John Pitblado

Federal Court Denies Bifurcation of Contract Claims and Uberrimae Fidei and Late Notice Defenses in Reinsurance Dispute

January 7, 2019 by John Pitblado

A Michigan federal court declined to bifurcate a case involving a contract dispute between a ceding insurer, Amerisure, and its reinsurer, Transatlantic Re, in a case arising from underlying asbestos claims dating back to the early 1980’s.

Amerisure sued TransRe alleging that it failed to reimburse Amerisure under a facultative reinsurance agreement covering losses and loss expenses arising from underlying asbestos claim liabilities insured by Amerisure. For its part, TransRe alleged that Amerisure breached the “duty of utmost good faith” by failing to apprise TransRe of all relevant information in its underwriting of the facultative agreement, thereby voiding the agreement. TransRe also claimed that Amerisure’s claim is barred due to late notice.

Amerisure filed a motion to bifurcate the proceedings to address the contract issues first. TransRe opposed the motion arguing that even if the contract issues were resolved, the breach of duty of utmost good faith and late notice issues would remain to be addressed, and thus bifurcation would not result in a more efficient proceeding.

The trial judge referred the issue to a special master, who found that bifurcation was inappropriate, as a phased proceeding would not result in convenience to the parties or judicial efficiency. The report noted that much of the discovery involved on the contract issues would overlap with the issues involved in TransRe’s defense based on breach of the duty of utmost good faith, such as the underwriting intent and meaning of the applicable policy or reinsurance language. The report concluded, therefore, that phasing the proceedings might ultimately be less efficient, rather than more efficient, and recommended denial of the motion.

The judge accepted the special master’s recommendation and denied Amerisure’s motion.

Amerisure Mut. Ins. Co. v. Transatlantic Reinsurance Co., No. 2:18-cv-11966 (USDC E.D. Mich., Nov. 29, 2018 (Report and Recommendation of Special Master), Dec. 20, 2018 (adopting report)).

This post written by John Pitblado.

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SDNY Compels Arbitration of Payment Obligation Dispute Under General Liability “Fronting” Policies

December 20, 2018 by John Pitblado

A New York district court has granted a motion to compel arbitration of matters arising out of general liability “fronting” policies issued by member companies of AIG. The policies were issued to Building Materials Holding Corporation (“BMHC”) and obligated AIG to “front” litigation costs incurred by BMHC’s additional insureds to defend third-party claims. BMHC was then required to reimburse AIG for such costs. The parties’ duties were further defined in a separate Payment Agreement (“Agreement”). AIG was to provide insurance under the policies, and BMHC agreed to pay its “Payment Obligation” to AIG, defined essentially as amounts AIG was required to front for claims covered under the polices. Pursuant to the Agreement, disputes as to the amount of any claim to be reimbursed by BMHC “must immediately be submitted to arbitration.” For any “other unresolved dispute arising out of this Agreement,” such dispute “must be submitted to arbitration.” The arbitrators were to “have exclusive jurisdiction over the entire matter in dispute, including any question as to its arbitrability.”

BMHC disputed whether certain costs paid by AIG were in fact covered under the policies. It refused to reimburse AIG for such amounts and sought declaratory relief in a California action. AIG filed a petition in the Southern District of New York to compel arbitration of the matters in the California action. BMHC argued that the disputed issues were not subject to arbitration. The SDNY identified two issues: (1) did the parties “clearly and unmistakably” reserve arbitrability issues for the arbitrators; and if not (2) is the California action subject to arbitration?

On the first issue, the court held that, under these facts, the “exclusive jurisdiction” language in the Agreement did not unequivocally reserve arbitrability issues for the arbitrators. Because a subsequent addendum to the Agreement contemplated that a court might in certain instances decide such issues, and the Agreement provided no guidance as to which arbitrability issues were reserved for arbitrators, the court found it had jurisdiction to decide whether the matters in the California action fall within the scope of the arbitration.

As to this second issue, however, the court found it “readily apparent” that the California action was subject to arbitration because the complaint was “clearly” predicated on a dispute over BMHC’s “Payment Obligation.” The court rejected BMHC’s attempt to recast the dispute as one involving insurance coverage issues to be determined before triggering any obligations under the Agreement. Even if there were coverage issues to be decided, the court found nothing in the Policies foreclosing arbitration of coverage issues necessary to resolve payment obligations. The court also declined to follow factually similar decisions by the Sixth and Ninth Circuits, finding the arbitration clauses in those cases to be materially different.

National Union Fire Insurance Company of Pittsburgh, PA v. BMC Stock Holdings, Inc., No. 18-CV-5777 (USDC S.D.N.Y. Dec. 3, 2018)

This post written by Alex Silverman.

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California Appellate Court Holds Parties Cannot Contract Around Service Requirements of Hague Service Convention

December 19, 2018 by John Pitblado

Changzhou Sinotype Technology Co., Ltd. (“Changzhou”) is a Chinese company that develops fonts. Changzhou and Los Angeles-based investment firm Rockefeller Technology Investments (Asia) VII (“Rockefeller”), entertained the idea of a joint venture to create a Silicon Valley-based company to develop and market international fonts.

The parties signed what Rockefeller characterized as a memorandum of understanding, and which Rockefeller believed was binding. However, Changzhou characterized the document as a “bei wang lu,” a type of memorandum understood in Chinese to merely record the current state of negotiations, and that the signing of a “bei wang lu” “does not create a binding contract.

After negotiations ultimately broke off, Rockefeller initiated an arbitration, citing the memorandum’s arbitration provision. Changzhou did not respond to the demand for arbitration, nor did it appear or participate in the arbitration Rockefeller filed in California. The arbitrator entered a default award in excess of $414 million against Changzhou.

Rockefeller brought an action to confirm the award in California state court. It effected service on Changzhou in China via mail, as had been “agreed” in the memorandum. Changzhou did not appear in the action, and judgment confirming the award entered in Rockefeller’s favor.

Approximately 15 months later, Changzhou moved to set aside the judgment on the grounds that it had never entered into a binding contract with Rockefeller, had not agreed to contractual arbitration, and had not been served with the summons and petition to confirm the arbitration award in the manner required by the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Hague Service Convention”).

The court denied Changzhou’s petition to vacate, finding service was effective in the action to confirm the award, even though it had not complied with the Hague Service Convention, as the parties were free to contract around the Convention, and had done so.

Changzhou appealed and a California intermediate appellate court reversed, finding that parties may not ‘contract around’ the Hague Service Convention. “[T]he Hague Service Convention does not permit Chinese citizens to be served by mail, nor does it allow parties to set their own terms of service by contract. [Changzhou] therefore was never validly served with process.”

The Appellate Court also did not credit the argument that Changzhou waited too long to challenge service, finding that a lack of personal jurisdiction is not curable, and that “[t]here is a wealth of California authority for the proposition that a void judgment is vulnerable to direct or collateral attack ‘at any time.’” (emphasis added).

Rockefeller Technology Investments (Asia) VII v. Changzhou Sinotype Technology Co., Ltd., No. B272170 (Cal. Ct. App. June 1, 2018)

This post written by John Pitblado.

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California District Court Denies Motion to Vacate FINRA Arbitration Award

December 18, 2018 by John Pitblado

A California district court recently denied a motion to vacate an arbitration award which had denied a plaintiff’s claims brought before the Financial Industry Regulatory Authority (“FINRA”).

The background of this case can be found here. In sum, in 2005, plaintiff Winnie Fang delivered certificates for shares of stock in Peet’s Coffee & Tea, Inc. (“Peet’s”) to Merrill Lynch that her deceased husband had previously held. In 2010, Fang was notified that the California Controller had received the Peet’s stock as unclaimed property. Fang then commenced an action against Peet’s and others in California state court for allegedly mishandling her investment, which was resolved by a “partial settlement.” Later, in 2015, Fang brought a FINRA arbitration against Merrill Lynch for breach of fiduciary duties and breach of contract. In February 2018, a FINRA arbitration panel issued an award, denying Fang’s claims in their entirety, and ordered her to pay $6,000 in expert witness fees incurred by Merrill Lynch. In the award, the panel detailed the prior proceedings. Among others, the panel noted that a hearing had been scheduled in October 2016, but that Fang failed to submit pre-hearing materials per an order of the panel. Instead, according to the panel, Fang filed an ex parte motion to continue the hearing on the grounds that Merrill Lynch had not provided certain discovery, and that Fang was planning to file a class action on the same claims, even though Fang had not filed any discovery motion by the deadline in the panel’s scheduling order, and had not filed a class action case. The panel denied Fang’s motion for a continuance. Fang then filed a motion to dismiss her claims without prejudice, and a motion for reconsideration of the denial of the continuance. The panel maintained the October 2016 hearing date, but said that it would take up Fang’s motions at the arbitration hearing. However, just before the hearing, Fang filed an action in California federal court, with a motion for a temporary restraining order to stop the FINRA arbitration for alleged procedural violations. The California district court denied a TRO. Fang then appealed to the Ninth Circuit, which affirmed the district court’s order. While the court proceedings were ongoing, the arbitration also proceeded. Fang and her counsel failed to appear at the October 2016 hearing. Merrill Lynch did appear, and an evidentiary hearing took place under FINRA rules. Merrill Lynch then sent the panel a copy of the Ninth Circuit decision affirming the denial of the TRO, and Fang submitted a “responsive” document that the panel interpreted to be another motion to dismiss without prejudice. The panel then suspended the arbitration until the California district court decided class certification in the case. The California district court, however, had already stayed that case, at the parties’ joint request, to allow for completion of the arbitration. Merrill Lynch then made a motion for the issuance of an award in the arbitration. A hearing took place in January 2018 on that motion and Fang’s new motion to dismiss. At the hearing, Fang’s lawyer said he could not attend the October 2016 hearing because “he had to appear in a matter for the United Nations,” which the panel noted had not been raised in his continuance papers. The panel then denied Fang’s motion to dismiss and issued the February 2018 award. Fang then moved in the California district court to vacate the award. Although she mentioned all four grounds in Section 10(a) of the Federal Arbitration Act (“FAA”) as a basis for overturning the panel’s award, the motion was based mainly on the claims that the award was the product of corruption, fraud and undue means, and exceeded the arbitrators’ authority.

The California district court, in denying the motion to vacate the award, noted that “courts may vacate an arbitrator’s decision ‘only in very unusual circumstances’” and that the party seeking to vacate the award bears a high “burden of establishing that one of the grounds . . . justifies vacating the award.” The court noted that Fang chose not to litigate the arbitration she had voluntarily commenced, and that there was no evidence indicating that the arbitrators were corrupt or partial to Merrill Lynch or that there was an actual bias against her, nor were there any facts that might create a reasonable impression of bias or otherwise indicate “evident corruption.” The court also held that Fang’s argument that the arbitrators exceeded their powers was also unavailing. In this regard, Fang argued that the panel misapplied FINRA rules to proceed with the arbitration. However, the court noted that interpretation of the FINRA rules is up to the arbitrators to decide. The court also found that Fang failed to show that the arbitrators somehow exceeded the bounds of the agreement that empowered them to hear Fang’s arbitration demand, and that Fang did not identify a FINRA rule stating that the arbitration should have been terminated after she expressed a desire to file a class action lawsuit, or any case that supports that proposition. The court noted that Fang was perfectly free to withdraw her claims at any time under FINRA rules, but the consequence would have been a withdrawal with prejudice, “which apparently did not suit Fang’s litigation plans.” Finally, the court held that Fang had also not shown that the arbitrators were “completely irrational” or guilty of “a manifest disregard of law.”

Fang v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 16-cv-06071 (N.D. Ca. Nov. 23, 2018).

This post written by Jeanne Kohler.

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Fourth Circuit Reverses Dismissal, Finding Federal Question Jurisdiction for Review of Arbitral Award

December 17, 2018 by John Pitblado

The Fourth Circuit Court of Appeals reversed a Virginia federal court’s dismissal of a challenge to an arbitration award. The underlying dispute arose out of a lawsuit filed by Alvin Moore against his email service provider, America Online, Inc. (“AOL”), for divulging information about his account to law enforcement who sought the information as part of an investigation into a claimed imminent threat. Moore sued AOL in state court, alleging a claim under Title II of the Electronic Communications Privacy Act of 1986 (known as the Stored Communications Act), 18 U.S.C. § 2701 et seq., for divulging the information about him without a warrant, a subpoena, or his consent. Moore also alleged that AOL had, without his consent, deleted all his emails, causing him damages in the amount of $74,999 (presumably just under the jurisdictional requirement for diversity jurisdiction in order to avoid removal to federal court).

However, AOL successfully compelled arbitration under its service provider agreement with Moore, and prevailed in the arbitration. Moore filed a petition to vacate the award in Virginia federal court, alleging both federal question and diversity jurisdiction. The court granted AOL’s motion to dismiss the petition for want of jurisdiction, finding it did not satisfy the amount in controversy requirement to sustain diversity jurisdiction. It did not address the issue of whether it had federal question jurisdiction due to the fact that the subject of the arbitration included a claim under the federal Stored Communications Act.

The Fourth Circuit reversed and remanded, for a merits consideration of Moore’s petition, given its finding that the district court has jurisdiction. It sided with the First and Second Circuits in a circuit split about whether the enforcement mechanisms under the FAA §§ 10 and 11 required the court to “look through” the petition to determine if the underlying dispute could have been brought in federal court, absent the arbitration agreement. Other Circuits have held in favor of an approach treating petitions to vacate or confirm as strictly matters of contract under an arbitration agreement, regardless of the subject matter of the dispute, and thus governed by state law, providing no independent basis for federal question jurisdiction. The Fourth Circuit explicitly rejected that approach, based on U.S. Supreme Court precedent adopting the “look through” approach with respect to petitions to compel arbitration under FAA § 4, and finding no reason that this approach should not also apply to the FAA’s enforcement mechanisms under §§ 10 and 11.

McCormick v. America Online, Inc., No. 17-1542 (4th Cir. Nov. 29, 2018).

This post written by John Pitblado.

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