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Did Debtor Lose His Right to Arbitrate by Utilizing a Foreign Judicial Process?

Iraq Middle Market Development Foundation v. Mohammad Ali Mohammad Harmoosh
No. 16-1403, (United States Court of Appeals for the Fourth Circuit, February 2, 2017)

by Caroline E. Willsey, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ca4.uscourts.gov/Opinions/Published/161403.P.pdf

In Iraq Middle Market Development Foundation v. Harmoosh, No. 16-1403, a creditor sought to have a judgment that was obtained in Iraq for non-payment of a promissory note recognized in the United States District Court for the District of Maryland. The district court granted summary judgment to the debtor and the United States Court of Appeals for the Fourth Circuit was asked to consider whether a debtor lost his right to arbitrate a dispute by utilizing the Iraqi judicial process.

The Iraq Middle Market Development Foundation (the “Foundation”) is a non-profit that makes and services loans to small businesses in Iraq. In November 2006, the Foundation lent Mohammad Harmoosh $2 million (USD) for his company, Al-Harmoosh for General Trade, Travel, and Tourism (“AGTTT”). The loan agreement included an arbitration clause which stated that all disputes arising out of the agreement were to be resolved by arbitration in Amman, Jordan. Harmoosh, who is a dual citizen of Iraq and the United States, and resides in Maryland, executed a promissory note.

In 2010, after Harmoosh defaulted on the loan, the Foundation tried to collect by suing Harmoosh for breach of contract in federal court in Maryland. Harmoosh successfully moved to dismiss the claim by arguing that the alleged breach was an arbitrable dispute. Then, in February 2014, the Foundation filed another civil action against Harmoosh in the Court of First Instance for Commercial Disputes in Baghdad. Harmoosh appeared in court and argued lack of personal jurisdiction and lack of personal liability for the debts of AGTTT. There was a dispute between the Foundation and Harmoosh as to whether Harmoosh raised the arbitration clause as a defense. The parties litigated their dispute and in April 2014, the Iraqi court found in favor of the Foundation and awarded it $2 million in damages plus costs and legal fees.

In April 2015, the Foundation again went to the District of Maryland, this time (1) seeking recognition of the Iraqi judgment under the Maryland Uniform Foreign Money-Judgments Recognition Act (“Maryland Recognition Act”) and (2) alleging that Harmoosh fraudulently conveyed some of his assets.

Generally, under the Maryland Recognition Act, a foreign judgment is conclusive so long as it is “final, conclusive, and enforceable where rendered.” There are several exceptions to this rule, including a provision that the court need not recognize a foreign judgment where “[t]he proceeding in the foreign court was contrary to an agreement between the parties under which the dispute was to be settled out of court.” Harmoosh moved to dismiss under this exception. Prior to the commencement of discovery, the district court granted summary judgment to Harmoosh on the Maryland Recognition Act claim. The court then granted Harmoosh’s motion to compel arbitration of the Foundation’s fraudulent conveyance claim. The Foundation appealed.

On appeal, the Fourth Circuit first considered whether the arbitration clause exception to the Maryland Recognition Act applies where a party forgoes his right to arbitrate by litigating the dispute in a foreign court. The Fourth Circuit disagreed with the District of Maryland’s reading of the Maryland Recognition Act. The District Court read the exception to mean that a Maryland court is permitted to decline recognition of any proceedings that are “contrary to” an agreement to settle a dispute out of court. Under this broad reading, all foreign judicial proceedings are “contrary to” an arbitration clause, regardless of whether the parties have foregone their rights to arbitrate. The Fourth Circuit concluded that the Maryland General Assembly, in enacting the Maryland Recognition Act, did not intend to give courts discretion to enforce contractual rights the parties themselves had chosen to waive. Therefore, the court held that this particular exception to the Maryland Recognition Act did not apply if the parties chose to forego their rights to arbitrate by participating in proceedings in a foreign court.

Next, the Fourth Circuit considered whether the Foundation had raised genuine issues of material fact as to whether Harmoosh decided to forego his arbitration rights. Here, the Fourth Circuit turned to the Federal Arbitration Act (the “Act”). Under the Act, a party loses his right to arbitrate when he is “in default in proceedings with such arbitration.” A party defaults, and thereby waives his right to arbitrate, only if he has utilized the litigation process so substantially that subsequently resorting to arbitration would prejudice the other party. Neither party disputes this point. Rather, Harmoosh argued that there was no genuine issue of material fact that he did not waive his rights to arbitrate. The Fourth Circuit concluded, however, that the Foundation raised a genuine dispute of material fact on this issue. Without any discovery, the Foundation offered evidence that Harmoosh voluntarily litigated the dispute in an Iraqi court, despite having previously asserted his right to arbitrate the same dispute in a U.S. court. Harmoosh, on the other hand, provided the declaration of his Iraqi counsel, who asserted that he raised the arbitration clause to the Iraqi court. Given the dispute clearly evidenced in the record, Harmoosh was not entitled to summary judgment.

Accordingly, the Fourth Circuit vacated the District of Maryland’s decision and remanded the case for further proceedings.


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