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John Pitblado

ILLINOIS FEDERAL COURT GRANTS MOTION TO CONFIRM ARBITRATION AWARD FOR PRE-HEARING SECURITY

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We previously reported on this case in our blog dated December 21, 2015. The background of the dispute is as follows. A dispute arose between an insurer and its insured under four written program agreements, each containing an arbitration clause. The insurer filed a single demand for arbitration with the American Arbitration Association (the “AAA”), alleging that the insureds failed to pay amounts due under the four program agreements. The insureds raised various objections to the arbitration demand, including that they were entitled to four separate arbitrations. The AAA ruled that the arbitration would continue as one arbitration, and the insureds appointed the sole arbitrator. Shortly thereafter, the insureds filed an action in Texas state court, seeking a Temporary Restraining Order (“TRO”) to stay the arbitration because it had been improperly consolidated. The Texas court granted the TRO, stating that the AAA had failed to follow the arbitration agreements by administering one proceeding, not four, and enjoined the AAA from administering the arbitration. The AAA removed the Texas action to federal court, and filed a motion to dismiss, to which the insureds did not file a response. After the TRO expired, the AAA attempted to resume administration of the arbitration, but the insureds would not participate in the arbitration and informed the AAA that their counsel could not communicate with the AAA given the pending Texas action. Thus, the insurer filed an action in Illinois federal court, where the arbitration was pending, seeking to compel arbitration, which was granted in November 2015. The parties then returned to arbitration.

In the arbitration, predicting future legal resistance from the insured, the insurer petitioned the arbitrators for the insured to post pre-hearing security. The arbitrators granted the petition, and ordered the insured to post about $4.6 million in security. The insured did not post such security, and the insurer thus sought to confirm the panel’s pre-hearing award for security in the Illinois federal court. In response, the insured argued that the award should be vacated because the arbitrators exceeded their authority under Section 10(a)(4) of the Federal Arbitration Act (the “FAA”).

The Illinois federal court first found that an interim pre-hearing security award is an “award” under the FAA. Thus, the court noted that, under the FAA, it must confirm the award unless a statutory exception applies, one of which is Section 10(a)(4)of the FAA. The court also noted that a party seeking relief under Section 10(a)(4) bears a heavy burden and that strong deference is given to arbitrators’ decisions. Then, focusing on the parties’ program agreements, the court held that there is support for the pre-hearing security award in the agreements and arbitration clause. Although the agreements did not mention prehearing security as a remedy available to the parties, the court noted that it does not mean such remedy is not available. In this regard, citing other precedents, the court noted that “[i]f an enumeration of remedies were necessary, in many cases the arbitrator[s] would be powerless to impose any remedy, and that would not be correct. Since the arbitrator[s] derive[] all [their] powers from the agreement, the agreement must implicitly grant [the arbitrators] remedial powers when there is no explicit grant.” The court then stated that the arbitration clause at issue provided that the arbitration was to be conducted under the AAA Rules, which allow for interim awards of security. Thus, the court held that, by adopting the AAA Rules into their agreements, the parties implicitly included the arbitrators’ authority to grant an award like the interim security award at issue. Finding the insured’s arguments to vacate unpersuasive, the court then granted the insurer’s motion to confirm the pre-hearing security award.

Zurich American Insurance Company, et al. v. Trendsetter HR, LLC, et al., No. 1:15-cv-08696 (USDC N.D. Ill. Aug. 24, 2016).

This post written by Jeanne Kohler.

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NEW YORK TRIAL COURT FINDS CEDENT IS NOT COVERED FOR LOSS ADJUSTMENT AND LEGAL EXPENSES IN EXCESS OF THE AMOUNTS STATED IN ITS REINSURANCE CERTIFICATE

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Relying on past New York precedent, a New York state trial court determined the language of certain reinsurance certificates at issue were unambiguous, declining to accept plaintiff’s extraneous evidence “that the custom and practice in the insurance trade is contrary” to such precedent.

The Court relied on the following three cases: Utica Mut. Ins. Co. v. Clearwater Ins. Co., 2014 WL 6610915 (N.D.N.Y. Nov. 20, 2014) (currently on appeal); Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 3 N.Y.3d 577 (2004); and Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990), wherein the courts “concluded that the [reinsurance] certificates as to the limit of liability are unambiguous, and therefore, extrinsic evidence should not be considered.” Notably, other courts have reached different results on this issue.

Although the certificate language here – “reinsurance accepted” – was different than the “limit” language considered by the New York Court of Appeals in Excess, the Court in Excess relied, in part, on the decision by the Second Circuit in Bellefonte – which involved reinsurance certificates with the same or similar language to the certificates at issue here. Citing to Excess in support of its decision, the Court noted:

Of course, both parties were well aware of the type of product that was being reinsured. It would be far from unreasonable to expect that at the time of procuring reinsurance, [the reinusred] could anticipate the possibility of incurring loss adjustment expenses in settling a claim… Certainly, nothing prevented [the reinsured] from insuring that risk either by expressly stating that the defense costs were excluded from the indemnification limit or otherwise negotiating an additional limit for loss adjustment expenses that would have been separate and apart from the reinsurer’s liability on the insured property. Failing this, the reinsurers were entitled to rely on the policy limit as setting their maximum risk exposure. (Excess, at 584-585).

The Court granted the moving defendants partial summary judgment on their affirmative defense pertaining to a cap on liability for both loss and expenses in the face amount of the reinsurance certificates. Utica Mut. Ins. Co. v. Abeille Gen. Ins. Co., n/k/a 21st Century Nat’l. Ins. Co., et al., Index. No. CA2013-002320 (Sup. Ct. N.Y. County Aug. 15, 2016).

This post written by Nora A. Valenza-Frost.

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COURT COMPELS NON-SIGNATORY AFFILIATES, BUT NOT BROKER, TO ARBITRATE PREMIUM PAYMENT DISPUTE

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National Union Fire Insurance Company of Pittsburgh brought a petition in a New York federal court, to compel nine related companies to arbitrate a payment dispute relating to certain policies of insurance issued to the Beelman Truck Company. In connection with the insurance, Beelman Truck Company entered into premium payment agreements with National Union that contained an arbitration provision. The agreements were signed by Frank J. Beelman, III, on behalf of the Beelman Truck Company. The payment agreements (and the policies to which they related) defined the signatory, Beelman Truck Company, to include its subsidiaries and affiliates. National Union sought to compel not only Beelman Truck Company, but eight of its affiliates, to arbitrate the payment dispute. Beelman Truck Company conceded it must arbitrate, but the eight affiliates challenged the petition, arguing they were not signatories and should not be bound the agreements’ arbitration provisions. In addition, Beelman Truck Company brought a counter-petition to compel the broker who placed the policies to be included in the arbitration. The Court granted National Union’s petition, finding the payment agreements unambiguously included affiliates. However, it denied the counter-petition, finding no evidence that the broker was a signatory, or could otherwise be bound by the arbitration clause in the payment agreements under principles of estoppel. National Union Fire Insurance Company of Pittsburgh v. Beelman Truck Company, Case No. 15-cv-8799 (USDC S.D.N.Y. Aug. 24, 2016).

This post written by John Pitblado.

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THIRD CIRCUIT AFFIRMS DISMISSAL OF SUIT TO VACATE FINRA ARBITRATION AWARD

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This case involved an underlying arbitration before an arbitration panel operating under the Financial Industry Regulatory Authority (“FINRA”) rules, which was brought by Judith and Kenneth Goldman against their financial advisor, Barry Guariglia, and his employer Citigroup Global Markets. The Goldmans had followed their investment adviser when he left his prior employer, Merrill Lynch, and went to Citigroup. In the arbitration, they claimed that when they transferred their account to Citigroup, they were subjected to a “devastating margin call” that wiped out their retirement savings. After 10 days of evidence and argument, and after the Goldmans submitted their case in chief, Citigroup moved to dismiss for lack of evidence. The FINRA arbitration panel dismissed the case, noting that “[w]hile all the claims were quite stridently argued, not a single claim was proven to be true by evidence.”

The Goldmans then filed a motion to vacate the arbitration award in a Pennsylvania federal court, and Citigroup moved to dismiss for lack of subject matter jurisdiction, which was granted by the court. In its decision, the court noted that it did not have subject matter jurisdiction because the Federal Arbitration Act does not itself create federal subject matter jurisdiction, and that the parties were not diverse, and thus, federal question jurisdiction would be required for the court to consider a motion to vacate an arbitration award. The Pennsylvania federal court found that the Goldmans failed to raise a federal question and simply sought to “assert the same claims they unsuccessfully brought in their arbitration.” The Goldmans then appealed to the Third Circuit Court of Appeals.

In their appeal, the Goldmans asserted that a district court can “look through a motion to vacate” at the underlying subject matter, relying on footnote in a prior Third Circuit decision, Goldman Sachs v. Athena Venture Partners, which stated that the district court has subject matter jurisdiction over a motion to vacate because the arbitration included federal securities law claims. The Third Circuit, however, rejected that argument, and found that it was not bound to follow the footnote in that case, noting that the footnote was an “unexamined exercise of jurisdiction and so is without precedential effect” and that the “drive-by jurisdictional ruling” in Athena goes against Third Circuit precedent. Thus, the Third Circuit affirmed the Pennsylvania federal court’s order dismissing the suit for lack of subject matter jurisdiction.

Goldman et al. v. Citigroup Global Markets Inc., et al., No. 15-2345 (3d Cir. Aug. 22, 2016).

This post written by Jeanne Kohler.

See our disclaimer.

TEXAS APPEALS COURT DENIES PETITION FOR A WRIT OF MANDAMUS THAT TRIAL COURT ERRED IN DENYING MOTION TO VACATE ARBITRATION PANEL’S ORDERS

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A Texas appeals court denied a petition for a writ of mandamus filed by Irving Drobny, on behalf of National Accident Insurance Group (“NAIG”) and National Accident Insurance Underwriters (“NAIU”) (collectively, “NAIU”), challenging a trial court’s denial of NAIU’s motion to vacate an arbitration panel’s pre-hearing security and discovery orders in favor of American National Insurance Corporation (“ANICO”).

The background of this case can be found here. In sum, ANICO and NAIU were parties to an Underwriting Agreement, in which ANICO authorized NAIU to market, underwrite, issue and collect premiums for ANICO insurance policies. A dispute arose between the parties because one of NAIU’s vice presidents allegedly defrauded both NAIU and ANICO of approximately $43 million. The parties participated in an arbitration, in which ANICO filed a motion for pre-hearing security. On October 24, 2014, the arbitration panel granted ANICO’s motion and ordered NAIU to post $20 million in pre-hearing security. On January 12, 2015, the panel issued another order granting a motion to compel discovery responses and depositions, a motion to compel compliance with order requiring pre-hearing security and a motion for continuance. On March 4, 2015, NAIU filed in a Texas trial court a motion for temporary restraining order, temporary injunction and motion to compel arbitration, essentially asking the court to vacate the pre-hearing security order. The Texas court found that it had no authority to grant NAIU’s motion to vacate the panel’s pre-hearing security order because under the Federal Arbitration Act (the “FAA”), NAIU had failed to timely challenge it, and thus, the court denied NAIU’s motion. The court did not expressly rule on any discovery issues. NAIU appealed the trial court’s order, or in the alternative, requested that it be treated as a petition for a writ of mandamus. The Texas appeals court held that it did not have jurisdiction over NAIU’s appeal as it was interlocutory, and thus the appeal was treated as a petition for a writ of mandamus.

In its order, the Texas appeals court found that the trial court did not abuse its discretion in denying NAIU’s motion to vacate the arbitration panel’s pre-hearing security order because it was not timely challenged within the 90-day period under Texas law and the 3-month period under the FAA. With respect to NAIU’s argument that there is no authority for pre-hearing security during arbitration, the court noted while the FAA does not speak to pre-hearing security, Texas law allows for pre-hearing security. The court also noted that the trial court held a hearing on the motion to vacate the pre-hearing security order at which NAIU presented no evidence. Thus, the Texas appeals court held that the trial court did not abuse its discretion in denying the motion to vacate the panel’s award of pre-hearing security. Further, as the trial court did not rule on any discovery issues, the Texas appeals court overruled NAIU’s second issue and denied NAIU’s petition for a writ of mandamus.

In Re Irving Drobny, as Representative of National Accident Insurance Group, et al., No. 01-15-00435-CV (Tex. Ct. App. Aug. 30, 2016).

This post written by Jeanne Kohler.

See our disclaimer.