 

 

Assuming for the sake of its discussion that the Delegation Provision, as provided, constituted an offer from the Company to the Employee, the appellate Court examined whether or not the offer was accepted.  In doing so, "the critical question [was] whether signals sent by [Employee] to [Company] objectively manifest [Employee's] intent to be presently bound."  Kunzie v. Jack-In-The-Box, Inc., 330 S.W.3d 476, 484 (Mo. Ct. App. 2010).

 

Under Missouri law, "mere continuation of employment [does not] manifest[] the necessary assent to [the] terms of arbitration" (Id.) and "silence generally cannot be translated into acceptance." Katz at 545.  However, continued employment may constitute acceptance when expressly stated in the document and informed of such by Company.  See Berkley v. Dillard's, Inc., 450 F. 3d 775, 777 (8th Cir. 2006).

 

Here, the Employee was twice presented opportunity to review the full Handbook through an optional hyperlink on the Company's network; however, the initial review was not conditioned on her offer of employment.  While the Employee was advised that upon entry to the Company's internal system that she acknowledged review of the Company's materials (including the Handbook and relevant Delegation Provision), the appellate court noted that the record did not establish that the Employee actually reviewed the Handbook, nor does she recall doing so. 

 

At best, the Company can show that the Employee acknowledged the existence of the Delegation Provision and was thus aware of the offer, but on the facts presented, it was possible that she never saw it, and "no authority [exists] holding that an employee's general knowledge or awareness of the existence of a contract constitutes the positive and unambiguous unequivocal acceptance required under Missouri law." Katz at 545.  Applying Missouri contract law, mere review of the subject materials did not constitute acceptance on the Employee's part, and thus no enforceable contract as to the Delegation Provision was formed.

 

Because an arbitration provision lacking a valid delegation provision leaves the remaining arbitration agreement open to review for validity, and is a standalone and independent contract from the delegation provision, it requires the same proof of the elements of a valid contract.  Because the Arbitration Provision was presented in the Handbook in the same fashion as the Delegation Provision, no valid contract was formed as to the Arbitration Provision due to lack of acceptance.

 

Accordingly, as no contractual relationship to dispute arbitration was formed between Company and Employee, the Eighth Circuit the trial court's denial of the Company's motion to compel arbitration was affirmed.

 

 

 

 

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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FYI: OH Sup Ct Holds Foreclosure Decree "Final and Appealable" Even Without Adjudication of Other Liens

The Supreme Court of Ohio recently held that, although a foreclosure decree did not specify certain amounts of outstanding liens due and owing upon the property, it nevertheless was a final, appealable order that left no issues remaining to be determined as to the rights and liabilities of the parties. 

 

The Ohio Supreme Court further noted that it was not required to adhere to the law-of-the-case-doctrine that was the basis for the appellate court's contrary ruling pursuant to its prior determination that foreclosure decree was not a final appealable order.

 

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

 

In October 2013, proceedings were initiated against husband and wife borrowers ("Borrowers") to foreclose three promissory notes secured by three mortgages upon Borrowers' property.  Upon agreement of the parties, in May 2014, judgment was entered in favor of the mortgagee ("Mortgagee") and against Borrowers.

 

After a bankruptcy petition filed by Borrowers which automatically stayed the foreclosure proceedings was eventually dismissed, summary judgment was entered in the Mortgagee's favor in December 2015.  The foreclosure decree, entered on January 12, 2016 declared Borrowers liable for the total amount of principal on the three loans and ordered sale of the property with priority of proceeds as follows: a county tax lien (in an unspecified amount), the three foreclosed mortgages upon the property, and a lien interest (in an unspecified amount) due to a third party ("Third Party Lienholder") pursuant to certificate.

 

Borrowers appealed the foreclosure decree.  Although the trial court granted the Borrowers' request to stay the court's foreclosure judgment, the appellate court denied their request to waive the appellate bond requirement.  After Borrowers failed to post the required bond, a sheriff's sale took place on February 26, 2016 where the property was purchased by the Mortgagee.

 

Before confirmation of the sale, the appellate court dismissed the appeal for lack of a final, appealable order because the foreclosure decree did not state the amounts due on the liens held by the county treasurer and third-party lienholder.  Thereafter on remand, the trial court granted the Mortgagee's motion to confirm sale and delivery of the property to Mortgagee and ordered distribution of proceeds.

 

The Borrowers appealed again, arguing that the argument that the trial court erred in issuing the confirmation order because the underlying foreclosure decree was not a final appealable order (the "Second Appeal").  The appellate court agreed, and reversed the confirmation of the sale, concluding that the law-of-the-case doctrine required adherence to its earlier determination that the foreclosure decree was not a final appealable order.

 

Upon the Mortgagee's motion for reconsideration, the appellate court denied reconsideration of its determination that the trial court lacked authority to confirm the sheriff's sale due to the nonfinality of the foreclosure decree, but granted reconsideration with respect to its remand instructions vacating the confirmation of sale order.  Because Mortgagee had already conveyed the property to third parties, the trial court was instructed to vacate the confirmation order and to determine possessory interests of the parties pending confirmation of a new sale, rather than return the deed to the Borrowers.

 

The Supreme Court of Ohio accepted Mortgagee's instant, discretionary appeal to consider two propositions of law: (i) whether a sheriff's sale can be confirmed even if the underlying foreclosure decree was a nonfinal order, and; (ii) whether a foreclosure decree which determines liability and the amount due the first mortgagor and leaves the remaining amounts to mechanical calculation is a final order subject to execution.

 

As you may recall, Ohio law dictates that foreclosure actions proceed in two stages, both of which end in a final appealable judgment: the order of foreclosure and the confirmation of sale.  CitiMortgage, Inc. v. Roznowski, 139 Ohio St.3d 299, 2014-Ohio-1984, 11 N.E. 3d 1140. 

 

The order of foreclosure determining lienholder priority and ordering a sheriff sale may be challenged on appeal, but once the foreclosure decree is final and upon completion of the appeals process, the rights and responsibilities of the parties under the foreclosure decree may no longer be challenged.  Id. 

 

The confirmation of sale is an ancillary proceeding limited to whether the sheriff's sale conformed to law, and an appeal of the order confirming the sale and dispersing proceeds is reviewed for an abuse of discretion, and limited to challenging the order itself and issues related to the confirmation proceedings — i.e. computation of final amounts due, accrued interest, corporate advances, etc.  Id.; Ohio Savs. Bank v. Ambrose, 56 Ohio St. 3d 53, 55, 563 N.E. 2d 1388 (1990).

 

First, the Supreme Court reviewed whether the law-of-the-case doctrine required it to adhere to the prior appellate decision that the foreclosure decree was not a final appealable order.  Although the appellate court correctly concluded that the doctrine precluded its reexamination of the nonfinality of the foreclosure decree, the Supreme Court noted it is not bound by prior decisions of a lower court, and thus, declined to apply the law-of-the-case doctrine here in order to address the merits with respect to the finality of the foreclosure decree.  Ohio Constitution, Art. IV, Section 2(B)(2)(e).

 

Although the appellate court concluded that the foreclosure decree's failure to state the amounts of the county tax and third-party liens rendered it a nonfinal nonappealable order, and that the trial court lacked authority to execute the foreclosure decree to order and confirm the sale of the property, the Supreme Court's holding in Roznowski led to a different conclusion. 

 

In Roznowski, the foreclosure decree included future expenses to be incurred by the bank in its damage award, but did not specify these amounts.  Nevertheless, the Supreme Court held that it was a final, appealable order that fully set forth the parties' responsibilities, leaving only "the trial court to perform the ministerial task of calculating the final amounts that would arise during confirmation proceedings."  Roznowski at par. 20.

 

Similarly here, the Court could not state with certainty the accrued taxes due at the time of the foreclosure decree, as this amount will likely change — and in fact, did by the time the court entered the confirmation of sale.  The Court reasoned that "No judgment of foreclosure and sale would ever be final if we required courts to compute taxes and all future costs as a prerequisite for finality," and those amounts may later be challenged by appealing the confirmation of sale.  Id.   Moreover, the decree was final and left no questions as to the rights of the Third-Party Lienholder because it referenced the recorded certificate of judgment which includes the amount of the judgment and costs.  Ohio R.C. 2329.02.

 

The Supreme Court also rebuffed the appellate court's reliance on Marion Prod. Credit Assn. v. Cochran, 40 Ohio St.3d 265, 270, 533 N.E.2d 325 (1988), for the proposition that a trial court errs in allowing the foreclosure and sale of property before all the claims and counterclaims in a foreclosure action have been resolved. 

 

Here, no claims were pending when the trial court entered its foreclosure decree, as the Borrowers counterclaims were dismissed some eighteen months prior.  Although the county treasurer asserted a cross claim under state code concerning its unpaid tax liens, the Supreme Court concluded that the foreclosure decree fully adjudicated the county's claims by declaring its tax lien priority as superior to all other lienholders.

 

Because the order of foreclosure determined the extent of each lienholder's interest, set out the priority of the liens, and determined the rights and no issues remaining to be determined as to the rights and liabilities of the parties, the Supreme Court concluded that the foreclosure decree was a final appealable order, and reversed the judgment of the appellate court and reinstated the confirmation of sale.

 

 

 

 

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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FYI: SCOTUS Adopts "Objectively Reasonable" Standard for Violations of BK Discharge Orders

In determining the legal standard for holding a creditor in civil contempt for attempting to collect a debt in violation of a bankruptcy discharge order, the Supreme Court of the United States "SCOTUS) adopted an "objectively reasonable" standard, and held that a court may hold a creditor in civil contempt if there is "no fair ground of doubt" as to whether the order barred the creditor's conduct.  

 

Accordingly, SCOTUS reversed the Ninth Circuit's ruling, which had applied a subjective standard for civil contempt.

 

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

 

The bankruptcy debtor ("Debtor") formerly owned an interest in an Oregon company ("Company").  The Company brought a lawsuit in Oregon state court claiming that the Debtor had breached its operating agreement.

 

Before trial, the Debtor filed for bankruptcy under Chapter 7 of the Bankruptcy Code.  Thereafter, the Bankruptcy Court issued a discharge order stating that the Debtor "shall be granted a discharge under § 727."

 

As you will recall, Section 727 provides that a discharge relieves a debtor "from all debts that arose before the date of the order for relief," "[e]xcept as provided in section 523."  Section 523 then lists in detail the debts that are exempt from discharge. 

 

After the discharge order was issued, the Oregon state court proceeded to enter judgment against the Debtor.  The Company then filed a petition in state court seeking attorney's fees that were incurred after the Debtor filed his bankruptcy petition.

 

All parties agreed that under the Ninth Circuit's decision in In re Ybarra, 424 F.3d 1018 (2005), a discharge order would normally discharge postpetition attorney's fees stemming from prepetition litigation unless the discharged debtor "returned to the fray" after filing bankruptcy. 

 

The Company argued that the Debtor had "returned to the fray" postpetition and was therefore liable for the postpetition attorney's fees that the Company sought to collect.  The state court agreed and awarded the Company its postpetition attorney's fees.

 

The Debtor then returned to the bankruptcy court and argued that he had not returned to the "fray" under Ybarra, and that the discharge order therefore barred the Company from collecting postpetition attorney's fees.  The Debtor requested that the court hold the Company in civil contempt for violating the discharge order. 

 

However, finding no violation of the discharge order, the bankruptcy court refused to hold the Company in civil contempt.

 

The Debtor appealed to the district court, which held that he had not returned to the fray, and therefore concluded that the Company had violated the discharge order by trying to collect attorney's fees.  The district court then remanded the matter back to the bankruptcy court. 

 

On remand, the bankruptcy court held the Company in civil contempt.  In doing so, it applied a standard likened to strict liability.  Specifically, the bankruptcy court determined that civil contempt sanctions were appropriate because the Company had been "aware of the discharge" order and "intended the action which violate[d]" it.  The court awarded the Debtor approximately $105,000 in attorney's fees and costs, $5,000 in damages for emotional distress, and $2,000 in punitive damages.

 

The Company appealed, and the Bankruptcy Appellate Panel vacated the sanctions, and the Ninth Circuit affirmed the panel's decision.  In reaching its decision, the Ninth Circuit applied a different standard from the bankruptcy court, concluding that a "creditor's good faith belief" that the discharge order "does not apply to the creditor's claim precludes a finding of contempt, even if the creditor's belief is unreasonable." 

 

Because the Company had a "good faith belief" that the discharge order did not apply to its claims, the Ninth Circuit held that the civil contempt sanctions were improper.

The Debtor then filed a petition for certiorari, which was granted. 

 

Initially, SCOTUS noted that "[t]he question before us concerns the legal standard for holding a creditor in civil contempt when the creditor attempts to collect a debt in violation of a bankruptcy discharge order." 

 

In determining the answer to the question, the Court analyzed two bankruptcy code provisions.  First, section 524, which provides that a discharge order "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset" a discharged debt.  Second, section 105, which authorizes a court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."

 

After reviewing these provisions, SCOTUS determined that they "authorize a court to impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order."

 

SCOTUS further observed that in cases outside the bankruptcy context, it has said that civil contempt "should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant's conduct."

 

Moreover, this standard reflects that civil contempt is a "severe remedy," and that principles of "basic fairness requir[e] that those enjoined receive explicit notice" of "what conduct is outlawed" before being held in civil contempt.

 

Thus, "[t]his standard is generally an objective one."  However, subject intent is not always irrelevant, and "civil contempt sanctions may be warranted when a party acts in bad faith." 

 

After analyzing these traditional civil contempt principles, SCOTUS noted they "apply straightforwardly to the bankruptcy discharge context."  Thus, "[u]nder the fair ground of doubt standard, civil contempt . . . may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statute that govern its scope."

 

SCOTUS therefore held: "[A] court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor's conduct.  In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful."

 

Because the Ninth Circuit erred in applying a subjective standard for civil contempt, its judgment was vacated and the matter was remanded.

 

 

 

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:

 

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and

 

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