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Ambac Assurance Corp. v. Knox Hills LLC

Court of Appeals of Kentucky

June 15, 2018



          BRIEF FOR APPELLANT: Sheryl G. Snyder Jason P. Renzelmann Louisville, Kentucky.

          BRIEF FOR APPELLEE: Palmer G. Vance II Matthew R. Parsons Lexington, Kentucky Thomas R. Johnson Courtney R. Peck Portland, Oregon.

          ORAL ARGUMENT FOR APPELLANT: Sheryl G. Snyder Louisville, Kentucky.

          ORAL ARGUMENT FOR APPELLEE: Thomas R. Johnson Portland, Oregon.



          KRAMER, JUDGE.

         This appeal involves a February 1, 2007 design/build agreement governing the rights of the several parties involved with a military housing construction and renovation project at Fort Knox, Kentucky. Specifically, on October 31, 2014, appellee Knox Hills, LLC (the owner of the project) filed a breach of contract action in Hardin Circuit Court against Ambac Assurance Corporation (the senior lender of the project) relating to what it characterized as Ambac's wrongful withholding of consent to a change order that would have substantially reduced the scope of the project. Additionally, Knox Hills sought an order staying the proceedings and compelling Ambac to arbitrate. For reasons discussed more thoroughly below, Ambac opposed Knox Hills' motion to compel arbitration.[1] The circuit court granted the motion. Following arbitration, the circuit court entered an order confirming the arbitrator's award in favor of Knox Hills. Ambac now appeals. Upon review, we reverse the circuit court in both respects and remand for further proceedings.

         There are two dispositive questions presented in this appeal. First, which tribunal should have determined whether arbitration was required between Knox Hills and Ambac? Second, was arbitration required? With respect to the first of these questions, the answer depends upon whether Ambac's refusal was based upon procedural arbitrability or substantive arbitrability -- a point that was recently and succinctly explained by the United States Court of Appeals for the Eighth Circuit:

Under the FAA, [2] arbitration agreements are deemed "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. But the FAA also imposes a basic principle: arbitration is a process of consent and not coercion. See Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 681, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010). "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (internal quotation marks omitted). Courts must therefore play a threshold role to determine "whether the parties have submitted a particular dispute to arbitration." Id.
These threshold or gateway issues are called substantive questions of arbitrability. Substantive questions include "whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy." Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003). Courts presume that substantive questions are "for judicial determination [u]nless the parties clearly and unmistakably provide otherwise." Howsam, 537 U.S. at 83, 123 S.Ct. 588 (alteration in original) (internal quotation marks omitted). Because arbitration is about consent of the parties, we "hesitate to interpret silence or ambiguity" in an agreement as grounds for committing such important questions to an arbitrator. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 945, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
Many questions that arise in the arbitration context are procedural or subsidiary questions that courts presume an arbitrator may decide. Howsam, 537 U.S. at 84, 123 S.Ct. 588. "Procedural questions arise once the obligation to arbitrate a matter is established, and may include such issues as the application of statutes of limitations, notice requirements, laches, and estoppel." Dell Webb Cmtys., Inc. v. Carlson, 817 F.3d 867, 873 (4th Cir.), cert. denied sub nom. Carlson v. Del Webb Cmtys., Inc., ___ U.S. ___, 137 S.Ct. 567, 196 L.Ed.2d 444 (2016). These are questions for an arbitrator both because the parties would most likely expect an arbitrator to decide them, see Howsam, 537 U.S. at 84, 123 S.Ct. 588, and because they do not challenge the arbitrator's underlying authority, see AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648-49, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986).

Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966, 970 (8th Cir. 2017) (footnote added).

         Here, Ambac refused to arbitrate Knox Hills' breach of contract action for two interrelated reasons. First, Knox Hills failed, prior to commencing arbitration, to submit its dispute to an "Advisor" described in the agreement. Second, Knox Hills and other relevant parties to the contract concededly failed to designate the "Advisor" within forty-five days after the agreement was executed on February 1, 2007.[3] To understand what this means, and whether it dealt with matters of substantive arbitrability (as Ambac argues) or procedural arbitrability (as the circuit court cited as its basis for allowing the ...

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