other-agreements

By Dean P. Cazenave

When lenders and borrowers want to modify the terms of an existing loan agreement, and the modifications are extensive and will affect many provisions of the agreement, the lender’s lawyer will often choose to draft an “amended and restated agreement” in order to document those modifications. A single amended and restated agreement will often be easier to read than would be the original agreement and a separate amendment (or a series of separate amendments). When they do so for a secured financing, the parties almost always intend that the collateral that secured the original loan agreement continue to secure the obligations under the amended and restated credit agreement;, as a result of a recent decision by the U.S. Court of Appeals for the Sixth Circuit, it is important that the document clearly states that it is not intended as a novation of the obligations under the original loan agreement.

Recently, in Bash v. Textron Financial Corporation (In re Fair Finance Company), 834 F.3d 651 (6th Cir. 2016), the U.S. Court of Appeals for the Sixth Circuit reversed a determination of the District Court for the Northern District of Ohio that an amended and restated loan agreement did not constitute a novation of the original loan agreement. In so doing, the court held, in largely reversing the dismissal of an adversary proceeding arising out of a Chapter 7 bankruptcy case, that the amended and restated loan agreement may actually have constituted (or at least it is ambiguous as to whether it constituted) a novation of the original loan agreement. If the amended and restated loan agreement did in fact constitute a novation, the security interests granted pursuant to the original loan agreement would have terminated at the time that the parties entered into the amended and restated loan agreement. The circuit court, after reversing the district court’s determination, remanded the question to the lower court for further proceedings.

The district court had rejected the novation argument, but the Sixth Circuit reversed, finding that the following provisions of the amended and restated loan agreement created a question of fact as to whether it was the parties’ intent to wholly replace and extinguish (i.e. novate) the original loan agreement and the security interest granted thereunder:

  • The statement that the restated loan agreement was for “valuable consideration, the receipt and sufficiency of which are hereby acknowledged”;
  • The language that the restated loan agreement “constitutes the entire agreement of Borrowers and Lender relative to the subject matter” thereof and would “supersede any and all prior oral or written agreements relating to the subject matter”; and
  • The re-grant of the security interest under the restated loan agreement.

It is cause for concern that all of the provisions the Sixth Circuit found were evidence of a novation in In re Fair Finance Company are regularly found in amended and restated loan documents throughout the broader loan market.

Significantly, the Sixth Circuit distinguished this case from In re TOUSA, Inc., where a district court ruled that the execution of an amended and restated agreement did not constitute a novation. The amended and restated agreement in TOUSA contained an explicit statement that the parties intended that the security interest and liens granted in the original security agreement would continue in full force and effect. The district court in TOUSA explained that notwithstanding the general language in the amended and restated agreement that all prior agreements were being restated in their entirety, the specific terms the parties agreed to must be given effect.

While one may question the sufficiency of the evidence that the Court relied on in finding that the parties may have intended to effect a novation, the lesson that a lawyer drafting an amended and restated financing agreement should draw from this decision is the importance of clearly and expressly stating the parties’ intent that the amended and restated agreement not constitute a novation. When drafting an amended and restated financing agreement, a lawyer should include an express statement that the agreement is not intended to constitute a novation or a termination of the obligations under the original agreement, and in the context of a secured financing, that the security interests created pursuant to the original agreement are intended to continue and to secure the obligations under the amended and restated agreement.

liquor-bottles

By Jill Gautreaux

The City of New Orleans (“the City”) has amended and re-enacted a gallonage tax on alcoholic beverages of low and high alcoholic content. A “gallonage tax” is a tax on alcoholic beverages based upon the amount, calculated in gallons, of alcoholic beverages sold. The current ordinance became effective on January 1, 2017, but industry members have sought to enjoin the implementation of this “new” tax. The ordinance closely follows the wording of the State gallonage tax statutes, which causes the tax to apply to wholesalers or Louisiana manufacturers because they are the first parties to come into possession of the alcoholic beverages in the State of Louisiana. The City ordinance does not have the effect that it apparently intended, and is worded as follows:

Section 10-511 – Who is liable for tax.

The taxes levied in sections 10-501 and 10-502 of this division shall be collected, as far as practicable, from the dealer who first handles the alcoholic beverages in the city. If for any reason the dealer who first handled the taxable alcoholic beverages has escaped payment of the taxes, those taxes shall be collected from any dealer in whose hands the taxable beverages are found.

On February 9, 2017, the City Council introduced an ordinance to amend Section 10-511, which qualified the word “dealer” in the first sentence and the first phrase of the second sentence with “wholesale”. Nevertheless, according to the current wording of the ordinance, if the wholesale dealer has “escaped” the tax, the retailer will be responsible for paying the tax to the City.

There is a strong likelihood that New Orleans alcoholic beverage retailers will end up having to pay some of this tax if the ordinance is enacted and enforced as currently written. Several large wholesale companies, including Southern Glazers, Southern Eagle, and Republic, do not have any physical presence within the City of New Orleans, and therefore should not be subject to the tax.

A few trade organizations have challenged the enforceability of the ordinance in Orleans Parish Civil District Court. The plaintiffs were successful in obtaining a temporary restraining order, but were denied a preliminary injunction. The temporary restraining order has lapsed, but, as of this date, the City has indicated that it will not collect the tax until the litigation has concluded. One City official has suggested that if the City prevails, that the tax due will be retroactive to January 1, 2017.

 

A United States Coast Guard Cutter of the Marine Protector class. This is an 87' vessel capable of 30+ knots and it is used for law enforcement, and search and rescue operations.

By Michael J. O’Brien

U.S. Coast Guard Form 2692 has been used for over forty (40) years to report marine casualties, commercial diving casualties, or outer continental shelf related causalities. Recently, the Form received a long overdue update. The new version of the form, effective as of 2017, is available here as well as the Coast Guard Home Port.  The new version of the form allows the document to be filled out electronically and to add a digital signature. There are also revised addendum forms for barge involvement, personnel casualties, witnesses, and any chemical testing. Further, the form’s data fields have been streamlined to align with statutory and regulatory language.

Please be sure to use new 2692 Form for all future incidents rather than the old form as we have received reports that the Coast Guard has rejected submissions using the old form.

BSEE

By Tod J. Everage

On February 3, 2017, BSEE issued its first Notice to Lessees (NTL) of 2017, advising of the revised OCSLA Civil Penalty Assessment Matrix. For the second time in 6 months, BSEE has increased the maximum civil penalty to $42,704 per day per violation, up from $42,017 per day per violation that was set in July 2016. These new changes were effective for all civil penalties assessed on or after February 3, 2017, even if the alleged violation predated February 3, 2017. The new matrix is shown below.

OCSLA Civil Penalty Assessment Matrix

February 3, 2017

GENERALIZED MATRIX FOR OCSLA CIVIL PENALTY ASSESSMENTS IN $/DAY/VIOLATION

Enforcement Code

Category A Category B Category C

W

$5,250-42,704

($15,750)*

$10,500-42,704

($21,000)*

$21,000-42,704

($26,250)*

C

$10,500-42,704

($21,000)*

$15,750-42,704

($26,250)*

$31,500-42,704

($36,750)*

S

$15,750-42,704

($26,250)*

$21,000-42,704

($31,500)*

$36,750-42,704

($38,850)*

Note: W=Warning, C=Component Shut-in, and S=Facility Shut-in

* = Starting Point for Assessment

Category A

Category B

Category C

Threat of injury to humans.

Threat of harm or damage to the marine or coastal environment, including mammals, fish and other aquatic life (threat may or may not involve endangered/threatened species).

Threat of pollution.

Threat of damage to any mineral deposit or property.

Injury to humans that results in 1-3 days away from work or 1-3 days on restricted work or job transfer.

Minor harm or damage to the marine or coastal environment, including mammals, fish, and other aquatic life (harm to aquatic life did not involve an endangered/threatened species).

Pollution caused by liquid hydrocarbon spillage of up to 50 barrels (bbls).

Minor damage to any mineral deposit.

Minor property damage equal or less than $25,000.

Additional incidents required to be reported under 30 CFR 250,188, except (a)(6), (b)(1), (b)(4).

Loss of human life.

Injury to humans that results in more than 3 days away from work or more than 3 days on restricted work or job transfer.

Serious harm or damage to the marine or coastal environment, including mammals, fish, and other aquatic life (harm to aquatic life involved numerous individuals or involved one or more members of an endangered/threatened species.

Pollution caused by liquid hydrocarbon spillage of more than 50 barrels (bbls).

Serious damage to any mineral deposit.

Serious property damage greater than $25,000.

The full text of the NTL can be found here.

la

By William Kolarik

The New Jersey Tax Court’s opinion in Elan Pharmaceuticals, Inc. v. Director, Division of Taxation, Dkt. No. 010589-2010 (Tax Ct. of N.J. February 6, 2017) highlights the potential constitutional concerns related to the application of Louisiana’s recently enacted throw-out rule.

On June 28, 2016, Louisiana Governor Edwards signed H.B. 20 (Act 8) (effective June 28, 2016) into law. In addition to changing the apportionment rules for certain industries and enacting market-based sourcing for sales of services, Act 8 also contains a throw-out rule. Specifically, Act 8 amends the Louisiana apportionment rules to provide that “[i]f the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated pursuant to [the Louisiana apportionment rules contained in La. R.S. 47:287.95 and its related regulations], the sale shall be excluded from the numerator and the denominator of the sales factor.”[1] The throw-out rule applies to all taxable periods beginning on or after January 1, 2016.

A throw-out rule is an, oftentimes controversial, alternative to a “throw-back” rule. A throw-back rule is a rule that sources a taxpayer’s sales that are not taxable in the state of destination to the state of origin. From a policy perspective, the proponents of throw-back rules assert that it is appropriate to redistribute non-taxed sales to the state of origin because the state of origin is ostensibly connected to the non-taxed sales in some manner. In contrast, a throw-out rule redistributes income derived from sales made to a state where a taxpayer is not subject to tax to another state where a taxpayer is subject to tax by removing the non-taxable sales from both the numerator and the denominator of the taxpayer’s sales factor. The proponents of throw-out rules justify the rule by asserting that a taxpayer’s entire taxable income should be subject to state income tax. As Elan Pharmaceuticals and its related cases demonstrate, a throw-out rule becomes problematic and raises constitutional concerns when a tax administrator attempts to apply the rule in a manner that taxes income earned in another state that the other state’s legislature has jurisdiction to tax but chooses not to tax.

Elan Pharmaceuticals is the latest in a series of New Jersey cases in which the New Jersey Courts prohibited the New Jersey Division of Taxation (the “Division”) from applying New Jersey’s, now repealed, throw-out rule in an unconstitutional manner. Elan Pharmaceuticals (“Elan”), the taxpayer, was a Delaware company headquartered in California. Elan had property in 39 states, inventory in seven states, and payroll in 48 states. Elan only filed tax returns in six states because the other states in which it did business chose not to tax Elan’s in-state business activity. In at least 17 of the states in which Elan did not file a corporate income tax return, Elan was not subject to state income tax by virtue of Public Law 86-272 (“PL 86-272”), a federal law that prohibits a state from levying a state income tax if a taxpayer limits its in-state business activity to the solicitation of sales orders that are accepted and filled from inventory located outside the state.[2]

On audit, the Division applied New Jersey’s throw-out rule to reduce the denominator of Elan’s sales factor to include only amounts included in the sales factor numerators of the six states in which Elan reported a sales factor numerator. Elan challenged the Division’s application of the throw-out rule and asserted that the exclusion of receipts from its sales factor denominator was arbitrary and improper because it excluded receipts that were (1) allocable to other states where Elan was taxable pursuant to a throw-back rule; or (2) allocable to states where Elan stored its inventory, an activity which is a constitutional basis for asserting nexus; and (3) allocable to California, where Elan was headquartered. In contrast, the Division asserted that its application of the throw-out rule was proper because it excluded receipts from states that lacked jurisdiction to tax due to PL 86-272.

The court began its analysis by explaining that the Division’s arguments overlooked the substance of the New Jersey Supreme Court’s decision in Whirlpool Properties Inc. v. Director, Division of Taxation, 208 N.J. 141 (2011). In Whirlpool, the New Jersey Supreme Court held that New Jersey’s throw-out rule was constitutional as applied only “when the category of receipts that may be thrown out is limited to receipts that are not taxed by another state because the taxpayer does not have the requisite constitutional contacts with the state or because of congressional action such as P.L. 86–272.”[3] In contrast, the throw-out rule violated the dormant Commerce Clause when it excluded receipts that were not taxed by another state because the state chooses not to impose an income tax.[4] Citing Lorillard Licensing Co. v. Director, Division of Taxation, 28 N.J. Tax 590 (Tax 2014), in which the Superior Court of New Jersey held that the phrase “subject to tax” under Whirlpool applied in the context of economic nexus, the court emphasized that the test for determining whether the throw-out rule was constitutionally applied is whether a taxpayer has the requisite constitutional contacts with a state to be subject to the state’s taxing jurisdiction. According to the court, the possibility that PL 86-272 was implicated did not foreclose the limitations on the application of the throw-out rule because PL 86-272 does not bar an origin state from taxing the income generated from sales of goods to a destination state that cannot tax the income.

After explaining the constitutional limitations that applied to the application of New Jersey’s throw-out rule, the court explored the extent to which the states where Elan did not file tax returns had the ability to tax Elan’s operations. The court noted that an origin state had the authority to tax Elan’s sales from that state via a throw-back rule and that several states where Elan did business had throw-back rules. Therefore, the Division could not isolate application of the throw-out rule to New Jersey and deny that other origin states could tax Elan’s sales via a throw-back rule. Next, the court rejected the Division’s contention that Delaware’s choice not to impose an income tax required a conclusion that Elan’s sales of goods shipped from Delaware be removed from Elan’s sales factor denominator. In addition, the court also explained that an origin state or a destination state could impose a business-presence based corporate tax on Elan as long as the state had a basis to assert nexus over Elan, such as Elan’s storage of inventory, ownership of property, or payroll in the state. Because other states could constitutionally tax Elan’s sales, the court reversed the Division’s determination that only receipts reported to six states could be included in Elan’s sales factor denominator.

Louisiana Implications

The Louisiana Department of Revenue (the “Department”) has not issued guidance regarding how it intends to apply Louisiana’s throw-out rule. Nevertheless, it is important to understand that the limitations on the application of a throw-out rule described in the New Jersey cases are constitutional limitations that apply to the application of any throw-out rule by any state, including Louisiana. A taxpayer preparing its 2016 Louisiana corporation income tax return should carefully consider the extent to which the Louisiana throw-out rule applies to its out-of-state business activity in states where it does not file a corporate income tax return. When considering how the Louisiana throw-out rule applies, a taxpayer should give extra scrutiny to any state that has the ability to levy a tax on its sales but that chooses not to do so, e.g., an origin state in which a taxpayer stores inventory that does not adopt a throw-back rule. In addition, a Louisiana taxpayer affected by the throw-out rule should carefully scrutinize any guidance issued by the Department that purports to apply the throw-out rule to sales in destination states that have the ability to levy a tax on the taxpayer.

For additional information, please contact: Christopher J. Dicharry at (225) 382-3492, Jaye Calhoun at (504) 293-5936, or Willie Kolarik at (225) 382-3441.

[1] La. R.S. § 47:287.95(M).

[2] 15 U.S. Code § 381.

[3] Whirlpool Prop. Inc. v. Director, Div. of Taxation, 208 N.J. 141, 172 (2011)

[4] Id. at 172-173.

ml

By Tod J. Everage

Until the U.S. 5th Circuit gets an opportunity to directly address the continued viability of Scarborough v. Clemco Industries, 391 F.3d 660 (5th Cir. 2004) in the wake of Atlantic Sounding v. Townsend, 557 U.S. 404 (2009), we are likely to see a lack of harmony among the district court judges considering this issue. Scarborough specifically protects third parties (see oil and gas companies) against punitive damage exposure (see uninsured) from injured seamen employed by their contractors (see vessel companies). We have been following the EDLA commentary on Scarborough as its erosion would significantly raise the potential liability of those companies who contract for the use of vessels. See previous posts here and here for more background on the Scarborough fight in the Eastern District of Louisiana. Recently, one of the two EDLA Judges holding the view that Scarborough was no longer good law reversed his course, resulting now in a 7-1 score in favor of Scarborough, further reducing concern for an unpredictable judicial roulette on this issue.

In a nutshell, Scarborough was the legal consequence of a long line of jurisprudence in the 5th Circuit holding that punitive damages were not available under the Jones Act or General Maritime Law (“GML”) that began with Miles v. Apex Marine, 498 U.S. 19 (1990). Where Miles protected the Jones Act employers from punitive damages, Scarborough protected all other third party defendants, such as oil and gas companies who had hired those Jones Act employers. In 2009, Townsend reined in the expanding prohibitions on punitive damages by finding that they could be awarded under GML for the employer’s willful and wanton failure to pay maintenance and cure. Townsend very directly and explicitly abrogated Guevera v. Maritime Overseas Corp., 59 F.3d 1496 (5th Cir. 1995) which had previously held just the opposite. That abrogation is relevant here because the Scarborough court cited Guevera favorably and extensively in its analysis.

Though Townsend definitely overruled Guevera, it also re-affirmed Miles, which remains a pillar of maritime jurisprudence in this area. Plaintiff attorneys view Townsend as a means to reverse the expansion of Miles and have renewed their attack on those judge-made roadblocks to the availability of punitive damages. With oil and gas companies being viewed as the “deep pockets” in lawsuits, Scarborough’s protection of those companies has become a popular focus.

After Townsend, several judges re-affirmed Scarborough with little more than lip service, as it seemed clear that Townsend was limited to maintenance and cure issues and the district courts could not “assume the Fifth Circuit has changed its position on personal injury claims falling outside the scope of Townsend.” See In re: Deepwater Horizon, 2011 WL 4575696 (E.D. La. 9/30/11) (Barbier, J.); see also O’Quain v. Shell Offshore, Inc., 2013 WL 149467 (E.D. La. 1/14/13) (Berrigan, J.); In re: International Marine, LLC, 2013 WL 3293677 (E.D. La. 6/28/13) (Lemmon, J.); Bloodsaw v. Diamond Offshore Mgmt. Co., 2013 WL 5339207 (E.D. La. 8/19/13) (Vance, J.); Ainsworth v. Caillou Island Towing Co., 2013 WL 3216068 (E.D. La. 10/21/13) (Brown, J.). Despite the perceived clarity, Judge Barbier foresaw the potential dispute that could arise on this issue given the underlying reasoning in Townsend. (“Though this conclusion is not without doubt given the Supreme Court’s recent decision in [Townsend]…”). In Todd v. Canal Barge Co., 2013 WL 5410409 (E.D. La. 9/25/13), Judge Fallon provided the first true analysis of the continued validity of Miles and its progeny after Townsend. Therein, Judge Fallon acknowledged the limitations of Townsend and the re-affirmation of Miles, and dismissed the plaintiff’s claims for punitive damages for negligence and unseaworthiness. This opinion makes his later decision in Collins all-the-more anomalous.

In 2014, the U.S. 5th Circuit decided McBride v. Estis Well Service, LLC, 768 F.3d 382 (5th Cir. 2014), wherein the en banc panel also held that Townsend was narrowly limited to maintenance and cure claims. McBride acknowledged the continued vitality of Miles to preclude all other forms of punitive damages claims under GML or the Jones Act, though it did not directly mention Scarborough. Judge Fallon then got another opportunity to address Scarborough in light of both Townsend and McBride. See Collins v. ABC Marine Towing, LLC, 2015 WL 5254710 (E.D. La. 9/9/2015). Therein, Judge Fallon distinguished Miles and McBride and was persuaded by Townsend’s abrogation of Guevera, which he felt served as the foundation for Scarborough. Judge Fallon held that Scarborough was “effectively overruled” by Townsend, finding that it was “inconsistent with current Supreme Court precedent.” He did not cite to his prior ruling in Todd just a year prior. This decision served as the first major blow to formerly-protected third party, non-Jones Act employers in the EDLA.

Shortly thereafter, Judge Morgan joined the majority, issuing two opinions upholding Scarborough. See Howard Offshore Liftboats, LLC, 2015 WL 7428581 (E.D. La. 11/20/15); Lee v. Offshore Logistical and Transports, LLC, 2015 WL 7459734 (E.D. La. 11/24/15). A few months later though, Judge Zainey issued an opinion against Scarborough, relying heavily on Judge Fallon’s reasoning in Collins. See Hume v. Consolidated Grain & Barge, Inc., 2016 WL 1089349 (E.D. La. 3/21/16). Judge Morgan again re-affirmed her confidence in Scarborough in Lewis v. Noble Drilling Services, 2016 WL 3902597 (E.D. La. 7/19/2016).

Heading into the 2017, only Judges Fallon and Zainey had rejected the continued viability of Scarborough and its punitive damages prohibition, while at least six of their colleagues held differently. Then, unexpectedly, Judge Fallon changed his mind and joined the majority. See Wade v. Clemco Indus., No. 16-00502 (E.D. La. 2/1/2017). Wade presented Judge Fallon with yet another opportunity to directly address Scarborough; but, this time his analysis and holding were fundamentally different. Wherein Collins, he focused on Scarborough’s reliance on Guevera, in Wade, he instead focused on Miles. Judge Fallon was also persuaded this time by McBride: “It has become clear since the en banc opinion in McBride that in wrongful death cases brought under general maritime law, a survivor’s recovery from employers and non-employers is limited to pecuniary losses.” Quite differently than holding that Scarborough was “effectively overruled,” this time he noted that McBride gave it “clarity and vitality.” As a consequence, Judge Fallon dismissed the plaintiff’s punitive damages claims against the third parties who were not the plaintiff’s Jones Act employer. This is good news for third party defendants finding themselves on the wrong end of a Jones Act lawsuit in the EDLA, as there is now only one judge’s opinion in favor of (and seven against) allowing punitive damage claims to proceed against them. Since these decisions are interlocutory in nature, they do not get appealed by right, and all prior cases have settled before the 5th Circuit could comment. Nevertheless, we will keep an eye out for any further developments, hoping that the remaining judges who get an opportunity to consider this issue fall in line with the legally-sound majority.

LouisianaPaddleboatStamp

By Mallory McKnight Fuller

When two parties agree to arbitrate, the obvious hope of the prevailing party is that the losing party will voluntarily comply with the arbitrator’s decision. This article is directed towards the situation in which the losing party refuses to so comply, and the prevailing party must petition the appropriate court system to “enforce” the arbitrator’s award.

Until confirmation, modification, or correction by a court of competent jurisdiction, an arbitration award is unenforceable under the law. The process for enforcing an arbitration award in Louisiana depends on whether the Federal Arbitration Act (“FAA”) or the Louisiana Binding Arbitration Law (“BAL”) applies.[1]

CONFIRMING ARBITRATION AWARDS

Whichever law applies, a party wishing to confirm an arbitration award must file a proceeding requesting confirmation of the award in a court of competent jurisdiction within one year of the award’s issuance.[2] While this one-year period is mandatory under the BAL, the federal courts of appeals are split on whether the same period is mandatory under the FAA. However, the U.S. Court of Appeals for the Fifth Circuit, which is the appellate court of federal jurisdiction over Louisiana, has implied that the one year limitations period is mandatory.[3]

In federal court, the FAA requires a party to begin the process of confirming an arbitration award by filing (and serving) either a petition or motion to confirm in the appropriate federal district court.[4]  Unlike the BAL, however, the FAA does not create independent subject matter jurisdiction, so the applicant must show that the federal district court has original subject matter jurisdiction over the dispute.[5]  The federal court has personal jurisdiction over the necessary parties once a party serves notice of the confirmation application on all parties.[6]

In both federal and state court, the confirmation of an arbitration award is a summary proceeding.[7]  The appropriate court will confirm the arbitration award (by granting the applicant’s motion) if no party challenges the enforcement of the award, and the court finds no grounds for vacating, modifying, or correcting the award.[8]  The court enters judgment on the award, which has the same force and effect as an ordinary judgment.[9]

VACATING, MODIFYING, OR CORRECTING AN ARBITRATION AWARD

Both the FAA and the BAL permit a party to challenge or request vacation, modification, or correction of an arbitration award.[10]  A notice of a motion to vacate, modify, or correct an arbitration award must be served upon the adverse party within three months after the award is issued.[11]  The grounds upon which an arbitration award can be changed or overturned are narrow and well-defined. Practically, this makes it very rare and difficult to alter an arbitration award.

Because arbitration is favored, both federal and state courts presume that an arbitration award is valid. Under the FAA and BAL, a court has authority to vacate an award only upon the following grounds:

  1. where the award was procured by corruption, fraud, or undue means;
  2. where there was evident partiality or corruption in the arbitrators, or either of them;
  3. where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
  4. where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.[12]

The FAA and BAL also limit a court’s authority to modify or correct an arbitration award. An award can be modified or corrected only:

  1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
  2. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
  3. Where the award is imperfect in matter of form not affecting the merits of the controversy.[13]

If one of these two grounds apply, the courts will modify or correct arbitration awards “so as to effect the intent thereof and promote justice between the parties.”[14]

AWARDS AND ORDERS SUBJECT TO APPEAL

Both the FAA and the BAL permit the appeal of certain arbitration orders, including any order confirming, modifying, correcting, or vacating an award.[15]  Under the BAL, a party appeals from an arbitration order or judgment entered on an award in the same manner as a party appeals from an ordinary order or judgment.[16]  The federal courts and Louisiana appellate courts review a trial court’s confirmation of an arbitration award de novo.[17]

**********

[1] Chapter 1 of the FAA governs domestic arbitrations and applies to maritime disputes and contracts “involving commerce.” 9 U.S.C. §§ 1-16. The BAL governs arbitration in Louisiana, unless preempted by the FAA. La. R.S. §§ 9:4201-9:4271.

[2] 9 U.S.C. § 9; La. R.S. 9:4209.

[3] Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726, 731 (5th Cir. 1987) (noting the complaint to enforce the arbitration award was filed within one year “As required by 9 U.S.C. § 9”).

[4] If the arbitration agreement does not specify the particular court, the party applying for confirmation of the award may file in any court in the district where the award was issued. 9 U.S.C. § 9.

[5] Vaden v. Discover Bank, 556 U.S. 49 (2009).

[6] 9 U.S.C. § 9.

[7] Id.; La. R.S. § 9:4209; see also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 22-23 (1983).

[8] 9 U.S.C. §§ 10-11; La. R.S. §§ 9:4205 and 9:4209.

[9] 9 U.S.C. § 13; La. R.S. § 9:4214.

[10] 9 U.S.C. § 11; La. R.S. § 9:4211.

[11] 9 U.S.C. § 12; La. R.S. § 9:4213.

[12] 9 U.S.C. § 10; La. R.S. § 9:4210.

[13] 9 U.S.C. § 11; La. R.S. § 9:4211.

[14] Id.; Gilbert v. Robert Angel Builder, Inc., 45,184 (La. App. 2 Cir. 4/14/10); 24 So. 3d 1109, 1113.

[15] La. R.S. § 9:4215; 9 U.S.C. § 16.

[16] La. R.S. § 9:4215.

[17] NCO Portfolio Mgmt., Inc. v. Walker, 08-1011 (La. App. 3 Cir. 2/4/09); 3 So. 3d 628, 632; Sarofim v. Trust Company of the West, 440 F.3d 213 (5th Cir. 2006)

Vector icons pack - Blue Series, office docs collection.

By Beau Bourgeois

Arbitration clauses are extremely common in construction contracts and subcontracts. In the event of a dispute, these clauses typically reflect the parties’ mutual agreement that any disputes arising from the project shall be arbitrated. Arbitration is similar to traditional litigation in many respects, but takes place out of court and is designed to be more efficient and cheaper. Both federal and Louisiana law strongly favor arbitration, and save a few exceptions, written pre-dispute arbitration agreements “shall be valid, irrevocable, and enforceable.”[1]

Whether a party is required to arbitrate rather than litigate first depends on two issues: 1) whether the agreement to arbitrate is valid, and 2) whether the agreement—by its terms—applies to the type of controversy at issue between the parties.[2]  Additionally, a party’s actions within a court proceeding can be deemed a “waiver” of the right to compel the same dispute into arbitration. In the typical dispute, the analysis will be straightforward, and the clause will be enforced, forcing the parties to resolve their dispute through binding arbitration rather than using the court system.

This article focuses on the admittedly rare situations in which a court may have proper grounds not to enforce an arbitration provision contained in the parties’ contract.

1.                  Contract Not Fully Executed by Both Parties

The threshold question in deciding whether parties must arbitrate is whether the parties actually agreed to arbitrate. In the typical scenario, both parties will have signed the contract containing the arbitration clause, and there will be no question that they agreed to arbitrate. Even if one of the parties does not know the contract contains the arbitration clause or does not understand its consequences, the party will still be required to arbitrate disputes. Louisiana courts have held that a signing party cannot avoid a contract’s terms by claiming that he did not read the contract, that he did not understand contract, or that the other party did not explain contract to him.[3]

Even when both parties to a contract do not sign, the parties may still be bound in certain scenarios. Louisiana law is clear that a party who prepares a contract and presents it to another for signature, but never personally signs, cannot later attempt to claim that he or she is not bound by the contract or its provisions.[4]  Thus, although many may think that they can escape the obligations of a contract that they did not sign, parties will often not be able to rely on such a technicality.

There is, however, an exception to this rule. A contract signed by only one party is not enforceable if the negotiations between the parties indicate that they have no intention of being bound until all of the terms of the agreement are incorporated into a written contract to be signed by both parties.[5]  A typical example is a situation where the parties orally negotiate the basic terms of an agreement but state that they want to have their managers or lawyers draft a formal, written document that both parties will sign. If there is never a written contract signed by both parties, there is never a contract or obligation to perform. It is important to note that a lack of contract does not necessarily mean that one party cannot be liable to the other. If one party begins performance or takes other action based on oral negotiations or promises, the other party may still be liable under theories of detrimental reliance or unjust enrichment.

Specifically as to arbitration agreements, despite a statute requiring them to be in writing, Louisiana law does not require the agreements to be signed to be enforceable.[6]  However, when an arbitration agreement—or contract containing an arbitration clause—lacks one or more parties’ signatures, the courts look to the conduct of the non-signing parties for evidence of intent to agree.[7]  Though no Louisiana court has yet addressed the issue, one could find that preparing and presenting a contract containing an arbitration provision is sufficient to show that party’s intent to agree to arbitrate. Otherwise the court will look to whether the non-signing party performed his obligations under the contract or otherwise acted as if the contract were enforceable. To avoid any uncertainty under this flexible inquiry, the party desiring the arbitration agreement should be sure to have both parties sign the contract for definitive proof of an agreement.

2.                  Unenforceable “Contracts of Adhesion”

Once a court determines that there was a mutual agreement to arbitrate, the clause will be enforced save some grounds for revocation of the contract such as fraud or error.[8]  Another relatively common ground upon which courts invalidate otherwise valid arbitration clauses is by finding that the agreement is a “contract of adhesion.” In general, a contract of adhesion is a printed contract—often in small font—prepared by one party with superior bargaining power presented to the other party in a “take-it-or-leave-it” manner. The nature of the contract is such that it raises questions as to whether the weaker party actually consented to its terms.

In these cases, the courts look beyond a party’s signature to determine if he or she truly consented to the arbitration clause. If an arbitration clause is adhesionary, the court will not enforce it and will allow the weaker party to proceed with a lawsuit despite their apparent agreement to arbitrate. In that sense, contracts of adhesion serve as an exception to the rule described above that a party is bound to contracts he or she signs regardless of knowledge or understanding of their terms. In the construction industry, these issues most often arise in the manufactured homes context where one party is a large corporation and the other is an individual buyer with little to no construction or business knowledge.[9]

Contracts of adhesion are typically standard form contracts; however, not all standard contracts are adhesionary and not all adhesionary contracts are in a standard form.[10]  The Louisiana Supreme Court has recently listed the factors to review in determining whether an agreement is an unenforceable contract of adhesion as follows: (1) whether the physical characteristics of the arbitration clause are deceiving (i.e., the font and size of the print), (2) whether the arbitration clause is distinguished from the rest of the agreement (i.e., whether the clause was concealed), (3) whether the clause requires both parties to pursue arbitration rather than a suit in court, and (4) whether one party has superior bargaining strength.[11]

The Louisiana Supreme Court has recently found an arbitration provision in a general waiver of liability signed by a patron of a trampoline park to be adhesionary. The arbitration provision of the waiver was the same size print and font as the rest of the electronic document. However, the two sentences regarding arbitration were “camouflaged” within a paragraph containing nine other sentences that did not pertain to arbitration. In addition, the waiver’s “I agree” language indicated to the Court that the agreement to arbitrate did not apply equally to the trampoline park, and the clause contained a liquidated damages provision which also only applied to the patron. Although the paragraph containing the provision had a box next to it that the patron affirmatively checked, the Court found that the patron’s electronic signature did not represent actual consent to arbitrate due to the adhesionary nature of the contract. Thus, the Court invalidated the provision.[12]

It should be noted that it would be almost impossible for one business to assert this defense against another because they would almost certainly have similar bargaining strength. Additionally, the party who does not want to sign a contract with an arbitration provision could easily walk away from the deal and work with someone else instead.

3.                  Waiver of Right to Arbitration

The rights provided by an otherwise valid arbitration clause can also be unintentionally “waived” by one of the parties. Louisiana courts have limited the waiver of arbitration to two situations where a party insisting on arbitration either (1) resorted to judicial remedies, or (2) allowed a significant period of time to elapse before demanding arbitration.[13]

Courts in Louisiana have found waiver of arbitration only in extreme cases.[14]  Waiver of arbitration is not a favored finding and there is a presumption against it.[15]  A party asserting waiver bears a heavy burden of proof to show that the opponent has waived a right to arbitrate, and there is a strong policy in Louisiana favoring arbitration when it has been agreed to by the parties.[16]  To find a waiver, Louisiana courts require a showing that the party demanding arbitration has meaningfully participated in court litigation proceeding so as to indicate its intention to litigate the dispute within that forum. Courts have been hesitant to draw a line in the sand as to how much litigation activity rises to the level of waiver, but one court has observed that the mere answering of a lawsuit does not equate to waiver.[17]

Although findings of waiver here are rare, the cautious litigant should assert its rights to arbitrate clearly and early in any separate court litigation. Courts do seem willing to review the entire record, rather than to fault a party for a single step taken in court. Still, a party’s argument for arbitration weakens to the extent the party continues to litigate the arbitrable dispute within court proceedings.

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As noted, this entire article is geared towards the rare scenarios in which a court will not enforce an arbitration provision. Although the issues described above do arise from time to time, typically, if the clause applies to the particular dispute, a court will force the parties to arbitrate rather than litigate.

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[1] 28 U.S.C. § 2 (2016); La. R.S. 9:4201 (2016).

[2] Dicorte v. Landrieu, 908 So. 2d 799, 801 (La. Ct. App. 4 Cir. 2008).

[3] Aguillard v. Auction Mgmt. Corp., 908 So. 2d 1, 17 (La. 2005).

[4] Rainey v. Entergy Gulf States, Inc., 35 So. 3d 215, 227 (La. 2010).

[5] Id. (citing Big ‘A’ Sand & Gravel Co. v. Bay Sand & Gravel Co., 282 So. 2d 837 (La. Ct. App. 1 Cir. 1963)).

[6] Hurley v. Fox, 520 So. 2d 467, 469 (La. Ct. App. 4 Cir. 1988) (“La. R.S. 9:4201 provides that if the agreement to arbitrate is in writing, it shall be valid, irrevocable and enforceable. The law does not provide that the agreement must be signed. We conclude, therefore, that if the agreement between the parties is written, the provisions of the statute are satisfied even though the writing is not signed by the parties.”).

[7] In re Succession of Taravella, 734 So. 2d 149, 151 (La. Ct. App. 5th Cir. 1999).

[8] Duhon v. Activelaf, LLC, 2016-0818 (La. 10/19/16), 2016 WL 6123820.

[9] See e.g., Easterling v. Royal Manufactured Housing, LLC, 963 So. 2d 399 (La. Ct. App. 3 Cir. 2007); Dufrene v. HBOS Mfg., LP, 872 So. 2d 1206 (La. Ct. App. 4 Cir. 2004).

[10] Duhon, 2016 WL 6123820.

[11] Id.

[12] Id.

[13] Lincoln Builders, Inc. v. Raintree Inv. Corp. Thirteen, 37,965 (La. Ct. App. 2 Cir. 1/28/04), 866 So. 2d 326, 331 (citing cases).

[14] Matthews-McCracken Rutland Corp. v. City of Plaquemine, 414 So.2d 756 (La. 1982).

[15] Lorusso v. Landrieu Enterprises, Inc., 02-2346 (La. App. 4 Cir. 5/21/03), 848 So.2d 656.

[16] Electrical & Instrumentation Unlimited, Inc. v. McDermott International, Inc., 627 So.2d 702 (La. Ct. App. 4 Cir.1993).

[17] Matthews-McCracken, 414 So.2d 756 (La. 1982).

Vector file of Silhouette Businessmen's hands complete solution by Third party

By Josh Coleman

Conventional wisdom holds that arbitration is a more preferable mechanism for dispute resolution than full-blown litigation in the court system. Knowing nothing else about the particulars of a particular dispute, if arbitration is available as an alternative to state or federal litigation, we generally advise our clients to arbitrate.

However, that does not mean that arbitration is preferable to traditional litigation in all respects, or that arbitration is always well-suited to resolve a particular dispute. We often are asked by clients to evaluate the benefits of arbitration versus litigation. The purpose of this brief article is to set forth the general framework within which we address that question.

Pros of Arbitration

The primary benefits of arbitration are well-documented:

  • Lower Cost: On average, seeing a case through arbitration costs less to the client than does seeing a case through litigation. The lower costs relate closely to more-streamlined discovery and the shorter length of the entire procedure.
  • Controlled & Compacted Schedule: Arbitration offers a high degree of predictability in the scheduling of deadlines, hearings, and awards. Most arbitrations resolve within one year of initiation.
  • Knowledgeable Arbitrator: Arbitration parties typically select an arbitrator from a pool of subject-matter experts. The American Arbitration Association maintains a listing of local arbitrators with specialty designations in a variety of fields (e.g., commercial construction). An arbitrator with industry experience requires less education on technical aspects of the case.
  • Privacy: Arbitration proceedings are not on the public record. This is a benefit where the subject matter of the arbitration is commercially sensitive. Parties can agree prior to the arbitration to effectively “seal” any evidence and perhaps even the outcome of the arbitration.
  • Finality: Arbitration parties have no rights to appeal the substance of the arbitrator’s decision. This means that arbitration awards are generally final, therefore a party can plan accordingly once the arbitrator issues its decision.

Cons & Quirks of Arbitration

However, the negatives of arbitration are less discussed:

  • Multi-Party Difficulties: To enter into arbitration, parties either voluntarily agree to so enter, or are compelled by a court to submit to arbitration based upon a prior and valid agreement to arbitrate. This makes complex multi-party disputes tough to arbitrate. For example, CGL insurers on construction projects usually cannot be compelled to participate as a party in a construction defect arbitration between a claimant and the respondent insured. The more parties a case involves, the less likely that arbitration will be a feasible option.
  • Higher Filing Fees: Clients are often surprised at the up-front filing fees required by arbitration service providers such as the American Arbitration Association (“AAA”). Those fees depend upon the claim amount. For example, an AAA claim of $150,000 requires payment of $3,000 in purely administrative fees. The amount of the fees increase along with the claim amount, and for larger claims, can approach $15,000. Also, these fees are in addition to arbitrator compensation, which must be covered by the parties and usually resembles typical hourly attorney billing.
  • Summary Judgment Unlikely: In traditional litigation, the summary judgment procedure is an effective tool to resolve certain claims before trial. For example, if the parties agreed on the relevant facts but disagreed on the interpretation of their contract, such an issue would be ideal for early resolution in court via summary judgment. However, arbitrators rarely grant summary judgment motions, so this tool is not effectively available in arbitration. Several experienced arbitrators have commented to us that, due to the finality of arbitration and lack of an appeal procedure, they are extremely hesitant to dispose of any part of a case prior to the hearing itself.
  • Adverse Ruling Is Final: The finality of arbitration certainly works against a party facing an adverse decision by the arbitrator. State and federal courts offer substantive appeal procedures which involve close scrutiny over the lower court’s decision; no such mechanism is available in arbitration. In almost all cases, the loser is stuck with the arbitrator’s initial decision.
  • Limited Subpoena Power: Parties often require testimony or information from a party who is not named in the proceeding. The subpoena process is available in arbitration, but can be limited in scope and time-consuming to properly enforce.

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It is true that arbitration is generally more preferable to court litigation as a dispute resolution mechanism. However, in cases in which a party has a choice over whether to arbitrate or litigate a particular dispute, the party should pay careful attention to the nature of the dispute in light of the pros, cons and quirks of the arbitration proceeding.

Accessibility computer icon

By Price Barker, Brian Carnie, and Michael Lowe

Disability access lawsuits have become a cottage industry and they have found their way into Louisiana, Texas and Arkansas.  Most are brought by the serial litigants working with same law firm.  These plaintiffs visit a business for the primary purpose of discovering an Americans with Disabilities Act (ADA) accessibility violation and then file a federal court lawsuit without giving the property owner, tenant or business advance notice of their complaint or an opportunity to fix the problems.

Now we are seeing a growing trend of “drive by” or “Google” disability access lawsuits.  The tag “drive-by” lawsuit came about due to accusations in many of these cases that either the plaintiff, or their lawyer, simply drove by the business, observed an alleged violation, and then filed suit.  The tag “Google lawsuit” arose from the belief of several business owners who have been sued that the ADA violations (such as the failure to have a lift seat at a hotel swimming pool) were discovered using Google earth.  In “drive-by” or “Google” lawsuits, the plaintiff almost always seeks attorneys’ fees, expert witness fees, and other litigation costs, as well as other concessions from the business they have sued.  Under federal law, business owners often have to pay both sets of attorneys’ fees, and if they do not settle, or make the corrections to their property demanded in the suit, it may end up costing them many thousands of dollars more, leading to accusations that these suits are simply money-making ventures for the plaintiff bar.

The ADA was passed by Congress in 1990.  Every private business in the United States open to the public must comply with the ADA.  This includes restaurants, bars, convenience stores, hospitals, hotels, shopping centers, and other retail locations.  The accessibility requirements of the ADA are very specific, and extensive.  There are thousands of requirements to be found in the 275-page ADA manual, which has specific requirements for things such as the slope and length of wheelchair ramps, the location and signage for handicap parking spots, and the height and location of door handles, sinks, toilets, and grab rails.

ADA access litigation is not limited to parking lots, sidewalks, restrooms and other alleged physical barriers in a “brick and mortar” establishment.  A growing number of lawsuits are being filed claiming that the business’ Web site does not provide adequate accessibility to the visually or hearing impaired.  Since 2010, the United States Department of Justice (DOJ) has delayed issuing specific regulatory guidance directly addressing the accessibility standards for commercial Web sites.  That does not mean that businesses do not have to try to comply with the general requirements of the ADA, nor does it prevent DOJ enforcement or suits by private plaintiffs.

Numerous ADA access lawsuits have been filed in federal court in Shreveport.  One of the recently filed claims is a class-action filed by a registered sex offender against a local municipality, claiming that the office where he is required to register as a sex offender is now violating the ADA by not providing him with a sign language interpreter.

So what should a business owner do to avoid this expensive headache?  A good starting point is to make your business an unattractive target.  Visit your location to see if there are any obvious ADA violations that would catch the attention of a “drive-by” plaintiff.  For example, look for un-ramped entrance steps, poorly maintained routes from handicap parking spaces to the entrance, handicap parking spaces with no access aisle, and observe the slope of your handicap parking spaces.  If you can see a slope, it is probably non-compliant.  And if you can see the slope, you can bet the plaintiff driving by will too.