Tuesday, August 20, 2013

Non-Party to Arbitration Agreement Able to Require Arbitration of Related Dispute

Non-Party to Arbitration Agreement Able to Require Arbitration of Related Dispute

        A recent decision of the Kentucky Court of Appeals held, inter alia, that a person, not a party to an agreement calling for arbitration of disputes, does have the right to compel arbitration.  In this instance, the individual controlled an unincorporated association that was alleged to be his alter-ego.  While he was ultimately held liable for the organization’s obligations, he did initially have the right to resist that determination on the basis of an arbitration clause.  Scott v. Louisville Bedding Co., ___ S.W.3d ___ , 2013 WL 3480312 (Ky. App. June 12, 2013). 
         Louisville Bedding entered into certain agreements with United Re Trusts and United Re AG dealing with certain aspects of the self-insured health insurance plan maintained by Louisville Bedding.  Scott, an individual, was the president of United Re AG; on its behalf he signed the relevant agreements.  There arose a dispute as to whether the United Re Trust or United Re AG committed to purchase or otherwise put in place reinsurance with respect to certain Louisville Bedding healthcare exposures.  Ultimately, Louisville Bedding brought suit naming both of the United Re companies and Scott as defendants; it was alleged that the United entities were themselves simply alter-egos of Scott.  While Scott did file an answer asserting that the dispute was subject to arbitration, neither of the United entities filed an answer, and default judgments were entered against them.  Scott moved to have the dispute referred to arbitration.  After some back and forth as to whether the Kentucky or the Federal Arbitration Act would control, it was ultimately held by the trial court that:
Because Scott signed the Agreement in his capacity as “President” of United Re AG, he was not a party to the Agreement; therefore, he could not enforce the arbitration provisions. 

Scott then appealed.

      For the Court of Appeals, the question came down simply to whether or not Scott was either a party to or beneficiary of the contract:
[W]e first address whether Scott was a party to the agreement or at least a beneficiary of its terms entitled to enforce the arbitration provisions.  Bedding admits that it entered into an agreement to arbitrate any claims it has against the United Re Entities; however, [Louisville Bedding] argues it did not enter into an agreement to arbitrate any claims it might have against Scott.  Scott argues that even though he was not a signatory to the Agreement, he is entitled to enforce it in his capacity as an employee of United Re AG.  2013 WL 3480312, *3. 
            The Court of Appeals would ultimately agree with Scott. 
First, in its complaint, Bedding alleges that Scott and United Re AG are one and the same.…  In short, Bedding treats Scott and the United Re Entities as if they are one and the same. Bedding cannot, on the one hand seek the benefit of the Agreement and, on the other hand, disavow the arbitration provisions that are part of the Agreement.

The Court of Appeals as well applied several federal decisions to the effect that an employee may enforce the arbitration agreement entered into between the employer and a third party.

      Ultimately, however, Scott did not prevail.  Under the Kentucky Arbitration Act, agreements to arbitrate with respect to insurance are not enforceable, and the Court found that the products sold by the United Re entities were in fact insurance.  Being unenforceable under the Kentucky Arbitration Act, the Court considered whether the agreement to enforce should alternatively be enforced under the Federal Arbitration Act.  There, engaging in an analysis of the McCarran-Ferguson Act, it was determined that there was no preemption.  Ultimately, Scott was afforded the right to enforce the terms of an arbitration provision that was otherwise unenforceable.

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