Brendan Gooley

Second Circuit Concludes Suit to Recover on Defaulted Foreign Bonds Was Untimely

August 31, 2022 by Brendan Gooley

The Second Circuit Court of Appeals recently concluded that a claim to recover on defaulted bonds issued by a foreign sovereign was untimely under New York’s six-year statute of limitation.

Bainbridge Fund Ltd. owned several bonds issued by the Republic of Argentina. Argentina defaulted on those bonds in 2001. In 2016, Bainbridge sued to recover on those bonds. The Southern District of New York concluded that Bainbridge’s suit was barred by New York’s six-year statute of limitation for most breach of contract actions. Bainbridge appealed.

On appeal, Bainbridge argued that (1) a 20-year statute of limitation for recovery of certain bonds applied to its claim and (2) even if the six-year statute of limitations applied, it had been tolled because Argentina had “acknowledged” the debt it owed on the bonds.

The Second Circuit rejected both arguments and affirmed the district court’s dismissal.

First, the Second Circuit held that the 20-year statute did not apply to the bonds issued by Argentina because that statute applied only to bonds issued by “the state of New York or … any person, association or public or private corporation,” and Argentina, a foreign sovereign, was not a “person” or other qualified entity under the statute. The six-year statute therefore applied.

Second, the Second Circuit held that the six-year statute had not been tolled. Although the Second Circuit acknowledged that the statute could be tolled where a debtor makes a written acknowledgement from which a promise to pay may be fairly implied, Argentina had made no such acknowledgement. To the contrary, quarterly financial statements issued by Argentina did not manifest an implied promise to pay defaulted bonds and Argentina had “repeatedly stated that it would not repay bonds not submitted to [an] exchange [program] and that these bonds ‘may remain in default indefinitely.’” Because tolling did not apply, Bainbridge’s claim was time barred.

Bainbridge Fund Ltd. v. Republic of Argentina, Nos. 21-37, 21-38 (2d Cir. June 22, 2022).

Second Circuit Concludes That Nigerian Ruling on Enforcement of Arbitration Award Is Entitled to Comity

August 10, 2022 by Brendan Gooley

The Second Circuit Court of Appeals recently partially refused to enforce a foreign arbitration award on the ground that it was required to give comity to a foreign court decision concerning that award.

Esso Exploration and Production Nigeria Ltd. entered into a contractual agreement with the Nigerian government to develop Nigerian oil fields. The agreement provided that the Nigerian National Petroleum Corp. (NNPC) was entitled to obtain (“lift”) portions of the extracted oil. The agreement also included an arbitration clause requiring arbitration in Nigeria.

A dispute arose regarding whether NNPC was “lifting” more than it was allowed. Esso and NNPC arbitrated that issue in Nigeria and the arbitration panel awarded Esso approximately $1.8 billion plus interest. NNPC challenged that award in Nigerian courts. A Nigerian court set aside part of the award. Esso meanwhile petitioned the U.S. District Court for the Southern District of New York to confirm its arbitration award in full. The district court denied Esso’s petition in full, concluding that it was required to give comity to the Nigerian court decision.

The Second Circuit affirmed in part. It agreed that the district court was required to give comity to the Nigerian court’s decision but noted that the Nigerian court had only set aside the arbitration award in part. There was therefore nothing preventing U.S. courts from enforcing the aspect of the award that Nigerian courts had not vacated.

Esso Exploration & Production Nigeria Ltd. v. Nigerian National Petroleum Corp., No. 19-3159 (2d Cir. July 8, 2022)

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).