January 31, 2013
Second Circuit Holds that Scope of "Arbitration" Is a Question of Federal Common Law
M.D. Imad John Bakoss (Bakoss) entered into an insurance contract with Lloyds of London (Lloyds), which provided for the paymetn of a benefit to Bakoss should be become "permanently totally disabled." Each party was permitted to have Bakoss examined by a physician of its choice to determine whether or not he was qualified to receive such a payment. In the case of a disagreement between the two party physicians, the two physicians were to name a third physician who would then determine whether or not Bakoss was in fact permanently totally disabled. That decision was, according to the insurance contract, "final and binding."
Bakoss brought a suit on the insurance contract in New York state court. Lloyd's removed the case to a federal district court, characterizing the third-physician clause as an arbitration agreemnt, which gave rise to federal question jurisdiction under the Federal Arbitration Agreement (FAA).
In agreeing with Lloyd's characterization of the agreement as an abritration agreement, the district court relied on other decisions from federal district courts. On appeal in Bakoss v. Certain Underwriters at Llods of London Issuing Certificate No. 0510135, Bakoss argued that the district court erred in using federal common law rather than New York state law in determining whether or not the agreement was one for arbitration. While the Second Circuit acknolwedged a Circuit split on the issue, it sided with those that reasoned that a congressional interest in favor of a uniform national arbitration policy counciled in favor of the application of federal common law. It thus upheld the exercise of subject-matter jurisdiction over the suit.
The Second Circuit also affirmed the district court's grant of summary judgment to Lloyd's on the ground that Bakoss did not provide timely notice of his potential permanent disability.
January 30, 2013
A New Stambovsky?
[Edited: Apologies to my co-blogger, Nancy Kim, for posting this before reading our own blog to see that she already covered it. I'll keep this up for the links to the cases but please read Nancy's post for a more in-depth analysis of the materiality issue.]
For professors who teach nondisclosure as a "reason not to enforce a contract," (that's what the book I use calls "defenses"), Stambovsky v. Ackley often is a favorite case due its entertaining facts. In the case, the buyers of a Nyack, NY house (pictured) seek to have the contract rescinded due to the home being haunted by poltergeists. The haunted condition was known by the sellers but was not disclosed to the buyers.
I am particularly fond of the case in part because the opinion is filled with puns such as, "[I]n his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, [however,] I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.". Puns aside, the case is instructive because it helps students understand the difference between nondisclosure versus misrepresentation and gets some students to question their faith in caveat emptor. The fact that I teach the case right around Halloween is a nice bonus.
The only potential problem with the case is that it's somewhat dated (yes, something from the 1990s can feel dated to current first-year students). Thankfully, a student of mine from last semester just sent me a link to this newer version of Stambovsky out of Pennsylvania (what do ghosts love about the mid-atlantic states?). In this new dispute, the buyer, a recent widow, is seeking to rescind the contract for sale of a home based on the nondisclosure of a murder-suicide in the home in the same year she agreed to purchase it. The trial court granted summary judgment to the sellers and the appellate court affirmed, finding that, "psychological damage to a property cannot be considered a material defect in the property which must be revealed by the seller to the buyer." The buyer now has appealed the case to the Supreme Court of Pennsylvania. No one knows how that court will exorcise its discretion (ba-dum-bum).
[Heidi R. Anderson]
New in Print (including new Books)
Charles T. Kirchmaier, Lt. Col., U.S. Army, Treating the Symptoms but Not the Disease: A Call to Reform False Claims Act Enforcement. 209 Mil. L. Rev. 186 (2011)
Marc T. Law and Cheryl X. Long, What Do Revolving-Door Laws Do? 55 J.L. & Econ. 421 (2012)
Maya Steinitz, The Litigation Finance Contract, 54 Wm. & Mary L. Rev. 455 (2012)
UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods. 30 J.L. & Com. 3 (2012).
Tess Wilkinson-Ryan, Legal Promise and Psychological Contract. 47 Wake Forest L. Rev. 843 (2012)
From the Hart website:
This book contains the papers prepared for a conference held at the Wisconsin Law School in 2011 to honour the work of Stewart Macaulay, one of the most famous contracts scholars of his generation. Macaulay has been writing about contracts and contract law for over 50 years; the 1960s were particularly productive years for him, when he introduced many novel ideas into the scholarly world. Macaulay's foundational work for what is now called relational contract theory was published during this period. Macaulay is also known for his use of empirical research and interdisciplinary theories to illuminate our knowledge of contracting practices.
The papers in this volume reflect, in diverse ways, on the subsequent influence and the contemporary relevance of Macaulay's work. All the contributors are important contracts scholars in their own right: David Campbell and John Wightman from the UK, Brian Bix, Jay Feinman, Robert Gordon, Claire Hill, Charles Knapp, Ethan Leib, Deborah Post, Edward Rubin, Carol Sanger, Robert Scott, Gordon Smith, Josh Whitford (with Li-Wen Lin) and William Woodward from the USA. The volume also reproduces Macaulay's most cited paper, 'Non-Contractual Relations in Business', and excerpts from two other important papers of his, 'Private Legislation and the Duty to Read-Business Run by IBM Machine, the Law of Contracts and Credit Cards', and 'The Real and The Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules'.
January 29, 2013
Murder-suicide and the new homeowner
A Pennsylvania homeowner is suing the seller of the house and a real estate agent, claiming fraud and misrepresentation, for failing to tell her that the home she recently purchased had been the scene of a murder-suicide the previous year. The homeowner had moved to Pennsylvania from California with her two children after her husband's death. She learned of the murder-suicide from a neighbor, several weeks after moving in. You can read about it here.
I don't know about you, but I think a murder suicide is pretty material, although there aren't enough facts here to indicate whether the seller and agent deliberately concealed the fact or whether the buyer inquired as to any unusual events happening in the house.... With respect to the seller, it might be one of those "tough luck" situations where the law just doesn't help the buyer even if the court feels sympathetic toward the buyer's situation. It's not clear whether the agent is the buyer's agent - if so, the agent should have disclosed this as a fiduciary. But it's more likely that the agent was actually the seller's agent, and not the agent of the buyer or a dual agent. (Got that? Just because someone has the word "agent" in their job title doesn't make that person your agent. Who is paying the commission? When in doubt about where the agent's loyalties lie - ASK the agent).
The lesson here - especially relevant given the recent rise in home sales - is BUYER BEWARE. I wonder if a quick online search of the address would have uncovered the grisly events that took place in it. It would probably be prudent for all potential home buyers to expressly ask, "Did anything unusual ever happen in this house that we should know about such as any crimes?" A buyer should also ask how long the current sellers have lived in the house and why they are moving. [In this case, such a question probably wouldn't have helped the homeowner. The immediate sellers were not the owners of the house when the murder-suicide took place, but subsequent owners who bought it, presumably at a low price given what had just happened in it, and then turned around and sold it to the out-of-state buyer]. The seller's failure to disclose in a situation where the buyer has specifically asked is entirely different from a failure to affirmatively disclose unasked for (albeit material) information.
N.B. Under California real estate law (which imposes a duty to disclose facts materially affecting the value of real property where the facts would be hard to uncover), the result would probably have been different. See Reed v. King, 145 Cal. App. 3d 261 (1983) involving a failure to disclose a multiple murder by a home seller. Interesting, given that the PA home buyer was from California and might have expected a bit more from the seller based upon her real estate experiences there...
Weekly Top Tens from the Social Science Research Council
January 28, 2013
Quick Thoughts on George Mason LEC Workshop on the Economics of Contracting
I'm about to leave Fort Myers, Florida after a great weekend on Captiva Island, where I participated in the George Mason LEC Workshop for Law Professors on the Economics of Contracting. Economists sure know how to organize a workshop. (By the way, the picture depicts a bird that was hanging out on the balcony of my hotel room).
Over at George Mason they understand incentives. Participants pay a $500 deposit that is only refunded after all sessions (including dinners) are attended. After attending all sessions, participants not only see a return of the deposit but additionally receive a $500 honorarium. Lodging and all meals were covered and they couldn't have paid for better weather (on the day I got there the weather was about 70 degrees warmer than New York). I am still waiting for someone to try to sell me a timeshare.
Broadly, the goal of the program is to expose legal academics to economics. The homework (though voluminous) was thoughtfully compiled and the instruction was engaging. Some participants were already fairly exposed to law and economics others (including myself) had tinkered on the margins in researching but had no background whatsoever. I found the material and the teaching very accessible.
The discussion included contractual (and non-contractual) solutions to hold up problems and price readjustment. We also discussed retail price maintenance and slotting fee contracts. I found the discussion of vertical integration most interesting, though I had to suspend my disbelief when told not to consider the liability implications of choosing to employ someone v. hire them as an indpendent contractor. There were other times when I had to suspend disbelief about psychology and decisionmaking capacity. So, I suppose this is the timeshare. While I didn't buy it, I do feel enriched for having spent some time considering these problems through a classical economics lens.
I highly recommend this and other George Mason programs to anyone with even a passing interest in economics. I learned that reputation matters (though to varying degrees depending on which economists you read). Whatever the case may be, George Mason deserves its excellent reputation for organizing these outstanding workshops. Thanks!
[Meredith R. Miller]
Eighth Circuit Grants Motion to Compel Arbitration of FLSA Claims Despite Class Action Waiver
In 2009, Bristol Care, Inc. (Bristol), which operates residential care facilities for the elderly, hired Sharon Owen (Owen) as administrator of its Cameron, Missouri facility. Owens' agreement with Bristol contained a arbitration clause that specifically provided that claims arising under the Federal Labor Standards Act (FLSA) were also subject to arbitration. The provision also provided that the parties could not arbitrate class claims. Claims relating to "harassment, discrimination, other statutory violations, or similar claims" were excluded from the mandatory arbitration provision.
In 2011, Owen sued, alleging violations of FLSA, claiming that she and others similarly situated were required to work in excess of 40 hours a week without being compenstated for overtime. Bristol moved to compel arbitration, but the Distict Court denied the motion, reasoning that arbitration provisions containing class action waivers are invalid with respect to FSLA claims. The District Court, relying on one district court decisions and one decision from the National Labor Relations Board (NLRB), distinguished this case from AT&T Mobility, LLC v. Concepcion, reasoning that Concepcion's ruling that arbitration provisions containing class action waivers are enforceable in consumer contracts did not extend to employment contracts.
In Owen v. Bristol Care, Inc., the Eighth Circuit reversed. It noted that, under the Federal Arbitration Act (FAA), courts are required to enforce arbitration agreements according to their terms. Federal legislation can override an arbitration provision and a class action waiver only if there is evidence of "congressional command" contrary to the FAA's requirement that arbiration agreements be enforced. The Eighth Circuit found no such contrary congressional commend in the FLSA. The court did not feel itself bound under Chevron deference or any other doctrine to defer to the NLRB's narrow interpretation of Concepcion. Most district courts that had considered the issue have rejected the NLRB's approach.
The Eighth Circuit also cited to opinions from five other Federal Circuit Courts which ruled that class action waivers in arbitration agreements are enforceable in FLSA cases. The Eighth Circuit reversed the District Court's denial of Bristol's motion to compel arbitration and remanded the case for an order staying proceedings and compelling arbitration.