PoolRe Insurance Corp. v. Organizational Strategies, Inc. et al
Filing
48
MEMORANDUM OPINION AND ORDER DENYING AS MOOT 20 Opposed MOTION for Leave to File Motion for Leave to Add Defendants, DENYING AS MOOT 41 MOTION to Strike Defendants Exhibits in Their Reply Brief, GRANTING 22 Opposed MOTION for Lea ve to File Excess Pages, DENYING AS MOOT 21 Opposed MOTION to Add Party (1) Optimal Casualty Corp., (2) Integration Casualty Corp., and (3) Systems Casualty Corp., DENYING 23 Opposed MOTION to Alter Judgment, GRANTING 26 MOTION to vacate. (Signed by Judge Gray H. Miller) Parties notified.(rkonieczny, 4)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
POOLRE INSURANCE CORP., et al.,
Plaintiffs,
v.
ORGANIZATIONAL STRATEGIES, INC., et al.,
Defendants.
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§
§
§
§
§
§
CIVIL ACTION H-13-1857
MEMORANDUM OPINION & ORDER
Pending before the court are the following motions: (1) a motion for leave to add defendants
(Dkt. 20) filed by plaintiffs Capstone Associated Services, Ltd., Capstone Associated Services
(Nevada), LP n/k/a Capstone Associated Services (Wyoming), LP, Capstone Insurance
Management, Ltd. (collectively, “Capstone”); PoolRe Insurance Corp. (“PoolRe”); and the Feldman
Law Firm LLP (the “Firm”) (Capstone, PoolRe, and the Firm will be referred to herein as the
“Feldman entities”); (2) the Feldman entities’ motion to add additional parties to the litigation (Dkt.
21); (3) the Feldman entities’ motion to exceed page limits (Dkt. 22); (4) the Feldman entities’
amended motion to confirm and compel (Dkt. 23);1 (5) a motion to vacate (Dkt. 26-1) filed by
defendants Nicolette Hendricks (“Nicolette”); William Hendricks (“William”) (Nicolette and
William are referred to herein as the “Hendrickses”); and Organizational Strategies, Inc. (“OSI”)
(the Hendrickses and OSI are collectively referred to herein as the “OSI entities”); and (6) PoolRe’s
motion to strike exhibits to the OSI entities’ reply in support of their motion to vacate (Dkt. 41).
1
The Feldman entities captioned this pleading as “Plaintiffs’ Expedited Corrected Motion to Compel Arbitration
Pursuant to 9 U.S.C. § 4; Motion to Stay Other Proceedings Pursuant to 9 U.S.C. § 3; Request for FRCP 59(e) Motion
to Alter or Amend This Court’s Memorandum Order and Opinion; and Request for Clarification as to Motion to
Confirm.” Dkt. 23 at 1. Because the Feldman entities have essentially filed an amended motion for confirmation and
to compel arbitration, the court refers to this pleading as the “amended motion to confirm and compel.”
After considering the motions, responses, replies, extensive record, and applicable law, the
court adjudicates the remaining issues and motions as follows: (1) the stay of the confirmation
proceedings is LIFTED; (2) the Feldman entities’ amended motion to confirm and compel (Dkt. 23)
is DENIED; (3) the OSI entities’ motion to vacate (Dkt. 26-1) is GRANTED; (4) the Feldman
entities’ motion for leave to file excess pages (Dkt. 22) is GRANTED; (5) the Feldman entities’
motions for leave to add additional defendants (Dkts. 20–21) are DENIED AS MOOT; and (6) the
Feldman entities’ motion to strike exhibits from the OSI entities’ reply brief in support of their
motion to vacate (Dkt. 41) is DENIED AS MOOT.
I. BACKGROUND
This contract dispute regarding captive insurance companies2 is now before two federal
district courts, the Third Circuit Court of Appeals in Philadelphia, and an arbitral forum in Houston,
Texas. Nevertheless, the court will provide a brief summary of the facts that have already been
presented to the respective tribunals over the past year, beginning with an identification of the
parties to the relevant disputes.3
A. Factual Background
Capstone is a series of related companies that provide turnkey formation and administration
services for captive insurance companies. See Dkt. 23, Ex. 17 (Capstone’s first arbitration demand)
2
A “captive insurance company” is “‘organized for the purpose of insuring the liabilities of its owner.’”
Westchester Fire Ins. v. Heddington Ins. Ltd., 883 F. Supp. 158, 160 n.4 (S.D. Tex. 1995) (Hittner, J.) (quoting
Clougherty Packing Co. v. Comm’r, 811 F.2d 1297, 1298 n.1 (9th Cir. 1987)). In Westchester, for example, Heddington
was Texaco’s captive insurer, and the named insureds under the policy were Texaco and its subsidiaries. Id.
3
In addition to summarizing the facts in the record of this proceeding, the court will refer to certain filings in
the related case now pending before Judge Richard Andrews of the United States District Court for the District of
Delaware. See Organizational Strategies Inc., et al. v. The Feldman Law Firm LLP, et al., No. 1:13-cv-764-RGA (D.
Del. removed May 2, 2013) (hereinafter the “Delaware Case” or the “De. Case”). The court takes judicial notice of the
pending judicial proceedings and public documents filed in Judge Andrews’s related case. See Lowrey v. Tex. A&M
Univ. Sys., 117 F.3d 242, 246 n.3 (5th Cir. 1997).
2
at 1–2. Capstone administers PoolRe, a third party insurer that provides pooling insurance services,
on behalf of its officers, directors, and owners, id. at 2, and the Firm provides legal services related
to Capstone’s support of captive insurance companies. Id. at 1 n.2.4 The Hendrickses manage OSI,
a professional services firm that provides systems work for the Department of Defense. Id. at 1.
On April 22, 2011, the Hendrickses participated in a conference call and webinar with the
Firm to discuss captive insurance planning options. See Dkt. 6, Ex. 2 (planning memorandum) at
1. On April 25, 2011, Stewart Feldman (“Feldman”), the Firm’s named partner, followed up with
a planning memo to the Hendrickses, outlining the process for the provision of services and
describing the need for a feasibility study “addressing the application of alternative risk/captive
planning to your operating entities.” Id. Feldman explained that the study would encompass a
review of OSI’s insurance coverage, loss exposure, tax returns, and financial statements. Id. In
addition to document review, the study included an on-site visit to OSI’s Washington, D.C.
corporate office for further review of financial and legal records related to captive insurance
planning. Id. Feldman added that after completion of a satisfactory on-site review, the Firm would
draft a business plan and financial projections for each captive, along with an application to
regulators of the captive’s domicile to form a property and casualty insurance company. Id. at 2.
Attached to the planning memo was the Firm’s billing guidelines, available at the Firm’s
website, which set forth the parties’ respective duties and obligations as part of the attorney/client
relationship. Id. at 5. The guidelines contain the first arbitration agreement at issue in this case,
which reads, in pertinent part, as follows:
4
According to the Firm’s engagement letter, the Firm is associated with Capstone, “which is owned by certain
of the Firm’s lawyers and related parties,” in order “to provide many of the needed support services.” Dkt. 6, Ex. 1 (June
20, 2011 engagement letter) at 2. The letter also states that Capstone is “a significant client of the Firm.” Id. at 4.
3
With respect to any and all other disputes and claims whatsoever between us related
to or arising out of our services (but in no event for attorneys’ fees and/or costs),
such shall be submitted to a recognized, neutral, arbitral association or arbitrator for
resolution pursuant to its single arbitrator, expedited rules. . . . If the first arbitration
organization or arbitrator which receives a written demand for arbitration of the
dispute from either of us does not complete the arbitration to finality within four
months of the written demand, either party then may file a written demand for
arbitration of the dispute with another recognized, neutral, arbitration association or
arbitrator, with the prior arbitration association or arbitrator then being immediately
divested of jurisdiction, subject to a decision being rendered by the replacement
arbitration association or arbitrator within four months of the written demand being
filed with the replacement arbitration group. All arbitration — regardless of the
arbitral organization actually hearing the dispute — shall be conducted pursuant to
the Commercial Arbitration Rules of the AAA [“American Arbitration Association”]
whose Expedited Procedures shall apply regardless of the size of the dispute with
only a single arbitrator hearing the dispute, again all regardless of the organization
sponsoring the arbitration in question. . . . The parties agree that the issue of
arbitrability shall likewise be decided by the arbitrator, and not by any other person.
That is, the question of whether a dispute itself is arbitrable shall be decided solely
by the arbitrator and not, for example, by any court. In so doing, the intent is to
divest the courts of all powers in disputes involving the parties, except for the
confirmation of the award and enforcement thereof. . . .
Id. at 7 (page 3 of the guidelines). The provision thus contains two relevant clauses, a “disputes
clause” that details the scope of arbitral disputes and the applicable AAA rules, and a “delegation
clause” that delegates the power to adjudicate gateway questions of arbitrability to the arbitrator.
After the on-site visit and further review, Feldman sent an engagement letter to the
Hendrickses on June 20, 2011 for the “formation and administration of a captive insurance
program.” Dkt. 6, Ex. 1 at 1.5 Nicolette signed the letter, dated June 29, 2011, and the letter
indicates a copy was sent to Charles Earls, III, Capstone’s President. Id. at 11–12. This multi-year
agreement contemplated the formation of two to three “intermediate” captive insurance companies,
as defined by section 831(b) of the Internal Revenue Code. Id. at 1. The three captives were
tentatively named Optimal Casualty Corp. (“Optimal”), Systems Casualty Corp. (“Systems”), and
5
PoolRe was not a party to the engagement letter or the services agreement.
4
Integration Casualty Corp. (“Integration”).6 Id. The captives were formed to underwrite alternative
risk programs for the benefit of OSI and its affiliates to protect them against loss exposures beyond
those covered by other commercial insurance carriers. Id. at 1–2. The letter noted that this
protection was “especially critical given the niche industry in which OSI operates.” Id. at 2. As a
defense contractor with more than 200 staff personnel, OSI maintains field offices across the United
States specializing in applied technology and services, and OSI engages in extensive public and
private sector contract work. Id.
The engagement letter further specifies that the Firm and Capstone “will handle the design,
formation and all aspects of the insurance operations on behalf of the captives, including operating
the captives, designing and maintaining the risk coverages and maintaining their accounting
records.” Id. at 3. The agreement’s initial term was three years, to end on December 31, 2013, and
upon any cancellation thereafter “Capstone’s ongoing responsibilities under the [Capstone Services
Agreement would end].”7 Id. at 5. The engagement letter contains a sixteen month advance-notice
termination clause, requiring notice of termination before August 31, 2012. Id.8
The Firm encouraged the Hendrickses to retain the services of an accounting firm to review
financial matters among the OSI captive entities, and “to review the various state and federal tax
returns which will be prepared in draft form for your signature and filing.” Id. at 10. The Firm
6
OSI, Optimal, Systems, and Integration are collectively referred to herein as the “OSI captive entities.”
7
The Capstone Services Agreement (hereinafter the “services agreement”), as described further infra, is an
agreement that was attached to the engagement letter as Exhibit B, to be executed among Capstone, the Firm, the OSI
entities, and the three captives, and it set forth the parties’ respective duties and obligations arising from Capstone’s
services in the formation and administration of OSI’s captive insurance program. Dkt. 6, Ex. B to Ex. 1.
8
The agreement also states that termination “is predicated upon all payments due Capstone being current as
of the time that notice is given.” Dkt. 6, Ex. 1 at 5.
5
recommended the services of Christine Williamson (“Williamson”), a CPA with the Virginia
accounting firm of Watkins Meegan. Id.
Attached to the engagement letter were six documents, including the Firm’s billing
guidelines and the services agreement. The attached guidelines contain an arbitration provision
identical to the agreement in the guidelines attached to the planning memo. See id. at 15–16. The
services agreement stated that it would be entered among Capstone, the Firm, the OSI entities, and
the three captives. Dkt. 6, Ex. B to Ex. 1 at 1. The contract parties agreed that the services
agreement would become effective at a subsequent date upon the “issuance of the insurance licenses
for each of the [captives].” Id. The services agreement set forth the contract parties’ respective
rights and obligations, and Capstone described itself as a service provider of turnkey administrative
services for small property and casualty insurance companies, including the captives. Id.
After discussing Capstone’s services, Article V of the services agreement specifies that
Capstone retains the ultimate ownership interest of all documents it prepares for the captives, but
the captives possess a limited, non-exclusive license to use the documents during the term of the
agreement. See id. at 8–9 art. V. Article VI contains a venue clause specifying that “[f]or purposes
of any disputes arising under Article V of this Agreement, the sole venue and jurisdiction for
resolution of such disputes shall be courts located in Harris County, Texas. As to other disputes
arising under this Agreement (with the express exception of disputes arising under Article V hereof),
venue and jurisdiction shall be in Delaware, it being expressly recognized that parallel proceedings
may thereby result.” See id. at 9 art. 6.4 (emphases added). Article VI does not refer to the prior
broad arbitration clauses contained in the attached billing guidelines of the Firm, but Article 6.1
provides:
6
The Parties hereto stipulate and agree that this Agreement amends the Engagement
Letter (including its attachments and prior amendments) and agree to bound by the
terms and provisions of this Agreement as if incorporated into the Engagement
Letter. To the extent of any conflict between the terms and provisions of this
Agreement and the Engagement Letter, this Agreement exclusively shall control.
Id. at 9 art. 6.1; accord id. at 2 art. III (“Any conflict between this Agreement and the Engagement
Letter shall be construed in a manner giving precedence to this Agreement in all cases
whatsoever.”). Lastly, section 6.8 of the services agreement contains a broad merger clause, in
which the parties agreed that “[t]his Agreement, including the exhibits, schedules, and other
documents and instruments referred to herein, together with the Engagement Documents, embodies
the entire agreement and understanding of the Parties hereto in respect of the subject matter
contained herein. With respect to the subject matter of this Agreement this Agreement supersedes
all prior agreements and understandings between the parties.” Id. at 10.
Although both PoolRe and the OSI entities have provided copies of the services agreement
to the court, no copy bears the contract parties’ signatures. Instead, the OSI entities have filed
copies of three letters from Feldman, on Capstone letterhead, memorializing the services agreement
among each of the captives in August 2011. Dkt. 26-1, Ex. 1 at 35 (fully executed letter
memorializing agreement among Capstone, the Firm, and Optimal); id. at 36–37 (executed
counterparts of letter memorializing agreement among Capstone, the Firm, and Integration); id. at
38–39 (executed counterparts of letter memorializing agreement among Capstone, the Firm, and
Systems).9
Thereafter, from June 2011 through early 2012, Capstone provided its services under the
engagement letter and services agreement to the OSI parties without any apparent material disputes.
9
William signed on behalf of Optimal and Integration, and Nicolette signed on behalf of Systems. Dkt. 26-1,
Ex. 1 at 35–39. The letters indicated that the captives were still in formation. Id.
7
Dkt. 23, Ex. 17 at 2. Also during this time, PoolRe and each captive issued a series of insurance
policies to OSI. Dkt. 33, Ex. D. Three other reinsurance agreements were entered into between
PoolRe and each captive, with policy periods of October 14, 2011 through January 1, 2012. Dkt.
33, Ex. C. These three reinsurance policies contain identical arbitration provisions, which state in
pertinent part:
It is hereby understood and agreed that all disputes or differences of any sort which
may arise under or in connection with this Policy . . . shall be submitted for binding,
final and non-appealable arbitration to the International Chamber of Commerce
[“ICC”] under and in accordance with its then prevailing ICC Rules of
Arbitration. The ICC Rules of Arbitration shall control except with respect to the
selection of the arbitration panel, which shall consist of one qualified, independent
arbitrator selected by the Anguilla, B.W.I. Director of Insurance. . . . The Arbitration
Proceeding shall take place in the Territory of Anguilla, B.W.I.10
Dkt. 6, Exs. 3–5 at 12 (emphasis added).
In mid-2012, a disagreement arose when OSI’s retained accounting firm, Watkins Meegan,
performed its annual audit and prepared OSI’s tax return. Dkt. 23, Ex. 17 at 2. As a result of
Watkins Meegan’s work, OSI requested that Capstone change certain accounting information for
2011 involving PoolRe and the three captives. Id. Capstone denied the request, claiming that it
could not justify the alterations. Id.
On August 24, 2012, Nicolette sent written notice to Capstone terminating the engagement
letter, purportedly effective December 31, 2013. Dkt. 21, Ex. 1 at 8. Then, after continued
discussions in late 2012 failed to achieve a resolution of the dispute, PoolRe cancelled its
agreements with the captives and returned the total deposit of retention premiums. Dkt. 23, Ex. 17
at 2. OSI subsequently claimed that it had not received the refund checks, and PoolRe began a
10
Anguilla is a Caribbean island within the British West Indies (B.W.I.) and is a member of the British Overseas
Territories. Koehler v. Bank of Berm. (N.Y.) Ltd., 229 F.3d 187, 187 n.1 (2d Cir. 2000) (Sotomayor, Circ. J., dissenting
from den. of reh’g en banc). Other members include the Cayman Islands, Bermuda, and the British Virgin Islands. Id.
8
process of tendering the disputed funds to an escrow account in Anguilla. Id. Further, in December
2012, after consulting with ethics counsel, the Firm withdrew from further work for OSI until the
dispute was resolved. Id. at 3. On February 26, 2013, OSI sent a letter to Capstone, which the latter
contends blocked it from providing further services to OSI under the engagement letter. Id.
B. Procedural Background
1.
Capstone Initiates the First Arbitration
Capstone filed an arbitration demand (beginning the “first arbitration”) against the “OSI
respondents”11 on March 12, 2013. Id. at 1. Capstone stated that its claim arose “out of a breach
of contract in which the [OSI respondents] made further performance by [Capstone] impossible.”
Id. Capstone forwarded its demand to Dion Ramos (“Ramos”)12 of Conflict Resolution Systems,
PLLC (“CRS”) in Houston, Texas on Friday, March 15, 2013, and requested that he appoint an
arbitrator and set a scheduling order.13 Dkt. 6, Ex. 7 at 3. On Monday, March 18, 2013, Ramos
appointed himself as the arbitrator of the first arbitration pursuant to CRS procedures. Id. at 2–3.
On March 29, 2013, the director of the Anguilla Financial Services Commission, Keith Bell,
sent a letter to “PoolRe Property & Casualty Insurance Corporation, c/o Capstone Insurance
Management (Anguilla), Ltd.” located in The Valley, Anguilla, to Feldman’s attention. Dkt. 6, Ex.
6 (letter from director Keith Bell). The letter related to PoolRe’s dispute with the captives, for
11
Capstone’s arbitration demand named the OSI entities and additional companies “in privity” with them as
respondents, “includ[ing] Optimal Casualty Corp., Integration Casualty Corp., and Systems Casualty Corp. and the
insureds listed in their various insurance policies.” Dkt. 23, Ex. 17 at 1 n.1. The entire group of respondents, which
includes the OSI entities and the companies purportedly “in privity” with them, see infra n.16 for a full list of the
captives and other insureds, are collectively referred to herein as the “OSI respondents.”
12
Ramos is a former civil district judge of the 55th Judicial District Court of Harris County, Texas.
13
Capstone’s arbitration demand was emailed to the arbitrator by a senior counsel of RSL Funding, LLC, a nonparty to the arbitration and both federal court cases. Dkt. 6, Ex. 7 (email string) at 3–4. RSL Funding’s senior counsel
identified himself as Capstone’s “attorney of record in this arbitration.” Id. at 3.
9
which PoolRe was seeking arbitration under the reinsurance agreements’ arbitration clauses quoted
above. Id. Bell notified Feldman that he understood that certain arbitration provisions in insurance
agreements designated “the Anguilla, B.W.I. Director of Insurance” to select an independent
arbitrator for dispute resolution. Id. at 1. Bell further explained that while there was no such official
in Anguilla, he designated Ramos and CRS to select the independent arbitrators and to administer
related arbitration proceedings. Id. at 1–2. He also directed that further contact should be made with
Ramos at his Houston address. Id. Notably, Bell failed to explain why the dispute was not being
submitted to the ICC under its then-prevailing rules, as mandated by PoolRe’s reinsurance
agreements. Dkt. 6, Ex. 3–5 at 12.
On April 15, 2013, the OSI respondents appeared in the first arbitration, filing a pleading
entitled a “Response to Demand for Arbitration, Motion to Dismiss for Lack of Arbitrability and,
in the Alternative, Counterclaims.” Dkt. 21, Ex. 1. The OSI respondents objected to the arbitration
itself and “the authority of this arbitrator.” Id. at 1 n.1. They also moved to dismiss Capstone’s
demand on grounds that the services agreement’s venue clause (article 6.4) superseded the
arbitration provision of the billing guidelines attached to the engagement letter. Id. at 10–14.
Lastly, the OSI respondents filed five counterclaims, for professional negligence, breach of fiduciary
duty, fraud in the inducement, breach of contract, and declaratory judgment. Id. at 14–18. As part
of the OSI respondents’ breach of fiduciary duty counterclaim, they pled that Feldman owned and
controlled Capstone and PoolRe, which was an inherent conflict of interest and a violation of
Feldman’s duty of loyalty to the OSI respondents. Id. at 15. They also requested relief in the form
of a declaratory judgment for the return of all consideration as a result of Feldman and Capstone’s
alleged material breach in developing and performing the captive insurance program. Id. at 17.
10
On April 22, 2013, the Firm and PoolRe intervened in the first arbitration against the OSI
respondents. Dkt. 23, Ex. 17 at 24. The Firm sought a declaratory judgment that it had no liability
to the OSI respondents related to its legal services and that it did not breach the engagement letter.
Id. PoolRe joined the arbitration, consistent with Bell’s March 29th referral letter, “for the limited
purpose of having [Ramos] appoint an Anguilla-based arbitrator” to arbitrate the disputes under the
reinsurance agreements. Id. at 25. PoolRe added that it sought a declaratory judgment that it had
no liability to the OSI respondents for the cancellation of the 2012 reinsurance policies. Id.
The following day, April 23, 2013, the Feldman entities filed their response to the OSI
respondents’ motion to dismiss. Dkt. 23, Ex. 17 at 6. The Feldman entities contended that the
arbitrator should exercise jurisdiction over the dispute based on five separate arbitration agreements,
contained in two copies of the Firm’s billing guidelines attached to the planning memo and
engagement letter and PoolRe’s three reinsurance agreements. Id. at 10.
On April 29, 2013, Ramos issued a preliminary ruling on jurisdiction via email to the parties.
Dkt. 23, Ex. 13 (email string) at 1. Ramos determined that under the planning memo and
engagement letter, he had jurisdiction to determine the arbitrability of Capstone’s claims. Id.
Pursuant to that authority, he found that the claims among the Firm, Capstone, and OSI were
arbitrable, including any claims for attorneys’ fees and/or costs “if they relate in any way to ‘any and
all other disputes or claims’ between the parties.” Id. With regard to PoolRe’s arbitration clauses
in the reinsurance agreements, Ramos found that he had jurisdiction and determined that PoolRe’s
intervention waived its right to have the proceeding in Anguilla “and that Houston, Harris County
Texas [is] an appropriate place for the Arbitration.” Id. Lastly, Ramos rejected the OSI
respondents’ contention that the services agreement mandated arbitration outside Houston, and
11
Ramos held that the broad arbitration clauses in the engagement letter and planning memo controlled
and had no forum-selection requirements. Id.
On April 30, 2013, the OSI respondents’ counsel objected to Ramos’s ruling via email. Dkt.
26-1, Ex. C to Ex. 2 at 1–2. Counsel’s email specifically objected to Ramos’s decision that rejected
the PoolRe agreements’ selection process and removed the arbitration from the ICC’s jurisdiction
and procedures:
Neither PoolRe nor You[r] Honor can now unilaterally amend insurance policies to
change the identity of the Anguilla party authorized to appoint an arbitrator, move
the venue of that arbitration out of Anguilla, or apply AAA expedited rules to an
arbitration that is to be conducted under the ICC Rules. Article 5 of the ICC Rules
provides my clients 30 days from the date of receipt in which to submit an Answer
and Counterclaims to a Request for Arbitration.
Id. at 2.
The following day, on May 1, 2013, Ramos formally denied the OSI respondents’ motion
to dismiss, holding as follows:
The Arbitrator finds the Claimant’s Arbitration Demand claims violations by the
Respondents of the lawfirm’s engagement agreement and the [services agreement].
Clearly the lawfirm’s actions under the engagement letter are subject to the
Arbitration clause. . . . The Arbitrator finds that the written agreements between the
parties have a valid Arbitration clause which requires all parties to Arbitrate their
claims rather than seeking relief in courts.
Dkt. 23, Ex. 16 at 1.
2.
The OSI Captive Entities File the Delaware Case
But even as the first arbitration continued, the OSI captive entities (OSI and the three
captives) filed suit in the Delaware Court of Chancery in late April 2013, asserting claims against
Capstone, the Firm, and Feldman individually for professional negligence, malpractice, fraud in the
inducement, and breach of contract. Dkt. 23, Ex. 13 at 2.14 Vice Chancellor Sam Glasscock, III of
14
PoolRe was not a named party to the Delaware case.
12
the Delaware chancery court issued a status quo order on May 1 and set a hearing on the application
for a temporary restraining order (“TRO”) on May 6, which, if granted, would have stayed the first
arbitration. Dkt. 26–1, Ex. 13. But before the TRO hearing, Capstone removed the case to federal
court in Delaware. Dkt. 7 (the OSI entities’ answer) at 4 ¶ 12.
Upon removal the Delaware Case was ultimately assigned to Judge Richard G. Andrews.
Id. On May 13, 2013, Capstone filed a motion to compel arbitration and stay the federal
proceedings. De. Case Dkt. 4. On May 24, 2013, Judge Andrews denied the TRO request, vacated
the status quo order, and held the motion to compel in abeyance for further briefing. De. Case Dkt.
18. On June 14, the Firm and Capstone filed a motion to dismiss on grounds that the arbitrability
of the pending disputes should be decided by Ramos in the first arbitration. De. Case Dkt. 24.
3.
PoolRe Files A Motion to Confirm Before the First Arbitration Hearing Begins
Meanwhile, back in Houston, as the Feldman entities and OSI respondents were preparing
for the June 26, 2013 hearing, PoolRe filed a motion to confirm in the instant case on June 25, in
which PoolRe applied “to this Court for an order confirming a forthcoming arbitration award.” Dkt.
1 (confirmation motion) at 1.15 Recognizing the unusual step of a litigant seeking confirmation of
an award that had not yet been entered, the court issued a show cause order on June 27, 2013 and
ordered PoolRe to demonstrate why the court should not dismiss the case for want of jurisdiction.
See Dkt. 4 (order to show cause) at 1; 9 U.S.C. § 9 (providing jurisdiction for the court to confirm
an arbitration award “at any time within one year after the award is made”) (emphasis added). The
court ordered PoolRe to respond no later than July 9, 2013. Dkt. 4 at 1.
15
PoolRe purportedly filed this pleading on behalf of the Feldman entities. Dkt. 6 at 1. As further explained
infra, Capstone and the Firm appeared as plaintiffs in this case on August 26, 2013, Dkts. 17–18, and joined PoolRe’s
motions filed on that date, including the amended motion to confirm and compel. Dkt. 23.
13
4.
The First Arbitration Hearing is Held, with the Second Arbitration to Follow
Returning to the arbitration, on Sunday, June 23, three days before the merits hearing in the
first arbitration was set to begin, Capstone filed a second arbitration demand alleging that the OSI
parties breached Article V of the services agreement. Dkt. 6, Ex. 10 (new demand in the “second
arbitration”) at 2 ¶ 2. The following day, on Monday, June 24, the Feldman entities filed a notice
purportedly withdrawing the second demand because they “incorrectly failed to note that their May
13, 2013 pleading identified misuse and dissemination of confidential and proprietary information
and trade secrets in violation of the parties’ contractual agreements as one of their claims.
Yesterday, [the Feldman entities] incorrectly filed this as a new claim and incorrectly stated that
such was not a claim in the pending arbitration.” Dkt. 9, Ex. A (the Feldman entities’ correction)
at 1–2. When the first arbitration hearing began two days later on Wednesday, June 26, Ramos
deferred consideration of the new demand, concluding: “I think I have to treat that as a new claim
for arbitration that was filed on Sunday. So it won’t be part of this case.” See Dkt. 9, Ex. B (Arb.
Hr’g Tr., June 26, 2013) at 5:6–8. The first arbitration hearing concluded the following day on
Thursday, June 27, 2013. Dkt. 6, Ex. 9 (arbitration award) at 1.
That same day, as the first arbitration concluded, the parties agreed to the submission of posthearing briefing and affidavits for attorneys’ fees to the arbitrator by the close of business on July
3, 2013. Dkt. 26-1, Ex. 11 at 4 (Arb. Hr’g Tr., June 27, 2013) at 643–44. On July 4, 2013, after
Ramos granted the Feldman entities a one-day filing extension, they filed their brief and a proposed
arbitration award. Id. at 3 (email string); Dkt. 26-1, Ex. 9 at 1–2 (cover email); id. at 3–11 (proposed
award). On the afternoon of Monday, July 8, 2013, the OSI respondents’ counsel requested that
Ramos strike the proposed award as exceeding the parties’ agreement on post-hearing submissions.
Dkt. 26-1, Ex. 10 at 1. Later that evening, the Feldman entities filed a post-hearing reply brief and
14
motion to strike the OSI respondents’ application for attorneys’ fees. Dkt. 26-1, Ex. 11 at 1–2. On
the morning of Tuesday, July 9, the OSI respondents’ counsel responded to the Firm’s filing and
moved to strike the reply brief, again for exceeding the parties’ briefing agreement. Id. at 1.
Later that day, Ramos issued the first arbitration’s award, which was nearly identical to the
proposed award provided by the Feldman entities. Dkt. 6, Ex. 9. The award identified “Claimants”
collectively as PoolRe, Capstone, and the Firm (herein designated as the Feldman entities). Id. at
1. The award cited the OSI respondents as the “Respondents,” namely “Organizational Strategies,
Inc. (‘OSI’), Nicolette Hendricks, William Hendricks and those in privity with any of the
aforementioned.” Id.16 Ramos described the proceedings as conducted “generally under the AAA
Commercial Arbitration Rules, single arbitrator, expedited rules wherein the parties opted for the
optional rules concerning emergency procedures.” Id. at 2.
Ramos found that the OSI respondents materially breached the June 20, 2011 engagement
letter through their purported August 24, 2012 termination notice. Id. at 2–3. He further found that
the “evidence proves the [OSI respondents] breached the contracts with [the Feldman entities] and
$15,000.00 is due Capstone per quarter, due and payable February 1st, July 1st, September 1st and
December 1st from January 1, 2013 through December 31, 2016 for each of the three captives.” Id.
at 3 ¶ 2. As to the Feldman entities’ request for declaratory relief, Ramos found that neither the Firm
nor any of its attorneys were liable for professional negligence or breach of fiduciary duty to the OSI
respondents. Id. at 4–5 ¶ 5(ii). He also found that “PoolRe is properly joined in the existing
arbitration involving Capstone and the Firm pursuant to its own arbitration agreements and ancillary
16
The award stated that “[t]hose in privity with the Respondents include Optimal Casualty Corp., Integration
Casualty Corp., Systems Casualty Corp., OSI Property Holdings, LLC; Widewater Property Holdings LLC; Aquia
Property Holdings, LLC; Hwang (Hendricks) Condominium, LLC; Hendricks Lodge LLC; Judith River Aviation LLC;
Judith River Ranch LLC; Melwood Holdings 1 LLC; Melwood Holdings 2 LLC; Shore Drive LLC; Hendricks Farm
LLC; Cedar Stone Arena, LLC; and Cedar Stone Lodge, LLC.” Dkt. 6, Ex. 9 at 1 n.1.
15
to the otherwise pending arbitration.” Id. at 5 ¶ 5(iii). Lastly, Ramos awarded the Feldman entities
“attorney’s fees, expenses and costs . . . in the amount of $451,244.44 to be divided among
themselves as they see fit.” Id. at 4 ¶ 3. This amount included fees and expenses borne by the
Feldman entities in defense of the Delaware case, which Ramos found were unjustified in light of
the parties’ five arbitration agreements and the goal of arbitration to provide a “cost efficient and
expeditious resolution” of the parties’ disputes. Id. at 7 ¶ 7.17
As to the OSI respondents’ counterclaims, Ramos denied the claims against PoolRe on
grounds that PoolRe had a right to exclude the OSI respondents from its pooling arrangement for
any reason whatsoever. Id. at 5–6 ¶ 6(I). Second, Ramos denied any relief for the OSI respondents’
breach of fiduciary duty counterclaim, explaining as follows:
The Arbitrator has found no fiduciary duty in the case of the [the Feldman entities]
generally or in the case of Capstone and PoolRe no fiduciary duty is due. No factual
evidence was presented to establish any breach of fiduciary duty by the [the Feldman
entities]. Thus, [the OSI respondents’] breach of fiduciary duty claim against the
[the Feldman entities] is denied in its entirety.
Id. at 6 ¶ 6(ii). The OSI respondents’ counterclaim for declaratory relief, attorneys’ fees, and costs
were denied. Id. at 4–6 ¶¶ 4, 6(iv).
Finally, Ramos directed the parties to proceed as follows with confirmation proceedings:
[The Feldman entities] may at their option enter this Final Arbitration Award with
the U.S. District Court for the Southern District of Texas as set out in 9 U.S.C. § 9
and thereafter may domesticate the judgment in any state in which it deems
appropriate, at its own expense, with the [OSI respondents] ordered to cooperate.
The [OSI respondents] are directed to dismiss the existing Delaware litigation with
prejudice and proceed to contest the arbitration as they wish under 9 U.S.C. § 10, 11
in Houston, TX in the federal courts for the Southern District of Texas, Houston
Division.
Id. at 7 ¶ 8.
17
Ramos did not explain why he awarded these additional attorneys’ fees and costs to the Feldman entities
collectively, when PoolRe was not a party to the Delaware case.
16
And so PoolRe returned to this court. Late in the evening on July 9, 2013, PoolRe timely
filed its response to the court’s order to show cause regarding jurisdiction over the confirmation
proceedings, Dkt. 5, and filed a second amended petition. Dkt. 6. PoolRe notified the court of
Ramos’s decision, stating that “[t]he arbitrator issued an Arbitration Award concerning all of the
matters that were the subject of the first arbitration on July 9, 2013.” See id. at 7 ¶ 14.18 The second
amended petition restated PoolRe’s original motion to confirm the arbitration award that was
rendered in PoolRe’s favor, and PoolRe also moved the court to compel the defendants to the second
arbitration, which was already underway before Ramos. Id. at 7–9. On July 11, the summons were
issued, and the OSI entities answered PoolRe’s second amended petition on July 23, 2013. Dkt. 7.
The OSI entities concurrently filed a brief in opposition to the motion to compel arbitration (Dkt.
9) and a motion for a TRO to stay the second arbitration. Dkt. 10.
5.
The Second Arbitration Begins, but Is Subsequently Stayed
Meanwhile, as more pleadings were being filed in this court, the second arbitration was well
underway. On July 18, 2013, the Firm and PoolRe (the “intervenors”) intervened “for postarbitration award violations of the arbitrator’s orders.”19 Dkt. 23, Ex. 10 at 4 ¶ 8; Dkt. 23, Ex. 11
(intervention in second arbitration) at 2 (“The Intervenors seek additional enforcement orders and
continuing attorneys fees arising out of the [OSI respondents’] [new] breaches of the Award as
entered by the Arbitrator.”). On July 27, 2013, the Feldman entities filed an amended and restated
18
For the sake of precision, the court notes that PoolRe filed its response at 11:26 p.m. (CDT) on July 9, and
then filed its second amended petition at 1:06 a.m. (CDT) on July 10, 2013. Dkts. 5–6.
19
Also on July 18, 2013, Capstone, Feldman, and the Firm filed a reply in support of their pending motion to
dismiss in the Delaware case in which they notified Judge Andrews of the status of the second arbitration proceedings.
Dkt. 23, Ex. 10 at 4 ¶¶ 7–8; De. Case Dkt. 34 at 4 ¶¶ 7–8. They stated that “[b]ecause [the first] arbitration has been
completed, awards are being confirmed in the Texas District Court and additional arbitration proceedings are pending
in order to cover any remaining disputes between the parties, the question of whether arbitration should be compelled
is moot.” Id. at 4 ¶ 9.
17
arbitration demand, in which they collectively sought additional relief relating to the OSI
respondents’ purported breaches of the July 9 arbitration. Dkt. 23, Ex. 12 at 2–3.
Two days later, on July 29, 2013, this court issued a memorandum opinion and order
addressing the pending motions. Dkt. 12. With regard to PoolRe’s motion to confirm the award in
the first arbitration, the court stayed the proceedings pending Judge Andrews’s decision on the
motion to compel, as he was the first judge asked to address the validity and potential coverage of
the relevant arbitration agreements. Id. at 17–19. The court also denied PoolRe’s motion to compel
the second arbitration. Id. at 10–15. The court determined that although the engagement letter’s
arbitration provision contained a broad grant of arbitrability and delegation of such determinations
to an arbitrator, the services agreement’s contrary intent that certain disputes be heard in the courts
of Harris County, Texas created an ambiguity as to the parties’ delegation intentions. Id. at 12–14.
This ambiguity, under the court’s reasoning, precluded a finding that the “services agreement
‘clearly and unmistakably’ reaffirms the delegation clause.” Id. at 14 (quoting First Options of Chi.,
Inc. v. Kaplan, 514 U.S. 938, 945, 115 S. Ct. 1920 (1995) (stating that courts hesitate to find that,
in the face of silence or ambiguity, the parties gave the arbitrator the power to make the traditional
judicial determination “on the ‘who should decide arbitrability’ point”)). In such circumstances, the
court retained the power to decide the threshold arbitrability question, and the court found that the
dispute over Capstone’s intellectual property rights, which arose under Article V of the services
agreement, was not arbitrable under the venue clause. Id. at 14–15. Pursuant to this finding, the
court denied PoolRe’s motion to compel and stayed the second arbitration. Id. at 15–17; Tai Ping
Ins. Co., Ltd. v. M/V Warschau, 731 F.2d 1141, 1144 (5th Cir. 1984); see also Societe Generale de
Surveillance, S.A. v. Raytheon European Mgmt. & Sys. Co., 643 F.2d 863, 868 (1st Cir. 1981)
(Breyer, Circ. J.) (concluding that “[t]o allow a federal court to enjoin an arbitration proceeding
18
which is not called for by the contract interferes with neither the letter nor the spirit” of the Federal
Arbitration Act (“FAA”)).
6.
After the Court’s Order, the Feldman Entities Return to the Second Arbitration
On August 16, 2013, the Feldman entities filed a “First Amended & Restated Arbitration
Demand” (the “live demand”) in the second arbitration.20 Dkt. 23, Ex. 14. The live demand
included claims for “continuing breaches (those being post-final arbitration hearing of June 26–27,
2013) of the parties’ contractual agreements and the orders set forth in the Arbitration Award” and
Capstone’s claim for misuse of intellectual property that is “ancillary to the first proceeding.”21 Id.
at 3–5. The Feldman entities explained that they were holding the intellectual property claim, as to
Capstone only, in abeyance pending clarification of this court’s July 29, 2013 opinion. Id. at 5 n.4.
Specifically, the Feldman entities stated as follows:
[T]he claims of the Firm and PoolRe as to the misuse of confidential, proprietary and
trade secret information are intended to proceed in the [second arbitration], with only
Capstone’s claim stayed until the matter is addressed by Judge Miller.
Id. The OSI respondents’ counsel objected to this filing via email to Ramos on August 20, 2013,
arguing that the live demand violated this court’s stay order. Dkt. 14, Ex. A at 1. He demanded that
the Feldman entities withdraw the live demand and warned that “[f]ailure to withdraw the amended
filing and assure us of future compliance by this afternoon will be construed as the participants’
refusal to comply with our demand.” Id.
The Feldman entities did not comply with the request, and on August 21, 2013, the OSI
entities filed a motion for an order to show cause why the Feldman entities should not be held in
20
The Feldman entities state that this is the “live and updated arbitration demand” in the second arbitration and
“now lies at the heart of any ruling to be made by this Court.” Dkt. 23 at 13 (citing Dkt. 23, Ex. 14).
21
The Firm and PoolRe joined Capstone in asserting the intellectual property claim against the OSI respondents.
Dkt. 23, Ex. 14 at 5.
19
civil contempt. Dkt. 14. The motion argued that the Feldman entities were not complying with the
court’s stay order and should be sanctioned accordingly. Id. at 3–4. However, before a hearing on
the OSI entities’ motion, Ramos informed the parties that he would not proceed with the live
demand asserted in the second arbitration. Dkt. 24, Ex. A at 1 (“I find Judge Miller’s [stay] order
broad enough to cover any further arbitration of these claims.”).
7.
The OSI and Feldman Entities Return to This Court
On August 26, 2013, the Firm and Capstone formally joined the confirmation proceedings
as plaintiffs in this case. Dkts. 17–18. The Feldman entities concurrently filed a motion for leave
to file several motions, including the amended motion to confirm and compel. Dkt. 16. On October
9, 2013, the OSI entities filed a motion to lift the stay of the confirmation proceedings and a motion
to vacate the award in the first arbitration. Dkt. 26. On October 10, the court granted the Feldman
entities’ motion for leave to file (Dkt. 16) and the OSI entities’ motion to lift the stay (Dkt. 26). See
Dkt. 27 (court’s order).
The OSI entities filed their response to the pending motions on November 8, 2013, Dkt. 33,
and PoolRe filed a response to the motion to vacate on November 13, 2013. Dkt. 36.22 PoolRe
replied to the OSI entities’ response on November 18, Dkt. 38, and the OSI entities replied to
PoolRe’s response to the motion to vacate on November 20, 2013. Dkt. 40. The OSI entities’ reply
included the entire transcript of the first arbitration and two additional affidavits. See id., Exs. A–B.
PoolRe objected to the filing of additional evidence on reply and moved to strike the additional
exhibits from the court’s consideration of the motion to vacate. Dkt. 41. The OSI entities responded
to PoolRe’s motion to strike on December 6, Dkt. 42, and PoolRe replied on December 12. Dkt. 43.
22
Capstone and the Firm responded to the motion to vacate on March 26, 2014. See Dkt. 47.
20
In sum, the motions that remain pending before the court are as follows: (1) the Feldman
entities’ motion for leave to add defendants (Dkt. 20); (2) the Feldman entities’ motion to add the
captives as parties to the litigation (Dkt. 21); (3) the Feldman entities’ motion for leave to file excess
pages (Dkt. 22); (4) the Feldman entities’ amended motion to confirm and compel (Dkt. 23); (5) the
OSI entities’ motion to vacate (Dkt. 26-1); and (6) PoolRe’s motion to strike exhibits (Dkt. 41).
These motions are ripe for disposition.
8.
The Delaware Case Proceeds to Judgment
Before turning to its analysis, however, the court notes several recent developments in the
Delaware case. On February 12, 2014, Judge Andrews decided the pending motions to dismiss for
lack of subject-matter and personal jurisdiction.23 Dkt. 44, Ex. 1. Judge Andrews found a valid
arbitration clause, as modified by the venue clause in the services agreement. He construed the
contract parties’ agreements to establish the fora for resolution of disputes as follows:
Certain fee disputes would be handled by the Houston Bar Association. Article V
disputes belong in the Harris County courts. All other disputes must be resolved by
a Delaware arbitrator.
Id. at 4–5. Based on this holding, Judge Andrews explained that “[s]ince the integrated agreement
[the engagement letter and its attachments] requires arbitration except for limited circumstances not
present in this case, the motions to dismiss for lack of subject matter jurisdiction must be granted.”
Id. at 5. He further dismissed Feldman’s motion to dismiss for lack of personal jurisdiction as moot.
Id. at 5 n.5.
23
The defendants in the Delaware case, namely Feldman, the Firm, and Capstone, filed three motions to dismiss
that were pending at the time of Judge Andrews’s February order. Two of those motions sought dismissal and stay on
grounds that the parties’ dispute was covered by the relevant arbitration agreements and that the arbitrator’s rulings
precluded further consideration of these claims and issues. De. Case Dkts. 24, 40. Feldman filed a separate motion to
dismiss for lack of personal jurisdiction. De. Case Dkt. 26. Capstone’s previous motion to compel arbitration (Dkt. 4)
was withdrawn on August 16, 2013. De. Case Dkt. 42.
21
On February 26, 2014, Capstone and the Firm filed a motion for clarification or
reconsideration of Judge Andrews’s opinion. De. Case Dkt. 52. Capstone and the Firm requested
that Judge Andrews clarify that the arbitration agreement was unambiguous and enforceable, and
further find that he lacked jurisdiction to determine any other issue, such as venue, which they
claimed was the exclusive province of the arbitrator. Id. at 1–2. The OSI captive entities responded
to the motion for clarification with three pleadings filed on March 13, 2014. First, the OSI captive
entities responded that “[t]his Court’s ruling that a Delaware arbitrator must preside over any
proceeding is correct, binding, and needs no clarification.” De. Case Dkt. 53 at 1. Second, they filed
a motion to compel arbitration of the pending dispute before James Green, Sr., Esq., a Delaware
arbitrator. De. Case Dkt. 54 at 1. Lastly, the OSI captive entities filed a notice of appeal of Judge
Andrews’s decision. De. Case Dkt. 55. The United States Court of Appeals for the Third Circuit
subsequently issued an order staying the appeal pending the disposition of the pending motion for
reconsideration, De. Case Dkt. 58, and Capstone, the Firm, and Feldman filed a cross-appeal of
Judge Andrews’s ruling on Friday, March 21, 2014. De. Case Dkt. 59.
II. ANALYSIS
As discussed above, there are five pending motions before the court. The key motions are
the Feldman entities’ amended motion to confirm and compel and the OSI entities’ motion to vacate.
Because the court’s resolution of these motions resolves the remaining issues, the court evaluates
the amended motion to confirm first, which subsumes an analysis of the motion to vacate, and the
court then turns to the amended motion to compel.
A. The Amended Motion to Confirm & The Motion to Vacate
The Feldman entities re-urge their motion to confirm the arbitration award, contending that
the court should not wait for Judge Andrews’s decision, which was issued in February, regarding
22
the validity of the arbitration agreement in the billing guidelines. Dkt. 23 at 14–16. They further
argue that the court should confirm the award and respect Ramos’s decisions on jurisdiction and
merits of a dispute that was arbitrable under five separate arbitration agreements. Id.
The OSI entities disagree, responding that there is no valid arbitration agreement at issue
and, therefore, no valid arbitration award to confirm. Dkt. 33 at 1. The OSI entities further move
to vacate the award under Section 10 of the FAA on several grounds, including (1) Ramos’s alleged
misconduct; (2) Ramos’s alleged partiality toward the Feldman entities; and (3) Ramos’s assumption
of jurisdiction over the dispute in excess of his contractually-assigned powers. Id. at 7.
Because the court finds that Ramos incorrectly assumed jurisdiction over PoolRe’s claims
under reinsurance agreements mandating arbitration before the ICC, and that this decision requires
vacatur of the award, the court declines to address the OSI entities’ first two grounds in the motion
to vacate. After discussing the general law of arbitration under the FAA, including the standard for
vacating awards rendered in excess of an arbitrator’s jurisdiction, the court explains the reasons for
its decision in this case.
1. Background Law on Confirmation/Vacatur of Arbitration Awards
For nearly a century, the federal courts in this country, pursuant to a clear congressional
directive, have enforced parties’ agreements to arbitrate their disputes. See Stolt-Nielsen S.A. v.
AnimalFeeds Int’l Corp., 559 U.S. 662, 681–82, 130 S. Ct. 1758 (2010). The Federal Arbitration
Act, originally enacted as the United States Arbitration Act in 1925, provides that a “written
provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
9 U.S.C. § 2. Before the institution of arbitration proceedings, a party to a purported agreement may
23
request an order from a federal district court directing that “arbitration proceed in the manner
provided for in such agreement.” Id. § 4. Further, the FAA provides that when the parties agree to
the appointment method for an arbitrator or arbitral body, the agreed method “shall be followed.”
Id. § 5. With these contractual principles in mind, the Supreme Court has frequently reminded lower
courts that “private agreements to arbitrate are enforced according to their terms” because arbitration
“is a matter of consent, not coercion.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior
Univ., 489 U.S. 468, 479, 109 S. Ct. 1248 (1989); see also Mastrobuono v. Shearson Lehman
Hutton, Inc., 514 U.S. 52, 57–58, 115 S. Ct. 1212 (1995).
This adherence to contract law is essential to understanding the arbitrator’s power, which
is wholly derived from the parties’ agreement to utilize arbitration as a dispute resolution mechanism
in lieu of the judicial process. AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643,
648–49, 106 S. Ct. 1415 (1986) (“[A]rbitrators derive their authority to resolve disputes only
because the parties have agreed in advance to submit such grievances to arbitration”). Indeed,
arbitrators have “no general charter to administer justice for a community which transcends the
parties” but rather are “part of a system of self-government created by and confined to the parties.”
United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 581, 80 S. Ct. 1347
(1960) (internal quotation marks omitted).
Moreover, after the parties have participated in an arbitration, the confirmation of an
arbitrator’s award is a summary proceeding. Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us,
Inc., 126 F.3d 15, 23 (2d Cir. 1997). The court’s review at this stage is “exceedingly deferential.”
Apache Bohai Corp. LDC v. Texaco China BV, 480 F.3d 397, 401 (5th Cir. 2007) (internal quotation
marks omitted), overruled on other grounds by Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576,
584–86, 128 S. Ct. 1396 (2008). Exceeding deference, however, is not tantamount to a blind
24
rubberstamp. While the FAA commands that the court “‘must grant’” the motion to confirm, there
are several well-delineated exceptions that permit a denial of confirmation when “‘the award is
vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.’” Hall St., 552 U.S.
at 587 (quoting 9 U.S.C. § 9).
Under Section 10(a) of the FAA, the court “may make an order vacating the award” in the
following four circumstances: “(1) where the award was procured by corruption, fraud, or undue
means; (2) where there was evident partiality or corruption in the arbitrators . . .; (3) where the
arbitrators were guilty of misconduct . . .; or (4) where the arbitrators exceeded their powers . . . .”
9 U.S.C. § 10(a). The fourth exception, as discussed above, derives its force from the general rule
that an arbitrator’s powers are “‘dependent on the provisions under which the arbitrators were
appointed.’” Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672 (5th Cir. 2002) (quoting Szuts v. Dean
Witter Reynolds, Inc., 931 F.2d 830, 831 (11th Cir. 1991)). Arbitrators exceed those powers when
they act “contrary to express contractual provisions,” particularly regarding the scope of their
authority. Delta Queen Steamboat Co. v. AFL-CIO, 889 F.2d 599, 602, 604 (5th Cir. 1989) (holding
that “where the arbitrator exceeds the express limitations of his contractual mandate, judicial
deference is at an end”); see also Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013)
(citing E. Associated Coal Corp. v. United Mine Workers of Am., 531 U.S. 57, 62, 121 S. Ct. 462
(2000) (holding that “as long as [an honest] arbitrator is even arguably construing or applying the
contract and acting within the scope of his authority, the fact that a court is convinced he committed
serious error does not suffice to overturn his decision”) (internal quotation marks omitted and
emphasis added)). In other words, “[i]f the contract creates a plain limitation on the authority of an
arbitrator, [the court] will vacate an award that ignores the limitation.” Apache Bohai, 480 F.3d at
401; see also Smith v. Transp. Workers Union of Am., 374 F.3d 372, 374–75 (5th Cir. 2004). This
25
determination is not made lightly, however, and “[a] reviewing court examining whether arbitrators
exceeded their powers must resolve all doubts in favor of arbitration.” Action Indus., Inc. v. U.S.
Fid. & Guar. Co., 358 F.3d 337, 343 (5th Cir. 2004) (internal quotation marks omitted).
In Delta Queen, the Fifth Circuit construed a collective bargaining agreement’s arbitration
provision and found that although the arbitrator had jurisdiction to determine whether “proper
cause” existed for company discipline, he could not impose the disciplinary relief that was the sole
province of management. Delta Queen, 889 F.2d at 602–04. Consistent with Delta Queen,
subsequent decisions from the circuit have fashioned the following rule: If an arbitrator clearly
intrudes on an issue reserved for an alternative decisionmaker or that is removed from anyone’s
discretion, the arbitrator exceeds his powers. Am. Eagle Airlines, Inc. v. Air Line Pilots Ass’n, Int’l,
343 F.3d 401, 410–11 (5th Cir. 2003) (“[I]f the relevant bargaining agreement requires just cause
for dismissal, an arbitrator acts beyond his jurisdiction by fashioning an alternate remedy once it has
concluded—implicitly or otherwise—that an employee’s conduct constitutes just cause for
dismissal”); E.I. DuPont de Nemours & Co. v. Local 900 of the Int’l Chem. Workers Union, 968
F.2d 456, 459 (5th Cir. 1992) (affirming the district court’s determination that an arbitrator exceeded
his authority to determine a remedy after finding just cause for termination).
To be sure, the parties can agree to delegate the question of arbitrability to the arbitrator, but
the court will only give effect to such delegation when there is “clear and unmistakable” evidence
that the parties agreed to arbitrate arbitrability. First Options, 514 U.S. at 944–45; Petrofac, Inc.
v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674–75 (5th Cir. 2012); Apollo
Computer, Inc. v. Berg, 886 F.2d 469, 472–73 (1st Cir. 1989) (holding that incorporation of ICC
Rules into the parties’ arbitration agreement is clear and convincing evidence that the parties agreed
to “submit issues of arbitrability to the arbitrator”). But even if the court finds that an effective
26
delegation clause exists, that clause, by its very terms, delegates the arbitrability question to a
particular decisionmaker and sometimes a specific arbitral forum. See, e.g., In re Salomon Inc.
S’holders’ Derivative Litig., 68 F.3d 554, 561 (2d Cir. 1995).
In Salomon, for example, shareholders in Salomon Inc. and Salomon Brothers, Inc.
(collectively, “Salomon”) brought a derivative suit alleging securities and common-law claims
arising from the Treasury bond scandal that ultimately led to the bank’s acquisition by Traveler’s
Insurance Group in 1997. Id. at 555; Cynthia A. Williams, The Securities & Exchange Commission
& Corporate Social Transparency, 112 HARV. L. REV. 1197, 1278 n.419 (Apr. 1999) (discussing
the 1991 bond scandal as a potential factor weakening the investment bank and causing its
takeover).24 The defendants, including ex-Salomon officials, moved to compel arbitration under the
FAA at the New York Stock Exchange (“NYSE”), the forum designated by the agreements.
Salomon, 68 F.3d at 555. After the NYSE declined to arbitrate the dispute, the defendants returned
to the district court and sought the appointment of substitute arbitrators under Section 5 of the
FAA.25 Id. at 555–56. The district court denied the motion and set the case for trial in October
1995. Id. at 556.
Before the trial began, however, the defendants filed an interlocutory appeal of the court’s
decision to the Second Circuit Court of Appeals. Id. at 556–57. They argued that the arbitration
agreements did not meet the “clear and unmistakable” test from the Supreme Court’s First Options
24
In 1991, certain Salomon brokers made unauthorized bids during a T-bill auction that enabled the company
to obtain a near monopoly in the auction. Salomon, 68 F.3d at 556. Salomon’s general counsel learned of the potential
wrongdoing and notified upper management and the brokers’ supervisor. Id. Management did not pursue the allegations,
however, and federal authorities ultimately became involved when they discovered the bid-rigging. Id. The SEC and
the Department of Justice fined Salomon and levied millions of dollars in penalties related to the scandal. Id. Salomon’s
shareholders filed a derivative case in late 1991, and this and other related federal cases were consolidated before Judge
Robert Patterson of the Southern District of New York in Manhattan. Id.
25
Section 5 sets forth a procedure in which the district court can appoint a substitute arbitrator upon motion of
a party to an agreement, if there is a failure in appointing an arbitrator when “the agreement [provides] . . . for a method
of naming or appointing an arbitrator or arbitrators or an umpire.” 9 U.S.C. § 5.
27
case, and thus Judge Patterson retained his traditional authority to determine arbitrability. Id. at 557.
They then argued that his referral of the matter to the NYSE was an implicit finding that the matter
was arbitrable, and that he had the duty to name a substitute arbitrator or arbitrators under Section
5 when the NYSE proved unwilling or unable to perform. Id.
The plaintiffs responded that Judge Patterson complied with First Options because the
agreements did assign the power to determine arbitrability to the NYSE. Id. Alternatively, plaintiffs
argued that defendants waived the “who decides arbitrability” question by moving for him to refer
the matter to NYSE and not renewing the objection when the case returned to Judge Patterson. Id.
The Second Circuit found that it need not reach the First Options issue because the
decisionmaker determination for arbitrability was moot when there was no forum available for
arbitration under the parties’ agreements in any case. Id. at 557–58 (“[W]e cannot compel a party
to arbitrate a dispute before someone other than the NYSE when the party had agreed to arbitrate
disputes only before the NYSE and the NYSE, in turn, exercising its discretion under its
Constitution, has refused the use of its facilities to arbitrate the dispute in question.”) (citing NYSE
CONST. art. XI, § 3). Specifically, the court held that Judge Patterson properly declined to appoint
a substitute arbitrator under Section 5 because the language of the arbitration agreements indicated
that the parties had designated the NYSE as the exclusive arbitral forum and that designation was
“central to the parties’ agreement.” Id. at 561 (internal quotation marks omitted) (citing Nat’l
Iranian Oil Co. v. Ashland Oil, Inc., 817 F.2d 326, 333–35 (5th Cir. 1987) (“Not only did NIOC
[National Iranian Oil Company] choose Tehran as the site of any arbitration, but the contract also
provides that Iranian law governs the interpretation and rendition of any arbitral awards . . . . The
language of the contract thus makes self-evident the importance of Iranian law and Iranian
institutions to NIOC.”)). The Second Circuit cautioned district courts to resolve who determines
28
arbitrability initially before referring the overall dispute to arbitration. Id. However, because the
NYSE was the exclusive arbitral forum designated by the parties, the court found that “we will not
disturb Judge Patterson’s decision to proceed to trial.” Id. In essence, the Second Circuit found that
the identification of the arbitrability decisionmaker is moot if the named arbitral forum is essential
to the parties’ agreement and refuses to hear the dispute. Id.
In Ranzy v. Tijerina, the Fifth Circuit addressed a similar issue as the Second Circuit in
Salomon, specifically whether, and if so, when, the district court may compel arbitration in a
substitute forum after the designated arbitral forum becomes unavailable. Ranzy v. Tijerina, 393 F.
App’x 174 (5th Cir. 2010). Cheryl Ranzy had agreed to arbitrate her disputes with defendant Extra
Cash of Texas in a contract stating that disputes “shall” be resolved by the National Arbitration
Forum (“NAF”) pursuant to its rules and procedures. Id. at 175. When the dispute arose, however,
the NAF was no longer available because it stopped hearing those types of consumer claims. Id.
The district court denied the defendants’ motion to compel arbitration, finding that it lacked the
power to appoint a substitute arbitrator when the arbitral forum was chosen with “mandatory, not
permissive” language. Id. The Fifth Circuit agreed with the district court, holding that a court need
not compel arbitration to a substitute forum when the parties’ agreement sets forth an “exclusive
forum for arbitrating disputes” and that forum becomes unavailable. Id. at 176 (agreeing with the
Second Circuit’s holding in Salomon, which the court described as “indistinguishable” from the case
at bar).
While Salomon and Ranzy address the court’s power to compel arbitration when the
designated forum is unavailable, several courts have held that a material departure from the
appointment procedure in the contract warrants vacatur under Section 10 and bars enforcement of
the arbitral award. See Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672–73 (5th Cir. 2002); see also R.J.
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O’Brien & Assocs., Inc. v. Pipkin, 64 F.3d 257, 263 (7th Cir. 1995) (“[I]n order to enforce an
arbitration award, the arbitrator must be chosen in conformance with the procedure specified in the
parties’ agreement to arbitrate.”); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos,
25 F.3d 223, 226 (4th Cir. 1994); Avis Rent A Car Sys., Inc. v. Garage Emps. Union, 791 F.2d 22,
25 (2d Cir. 1986) (holding that an arbitrator who interpreted two agreements with conflicting
appointment clauses was without jurisdiction to construe the agreement precluding his appointment).
In Avis, a pay dispute between Avis Rent A Car System, Inc. (“Avis”) and one of its unions
arose when the parties could not agree as to which agreement controlled the issue of wages, as
between the “Association Agreement” and the “Avis Agreement.” Avis, 791 F.2d at 23. The union
sought arbitration under the procedures of the Association Agreement, which permitted arbitration
under certain circumstances before the New York State Board of Mediation (the “Mediation
Board”). Id. at 23–24. Avis contended that the dispute should be resolved pursuant to the
procedures in the Avis Agreement, which specified that the parties’ unresolvable issues under the
grievance procedures “‘shall be submitted to the American Arbitration Association under its rules
of procedure.’” Id. (quoting Section 3 of the Avis Agreement). Over Avis’s objection, the Mediation
Board appointed an arbitrator under the authority of the Association Agreement, which permitted
its involvement, rather than pursuant to the Avis Agreement, which did not. Id. at 24. Nevertheless,
with both agreements before him, the arbitrator subsequently issued an award that set the ultimate
rates of pay based on an implicit construction of the Avis Agreement. Id. Avis then moved to
vacate the award on grounds that the arbitrator exceeded his powers because he was without
jurisdiction to construe the Avis Agreement. Id. The district court confirmed the award, finding that
although the arbitrator’s appointment did not conform to the Avis Agreement’s procedures for AAA
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arbitration, the parties “received the essence of their bargain” and were not prejudiced by the
Mediation Board’s involvement. Id.
The Second Circuit reversed the district court’s order and vacated the award. Id. at 24–26.
The court held that because the arbitrator’s appointment was inconsistent with the Avis Agreement,
he had no power to construe that agreement. Id. at 25. The Avis court specifically found as follows:
[The district court’s opinion] fails to acknowledge that arbitration depends on the
consent of the parties to the contract. Under Article XX of the Avis Agreement, the
Union and Avis agreed to binding arbitration only by a person selected under AAA
rules. Courts generally enforce such clauses strictly, vacating awards entered by
arbitrators whose qualifications or method of appointment fail to conform to
arbitration clauses.
Id. Because the Mediation Board, and not the AAA, selected an arbitrator based on criteria not
contemplated by the Avis Agreement, the Second Circuit reversed and remanded with instructions
to the district court to “order the parties to place their dispute before an arbitrator selected under
AAA procedures.” Id. at 26.
In sum, Salomon and Ranzy hold that a district court may decide certain threshold matters
regarding the particular forum where arbitrable disputes—including arbitrability if the parties clearly
and unmistakably delegate that question—may be heard. Ranzy, 393 F. App’x at 176 (affirming the
district court’s denial of a motion to compel when the chosen, and essential, arbitral forum became
unavailable); Salomon, 68 F.3d at 561 (holding that the court’s failure to determine who decides
arbitrability was immaterial when the mandatory forum for any alternative dispute resolution was
unavailable, leaving judicial resolution as the only available option for the parties’ dispute).
Moreover, when an arbitration has already occurred, and an aggrieved party moves to vacate under
Section 10, Brook, Delta Queen, and Avis hold that a court must vacate the award when the
arbitrator lacks the jurisdiction to arbitrate the dispute because he was not the prescribed
decisionmaker or is otherwise appointed in a manner materially deviating from mandatory selection
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procedures. Brook, 294 F.3d at 673–74 (holding that the AAA must follow the procedures for
arbitrator selection but also finding that the losing party waived any error by failing to file a clear
written objection to a defect in the selection process); Delta Queen, 889 F.2d at 603–04 (vacating
an award because the arbitrator’s finding of proper cause for termination “divested [him] of further
jurisdiction over the matter. Any subsequent disciplinary decision became the sole responsibility
of [a different decisionmaker, the employer]”); Avis, 791 F.2d at 26 (precluding enforcement of an
award if arbitrator’s selection is a material departure from the method agreed to by the parties).
2.
Application of Law to the Facts
As a threshold matter, the court notes that its stay of confirmation proceedings was premised
on deference to Judge Andrews’s decision on the validity of the billing guidelines’ arbitration
agreement. Dkt. 12 at 17–19. Now that Judge Andrews has found that agreement to be valid, see
Dkt. 44, Ex. 1 at 4–5, the stay of confirmation proceedings is LIFTED. And for purposes of this
court’s analysis on the motion to confirm, the court need not disturb Judge Andrews’s decision and
assumes, arguendo, that the guidelines’ arbitration agreement permits arbitration of certain disputes.
Nevertheless, the court must consider three other arbitration provisions at issue in PoolRe’s
reinsurance agreements. PoolRe purportedly asserted its arbitration rights and intervened in the first
arbitration, filing claims for declaratory relief against the captives and asking that Ramos appoint
an Anguilla-based arbitrator. Dkt. 23, Ex. 17 at 24–25. However, on April 29, 2013, instead of
appointing another arbitrator, Ramos found that he had jurisdiction over PoolRe’s claims and that
PoolRe implicitly consented to arbitration in Houston by filing its intervention. Dkt. 23, Ex. 13 at
1. Ramos defended his assumption of jurisdiction in the award, stating that PoolRe was “properly
joined” in the first arbitration “pursuant to its own arbitration agreements and ancillary to the
otherwise pending arbitration.” Dkt. 6, Ex. 9 at 5 ¶ 5(iii).
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The OSI entities move to vacate the award on grounds that PoolRe may not intervene in an
arbitration initiated under agreements to which it was not a party. Dkt. 26-1 at 21. Further, the OSI
entities argue that PoolRe’s reinsurance agreements with the captives specified that arbitration of
their disputes would proceed “under the auspices of the ICC” and under ICC rules, neither of which
occurred. Id. at 21–22; Dkt. 33 at 17–18 & n.66 (explaining that Article 4 of the ICC Arbitration
Rules requires a request for arbitration be submitted to the ICC’s Secretariat, a procedure that was
not followed); see also Dkt. 26-1, Ex. C to Ex. 2 at 2 (email from the OSI respondents’ counsel in
which he objects to Ramos’s approval of an intervention over a dispute with agreements that require
arbitration before the ICC and under ICC rules, not the AAA expedited rules). The Feldman entities
argue that the court should defer to Ramos’s jurisdictional findings because he was delegated the
authority to decide arbitrability under the five contracts at issue. Dkt. 36 (PoolRe’s response to the
motion to vacate) at 13 (defending Ramos’s exercise of jurisdiction and procedural application of
the AAA expedited rules and stating that “[a]fter all, the right to arbitrate springs from consent”)
(citing AT&T Techs., 475 U.S. at 648–49); Dkt. 47 (the Firm and Capstone’s response to the motion
to vacate) at 2–7 (incorporating PoolRe’s objections to the motion to vacate and further contending
that Ramos’s jurisdictional rulings pursuant to the rules of both the AAA and ICC preclude judicial
review).
First, as a matter of general principle, the court agrees with the Feldman entities that
arbitration is a matter of consent and the parties to the reinsurance agreements agreed to delegate
arbitrability disputes by contracting for arbitration before the ICC and under its rules. Apollo, 886
F.2d at 472–73. But the terms of that agreement expose the fundamental flaw in the Feldman
entities’ logic. For the court to accept the arbitrator’s assumption of jurisdiction, that arbitrator must
be the actual decisionmaker that the parties selected as an integral part of their agreement. Salomon,
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68 F.3d at 560–61; Delta Queen, 889 F.2d at 603–04; Ranzy, 393 F. App’x at 176. PoolRe and each
captive did not consent to arbitration on the merits and threshold arbitrability matters before any
arbitrator applying any procedural rules whatsoever; rather, they agreed that arbitration “shall be
submitted” to the ICC under its rules of arbitration. See, e.g., Dkt. 6, Ex. 3 at 12 ¶ 3(A); cf. Oxford
Health, 133 S. Ct. at 2068 (reiterating the longstanding rule that an arbitrator exceeds his powers
when he acts “outside the scope of his contractually delegated authority”) (internal quotation marks
omitted). The submission to the ICC did not occur, and the award clearly states that the proceedings
were conducted under the AAA Commercial Arbitration Rules. Dkt. 6, Ex. 9 at 2. Further,
PoolRe’s intervention tainted the entire process and arbitration award because, among other things,
the Feldman entities (collectively referred to by Ramos as the “Claimants”) were awarded attorneys’
fees, expenses, and costs in the amount of $451,244.44 “to be divided among themselves as they see
fit,” id. at 4 ¶ 3, including expenses incurred by “Claimants” in the Delaware case, even though
PoolRe never appeared in any of the Delaware proceedings. Dkt. 38 at 5 (PoolRe’s categorical
assertion that “[i]t is undisputed that PoolRe never appeared or participated as a party in [the
Delaware] case—either in the state court proceeding or in the federal court action pending before
the Honorable Richard G. Andrews”).
In sum, consistent with Salomon and Ranzy, this court determines that the parties to the
reinsurance agreements selected the ICC, and application of its rules, as a mandatory and essential
condition of their agreement to arbitrate. Salomon, 68 F.3d at 560–61; Ranzy, 393 F. App’x at 176.
Ramos thus lacked jurisdiction to hear PoolRe’s claims against the non-consenting captives and
consolidate the claims into the first arbitration. This assertion of power, over the OSI respondents’
objection, warrants vacatur of the award. Brook, 294 F.3d at 673; Avis, 791 F.2d at 25–26.
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3.
Conclusion
Ramos lacked the authority to hear disputes among PoolRe and the three captives, and the
arbitration award based on a fatally-flawed jurisdictional assertion cannot stand. The Feldman
entities amended motion to confirm is DENIED, and the OSI entities’ motion to vacate is
GRANTED. The Feldman entities’ motion for leave to extend page limits is GRANTED. Lastly,
because the court arrives at its decision without the need to consider the exhibits attached to the OSI
entities’ reply brief, the Feldman entities’ motion to strike is DENIED AS MOOT.
B.
The Amended Motion to Compel
The Feldman entities request that the court reconsider its previous denial of the motion to
compel arbitration, contending that the court erred in failing to refer issues to Ramos that were
plainly arbitrable under the relevant agreements. Dkt. 23 at 16–22. The court need not reconsider
its July 29, 2013 order, however, because the live arbitration demand seeks to enforce relief arising
from the claims asserted in the first arbitration. Dkt. 23, Ex. 14 (the live demand) at 3–6. The
court’s order vacating that award precludes the relief requested in the second arbitration. For these
reasons, the Feldman entities’ amended motion to compel is DENIED.
Further, the denial of the amended motion to confirm and compel (Dkt. 23) also moots the
request to add Integration, Systems, and Optimal as defendants in this case. The Feldman entities’
motions for leave to add the captives as additional defendants (Dkts. 20–21) is therefore DENIED
AS MOOT.
III. CONCLUSION
The court is mindful that its review of arbitration awards is quite limited. Underlying these
limitations, however, is the recognition that agreements to arbitrate should be respected and their
terms enforced. Indeed, after the conclusion of an arbitration, the court cannot second guess the
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arbitrator’s jurisdiction and decision so long as “the arbitrator is even arguably construing or
applying the contract and acting within the scope of his authority.” United Paperworkers Int’l
Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 S. Ct. 364 (1987) (emphasis added) (quoted
in Oxford Health, 133 S. Ct. at 2068). Although rare, this case presents an example of the second
exception, in which an arbitrator assumed authority over a dispute that the parties’ agreements
mandated be referred to a different forum, namely the ICC. This error fundamentally prejudiced the
proceedings, and pursuant to its authority under the FAA, the court may not sanction relief relating
to the enforcement of the July 9, 2013 arbitral award.
For these reasons, the court adjudicates the remaining issues and motions as follows: (1) the
stay of the confirmation proceedings is LIFTED; (2) the Feldman entities’ amended motion to
confirm and compel (Dkt. 23) is DENIED; (3) the OSI entities’ motion to vacate (Dkt. 26-1) is
GRANTED; (4) the Feldman entities’ motion for leave to exceed page limits (Dkt. 22) is
GRANTED; (5) the motions for leave to add new defendants (Dkts. 20–21) are DENIED AS
MOOT; and (6) the Feldman entities’ motion to strike (Dkt. 41) is DENIED AS MOOT.
Signed at Houston, Texas on March 31, 2014.
___________________________________
Gray H. Miller
United States District Judge
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