The US Court of Appeals for the Ninth Circuit has upheld a district court’s order compelling individual arbitration and dismissing a putative class action alleging violations of the Racketeer Influenced and Corrupt Organizations Act and Arizona law in the Dimitri Shivkov v. Artex Risk Solutions case.
The group of 81 clients led by Shivkov failed to prove that captive insurance providers Artex Risk Solutions, Tribeca Strategic Advisors among others breached their fiduciary duty to point out and fully explain an arbitration clause.
Background
In August 2019, Plaintiffs Dimitri Shivkov alleged that the companies’ had devised a conspiracy to promote and sell tax-advantaged captive strategies that were viewed as illegal, according to the Internal Revenue Service (IRS), which disallowed the offered tax benefits.
Shivkov and others who entered into captive agreements with the named defendants brought several claims, including breach of fiduciary duty, negligent misrepresentation, disgorgement, and civil conspiracy.
However, all agreements signed by the plaintiffs included an ‘Arbitration Clause’ stipulating that any dispute between the relevant parties that could not be resolved through Arizona mediation would be arbitrated by the American Arbitration Association.
Artex argued that the claims should be arbitrated individually under this clause; because all claims in this lawsuit are barred by the Arbitration Clause, individual arbitration would inevitably lead to a dismissal of the action.
Shivkov appealed the district court decision and explained that the “plaintiffs alleged that pursuant to agreements between themselves and two defendants, defendants formed captive insurance companies that plaintiffs owned, and to which they paid insurance premiums”.
In his appeal, he added that the “plaintiffs claimed the payments as tax-deductible business expenses without recognising them as taxable income. The IRS audited plaintiffs, issued delinquency notices, and sought to impose penalties. After settling with the IRS, plaintiffs filed suit, alleging that the captives were illegal and abusive tax shelters, about which defendants failed to inform or advise them.”
Affirming the district court decision
At the US Court of Appeals for the Ninth Circuit, senior US district judge Stephen McNamee delivered the court order to grant Artex’s renewed joint motion to compel individual arbitrations, dismissing the action in its entirety as all claims in the suit are barred by the aforementioned Arbitration Clause.
Addressing an issue of the first impression concerning the survival of arbitration obligations following contract termination, McNamee held that the agreements “did not expressly negate the presumption in favour of post-termination arbitration or clearly imply that the parties did not intend for their arbitration obligations to survive termination”.
It also held that under Arizona contract law, the arbitration clause encompassed all plaintiffs’ claims.
Joining another seven circuits, the court also stated that the availability of class arbitration is a “gateway issue” that a court must presumptively decide”.
“The parties’ agreements did not clearly and unmistakably delegate that issue to the arbitrator. Because the agreements were silent on class arbitration, they did not permit class arbitration”, the panel explained.
Finally, the panel concluded that “pursuant to Arizona law on alternative estoppel, all non-signatory defendants could compel arbitration pursuant to the agreements”.
In their amended complaint, the clients said that the captive insurance providers misrepresented the process and tax benefits they could receive for having a captive insurance company.
The panel concluded that pursuant to Arizona law on alternative estoppel, all non-signatory defendants could compel arbitration pursuant to the agreements.
Artex did not immediately respond to the request for comment.