Carlton Fields

TEXAS COURT ADJUDICATES CLAIM AGAINST INSURER IN RECEIVERSHIP

August 4, 2016 by Carlton Fields

In mid-June, a Texas court adjudicated a dispute between an insurance receiver and an insurer that claimed that it was owed more than twice as much from the insolvent insurer due to a misclassification of its claim. The dispute arose out of the receivership of the Vesta Fire Insurance Corporation and Global Reinsurance Corporation. Global Re submitted a proof of claim in an amount exceeding $6 million, and the special receiver classified the claim in such a way that Global Re was entitled to about $ 1.5 million. Global Re objected, indicating that it believed its claim should have been allowed in an amount exceeding $3.5 million. The receiver applied for final disposition of Global Re’s disputed claim, and the Texas state court approved the final disposition in the class and amount originally determined by the receiver. Texas v. Vesta Fire Insurance Corp., No. D-1-GN-06-002366 (Tex. Dist. Ct. June 15, 2016).

This post written by Zach Ludens.

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DELAWARE CHANCERY COURT FINDS THAT ANTI-SUIT INJUNCTION BARS TRUSTEE UNDER REINSURANCE TRUST AGREEMENT FROM PURSUING THIRD-PARTY LITIGATION AGAINST INSOLVENT INSURER

August 3, 2016 by Carlton Fields

Freestone Insurance Company is a Delaware-domiciled insurer that has been placed in liquidation. U.S. Bank National Association served as the trustee under a reinsurance trust agreement (the “Trust Agreement”) between Freestone and Companion Property and Casualty Company (“Companion”). The trust agreement secured a reinsurance arrangement that allowed Freestone to do business through Companion in jurisdictions where Freestone was not admitted to sell insurance. Under the arrangement, Companion wrote policies as a “fronting insurer” on Freestone’s behalf, and Freestone reinsured the risks under those policies. The trust agreement required Freestone to place collateral into a trust account for Companion’s benefit, in order to secure Freestone’s reinsurance obligations. In its capacity as trustee, U.S. Bank had various duties related to the collateral. After Freestone failed to make certain payments under the reinsurance arrangement, Companion sought to draw down on the collateral, the value of which was insufficient to cover the claims being made under the reinsured policies. As a result, Companion sued U.S. Bank in federal court in South Carolina for damages, alleging that U.S. Bank breached its obligations as trustee by permitting Freestone to place poor quality collateral in the trust account (the “South Carolina Action”).

As part of Freestone’s liquidation claims process, which is governed by Delaware’s Uniform Insurers Liquidation Act (the “Uniform Act”), U.S. Bank filed certain claims notices against Freestone that relate to the South Carolina Action. U.S. Bank also sought to assert third-party claims against Freestone in the South Carolina Action for contribution and indemnification, and thus filed a motion with the Delaware Chancery Court seeking to lift the anti-suit injunction set forth in the Freestone liquidation Order that barred third-party claims against Freestone other than through the liquidation claims process. The Chancery Court denied U.S. Bank’s motion, finding that granting such relief would contravene the Uniform Act, interfere with the liquidation claims process and impose unnecessary and unwarranted costs on Freestone and the Delaware Insurance Commissioner as Freestone’s statutory receiver. In the Matter of the Liquidation of Freestone Insurance Company, Case No. 9574-VCL (Del. Chancery Ct. July 7, 2016).

This post written by Rob DiUbaldo.
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ILLINOIS FEDERAL COURT DENIES MOTION TO TRANSFER WHERE CONTRACTS ENTERED INTO AND PARTY LOCATED IN ILLINOIS

August 2, 2016 by Carlton Fields

Earlier this month, a federal court in Illinois denied a motion to transfer a case to California. The motion arose out of a reinsurance dispute between the R&Q Reinsurance Company and American Insurance Company. R&Q filed its case in the Illinois federal court, and American moved to transfer the case to California, arguing that R&Q was seeking to “avail itself of Illinois’ notice laws, which arguably provide reinsurers with a less onerous path to avoid their obligations on late notice grounds.” R&Q argued that the case should remain in Illinois, among other reasons, because R&Q was based in Illinois and the reinsurance contracts were executed there. Additionally, R&Q argued that to the extent that AIC’s records were electronic, those documents and that data is “as much present in Illinois” as in California. However, R&Q noted that “this action arises out of events that transpired in at least three, and possibly 5 different states.” American replied that the key witnesses were “either in California or outside of Illinois,” continuing to make its case for a transfer to California. After an oral hearing, the court denied the American’s motion to transfer, keeping the case in Illinois. R&Q Reinsurance Co. v. American Insurance Co., Case No. 1:16-cv-4199 (USDC N.D. Ill. July 11, 2016).

This post written by Zach Ludens.

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FIFTH CIRCUIT REJECTS MISBEHAVIOR CHALLENGE TO ARBITRATION AWARD

August 1, 2016 by Carlton Fields

Foundation Surgery Affiliate of Southwest Houston, LLC (“Southwest”), the owner of a surgical and imaging facility in Houston, entered into a purchase and sale agreement in 2008 with Rainier Capital Acquisitions, LP, which assigned its interest to Rainier DSC (together with the other related defendants-appellees, “Rainier”). Rainier DSC purchased the subject property and sold fractional tenant-in-common interests to Plaintiffs (the “Investors”), who each signed an agreement with Rainier DSC that contained an arbitration provision. After several years, Southwest ceased making certain payments required by the agreement. The Investors sued Southwest, Rainier and individual physician members of Southwest, among others, alleging various state law claims and violations of federal securities laws. After the suit was removed, Rainier moved to compel arbitration. The Investors ultimately agreed to arbitrate their claims against Rainier.

An arbitrator decided in favor of Rainier on all claims, and awarded Rainier over $500,000 in attorneys’ fees and expenses. A federal district court confirmed the award. The Investors then appealed to the U.S. Court of Appeals for the Fifth Circuit, arguing that the arbitration award should be vacated because: (1) the district court’s failure to stay the underlying litigation of the non-arbitrating parties was “misbehavior” that prejudiced the Investors’ right to a fair arbitration against Rainier; and (2) the arbitrator purportedly refused to hear pertinent and material evidence. Applying the standard set forth in Section 10 of the Federal Arbitration Act (“FAA”), the Fifth Circuit confirmed the arbitrator’s award. First, the circuit court found that the Investors’ argument pertaining to the arbitrator’s misconduct was premised on purported misbehavior by the district court, and thus outside the scope of Section 10(a)(3) of the FAA, which provides that misconduct by “arbitrators” provides a basis for vacatur. Second, the circuit court held that the arbitrator’s decision to admit into evidence the deposition testimony of certain witnesses who the arbitrator refused to subpoena to testify at the arbitration did not warrant vacatur of the award, as the Investors were allowed to depose the witnesses and had failed to provide the arbitrator with any basis as to why their testimony was required at the hearing. Rainier DSC 1, et al. v. Rainier Capital Management, L.P., et al., No. 15-20383 (5th Cir. July 7, 2016).

This post written by Rob DiUbaldo.
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SECOND CIRCUIT REJECTS ARGUMENT THAT ARBITRATION CLAUSE WAS VOID DUE TO INABILITY TO VINDICATE RIGHTS UNDER TITLE VII AND ADA

July 28, 2016 by Carlton Fields

The Second Circuit recently affirmed in relevant part, an order compelling arbitration of claims under Title VII and the Americans with Disabilities Act in connection with the termination of the plaintiff’s employment. The plaintiff alleged that the six-month limitations period in the arbitration clause did not provide a sufficient opportunity to exhaust administrative remedies, thus rendering the arbitration agreement invalid. The court rejected this argument, holding that it was “not clear” under Title VII and the ADA that the plaintiff “would be required to exhaust administrative remedies prior to arbitration.” And even if exhaustion prior to arbitration was required under the law, “an arbitration provision that requires an employment discrimination claim to be arbitrated before statutory exhaustion procedures could possibly be completed is easily construed as reflecting the parties’ agreement to waive such requirement, as well as any defense based on that requirement.” Additionally, the court held, “the arbitrator would seem to be the appropriate party to determine these issues and related ones,” such as whether the exhaustion requirement applies and whether the parties’ agreement should be construed to waive that requirement. Virk v. Maple-Gate Anesthesiologists, P.C., et al., Case No. 15-513-cv (2d Cir. July 1, 2016).

This post written by Joshua S. Wirth.

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