Originally from Dispute Resolution Journal

INTERNATIONAL/INSURANCE

Arbitration of Direct-Action Claim

Overturning its prior precedent, the 5th Circuit held that the Federal Arbitration Act (FAA) does not preclude a non-signatory who has a judgment against a bankrupt insured from being required to arbitrate his nonpayment claims against the insurer under Louisiana’s “direct action” statute. The appeals court expressed no opinion as to the effect of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) on direct action claims, concluding that whether the nonsignatory could be required to arbitrate under traditional principles of state law, or the arbitration rules to which the parties had agreed, had to be decided by the district court on remand.

Anthony Todd was injured while serving as a chef on the M/V American Queen, a steamboat owned and operated by Delta Queen Steamboat Co. Delta Queen filed for bankruptcy, but the bankruptcy court allowed Todd to sue and he obtained a judgment against Delta Queen, but was never paid. At the time of Todd’s injury, Steamship insured Delta Queen against liability for injuries to its employees.

Todd later sued Steamship in state court under the state direct action statute, seeking to collect on the judgment against Delta Queen. Steamship removed the case to federal court, where it filed a motion to stay the litigation under the FAA and to compel Todd to arbitrate under the New York Convention, which applied because Delta Queen’s insurance policy with Steamship purported to call for arbitration outside the United States.

The district court denied Steamship’s motions for a stay and to compel arbitration. It relied on Zimmerman v. International Companies & Consulting, Inc. (107 F.3d 344, 5th Cir. 1997), which held that a direct action plaintiff cannot be compelled to arbitrate under the FAA and a court cannot be compelled to stay a direct action plaintiff’s lawsuits during arbitration. Steamship appealed.

The 5th Circuit concluded that the U.S. Supreme Court decision in Arthur Andersen LLP v. Carlisle (No. 08–146, 2009 WL 1174853, 556 U.S. __, May 4, 2009) “effectively overruled” the Zimmerman decision by holding that “non-signatories to arbitration agreements (such as direct-action plaintiffs) may sometimes be compelled to arbitrate” under the arbitration agreement when “traditional principles” of state law, such as assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, and waiver and estoppel, allow a contract to be enforced by or against non-parties.

Therefore, the 5th Circuit reversed the district court’s decision in Todd and remanded the case for the district court to determine whether Todd could be compelled to arbitrate without regard to Zimmerman.