Michael Wolgin

Applied Underwriters Overcomes Bid for Renewed Motion for Class Certification in Workers’ Compensation Reinsurance Dispute

August 12, 2019 by Michael Wolgin

We have been tracking certain class actions filed against Applied Underwriters Inc. and Applied Risk Services Inc. alleging that the companies fraudulently marketed and sold workers’ compensation insurance programs to California employers in violation of state and federal law. The case involves a disputed reinsurance participation agreement used to control workers’ compensation rates. As we previously reported, on January 29, 2019, the court denied class certification, holding that the plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by Federal Rule of Civil Procedure 23(b)(3).

Subsequent to that ruling, the plaintiffs requested a status conference, which the court granted. The conference addressed a number of issues, including whether one of the plaintiffs could file a renewed motion for class certification based on a more limited proposed class, whether plaintiffs could communicate with putative class members, and whether the court would set a settlement conference. The new proposed class “would consist of all California participants in defendants’ insurance programs that paid more under defendants’ Reinsurance Participation Agreement than they would have under guaranteed cost workers’ compensation insurance policies issued by California Insurance Company.” Class certification would be sought only on the plaintiff’s claim “under the unlawful prong of California’s Unfair Competition Law.”

The court denied the requests for a renewed motion for class certification and for leave to communicate with putative class members. The court noted that the relevant plaintiff failed to provide “the court with any explanation for why it could not have pursued this narrowed class definition in the initial motion for class certification.” The court observed that the plaintiffs were seeking certification of essentially the same class in a separate New York proceeding. The court also held that the proposed narrower class still would “not resolve the court’s concerns identified in the prior order denying class certification.” The court did decide to consolidate for trial the related cases before the court, and further ordered the cases to the court’s Voluntary Dispute Resolution Program.

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., No. 2:16-cv-01211 (E.D. Cal. Apr. 17, 2019).

Odyssey Reinsurance Obtains Summary Judgment in Fraudulent Transfer Case Against Owners of Agency Involved in Reinsurance Arrangement

July 22, 2019 by Michael Wolgin

We have been tracking an ongoing reinsurance matter in which Odyssey Reinsurance Co. obtained a $3.2 million default judgment against Cal-Regent Insurance Services Corp. and Pacific Brokers Insurance Services (PBIS) as a result of fraudulent transfers made between the two companies and the owner/officers of both companies, Richard and Diane Nagby. As we previously reported, Odyssey obtained a judgment against Cal-Regent in 2015 for $3.2 million to recover the amount of return commissions it was owed. The Nagbys, however, had previously formed PBIS and caused Cal-Regent to transfer substantially all of its assets to PBIS. Three months before judgment was entered in Odyssey’s initial action against Cal-Regent, the Nagbys caused PBIS to sell substantially all of its assets to AmTrust for $5 million, which the Nagbys agreed to divide among themselves.

Odyssey filed the present action on March 21, 2017, alleging liability under California’s Uniform Fraudulent Transfer Act (UFTA) and alter ego and successor liability law. The court previously granted default judgments as well as preliminary injunctions against the Nagbys enjoining them from disposing the AmTrust proceeds. On October 27, 2017, the court entered a judgment as to Cal-Regent and PBIS, including a monetary award against PBIS of $3,219,482.68, the amount owing on the District of Connecticut judgment against Cal-Regent. On March 5, 2018, the court certified the judgment as final, and no appeal was taken.

The court has now granted Odyssey’s motion for summary judgment seeking to recover from the Nagbys the money transferred to them from the sale of PBIS to AmTrust. Odyssey’s theory of liability under the UFTA was based on constructive fraud, which does not require a showing of fraudulent intent by the Nagbys. The court found that the Nagbys were liable because: (1) Cal-Regent transferred its assets to PBIS (Cal-Regent transferred at least 75% of its relationships with insurance brokerage firms) and was rendered insolvent; (2) PBIS then sold all of its assets to AmTrust; (3) the initial proceeds of the sale and a subsequent payment by AmTrust were distributed to the Nagbys; and (4) these distributions rendered Cal-Regent and PBIS insolvent in that they were left unable to pay off their debt owed to Odyssey.

The court further found that Odyssey demonstrated that it was a creditor of PBIS under California’s standard for successor liability, finding that Odyssey showed that there was no adequate consideration given by PBIS for Cal-Regent’s assets, that Cal-Regent’s debts were left unpaid, and that Mr. Nagby owned both Cal-Regent and PBIS. Finally, the court also found that Odyssey could recover the full amount owing on the District of Connecticut judgment from Mr. Nagby under Nevada corporate law because Mr. Nagby’s authorization for the unlawful distributions left PBIS unable “to pay its debts as they became due in the usual course of business” and left PBIS with assets “less than the sum of its total liabilities.”

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. July 2, 2019).

Ninth Circuit Affirms Order Denying Arbitration, Applying Precedent That State Law Does Not Overcome the New York Convention’s Signatory Requirement to Compel Arbitration

July 3, 2019 by Michael Wolgin

In a trademark dispute, Shrinivas Sugandhalaya LLP (SS LLP), an incense manufacturing company based in Mumbai, appealed the denial of its motion to compel arbitration against Balkrishna Setty and his company Shrinivas Sugandhalaya (BNG) LLP, located in Bangalore. SS LLP sought to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), by invoking the arbitration clause in a partnership agreement to which SS LLP was not a signatory. The Ninth Circuit affirmed the denial of arbitration, relying on the requirement under the New York Convention that the party seeking to compel arbitration be a party to the arbitration agreement. The court explained that to the extent the FAA would permit a nonsignatory to invoke arbitration through certain state contract or equitable laws, the Convention’s bar of arbitration would control over the FAA. The court also rejected other arguments of SS LLP, finding that they were not raised before the district court.

Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. June 6, 2019).

Court Finds Panel Did Not Manifestly Disregard Law When It Entered FINRA Award in Favor of Investment Firm and Advisors in Dispute over Fraud Committed by Late NFL Player’s Agent

June 13, 2019 by Michael Wolgin

The widow of a former NFL football player sued the player’s sports agent and financial adviser, alleging that the former player was defrauded by the agent in connection with the loss of the proceeds of the player’s life insurance policy. The plaintiff alleged that upon the player’s death, the insurance proceeds were paid to a trust, for which the agent acted as trustee without authorization. The funds were depleted by the agent, and the plaintiff asserted claims of breach of fiduciary duty, negligence, and fraud against the agent and the agent’s investment firm and financial advisors.

The matter went to FINRA arbitration, and the panel concluded that the investment firm and the financial advisors were not legally responsible for the harm. The plaintiff moved to vacate the award on the ground that the panel manifestly disregarded the law when it reached the conclusion that “the Investment Firm and Investment Advisors were not required to conduct any investigation into the obviously suspicious and fraudulent behavior.” The firm and advisors moved to confirm the award, arguing that the plaintiff’s motion to vacate the award was untimely beyond the three-month limitation period. They relied upon the early issuance of the award, which contained two out of three signatures of the panel. The plaintiff relied upon a later date on which the third signature on the award was issued.

The court avoided ruling on the issue of timeliness, noting that some case law did support raising grounds for vacatur as a defense to a motion to confirm, even after the limitations period has expired. Turning to whether the panel manifestly disregarded the law, the court explained that, assuming “manifest disregard” is even a valid ground for vacatur in the Fifth Circuit, the panel did not disregard the existence of a clearly governing legal principle. The panel determined that “the Trustee of the trust was the person solely responsible for the asset destruction of the trust” and that the plaintiff failed to present any breach of a fiduciary duty “under any law or regulation.” The court concluded that “the Panel considered the existence of governing law, but found that a fiduciary duty did not exist under this law. Plaintiff’s issue with the arbitration decision is not that the Panel ignored the law entirely, but that the Panel did not reach Plaintiff’s desired outcome when applying the law. Therefore, even under the ‘manifest disregard of the law’ standard, Plaintiff’s motion for vacatur fails.” The court therefore denied the motion to vacate and confirmed the award.

Warren v. Geller, No. 2:11-cv-02282 (E.D. La. May 3, 2019).

Court Finds Arbitration Panel Did Not Exceed Powers or Manifestly Disregard the Law in Confirming Award in Dispute Over Leasing of Oil Lands

May 22, 2019 by Michael Wolgin

The case relates to an arbitration award entered in a dispute between affiliated oil exploration and marketing companies, on the one hand, and owners of land leased to the oil companies, on the other hand. The leases at issue authorized the exploration company to produce and sell any oil and natural gas found there. In exchange, the owners of the land would receive royalties calculated as a percentage of the proceeds attributable to the production from each well. The owners objected to the amount of the royalties paid by the exploration company, which were calculated based on the exploration company’s sales of the oil and gas to its affiliated marketing company, instead of based on the higher amounts for which the marketing company would sell the oil and gas downstream to third parties. The dispute went to an arbitration, which found that the owners failed to provide evidence that the oil sales between the affiliated companies were less than what would occur in an arms-length transaction. The panel found that the exploration company had legitimately transferred title to the oil and gas, and received sufficient consideration from the affiliated marketing company.

The owners petitioned the court to vacate the award, arguing that the arbitrators “exceeded their powers” and “effectively dispensed their own brand of industrial justice,” and that they “manifestly disregarded the law.” The court rejected both arguments, disagreeing that the arbitrators “ignored the central question” in dispute. According to the court, the panel found that (1) title was transferred to the marketing company; (2) the exploration company marketed the oil and gas as required; (3) the exploration company made “legally sufficient accounting entries on their books and records to evidence transfer of title and consideration paid for the oil and gas”; (4) the leases permitted the exploration company to sell to an affiliate; and (5) the owners failed to provide evidence of any defects with the sales transactions. The court found, without expressing any opinion about whether the panel was correct, that the panel “stayed well within its powers to adjudicate the dispute and executed those powers appropriately.” The court further found that the panel did not manifestly disregard the law. The court explained that the panel “was asked to interpret contracts that were arguably inconsistent both internally and with one another, and it made an informed, careful judgment about how to do so.” The court therefore granted summary judgment in favor of the oil companies and confirmed the award in its entirety.

Hale v. Chesapeake Expl., LLC, No. 4:18-cv-02217 (N.D. Ohio Apr. 25, 2019).