FYI: 5th Cir Affirms Order Compelling Arbitration of Age Discrimination Claim

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court's order compelling the arbitration of an employee's federal age discrimination claim against a financial institution employer, holding that the trial court correctly found that there was a meeting of the minds between the employee and the employer as required to form the arbitration agreement.

 

In addition, the Fifth Circuit held that the trial court properly referred this dispute to an arbitrator because the employee's defense that the arbitration agreement was procedurally unconscionable went to the Agreement's enforceability, not its existence.

 

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

 

The plaintiff employee worked for the employer from 1998 until her October 2017 termination. During her employment, the employee "agreed several times through employment contracts and acknowledgments of employee handbooks to refer all employment disputes to arbitration."

 

In 2016, the employer again required the employee to "review and acknowledge" the employer's Arbitration Agreement.  The Agreement required referring any employment-related dispute to arbitration pursuant to the rules of the American Arbitration Association. The Agreement delegated to the arbitrator "any legal dispute . . . arising out of, relating to, or concerning the validity, enforceability or breach of this Agreement, shall be resolved by final and binding arbitration."

 

On November 15, 2016, the employee viewed the Arbitration Agreement and electronically certified that she "carefully read the Employment Dispute Resolution Program/Agreement within and that I understand and agree to its terms."

 

In October 2017, the employer terminated the employee for allegedly inappropriate interactions with employees that she supervised. The employee eventually filed suit in federal court claiming that the termination violated the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964.

 

The employer timely moved, under the Federal Arbitration Act and pursuant to the 2016 Arbitration Agreement, to compel the employee to arbitrate her claims.

 

The employee responded to the motion to compel arbitration by asserting that no Arbitration Agreement existed for two reasons.

 

First, she argued that no meeting of the minds occurred because "she did not understand that she was agreeing to a binding arbitration agreement and therefore there was not the mutual assent necessary for contract formation under Mississippi law."

 

Second, she claimed that "the Agreement was procedurally unconscionable because of disparate bargaining power and her lack of a meaningful opportunity to bargain."

 

The trial court granted the employer's motion to compel arbitration and dismissed the case with prejudice finding that a meeting of the minds occurred to form the Arbitration Agreement. In addition, the trial court held that the arbitrator could decide the unconscionability claim because it only allows a court to nullify an existing agreement rather than affecting whether an arbitration agreement actually exists. 

 

This appeal followed.

 

The Fifth Circuit initially observed that when a party disputes whether an arbitration contract exists, "the challenge is always for the courts to decide." Will-Drill Resources, Inc., v. Samson Resources Co., 352 F.3d 211, 219 (5th Cir. 2003). However, if a court determines that an arbitration contract exists, "then whether that contract may be enforced for or against the parties in the particular case is for an arbitrator to decide."

 

The Fifth Circuit applies state contract law to determine if a challenge to a contract is "to formation itself or to subsequent enforcement."  The dispute here arose out of a Mississippi contract which requires the following: "(1) two or more contracting parties, (2) consideration, (3) an agreement that is sufficiently definite, (4) parties with legal capacity to make a contract, (5) mutual assent, and (6) no legal prohibition precluding contract formation."

 

The Fifth Circuit first examined the employee's argument that no meeting of the minds occurred. The Fifth Circuit determined that it may decide this issue because it "goes to the formation of the Arbitration Agreement." 

 

The Fifth Circuit noted that the employee received and reviewed electronic communications that "clearly identified an arbitration agreement as the subject of the communications." The employee certified that she "carefully read the Employment Dispute Resolution Program/Agreement within and that I understand and agree to its terms." The employee does not dispute that she "agreed to the Arbitration Agreement," but claims that she "simply acknowledged "receipt of another policy or directive" without understanding that she agreed to arbitrate any employment disputes. 

 

The Fifth Circuit rejected this argument because the employee's "unilateral lack of diligence does not preclude contract formation under Mississippi law." To hold otherwise would "destroy the value of all contracts." Thus, the trial court correctly determined that there was a meeting of the minds necessary to form the Arbitration Agreement.

 

The Fifth Circuit next turned to the employee's argument that no arbitration contract existed because a disparate bargaining power rendered the contract procedurally unconscionable.  The Fifth Circuit examined this argument under Mississippi law.

 

The Mississippi Supreme Court examined this issue in Caplin Enters. Inc. v. Arrington, 145 So. 3d 608 (Miss. 2014), where the plaintiffs argued that an arbitration clause in a larger contract was both procedurally and substantively unconscionable. The Mississippi Supreme Court held that both of these unconscionability claims related "to the enforcement of the arbitration agreement, not to whether the agreement to arbitrate was itself validly formed." 

 

Consistent with this, the Fifth Circuit noted that, "applying Mississippi law to an arbitration challenge, this court has likewise categorized both procedural and substantive unconscionability as challenges to contract enforcement, not contract formation." See Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 430 (5th Cir. 2004).

 

Here the employee's procedural unconscionability argument to an existing contract challenges "contract enforcement rather than contract formation." Thus, Fifth Circuit held that the trial court correctly referred this challenge to an arbitrator.

 

Therefore, the Fifth Circuit affirmed the trial court order compelling arbitration and dismissing this case.

 

 

 

 

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: 6th Cir Holds Hazard Insurer Could Not Deduct "Labor Costs" from Policy Proceeds

The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a homeowner's claims against her hazard insurer related to its deduction for costs of labor as "depreciation" in determining its net payment for damage to the home. 

 

In so ruling, the Sixth Circuit concluded that because "depreciation" was not defined under the policy, and the homeowner's interpretation was a fair reading of an ambiguous term, the policy language must be interpreted strictly against the insurer under Ohio law.

 

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

 

A homeowner ("Homeowner") submitted a claim under her homeowner's insurance policy (the "Policy") after her property sustained significant water damage.  The insurer ("Insurer") accepted coverage and the parties agreed that the total estimated cost to repair or replace damage to the home totaled $32,965.09. After making deductions for "depreciation" under the terms of the Policy, the Insurer provided a net payment of $28,394.74 to the Homeowner.

 

Although it was undisputed that the Policy allowed for a deduction for depreciation, the Homeowner disputed the Insurer's deduction of labor costs as part of its calculation of depreciation. 

 

The Homeowner filed a putative class action suit in Ohio state court against the Insurer and on behalf of policyholders of the Insurer and its other entities.  The Insurer removed the action to federal court and moved to dismiss the complaint for failure to state a claim, which was granted by the trial court.  The Homeowner timely appealed to the Sixth Circuit.

 

As an initial matter, the Sixth Circuit reviewed the Insurer's argument that the Homeowner had standing only to pursue claims against the Insurer as the entity that issued the subject Policy. 

Although the Homeowner brought suit as a putative class action on behalf of policyholders of the Insurer's other entities, because she conceded that the remaining entities are not parties to the Policy at issue in this case, and as the only named plaintiff in the action, the Sixth Circuit concluded that the Homeowner lacked standing to file suit against the Insurer's entities who were not parties to the Policy.   See Lujan v. Defenders of Wildlife, 504 U.S. 555, 559–61 (1992).  As such, the Sixth Circuit directed the trial court to dismiss the Homeowner's claims against the Insurer's remaining entities without prejudice on remand.

 

Turning to the merits of the case, the issue on appeal was whether the Policy permitted the Insurer to depreciate labor costs in calculating actual cash value (ACV).

 

The language of the Policy provided, in relevant part, that "[i]f you do not repair or replace the damaged, destroyed or stolen property, payment will be on an actual cash value basis. This means there may be a deduction for depreciation."  The Policy, nor Ohio Administrative Court define the term "depreciation."

 

The Insurer contended that "depreciation" must account for the cost of both materials and labor, and it was entitled to depreciate both in calculating ACV.  The Homeowner did not dispute that "depreciation" included the cost of materials, but argued that the term "depreciation" was ambiguous with respect to labor costs.

 

As the case was before the trial court based on diversity, it sought to apply the substantive law of Ohio's highest court.  The Ohio Supreme Court had not spoken on this issue, and rulings of its lower courts were inconclusive, leaving the Sixth Circuit to turn to Ohio's general rules of contract interpretation and insurance law.

 

Under Ohio law, if an insurance policy is ambiguous, the policy is construed strictly against the insurer; if the policy is ambiguous, and the insured's interpretation is reasonable, the insured prevails. Andersen v. Highland House Co., 757 N.E.2d 329, 332–33 (Ohio 2001).

 

The Sixth Circuit cited its recent decision in Hicks v. State Farm Fire & Casualty Co., 751 F. App'x 703 (6th Cir. 2018), a case arising under Kentucky law also held that ambiguities in insurance policies are construed strictly against the insurer.  In Hicks, the Sixth Circuit was asked to interpret nearly identical policy language as the case at bar, wherein neither the policy, nor Kentucky Administrative Regulations defined "depreciation," and concluded that "depreciation" excluded labor costs.  Hicks, 751 F. App'x at 710.

 

Here, the Insurer attempted to distinguish Hicks by arguing that the language of Ohio Administrative Code defines ACV as "replacement cost of property at the time of loss.. less any depreciation," as opposed to Kentucky regulations which define ACV as "replacement cost of property at the time of loss less depreciation, if any."  Compare, OHIO ADMIN. CODE § 3901-1-54(I)(2)(a) (2016), 806 KY. ADMIN. REGS. 12:095(9)(2) (2007). 

 

The Sixth Circuit rejected the Insurer's argument, reading "any depreciation" as simply saying "whatever depreciation there happens to be."  Moreover, the Court noted that the Homeowner's interpretation that ACV depreciation does not include labor costs has been recognized by numerous state and federal courts because depreciation traditionally refers to value lost from physical wear and tear.  Hicks, 751 F. App'x at 709–11 (collecting cases); Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 178–79 (Tenn. 2019).

 

Because the Sixth Circuit found that the Homeowner's interpretation of "depreciation" was a fair reading of an ambiguous term, the policy language must be construed in her favor and could only be applied to the cost of materials, not to labor costs.  Accordingly, the trial court's judgment of dismissal was reversed and remanded to the trial court for further proceedings. 

 

 

 

 

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: 7th Cir Holds State Law Determines "Present Right to Repossession" Under FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently held that in the absence of an FDCPA-specific rule regarding "present right to possession," the Court must look to state law to determine whether a repossessor has a present right to possess the property at the time it was seized.

 

Here, the Court held that under Indiana law, a repossessor has a present right to take possession of collateral without judicial process only if he proceeds without a breach of the peace.

 

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

 

A consumer ("Consumer") obtained a loan from a bank to finance the purchase of a sport utility vehicle (SUV). The loan agreement provided the bank with a security interest in the SUV and the right to possession if the Consumer defaulted. The loan also provided any repossession would proceed without a beach of the peace.

 

The Consumer defaulted, and the bank hired a repossession firm who subcontracted a towing company to repossess the SUV.

 

The towing company arrived to repossess the SUV and was met by the Consumer who protested, saying she would not voluntarily surrender it, and ordered them to leave the property. The towing company then called the police who handcuffed the Consumer while the vehicle was towed away, releasing her once the SUV was gone.

 

The Consumer sued the repossession firm and towing company for violations of the federal Fair Debt Collection Practices Act ("FDCPA").  § 1692f(6)(A) of the FDCPA prohibits debt collectors from "[t]aking … any nonjudicial action to effect dispossession or disablement of property if there is no present right to possession of the property claimed as collateral through an enforceable security interest."

 

The trial court entered summary judgment for the repossession firm and towing company, construing the claim as an impermissible attempt to use the FDCPA to enforce a violation of state law. The Consumer appealed to the Seventh Circuit.

 

On appeal, the Consumer admitted she defaulted on the loan and that the bank had a valid and enforceable security interest, but argued that the towing company lacked a present right to possess the SUV because Indiana law provides that a secured party may take possession of collateral without judicial process only "if it proceeds without breach of the peace." If a breach of the peace occurs, the repossessor "must desist and pursue his remedy in court." Allen v. First Nat'l Bank of Monterey, 845 N.E.2d 1082, 1086 (Ind. Ct. App. 2006).

 

The repossession firm and towing company countered that the requirement for "present right to possession" means only that the repossessor must have an enforceable security interest in the property claimed as collateral.

 

The Seventh Circuit noted the FDCPA does not define the phrase "present right to possession." Repossession rights are governed by the relevant state's property and contract law, and in the absence of an FDCPA-specific rule, the court must look to state law to determine whether a repossessor had a present right to possess the property at the time it was seized.

 

In Indiana, a repossessor has a present right to take possession of collateral without judicial process only if he proceeds without a breach of the peace.

 

In making its ruling, the Seventh Circuit relied on two prior rulings. In First, Seeger v. AFNI, Inc., 548 F.3d 1107, 1111 (7th Cir. 2008), the Court could not determine whether the methods used by a cell-phone company to collect debts were "permitted by law" under the FDCPA without reference to Wisconsin law. Second, in Suesz v. Med-1 Sols., Inc., 757 F.3d 636 (7th Cir. 2014) (en banc), the Court looked to Indiana law to identify the "judicial district or similar legal entity" under the FDCPA for venue purposes.

 

The Seventh Circuit distinguished Seeger and Suesz from cases attempting to use state law to define "unfair or unconscionable" debt collection methods under the FDCPA, noting that "vague" language prohibiting unfair or unconscionable debt-collection practices could not be read to "transform the FDCPA into an enforcement mechanism for matters governed by state law."

 

The Court held the towing company was pursuing a self-help remedy by seizing the SUV, further, a reasonable jury could conclude that a breach of the peace occurred during the repossession attempt. At that point, the towing company no longer had a present right to possession pursuant to Indiana code, but its employees took the Consumer's SUV anyway.

 

Accordingly, the Seventh Circuit reversed the ruling of the trial court and 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

 

 

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