Court: District Court, E.D. Michigan; October 31, 2014; Federal District Court
The order denies the plaintiffs' motion to vacate and grants the defendant Multiband's motion for summary judgment, affirming the arbitrator's award. In 2008, Multiband sought to buy the plaintiffs' stock in DirecTECH Holding Company, during which the Department of Labor was investigating transactions related to the company's employee stock ownership plan. Despite a lawsuit from the Department of Labor against the plaintiffs for $42 million, a settlement of $2.9 million was reached without liability admission, with Multiband kept informed throughout the process.
Following the settlement, the plaintiffs sought indemnity from Multiband based on prior agreements, but Multiband refused. This led to arbitration, where the plaintiffs claimed indemnity or damages for reliance on the agreements. The arbitrator ruled the indemnity agreements were unenforceable but neglected to address the plaintiffs' argument regarding reliance on those agreements. The court initially agreed with the plaintiffs, citing the arbitrator's manifest disregard of the law in voiding the agreements. However, the Sixth Circuit reversed this decision, concluding that the arbitrator did not manifestly disregard the law and seemingly rejected the plaintiffs' argument about the arbitrator exceeding his powers.
As the Sixth Circuit appeared to have addressed and rejected the plaintiffs' alternative argument, the court feels compelled to affirm the arbitration award in favor of Multiband. The plaintiffs, Bernard Schafer and Henry Block, are identified as founders of Michigan Microtech, which expanded to include DirecTECH and other entities under a holding company, where they executed an indemnification agreement for their roles as directors, excluding coverage for certain wrongful acts.
The Company agrees to indemnify the Board Member against all losses, claims, damages, and expenses (collectively referred to as 'Losses') arising from actions related to their role for the Company, as long as the Board Member did not engage in wrongful acts or gross negligence. The indemnification includes attorney’s fees and other associated costs and is subject to a mandatory arbitration clause. The Holding Company established an employee stock ownership plan (ESOP) and an employee stock ownership trust (ESOT), with Plaintiffs serving as trustees and executing similar indemnification agreements. In 2005, the United States Department of Labor (DOL) investigated the Holding Company for potential breaches of fiduciary duty linked to inflated stock purchases for the ESOP. Despite the investigation, Multiband negotiated to acquire the Holding Company in 2007, during which it provided a report on the DOL’s findings and executed indemnification agreements to encourage the Plaintiffs to sell their stock. Multiband agreed to indemnify the Plaintiffs for losses connected to their trustee roles, excluding deliberate wrongful acts or gross negligence. The indemnification was crucial for the Plaintiffs’ decision to sell their shares for $43.9 million. In December 2009, the DOL filed a civil suit against the Plaintiffs for breaching fiduciary duties. The Plaintiffs settled in 2011, agreeing to pay $1,450,000 without admitting liability. Subsequently, they sought indemnification from Multiband, which refused, leading the Plaintiffs to file an arbitration complaint alleging breach of contract. Multiband contended that the indemnification agreements were void for public policy reasons under 29 U.S.C. 1110(a), while the Plaintiffs argued for their enforceability.
Multiband contended that the indemnification agreements were void, prompting Plaintiffs to present an alternative claim based on two theories. First, they claimed Multiband fraudulently induced them into signing an indemnification agreement, asserting Multiband misrepresented its intention to assume indemnification obligations. Second, they argued that Multiband was estopped from contesting the enforceability of the agreements, as Plaintiffs had detrimentally relied on Multiband's promises during the sale of their stock, which would have had a higher price had those promises not been made.
To expedite arbitration, both parties agreed to submit only the threshold issues related to the breach of contract claim to the arbitrator, focusing on whether the indemnification agreements were void under 29 U.S.C. 1110(a). The arbitrator conducted a hearing on these issues but did not consider Plaintiffs’ alternative claims for fraudulent inducement and estoppel in the initial submission. During the hearing, Plaintiffs referenced these claims, arguing that the agreements were valid under ERISA and that Multiband had intended to provide indemnification.
In June 2012, the arbitrator ruled that the indemnification agreements were unenforceable under 29 U.S.C. 1110(a), determining that they were void under ERISA. Consequently, Plaintiffs' breach of contract claims were dismissed. The arbitrator further indicated that Plaintiffs' alternative claims for fraudulent inducement and estoppel lacked merit, but did not elaborate on the reasons for this conclusion. No discovery or evidence was presented regarding these alternative claims.
On July 18, 2012, Plaintiffs initiated a lawsuit to vacate an arbitration decision, citing two reasons: 1) the finding that indemnification agreements were void was in manifest disregard of the law, and 2) the Arbitrator exceeded his authority by dismissing alternative claims for fraudulent inducement and estoppel without allowing evidence presentation. The Court vacated the arbitration award on February 29, 2013, applying Sixth Circuit precedent that defines 'manifest disregard' as when arbitrators ignore clearly defined legal principles. The Court concluded that the Arbitrator knowingly disregarded the law, determining that the decision was not merely an error but required vacatur. Multiband appealed, arguing the Arbitrator did not act in manifest disregard. On January 6, 2014, the Sixth Circuit reversed the vacatur, ruling that the Arbitrator had not disregarded the law, and remanded for further proceedings. Plaintiffs subsequently filed a Petition for Rehearing, which was denied. Upon return to the district court, both parties filed cross-motions for summary judgment. Plaintiffs maintained their claim that the Arbitrator exceeded his powers by not allowing evidence on their alternative claims, while Multiband argued this point had been previously rejected by the Sixth Circuit. The district court must adhere to the mandate and law of the case as established by the appellate court, which prevents relitigation of previously decided issues. The law-of-the-case doctrine applies only to questions necessarily resolved in the earlier appeal.
The term 'necessarily decided' pertains to issues that were comprehensively addressed in a prior appeal. Upon remand, the trial court may explore matters not explicitly or implicitly ruled on by the appellate court. To ascertain whether an issue was necessarily decided, the mandate must be interpreted alongside the appellate court's analysis, emphasizing the importance of context. In the appeal, Multiband contested the ruling that the arbitrator acted with 'manifest disregard' of the law, which was pivotal in vacating the arbitration award. Multiband's brief concentrated solely on this point. Conversely, Plaintiffs' appellee brief primarily argued that the arbitrator also acted in 'manifest disregard' of the law but additionally claimed that the arbitrator exceeded his authority by dismissing their fraudulent inducement and estoppel claims without addressing them. The arbitrator ruled on the agreed issues but failed to justify dismissing the alternative claims, preventing the Petitioners from presenting evidence on those claims. Therefore, the arbitrator exceeded his authority, necessitating the vacating of the arbitration decision. Plaintiffs presented their alternative argument to the Sixth Circuit, detailing that the arbitrator exceeded his power by not considering the fraudulent inducement claim, citing relevant statutory authority and case law. However, the Sixth Circuit ultimately dismissed this alternative claim, determining that the only viable argument for vacating the arbitration award was that the arbitrator acted in 'manifest disregard' of the law. Consequently, the Sixth Circuit's findings indicated that Plaintiffs' alternative claims were also necessarily decided, as Multiband raised only one argument regarding the arbitrator's conduct, while Plaintiffs provided two grounds for affirming the original order vacating the arbitration award.
The Sixth Circuit vacated the earlier Order by this Court, implicitly deeming both arguments presented by the Plaintiffs as meritless. The court determined that the arbitrator's decision did not meet any of the criteria set by the Federal Arbitration Act (FAA) for vacating an arbitration award. According to the FAA, arbitration awards must be confirmed unless explicitly vacated, modified, or corrected under specified sections. The Sixth Circuit's denial of rehearing reinforced its rejection of the Plaintiffs’ alternative argument regarding the arbitrator's authority. After the reversal of the vacated award, the Plaintiffs filed for en banc rehearing, reiterating two arguments: first, that the arbitrator displayed manifest disregard for the law; and second, more crucially, that the arbitrator exceeded his powers by dismissing their fraud claim without a hearing. The Plaintiffs claimed that the Sixth Circuit had not addressed this issue. The court’s opinion did not clarify how the arbitrator’s dismissal of claims without hearing them did not violate due process rights, as stated in 9 U.S.C. 10(3-4). In response to the Plaintiffs’ petition, the Sixth Circuit noted that the issues had already been fully considered in the original case submission. The Plaintiffs argued that their alternative claim was ignored because it was not addressed in the original Order. However, the Sixth Circuit clarified that while federal appellate courts typically do not engage with unaddressed issues from lower courts, it is not a strict jurisdictional rule, and courts can exercise discretion in exceptional cases. The Sixth Circuit exercised such discretion in this instance. Additionally, the Plaintiffs contended they were only defending against the appellant's arguments, which meant they were not obligated to raise their alternative claim at the Sixth Circuit. However, they did present this claim, and the appellant responded, thus altering the boundaries of the appeal process.
The Court acknowledges that the Sixth Circuit has definitively ruled on the Plaintiffs’ claim concerning the arbitrator exceeding his authority by not addressing their alternative claim, establishing this ruling as the law of the case. Despite the Court's personal disagreement with the Sixth Circuit's conclusion, it lacks the authority to revisit that decision. The Sixth Circuit's prior determination negates any grounds for vacating the arbitral award, leading to the affirmation of that award.
Consequently, the Plaintiffs’ Motion to Vacate is denied, and the Defendant Multiband’s Motion for Summary Judgment is granted. The scheduled hearing for November 25, 2014, is canceled. The Plaintiffs had alleged six counts of breach of contract against Multiband, based on both direct agreements and those assumed by Multiband. A relevant legal provision states that any agreement attempting to relieve a fiduciary of liability is void for public policy reasons.
During the arbitration, the arbitrator highlighted the implications of a specific statute, suggesting that had the statute not been in place, the parties might have faced serious liability. Legal counsel for Multiband acknowledged that the indemnity provisions in question would not be invalid but indicated there were further considerations regarding potential breaches of fiduciary duties to be addressed later.
Counsel for Multiband affirmed the validity of certain agreements while noting the need to assess whether actions taken affected payment obligations. The arbitrator identified three key issues for evaluation under 29 U.S.C. 1110: 1) the enforceability of indemnity agreements between former fiduciaries of an ESOP and a third party; 2) the validity of assumption agreements between an ESOP sponsor and a third party regarding indemnity for directors and former trustees; and 3) whether a settlement payment in Department of Labor litigation nullifies indemnity agreements. After the Sixth Circuit reversed an order vacating an arbitral award, Plaintiffs petitioned the Supreme Court for certiorari, which was denied. The case was consequently stayed. Plaintiffs argued that the Sixth Circuit overlooked their alternative argument, but this interpretation was rejected, as the court is assumed to have considered all briefs thoroughly. Plaintiffs also sought rehearing on the basis of due process rights related to claims not submitted in summary judgment but did not establish that any of the limited grounds for reconsideration were applicable. The exceptions for reconsideration are narrowly defined, and the law of the case doctrine mandates that lower courts adhere to higher court rulings. The court also indicated that it would not consider Multiband's alternative arguments such as res judicata and equitable estoppel for affirming the arbitral award.
