Fifth Circuit Refuses to Compel Arbitration Based on Full Faith and Credit Clause

The United States Court of Appeals for the Fifth Circuit has refused to compel arbitration in a contract dispute over annuity payments. In Saucier v. Aviva Life and Annuity Co., No. 13-60854 (5th Cir., October 29, 2014), a man, Saucier, agreed to accept a structured settlement for certain personal injury claims in 1990. As part of the settlement, Saucier received periodic annuity payments from Aviva Life and Annuity Company. In 2008, Saucier agreed to transfer his right to receive two future annuity payments to RSL Funding in exchange for cash. In order to receive the cash, Saucier signed three separate agreements. Each contract contained an arbitration clause that stated any and all disputes between the parties must be resolved through arbitration. In March 2009, a Mississippi chancery court approved the parties’ proposed transfer agreement based on a petition that was filed by RSL.

Several months later, Saucier sought to have the court’s approval of the transfer set aside. In September 2009, Saucier’s motion was approved because the court found that RSL failed to comply with the notice requirements included in the state’s Structured Settlement Protection Act (“SSPA”). Two months later, Saucier asked the chancery court to hold that the parties’ agreement was invalid and sanction RSL. RSL then asked the court to stay the proceedings and compel the dispute to arbitration. After finding the transfer agreements were not enforceable under the SSPA, the chancery court denied RSL’s motion to compel arbitration. The court also issued a permanent injunction prohibiting arbitral proceedings in the case.

RSL appealed the state court’s decision to the Mississippi Court of Appeals. The appellate court affirmed the chancery court’s holding that arbitration was not proper since the contracts containing the parties’ agreement to arbitrate were not enforceable.

While the case between Saucier and RSL was ongoing, Saucier sought a declaratory judgment against Aviva in a Mississippi state court. Aviva immediately removed the case to federal court. Although the federal court initially stayed the proceedings pending the outcome of Saucier’s lawsuit against RSL, the district court later remanded the case back to state court. RSL then asked the Fifth Circuit Court of Appeals to review the district court’s refusal to compel arbitration prior to remanding the case. The appellate court vacated the district court’s decision and remanded the dispute to “to ‘determine in the first instance whether any issues or claims decided by the state court are entitled to preclusive effect’ and to ‘determine whether RSL is entitled to compel arbitration under 9 U.S.C. § 3.’”

On remand, the federal court again denied RSL’s motion to compel arbitration. According to the court, the doctrine of collateral estoppel precluded RSL from relitigating the state court’s holding that the parties’ agreement to arbitrate was unenforceable. In response to the court’s holding, RSL again appealed the case to the nation’s Fifth Circuit.

The U.S. Court of Appeals for the Fifth Circuit first examined the full faith and credit statute contained in 28 U.S.C. § 1738 to determine whether the state court’s prior holding precluded arbitration in the case. Although RSL argued the state court only held that the arbitration clause in one of the three agreements at issue was unenforceable, the court disagreed:

RSL argues on appeal that the district court erroneously applied the doctrine of collateral estoppel, because the Mississippi state court proceedings failed to determine the question of arbitrability under all three agreements. Principally, RSL contends that the state court decisions invalidated the arbitration clause in the Amended Transfer Agreement, but did not consider the arbitration clauses in the related ancillary documents. It is apparent from the Mississippi court of appeals’ opinion, however, that it viewed the three agreements in globo as the “transfer agreement.”

The Court of Appeals then examined the four elements required for collateral estoppel to apply under Mississippi law. According to the court, because the state court’s order was a final judgment, the issue of arbitrability under each agreement was litigated, the issue of arbitrability was determined by the state court, and “the issue of arbitrability was essential to the prior judgments,” each element was satisfied.

Finally, the Fifth Circuit Court of Appeals held:

Because we find that a Mississippi state court would give preclusive effect to the prior state court judgments, we are obligated under the Full Faith and Credit Clause to give the same effect. We hold, as the district court held, that RSL is precluded from compelling arbitration in federal district court under its three agreements with Saucier. AFFIRMED.

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