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New reinsurance-related and arbitration developments from Carlton Fields

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Brendan Gooley

Fifth Circuit Suggests Question of Class Arbitrability Was for Arbitrator Not Court

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The Fifth Circuit has suggested that the question of class arbitrability was for the arbitrator, not the court, based on the language of the arbitration clause at issue. The court ultimately concluded, however, that it did not need to reach that issue because the appellant challenging the arbitrator’s conclusion that class arbitration was available forfeited the argument.

Roy Conrad initiated arbitration against his employer Sun Coast Resources Inc. regarding purported violations of the Fair Labor Standards Act. The arbitrator concluded that the parties’ agreement “clearly provide[d] for collective actions.” Sun Coast moved to vacate that determination, but the district court rejected Sun Coast’s arguments. The Fifth Circuit affirmed.

The court explained that although there was a presumption that class arbitrability is a question for the court, “the arbitration agreement … appear[ed] to assign the question of class arbitrability to the arbitrator rather than to the court.” The arbitration clause covered “any dispute concerning the arbitrability of any such controversy or claim” and incorporated the American Arbitration Association rules for arbitration. Those provisions “strongly indicate[d] that the parties bargained for the arbitrator to decide class arbitrability.”

The Fifth Circuit nevertheless found it unnecessary to decide that issue. Sun Coast had forfeited its argument that the arbitrator invaded the province of the court by failing to raise that argument before the arbitrator and then failing to properly raise it before the district court.

In fact, Sun Coast had “affirmatively agreed that the arbitrator should decide whether collective proceedings were appropriate.”

The court also refused to vacate the arbitrator’s award on the merits. It concluded that the arbitrator interpreted the agreement and focused on the arbitration clause’s text, which was sufficient regardless of whether the arbitrator’s decision was in fact correct.

Sun Coast Resources, Inc. v. Conrad, No. 19-20058 (5th Cir. Apr. 16, 2020).

Court Compels Arbitration Based on Merger Clause Incorporating Separate Agreement Into Contract Containing Arbitration Clause and Rejects Argument That Delay Precluded Arbitration

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The U.S. District Court for the Middle District of North Carolina has compelled arbitration over a party’s objection that the dispute at issue was not within the scope of the arbitration clause and that arbitration was precluded by the opposing party’s failure to seek it sooner. The court concluded that a merger clause in the contract amendment containing the arbitration clause and the broad language of the arbitration clause rendered the dispute about a separate agreement incorporated into the amendment and subject to the arbitration clause and ruled that there was no actual prejudice to preclude the invocation of the arbitration clause.

In concluding that delay did not preclude arbitration, the court found significant the fact that the party opposing arbitration had agreed in a Rule 26(f) report to allow the opposing party to file a motion to compel, which greatly undermined the party’s prejudice argument.

North Carolina Mutual Life Insurance Co. entered into a coinsurance agreement with Max Re Ltd. pursuant to which Max Re and later a successor agreed to reinsure certain liabilities in North Carolina Mutual policies. North Carolina Mutual and Max Re’s successor subsequently entered into a novation agreement with Port Royal Reassurance Company SPC Ltd. pursuant to which Port Royal replaced Max Re’s successor as reinsurer. The parties also entered into an amendment to the coinsurance agreement that contained an arbitration clause and a merger clause related to the coinsurance agreement. The amendment also incorporated a trust agreement related to the reinsurance obligations of the various parties to the amendment.

In September 2016, North Carolina Mutual filed suit claiming mismanagement and misappropriation of trust assets in violation of the trust agreement. The parties engaged in settlement negotiations, and several parties reached an agreement in March 2017. The court then stayed the remaining portion of the action until September 2018. The settlement agreement, however, fell apart and the court lifted its stay in April 2018. North Carolina Mutual subsequently filed an amended complaint, which Port Royal answered, that invoked the arbitration clause as an affirmative defense. More than a year later, the parties filed their Rule 26(f) report. The parties agreed in that report that Port Royal could file a motion to compel arbitration by a certain date. Port Royal thereafter filed its motion to compel.

North Carolina Mutual opposed Port Royal’s motion, arguing that (1) its claims against Port Royal were not within the scope of the arbitration clause and (2) Port Royal was in “statutory default” and could not invoke the arbitration clause because years had elapsed since the action was filed.

The Middle District of North Carolina rejected both arguments.

First, the court concluded that North Carolina Mutual’s claims, which related to the trust agreement, were within the scope of the amendment’s arbitration clause. That clause was broad and encompassed “any dispute or claim arising out of or relating to” the parties agreement, which included the trust agreement because of the amendment’s merger clause, which evidenced an “intent … to ‘roll up’ several separate agreements [including the trust agreement] into one integrated contract.”

Second, the court explained that in order to preclude arbitration based on “statutory default,” the party objecting to arbitration had to establish “actual prejudice.” The court analyzed two factors to determine whether such prejudice existed: (1) the degree of Port Royal’s delay in seeking arbitration; and (2) the nature and extent of Port Royal’s litigation activities. Although the court recognized that this action had been pending for years, it noted that the case’s history included a settlement agreement and a stay. The court also emphasized that North Carolina Mutual agreed in the Rule 26(f) report that Port Royal could file a motion to compel arbitration, which “greatly undermine[d] [North Carolina Mutual’s] claim of prejudicial delay.” Port Royal’s litigation activity, meanwhile, was limited to filing answers, participating in a pretrial conference, and moving to compel.

The court also rejected North Carolina Mutual’s argument that the court should deny arbitration because North Carolina Mutual would have to prosecute litigation and arbitration simultaneously if the court compelled arbitration. The court noted that North Carolina Mutual “took on that risk when it brought its claims in federal court while being party to a contractual agreement with a mandatory arbitration provision.”

North Carolina Mutual Life Insurance Co. v. Stamford Brook Capital, LLC, No. 1:16-cv-01174 (M.D.N.C. Apr. 10, 2020).

Fireman’s Fund Obtains Second Circuit Reversal in Long-Running Reinsurance Dispute Involving Asbestos Claims and Policies Without Aggregate Limits

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The Second Circuit has reversed a $64 million judgment against Fireman’s Fund Insurance Co. in the latest ruling in a long-running dispute related to primary and excess policies that Utica Mutual Insurance Co. issued to a company later embroiled in asbestos claims.

We’ve been closely following this dispute at the district court level. For a full recap, see our posts noting that the district court refused to seal summary judgment exhibits, allowed “follow-the-fortunes” (also known as “follow-the-settlements”) evidence, and refused to change a credibility determination. We’ve also covered a companion case on several occasions.

To recap, Utica Mutual Insurance Co. issued primary and excess policies to Goulds Pump Inc. Utica reinsured a portion of the excess policies with Fireman’s Fund Insurance Co. Goulds subsequently faced thousands of asbestos claims related to its products. Utica defended and indemnified those claims pursuant to its policies.

A dispute arose between Utica and Goulds because Utica’s policies allegedly did not contain aggregate limits. To avoid potentially catastrophic losses as a result of that purported omission, Utica settled its dispute with Goulds. The parties agreed, among other things, that the primary policies contained aggregate limits and that Goulds’ umbrella policies would cover losses that exceeded the primary policies’ aggregate limits. They also stipulated the settlement was fair, just, and reasonable and resolved within the terms of the policies.

Utica subsequently sought reimbursement from Fireman’s Fund pursuant to the reinsurance contracts. In short, the district court denied cross-motions for summary judgment, and a jury subsequently returned a $64 million verdict in favor of Utica following a 12-day trial.

Fireman’s Fund appealed to the Second Circuit. It argued that it did not owe anything to Utica because the reinsurance certificates contained a “follow form” clause that provided that Fireman’s Fund’s liability “shall follow that of [Utica] and … shall be subject in all respects to all the terms and conditions of [the umbrella policies]” and the umbrella policies provided they only applied in excess of the limits stated in the schedules accompanying the umbrella policies, which Fireman’s Fund claimed did not contain any aggregate limits for bodily injury claims.

Applying New York law, the Second Circuit agreed. It explained that the plain language of the excess policies provided that they only applied “in excess of … the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies,” and “the limits of liability listed in [those] Schedules for bodily injury d[id] not include aggregate limits.” The court rejected Utica’s argument that the language in the excess policies only required occurrence limits, not aggregate limits, to be listed as inconsistent with the plain language of the excess policies and New York’s principles of contract interpretation.

Utica argued, however, that Fireman’s Fund was obligated to reimburse it pursuant to the reinsurance contracts because those contracts contained a “follow-the-settlements” clause that provided that all “claims involving this reinsurance, when settled by [Utica], shall be binding on [Fireman’s Fund].” The Second Circuit explained that follow-the-settlements clauses may “not alter the terms or override the language of reinsurance policies.” Adopting Utica’s argument would “render the follow form clause in the reinsurance contract and the umbrella policy language defining Utica’s loss meaningless” and would contradict the parties’ expressed agreement.

The Second Circuit therefore reversed the judgment against Fireman’s Fund.

Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 18-828 (2d Cir. Apr. 28, 2020).

District Court Compels Arbitration for Claims Against Supervisor Despite Plaintiff’s Claims Regarding Never Seeing or Signing Agreement Containing Arbitration Clause

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The U.S. District Court for the District of Nebraska recently granted a defendant’s motion to compel arbitration despite a plaintiff’s claims that she had never seen or signed the employment agreement containing the arbitration clause and that the agreement did not cover certain claims and could not be invoked by a defendant who was not a party to the agreement.

Barbara Nelson worked as an assistant manager in a restaurant owned by American Blue Ribbon Holdings LLC. Julie Kunkle was Nelson’s supervisor. Nelson filed a number of claims related to her employment against American Blue Ribbon Holdings and Kunkle, including a defamation claim related to purported statements Kunkle made to restaurant employees and others.

American Blue Ribbon Holdings obtained a stay with respect to Nelson’s claims related to potential bankruptcy proceedings. Kunkle moved to compel arbitration, claiming that Nelson’s claims were within the scope of an arbitration clause Nelson signed when she was hired by American Blue Ribbon Holdings.

The district court granted Kunkle’s request despite Nelson’s claims that (1) she had never signed the employment agreement in question and (2) even if she had, the arbitration clause did not cover her claims against Kunkle, who was not a signatory to the agreement with American Blue Ribbon Holdings.

First, the court rejected Nelson’s “self-serving” affidavit that she had never seen nor signed the arbitration clause. The evidence established that someone had to access the agreement containing the clause via an emailed link sent to Nelson’s email account, enter Nelson’s email address as a username, use Nelson’s zip code as the password, and subsequently enter Nelson’s “address, telephone number, date of birth, Social Security number, gender, marital status, and direct deposit banking information.” The evidence further established that American Blue Ribbon Holdings did not otherwise collect this information and that Nelson signed the agreement again when she started.

Second, the court concluded that Nelson’s claim against Kunkle was within the scope of the arbitration agreement and that Kunkle could invoke that agreement even though she was not a signatory to it. The agreement was broad and covered, among other things, “disputes regarding the employment relationship” brought under certain employment statutes “and all other state statutory and common law claims.” The fact that (1) Kunkle was an agent of American Blue Ribbon Holdings; (2) allowing Nelson to sue Kunkle for employment-related claims covered by the agreement would limit the agreement’s effectiveness; and (3) many of Nelson’s claims against Kunkle were synonymous or intertwined with her claims against American Blue Ribbon Holdings was sufficient for the clause to cover Nelson’s defamation claim, as well as claims that Kunkle violated Nelson’s rights under the Family and Medical Leave Act.

The court therefore stayed Nelson’s action pending arbitration proceedings.

Nelson v. Kunkle, No. 8:19-cv-00329 (D. Neb. Mar. 20, 2020).

First Circuit Affirms Confirmation of FINRA Award Over Claim That Arbitration Panel Should Have Held Investment Firm Liable Under Doctrine of Respondeat Superior

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The First Circuit has affirmed the confirmation of a FINRA award over an appellant’s claim that the arbitrators erred by, among other things, not holding an investment firm liable under the doctrine of respondeat superior. The court held that the evidence supported the arbitrators’ finding and that the appellant had not come close to satisfying the “manifest disregard” standard.

Kenneth Ebbe invested his pension and 401(k) with Richard Cody. Cody told Ebbe that the distributions Ebbe was receiving were interest only and that his account’s balance remained around $500,000. The distributions were actually significantly reducing Ebbe’s principal.

FINRA’s appeals panel suspended Cody. Cody therefore transferred Ebbe’s account to his wife, who worked as an investment adviser at Concorde Investment Services LLC. Cody nevertheless continued to meet with Ebbe regarding his account. Ebbe received monthly statements that accurately reflected that his account balance was declining, but Cody told Ebbe that those statements did not include all of Ebbe’s investments. After his suspension ended, Cody joined Concorde as an investor. Both he and his wife were eventually terminated after Concorde discovered that Cody had contacted customers during his suspension.

Ebbe eventually discovered that his account had no value and filed for arbitration with FINRA against the Codys, Concorde, and others. The Codys did not appear. During the four-day hearing, Ebbe’s expert testified that Cody committed defalcations and that Concorde had a duty to reasonably supervise the Codys, but did not opine that Concorde had violated that duty and admitted there was no evidence that Cody’s wife had made any misrepresentation to Ebbe.

Concorde presented evidence that it had hired Cody’s wife after a diligent background check, that it supervised her, and that it had complied with all industry rules.

The arbitration panel found that the Codys were jointly and severally liable for $286,000 in damages but denied Ebbe’s remaining claims, including the claims against Concorde.

Ebbe moved to confirm in part and vacate in part the award. Concorde and another defendant moved to confirm it. The district court confirmed the award and Ebbe appealed.

The First Circuit rejected Ebbe’s claims, including his principal claim that the panel had committed manifest disregard for the law and that Concorde should be liable as well under the doctrine of respondeat superior. The court noted that arbitrators are not required to explain their awards and that a party is hard pressed to satisfy the demanding standard for manifest disregard. The court also noted that the evidence supported the arbitrator’s finding in favor of Concorde and that the award against the Codys could have been nothing more than a default judgment.

Ebbe v. Concorde Investment Services, LLC, No. 19-1819 (1st Cir. Mar. 24, 2020).