McGlinchey Commercial Law Bulletin
When do the AAA Rules Govern Arbitrability?Read Time: 9 mins
McGlinchey’s Commercial Law Bulletin is a biweekly update of recent, unique, and impactful cases in state and federal courts in the area of commercial litigation. We’re pleased to expand our Commercial Law Bulletin from its previous coverage of Ohio case law to include additional areas in McGlinchey’s footprint.
Excess Sale Proceeds
Royal Oaks Landmark, LLC v. Royal Oak Cal, LLC, 12th Dist. Clermont No. CA2021-06-025, 2022-Ohio-1144
In this appeal, the Twelfth Appellate District affirmed the trial court’s decision, agreeing that as the remaining sale proceeds did not satisfy the lienholder’s full award it was entitled to under the foreclosure order, there were no excess funds to distribute and the judgment debtor was not entitled to receive any of the remaining funds.
The Bullet Point: At issue in this dispute was whether the judgment debtor was entitled to “excess funds” allegedly remaining following the distribution of sale proceeds in a foreclosure. Here, the plaintiff filed a foreclosure action against the defendant judgment debtor and named the mortgage holder as a defendant due to its senior lienholder interest and position. The plaintiff obtained judgment and the trial court ordered distribution of proceeds first to the clerk for costs, second to the treasurer for property taxes, third to the senior mortgage lienholder, and fourth to the plaintiff. After the property was sold, the judgment debtor filed a motion to disburse funds, alleging that the priority lienholders had been paid and seeking a court order to “release the excess funds.” The plaintiff objected, arguing it was a priority lienholder whose judgment had not been fully satisfied and that there were no excess funds. The motion to disburse funds was denied, the remaining sale proceeds were awarded to the plaintiff, and the judgment debtor appealed.
Ohio’s R.C. 2329.44 provides the statutory procedure for the distribution of excess funds remaining after judicial sales. Following a sale, if there are sale funds remaining after satisfaction of the writ of execution, the remaining balance is delivered to the clerk of court. R.C. 2329.44. Further, the clerk of court is not required to pay the balance to the judgment debtor or its legal representatives. Id.
Here, the trial court set the priority lienholders in its foreclosure order. Following the court costs and property taxes, the trial court named the mortgage lienholder as the third priority interest and the plaintiff as the fourth priority interest. Specifically, the plaintiff was awarded “up to the sum of $911,412.46.” The property sold for $1,621,700, the mortgage lienholder received its full distribution, and there was $508,185.39 left to be distributed. The judgment debtor argued that as the balance of the sale funds was held by the clerk, these were “excess funds” to be distributed in accordance with R.C. 2329.44. Contrary to the judgment debtor’s allegation, the plaintiff’s judgment had not been satisfied; the clerk simply held the balance of the sale funds for resolution of the motion to disburse. The appellate court explained that the funds held by the clerk were more accurately characterized as “remaining funds” subject to distribution to the next priority lienholder as opposed to “excess funds.” Specifically, as there was only $508,185.39 left to be distributed and the plaintiff’s award was $911,412.46, it was “clear that plaintiff would not receive the full award it was entitled to under the terms of the foreclosure order.” As the plaintiff’s award was not fully satisfied by the balance of the sale funds, there were no excess funds available to the judgment debtor.
Am. Steel City Indus. Leasing, Inc. v. Bloom Land Co., LLC, 11th Dist. Trumbull No. 2021-T-0013, 2022-Ohio-1004
In this appeal, the Eleventh Appellate District affirmed the trial court’s decision, agreeing that the purchase agreement, when read as a whole, was subject to only one reasonable interpretation and did not demonstrate an intent by the parties to temper the ordinary meaning of the term “equipment” in such a way as to exclude the machinery in dispute.
The Bullet Point: At issue in this dispute was whether a purchase agreement was clear and unambiguous or whether parol evidence was necessary to clarify ambiguity. In Ohio, if a contract is clear and unambiguous, its interpretation is a matter of law and there is no issue of fact to be determined. However, if a term cannot be determined from the four corners of the contract, factual determination of intent or reasonableness may be necessary to supply the missing term. In cases involving contract interpretation, Ohio courts “start with the primary interpretive rule that courts should give effect to the intentions of the parties as expressed in the language of their written agreement.” Further guidance is provided with other primary interpretive rules, including the rule that “common words appearing in a written instrument will be given their ordinary meaning unless manifest absurdity results, or unless some other meaning is clearly evidenced from the face or overall contents of the instrument.” As the Supreme Court of Ohio has previously explained, the rules of contract interpretation “must yield to the intent of the parties, and when the parties clearly did not intend [a] *** definition to apply, a court cannot force that construction upon them.” As such, defined terms must still be interpreted in the context of the entire agreement. “A contract will not be interpreted literally if doing so would produce absurd results, in the sense of rules that the parties, presumed to be rational persons pursuing rational ends, are very unlikely to have agreed to seek.”
Statute of Limitations for Breach of Contract
MOHAMMAD TABBAA, v. DR. HAZEM NOURALDIN, ET AL., 8th Dist. Cuyahoga No. 110737, 2022-Ohio-1172
In this appeal, the Eighth Appellate District reversed the trial court’s decision and remanded the case, finding that the plaintiff’s breach of contract claim on the written contract was timely filed under the applicable 15-year statute of limitations in effect prior to the 2012 amendment of R.C. 2305.06 and that the plaintiff’s claim on the oral contract was possibly subject to the six-year statute of limitations in effect prior to 2021 amendment of R.C. 2305.07.
The Bullet Point: In Ohio, a breach-of-contract claim accrues when the alleged breach causes actual damages to the complaining party. R.C. 2305.06 provides the statute of limitations for “contracts in writing” and states that an action shall be brought within six years after the cause of action accrued. Notably, R.C. 2305.06 was amended and became effective June 16, 2021. As explained in an editor’s note to the 2021 amendment, the limitations period for claims that accrued prior to the 2021 effective date shall be the limitations period in existence prior to 2021, or six years from the 2021 effective date, whichever occurs first. R.C. 2305.06 was also amended in 2012. Per an editor’s note related to the 2012 amendment, the limitations period for causes of action that accrued prior to the effective date of the 2012 amendment “shall be eight years from the effective date of this act or the expiration of the period of limitations in effect prior to the effective date of this act, whichever occurs first.” The statute of limitations applicable to written contracts prior to the 2012 amendment was 15 years. See Amendment Notes to R.C. 2305.06.
Here, the plaintiff’s breach-of-contract action accrued as early as 2010, before both the 2012 and 2021 amendments to R.C. 2305.06. Consequently, the 15-year statute of limitations applied to the parties’ written contract and the plaintiff timely filed his claim for breach of contract based on the written contract. Ohio’s R.C. 2305.07 provides the statute of limitations for “contracts not in writing.” Pursuant to R.C. 2305.07(A), an action shall be brought within four years after the cause of action accrued. R.C. 2305.07 was also amended and became effective June 16, 2021. Likewise, the editor’s note to the 2021 amendment of R.C. 2305.07 explained that the limitations period for claims under R.C. 2305.07(A) that accrued prior to the 2021 effective date shall be the limitations period in existence prior to 2021, or four years from the 2021 effective date, whichever occurs first. The statute of limitations for oral contracts in effect prior to the 2021 effective date was six years. See Amendment Notes to R.C. 2305.07.
Here, the appellate court noted evidence on the record that suggested the plaintiff’s cause of action on the oral contract may have accrued at some point between 2010 and 2016. In that event, the six-year statute of limitations would apply to the parties’ oral contract. Nevertheless, the plaintiff alleged that his cause of action on the oral contract had not yet accrued because the defendants had not yet deprived him of proceeds to which he allegedly was entitled. As there was insufficient information to make a determination as to whether the cause of action on the oral contract accrued, the appellate court found the trial court erred in granting summary judgment on the claim without sufficient evidence to make such a determination on the applicable statute of limitations.
Administrative Exemption of the Fair Labor Standards Act
Brown v. Nexus Business Solutions, No. 20-13909 (11th Cir. April 1, 2022)
The Eleventh Circuit examined whether certain employees were covered by the administrative exemption of the Fair Labor Standards Act (FLSA) provision requiring time-and-a-half compensation for overtime.
The Bullet Point: Under the FLSA, employees who work over 40 hours per week are generally entitled to time-and-a-half compensation for overtime. However, under the administrative exemption, these overtime provisions do not apply to employees working in “a bona fide executive, administrative, or professional capacity.” An employee is an administrative worker if (1) her salary exceeds the minimum established by the regulation, (2) she mainly performs “office or non-manual work directly related to the management or general business operations of the employer” or its customers, and (3) her “primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”
At issue in this appeal was whether certain employees working as “business development managers” fell under the administrative exemption. Specifically, the parties disagreed on whether the employees’ primary duties included the exercise of discretion with respect to matters of significance. The Eleventh Circuit identified several factors guiding this inquiry: whether (1) the employee has the authority to make an independent choice, free from immediate direction or supervision; (2) the work is not mechanical, repetitive, recurrent, or routine; and (3) the work relates to matters of significance which refers to the level of importance or consequence of the work performed.
In reviewing these factors, the Eleventh Circuit determined the employees’ primary duties included exercising discretion in the performance of business development tasks, such as building relationships and developing leads, which are matters of significance from the perspective of the employer. The Eleventh Circuit noted that a worker need not have limitless discretion or a total lack of supervision to qualify as an administrative worker. The Eleventh Circuit concluded the employees were not entitled to overtime compensation because they are administrative workers who fall within the administrative exemption of the FLSA and therefore affirmed the district court’s grant of summary judgment to the employer.
Agreement to Delegate Arbitrability Determinations to an Arbitrator
Airbnb v. Doe, No. SC20-1167 (Fla. March 31, 2022)
The Florida Supreme Court held that where an agreement incorporates by reference the American Arbitration Association (AAA) Rules, the agreement clearly evidences the parties’ intent to empower an arbitrator to resolve questions of arbitrability.
The Bullet Point: Under the Federal Arbitration Act, terms of service that incorporate by reference the AAA Rules that expressly delegate arbitrability determinations to an arbitrator constitute “clear and unmistakable” evidence of the parties’ intent to empower an arbitrator, rather than a court, to resolve questions of arbitrability.
At issue in this case was whether the respondents agreed to empower an arbitrator to decide questions of arbitrability by agreeing to be bound by petitioner Airbnb’s Terms of Service. The issue first arose when the respondents brought litigation against Airbnb in the circuit court and Airbnb moved to compel arbitration. The circuit court granted the motion to compel, concluding that the parties entered an express agreement that incorporated the AAA rules and were therefore bound to submit the issue of arbitrability to the arbitrator. On appeal, the Second District reversed the circuit court’s order compelling arbitration, ruling that the Terms of Service did not clearly and unmistakably evidence the parties’ intent to delegate questions of arbitrability to an arbitrator. The Second District reasoned the reference to the AAA Rules in the Terms of Service was broad, nonspecific, and cursory because it simply identified the entirety of a body of procedural rules, and the reference was actually limited to how the arbitration was supposed to be administered.
The Florida Supreme Court, however, disagreed with the reasoning of the Second District and quashed its decision, instead agreeing with Airbnb and the circuit court that the parties clearly and unmistakably agreed that an arbitrator decides questions of arbitrability when they agreed to Airbnb’s Terms of Service. The Court noted that the Terms of Service explicitly incorporate by reference the AAA Rules, provided a hyperlink to the AAA Rules, and provided a phone number for the AAA. The Court further noted that the incorporated AAA Rules specifically state that the arbitrator has the power to rule on the arbitrability of any claim or counterclaim, and the “administered” language in the Terms of Service apply at the outset of a claim before arbitration has commenced. The Court therefore concluded that because Airbnb’s Terms of Service incorporated by reference the AAA Rules that expressly delegated arbitrability determinations to an arbitrator, the agreement clearly and unmistakably evidenced the parties’ intent to empower an arbitrator, rather than a court, to resolve questions of arbitrability.
Admissibility of Deposition Testimony Under the Business Records Exception
Roberts v. Direct Gen Ins., No. 2D21-195 (Fla. 2d DCA March 30, 2022)
The Second District held the business records exception is inapplicable to admit deposition testimony concerning the contents of business records where the records were not offered into evidence.
The Bullet Point: While the business records exception allows the admission of a memorandum, report, record, or data compilation, it does not authorize the admission of hearsay testimony concerning the contents of business records that have not first been admitted into evidence.
In this appeal, the Second Circuit specifically wrote to address the trial court’s findings pertaining to the admissibility of deposition testimony under the business records exception to the hearsay rule. At issue was the trial court’s decision to grant a motion for summary judgment that relied upon deposition testimony concerning the contents of business records but did not include the records as part of the summary judgment evidence. The trial court granted the motion, reasoning that the deposition testimony was admissible under the business records exception. The Second District disagreed with that reasoning, concluding the deposition testimony was admissible only as testimony from personal knowledge. The Second District held that the trial court’s reliance on the business records exception was misplaced, as it does not authorize the admission of deposition testimony concerning the contents of business records without having first admitted those business records.