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Rob DiUbaldo

SIXTH CIRCUIT FINDS THAT COMPELLING ARBITRATION DOES NOT IMPAIR STATE INTEREST IN EXCLUSIVE JURISDICTION OVER MATTER ALREADY REMOVED TO FEDERAL COURT

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The Sixth Circuit Court of Appeals has found that Kentucky’s Insurers Rehabilitation and Liquidation Law (IRLL) did not reverse-preempt the Federal Arbitration Act so as to prohibit the arbitration of a dispute when that dispute had already been removed to a federal district court.

The case arose out of the insolvency of the Kentucky Health Co-op, a non-profit health insurance company. The Kentucky Department of Insurance instituted a delinquency proceeding in Franklin County Circuit court and, as liquidator, brought a collateral proceeding against CGI Technologies and Solutions, Inc. CGI had provided claims processing services to the Kentucky Health Co-op under an agreement providing that all disputes would be resolved by arbitration and that Kentucky law would apply. CGI removed the case to federal court based on diversity jurisdiction and moved to compel arbitration, and the liquidator moved to remand the matter to state court. The district court refused to remand the case but denied the motion to compel arbitration, and CGI appealed the denial of the motion to compel arbitration, but did not appeal the denial of the motion to remand.

On appeal, the liquidator argued that federal law favoring arbitration was reverse-preempted by Kentucky law providing that the Franklin Circuit Court has exclusive jurisdiction over all matters relating to an insolvent insurer’s liquidation. Such reverse preemption, which is authorized by the McCarran-Ferguson Act, applies when 1) the state statute was enacted for the purpose of regulating the business of insurance; 2) the federal statute involved does not specifically relate to the business of insurance; and 3) the application of the federal statute would invalidate, impair, or supersede the state statute regulating insurance. The Sixth Circuit easily found that the first two of the requirement for preemption were satisfied, but found that the third was not. The alleged impairment of the state statute was the fact that it would deny the Franklin Circuit Court of exclusive jurisdiction over the matter as provided for by the IRLL. But since the Liquidator had not appealed the denial of the motion to remand, no matter what the court decided the action would remain in federal court, and not be returned to state court. Finding that enforcing the arbitration clause would thus not invalidate, impair, or supersede a state statute regulating insurance, the Sixth Circuit vacated the order denying CGI’s motion to compel arbitration.

Atkins v. CGI Technologies and Solutions, Inc., Case No. 17-5506 (6th Cir. Feb. 9. 2018)

This post written by Jason Brost.

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ELEVENTH CIRCUIT SLAPS DOWN BANK’S THIRD ATTEMPT TO COMPEL ARBITRATION IN OVERDRAFT LITIGATION FIGHT

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The Eleventh Circuit recently upheld a district court’s denial of RBC Bank’s latest attempt to compel arbitration of a dispute with banking customers over allegedly fraudulent overdraft practices. The bank had previously lost its bid to enforce the arbitration provision in a 2008 customer account agreement (“CAA”). PNC Bank, which had acquired RBC, issued a new CAA in 2012 that lacked an arbitration provision and purported to be binding on account holders who did not opt out. The lower court then denied RBC’s renewed motion to compel arbitration based on the 2008 CAA, finding the 2012 CAA superseded the 2008 CAA. Shortly thereafter, PNC distributed a 2013 amended CAA including an arbitration provision that purported to apply retroactively to existing claims and to be binding on account holders who did not opt out. The present opinion came in review of the district court’s subsequent denial of another motion to compel arbitration, this one based upon the 2013 CAA, finding that PNC waived the right to pursue arbitration under the 2013 CAA where it did not issue the amendment until three years after this litigation began, failed to argue the 2013 CAA for almost two years after its purported effective date, and previously pursued arbitration under the 2008 CAA instead. The court also alternatively held the 2013 CAA amendment was not effective because both parties did not “expressly” agree to the arbitration provision addition.

Upon review, the Eleventh Circuit affirmed the denial of arbitration but for different reasons than the trial court articulated. The appellate court did not address waiver because it instead found PNC failed to demonstrate the necessary meeting of the minds regarding arbitration via the 2013 CAA. The court’s analysis centered on two primary considerations: (1) that PNC communicated with the plaintiff regarding the purported retroactive effect of the arbitration provision (which would effectively end the litigation) directly rather than through counsel, and (2) plaintiff repeatedly evinced his resistance to arbitration notwithstanding his failure to opt out of the 2013 CAA. Specifically, the court found PNC’s failure to communicate through plaintiff’s counsel to be material to its interpretation of the 2013 CAA’s retroactive effect. The contrast between plaintiff’s “uncounseled,” non-response to the opt out offer and the “counseled” response of repeated and ongoing opposition to arbitration demonstrated plaintiff could not have agreed to retroactive application of the arbitration agreement.

The court rejected PNC’s argument that refusing to enforce the 2013 CAA would be asymmetric considering the court previously enforced the 2012 CAA, because then plaintiff was not demonstrating inconsistent behavior, was seeking to enforce an agreement against PNC that PNC drafted, and did not exhibit ethically questionable behavior. Additionally, the court rejected PNC’s argument that plaintiff’s filing of an amended complaint revived its arbitration rights because the court’s conclusion that plaintiff did not agree to the 2013 CAA necessarily meant there were no arbitration rights to revive, and that the amended complaint’s changes would not warrant revival.

Dasher v. RBC Bank (USA), No. 15-13871 (11th Cir. Feb. 13, 2018).

This post written by Thaddeus Ewald .

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NEBRASKA FEDERAL COURT APPLIES FIRST-TO-FILE RULE TO REINSURANCE BREACH OF CONTRACT DISPUTES, TRANSFERS CASE TO CONNECTICUT

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The District of Nebraska recently ruled in favor of Charter Oak Oil Co. (“Charter Oak”)’s attempt to dismiss a breach of contract case by Applied Underwriters Captive Risk Assurance Co. (“AUCRA”) based on the first-to-file rule. AUCRA administered the investment component of a reinsurance participation plan with Charter Oak. Charter Oak moved to dismiss for improper venue based on concurrent litigation by Charter Oak against AUCRA in Connecticut federal court. AUCRA opposed the motion to dismiss, arguing that “compelling circumstances” and “red flags” existed sufficient to warrant an abrogation of the first-to-file rule. Specifically, AUCRA alleged it warned Charter Oak via a demand letter of its intent to file this lawsuit in Nebraska and Charter Oak raced to the Connecticut courthouse first. AUCRA further alleged that it was attempting to settle the dispute out of court by notifying Charter Oak of its intent to file suit.

The court, however, brushed off those arguments and held that “even assuming them to be true” the first-to-file rule still applied. It noted there was no evidence that Charter Oak knew the Nebraska lawsuit was imminent, that Charter Oak misled AUCRA to gain the advantages of filing first, or that Charter Oak made any prior assurances it would not file a complaint but then did anyway. Additionally, the court rejected AUCRA’s argument that jurisdiction did not attach in Connecticut because that court was still considering AUCRA’s motion to enforce a Nebraska forum-selection clause at the time this lawsuit was filed because the Connecticut court had since denied that motion. Finally, the court noted that while the Connecticut litigation included different allegations, the two complaints “substantially overlap” which strengthened the case for applying the first-to-file rule.

Procedurally, the court denied the dismissal of AUCRA’s breach of contract claim and asked AUCRA to decide whether it wished to dismiss the complaint without prejudice or transfer it to Connecticut. On January 16, 2018, the Court granted AUCRA’s request and transferred the case to Connecticut.

Applied Underwriters Captive Risk Assurance Co. v. Charter Oak Oil Co., Case No. 17-164 (D. Neb. Jan. 4, 2018).

This post written by Thaddeus Ewald .
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REINSURER PREVAILS IN DISMISSING BREACH OF CONTRACT, BAD FAITH CLAIMS ASSERTED BY UNDERLYING POLICYHOLDER

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A federal district court in Pennsylvania recently dismissed all claims asserted by an insured against a reinsurer in a coverage dispute over an explosion at plaintiff Three Rivers Hydroponics (“Three Rivers”)’s commercial greenhouse. Three Rivers’s greenhouse was insured by Florists’ Mutual Insurance Co. (“Florists”), which in turn reinsured that policy through Hartford Steam Boiler Inspection and Insurance Company (“HSB”). Three Rivers’s amended complaint alleged breach of contract, bad faith, and civil conspiracy claims against both Florists and HSB. In this opinion the court granted defendants’ motion to dismiss aimed at removing HSB from the lawsuit and dismissing the civil conspiracy claim against both.

First, the court dismissed the breach of contract claim against HSB because there was no privity of contract between it and Three Rivers and Three Rivers was not a third-party beneficiary of the reinsurance agreement. Simply put, Three Rivers was not a party to the reinsurance agreement between HSB and Florists and HSB was not a party to the insurance policy between Three Rivers and Florists; nor had HSB assumed Florists’ obligations under the insurance policy. Additionally, Three Rivers was not a third-party beneficiary of the reinsurance agreement because the parties did not express an intention to benefit Three Rivers anywhere in the relevant contract and there were no compelling circumstances to grant third-party beneficiary status. In particular, the court rejected Three Rivers’s argument the implied covenant of good faith evidences intent to benefit third-parties because allowing it would mean that every reinsurance agreement necessarily intends to benefit individual underlying policyholders, an untenable result under Pennsylvania law.

Second, the court dismissed the bad faith claim against HSB after finding it was not an “insurer” under Pennsylvania’s bad faith statute. HSB was not identified as an insurer in policy documents, was not a party to the policy, and did not act as an insurer. Furthermore, Pennsylvania courts have held that parties lacking contractual relationships with the insured (such as reinsurers) cannot be sued under the bad faith statute.

Third, the court dismissed the civil conspiracy claim against both defendants. The court side-stepped deciding plaintiff’s argument that bad faith can be the predicate tort for a civil conspiracy claim by holding that the conspiracy claim failed to allege the required malice element where it could not allege defendants acted without a business motive.

Finally, the court partially granted Florists’ motion to strike. It struck the complaint’s introduction because it technically violated the requirement for numbered paragraphs, but denied the requested strikes otherwise because the procedural device was not intended to address the merits and defendants failed to satisfy the heavy burden required for a motion to strike.

Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co., Case No. 15-809 (W.D. Pa. Feb. 8, 2018).

This post written by Thaddeus Ewald .

See our disclaimer.

SEC SETTLES CLAIMS AGAINST INDIVIDUAL AND ENTITIES IT CLAIMED USED INVESTMENTS IN REINSURANCE BUSINESS TO FINANCE LAVISH LIFESTYLE

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A federal district court in Connecticut has entered final judgments pursuant to agreements between the SEC and three defendants—David Haddad, Trafalgar Square Risk Management, LLC, and New England RE, LLC—in a case alleging that Haddad deceived investors into investing in Trafalgar and New England RE by representing that he would use their investments to grow these businesses, when in reality he used those investments to fund his own lavish lifestyle and pay off earlier investors.

According to the SEC’s complaint, Haddad created Trafalgar in 2009 and held it out to be, variously, “a stop-loss insurance sales underwriting consulting and marketing firm and a private investment firm that aggregates funds to invest in entities including marketing firms, managing general underwriters, third party administrators, and reinsurance companies.” The SEC alleged that, over the next seven years, Trafalgar took in commissions and fees that far exceeded its legitimate business expenditures, that Haddad spent Trafalgar’s cash to pay his personal expenses, and that, when this spending outpaced Trafalgar’s income, Haddad began raising money from investors to make up the difference. The SEC alleged that Haddad misled investors by falsely claiming that he would use their money to grow Trafalgar’s business, failing to tell them that he would be spending their money on his personal expenses and promising high returns that the business could not support. The SEC further alleged that Haddad created New England RE in 2014, purportedly to operate as a reinsurer that would market, underwrite, and bind stop-loss insurance coverage to self-insured employers, but actually as a vehicle for soliciting investments that he could use to pay off investors in Trafalgar and to finance his personal expenditures. The SEC claimed that Haddad and the two entities violated section 17(a) of the Securities Act and section 10(b) of the Exchange Act by deceiving investors through false statements and omissions into investing in Trafalgar and New England Re.

The three separate final judgments—with respect to New England Re, Trafalgar, and Haddad—were entered pursuant to the consent of the SEC and each of the defendants, with defendants neither admitting nor denying the factual allegations contained in the complaint. Per those judgments, defendants are permanently restrained from further violating the securities laws and from soliciting investments in securities without providing written disclosures regarding their “prior regulatory history,” and they must pay $1,097,257.07 in disgorgement, prejudgment interest, and civil penalties.

S.E.C. v. Haddad, et al., Civil Action No. 3:18-Cv-00055 (D. Conn. January 18, 2018)

This post written by Jason Brost.
See our disclaimer.