What happens when one party to an arbitration no longer remains solvent, yet a successor entity remains viable, although not a party to an arbitration proceeding? Mississippi recently decided that a separate action could be brought in US District Court against the non-contracting successor entity which was not barred by judicial estoppel.
In 2009, RDS contracted with S&S Construction LLC to construct a building in Ocean Springs, Miss. The occupant, RDS, alleged there were problems with the roof leaking.
In 2011, contractor S&S Construction changed its name after being purchased by Abrams Group. It was a subject of some debate as to whether or not S&S was doing business under the new name or, alternatively, no longer in existence.
ARBITRATION ACTION AGAINST S&S
RDS, as owner of the building, brought suit against S&S Construction as well as the successor, Abrams. The suit was dismissed in favor of an arbitration clause and Abrams refused to consent, claiming it was not obligated as the contract containing the provision was with S&S Construction. RDS was successful in the arbitration action against S&S and subsequently awarded over $200,000 which remains to be paid. S&S has made claims of being insolvent.
Upon learning of S&S insolvency, RDS initiated a declaratory judgment action against Abrams and S&S seeking authority from the court that S&S and Abrams each be subject to the arbitration provision under successor liability. Abrams sought to have the action barred under the theory of judicial estoppel, arguing that RDS had already attempted to fight the dispute in arbitration, and was now changing theories and strategy for purposes of maneuvering.
The Court found that RDS could proceed and its behavior was not inconsistent.
“RDS not only has asserted that Abrams and S&S are the same entity, but also has raised alternative arguments for liability based on successor liability, merger, and other theories, which is consistent with its assertions in the 2014 action. In short, it appears that RDS’s position has always been that S&S and Abrams are responsible for its damages. RDS’s decision to pursue S&S only in the previous action and to dismiss Abrams without prejudice in response to Abrams’ argument that it was not a signatory to the arbitration agreement at issue does not preclude it from making the claims it makes here and does not equate to asserting a legal position which is plainly inconsistent with a prior position.”
RDS Real Estate LLC v. Abrams Group Construction LLC, et al., No. 15-cv-361-LG-RHW, S.D. Miss.; 2016 U.S. Dist. LEXIS 125652