Brendan Gooley

Ninth Circuit Reverses Denial of Motion to Compel Arbitration

May 13, 2024 by Brendan Gooley

The Ninth Circuit Court of Appeals recently reversed a district court’s decision to deny a motion to compel arbitration in a case involving a request to refund the cost of airline tickets after a cancellation.

Winifredo and Macaria Herrera purchased airline tickets on Cathay Pacific flights through a third-party booking website, ASAP Tickets. ASAP’s terms and conditions included an arbitration clause requiring binding arbitration through the American Arbitration Association. During their trip, Cathay Pacific canceled the Herreras’ return flight and told them to talk to ASAP about a refund. ASAP apparently denied the Herreras’ request for a refund. The Herreras filed suit against Cathay Pacific, which moved to compel arbitration pursuant to ASAP’s terms and conditions. The district court denied Cathay Pacific’s motion, reasoning that the Herreras’ gripe was with Cathay Pacific, not ASAP.

Cathay Pacific appealed, and the Ninth Circuit reversed and remanded. It first rejected the argument that federal regulations precluding arbitration provisions in “contracts of carriage” precluded arbitration in this case, explaining that the regulation in question did not prohibit “airline carriers from enforcing arbitration agreements between passengers and third parties if the applicable law permits them to do so.” The court then held that California contract law allowed Cathay Pacific to invoke ASAP’s arbitration clause because the Herreras’ breach of contract claim was “intimately founded in and intertwined with” ASAP’s terms and conditions. ASAP had effectively acted as a “middleman” for “refund-processing purposes.” The Ninth Circuit then rejected the Herreras’ arguments that it would be unfair to allow Cathay Pacific to invoke the arbitration clause because “the refund process was not clear.”

Herrera v. Cathay Pacific Airways Ltd., No. 21-16083 (9th Cir. Mar. 11, 2024).

District Court Grants Motions to Dismiss Claims Brought by Reinsurer

April 24, 2024 by Brendan Gooley

The U.S. District Court for the Northern District of Texas recently dismissed certain claims brought by a reinsurer related to its efforts to audit an insurer’s broker.

Antares Reinsurance Co. reinsured United Specialty Insurance Co. United Specialty contracted with National Transportation Associates (NTA) to sell United Specialty policies on commission. Antares sought to audit NTA because it suspected it of fraud. A disagreement concerning the terms of the audit ensued, and Antares filed suit against several defendants seeking specific performance of a contractual provision allowing Antares to inspect NTA’s books, asserting various claims, including breach of contract and fraud/fraudulent misrepresentation, and requesting declaratory relief articulating Antares’ rights regarding inspecting NTA’s books.

The district court dismissed Antares’ claims. It found the specific performance claim moot because the defendants “permitted inspection of the relevant books and records” and that “additional” demands for inspection that the defendants had refused were “non-contractual.” The court held that the fraud claims were barred by the economic loss rule, which provides that “malfeasance doesn’t give rise to a fraud claim unless it resulted in damages beyond those recoverable for the contractual breach itself.” The fraud claims, the court held, “resulted in harms indistinguishable from breach of the underlying contract.” Finally, the court held that the request for declaratory relief was duplicative of the breach of contract claims. The defendants did not move to dismiss the breach of contract claim, however, and that claim therefore survived.

Antares Reinsurance Co. v. National Transportation Associates, Inc., No. 4:23-cv-00928 (N.D. Tex. Mar. 20, 2024).

Tax Court Upholds IRS Decision That Premiums Paid to Microcaptive Insurance Companies Did Not Qualify for Tax Deductions

April 22, 2024 by Brendan Gooley

The U.S. Tax Court recently upheld a determination by the IRS that premium payments to certain microcaptives could not be deducted for tax purposes because the premium payments were not actually for “insurance.”

Dr. Sunil S. Patel, who operated an eye surgery center and two research centers, supplemented his businesses’ commercial insurance by purchasing policies from two purported microcaptive insurance companies. Dr. Patel and his wife, Dr. McAnally-Patel, claimed tax deductions for the premiums paid to those microcaptives. The IRS concluded that the premiums could not be deducted and assessed deficiencies and penalties against the Patels.

The Patels challenged the IRS’ determination, but the Tax Court upheld it. The court noted that the Tax Code “does not prohibit deductions for microcaptive insurance premiums,” but “the deductibility of insurance premiums depends on whether the premiums were truly payments for insurance.” To analyze that question, the court examined “four criteria,” whether:

(1) the insurer distributes the risk among its policy holders; (2) the arrangement is insurance in the commonly accepted sense; (3) the arrangement shifts the risk of loss to the insurer; and (4) the arrangement involves insurable risks.

The court found that the microcaptives “fail[ed] to demonstrate risk distribution.” It found a “circular flow of funds,” “no evidence of any arm’s-length negotiations in determining the premiums paid,” and no evidence that the premium “was actuarially determined.”

It also concluded that, “aside from [some] organizational formalities,” the microcaptives “were not operated as insurance companies” in the commonly accepted sense. They “had no employees of their own that performed services” and a separate entity “orchestrated [their] activities so that they appeared to be engaged in the business of issuing insurance contracts.”

The court therefore declined even to consider “whether [the microcaptives’] transactions involved insurance risk or risk shifting.” The Tax Court sustained the IRS’ conclusion that the Patels could not deduct the premiums paid to the microcaptives.

Patel v. Commissioner of Internal Revenue, Nos. 24344-17, 11352-18, 25268-18 (U.S.T.C. Mar. 26, 2024).

Fourth Circuit Holds That District Court Lacks Jurisdiction to Confirm Arbitration Award

April 5, 2024 by Brendan Gooley

The Fourth Circuit Court of Appeals recently held that a district court lacked jurisdiction to confirm an arbitration award because the court did not have an independent basis for jurisdiction on the face of the application and could not “look through” to see if it had such jurisdiction.

An arbitration panel issued an award in favor of SmartSky Networks LLC. SmartSky moved to enforce that award. The district court confirmed the award and the parties who lost the arbitration appealed to the Fourth Circuit. They claimed that the district court lacked subject matter jurisdiction to confirm the award under the U.S. Supreme Court’s 2022 decision in Badgerow v. Walters, which held that to enforce or vacate an arbitration award under Sections 9 or 10 of the Federal Arbitration Act, a court “must have a basis for subject matter jurisdiction independent from the FAA and apparent on the face of the application” (i.e., the court cannot “look through” to see if it has jurisdiction in applications under Sections 9 or 10).

The Fourth Circuit agreed that the district court lacked jurisdiction:

At the time the parties filed their respective Section 9 and 10 applications, they were no longer litigating over their fraught business relationship — those issues and claims had been resolved by the Tribunal. Instead, the parties’ dispute focused on the enforceability of the arbitral award. To find it had jurisdiction over what was in essence a contract dispute among the parties, the district court had to “look through” to the civil lawsuit and determine that a federal claim existed.

The Fourth Circuit explained that the district court could not do that under Badgerow.

The Fourth Circuit also rejected SmartSky’s argument that the district court had jurisdiction because it had stayed the action pending arbitration and therefore retained jurisdiction. The court explained: “Section 8 [of the FAA] is the only section that expressly provides that a district court may ‘retain’ jurisdiction to enforce, vacate, or modify an award. Sections 9 and 10 do not contain such language and … do not provide any escape from Badgerow’s holding that there must be an independent basis for subject matter jurisdiction for applications.”

SmartSky Networks, LLC v. DAG Wireless, Ltd., No. 22-1253 (4th Cir. Feb. 13, 2024).

D.C. Circuit Affirms Decision Vacating and Remanding Arbitration Decision

April 3, 2024 by Brendan Gooley

The D.C. Circuit Court of Appeals recently affirmed a district court’s decision to vacate and remand an arbitration decision in a case concerning companies’ withdrawal from a retirement fund.

For many years, various companies made contributions on behalf of their employees to the IAM National Pension Fund. Several of those companies decided to withdraw from the fund, however. Pursuant to the Multiemployer Pension Plan Amendments Act (MPPAA), the employers had to pay fees associated with their withdrawal. The fees were calculated by an actuary. Under the MPPAA, employers who seek to challenge the fees assessed must do so through arbitration. In this case, several employers initiated arbitration to dispute the fees.

The arbitrator concluded that the fund “erred in its calculations” by using certain assumptions and issued an array of other rulings. The fund sought to confirm in part and vacate in part the arbitrator’s award. The district court vacated the arbitration award and remanded the case to the arbitrator after ruling, in relevant part, that the actuaries had broader discretion to make assumptions that the arbitrator had concluded. The fund and several companies appealed.

The D.C. Circuit affirmed, holding that the district court “correctly found that the arbitrator erred in concluding that an actuary must use” certain assumptions and methods as of a particular date “when calculating withdrawal liability” under the MPPAA.

Trustees of the IAM National Pension Fund v. M&K Employee Solutions, LLC, No. 22-7157 (D.C. Cir. Feb. 9, 2024).