Abbeville fraud litigation leads to noteworthy arbitration case

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Supreme Court finds arbitration clause unenforceable against nonsignatories

Abbeville, SC

I found it hard to believe the South Carolina Supreme Court took 21 pages to hold an arbitration provision unenforceable against nonsignatories to the contract, but it did! In an April case involving insurance fraud in Abbeville County, the Supreme Court reversed the Court of Appeals, which had relied on an equitable estoppel theory to bind individual insureds to a contract between an insurance agency and the insurance companies*.

The case arose out of numerous lawsuits brought by individual insureds against an insurance agent, Laura Willis, her broker, their agency and six insurance companies for which their offices sold policies. The suits alleged Willis engaged in fraudulent conduct including forging insurance documents and converting cash payments to her own use, resulting in the insureds having no coverage or reduced coverage. Two of the lawsuits were brought by other insurance agents, alleging Willis engaged in illegal business practices that effectively blocked them from the local market, resulting in a substantial loss of clients and revenue.

The other defendants were alleged to have failed to properly investigate, train and supervise Willis, especially after she was fined, publicly reprimanded and place on probation for dishonesty by the South Carolina Insurance Commission in 2011. Alternatively, Willis was alleged to have acted with express or implied permission of the other defendants.

A full year into the litigation, three of the insurance companies filed motions to compel arbitration and dismiss the lawsuits. The arbitration clause in question was contained in a 2010 agency contract signed by the insurance companies and the insurance agency. The theory was that the insureds were third-party beneficiaries to the contract or were equitably estopped from asserting their nonparty status. The Circuit Court denied the motion to compel arbitration, but the Court of Appeals reversed and remanded, holding equitable estoppel should be applied to enforce arbitration against the nonsignatories because the individuals sought to benefit from other provisions in the agency agreement.

The Supreme Court stated that while arbitration is viewed favorably by the courts, it is predicated on an agreement to arbitrate because parties are waiving their fundamental right to access to the courts. The Court held that whether the provision is enforceable is a state law question, and that South Carolina has recognized several theories that could bind nonsignatories to arbitration agreements under general principles of contract and agency law, including (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, and (5) estoppel.

The estoppel argument is based on a direct benefits theory in South Carolina. Under that theory, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement.

In this case, according to the Supreme Court, the plaintiffs did not allege a claim of breach of the contract, and they were not even aware of the existence of the contract until arbitration was sought a year into the litigation. In the Court’s view, the plaintiffs did not knowingly exploit and receive a direct benefit from the agency agreement. The Agreement was purely for the benefit of its parties, outlining their business relationship.

The Court also stated that equitable estoppel is ultimately a theory designed to prevent injustice, and it should be used sparingly. This litigation will continue!

And I’ve reduced the 21-page case to less than 600 words for your reading pleasure. You’re welcome!

Wilson v. Willis, South Carolina Supreme Court Opinion 27879 (April 10, 2019)

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South Carolina lawyers: “Reply All” is not always your friend!

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Don’t communicate with represented parties accidentally!

business woman shocked computer

“Ruh-roh”

There are numerous ways a lawyer can get into trouble with the Supreme Court, but inadvertently communicating with another lawyer’s client can be avoided simply by thinking before hitting “Reply All” in your email system.

Ethics Advisory Opinion 18-04 addressed this concern. The situation posed to the Ethics Advisory Committee was:

Factual Background: Lawyer A sends an email to Lawyer B and copies several people, including Lawyer A’s client. Lawyer A has not previously consented to Lawyer B contacting Lawyer A’s client and does not expressly do so in the email.

Question:  If Lawyer B receives an email from Lawyer A on which Lawyer A’s client is copied, may the lawyer “reply to all” – copying Lawyer A’s client with the response – without the express consent of Lawyer A?”

The Committee discussed Rule 4.2, SCRPC, which provides that in representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter unless the lawyer has consent of the other lawyer or is authorized to do so by law or a court order.

The purpose of the rule is to ensure proper functioning of the legal system by protecting a party who is represented by counsel from overreaching by other lawyers. The rule is also aimed at preventing interference in the lawyer-client relationship.

Two previous opinions discussed whether letters can be ethically mailed to opposing parties represented by counsel. Ethics Advisory Opinion 91-02 advised prosecutors to avoid copying criminal defendants on court appearance notifications without the consent of the defense attorney. Similarly, Ethics Advisory Opinion 93-16 advised plaintiffs’ lawyers to avoid copying defendants on settlement offers to defense counsel without the consent of defense counsel.

The Committee opined that copying an opposing party on email is prohibited in the same way sending a letter is prohibited, absent consent of opposing counsel. The question then became whether consent must be express or may be implied. The Restatement (Third) of the Law Governing Lawyers indicates the consent may be implied: “An opposing lawyer may acquiesce, for example, by being present at a meeting and observing the communication. Similarly, consent may be implied rather than express, such as where such direct contact occurs routinely as a matter of custom, unless the opposing lawyer affirmatively protests.”

The North Carolina, Alaska and New York City Bar Committees had previously opined that, while this consent may be implied, the mere fact that an attorney copies a client on an email sent to opposing counsel does not, by itself, constitute implied consent to a response sent to both opposing lawyer and the opposing client. South Carolina’s Committee agreed.

The Committee stated, however, that consent to a “reply all” may sometimes be implied. The Committee indicated that whether the matter is adversarial is an important factor. Additionally consent may be implied if the email is about scheduling under circumstances whether the client’s availability is at issue along with counsels, if email conversations among counsel and sophisticated clients together are the normal course of dealing, or if the lawyer initially cc’d the client expressly invites a “reply all” response.

The Committee cautioned that the practice of copying a client by either “cc” or “bcc” when emailing opposing counsel poses the risk of revealing confidential information. The Committee said that the recipient of an email might not recognize all the names in a group email and might communicate with opposing client’s client inadvertently by using “reply all”.  For these reasons, the Committee said that it is generally unwise to “cc” a client on an email communication to opposing counsel.

The Committee summarized its opinion: “Absent consent of Lawyer A, Lawyer B may not communicate with Lawyer A’s client about the subject of the representation either directly or by copying Lawyer A’s client in an emails sent in response to Lawyer A’s email on which the client was copied. The mere fact that a lawyer copies his own client on an email does not, without more, constitute implied consent to a “reply to all” responsive email.

My advice? Use caution when hitting “reply all” in all circumstances! “Less is more” is a generally good rule to follow in email communications. I have actually heard that one lawyer may set up another lawyer by coping a client in email communications. Don’t be a victim!