Sharon M. Porcellio
Sharon M. Porcellio ()

In the context of a reverse-race discrimination claim under Title VII of the Civil Rights Act, the Western District analyzed whether a corporation is an individual under a bankruptcy provision excepting plaintiff’s claim from discharge. In another case, a judge refused to compel arbitration finding the arbitration provisions substantively unconscionable in a decision chock full of interesting footnoted related discussions.

In Fantigrossi v. Am. Eagle Airlines, 2017 U.S. Dist. LEXIS 28229 (W.D.N.Y. Feb. 28, 2017), Chief Judge Frank P. Geraci Jr. analyzed a company’s ability to extinguish potential Title VII claims through Chapter 11 bankruptcy proceedings. Plaintiff commenced a Title VII action against his former employer, American Eagle Airlines (AEA), for alleged reverse-race discrimination after AEA terminated his employment.

Plaintiff’s complaint stemmed from an incident that occurred while plaintiff sat with two African American colleagues in the AEA’s employee breakroom using his personal laptop computer. One colleague asked plaintiff if he had seen comedian Katt Williams’ comedy routines. 2017 U.S. Dist. LEXIS 28229 at *2. After plaintiff said he had not, his colleague used plaintiff’s laptop to play one of the routines. While watching the routine with his colleagues, an AEA compliance coordinator entered the breakroom, hearing the comedian making claimed racial slurs. The compliance coordinator complained to plaintiff and his colleagues that the comedian’s language was inappropriate and took plaintiff’s laptop.

About five months later, AEA’s general manager instructed plaintiff to prepare a written report about the incident. Plaintiff asked the general manager whether plaintiff’s African American colleagues were also being questioned regarding the breakroom incident. The general manager indicated they were not and terminated plaintiff on Nov. 18, 2011. Plaintiff filed a grievance with AEA seeking a reversal of his termination decision. After a grievance hearing on Dec. 9, 2011, AEA upheld the termination. Plaintiff commenced this case on April 29, 2013, which was automatically stayed because of AEA’s bankruptcy.

On Nov. 29, 2011, AEA and its parent company, AMR Corporation (AMR), filed for Chapter 11 bankruptcy protection. The bankruptcy court later entered a “Bar Date Order” of July 16, 2012, as the deadline for any person or entity to file a claim for any claim that arose prior to the filing of the bankruptcy petition. The bankruptcy court discharged AMR from all debts and claims that existed before Dec. 9, 2013, the effective date of the reorganization plan. After confirmation of the reorganization plan, this court lifted the stay of plaintiff’s case. AEA responded to plaintiff’s complaint by filing a motion to dismiss.

AEA argued that because plaintiff failed to file a proof of claim in the Chapter 11 proceeding, any potential employment discrimination claims were discharged under Bankruptcy Code §1141, which discharges a debtor from debts that arose before the date of the confirmation regardless of whether proof of the debt was filed. Id. at *6. Plaintiff contended that his termination date placed him outside the bankruptcy court’s purview because he was terminated after AEA filed bankruptcy and that his claim is not dischargeable as a matter of law under the Bankruptcy Code. This court, however, found plaintiff’s arguments meritless.

Judge Geraci focused on when plaintiff’s claims actually arose, since “a claim arises, for the purposes of discharge … at the time of the events giving rise to the claim, not at the time plaintiff is first able to file suit on the claim.” Id. at *7. Employment discrimination cases arise on the date the employee learns of the employer’s discriminatory conduct. Id. Plaintiff’s complaint did not support his position that he was terminated after AEA filed for bankruptcy. AEA terminated his employment on Nov. 18, 2011. The grievance procedure plaintiff pursued did not extend his claim’s accrual date as the “existence of a grievance procedure in no way suggests that a decision to terminate is tentative.” Id. at *9. Plaintiff also argued that his claim was non-dischargeable under 11 U.S.C. §523(a)(6) because of AEA’s willful and malicious conduct. That provision provides that a debt may not be discharged where an “individual debtor” causes willful or malicious injury to another entity. Id. at *11. The court’s analysis focused on whether the term “individual” included “corporate entities” such as AEA. Id. at *12. After analyzing the statutory and ordinary meaning of the word “individual,” the court held that the word, within the application of §523(a), did not apply to corporations and Congress’ legislative intent was to exclude corporations from §523(a). The court thus dismissed plaintiff’s action with prejudice.

Unconscionable Agreements

In Eisen v. Venulum, 2017 U.S. Dist. LEXIS 44504 (W.D.N.Y. March 27, 2017), plaintiff, a New York state resident, commenced an action for alleged violations of the Securities Acts of 1933 (1933 Act) and 1934 and related state law claims after investing with defendant corporation, Venulum. 2017 U.S. Dist. LEXIS 44504 at *1. Venulum, incorporated in the British Virgin Islands (BVI), with its principal place of business in Canada, solicited business investments from plaintiff. Plaintiff later entered into a contract with Venulum.

The first contract between plaintiff and Venulum in 2008 contained an arbitration clause that provided that any binding arbitrations must occur in the BVI, and apply BVI’s law. Within about two years of signing that contract, plaintiff alleged that he wanted to liquidate his approximately $122,480 investment. Despite a prior contrary representation that he could liquidate at any time on 10 days’ notice, a Venulum representative stated plaintiff could not liquidate his investments unless he signed a second contract and invested an additional $100,000. He was also told he would lose most of his prior investment if he did not sign the second contract. Plaintiff signed a second contract which contained essentially the same arbitration clause as the first contract.

In 2012, the Securities and Exchange Commission (SEC) charged Venulum and its principal with violating the 1933 Act. As part of a settlement agreement with the SEC and other state regulators, Venulum and its principal entered into Consent Order under which they were “permanently restrained and enjoined from violating Section 5 of the Securities Act, by selling any security in the United States without registering with the SEC.” Id. at *6. After learning of the Consent Order, plaintiff requested that Venulum return his investment and liquidate his account. Plaintiff alleged that he was required to enter into yet another contract before he could obtain his money from Venulum. At alleged risk of losing his entire investment, he entered into a third contract. Similar to the previous contracts, the third contract also contained an arbitration clause providing for BVI law and arbitration in the BVI.

After plaintiff commenced this action, defendants moved to compel arbitration under the three contracts and to dismiss plaintiff’s action. Plaintiff, in response, asserted that Venulum’s arbitration clauses were void and unenforceable and that the court lacked jurisdiction to compel arbitration in BVI.

The first issue Judge Elizabeth A. Wolford addressed was which contract’s arbitration terms applied. The court ruled that the third contract applied since its terms superseded the other agreements. In reaching this conclusion, the court examined the general language of the agreements and the general intent of the parties in forming each agreement. For instance, the court reasoned that the parties intended that the third contract supersede the prior contracts because it “established the terms and conditions for ‘any’ transaction between Plaintiff and Venulum regarding the sale of wines or champagne.” Id. at *16. (See also discussion of use of arbitration clauses by non-signatories. Id. at *11, fn. 2.) Although the court held that Venulum’s third contract with plaintiff superseded all prior agreements, the court chose to address the validity and applicability of the arbitration clauses under both the second and third contracts.

Judge Wolford then examined the validity of the arbitration provisions and whether they were enforceable. Before a court can compel arbitration, it is required to decide: “(1) whether the arbitration agreement is valid; and (2) whether the dispute is within the scope of the arbitration agreement.” Id. at *17. In examining the validity of arbitration clauses, the court stated that under the Federal Arbitration Act (FAA), arbitration clauses are a matter of contract law, and as such, they may be invalidated by general contract defenses. Defendants argued that it is the arbitrator, not the court, which has the power to determine whether arbitration clauses are valid because the arbitration clauses involved in this case reference the International Chamber of Commerce (ICC) arbitration rules. Id. at *20. In support of their argument, the defendants relied on Shaw Group v. Triplefine Int’l, 322 F.3d 115 (2d Cir. 2003), which provided that if parties agree to include the ICC’s arbitration rules in a contract, this shows an agreement on behalf of the parties to “arbitrate arbitrability,” and a court should defer questions of arbitration clause’s validity to the arbitrator. 2017 U.S. Dist. LEXIS 44504 at *20. Judge Wolford, however, found defendants’ arguments unpersuasive.

She noted that although an arbitrator can determine arbitrability, this can occur only where the party seeking arbitration shows a “clear and unmistakable expression” that the parties intended to submit arbitrability disputes to arbitration. Id. at *21. The court reasoned that although the arbitration clauses in the contracts contained a provision that ICC’s rules will control during arbitrations, defendants’ reliance on the Shaw Group case is incorrect because of a textual change in the ICC’s rule. The text of the ICC’s Rule 6.2, in place when Shaw Group was decided, provided that an arbitrator determined the validity of an arbitration agreement if any party contested the validity of the arbitration agreement. Id. at *22. This rule was amended and later renumbered Rule 6.3. The revised ICC rule now provides that “if any party against which a claim has been made,” raises an arbitration clause’s validity then an arbitrator determines the validity of the arbitration agreement. Id.

Plaintiff and defendants disagreed over what the change in the language meant. In reaching her decision, Judge Wolford disagreed with other courts in the Second Circuit, id. at *23, fn. 4, and accepted the plaintiff’s interpretation that the revised language in ICC’s Rule 6.3 meant that an arbitrator determines validity of an arbitration clause “only if the party against whom a claim is asserted challenges the validity of the clause.” Id. at *22. As a result, the court found that ICC’s Rule 6.3 does not relegate the issue of validity to the arbitrator in this case because plaintiff is the party asserting a claim and arguing that the arbitration clauses are invalid.

Unconscionable Clauses

The court then examined whether plaintiff could void the arbitration clauses in the contracts as unconscionable. Although both sides agreed that New York law controlled the issue of unconscionability, the court, sitting in New York, used New York choice-of-law rules and applied New York law to determine whether the arbitration clauses were unconscionable. Judge Wolford assessed arguments as to whether the arbitration clauses were procedurally or substantively unconscionable. She found plaintiff’s argument that the arbitration clauses were procedurally unconscionable unpersuasive and focused instead on whether plaintiff’s case constituted an “exceptional case” where substantive unconscionability can be found. Id. at *32. Judge Wolford found that not only were the arbitration clauses substantively unconscionable, they were also void as a matter of public policy. The arbitration clauses shielded defendants from federal securities laws by applying BVI law in their arbitration agreements, and as such, it would be against public policy compel arbitration under these provisions. As a result, defendants’ motion to compel arbitration was denied.

In the context of a reverse-race discrimination claim under Title VII of the Civil Rights Act, the Western District analyzed whether a corporation is an individual under a bankruptcy provision excepting plaintiff’s claim from discharge. In another case, a judge refused to compel arbitration finding the arbitration provisions substantively unconscionable in a decision chock full of interesting footnoted related discussions.

In Fantigrossi v. Am. Eagle Airlines, 2017 U.S. Dist. LEXIS 28229 (W.D.N.Y. Feb. 28, 2017), Chief Judge Frank P. Geraci Jr. analyzed a company’s ability to extinguish potential Title VII claims through Chapter 11 bankruptcy proceedings. Plaintiff commenced a Title VII action against his former employer, American Eagle Airlines (AEA), for alleged reverse-race discrimination after AEA terminated his employment.

Plaintiff’s complaint stemmed from an incident that occurred while plaintiff sat with two African American colleagues in the AEA’s employee breakroom using his personal laptop computer. One colleague asked plaintiff if he had seen comedian Katt Williams’ comedy routines. 2017 U.S. Dist. LEXIS 28229 at *2. After plaintiff said he had not, his colleague used plaintiff’s laptop to play one of the routines. While watching the routine with his colleagues, an AEA compliance coordinator entered the breakroom, hearing the comedian making claimed racial slurs. The compliance coordinator complained to plaintiff and his colleagues that the comedian’s language was inappropriate and took plaintiff’s laptop.

About five months later, AEA’s general manager instructed plaintiff to prepare a written report about the incident. Plaintiff asked the general manager whether plaintiff’s African American colleagues were also being questioned regarding the breakroom incident. The general manager indicated they were not and terminated plaintiff on Nov. 18, 2011. Plaintiff filed a grievance with AEA seeking a reversal of his termination decision. After a grievance hearing on Dec. 9, 2011, AEA upheld the termination. Plaintiff commenced this case on April 29, 2013, which was automatically stayed because of AEA’s bankruptcy.

On Nov. 29, 2011, AEA and its parent company, AMR Corporation (AMR), filed for Chapter 11 bankruptcy protection. The bankruptcy court later entered a “Bar Date Order” of July 16, 2012, as the deadline for any person or entity to file a claim for any claim that arose prior to the filing of the bankruptcy petition. The bankruptcy court discharged AMR from all debts and claims that existed before Dec. 9, 2013, the effective date of the reorganization plan. After confirmation of the reorganization plan, this court lifted the stay of plaintiff’s case. AEA responded to plaintiff’s complaint by filing a motion to dismiss.

AEA argued that because plaintiff failed to file a proof of claim in the Chapter 11 proceeding, any potential employment discrimination claims were discharged under Bankruptcy Code §1141, which discharges a debtor from debts that arose before the date of the confirmation regardless of whether proof of the debt was filed. Id. at *6. Plaintiff contended that his termination date placed him outside the bankruptcy court’s purview because he was terminated after AEA filed bankruptcy and that his claim is not dischargeable as a matter of law under the Bankruptcy Code. This court, however, found plaintiff’s arguments meritless.

Judge Geraci focused on when plaintiff’s claims actually arose, since “a claim arises, for the purposes of discharge … at the time of the events giving rise to the claim, not at the time plaintiff is first able to file suit on the claim.” Id. at *7. Employment discrimination cases arise on the date the employee learns of the employer’s discriminatory conduct. Id. Plaintiff’s complaint did not support his position that he was terminated after AEA filed for bankruptcy. AEA terminated his employment on Nov. 18, 2011. The grievance procedure plaintiff pursued did not extend his claim’s accrual date as the “existence of a grievance procedure in no way suggests that a decision to terminate is tentative.” Id. at *9. Plaintiff also argued that his claim was non-dischargeable under 11 U.S.C. §523(a)(6) because of AEA’s willful and malicious conduct. That provision provides that a debt may not be discharged where an “individual debtor” causes willful or malicious injury to another entity. Id. at *11. The court’s analysis focused on whether the term “individual” included “corporate entities” such as AEA. Id. at *12. After analyzing the statutory and ordinary meaning of the word “individual,” the court held that the word, within the application of §523(a), did not apply to corporations and Congress’ legislative intent was to exclude corporations from §523(a). The court thus dismissed plaintiff’s action with prejudice.

Unconscionable Agreements

In Eisen v. Venulum, 2017 U.S. Dist. LEXIS 44504 (W.D.N.Y. March 27, 2017), plaintiff, a New York state resident, commenced an action for alleged violations of the Securities Acts of 1933 (1933 Act) and 1934 and related state law claims after investing with defendant corporation, Venulum. 2017 U.S. Dist. LEXIS 44504 at *1. Venulum, incorporated in the British Virgin Islands (BVI), with its principal place of business in Canada, solicited business investments from plaintiff. Plaintiff later entered into a contract with Venulum.

The first contract between plaintiff and Venulum in 2008 contained an arbitration clause that provided that any binding arbitrations must occur in the BVI, and apply BVI’s law. Within about two years of signing that contract, plaintiff alleged that he wanted to liquidate his approximately $122,480 investment. Despite a prior contrary representation that he could liquidate at any time on 10 days’ notice, a Venulum representative stated plaintiff could not liquidate his investments unless he signed a second contract and invested an additional $100,000. He was also told he would lose most of his prior investment if he did not sign the second contract. Plaintiff signed a second contract which contained essentially the same arbitration clause as the first contract.

In 2012, the Securities and Exchange Commission (SEC) charged Venulum and its principal with violating the 1933 Act. As part of a settlement agreement with the SEC and other state regulators, Venulum and its principal entered into Consent Order under which they were “permanently restrained and enjoined from violating Section 5 of the Securities Act, by selling any security in the United States without registering with the SEC.” Id. at *6. After learning of the Consent Order, plaintiff requested that Venulum return his investment and liquidate his account. Plaintiff alleged that he was required to enter into yet another contract before he could obtain his money from Venulum. At alleged risk of losing his entire investment, he entered into a third contract. Similar to the previous contracts, the third contract also contained an arbitration clause providing for BVI law and arbitration in the BVI.

After plaintiff commenced this action, defendants moved to compel arbitration under the three contracts and to dismiss plaintiff’s action. Plaintiff, in response, asserted that Venulum’s arbitration clauses were void and unenforceable and that the court lacked jurisdiction to compel arbitration in BVI.

The first issue Judge Elizabeth A. Wolford addressed was which contract’s arbitration terms applied. The court ruled that the third contract applied since its terms superseded the other agreements. In reaching this conclusion, the court examined the general language of the agreements and the general intent of the parties in forming each agreement. For instance, the court reasoned that the parties intended that the third contract supersede the prior contracts because it “established the terms and conditions for ‘any’ transaction between Plaintiff and Venulum regarding the sale of wines or champagne.” Id. at *16. (See also discussion of use of arbitration clauses by non-signatories. Id. at *11, fn. 2.) Although the court held that Venulum’s third contract with plaintiff superseded all prior agreements, the court chose to address the validity and applicability of the arbitration clauses under both the second and third contracts.

Judge Wolford then examined the validity of the arbitration provisions and whether they were enforceable. Before a court can compel arbitration, it is required to decide: “(1) whether the arbitration agreement is valid; and (2) whether the dispute is within the scope of the arbitration agreement.” Id. at *17. In examining the validity of arbitration clauses, the court stated that under the Federal Arbitration Act (FAA), arbitration clauses are a matter of contract law, and as such, they may be invalidated by general contract defenses. Defendants argued that it is the arbitrator, not the court, which has the power to determine whether arbitration clauses are valid because the arbitration clauses involved in this case reference the International Chamber of Commerce (ICC) arbitration rules. Id. at *20. In support of their argument, the defendants relied on Shaw Group v. Triplefine Int’l , 322 F.3d 115 ( 2d Cir. 2003 ) , which provided that if parties agree to include the ICC’s arbitration rules in a contract, this shows an agreement on behalf of the parties to “arbitrate arbitrability,” and a court should defer questions of arbitration clause’s validity to the arbitrator. 2017 U.S. Dist. LEXIS 44504 at *20. Judge Wolford, however, found defendants’ arguments unpersuasive.

She noted that although an arbitrator can determine arbitrability, this can occur only where the party seeking arbitration shows a “clear and unmistakable expression” that the parties intended to submit arbitrability disputes to arbitration. Id. at *21. The court reasoned that although the arbitration clauses in the contracts contained a provision that ICC’s rules will control during arbitrations, defendants’ reliance on the Shaw Group case is incorrect because of a textual change in the ICC’s rule. The text of the ICC’s Rule 6.2, in place when Shaw Group was decided, provided that an arbitrator determined the validity of an arbitration agreement if any party contested the validity of the arbitration agreement. Id. at *22. This rule was amended and later renumbered Rule 6.3. The revised ICC rule now provides that “if any party against which a claim has been made,” raises an arbitration clause’s validity then an arbitrator determines the validity of the arbitration agreement. Id.

Plaintiff and defendants disagreed over what the change in the language meant. In reaching her decision, Judge Wolford disagreed with other courts in the Second Circuit, id. at *23, fn. 4, and accepted the plaintiff’s interpretation that the revised language in ICC’s Rule 6.3 meant that an arbitrator determines validity of an arbitration clause “only if the party against whom a claim is asserted challenges the validity of the clause.” Id. at *22. As a result, the court found that ICC’s Rule 6.3 does not relegate the issue of validity to the arbitrator in this case because plaintiff is the party asserting a claim and arguing that the arbitration clauses are invalid.

Unconscionable Clauses

The court then examined whether plaintiff could void the arbitration clauses in the contracts as unconscionable. Although both sides agreed that New York law controlled the issue of unconscionability, the court, sitting in New York , used New York choice-of-law rules and applied New York law to determine whether the arbitration clauses were unconscionable. Judge Wolford assessed arguments as to whether the arbitration clauses were procedurally or substantively unconscionable. She found plaintiff’s argument that the arbitration clauses were procedurally unconscionable unpersuasive and focused instead on whether plaintiff’s case constituted an “exceptional case” where substantive unconscionability can be found. Id. at *32. Judge Wolford found that not only were the arbitration clauses substantively unconscionable, they were also void as a matter of public policy. The arbitration clauses shielded defendants from federal securities laws by applying BVI law in their arbitration agreements, and as such, it would be against public policy compel arbitration under these provisions. As a result, defendants’ motion to compel arbitration was denied.