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When Do The AAA Rules Govern Arbitrability? – Contracts and Commercial Law

McGlinchey’s Commercial Law Bulletin is a biweekly
update of recent, unique, and impactful cases in state and federal
courts in the area of commercial litigation. We’re pleased to
expand our Commercial Law Bulletin from its previous coverage of
Ohio case law to include additional areas in McGlinchey’s
footprint.


Ohio

Excess Sale Proceeds

Royal Oaks Landmark, LLC v. Royal Oak Cal, LLC,
12th Dist. Clermont No. CA2021-06-025, 2022-Ohio-1144

In this appeal, the Twelfth Appellate District affirmed the
trial court’s decision, agreeing that as the remaining sale
proceeds did not satisfy the lienholder’s full award it was
entitled to under the foreclosure order, there were no excess funds
to distribute and the judgment debtor was not entitled to receive
any of the remaining funds.

The Bullet Point: At issue in this dispute
was whether the judgment debtor was entitled to “excess
funds” allegedly remaining following the distribution of sale
proceeds in a foreclosure. Here, the plaintiff filed a foreclosure
action against the defendant judgment debtor and named the mortgage
holder as a defendant due to its senior lienholder interest and
position. The plaintiff obtained judgment and the trial court
ordered distribution of proceeds first to the clerk for costs,
second to the treasurer for property taxes, third to the senior
mortgage lienholder, and fourth to the plaintiff. After the
property was sold, the judgment debtor filed a motion to disburse
funds, alleging that the priority lienholders had been paid and
seeking a court order to “release the excess funds.” The
plaintiff objected, arguing it was a priority lienholder whose
judgment had not been fully satisfied and that there were no excess
funds. The motion to disburse funds was denied, the remaining sale
proceeds were awarded to the plaintiff, and the judgment debtor
appealed.

Ohio’s R.C. 2329.44 provides the statutory procedure for the
distribution of excess funds remaining after judicial sales.
Following a sale, if there are sale funds remaining after
satisfaction of the writ of execution, the remaining balance is
delivered to the clerk of court. R.C. 2329.44. Further, the clerk
of court is not required to pay the balance to the judgment debtor
or its legal representatives. Id.

Here, the trial court set the priority lienholders in its
foreclosure order. Following the court costs and property taxes,
the trial court named the mortgage lienholder as the third priority
interest and the plaintiff as the fourth priority interest.
Specifically, the plaintiff was awarded “up to the sum of
$911,412.46.” The property sold for $1,621,700, the mortgage
lienholder received its full distribution, and there was
$508,185.39 left to be distributed. The judgment debtor argued that
as the balance of the sale funds was held by the clerk, these were
“excess funds” to be distributed in accordance with R.C.
2329.44. Contrary to the judgment debtor’s allegation, the
plaintiff’s judgment had not been satisfied; the clerk simply
held the balance of the sale funds for resolution of the motion to
disburse. The appellate court explained that the funds held by the
clerk were more accurately characterized as “remaining
funds” subject to distribution to the next priority lienholder
as opposed to “excess funds.” Specifically, as there was
only $508,185.39 left to be distributed and the plaintiff’s
award was $911,412.46, it was “clear that plaintiff would not
receive the full award it was entitled to under the terms of the
foreclosure order.” As the plaintiff’s award was not fully
satisfied by the balance of the sale funds, there were no excess
funds available to the judgment debtor.

Contract Interpretation

Am. Steel City Indus. Leasing, Inc. v. Bloom Land
Co., LLC
, 11th Dist. Trumbull No. 2021-T-0013,
2022-Ohio-1004

In this appeal, the Eleventh Appellate District affirmed the
trial court’s decision, agreeing that the purchase agreement,
when read as a whole, was subject to only one reasonable
interpretation and did not demonstrate an intent by the parties to
temper the ordinary meaning of the term “equipment” in
such a way as to exclude the machinery in dispute.

The Bullet Point: At issue in this dispute
was whether a purchase agreement was clear and unambiguous or
whether parol evidence was necessary to clarify ambiguity. In Ohio,
if a contract is clear and unambiguous, its interpretation is a
matter of law and there is no issue of fact to be determined.
However, if a term cannot be determined from the four corners of
the contract, factual determination of intent or reasonableness may
be necessary to supply the missing term. In cases involving
contract interpretation, Ohio courts “start with the primary
interpretive rule that courts should give effect to the intentions
of the parties as expressed in the language of their written
agreement.” Further guidance is provided with other primary
interpretive rules, including the rule that “common words
appearing in a written instrument will be given their ordinary
meaning unless manifest absurdity results, or unless some other
meaning is clearly evidenced from the face or overall contents of
the instrument.” As the Supreme Court of Ohio has previously
explained, the rules of contract interpretation “must yield to
the intent of the parties, and when the parties clearly did not
intend [a] *** definition to apply, a court cannot force that
construction upon them.” As such, defined terms must still be
interpreted in the context of the entire agreement. “A
contract will not be interpreted literally if doing so would
produce absurd results, in the sense of rules that the parties,
presumed to be rational persons pursuing rational ends, are very
unlikely to have agreed to seek.”

Statute of Limitations for Breach of Contract

MOHAMMAD TABBAA, v. DR. HAZEM NOURALDIN, ET
AL.
, 8th Dist. Cuyahoga No. 110737,
2022-Ohio-1172

In this appeal, the Eighth Appellate District reversed the trial
court’s decision and remanded the case, finding that the
plaintiff’s breach of contract claim on the written contract
was timely filed under the applicable 15-year statute of
limitations in effect prior to the 2012 amendment of R.C. 2305.06
and that the plaintiff’s claim on the oral contract was
possibly subject to the six-year statute of limitations in effect
prior to 2021 amendment of R.C. 2305.07.

The Bullet Point: In Ohio, a
breach-of-contract claim accrues when the alleged breach causes
actual damages to the complaining party. R.C. 2305.06 provides
the statute of limitations for “contracts in writing” and
states that an action shall be brought within six years after the
cause of action accrued. Notably, R.C. 2305.06 was amended and
became effective June 16, 2021. As explained in an editor’s
note to the 2021 amendment, the limitations period for claims that
accrued prior to the 2021 effective date shall be the limitations
period in existence prior to 2021, or six years from the 2021
effective date, whichever occurs first. R.C. 2305.06 was also
amended in 2012. Per an editor’s note related to the 2012
amendment, the limitations period for causes of action that accrued
prior to the effective date of the 2012 amendment “shall be
eight years from the effective date of this act or the expiration
of the period of limitations in effect prior to the effective date
of this act, whichever occurs first.” The statute of
limitations applicable to written contracts prior to the 2012
amendment was 15 years. See Amendment Notes
to R.C. 2305.06.

Here, the plaintiff’s breach-of-contract action accrued as
early as 2010, before both the 2012 and 2021 amendments to R.C.
2305.06. Consequently, the 15-year statute of limitations applied
to the parties’ written contract and the plaintiff timely filed
his claim for breach of contract based on the written contract.
Ohio’s R.C. 2305.07 provides the statute of limitations for
“contracts not in writing.” Pursuant to R.C. 2305.07(A),
an action shall be brought within four years after the cause of
action accrued. R.C. 2305.07 was also amended and became effective
June 16, 2021. Likewise, the editor’s note to the 2021
amendment of R.C. 2305.07 explained that the limitations period for
claims under R.C. 2305.07(A) that accrued prior to the 2021
effective date shall be the limitations period in existence prior
to 2021, or four years from the 2021 effective date, whichever
occurs first. The statute of limitations for oral contracts in
effect prior to the 2021 effective date was six
years. See Amendment Notes to R.C.
2305.07.

Here, the appellate court noted evidence on the record that
suggested the plaintiff’s cause of action on the oral contract
may have accrued at some point between 2010 and 2016. In that
event, the six-year statute of limitations would apply to the
parties’ oral contract. Nevertheless, the plaintiff alleged
that his cause of action on the oral contract had not yet accrued
because the defendants had not yet deprived him of proceeds to
which he allegedly was entitled. As there was insufficient
information to make a determination as to whether the cause of
action on the oral contract accrued, the appellate court found the
trial court erred in granting summary judgment on the claim without
sufficient evidence to make such a determination on the applicable
statute of limitations.


Florida

Administrative Exemption of the Fair Labor Standards Act

Brown v. Nexus Business Solutions, No. 20-13909
(11th Cir. April 1, 2022)

The Eleventh Circuit examined whether certain employees were
covered by the administrative exemption of the Fair Labor Standards
Act (FLSA) provision requiring time-and-a-half compensation for
overtime.

The Bullet Point:  Under the FLSA,
employees who work over 40 hours per week are generally entitled to
time-and-a-half compensation for overtime. However, under the
administrative exemption, these overtime provisions do not apply to
employees working in “a bona fide executive, administrative,
or professional capacity.” An employee is an administrative
worker if (1) her salary exceeds the minimum established by the
regulation, (2) she mainly performs “office or non-manual work
directly related to the management or general business operations
of the employer” or its customers, and (3) her “primary
duty includes the exercise of discretion and independent judgment
with respect to matters of significance.”

At issue in this appeal was whether certain employees working as
“business development managers” fell under the
administrative exemption. Specifically, the parties disagreed on
whether the employees’ primary duties included the exercise of
discretion with respect to matters of significance. The Eleventh
Circuit identified several factors guiding this inquiry: whether
(1) the employee has the authority to make an independent choice,
free from immediate direction or supervision; (2) the work is not
mechanical, repetitive, recurrent, or routine; and (3) the work
relates to matters of significance which refers to the level of
importance or consequence of the work performed.

In reviewing these factors, the Eleventh Circuit determined the
employees’ primary duties included exercising discretion in the
performance of business development tasks, such as building
relationships and developing leads, which are matters of
significance from the perspective of the employer. The Eleventh
Circuit noted that a worker need not have limitless discretion or a
total lack of supervision to qualify as an administrative worker.
The Eleventh Circuit concluded the employees were not entitled to
overtime compensation because they are administrative workers who
fall within the administrative exemption of the FLSA and therefore
affirmed the district court’s grant of summary judgment to the
employer.

Agreement to Delegate Arbitrability Determinations to an
Arbitrator

Airbnb v. Doe, No. SC20-1167 (Fla. March 31,
2022)

The Florida Supreme Court held that where an agreement
incorporates by reference the American Arbitration Association
(AAA) Rules, the agreement clearly evidences the parties’
intent to empower an arbitrator to resolve questions of
arbitrability.

The Bullet Point:  Under the Federal
Arbitration Act, terms of service that incorporate by reference the
AAA Rules that expressly delegate arbitrability determinations to
an arbitrator constitute “clear and unmistakable”
evidence of the parties’ intent to empower an arbitrator,
rather than a court, to resolve questions of arbitrability.

At issue in this case was whether the respondents agreed to
empower an arbitrator to decide questions of arbitrability by
agreeing to be bound by petitioner Airbnb’s Terms of Service.
The issue first arose when the respondents brought litigation
against Airbnb in the circuit court and Airbnb moved to compel
arbitration. The circuit court granted the motion to compel,
concluding that the parties entered an express agreement that
incorporated the AAA rules and were therefore bound to submit the
issue of arbitrability to the arbitrator. On appeal, the Second
District reversed the circuit court’s order compelling
arbitration, ruling that the Terms of Service did not clearly and
unmistakably evidence the parties’ intent to delegate questions
of arbitrability to an arbitrator. The Second District reasoned the
reference to the AAA Rules in the Terms of Service was broad,
nonspecific, and cursory because it simply identified the entirety
of a body of procedural rules, and the reference was actually
limited to how the arbitration was supposed to be administered.

The Florida Supreme Court, however, disagreed with the reasoning
of the Second District and quashed its decision, instead agreeing
with Airbnb and the circuit court that the parties clearly and
unmistakably agreed that an arbitrator decides questions of
arbitrability when they agreed to Airbnb’s Terms of Service.
The Court noted that the Terms of Service explicitly incorporate by
reference the AAA Rules, provided a hyperlink to the AAA Rules, and
provided a phone number for the AAA. The Court further noted that
the incorporated AAA Rules specifically state that the arbitrator
has the power to rule on the arbitrability of any claim or
counterclaim, and the “administered” language in the
Terms of Service apply at the outset of a claim before arbitration
has commenced. The Court therefore concluded that because
Airbnb’s Terms of Service incorporated by reference the AAA
Rules that expressly delegated arbitrability determinations to an
arbitrator, the agreement clearly and unmistakably evidenced the
parties’ intent to empower an arbitrator, rather than a court,
to resolve questions of arbitrability.

Admissibility of Deposition Testimony Under the Business
Records Exception

Roberts v. Direct Gen Ins., No. 2D21-195 (Fla.
2d DCA March 30, 2022)

The Second District held the business records exception is
inapplicable to admit deposition testimony concerning the contents
of business records where the records were not offered into
evidence.

The Bullet Point:  While the business
records exception allows the admission of a memorandum, report,
record, or data compilation, it does not authorize the admission of
hearsay testimony concerning the contents of business records that
have not first been admitted into evidence.

In this appeal, the Second Circuit specifically wrote to address
the trial court’s findings pertaining to the admissibility of
deposition testimony under the business records exception to the
hearsay rule. At issue was the trial court’s decision to grant
a motion for summary judgment that relied upon deposition testimony
concerning the contents of business records but did not include the
records as part of the summary judgment evidence. The trial court
granted the motion, reasoning that the deposition testimony was
admissible under the business records exception. The Second
District disagreed with that reasoning, concluding the deposition
testimony was admissible only as testimony from personal knowledge.
The Second District held that the trial court’s reliance on the
business records exception was misplaced, as it does not authorize
the admission of deposition testimony concerning the contents of
business records without having first admitted those business
records.

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