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COA: Trust not bound by ISTA employment arbitration clause

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The Indiana Court of Appeals has ruled that two former leaders in the Indiana State Teachers Association who served as trustees for a legally separate insurance trust can’t force the trust’s governing board to adhere to arbitration clauses outlined in their ISTA employment contracts.

An appellate ruling came today in Warren L. Williams, et al. v. David Orentlicher, et al., No. 49A02-1003-PL-249, a case that raised questions about the overlap in employment contracts and common law fiduciary duties when the lines are blurred by someone functioning as an employee when performing those separate trustee tasks.

The case involves Warren L. Williams, the ISTA’s executive director from 1984 until his resignation in May 2009, and Robert Frankel, the labor organization’s deputy executive director from 2002 until his resignation in April 2009. With their ISTA positions, both also held ex officio roles with the ISTA Insurance Trust. The trust was created in 1985 as a common law trust legally separate from the ISTA and designed to provide insurance programs for Indiana school corporations to adopt as benefit plans for their employees. Williams served as a trustee and devoted about 20 percent of his total work time to the trust, while Frankel was the trust director and spent about 40 percent of his time on that activity.

Both renewed their ISTA employment contracts in July 2008, and while neither mentioned the trust, their responsibilities included anything the board of directors might define from time to time. Each contract contained an arbitration clause stipulating that “any issue arising regarding the performance of any obligation under the terms of this Agreement” would go through arbitration.

The two resigned in spring 2009, and that summer the trustees filed a complaint against Williams and Frankel and others who were alleged to have breached their fiduciary duties to the trust and conspired to place a bulk of the trust’s assets in alternative investments and private placements without board approval. As a result of this alleged malfeasance, the trustees said the trust could not function as a funding vehicle for medical insurance programs and long-term disability insurance and that left about 650 claimants without assistance for an estimated $34 million in benefits.

Williams and Frankel filed a motion to compel for arbitration on claims the ISTA had denied them compensation and benefits, and the trust responded that its case was separate from any employment contract arbitration issue because the pair was being sued in their capacities as trust officials, not their ISTA leadership positions. Marion Superior Judge Robyn Moberly denied the motion and later denied their motion to stay the trial court proceedings pending appeal. The Court of Appeals also denied that request in July.

The appellate court affirmed Judge Moberly’s findings and held that the trust is not a party to the employment contracts and that’s what is at issue when it comes to the motion to compel arbitration.

Citing a handful of federal precedents from across the country, the majority of Judge Edward Najam and Chief Judge John Baker determined that the legal duties that Williams and Frankel allegedly breached flowed to the trust as a matter of Indiana law and didn’t fall within the express terms of their employment contracts with the ISTA. Neither action is dependent upon the other, they ruled.

Judge Najam also pointed out that counsel for Williams and Frankel didn’t contend during oral arguments that the trust is an “alter ego of the ISTA” when the appellate court asked about that, and so the “close relationship theory” doesn’t apply here.

“As such, the Trust is not estopped from disclaiming the arbitration clauses, even if the Trust is a third party beneficiary to the contracts,” Judge Edward Najam wrote for the majority, which Chief Judge John Baker joined. “And the ‘close relationship’ between the Trust and the ISTA is not, on these facts, legally sufficient to compel the Trust to arbitrate its claims against Williams and Frankel.”

Judge James Kirsch dissented in a separate opinion, saying he’d reverse and order the trial court to grant the motion because Williams’ and Frankel’s respective ISTA responsibilities were an integral foundation for what they did as ex officio members for the trust.

“The affairs of the Indiana State Teachers Association included those of the Trust,” he wrote. “As defined by the ISTA Board of Trustees, the duties of the positions that Williams and Frankel held with ISTA required them to carry out their duties with the Trust. Having received the benefits of such agreements, the Trust should not now be able to disavow the arbitration provisions contained therein. It should be bound to the arbitration provisions of such agreements, to the same extent that ISTA itself is bound.”

Judge Kirsch cited TWH, Inc. v. Binford, 898 N.E. 2d 451 (Ind. Ct. App. 2008), where the appellate court, with Judge Najam authoring, held that a third party beneficiary of a contract containing an enforceable arbitration provision is bound by such provision even though the beneficiary was not a signatory to the agreement.

But the majority declined to “expand” the Binford rule as it says Judge Kirsch advocates, saying that the Trust here is not asserting a contract nor disavowing an employment contract provision. Instead, this is a common law claim against Williams and Frankel independent of the pair’s employment contracts with the ISTA and any issues arising from that.
 

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  1. I grew up on a farm and live in the county and it's interesting that the big industrial farmers like Jeff Shoaf don't live next to their industrial operations...

  2. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

  3. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

  4. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

  5. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

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