Articles Posted in Litigation

When entering into a contract it is important to read all the terms, especially the general provisions near the end of the agreement. Oftentimes those provisions state that a party must waive their right to a jury trial and settle all disputes arising from the contract by arbitration. Arbitration is an alternative to the judicial system when it comes to settling disputes. Each party chooses an arbitrator, which is usually a lawyer or former judge with experience in the subject matter, and then agree on a third, neutral arbitrator to comprise a panel. Generally, their decision is binding and final. It pays to hire a good attorney if you find yourself on the wrong end of an arbitration decision.

Recently, Medistar Home Health of Baton Rouge (“Medistar”) contracted to buy from Lakeview Home Care, LLC (“Lakeview”) the property rights and assets used in the operation of a home health agency. The parties agreed on a purchase price of $4,250,000. Lakeview financed a portion of the price through a $1,250,000 promissory note. The note required Medistar to make five annual payments of $250,000 with a seven percent interest rate.

Medistar did not make its first payment and claimed that Lakeview owed it for breaching their Asset Purchase Agreement and causing Medistar to suffer losses. An arbitration panel awarded Medistar $350,000 in costs and attorney’s fees. However, in Louisiana there is a law that permits parties to request a court to confirm an arbitration award or vacate or modify the award within one year after an arbitration decision. The court will only vacate an arbitration award if it was procured by corruption or misconduct of the arbitrators.

Parties to a lawsuit are required to submit evidence in support of their claim. Depending on the piece of evidence, the court may demand very specific evidence; and in such circumstances, complying with the mere spirit of the order to produce evidence may not be enough for the court. A party who does not provide the evidence requested by the court may be held in contempt as one Louisiana plaintiff recently found out the hard way.   

The case arose from a dispute regarding the right to harvest particular tracts of timber. The plaintiffs in the original case were the owners of the land, Paradise Land and Lake, LLC, and Paradise Rod and Gun, Inc. (“Paradise”). In 1998, an Act of Exchange was executed between Paradise and Roy O. Martin Lumber Company, Inc. (“Martin”). According to the document, Martin bought the merchantable timber, but with a limitation of one harvest during a twenty-five period. In 2008, as a result of a pair of Timber Rights Agreements between Martin and Louisiana Hardwood Products, LLC and Louisiana Hardwood Forestlands, LLC (“Louisiana Hardwood”), Martin’s right to harvest timber was transferred to Louisiana Hardwood for the remainder of the twenty-five years stipulated by the original agreement.

Before transferring rights to Louisiana Hardwood, Martin had harvested timber on two portions of the property. Per the terms of the original agreement, Louisiana Hardwood did not have the right to harvest timber from either of these two areas; however, when Louisiana Hardwood attempted to harvest timber from other portions of the property, timber from the disallowed area was taken.

How do you know whether an arbitration provision in a contract applies? The easy answer: read the contract. If you are a member of a company that provides services to you, such as financing your small business needs, you must be sure to closely read any and all documentation relating to the services provided and what you can do if you are dissatisfied with the company’s work. Companies will often include an arbitration and mediation clause in their contracts with individual members. This means that instead of suing the company in a court of law, the dispute would first have to be arbitrated by an independent third party and an attempt at mediation would have to be made. In Louisiana, companies frequently create operating agreements that function as contracts between owners and members. These operating agreements use a lot of boiler plate language that is ultimately enforced. In fact, Louisiana law favors arbitration. See La. R.S. 9:4201; see also  v. Auction Mgmt. Corp., 908 So.2d 1, 18 (La. 2005).

In May 2014, eleven members of a small business financing company, North Louisiana Bidco, LLC (NLB), filed a lawsuit to enforce their rights to examine NLB’s financial and other records. The eleven members became concerned when NLB was sued by various clients and incurred a bad debt expense of $6 million, which showed on the company’s 2013 financial statements. In response, NLB raised the exception of prematurity. NLB argued that the company’s operating agreement required the members of the company to mediate their disputes amongst themselves and if mediation failed, to submit disputes for arbitration. The members that were suing the company in this instance opposed the prematurity argument and asserted that this dispute was not one “among members” but instead was between the body of the membership itself and the management of the company. The Trial Court upheld the prematurity exception. It held that this was indeed a dispute between members and the mediation and arbitration clause applied.

When the members of NLB appealed the Trial Court’s decision they argued that this dispute was a demand by the members of the company against the company itself. The members were attempting to enforce their own rights to view the company’s records rather than trying to enforce any rights against the other members. The Second Circuit Court of Appeal agreed with the eleven members stating that this was not a dispute between members. Therefore, in the absence of such a dispute between members, the arbitration clause could not be enforced. In addition, the Court of Appeal pointed out that for the arbitration clause to be triggered, the action must have been a dispute arising among members relating to the operating agreement. The operating agreement at issue here made it clear that members had the right to inspect the company’s books and records and no party disputed this fact. Because there was no dispute relating to the agreement and because the dispute was ultimately not between members, the Court of Appeal held that the arbitration clause did not apply and the members would be allowed to bring a lawsuit against the company.