Brendan Gooley

Tenth Circuit Affirms Tax Court’s Decision That Captive Insurance Arrangement Did Not Qualify for Tax Exemption

August 8, 2022 by Brendan Gooley

The Tenth Circuit Court of Appeals recently affirmed the tax court’s decision that a captive insurance arrangement that reinsured a number of other captive insurers did not qualify for a tax exemption.

Reserve Mechanical Corp. issued a number of insurance policies to Peak Mechanical Corp. Reserve and Peak had the same owners, and the arrangement was a form of captive insurance. The arrangement may have been an attempt to obtain tax benefits pursuant to a program that allowed both the deductibles and premiums to be exempt from taxation.

To attempt to qualify for that program, Reserve tried to ensure that at least 30% of its premiums came from companies not affiliated with it. It therefore arranged, among other things, through Capstone Associated Services Ltd. to reinsure a number of other captive insurers that worked with Capstone. Capstone also arranged for each captive insurer it worked with to assume a small percentage of risk from coinsuring thousands of vehicle service contracts.

The IRS concluded that this arrangement did not qualify for an exemption and assessed taxes.

The Tenth Circuit affirmed. It agreed with the IRS that Reserve had not satisfied its burden to demonstrate that its purported insurance transactions were truly arrangements for insurance. Although Reserve complied with some, but not all, of the formalities for insurance companies and went through some of the motions associated with pricing insurance premiums, the record reflected that no “experience, expertise, or studies supported the need for Peak to obtain the policies” and the “premiums for [certain] additional insurance were not supported by any study of similar commercially available policies or careful analysis of Peak’s risks of loss.”

With respect to the reinsurance agreements, the Tenth Circuit concluded that those agreements “did not create any meaningful risk for Reserve” and noted that “Reserve did not satisfy even the distribution threshold that Capstone set for it — obtaining 30% of its insurance premiums by insuring unaffiliated risks.”

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, No. 18-9011 (10th Cir. May 13, 2022).

D.C. Circuit Affirms Dismissal of Claims Against Reinsurers

June 2, 2022 by Brendan Gooley

The D.C. Circuit recently affirmed a judgment in favor of reinsurers in a suit brought by an insured after concluding that the insured could not assert breach of contract and related claims against the reinsurers because the insured had no direct relationship with the reinsurers.

Vantage Commodities Financial Services I LLC hired Equifin Risk Solutions LLC to create a captive insurance entity (Assured Risk Transfer PCC LLC (ART)) to manage risk associated with its business of financing retail energy companies. Equifin found several reinsurers to reinsure ART. One of the companies to which Vantage loaned money (Glacial Energy Holdings) defaulted. Vantage submitted a claim to ART. An arbitrator ruled in Vantage’s favor, but ART could not cover the loss. The reinsurers then informed ART that any claim would be denied because ART had failed to notify them of Vantage’s claims or provide proof of Vantage’s losses within the time limit required in the reinsurance agreements.

Vantage then filed suit against ART, the reinsurers, and companies involved with the formation and management of ART (“Willis Defendants”). Vantage asserted claims for breach of contract and sought a declaratory judgment regarding the reinsurers’ duties and further asserted claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The district court dismissed Vantage’s breach of contract claim and request for declaratory relief against the reinsurers and then granted summary judgment to the reinsurers on the remaining claims.

The D.C. Circuit affirmed. With respect to Vantage’s breach of contract and declaratory judgment claims, the court held that “Vantage failed to plead facts sufficient to show a contractual relationship with the Reinsurers.” The court noted that reinsurers generally do “not have a direct contractual relationship with the original insured unless the terms of the reinsurance agreement create such a relationship,” and the agreements in this case created no such relationship. There were “no allegations that the Reinsurers dealt directly with Vantage or otherwise treated Vantage as if it were directly insured by them.” Turning to Vantage’s remaining claims, the court explained that there was “no record evidence of any consideration to support [Vantage’s] alleged implied contract with the Reinsurers.” The consideration had been between ART and the reinsurers. Vantage’s promissory estoppel and unjust enrichment claims meanwhile suffered “from the absence of any evidentiary support.” The claims “depend[ed] on the existence of an agency relationship between the Reinsurers and either ART or the Willis Defendants,” but “Vantage point[ed] to no evidence of statements or conduct by the Reinsurers that authorized ART or the Willis Defendants to act on their behalf.” The reinsurance binders meanwhile “merely disclose[d] the existence and terms of a reinsurance agreement between ART and the Reinsurers.” Finally, Vantage’s claims against the Willis Defendants for negligence were barred by the “economic loss doctrine” because Vantage sought “to recover purely economic losses” and no exception applied.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, No. 21-7033 (D.C. Cir. Apr. 22, 2022).

Second Circuit Concludes That Workers Who Deliver Baked Goods Are Not Transportation Workers and Must Arbitrate Their Claims

May 31, 2022 by Brendan Gooley

A divided panel of the Second Circuit recently held that independent distributors who distribute bakery products were not transportation workers and therefore were not exempt from the Federal Arbitration Act (FAA). The Second Circuit therefore concluded that the transportation workers were bound by an arbitration clause in their agreements.

The plaintiffs were “independent distributors” who “own[ed] distribution rights” to distribute baked goods in Connecticut. The plaintiffs contracted with subsidiaries of Flowers Foods Inc. for those rights. They would “pick up” “baked goods from local Connecticut warehouses and deliver the goods to stores and restaurants within their assigned territories.” The plaintiffs “earn[ed] the difference between the price at which” they “acquire[d] the bakery products” “and the price paid by the stores and restaurants.” “In their roles as independent distributors, the plaintiffs” sought to “maximize sales; solicit new locations [to make sales]; stock shelves and rotate products; remove stale products; acquire delivery vehicles; maintain equipment and insurance; distribute Flowers’ advertising materials and develop their own (with prior approval by Flowers); retain legal and accounting services; and hire help.” The plaintiffs could also sell their distribution rights for a profit and carry other goods but did not carry any other goods.

The plaintiffs filed a putative class action alleging violations of the Fair Labor Standards Act and Connecticut wage laws. The defendants moved to compel arbitration pursuant to an arbitration clause in the distribution agreements. The plaintiffs sought to avoid arbitration by arguing that they were transportation workers and were therefore exempt from arbitration under the FAA’s exclusion for “seamen, railroad employees, [and] any other class of workers engaged in foreign or interstate commerce” (i.e., transportation workers). The district court concluded that the plaintiffs were not “transportation workers” and therefore compelled arbitration.

A Second Circuit panel affirmed with one judge concurring and one judge dissenting. The Second Circuit defined “transportation workers” “by affinity” (i.e., by looking to the examples of transportation workers in the FAA’s exemption: Seamen and railroad employees). Both seamen and railroad employees, the court noted, work in the transportation industry. The Second Circuit concluded that “an individual works in a transportation industry if the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers, and the industry’s predominant source of commercial revenue is generated by that movement.”

Applying that standard to the facts before it, the Second Circuit concluded that the plaintiffs were “in the baking industry,” not the transportation industry. Although the plaintiffs spent “appreciable parts of their working days moving goods,” “the stores and restaurants [were] not buying the movement of the baked goods, so long as they arrive.” “The charges [were] for the baked goods themselves, and the movement of those goods [was] at most a component of total price. The commerce [was] in breads, buns, rolls, and snack cakes — not transportation services.”

The Second Circuit also noted that the distributor agreements identified the industry that the distributors worked in as the “baking industry,” not the transportation industry.

Because the plaintiffs worked in the baking industry, not the transportation industry, they were not exempt from the FAA, and the district court therefore properly compelled arbitration.

Bissonnette v. LePage Bakeries Park St., LLC, No. 20-1681 (2d Cir. May 5, 2022).

Southern District of New York Concludes That Equitable Tolling Does Not Save Untimely Petition to Confirm Foreign Arbitration Award

May 11, 2022 by Brendan Gooley

The Southern District of New York has held that a petitioner did not show that it diligently pursued its rights or that extraordinary circumstances existed to equitably toll the three-year statute of limitation to confirm a foreign arbitration award. The court therefore dismissed the petition to confirm the award on the ground that it was time-barred.

PT Rahajasa Media Internet entered into contracts with a branch of the Indonesian government to provide internet access to various locations in Indonesia. PT Rahajasa completed certain work on the projects before the Indonesian government apparently decided not to proceed with the projects. In early 2017, PT Rahajasa and the Indonesian government arbitrated how much the Indonesian government owed PT Rahajasa. On July 27, 2017, the Indonesian National Board of Arbitration awarded PT Rahajasa approximately $17 million. PT Rahajasa registered the award in an Indonesian court in August 2017, and the award became final and binding in September 2017.

On March 26, 2018, PT Rahajasa made a formal application for an order of execution in the Indonesian court, which PT Rahajasa claimed the Indonesian court was required to issue within 30 days of PT Rahajasa’s request. The Indonesian court never issued the order, despite PT Rahajasa apparently following up on its application several times.

On December 30, 2020, PT Rahajasa petitioned the Southern District to confirm the award. The Southern District issued an order to show cause as to why the petition should not be dismissed on the ground that it was filed more than three years after the arbitration award was entered.

In response, PT Rahajasa argued that the three-year statute of limitation should be equitably tolled. It claimed, among other things, that the Indonesian government had colluded to preclude it from enforcing the award in Indonesia and that the COVID-19 pandemic and other issues had hampered its attempts to enforce the award in Indonesian courts in a timely fashion.

The district court concluded that equitable tolling did not apply because PT Rahajasa had not established that it had been diligent in pursuing its rights or that extraordinary circumstances stood in its way and prevented its timely filing. The court noted that PT Rahajasa had not explained why it waited six months after the award became final to seek an order of execution or what, specifically, it did in the years thereafter to follow up on its application or what happened when it did follow up. The court also noted that the COVID-19 pandemic did not arise until years after PT Rahajasa obtained its award. Nor did PT Rahajasa explain what efforts it made to pursue its award when the pandemic required Indonesian courts to begin virtual proceedings. PT Rahajasa also did not explain why it waited until December 2020 to file its petition. With respect to extraordinary circumstances, the court explained that PT Rahajasa’s claims of collusion were “conclusory and speculative” and that PT Rahajasa had not established a causal relationship between these alleged extraordinary circumstances and an inability to petition the Southern District to confirm its award in a timely fashion. The court therefore dismissed the petition.

PT Rahajasa Media Internet v. Telecommunication and Informatics Financing Provider and Management Centre, No. 1:20-cv-11035 (Mar. 31, 2022).

New York Federal Court Confirms Arbitration Award Under Cyprus-Libya Bilateral Investment Treaty

April 15, 2022 by Brendan Gooley

On March 23, 2022, a New York federal court confirmed an award in an arbitration before a tribunal of the International Chamber of Commerce (ICC) between Olin Holdings Ltd. and the state of Libya under a bilateral investment treaty. In the underlying ICC arbitration, Olin claimed that the Libyan government obstructed the operation of, and ultimately expropriated, Olin’s dairy factory in Libya’s capital city Tripoli in violation of the bilateral investment treaty between Libya and Cyprus, where Olin was formed. Olin sought $147,882,000 as compensation for the damages it allegedly incurred as a result.

In June 2016, the ICC tribunal issued a jurisdictional award, concluding that the bilateral investment treaty included an agreement to arbitrate the dispute and that Olin’s prior lawsuits against Libya in Libyan court did not preclude Olin from invoking the arbitration clause. The tribunal held an evidentiary hearing on the merits and issued a final award awarding Olin €18,225,000 in damages; $773,000 for the costs of arbitration; and €1,069,687.70 for general legal costs and expenses, plus simple interest at a rate of 5% per annum from the date of the final award.

Olin petitioned to confirm the final award in New York state court, and Libya removed the petition to federal court. Noting that courts are required to review arbitrators’ decisions “with considerable deference” if the record supplies “clear and unmistakable evidence” that the parties agreed to submit a given issue to arbitration, the court concluded that the terms of reference agreement entered into by the parties at the outset of the ICC arbitration constituted such clear and unmistakable evidence of the parties’ intent to arbitrate with respect to both arbitrability and the substantive issues in the dispute, indicating that deferential review was warranted.

The court noted that under this deferential standard, if the arbitrators “explain their conclusions in terms that offer even a barely colorable justification for the outcome reached, confirmation of the award cannot be prevented by litigants who merely argue, however persuasively, for a different result.” The court further noted that under the New York Convention, the court was required to confirm the final award unless it finds one of the seven grounds for refusal or deferral of recognition or enforcement of the award specified in the Convention. In finding that the ICC tribunal presented more than a “barely colorable justification” for the final award, the court noted that the final award was 143 pages long, and thoughtfully and thoroughly considered and rejected each of Libya’s defenses to Olin’s claims. The court further considered each of the seven enumerated grounds for refusing to confirm an award under the Convention and found that none of those grounds had been met. As a result, the court granted Olin’s motion to confirm the final award. The court separately denied Libya’s motion to dismiss the petition on forum non conveniens grounds, finding that Libya failed to meet its burden to establish any of the factors that would support dismissal of the action in favor of a foreign jurisdiction.

Olin Holdings Ltd. v. State of Libya, No. 1:21-cv-04150 (S.D.N.Y. Mar. 23, 2022).