Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Kenneth Cesta

Kenneth Cesta

SDNY Confirms Arbitration Order, Holding Order Was Final and Arbitrator Did Not Exceed Authority

by

In Subway Franchise Systems of Canada ULC v. Subway Developments 2000 Inc., the U.S. District Court for the Southern District of New York addressed whether an arbitrator exceeded her authority when ordering that one of the parties to the arbitration must continue making interim payments during the pendency of the arbitration, and whether the arbitrator’s order was final and subject to appeal.

The underlying arbitration involved claims brought by Subway Developments 2000 Inc. against Subway Franchise Systems of Canada ULC alleging that Subway Franchise wrongfully terminated two development-agent agreements between the parties. The development-agent agreements included a mandatory arbitration provision that covered disputes regarding the termination of the agreements. The agreements further provided that any arbitration initiated under the agreements is limited to a determination by the arbitrator of the validity of the termination of the agreement by Subway Franchise, potential reinstatement of Subway Development if the termination is found to be invalid, and for a determination of damages. The agreements also included a provision requiring Subway Franchise to make 50% of the periodic payments due to Subway Development during the pendency of the arbitration until the arbitrator issued a decision. Subway Franchise initially took the position that it was excused from making the required payments but later made the payments either directly to Subway Developments or to Subway Franchise’s attorney trust account. Subway Developments objected and brought the matter to the arbitrator’s attention. After a hearing, the arbitrator issued an order requiring Subway Franchise to resume making the payments required under the development-agent agreements directly to Subway Developments during the pendency of the arbitration. Three months later, the arbitrator entered another order imposing sanctions if Subway Franchise failed to comply with the prior order and denying Subway Franchise’s motion to stay the order.

Subway Franchise then filed a petition in the district court seeking to vacate the arbitrator’s order, contending that the arbitrator exceeded her authority by compelling it to make interim payments directly to Subway Developments during the pendency of the arbitration. Subway Developments opposed the petition, arguing that the arbitrator’s order was not final and thus not subject to appeal, or in the alternative, to confirm the arbitrator’s order. In reviewing the petition, the court noted that the case is governed by the New York Convention since both parties to the proceeding maintained their principal place of business outside the United States and that the domestic provisions of the Federal Arbitration Act (FAA) also applied since the arbitration was being conducted in the United States. The court then addressed whether the arbitrator’s order was final and subject to appeal, concluding that since the order “determines temporary control over the money that would be used to secure any potential judgment” the order is “final for the purpose of judicial review.” The court then addressed Subway Franchise’s petition to vacate the order under section 10(a)(4) of the FAA, which allows a party to seek to vacate an arbitration award when the arbitrator “exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” After a thorough review of applicable case law and the record submitted, the court concluded that Subway Franchise “fails to meet the high standard to demonstrate that the arbitrator exceeded her authority here” and denied Subway Franchise’s petition to vacate the order. The court then addressed Subway Developments’ petition to confirm the arbitration order, concluding that it must confirm the arbitration order under the New York Convention since no grounds exist to vacate the award.

Subway Franchise Systems of Canada, ULC v. Subway Developments 2000, Inc., No. 1:24-cv-00593 (S.D.N.Y. June 21, 2024).

Alabama Federal Court Holds That Tort of Bad Faith Does Not Extend to Reinsurance Contracts

by

In Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., the U.S. District Court for the Middle District of Alabama addressed whether, under Alabama law, “reinsurance falls within the limited category of insurance agreements to which the tort of bad faith applies.” The case involved claims brought by plaintiff Alabama Municipal Insurance Corp. (AMIC), a nonprofit joint insurance company owned by several municipalities, against its reinsurer Munich Reinsurance America Inc. AMIC obtained contracts for reinsurance from Munich under which Munich covered and would be responsible for paying a portion of claims received by AMIC that exceeded a base amount noted in the reinsurance contracts. AMIC alleged that Munich wrongfully declined reinsurance coverage for the full amount due under five separate insurance claims submitted to AMIC, and Munich underpaid the claims by approximately $1.9 million.

AMIC filed a lawsuit against Munich alleging breach of the reinsurance contracts for the five claims and for bad faith for refusing to pay on three of the claims. Munich filed a motion to dismiss the three counts of bad faith under Federal Rule of Civil Procedure 12(b)(6), arguing that “Alabama does not recognize the tort of bad faith in the reinsurance context.” The parties agreed the dispute was governed by Alabama state law. In addressing the motion to dismiss, the court observed that the Alabama Supreme Court had not addressed whether a claim for bad faith may be brought in connection with a reinsurance contract. The court then noted that “[w]here no state court has decided the issue a federal court must make an educated guess as to how that state’s supreme court would rule.” Applying this principle after a thorough review of decisions addressing the tort of bad faith, the court concluded that “[g]iven the Alabama Supreme Court’s repeated efforts to limit the application of the tort [of bad faith], as well as its emphasis on the primary purpose of the tort as a means to protect consumers, this court concludes that the Alabama Supreme Court would not extend the tort of bad faith to the reinsurance context.” The court then granted Munich’s motion to dismiss the bad faith claims and denied AMIC’s motion to amend its complaint to add additional claims of bad faith.

Alabama Municipal Insurance Corp v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (M.D. Ala. July 22, 2024).

 

NJ Court Finds No Waiver of Arbitration Rights in FDCPA Case, Grants Motion to Compel

by

In Hejamadi v. Midland Funding LLC, the U.S. District Court for the District of New Jersey, on remand from the Third Circuit Court of Appeals, addressed whether the defendants waived their rights to compel arbitration of the plaintiffs’ putative class action claims alleging violations of the Fair Debt Collection Practices Act (FDCPA).

The court’s opinion notes that the case involved a lengthy procedural history set forth in two prior opinions and in the Third Circuit’s decision remanding the matter to the district court. In sum, in 2017, the defendants purchased various credit card accounts from Citibank and then filed a debt collection action against plaintiff Shanthi Hejamadi, who in turn filed a counterclaim against the defendants pursuant to the FDCPA. The defendants dismissed the collection claim, removed the remaining counterclaim to federal court, and moved to compel arbitration under the mandatory arbitration and class action waiver provisions in the plaintiff’s original credit card agreements with Citibank. After amendments to the class action complaint, the court denied the motion to compel arbitration without prejudice and ordered limited discovery on the arbitrability issue. The defendants renewed their motion to compel arbitration, which was granted by the court on March 31, 2022. The court found that the defendants “had the right to arbitrate plaintiff’s claims … and had not waived that right.” The court based its opinion on Third Circuit precedent at that time, which focused on analyzing prejudice to the party opposing arbitration in analyzing a motion to compel like the one before the court.

The plaintiffs appealed the court’s March 31 opinion and while the appeal was pending, the U.S Supreme Court issued its opinion in Morgan v. Sundance Inc., 596 U.S. 411 (2022), which, as noted by the district court, held that “whether a party waived a contractual right to arbitrate is decided by the same standard as waiver of any other contractual right” and that “there are no arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the Federal Arbitration Act’s policy favoring arbitration.” The Third Circuit remanded the plaintiffs’ pending appeal of the order compelling arbitration to the district court to address the waiver issue now governed by the decision in Morgan.

On remand, the district court noted that Morgan “rejected the case law of various circuits, including the Third Circuit, that conditioned arbitration waiver on a showing of prejudice” and that the Third Circuit’s test in determining whether a party waived its right to arbitrate will now focus “on the actions of the party seeking to arbitrate, rather than the effects of those actions on the party opposing arbitration.” Applying this new standard to the defendants’ renewed motion to compel arbitration in the Hejamadi action, the court noted that the “waiver inquiry — whether a party has intentionally relinquished or abandoned its rights to arbitrate — is informed by the circumstances and context of each case.” After a thorough review of the record, the court found that the defendants’ conduct did not establish a waiver of their right to arbitrate and ordered that the parties proceed to arbitration.

Hejamadi v. Midland Funding LLC, No. 2:18-cv-13203 (D.N.J. June 25, 2024).

Oregon District Court Denies Motion to Compel Arbitration, Finds It Involves Procedural Questions Best Left to Arbitrators

by

In Sacramento Drilling Inc. v National Casualty Co., the U.S. District Court for the District of Oregon addressed an amended motion to compel arbitration brought by defendant National Casualty Co. seeking to limit arbitration to only certain claims.

The underlying matter involved claims related to alleged losses incurred by plaintiff Sacramento Drilling (a subcontractor) for furnishing labor and materials for defendant White Construction (the general contractor) associated with the construction of two projects. The agreement between Sacramento and White included a mandatory arbitration clause that “mediation and binding arbitration shall be the sole methods of dispute resolution for any dispute arising out of this Subcontract or Subcontractor’s performance of the Subcontract Work.” Sacramento’s equipment accidentally severed an overhead electrical line, and a dispute arose regarding the amount that Sacramento was due for its work after deductions were taken by White for the damages caused by Sacramento. National Casualty had issued insurance policies for the projects naming Sacramento and White as additional insureds, and Sacramento tendered the claim for the loss to National Casualty, which denied a portion of the alleged loss. The insurance policies also contained a mandatory arbitration provision covering all differences arising out of the insurance policies. Sacramento’s state court lawsuit against White, National Casualty, and others was removed by National Casualty to federal court and the parties then filed a joint motion for a stay, which included an agreement that the case should be stayed pending the arbitration between Sacramento, White, and National Casualty. The district court granted the joint motion.

Prior to the arbitration, National Casualty filed an amended motion seeking to limit the arbitration to the contract claims under the insurance policy only. The district court denied the motion, finding that National Casualty’s effort to limit the claims did not present questions of arbitrability that are reserved for judicial determination. The court noted that none of the parties disputed the validity of the arbitration clauses at issue and that the arbitrability of the dispute had already been established in connection with the initial joint motion. Rather, the amended motion involved procedural questions including “how the parties have agreed to arbitrate, not whether the parties agreed to arbitrate.” The court ruled that these types of issues are for the arbitrator to decide and denied National Casualty’s motion.

Sacramento Drilling Inc. v National Casualty Co., No. 3:23-cv-00889 (D. Or. June 20, 2024)

Alabama Federal Court Seals and Approves FLSA Settlement Agreement, Addresses Confidentiality Provision

by

The plaintiff was employed by defendant Pilot Catastrophe Services Inc. as an insurance claims adjuster, where she was responsible for inspecting property damage claims and providing damage estimates to insurance companies. The plaintiff brought a collective action under the Fair Labor Standards Act (FLSA) alleging that she and other claims adjusters were misclassified as salaried employees exempt from overtime requirements, and Pilot violated the FLSA by failing to pay overtime wages. Pilot filed a motion to compel arbitration pursuant to the arbitration provisions set forth in the plaintiff’s employment agreements and moved to dismiss the class and consolidated action claims. While the motions were pending, the parties filed a joint status report confirming that the plaintiff did not oppose Pilot’s motion to dismiss the class action and collective action claims. The parties also reported that after agreeing to arbitrate, they reached a settlement of the plaintiff’s FLSA claims and requested 60 days to finalize the settlement. After further revising the settlement agreement, the parties filed an amended joint motion to approve the settlement. Pilot filed a motion to seal the amended joint motion and settlement agreement.

First, addressing the motion to seal, the court cited prior district court decisions confirming that “when, as here, a settlement must be approved by a court, the settlement becomes part of the judicial record.” However, the court further noted that “confidentiality provisions have been approved in FLSA settlement where the provision is bargained for and the plaintiff receives separate consideration.” The court then found that the plaintiff in this matter “separately bargained for and received separate consideration for the confidentiality provision” reflected in her employment agreements and had jointly moved to approve the amended settlement agreement with Pilot. With this finding, the court concluded that “the public interest in assuring that employee wages are fair” was adequately protected in this case since the monetary terms of the plaintiff’s FLSA settlement were disclosed in the court’s order and contained in the record, and granted Pilot’s motion to seal. Second, the court addressed the amended joint motion to approve the settlement, noting that the Eleventh Circuit recognizes two methods for settlement of FLSA claims, including, as the court utilized in this case, a court determination that the settlement “is a fair and reasonable resolution of a bona fide dispute over FLSA provisions.” Applying this standard of review, the court approved the amended settlement agreement, noting that the plaintiff had a “significant risk of little to no recovery should this action proceed to trial or arbitration” and concluding that the settlement is a “fair and reasonable resolution of her FLSA claims.”

Pleasants v. Pilot Catastrophe Services, Inc., No. 1:23-cv-00132 (S.D. Ala. Apr. 30, 2024).