Mon 08/20/2018 19:24 PM
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UPDATE 1: 7:24 p.m. ET 8/20/2018: This evening, the Noble defendants filed a notice of appeal of Judge Christopher Sontchi’s opinion granting in part and denying in part the Noble defendants’ motion to dismiss the Paragon litigation trust’s adversary proceeding against them in favor of arbitration.

Original Story 12:19 p.m. UTC on Aug. 6, 2018

Judge Sontchi Permits Arbitration of Unjust Enrichment Claim Against Noble Corporate Defendants, Orders Concurrent Arbitration and Litigation Proceedings

Relevant Document:
Opinion

Judge Christopher Sontchi this morning issued an opinion in the Paragon litigation trust’s adversary proceeding against Noble Corp. and related individual defendants, granting in part and denying in part the Noble defendants’ motion to dismiss the proceeding in favor of arbitration.

Judge Sontchi rules that the trust’s claim for unjust enrichment against the corporate defendants that signed the relevant agreements must proceed through arbitration. However, the judge declines to extend arbitration to claims against Paragon and Noble directors who are not signatories to the contract containing the arbitration provision and, rather, are expressly excluded from the arbitration provision. As to the Noble corporate defendants, Judge Sontchi grants the motion to compel arbitration as to Count VIII for unjust enrichment against those defendants but denies the motion for the remaining two counts for breach of fiduciary duty claims. The judge further permits arbitration of Count VIII and litigation of the remaining claims in bankruptcy court to proceed concurrently, ruling that “the very heart of the Complaint stems from the fraudulent conveyance” claims. “Ultimately, the Court sees no reason to delay litigation of the majority of the claims pending the resolution of one associated claim,” says the opinion.

Through the litigation trust’s adversary proceeding, the litigation trust seeks to avoid three intercompany notes - two in the amount of $678.6 million each and one in the amount of $353.3 million - and related note payments as fraudulent transfers. The trust also seeks damages resulting from the “misconduct of Noble and various individuals who enriched Noble at Paragon’s expense.”

The opinion notes that the defendants sought dismissal of counts VI to VIII, which relate to alleged breach of fiduciary duty, aiding and abetting breach of fiduciary duty and unjust enrichment, in favor of arbitration and further sought to stay any remaining litigation in the bankruptcy court pending arbitration. Judge Sontchi first finds that there is a strong federal presumption in favor of arbitration and that to the extent an arbitration clause is applied to a debtor-derivative, noncore matter, “the bankruptcy court does not have the authority to deny enforcement of the arbitration.” However, the opinion explains, only parties that have entered into a valid agreement can be forced to arbitrate and, as such, “a court must determine that (1) an enforceable agreement to arbitrate exists, and (2) the particular dispute falls within the scope of that agreement.”

Judge Sontchi turns to the trust’s argument that the plan and confirmation order confer to the bankruptcy court “exclusive jurisdiction” to “adjudicate the Noble Claims,” superseding the otherwise applicable arbitration provision in the contracts at issue. Judge Sontchi rules that this “does not seriously consider what it means for the adjudication” to occur “to the fullest extent permitted by law.” The opinion notes that the plan provides that the Noble entities “retain any and all rights and defenses against the Litigation Trust with respect to the Noble Claims,” which Judge Sontchi finds “surely also includes affirmative defenses, including arbitration.”

With respect to the trust’s argument that the arbitration provision cannot be enforced because Paragon had no capacity to agree “that any disputes as to arbitrability or the scope of issues and/or parties subject to arbitration must be decided by the arbitration panel,” the judge rules that a delegation provision in an arbitration agreement will only prove to be unconscionable when the challenging party proves “both substantive and procedural aspects … [as] decided by the court against the background of the contract’s commercial setting, purpose, and effect.” Judge Sontchi finds that the trust has not brought a challenge to the substantive terms of the arbitration provision and, therefore, there are not sufficient facts for the trust to prove substantive unconscionability.

“Because the parties appear to be in agreement on this issue,” the court assumes, without deciding, that New York state law is applicable in reviewing the enforceability of the arbitration provision. The opinion then finds that there is “clear and unmistakable evidence” that the Paragon and Noble entities intended to arbitrate questions of arbitrability. Judge Sontchi rules that it is clear that the master separation agreement, or MSA (which contains the arbitration clause), will apply at least to signatories of the agreements at issue and to corporate defendants represented by the signatories. Therefore, says the judge, any questions of arbitrability relating to these parties should be left to the arbitrator to decide.

However, with respect to nonsignatory defendants (the Paragon and Noble directors), the court rules that “there is no room for the interpretation that the Paragon and Noble Directors can compel the signatory, Paragon, to arbitration.” According to the opinion, there is no “evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes” and, in fact, “there is clear evidence that the parties expressly ruled out arbitrating their disputes.” To the extent that there are exceptions to these well-established principles, they apply only to the assignation or assumption of contracts, adds the opinion. “The conclusion to exclude the non-signatory Defendants not only prevents the Court from sending questions of arbitrability regarding the non-signatory Defendants to the arbitrator, but prevents enforcement of the Arbitration Provision by the non-signatory Defendants at all,” writes Judge Sontchi.

Finally, with respect to the defendants’ request for stay of the litigation in favor of arbitration, Judge Sontchi notes that “the allegations in the Complaint regarding Count VIII clearly tie back to the alleged non-arbitrable fraudulent transfer claims,” which concern certain obligations and payments surrounding notes to which Paragon was connected. Judge Sontchi writes that there is “no doubt” that Count VIII “revolves around the same conduct and facts as the constructive fraudulent transfer action.” The judge finds that the arbitration provision only applies to one of the three counts for which the defendants initially sought arbitration and, therefore, “the claims that predominate are clearly those that remain in this Court.” While “factually intertwined” claims may benefit from a stay of litigation, says the opinion, “that one element alone does not suffice to require a stay.” Rather, says the judge, “Count VIII does not present a critical and predominate part of the proceedings in the Complaint.” The opinion finds that the collateral estoppel problems established by the results of arbitration would be “limited.”

The judge heard oral argument in June.
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