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Media Alerts - Iraq Middle Market Development Foundation v. Harmoosh, et al. - Fourth Circuit
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March 14, 2017
  Iraq Middle Market Development Foundation v. Harmoosh, et al. - Fourth Circuit
Fourth Circuit Applies Basic Contractual Right to Claim for Recognition of Foreign Civil Judgment

Areas of Law: Contracts

Issue Presented: Whether the Maryland Recognition Act's arbitration clause exception applies if a party forgoes the right to arbitrate by participating in judicial proceedings in a foreign court.

Brief Summary: In a published opinion, the Fourth Circuit vacated the grant of summary judgment in favor of the appellee and remanded the case to the United States District Court for the District of Maryland. In a lawsuit brought by the appellant-creditor to recognize a civil judgment against the appellee-debtor from an Iraqi court, the district court granted a motion for summary judgment upon the appellee's invocation of an arbitration clause in the loan agreement. Upon appeal of this ruling, the Fourth Circuit held there was still a genuine issue of material fact as to whether the appellee voluntarily waived the arbitration clause during judicial proceedings in the Iraqi court. Because the Fourth Circuit found that such a voluntary waiver in a foreign court is not contrary to the disputed arbitration clause for the purposes of the Maryland Recognition Act, the appellee was not entitled to summary judgment by the district court.

Extended Summary: The appellant, Iraq Middle Market Development Foundation, is a non-profit corporation that makes and services loans to businesses in Iraq. In 2006, Iraq Middle Market agreed to lend $2 million to Jawad Al-Harmoosh for his company, AGTTT. A managing partner at AGTTT, Mohammad Harmoosh, signed a promissory note guaranteeing repayment of the loan. Harmoosh is a dual citizen of Iraq and the United States, and lives in Maryland. The loan agreement contained an arbitration clause which required that all legal disputes be "finally and exclusively settled by arbitration."

In 2010, Iraq Middle Market sued the appellees in federal court in Maryland for breach of contract after the appellees refused to repay the loan. The appellees moved to dismiss the claim by invoking the loan agreement's arbitration clause. The district court dismissed the suit, but thereafter the appellees did not move to compel arbitration. Subsequently, in 2014, the appellant filed another civil action against the appellees to collect on the promissory note. This time, the appellant did so in an Iraqi court. The appellees asserted multiple affirmative defenses, but the parties disagreed as to whether they ever raised the arbitration clause in that proceeding. Although invocation of an arbitration clause would have deprived the Iraqi court of jurisdiction, the suit was litigated on the merits through final judgment. The Iraqi court found in favor of the appellant and awarded $2 million in damages. That judgment was subsequently affirmed by two appellate courts in Iraq.

Upon that decision, appellant brought the present complaint seeking recognition of the Iraqi judgment under the Maryland Uniform Foreign Money-Judgments Recognition Act. Under that act, a foreign judgment regarding a sum of money is generally conclusive between the parties if it is "final, conclusive, and enforceable where rendered." Md. Code, Courts and Judicial Proceedings, § 10-702 & 10-703. However, the act does recognize exceptions to this general rule, including if "the proceeding in the foreign court was contrary to an agreement between the parties under which the dispute was to be settled out of court." Md. Code, Courts and Judicial Proceedings, § 10-704(b)(4). The appellee invoked this statutory exception in a motion for summary judgment, which the district court granted because, in the court's view, the Iraqi judgment was "contrary to an arbitration provision."

The Fourth Circuit reviewed the grant of summary judgment de novo and first examined whether the disputed exception applies if a party forgoes its right to arbitrate by participating in judicial proceedings in a foreign court. This issue is a question of state law that had not yet been addressed by the Maryland Court of Appeals. Therefore, because the federal court had diversity jurisdiction over the case, its role was "to anticipate how [Maryland's highest court] would rule on this question."

The appellee contended that this exception permits courts to decline recognition of a foreign judgment if the dispute should not have been litigated at all under the terms of an arbitration clause. The Fourth Circuit found this argument to be overly broad. The court did not believe the state legislature would have intended for courts to enforce contractual rights the parties had waived or resolved in front of a foreign court. The Fourth Circuit had not addressed this issue before, but those courts that had considered similar provisions recognized that parties may waive such exceptions. Furthermore, the parallel federal act on recognition of foreign judgments, largely adopted by Maryland in creating the act at issue herein, allowed for either express or implied waiver of out-of-court remedies. The Fourth Circuit also found that appellee's argument was at odds with Maryland's common law of contracts, in which arbitration clauses can be waived the same as any other contractual right. Finally, the Fourth Circuit felt that appellee's arguments would frustrate the purpose of the Maryland Recognition Act, specifically international comity and mutual recognition of foreign judgments.

Therefore, the Fourth Circuit held that "judicial proceedings in a foreign court are not 'contrary to' an arbitration clause for the purposes of the Maryland Recognition Act if the parties choose to forego their rights to arbitrate by participating in those proceedings." In that event, the Fourth Circuit held that the exception invoked by the appellee simply would not apply.

With that new rule in mind, the Fourth Circuit considered whether the appellant had raised genuine issues of material fact on the issue of appellee's waiver of his arbitration rights. In this instance, waiver occurred only if appellee "so substantially utilize[d] the litigation machinery that to subsequently permit arbitration would prejudice" the appellant. Appellee did not dispute that appellant would lose entitlement to recover on a $2 million judgment if the appellee were allowed to assert the right to arbitrate.

The Fourth Circuit found that the appellant introduced sufficient evidence to preclude summary judgment. Specifically, the appellant showed that the appellee was aware of the right to arbitrate, as he had raised it in defense of the first lawsuit in Maryland, but still voluntarily litigated the dispute in Iraq. Both sides introduced conflicting evidence as to whether the issue of the arbitration clause was ever raised as a defense in the Iraqi court proceedings. Consequently, the Fourth Circuit found there were still genuine issues of material fact as to whether the appellee waived his right to arbitrate. Therefore, the appellee was not entitled to summary judgment and that grant was vacated, with the case remanded to the district court to resolve the factual questions still at issue in the case.

To read full opinion, click here.

Panel: Judges Wilkinson, Motz, and Floyd

Argument Date: 12/7/2016

Date of Issued Opinion: 2/2/2017

Docket Number: No. 16-1403

Decided: Vacated and remanded by published opinion

Case Alert Author: Patrick J.L. Dillon, Univ. of Maryland Carey School of Law

Counsel: ARGUED: D. Michelle Douglas, KALBIAN & HAGERTY, LLP, Washington, D.C., for Appellant. Mukti N. Patel, FISHERBROYLES LLP, Princeton, New Jersey, for Appellees. ON BRIEF: Haig V. Kalbian, KALBIAN & HAGERTY, LLP, Washington, D.C., for Appellant.

Author of Opinion: Judge Motz

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 03/14/2017 01:20 PM     4th Circuit  

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