A Delaware federal magistrate judge recommended tossing a bid by a cargo airline's owners to arbitrate a suit claiming they sold overvalued shares of the company to an employee stock ownership plan, finding the plan's arbitration provision conflicts with the Employee Retirement Income Security Act.
U.S. Magistrate Judge Jennifer L. Hall said Wednesday that while the Federal Arbitration Act mandates that courts enforce arbitration agreements according to their terms, the law doesn't require — and the U.S. Supreme Court has never said — that every provision must be enforced just because it's titled "arbitration agreement."
Western Global Airlines' founders James and Carmit Neff, who are married, as well as ESOP trustees Prudent Fiduciary Services LLC and company founder and president Miguel Paredes said in a July brief that a clause in plan documents says participants can't sue on behalf of the plan and recover planwide damages. But Judge Hall said this directly conflicts with rights bestowed to beneficiaries by ERISA.
"The arbitration provision here does not merely purport to change the manner in which plaintiffs' individual claims are decided; rather, it purports to change the nature of the substantive remedy provided by the statute," Judge Hall wrote. "It deprives plaintiffs of the right to seek the statutory remedy of plan-wide monetary relief, and it is therefore unenforceable."
She added that the provision also states that if it's unenforceable, the entire arbitration agreement becomes null and void, and therefore the motion to compel arbitration should be denied.
Judge Hall said the arbitration procedure in this ESOP is nearly identical to one considered by a Colorado federal court last year. In March, U.S. District Judge Regina M. Rodriguez said the agreement between Envision Management Holding Inc. and a former employee conflicts with ERISA, and Judge Hall said she found this holding persuasive.
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The proposed class is represented by Carmella P. Keener of Cooch & Taylor PA; Peter K. Stris, Rachana A. Pathak, Victor O'Connell and John Stokes of Stris & Maher LLP; Michelle C. Yau, Daniel R. Sutter and Eleanor Frisch of Cohen Milstein Sellers & Toll PLLC; and Paul J. Lukas, Brock J. Specht and Caroline E. Bressman of Nichols Kaster PLLP.
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