Carlton Fields

NATURE OF REINSURANCE RELATIONSHIP PRECLUDES DISMISSAL OF NEGLIGENCE CLAIM BROUGHT BY REINSURER AGAINST CEDENT

April 7, 2015 by Carlton Fields

A federal district court has denied a cedent’s motion to dismiss a negligence claim brought against it by its reinsurer, Old Republic National Title Insurance. The dispute between Old Republic and First American Title arose out of a reinsurance agreement where Old Republic agreed to assume a specified share of First American’s contractual liability under certain title insurance policies. First American negotiated a settlement of claims brought under those title policies and then asserted that Old Republic was obligated under the reinsurance agreement to pay its proportionate share of that sum. Old Republic paid the amount under a full reservation of rights, then sued First American for several causes of action, including negligence. The negligence claim alleged that when Old Republic made the offer for the reinsurance agreement, “First American undertook a duty to underwrite the Title Policies in a reasonably prudent manner and created a special relationship” with Old Republic that First American then breached.

First American moved to dismiss the negligence claim, arguing that the “gist of the action” doctrine precludes it. That doctrine states that an action in tort will not arise for breach of contract unless the tort action arises independent of the existence of the contract. First American argued that its liability stems from the parties’ reinsurance agreement and any duty owed by First American to Old Republic arises solely out of that contractual relationship. The court rejected that argument and the doctrine’s application, stating that the nature of the relationship between reinsurers and cedents, including the exercise of utmost good faith between them, supported a duty grounded in social policy, not solely in contract. The court further found that irrespective of the source of the duty owed, the negligence claim would not be dismissed because Old Republic, in the alternative, sought to rescind the reinsurance agreement and if the rescission claim ultimately prevailed, then the “gist of the action” would no longer be contractual. Old Republic National Title Insurance Co. v. First American Title Insurance Co., No. 8:15-cv-126 (USDC M.D. Fla. March 25, 2015).

This post written by Renee Schimkat.

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COURT FINDS IN FAVOR OF HARBINGER ON $50 MILLION CLAIM INVOLVING PURCHASE OF OLD MUTUAL FINANCIAL LIFE INSURANCE COMPANY

April 6, 2015 by Carlton Fields

In a lengthy opinion detailing extensive findings of fact and law, a New York federal district court entered its order in favor of Harbinger F&G, LLC and against OM Group (UK) Limited in an action stemming from claims arising from the stock purchase agreement for the purchase of Old Mutual Financial Life Insurance Company by Harbinger from OM Group. Under the Agreement, Harbinger was entitled to a $50 million purchase price reduction if the Maryland insurance regulators did not approve a post-closing transaction between Old Mutual and Front Street Re, a reinsurance company owned indirectly by Harbinger, and if Harbinger fulfilled certain other conditions precedent. Harbinger was required to prepare and file certain approval documentation in the form agreed to by the parties, to use reasonable best efforts to obtain governmental approval for the reinsurance transaction and, if the transaction was not approved, Harbinger was required to engage in certain remedial efforts. When the post-closing transaction was not approved but OM Group failed to make the purchase price reduction payment, Harbinger sued. After holding a bench trial on those issues not disposed of on summary judgment, the trial court entered judgment in favor of Harbinger but found OM Group was entitled to the payment of certain fees from Harbinger. “>Harbinger F&G, LLC v. OM Group (UK) Limited, Case No. 12 Civ. 05315 (CRK) (USDC S.D.N.Y. Mar. 18, 2015).

This post written by Leonor Lagomasino.

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COURT DENIES SUMMARY JUDGMENT MOTIONS DESPITE AN EXPRESS AGREEMENT TO ARBITRATE

April 2, 2015 by Carlton Fields

A New York federal district judge denied Plaintiffs McKenna Long & Aldridge, LLP (“McKenna”) and Vincent W. Sedmak (“Sedmak”) motions for summary judgment which sought to stop an arbitration action from Ironshore Specialty Insurance Company (“Ironshore”).

Five years ago, Eidos, LLC (“Eidos”), with McKenna serving as counsel, obtained a $20 million loan from Stairway Capital Management II LP (“Stairway”) to finance an enforcement litigation program. As a precondition for the issuance of the loan, Ironshore provided a loss reimbursement policy in case the original loan was not paid back. The arbitration provision in that policy provided the framework for this litigation. Ironshore refused to pay Eidos pursuant to the loss reimbursement policy due to the alleged misuse of loan funds from Sedmak. Ironshore sued to compel arbitration under the policy and McKenna and Sedmak simultaneously moved for summary judgment. As both McKenna and Sedmak did not sign the loss reimbursement policy agreement, the court noted that the arbitration provision therein would only be enforced under the following theories–1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.

The court found “no triable issue as to whether plaintiffs have directly benefited from the Policy, or as to whether McKenna was an intended third-party beneficiary of the Policy and knowingly accepted benefits stemming from the Policy.” The court noted that McKenna was estopped from denying arbitration as they were the direct recipient of over $11 million in legal fees. Furthermore, as part of the loan was used to pay Sedmak’s salary and certain loan proceeds were transferred to a corporation owned by Sedmak, Sedmak was a third party beneficiary and therefore could not contest Ironshore’s right to arbitration. McKenna Long & Aldridge, LLP v. Ironshore Specialty Ins. Co., No. 14-CV-6633 KBF, 2015 WL 144190, at *1 (S.D.N.Y. Jan. 12, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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ARBITRATION ROUNDUP

April 1, 2015 by Carlton Fields

Award Authorizing Class Action Litigation

Emilio v. Sprint Spectrum L.P., Case No. 14-732-cv (2d Cir. Nov. 12, 2014) (affirming denial of motion to vacate award; district court did not err by finding that arbitrator did not exceed powers nor manifestly disregard law when it ruled that Sprint could not be compelled to proceed with class arbitration and plaintiff could not be compelled to proceed with bilateral arbitration under state law, which the arbitration agreement stated would govern);

Emilio v. Sprint Spectrum L.P., Case No. 1:11-cv-03041 (USDC S.D.N.Y. Dec. 23, 2014) (denying motion to dismiss class action or strike class allegations; defendant collaterally estopped from relitigating basis for prior arbitration rulings authorizing class action litigation)

Manifest Disregard

NDV Investment Co. v. Apex Clearing Corp., Case No. 1:14-cv-00923 (USDC S.D.N.Y. Jan. 8, 2015) (denying motion to vacate FINRA award; granting cross-motion to confirm award; no manifest disregard of the law for misapplying FINRA rule or for the panel’s failure to permit a full hearing; no arbitrator “misconduct” for refusing to hear evidence);

Power Partners Mastec, LLC v. Premier Power Renewable Energy, Inc., Case No. 1:14-cv-08420 (USDC S.D.N.Y. Feb. 20, 2015) (granting petition to confirm nearly $3 million award; no manifest disregard of law; arbitrator’s findings were supported by the record);

Sotheby’s International Realty, Inc. v. Relocation Group, LLC, Case No. 14-253-cv (2d Cir. Jan. 6, 2015) (reversing district court’s order that vacated award as manifest disregard of law; court failed to apply test, which includes finding that relevant law was “clear,” determining that no “barely colorable justification” for the panel’s decision existed, and addressing alternate readings of the relevant law that might have supported the arbitrators’ decision)

Exceeding Authority

Seagate Technology, LLC v. Western Digital Corp., Case No. A12-1944 (Minn. Oct. 8, 2014) (affirming appellate court’s order reinstating $500 million arbitration award; defendants did not waive their rights to challenge the award, but a review of the merits of the award showed that arbitrator did not exceed authority by issuing punitive sanctions for defendants’ fabrication of evidence, which included excluding defendants’ evidence and defenses);

BNSF Railway Co. v. Alstom Transportation, Inc., Case No. 13-11274 (5th Cir. Feb. 6, 2015) (reversing order vacating arbitration award; court improperly reviewed merits of arbitrators’ interpretation of contract instead of limiting review to “whether the arbitrators even arguably interpreted the Agreement in reaching their award”)

Scope of FAA

Wiand v. Schneiderman, Case No. 14-11203 (11th Cir. Feb. 10, 2015) (affirming district court’s order compelling arbitration and denying motion to vacate award; court-appointed receiver’s “clawback” action against estate of investor in Ponzi scheme is not exempt from FAA; court did not err in referring validity of contract to arbitration; court did not err in holding arbitrator did not exceed powers; court would not review arbitrator’s evidence-based rulings)

This post written by Michael Wolgin.
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COURT APPLIES CONCEPCION AND COMPELS ARBITRATION, REJECTING CLAIM THAT AGREEMENT PRECLUDED “EFFECTIVE VINDICATION OF STATE STATUTORY RIGHTS”

March 31, 2015 by Carlton Fields

In a putative class action alleging violation of Pennsylvania labor laws, unfair trade practices, and other state law claims brought by a franchisee against the franchisor and two subsidiaries, the court stayed the proceedings and compelled individual arbitration. The franchise agreement contained an arbitration clause and a class arbitration waiver provision, among other provisions limiting litigation, discovery, and certain damages, and shifting certain fees and costs. The plaintiff franchisee argued that the arbitration provision was unenforceable because it prevented him from effectively vindicating his state statutory rights. The court rejected this argument, holding that Concepcion and other U.S. Supreme Court precedent confirmed that there is “absolutely no rule that prevents arbitration when a person cannot effectively vindicate his or her state statutory rights,” and that the “effective-vindication” rule may apply only when the FAA is alleged to conflict with another federal law. The court also applied equitable estoppel to reject the franchisee’s alternative argument that only the franchisor, the sole signatory to the franchise agreement, could compel arbitration; the court found that the franchisee relied on the franchise agreement in his pleading, and that a close relationship existed among the defendant entities. The court also construed the agreements between the parties to find that the claims asserted by the franchisee fell within the scope of the arbitration agreement. Last, the court construed the scope of the arbitration provision and held that it applied to the franchisee’s claims, notwithstanding the franchisee’s argument that his claims did not arise out of the franchise agreement. The provision covered disputes “arising out of or relating to” the “rights and obligations of the parties,” which clearly applied. Moreover, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” (citing Stolt-Nielsen). Torres v. Cleannet, U.S.A., Inc., et al., Case No. 2:14-cv-02818 (USDC E.D. Pa. Feb. 5, 2015).

This post written by Michael Wolgin.

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