Carlton Fields

Seventh Circuit Affirms Ruling Denying Motion to Compel Arbitration, Holding That Company Waived Right to Arbitrate

November 7, 2018 by Carlton Fields

GC Services Limited Partnership (“GC Services”), a debt collector hired by a bank to collect an allegedly unpaid balance on a credit card, advised plaintiff Francina Smith (“Smith”) that it would commence a collection proceeding unless she disputed the debt in writing. In July 2016, Smith filed a class action suit in Indiana federal court against GC Services, alleging violations of the Fair Debt Collections Practices Act. The credit agreement between the creditor and Smith contained an arbitration clause and a class waiver for all disputes. In August 2016, GC Services filed a motion to dismiss the suit on several grounds but did not mention the arbitration clause in the agreement. Plaintiff then amended her complaint, to which GC Services responded and filed a second motion to dismiss that also did not mention the arbitration agreement. In March 2017, while several discovery disputes were ongoing, GC Services notified Smith of the arbitration agreement and demanded arbitration. In response, Smith refused to arbitrate. In April 2017, GC Services filed an answer to the complaint that again did not mention the arbitration agreement. In June 2017, the Indiana district court denied GC Services’ motion to dismiss. Thereafter, in August 2017, GC Services then filed its motion to compel arbitration. The Indiana district court denied the motion to compel arbitration on two grounds: 1) as a non-signatory, GC Services could not enforce the arbitration agreement; and 2) GC Services waived its right to arbitrate “by not diligently asserting that right.” GC Services appealed.

The Seventh Circuit initially noted that it did not need to address the issue of whether GC Services, a non-signatory to the underlying agreement, can compel arbitration if the district court was correct that the right to arbitrate was waived. Thus, the Seventh Circuit first analyzed whether GC Services waived the right to arbitrate. In analyzing the issue, the Court first found that “GC Services acted inconsistently with the right to arbitrate.” It noted that GC Services did not demand arbitration until eight months after suit was brought and then waited another five months thereafter before moving to compel arbitration. The Seventh Circuit also noted that GC Services, a sophisticated debt collection agency, would be aware that credit card agreements usually include arbitration clauses and it could have found the agreement at issue by simply searching the internet. The Court also noted that even after GC Services discovered the existence of the arbitration agreement, it made no mention of it in its answer filed in court nor did it request to supplement its briefing on the pending motions to dismiss and for class certification. The Seventh Circuit found that such actions were “unjustified and manifestly inconsistent with an intention to arbitrate” and held that the district court’s conclusion that GC Services waived its right to arbitrate was not erroneous. The Seventh Circuit also noted that Smith would be prejudiced if the case were to go to arbitration at that time because GC Services waited to move to compel arbitration until after it received the decisions on the motion to dismiss and class certification against it, which the Court noted was an attempt to “play heads I win, tails you lose.” The Seventh Circuit affirmed the district court’s decision that GC Services waived its right to compel arbitration.

Smith v. GC Services Limited Partnership, No. 18-1361 (7th Cir. Oct. 22, 2018).

This post written by Jeanne Kohler.
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FSOC Rescinds Prudential’s Designation as Systemically Important Financial Institution

November 6, 2018 by Carlton Fields

The Financial Stability Oversight Council (“FSOC”) announced on October 17, 2018 that it has voted unanimously to rescind the designation of Prudential Financial Inc. (“Prudential”) as a systemically important financial institution (“SIFI”). Prudential is currently the largest life insurance company and the seventh largest insurer and bank holding company in the United States. Due to the size, scope and complexity of its business, it was labeled a SIFI in 2013 and added to the list of nonbanks considered “too big to fail” – those whose collapse the Treasury Department believed could threaten the stability of U.S. financial markets. SIFIs are subject to strict supervision and oversight by the Federal Reserve. Pursuant to the Dodd-Frank Act, the FSOC must annually reevaluate the continued necessity of a SIFI-designation.

The FSOC previously identified three channels through which the negative effects of a SIFI’s distressed finances could be transmitted to the market, including exposure to the SIFI by market participants, asset liquidation, and the inability or unwillingness of the SIFI to carry out critical functions or services. In 2013, the FSOC found the threat posed by Prudential arose primarily from exposure and asset liquidation channels. According to the FSOC’s most recent evaluation, although certain aspects of Prudential’s business and activities have not materially changed since 2013, several factors have significantly affected its previous conclusion that Prudential could cause financial instability if it experienced material financial distress. The factors include actions taken directly by Prudential, such as creating and dissolving captive reinsurance companies and restructuring debt, as well as certain critical regulatory developments and related initiatives by the National Association of Insurance Commissioners.

Notwithstanding the FSOC’s determination, Prudential and eight other insurance companies remain designated as globally significant SIFIs by the International Association of Insurance Supervisors and the Financial Stability Board. Two of these insurers had also been designated as SIFIs under the Dodd-Frank Act, but the labels were since rescinded or otherwise removed.

This post written by Alex Silverman.
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European Reinsurers Question Whether Proposed Changes to the Credit for Reinsurance Models Would Ensure Compliance with the Covered Agreement

November 5, 2018 by Carlton Fields

We have posted a number of times on the Covered Agreement between the U.S. and the E.U. concerning the reduction of collateral requirements for reinsurance provided by reinsurers domiciled in the E.U. The approach of the National Association of Insurance Commissioners (“NAIC”) to the implementation of the Covered Agreement, through its Reinsurance Task Force, has been based upon proposed amendments to the Credit for Reinsurance Model Act and Credit for Reinsurance Model Regulation, with the assumption being that the adoption of the revised Models by the individual states would ensure compliance with the Covered Agreement. Drafts of the revised Models have been under consideration, and are scheduled to be presented for a vote at the NAIC’s Fall National Meeting in approximately two weeks. The Reinsurance Advisory Board (“RAB”), which is a trade association composed of European domiciled reinsurers that purport to account for “approximately 60% of worldwide reinsurance business,” has submitted a comment letter to the chair of the NAIC’s Reinsurance Task Force expressing doubts over whether the proposed revisions to the Models would appropriately implement the Covered Agreement. This is potentially a serious issue, because if the revised Models do not appropriately implement the requirements of the Covered Agreement, the adoption of the revised Models by the states might not save state credit for reinsurance laws from preemption by the Covered Agreement. The RAB is represented at the CEO level by Gen Re, Hannover Re, Lloyd’s of London, Munich Re, Partner Re, Scor, and Swiss Re.

While many of the comments in the RAB’s letter concern fairly modest wording issues, one of the concerns expressed by the RAB is that “some of the language in the exposure drafts [of the proposed Model revisions] deviates significantly from the language of the bilateral agreement [i.e., the Covered Agreement] and thereby provides extensive discretion to state regulators in their compliance with the terms of the bilateral agreement.” We raised this issue as a possible concern in our last post on the Covered Agreement. One of the criticisms of the Covered Agreement in the Congressional hearing on the agreement shortly after it was announced was that it was too rigid, and took away the discretion and flexibility that individual state insurance commissioners have in our state-based structure of insurance regulation. The focus of the letter on the ability of individual state insurance commissioners to exercise some discretion in the implementation of the Models raises an issue that may be problematic. It will be interesting to see if and how the NAIC responds to this letter.

On a related note, the U.S. Department of the Treasury has announced plans to engage in discussions with the United Kingdom aimed at agreeing to a Covered Agreement with the U.K. that would be similar to that in place with the E.U. The NAIC has stated its position on that announcement.

This post written by Rollie Goss.
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New York Federal Court Confirms Arbitration Award in Credit Insurance Dispute Over Material Misrepresentations Based, In Part, on Underwriters’ Testimony of Materiality

October 11, 2018 by Carlton Fields

The Southern District of New York federal confirmed an arbitral award related to a credit insurance policy claim over claims of manifest disregard of the law related to the materiality of misrepresentations in the insurance application. In the underlying credit agreement, HSBC Bank Brasil (“HSBC”) agreed to extend $50 million in credit to Casablanca International Holdings (“Casablanca”) with repayment guaranteed by Schahin Engenharia S.A. (“Schahin”). The credit insurers required HSBC to complete an application that included questions regarding past defaults, history of late payments, and repayment difficulties in the course of insuring the credit agreement if Schahin failed or refused to honor its guarantor obligations. When Casablanca eventually defaulted on its obligations and both Casablanca and Schahin filed bankruptcy, HSBC submitted a claim to the insurers. An arbitrator dismissed HSBC’s claims after finding that it made material misrepresentations in the insurance application that rendered the policy void ab initio, where HSBC denied knowledge of any circumstances that would raise the likelihood of loss.

The central dispute was whether the arbitrator manifestly disregarded the law on materiality of misstatements in an insurance application, specifically whether underwriters’ testimony alone can prove materiality.

First, the court found the arbitrator’s decision did not manifestly disregard the law on materiality. The court distinguished the cases cited by HSBC’s successor-in-interest because those cases all addressed the sufficiency of underwriters’ testimony in the context of motions for summary judgment. In the context of a summary judgment standard, the issue is whether underwriters’ testimony alone demonstrates materiality as a matter of law. In the present context, however, the parties did not move for summary judgment and instead conducted a full hearing on the merits. Therefore, the insurers in this setting were not required to prove material misrepresentation as a matter of law, but merely a matter of fact to the fact-finder. Furthermore, the court noted that even if the arbitrator incorrectly interpreted the law, he had a colorable justification sufficient to preclude vacatur.

Next, the court concluded that even if the insurers were required to introduce additional evidence of materiality beyond the underwriters’ testimony, it was satisfied they had done so. Specifically, the court noted that the issuance of the policy was “expressly conditioned” upon completion of the insurance application and the insurers’ satisfaction with the answers contained therein. Additionally, the court pointed to the plain text of the insurance policy, credit agreement, and insurance application, credit review reports produced, and New York law as all supporting the arbitrators’ determination that the misrepresentations were material.

Finally, the court granted the cross-motion to confirm the arbitral award. Pursuant to both the New York Convention and the Federal Arbitration Act, there are limited grounds that justify refusal to confirm an arbitral award. The court found none of the grounds articulated under either framework were satisfied in this case, and thus confirmed the award.

Banco Bradesco S.A. v. Steadfast Ins. Co., Case No. 18-331 (USDC S.D.N.Y. Sept. 7, 2018).

This post written by Thaddeus Ewald .

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Texas Department of Insurance Proposes Rule Changes Regarding Captive Insurance

October 10, 2018 by Carlton Fields

The Texas Department of Insurance has proposed a set of amendments to its regulations concerning captive insurance in order to implement changes passed into law by the Texas legislature in 2015 and 2017. The 2015 legislation allowed the Department to approve dividends and distributions to holders of an equity interests in a captive insurance company, while the 2017 legislation allowed captive insurance companies to be formed as captive exchanges, allowed the Commissioner to waive the actuarial opinion required for captive insurers under certain circumstances, allowed the Secretary of State to form a captive insurer before the Department approves that insurer’s formation documents, allowed the Department to approve distributions to policyholders, and provided a procedure for making determinations regarding acceptable qualified jurisdictions and rating agencies for reinsurance transactions.

The proposed regulations establish rules and procedures meant to implement each of these changes.

The Department will be accepting public comments on these proposed regulations through October 22, 2018.

This post written by Jason Brost.

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