John Pitblado

SIXTH CIRCUIT AFFIRMS OHIO FEDERAL COURT’S RULING DENYING MOTION TO COMPEL ARBITRATION BECAUSE ARBITRATION CLAUSE IN AN EXPIRED AND DISPUTED CONTRACT WAS NOT ENFORCEABLE

January 2, 2017 by John Pitblado

This case involves a dispute between Shandong Linglong Tire Co. Ltd., a Chinese tire manufacturer, its Thai and U.S. subsidiaries (collectively, “Linglong”) and Horizon Tire, Inc., Linglong’s U.S. distributor.

A brief history of the case is as follows. In 2015, Horizon sued Linglong in California federal court, alleging that Linglong had not repaid a $3.6 million loan, failed to fulfill a November 2014 order for tires, and failed to honor Horizon’s exclusive distributorship rights for Linglong’s tires. Linglong then sued Horizon in Ohio federal court, seeking, among other things, a declaration that Horizon did not have an exclusive distributorship arrangement with Linglong. Horizon dismissed its California suit, and filed an answer and counterclaims in Ohio. Linglong amended its complaint, and Horizon then filed an answer and amended counterclaims for declaratory relief, breach of contract, and misappropriation of trade secrets, among other claims. Linglong filed a motion under Rule 12(b)(1) to dismiss or stay Horizon’s amended counterclaims pending arbitration based on an arbitration clause in a Collaboration Agreement between them entered into in 2006, which expired in 2011 (the “Agreement”). The Ohio district court denied the motion, reasoning that Horizon’s claims were not based on the Agreement, that the Agreement had expired, and that Linglong had waived any right to arbitrate. Linglong then appealed to the Sixth Circuit, arguing that the arbitration clause survived the expiration of the Agreement.

The Sixth Circuit, in reviewing the Ohio district court’s refusal to compel arbitration de novo, noted that an arbitration clause survives the expiration of a contract only when the dispute at issue “arises under the contract,” which occurs in two circumstances relevant to the current dispute. First, the Court stated that a dispute arises under the contract when a “majority of the material facts and occurrences” giving rise to the dispute occurred prior to the expiration of the contract at issue. In this case, the Court noted that the vast majority of events at issue occurred after the expiration of the Agreement. Second, a dispute arises under the contract when the contractual right at issue survives the expiration of the contract itself. Although the Sixth Circuit noted that one might interpret Horizon’s claims for permanent right of exclusive distributorship to arise out the Agreement, the Court also noted that Horizon itself had stated that “to the extent that Horizon had a claim based on a continuing obligation created by the Collaboration Agreement, Horizon has unequivocally and irrevocably waived it.” The Sixth Circuit then found that the Agreement’s arbitration clause does not apply to Horizon’s claims and that Horizon is estopped from making any claim based upon the Agreement. Thus, the Court affirmed the Ohio district court’s order denying Linglong’s motion.

Linglong Americas Inc. et al. v. Horizon Tire Inc., No.16-3520 (6th Cir. Dec. 1, 2016).

This post written by Jeanne Kohler.

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SDNY CONFIRMS ARBITRATION AWARD UNDER FAA AND THE NEW YORK CONVENTION DESPITE AWARD BEING SILENT ON TAX LIABILITY

December 15, 2016 by John Pitblado

An arbitration award required respondent to pay a series of royalty payments, audit costs and interest, but did not address either party’s tax obligations. Respondent made several payments to petitioner, but withheld 20% from some of the payments citing its obligation under Taiwanese tax laws and regulations. The arbitration panel declined to amend the award in regards to the tax law issue, stating it was without power or jurisdiction, and further, no claims regarding these deductions was ever made or determined in the arbitration.

Respondent argued against enforcement of the final award for three reasons. The first reason, that enforcement of the award would violate Taiwanese tax law and therefore public policy, was rejected because the award said nothing about obligations to pay taxes, and thus did not prevent respondent from paying taxes directly rather than withholding taxes from its payment of the award. The second reason, that due process was violated under the New York Convention, was rejected, as respondent never “attempted to make a ‘case’ regarding tax withholding, much less that it was ‘unable to present’ one” during the arbitration. The third reason, that respondent had satisfied its obligation through prior payments net of tax withholding, was also rejected because respondent “provided no basis from which to infer that the tribunal implicitly authorized [respondent[ to deduct taxes,” as expressly stated by the arbitration panel when asked to amend the award. The Court confirmed the award.

Mondis Technology Ltd. v. Wistron Corp., No. 15-CV-02340 (USDC SDNY Nov. 3, 2016)

This post written by Nora A. Valenza-Frost.

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SOUTH CAROLINA FEDERAL COURT MAKES TWO RULINGS ON MOTIONS TO DISMISS IN DISPUTE INVOLVING REINSURANCE TRUST AGREEMENTS

December 14, 2016 by John Pitblado

This case was previously reported by us on our blog on January 5, 2016, June 28, 2016 and July 20, 2016. For the full procedural background, we refer to the recent November 3, 2016 and November 16, 2016 decisions. In sum, Plaintiff Companion Property and Casualty Insurance Company (“Companion”) participated in a fronted insurance program with two reinsurers, Redwood and Freestone. Reinsurance collateral trusts were established for Companion’s benefit and maintained by defendant U.S. Bank as trustee. Companion authorized Redwood and Freestone to administer the trusts’ assets by giving direction to U.S. Bank. One such direction was to authorize certain third-parties who could act for Redwood and Freestone with regard to each trust account. Through the direction of Redwood, Freestone and their authorized third-parties, U.S. Bank made certain investments which were ultimately to the detriment of the trusts.

U.S. Bank then made claims against the third-parties for apportionment, contribution and indemnification for its liability to Companion. The third-parties moved to dismiss U.S. Bank’s claims, which was granted except for U.S. Bank’s claim for contribution. U.S. Bank then filed an amended third-party complaint, adding Aon Insurance Managers (Cayman) Ltd. (“Aon”) as a third-party defendant. One of the third-parties, Alexander Chatfield Burns (“Burns”) also filed an answer to U.S. Bank’s third-party complaint, which contained seven counterclaims against U.S. Bank. U.S. Bank then moved to dismiss Burns’ counterclaims. Aon also moved to dismiss the third-party complaint by U.S. Bank on the basis that the court lacked personal jurisdiction over it. Burns also filed a fourth party complaint against U.S. Bank Trust National Association (“USBT”) for contribution. USBT also moved to dismiss the complaint by Burns on the basis that the court lacked personal jurisdiction over it.

The South Carolina federal court recently ruled on the motions to dismiss by U.S. Bank, Aon and USBT. On November 3, 2016, the court granted in part and denied in part U.S. Bank’s motion to dismiss Burns’ counterclaims. First, the court noted that Burns’ contribution counterclaims were premised on its liability to either U.S. Bank or Companion. The court dismissed Burns’ contribution counterclaim against U.S. Bank premised on Burns’ liability to U.S. Bank as contribution is not available in such case. As for Burns’ contribution counterclaim premised on its liability to Companion, even though Companion had not yet formally sued Burns, that counterclaim remained. The court noted that the torts giving rise to U.S. Bank’s and Burns’ liability to Companion have already occurred and thus, Burns’ cause of action for contribution had accrued. Burns’ remaining counterclaims sounding in contract and tort, however, were dismissed because through those claims, Burns was seeking to recover damages on behalf of Redwood and Freestone, and thus ran afoul of the prudential standing doctrine.

On November 16, 2016, the South Carolina federal court granted the motions to dismiss by Aon and USBT. With respect to USBT’s motion to dismiss Burns’ fourth party complaint, the court found that Burns failed to meet his burden that USBT, which is incorporated and has its principal place of business in Delaware, should be subject to the court’s general or specific personal jurisdiction, and thus the complaint against USBT was dismissed. With respect to Aon’s motion to dismiss U.S. Bank’s third-party complaint, the court found that U.S. Bank also failed to meet its burden that Aon, which is incorporated and has its principal place of business in the Cayman Islands, should be subject to the court’s specific personal jurisdiction, and thus the complaint against Aon was dismissed.

Companion Property and Casualty Insurance Co. v. U.S. Bank Nat’l Association, No. 3:15-cv-01300 (USDC D.S.C. Nov. 3, 2016 and Nov. 16, 2016).

This post written by Jeanne Kohler.

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SECOND CIRCUIT UPHOLDS CONFIRMATION OF ARBITRATION AWARD FINDING THE PENALTY PROVISION IN CONTRACT DID NOT VIOLATE PUBLIC POLICY

December 13, 2016 by John Pitblado

Although unable to revisit the arbitration panel’s fact-finding or legal reasoning behind an arbitration award, the Second Circuit Court of Appeals upheld confirmation of the award itself, as it did not violate public policy. The arbitration panel, which acknowledged the policy against contract penalties, nevertheless found the policy inapplicable because it construed the contract clause at issue as a termination provision, rather than as a liquidated damages provision. Petitioners pointed to no laws nor legal precedents indicating that the contract’s termination provisions “setting the terms for ending a joint venture are contrary to well defined and dominant public policy.” Thus, the Court upheld the Southern District’s confirmation of the award.

PDV Sweeny, Inc., et al. v. Conocophillips Co., et al., No. 16-170-cv (2d Cir. Nov. 7, 2016)

This post written by Nora A. Valenza-Frost.

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IRS TREATS CAPTIVES WITH SECTION 831(B) ELECTIONS AS “TRANSACTIONS OF INTEREST”

December 12, 2016 by John Pitblado

On the heels of Congress’ amendments last year to Section 831(b) of the Internal Revenue Code to curb perceived abusive use of so-called “micro” captive insurance companies, the IRS recently issued Notice 2016-66 officially classifying such uses as “transactions of interest” as of November 1, 2016. Such classification means that any taxpayers engaging in a transaction similar to the one described in the Notice on or after November 1, 2006 must disclose such participation. Material advisors may also have disclosure and list maintenance obligations under Sections 6111 and 6112. Failure to disclose such a transaction exposes the taxpayer to penalties under Section 6707A of the Code. Other penalties may also apply upon audit.

Section 2.01 of the Notice describes specific attributes of the transaction. They include a person who owns a business entity acting as the Insured. A Captive owned by such person, the Insured, or related persons enters into purported insurance or reinsurance contracts with the Insured. The Captive makes an election under Section 831(b), which allows the Captive to exclude from its income net written premium. The person, the Insured, or related persons own at least 20 percent of the Captive’s stock. Finally, one or both of the following is true:

Total liabilities assumed by the Captive for insured losses and administrative expenses during the “Computation Period” is less than 70 percent of:
- Premiums earned by the Captive during the “Computation Period,” less
- Policyholder dividends paid by the Captive during the Computation Period; or
The Captive has made a loan or otherwise conveyed assets to the person, the Insured, or a person related to such person or Insured in a manner claimed to be tax free.

The Notice defines the “Computation Period” as the most recent five taxable years of the Captive or, if the Captive has been in existence for less than five taxable years, the entire period of the Captive’s existence. This means that, for most taxpayers, immediate dissolution of a Captive will not avoid the disclosure obligations. Anyone with a captive arguably within the ambit of Notice 2016-66 should contact a tax professional for further advice.

This post written by Richard Euliss.

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