Zurich American Insurance Company et al v. Staffing Concepts International, Inc. et al
Filing
44
OPINION and Order: Signed by the Honorable Charles R. Norgle, Sr on 7/23/2015. Mailed notice (sxn, )
SKN
IN THE UNITED STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ZURICH AMERICAN INSURANCE
COMPANY and AMERICAN ZURICH
INSURANCE COMPANY,
)
)
)
)
)
Petitioners,
Civil ActionNo. 14 CY 3454
)
)
v.
STAFFING CONCEPTS
lNC., et al.,
INTERNATIONAL,
Respondents.
Hon. Charles R. Norgle
)
)
)
)
)
OPINION AND ORDER
Before the Court is Petitioners Zurich American Insurance Company and American
Ztlrich Insurance Company's (collectively, "Petitioners") motion to confirm the final arbitration
award ("Final Award") that was entered on May 7,20t5 against Respondents Staffing Concepts
International, Inc. ("SCI"), Leasing Resources of America, Inc. ("LRA"), and Professional
Management Services Group, Inc. ("PMSG") flWaPEO Management Group, Inc. a/k/a PEO
Management Services Group, Inc. (collectively, "Respondents"). For the following reasons, the
motion is granted.
I. BACKGROUND
Petitioners provided workers compensation insurance to Respondents in connection with
eight consecutive policy years from March 1,2004 to March 1,2012.In2013, a dispute arose
regarding the "non-policy agreements" between the parties from2004 to 2012. Petitioners sought
recovery of past amounts invoiced to PMSG under the non-policy agreements, as well as,
additional collateral to protect Petitioners from future losses. To resolve the dispute, Petitioners
sent an arbitration demand to Respondents in May of 2013. A three-arbitrator panel (the "Panel")
was selected pursuant to the arbitration agreement and arbitration proceedings began.
On May 21,2013, Respondents, jointly represented by the same attorney in the
arbitration proceeding, filed an answering statement acknowledging that they were signatories to
the arbitration agreement and presented
a
joint defense to the Panel. Respondents objected to the
arbitrability of Petitioners' demand, arguing that the state statutes of Florida precluded the
arbitration of their insurance contract dispute. The Panel denied the objection. Respondents
proceeded to actively participate in the arbitration by conducting discovery and
filing the
appropriate pleadings. Respondents did not challenge the arbitration in federal court.
The first filing before this Court did not occur for almost ayear1' on May 12,2014,
Petitioners filed a petition to confirm an arbitration order, which directed Respondents to post
$12,496,308.00 as security prior to the final arbitration hearing. On May 30,2014, Peter J.
Muchunas ("Mr.Muchunas") from the law firm Mclntyre, Thanasides, Bringgold, Elliot,
Grimaldi & Guito, P.A. entered an appearance on behalf of all Respondents and objected to the
petition. Then, prior to this Court's ruling, Thomas M. Cushing ("Mr. Cushing") and Christopher
A. Kreid from the law firm Christopher A. Kreid & Associates, LLC filed
a
motion to substitute
counsel for LRA. The motion stated that "LRA is represented in this action by attorney Peter J.
Muchunas...LRA has recently discharged Peter J. Muchunas... [and] LRA has engaged attomeys
Thomas M. Cushing and Christopher A. Kreid...to represent
it... ." Mot. for
Substitution
of
Att'ys at 1. The Court ordered the parties to file an agreed written status report before it ruled on
the pending petition. After reviewing the status report, the Court found that a final decision from
the Panel was imminent because the final arbitration hearing had already occurred; so, it denied
the petition as moot on February 27,2015.
Meanwhile, LRA made the same substitution of counsel in the arbitration proceeding and
the Panel heard LRA's new objection to arbitrability at a pre-hearing conference on January 7,
2015. LRA argued that it was not a signatory to the non-policy agreements, thus not bound to
arbitrate the matter. The Panel denied the objection. It found that estoppel barred LRA from
avoiding the arbitration because LRA did not comply with American Arbitration Association
Commercial Rule 7(c) and LRA's objection, coming only days before the final hearing, had been
waived.
After four days of evidentiary hearings and receiving post-hearing briefs, the Panel issued
its Final Award on May 7,2015. The Panel once again entertained LRA's defense that it never
executed a non-policy agreement, thus it could not be held liable. The Panel found three
independent bases why LRA was bound under the2011 non-policy agreement: (1) Debra
Hubbard ("Ms. Hubbard"), president of PMSG, had implied authority to sign the agreement on
behalf of LRA; (2) LRA ratified Ms. Hubbard's signature when it became aparty to the
Collateral Trust Agreement, which incorporated the 2011 non-policy agreement; and (3) LRA
ratified the agreement by receiving insurance benefits from Petitioner and by participating in the
arbitration. Finding in favor of Petitioners, the Panel found: (1) SCI liable for $16,881,619.001 in
principal, $6,874,840.00 in collateral, and $28,578.64 in interest; (2) PMSG liable for
$16,280,940.00 in principal, $1,355,480,00 in collateral, and$26,284.38 in interest; and (3) LRA
liable for $10,244,014.00 in principal, $6,660,829.00 in collateral, and $14,970.90 in interest. In
sum, the Panel found Respondents
jointly and severally liable with the total award not to exceed
$16,662,867.00 in principal, $7,989,435.00 in collateral, and $29,601.24 in interest. Petitioner
now moves to confirm the Panel's Final Award in all respects.
II. DISCUSSION
The Federal Arbitration Act (ooFAA"), 9 U.S.C. $
I
er
seq,"reflects an 'emphatic federal
policy in favor of arbitral dispute resolution."' KPMG LLP v. Cocchi, 132 S. Ct.23,25 (2011)
(citations omitted). If a petition is timely submitted in a proper venue with jurisdiction, then,
I
It is clear from the Final Award that the total award of principal is $16,662,867.00. The Panel's finding that SCI
owes $16,881,669.00 in principal appears to be "an evident material miscalculation of figures or an evident material
mistake." See 9 U.S.C. $ I l(a). Accordingly, the Court modifies SCI's liability for principal to $16,662,867.00.
J
notwithstanding Sections 10 and 11, "a judgment of the court shall be entered upon the award
made pursuant to the arbitration." 9 U.S.C. $ 9. Respondents SCI and PMSG do not object.
Respondent LRA, however, argues that it never agreed to arbitrate, therefore, "the arbitrators
exceeded their powers" and the award should be vacated. See id. $ 10(a)(a). Petitioners argue
that LRA waived this argument; and that regardless of the waiver, the Panel correctly decided
that LRA had a duty to arbitrate; thus, all that is left is for the Court is to confirm the Final
Award.
A. Standard of Decision
"Judicial review of arbitration awards is tightly limited; perhaps it ought not be called
'review' at all." Baravati v. Josephthal. Lyon & Ross.Inc.,28 F.3d 704,706 (7th Cir. 1994)."If
the district judge is satisfied that the arbitrators resolved the entire dispute and can figure out
what that resolution is, he must confirm the award." IDS Life Ins. Co. v. Rgyal Alliance Assocs..
Lnc.,266 F .3d 645,650-51 (7th Cir. 2001).
B. LRA Waived Its Argument That It Was Not A Signatory To The Agreement To
Arbitrate
LRA's argument is correct to a point; "[a]rbitration is contractual by nature-a party
cannot be required to submit to arbitration any dispute which he has not agreed so to submit."
Zurich Am. Ins. Co, v. Watts Ind. Ins.. Inc. , 417 F.3d 682, 687 (7th Cir. 2005) (internal
quotations and citations omitted). However, with "[t]hat said, there are five doctrines through
which a non-signatory can be bound by arbitration agreements entered into by others: (1)
assumption; (2) agency; (3) estoppel; (4) veil piercingt and (5) incorporation by reference." Id.
(citations omitted). "Thus, even though the ordinary rule is that the question whether an
agreement to arbitrate exists is one for the court, the right to
a
judicial determination of
arbitrability is, like many rights, one that can be waived." Enrtl. Barrier Co." LLC v. Slurry
Inc., 540 F.3d 598, 606 (7th Cir. 2008) (citations omitted).
S)rs..
The arbitration proceeding and arguments in this case are similar to Environmental
Barrier Co.. LLC" 540 F.3d 598. A litigant in Environmental Barrier, a company called SSI,
participated in arbitration for seven months and did not challenge the arbitrability of the dispute
until the opposing pafry, a company called EBC, filed an action to confirm the award in federal
court. In opposition to the confirmation of the award, SSI argued that EBC was not a signatory to
the agreement, thus, there was no agreement to arbitrate and the arbitrator did not have the
authority to decide the dispute. However, "[o]nly after the arbitrator issued an award unfavorable
to SSI and the case wound up in court did SSI raise an objection to the arbitrator's authority to
decide the dispute." Id. at 606.
Affirming the district court's confirmation of the arbitration
award, the Environmental Barrier court held that SSI waived its objection to arbitrability "[b]y
freely submitting to the arbitration of its claims without preserving a challenge to the arbitrator's
authority." Id. at 607. The Seventh Circuit emphasized that SSI's late challenge was "not a tactic
we can accept, for sound policy reasons. It is tenibly wasteful of the arbitrator's time, the
parties' time, and the court's time." Id.
As the procedural history elucidates here, LRA has waived its argument that it was not a
signatory to the arbitration agreement. The arbitration proceeding began in May 2013 and has
continued for twenty-six months. The pleadings filed in the arbitration and the pleadings filed
before this Court all explicitly show that LRA has been represented by legal counsel throughout
the dispute resolution process. As a matter of law, "litigants are bound by the acts and omissions
of their chosen agents, including lawyers, and that legal bungling therefore does not justify
reopening
a
judgment." Choice Hotels Int'I. Inc. v. Grover, --- F.3d ---,2015 WL 4081169 at*2
(7th Cir. July 7,2015) (citing Link v. Wabash R.R., 370 U.S. 626 (1926)). In this case, LRA was
first represented by Mark M. Barber
(ooMr.
Barber") from the law firm Broad and Cassel, next by
Mr. Muchunas, and now by Mr. Cushing. The Motion to Substitute Counsel, signed by Mr.
Cushing and Mr. Muchunas, acknowledges that LRA was previously represented by Mr.
Muchunas during the arbitration and the pleadings filed in the arbitration proceeding verify that
assertion. LRA is bound by the actions or inactions of its attomeys of record and cannot blame
its attorney as a ground to vacate the Panel's award. See Choice Hotels Int'1. Inc., --- F.3d ---,
2015 WL 4081 169 at * 1 ("Litigants who choose a poor lawyer may bear the costs themselves, or
shift them to the lawyer, but cannot shift them to an adversary who bore no fault for the
problem.")
The May 21,2013 Objection to Arbitrability filed by Mr. Barber admitted that LRA was
a signatory to the arbitration agreement. The only objection to arbitrability made on
LRA's
behalf was on the ground that the state laws of Florida preempted the Federal Arbitration Act.
LRA then actively participated in the arbitration proceeding for over ayear before filing
anything in this Court.
On June 05,2014, Mr. Muchunas filed a responsive pleading to Petitioners' request to
confirm the Panel's order requiring Respondents to post pre-hearing security in the amount of
$12,496,308.00. In that pleading, Mr. Muchunas appeared as counsel for all Respondents and
raised a general objection under 9 U.S.C. $ 10(a)(a), stating that "[t]he arbitration agreement is
unenforceable and is currently being challenged before the Panel." Resp'ts' Answer to Pet. to
Confirm Arbitration Award and Req. for Vacatur at2.The second responsive pleading filed by
Mr. Muchunas on behalf of all Respondents (once again including LRA) elaborated on his
argument why the award should be vacated. The argument was that the Panel's pre-hearing
security award constituted a fine or punitive damage award, which exceeded the authority of the
Panel under the parties' arbitration agreement. Notably, this argument not only implies that an
enforceable arbitration agreement exists, but it is void of any argument that LRA was not aparty
to the arbitration agreement.
The first time that LRA raised the current basis for objecting to arbitration was at a prehearing conference with the Panel on January 7,2015, twenty months after arbitration
proceedings began. Furthermore, the current objection came only after the Panel ordered LRA
and the other Respondents to post a bond over $12
million, and that o'order [was] intended to be a
partial final award." Pet. to Confirm Arbitration Award, Ex. B at 7. None of the earlier
objections contended that LRA was not a signatory to the non-policy agreement; in fact, the first
objection admitted that LRA was a signatory. By January 2015, the argument had been waived.
LRA had already freely submitted to and participated in the arbitration. See Envtl. Barrier Co."
LLC,540 F.3d at 607;
see also Slaney v. The
Int'l Amateur Athletic Fed'n,244F.3d 580,
591
(7thCir.2001).
Futhermore, Petitioners assert, and the record supports, that at this stage of the dispute:
the parties [have] exchanged more than 350,000 pages of documents and
conducted six depositions. The arbitrators had multiple pre-trial conferences with
the parties resulting in eleven pre-hearing orders. The final arbitration hearing
lasted four days and involved three arbitrators, three sets of counsel, live
testimony from six witnesses, and more than one hundred exhibits. The parties
submitted both pre-hearing and post-hearing briefs to the arbitrators.
Zurich's Reply in Supp. of Mot. to Confirm Arbitration Award at l-2. And that goes without
mention of the Panel's nineteen-page Final Award and the fourteen months of litigation in this
Courl. It would be against sound policy for this Court to sustain LRA's objection and vacate the
award when so much time and so many resources have been invested into resolving this dispute.
Nonetheless, the Panel already resolved the issue in its Final Award and its finding that LRA had
a duty to arbitrate is satisfactory.
It appears that LRA only raised this objection when the tide of
the arbitration began to shift and collapse upon
as security before the
See
it-when it was ordered to post over
$12
million
final arbitration hearing. The Court will not re-entertain LRA's objection.
Slaney,244F.3d at 591 ("Our judicial system is not meant to provide a second bite at the
apple for those who have sought adjudication of their disputes in other forums and are not
content with the resolution they have received.").
For the reasons above, Sphere Drake Insurance v.
587 (7lh
Cir. 2001), Zurich American Insurance
Co.
All American Insurance
Co.
,256 F .3d
, 417 F.3d 682, and the other cases that LRA
cites are unhelpful for its proposition that judicial review of its obligation to arbitrate the matter
is required. In those cases, the party objecting to arbitration raised and preserved the objection to
the
judiciary before actually engaging in the arbitration proceedings. The Court finds that LRA
has waived its right to a judicial determination of
arbitrability.
Notwithstanding that finding, the Court does not take lightly LRA's contention that
"LRA did not know it was in the arbitration
case, did not hire an attomey on its behalf, and did
not authorize or rutify the representation that LRA was a signatory to the Program Agreement
that contains the arbitration clause." LRA's Resp. to Mot. to Confirm Arbitration Award at 5. In
support of this contention, LRA submits an affidavit signed on or around June 11, 2015, from
John W. Hardin (ooMr. Hardin"), its President, CEO, and owner.
If true, it is a serious problem
that LRA did not know that it hired Mr. Barber or Mr. Muchunas to represent it in the arbitration.
Remember that, "litigants are bound by the acts and omissions of their chosen agents." Choice
Hotels Int'l" Inc., --- F.3d ---,2015 WL 4081169 at *2 (emphasis added).
Mr. Hardin's sworn statement says that it was "[u]nknown to LRA or its officers, that
[the] agreement which PMIS]G signed with ZURICH also named LRA as aparty to the
agreement." Second Aff. of John W. Hardin
at\ 4. This is worth mentioning because LRA
submitted only four insurance claims in the 201I policy year, totaling merely $12,484.00; yet, it
is now saddled with
a
judgment against it totaling about $16.9 million. This disparity sounds
unconscionable, beyond the bounds of what LRA bargained for, and at the very least,
unequitable. On the other hand, the four claims LRA submitted are further evidence that LRA
knew about the agreement and ratified it; because LRA participated in the insurance policy and
received benefits from it. Regardless, the issue of equity was for the Panel to decide. Whether
PMSG and Ms. Hubbard can be held liable to indemnify LRA for exceeding the scope of their
agency relationship when they signed on
LRA's behalf is a different matter that is not before this
Court. LRA even mentions in its response brief that it is pursuing that potential remedy in federal
court in Florida.
Regarding LRA's assertion that it was not represented by any legal counsel and did not
know about the arbitration proceeding, Mr. Hardin states:
[in arbitration] were taken without notice to [him] or to LRA that
ZURICH was seeking to hold LRA jointly liable for PM[S]G's breaches. Any
assertions or admissions by an attorney that LRA was a signatory to the
agreement containing the arbitration clause, or that LRA otherwise consented to
These steps
arbitration of this matter, were made without [his] knowledge or authorization or
the authorization of LRA.
Second
Aff. of
John W. Hardin at !f 6.
If this is true, LRA could arguably have
a malpractice
claim against Mr. Barber, Mr. Muchunas, and their respective law firms. Nonetheless, this is still
not a basis for vacating the Panel's Final Award because "intentional misconduct of lawyers is
likewise imputed to their clients," see Choice Hotels International. Inc., --- F.3d ---, 2015 WL
4081169 at*2 (citing Societe Intemationale v. Rogers, 357 U.S. 197 (1958), and National
Hocke), League v. Metropolitan Hgckey Club. Ing.,427 U.5.639 (1976)), and it is undeniable
that Mr. Barber and Mr. Muchunas intentionally entered appearances and filed pleadings on
behalf of LRA. That does not mean that LRA is left without a potential remedy. "When lawyers
fail, the remedy is malpractice litigation against the wrongdoer, not more litigation against an
innocent adversary in the original litigation." Id. Petitioners are nothing more than innocent
adversaries here.
However, LRA's assertion that Mr. Barber and Mr. Muchunas would immerse
themselves in the litigation without notifying or formally representing LRA is implausible. There
9
was voluminous and costly discovery in this case; no one contends that counsel volunteered their
services and paid for the costs of the documents.
It is more likely that these attorneys sent
invoices to LRA and may have even received payment from LRA for their services.
That being said, the veracity of Mr. Hardin's statements deserve scrutiny. He goes on to
state that "[he] was advised that LRA was a Respondent in this matter in August of 2014."
Second
Aff. of
John W. Hardin at fl 8. This statement uses passive voice and clearly omits how
or who told him about LRA's involvement in the arbitration. Who advised him? He says he "did
not speak with attorneys of record for LRA and PMIS]G until November or December of 2014."
Id. It is also suspicious why he waited five months from the time that he learned LRA was
involved in the arbitration to substitute counsel. He includes no explanation for the delay. Why
would anybody wait five months to contact a new attomey to fix a situation in which they were
erroneously ordered to forfeit over $12 million? Furthermore, how does a person who is so
involved in a company (Hardin describes himself as President, CEO, and owner of LRA) not
know for eighteen months that his company is facing a potential multi-million dollar judgment?
Mr. Hardin admits that LRA had a contractual business relationship with PMSG. In its Final
Award, the Panel found that Mr. Hardin "worked at his brother's company, SCI, for 20 years."
Zurich's Reply in Supp. of Mot. to Confirm Arbitration Award, Ex.
1
at 13. Did the Respondents
not confer? Did Mr. Hardin and his brother not talk? These facts imply that Mr. Hardin engaged
in conscious avoidance of knowing about LRA's involvement in the arbitration.
Also unusual, is that the first affidavit signed and submitted by Mr. Hardin on or around
January 21,2015, mentions absolutely nothing about being unaware that LRA was represented
by an attorney in the arbitration. This is despite Mr. Hardin's statement in his second affidavit
that he knew LRA was aparty to the arbitration since August2014, five months before
10
submitting the first affidavit. As represented in his affidavit, Mr. Hardin's nonfeasance as an
officer of LRA is remarkable.
The Court has not conducted an evidentiary hearing in this matter, and does not reach the
conclusion that Mr. Hardin lacks credibility. However, Mr. Hardin is admonished of the severe
consequences of making false or misleading statements or omissions under the guise of a sworn
affidavit to this Court and any other tribunal. And, Mr. Cushing is admonished of the
consequences of submitting such a statement to the Court.
III. CONCLUSION
The Court finds LRA waived its argument that it was not a signatory to and not bound by
the agreement to arbitrate. There is no need for the Court to reach Petitioners' additional
arguments. The Court confirms the Panel's Final Award. Judgment in favor of Petitioners is to
enter accordingly: (1) SCI is liable for $16,662,867.00 in principal, $6,874,840.00 in collateral,
and $28,578.64 in interest; (2) PMSG is liable for $16,280,940.00 in principal, $1,355,480.00 in
collateral, and$26,284.38 in interest; and (3) LRA is liable for $10,244,014.00 in principal,
$6,660,829.00 in collateral, and$14,970.90 in interest. Respondents are jointly and severally
liable with the total award not to exceed $16,662,867.00 in principal, $7,989,435.00 in collateral,
and $29,601.24 in interest.
IT IS SO ORDERED.
CHARLES RONALD
United States District Court
DATE: luly 23,2015
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