Article

Note: To assure performance of a heavy equipment lease by Lessee, Residuos Industriales Multiquim, S.A. de C.V., its parent, Waste Management, Inc. applied for and obtained issuance of a performance standby letter of credit for US$795,000 in favor of Lessor, Bethlehem Corporation. Under the terms of the LC, Beneficiary was authorized to draw on the LC if one of its authorized officers certified that Lessee defaulted on the lease.

When Parent/Applicant sold its shares in Subsidiary/Lessee to Purchaser, CGEA Onyx, S.A., the Stock Purchase Agreement provided for arbitration of disputes by the International Chamber of Commerce and a general release between Applicant and Lessee. Subsequently, Lessee fell behind on its lease by $60,000 and, as a consequence, Beneficiary drew on the LC for the full $795,000. According to the terms of the application, Applicant reimbursed Issuer.

Based on other claims arising out of the Purchase Agreement, the Purchaser initiated arbitration proceedings against Applicant, which counterclaimed on a theory of breach of contract and sought reimbursement from Purchaser for Applicant's reimbursement payment for the standby. In addition to its counterclaim in arbitration, Applicant filed this action in Texas state court against Lessee for reimbursement of the monies paid out on the LC, alleging unjust enrichment, restitution, and breach of subrogated contract.

The case was removed to federal court, where Lessee moved to stay the litigation because the dispute over the LC was included in the ongoing arbitration between Applicant and Purchaser. The District Court for the Southern District of Texas denied the motion to stay. Lessee filed an interlocutory appeal and moved to dismiss for lack of appellate jurisdiction. The U.S. Court of Appeals for the Fifth Circuit, Duhe, Stewart, and Jolly, JJ., in an opinion by Jolly, J., denied Applicant's motion to dismiss the appeal for lack of jurisdiction, and reversed and vacated the district court's denial of Lessee's motion to stay litigation pending arbitration. The case was remanded to the district court with instructions to enter the stay.

Parent argued that Lessee was not a signatory to the arbitration agreement and, so, was not entitled to have the legal action against it stayed under the U.S. Federal Arbitration Act, 9 U.S.C. 3.

The appellate court noted that "in certain limited circumstances, nonsignatories [to an arbitration agreement] do have the right to ask the court for a mandatory stay of litigation, in favor of pending arbitration to which they are not a party." It stated the Section "gives a non-signatory litigant standing to apply for a stay when the litigation involves 'any issue referable to arbitration.'" where the disputes involve the same operative facts, the claims are "inherently inseparable", and the litigation would have a critical impact on the arbitration.

Assessing these factors, the appellate court concluded that:

Fundamentally, we have one dispute: Who, if anyone, should reimburse [Applicant] for the $795,000 it paid to [Beneficiary] (through the Letter) as a result of [Lessee's] default? [Applicant's] argument based on the differences in its legal and equitable theories is not a plausible defense to this arbitration; it is the violated right that matters, not the purported remedy. [Applicant] only suffered one alleged harm, so the resulting litigation and the arbitration are 'inherently inseparable' from the instant litigation ... .

[JEB/fkd]

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