Rob DiUbaldo

MF GLOBAL HOLDINGS REINSURER’S $15 MILLION BOND STRUCK BY BANKRUPTCY COURT AND LEAVE TO APPEAL REJECTED BY NEW YORK FEDERAL COURT

July 24, 2017 by Rob DiUbaldo

Two courts in New York recently issued decisions concerning Allied World’s ongoing coverage dispute with MF Global Holdings Ltd. over the former’s bankruptcy. As previously reported on this blog, the Bankruptcy Court for the Southern District of New York, in a series of opinions, has found that Allied World and other re/insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions, granted a preliminary injunction prohibiting the insurers from enforcing those injunctions, and ordered Allied World to post a $15 million bond as an unauthorized foreign insurer. Late last month, the Southern District of New York—with appellate jurisdiction over Bankruptcy Court decisions—denied Allied World’s motions seeking leave to appeal the court’s order granting a preliminary injunction, the contempt order for violating a prior temporary restraining order, and the Barton violation order. In another ruling last week, the Bankruptcy Court struck a $15 million bond posted in response to that court’s earlier order.

In part, the Southern District rejected Allied World’s argument it was entitled to an appeal as of right regarding the Barton order because, as an automatic stay, it was akin to a permanent injunction which qualifies as a final order subject to interlocutory review. The court found the Barton order was not an appealable final order. Although in certain circumstances a Barton violation order could constitute a final order, the court held that as a “practical matter” it was not final because the Bankruptcy Court intended to reconsider the propriety of the order imminently. Indeed, the parties had submitted additional briefing on the issue and an opinion on the matter was pending in the Bankruptcy Court at the time. Additionally, the court rejected Allied World’s alternative ground for appeal under the collateral order doctrine because it failed the doctrine’s third prong that the order at issue be effectively unreviewable.

Next, the court addressed Allied World’s motions for leave to appeal the preliminary injunction, contempt order, and Barton order. In regards to Allied World’s argument that the Bankruptcy Court lacked personal jurisdiction for the preliminary injunction and Barton order based upon insufficient service, the court found the record was incomplete on the service and thus interlocutory review was inappropriate. In regards to Allied World’s argument that the Bankruptcy Court applied the Barton doctrine in novel ways by extending the types of defendants covered and by applying it extraterritorially, the court noted the Barton order was hardly a “controlling issue of law” for the overarching litigation because proceedings in the matter would continue even if it were reversed. Additionally, the court concluded Allied World did not demonstrate any substantial ground for differences of opinion aside from mere conjecture on either supposedly novel application. In regards to Allied World’s argument for pendent jurisdiction over the contempt order, the court denied that motion because it had denied leave to appeal either of the other two orders.

The Bankruptcy Court also struck Allied World’s bond filed in response to the court’s June 12 order. After Allied World posted the bond, MF Global moved to strike the bond on the grounds that it inappropriately conditioned performance upon the exhaustion of any appeal filed by Allied World from a final judgment of the Bankruptcy Court. The court found that the statute requiring the bond imposed no such requirement for exhaustion of appeals and the statute’s trigger—a “final judgment”—includes final judgment of trial courts notwithstanding ongoing appeals. Further, the court found Allied World’s proposed modifications to the bond were likewise unacceptable, noting the only way Allied World could avoid or delay payment would be a stay of enforcement pending appeal and subsequent posting of a supersedeas bond. Allied World must now post a compliant $15 million bond by July 21, 2017.

This post written by Thaddeus Ewald .

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AUTOMOBILE WARRANTY SERVICES PROVIDER LOSES ON MOTION TO DISMISS DEALERSHIP’S COUNTERCLAIMS AND REQUEST FOR PRELIMINARY INJUNCTION

July 6, 2017 by Rob DiUbaldo

In a dispute between providers of automobile warranty services (“Plaintiffs” or “American Guardian”) and a Florida car dealership (“Defendants” or “JCR”), an Illinois federal district court recently dealt two blows to the Plaintiffs by refusing to dismiss the Defendants’ counterclaims and refusing to grant a requested preliminary injunction. The parties entered into an agreement in which American Guardian would provide warranties to JCR’s customers, as well as administer and approve payments for all claims under the American Guardian contracts sold by JCR, secure insurance policies indemnifying the parties against obligations, and administer reimbursement to JCR for the cost of repairs. The agreement contained a modification clause requiring amendments be supplemented by writing, which the parties utilized to make subsequent changes, including adding a production agreement requiring JCR to sell a minimum number of warranty and service contracts monthly for five-years and inserting an exclusivity provision.

The parties’ relationship eventually broke down and JCR stopped selling American Guardian contracts, leading American Guardian to file suit. Defendants counterclaimed for fraud in the inducement as well as breach of contract and the duty of good faith and fair dealing. The fraudulent inducement counterclaim was based on an American Guardian agent’s alleged representation before the master agreement was signed to JCR’s owner that Plaintiffs would establish an “offshore reinsurance company” to allow JCR to retain the warrant payments paid by customers as well as earn investment income. The good faith and fair dealing claim was based on American Guardian’s alleged failure to monitor JCR’s loss ratio on claims made by its customers on American Guardian contracts. The district court denied Plaintiffs’ motion to dismiss on each of these claims.

First, Plaintiffs challenged the fraud counterclaim’s sufficiency of pleadings regarding the elements of fraud and the specificity of pleadings in light of Rule 9(b)’s heightened pleading standard. The court rejected Plaintiffs’ argument that JCR’s allegations regarding false statements were non-actionable as representations of intent regarding future conduct. The court read the claim as one for promissory fraud rather than fraudulent inducement, finding that JCR had sufficiently alleged that American Guardian’s agent made a fraudulent promise regarding the formation of a reinsurance company with no intent to fulfill it. Furthermore, the court rejected Plaintiffs’ argument that the agreement’s integration clause was a no-reliance clause which precluded a fraud suit. Finally, the court found that JCR had alleged its fraud claim with sufficient particularity as to “when” the fraudulent promise occurred.

Second, Plaintiffs challenged the good faith and fair dealing counterclaim only on damage grounds—that any excess payments on claims would harm Plaintiffs, and not Defendants, because only American Guardian was responsible for payment on claims. The court concluded this misread the agreement, which provided for both parties making payments for repairs and expenses incurred by JCR customers, and thus declined to dismiss the claim. Interestingly, the court did go on to note “a few of the intricacies at play” with the claim that Plaintiffs did not mention in their motion but which might affect the claim later in the litigation—a bone thrown by the court to counter Plaintiffs’ “misapprehension of many of the salient issues” in the case.

The district court also denied Plaintiffs’ request for a preliminary injunction blocking Defendants from selling vehicle service contracts and related warranty products on behalf of Plaintiffs’ competitors. The court held that Plaintiffs had failed to show a likelihood of success on the merits because they failed to adequately address the host of Defendants’ affirmative defenses that would preclude recovery. The court noted that for the defenses of estoppel and accord and satisfaction in particular, the Plaintiffs introduced inapposite evidence or no evidence at all, thus failing to show a likelihood of overcoming those defenses. Furthermore, the court noted, Plaintiffs’ requested injunction of preventing JCR’s sales of competitor warranties would do nothing to redress the alleged injury (denied profits on JCR’s warranty sales). Nor had Plaintiffs shown that loses could not be compensated for purely by monetary damages later at trial, that waiting for a final judgment would fail to redress their injury, or that their goodwill had been harmed in any way. Thus, the court refused to impose a preliminary injunction.

Am. Guardian Warranty Servs., Inc. v. JCR-Wesley Chapel, LLC, Case No. 16 C 11407 (USDC N.D. Ill. May 22, 2017)

This post written by Thaddeus Ewald .

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BANKRUPTCY COURT REQUIRES AN MF GLOBAL HOLDINGS BERMUDA REINSURER TO POST $15 MILLION BOND BEFORE DECIDING MOTION TO COMPEL ARBITRATION

July 3, 2017 by Rob DiUbaldo

In the most recent decision in an ongoing dispute between MF Global Holdings Ltd. and its (re)insurers, the Bankruptcy Court for the Southern District of New York ordered Allied World to post a $15 million bond before the court would consider its pending motion to compel arbitration. As previously reported on this blog, the Bankruptcy Court found the Bermuda Insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions. Following that decision the Bermuda Insurers dismissed the Bermuda actions and the anti-suit injunctions were lifted. MF Global Holdings has since reached a settlement with one Bermuda Insurer and has been able to respond to another Bermuda Insurer (Allied World)’s pending motions to dismiss and to compel arbitration in Bermuda.

In response MF Global Holdings argued that, pursuant to New York Insurance Law § 1213, Allied World was required as an unauthorized foreign insurer to post a bond sufficient to secure payment of any possible final judgment (or procure a license to do insurance business in the state) before it filed any pleading in the proceeding against it. Allied World contended that its motions are not “pleadings” covered by the statute, its policy was not issued or delivered in New York (and thus not subject to section 1213), and that the statute is preempted by the New York Convention. Concluding that Allied World cannot “so easily avoid” the protections provided by New York Insurance Law, the Bankruptcy Court rejected each of those arguments in an opinion dated June 12, 2017.

First, the court rejected the reading of the term “pleading” offered by Allied World. Allied World claimed the statute covered only pleadings that defend against the complaint on the merits, such as an answer, but the court relied on precedent interpreting the bond requirement broadly to include motions to dismiss or compel within the definition of “pleading.” Second, the court rejected the notion that Allied World delivering the insurance policy to MF Global’s Bermuda broker meant that it did not deliver a policy in New York and come under the purview of New York Insurance Law. To accept that argument would allow foreign unlicensed insurers to subvert the law’s intent of regulating such insurers, the Court found, by using a broker or intermediary to physically deliver a policy that the insurer knew would provide coverage to a New York company insuring risks in New York. Finally, the court found no conflict between section 1213 and the New York Convention.

The court, however, did not require a bond in the full $60 million amount requested by MF Global. Instead, the court used its discretion to fix the bond amount at $15 million—the policy limit of Allied World’s policy—before it would consider the insurer’s pending motion to compel arbitration or to dismiss.

In re: MF Global Holdings Ltd., Case No. 16-01251 (Bankr. S.D.N.Y. June 12, 2017)

This post written by Thaddeus Ewald .

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ARBITRATION PROVISION ENFORCEABLE DESPITE QUESTIONS ABOUT LEGITIMACY OF REMAINDER OF AGREEMENT

June 15, 2017 by Rob DiUbaldo

A New York state trial court has denied a motion to stay arbitration in an action brought by plaintiffs, a private equity firm and its affiliate, against defendants, two of plaintiffs’ former officers, despite plaintiffs’ argument that the employment and separation agreements containing the relevant arbitration clauses were invalid.

Plaintiffs’ lawsuit alleged, inter alia, that defendants breached their fiduciary duties and committed fraud by engaging in multiple transactions in plaintiffs’ names for defendants benefit. Defendants responded with five counterclaims and nine affirmative defenses, including that the dispute was subject to arbitration. In opposing arbitration, Plaintiffs relied upon a case in which a court held that the plaintiff had “raised a threshold issue regarding the validity of the parities’ agreement” and that “the validity of the arbitration provision was thus an issue for the court to decide.” The court found this case inapposite, finding that defendants’ employment and separation agreements left no doubt that matters regarding their employment would be resolved by arbitration. Emphasizing that doubts regarding whether an arbitration clause covers a particular dispute should be resolved in favor of coverage, the court held that the arbitration provisions were valid and binding, even if the rest of the employment agreements were not valid, because plaintiffs had failed to show “that the arbitration agreements were permeated by fraud.”

Plaintiffs also challenged a portion of the arbitration agreement stating that plaintiffs “shall pay all fees in excess of those which would be required if the dispute was decide in a court of law,” arguing that the burden of this cost would prevent them from pursuing their claims against defendants. However, emphasizing that courts are loathe to interfere “with the freedom of consenting parties in structuring their arbitration relationship,” the court found that plaintiffs had not provided evidence showing that litigating the matter in court would be cheaper or that they were unable to bear these costs. The court also refused to dismiss defendants’ counterclaims for reimbursement of their legal fees and violation of a non-disparagement clause. However, it dismissed defendants’ claim for defamation, which was based on the allegations of plaintiffs’ complaint, because such statements are absolutely privileged, and dismissed their claim for harassment because New York does not recognize this as an independent cause of action.

Southport Lane Management, LLC et al. v. Adler et al., Index No. 155915/2016 (N.Y. Sup. Ct., April 14, 2017)

This post written by Jason Brost.

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FIFTH CIRCUIT FINDS PAYDAY LENDER’S SUBMISSION OF FALSE WORTHLESS CHECK AFFIDAVITS EQUATES TO WAIVER OF ARBITRATION

June 14, 2017 by Rob DiUbaldo

Plaintiffs-Appellees brought suit against short-term lender PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively “PLS”), alleging the following scheme. First, as part of the application process, PLS would require customers to provide a blank or post-dated check for the amount borrowed plus fees. PLS assured its customers that the checks would only be used to verify checking accounts and would not be cashed. However, PLS did cash the checks of customers who defaulted, and, if the check bounced, PLS would submit worthless check affidavits to the local district attorney. As a consequence, those customers were notified that they would face criminal charges if they did not pay PLS for the outstanding balance.

Plaintiffs alleged that they fell victim to this scheme and asserted several causes of action against PLS, including malicious prosecution, fraud, and related violations of Texas’s Financial Code. PLS moved to dismiss the proceedings and compel Plaintiffs to arbitrate their claims pursuant to an arbitration clause in the loan agreement. The District Court for the Western District of Texas denied PLS’s motion to dismiss, finding that PLS had waived its right to compel arbitration of Plaintiffs’ claims when it submitted affidavits regarding their checks in the context of the litigation. PLS appealed and this decision followed.

Reviewing de novo, the Fifth Circuit affirmed. PLS first argued that the district court erred by deciding whether PLS waived its right to compel arbitration by participating in litigation conduct when it submitted the affidavits. On this issue, the Fifth Circuit reaffirmed its position that the court, not the arbitrator, is in the best position to decide whether certain conduct amounts to a waiver under applicable law. The panel rejected PLS’s argument that this position was inconsistent with the Supreme Court’s 2014 decision in BG Group, PLC v. Republic of Argentina, and further stressed that unlike other types of waiver, litigation-conduct waiver implicates courts’ authority to control judicial procedures or to resolve issues arising from judicial conduct.

The panel also rejected PLS’s second argument – that the district court erred by ignoring the parties’ express agreement to arbitrate all disputes, including any litigation-conduct waiver claims. Here, the panel found that PLS had waived this issue by raising it for the first time in its motion to reconsider, and in any event, the arbitration did not contain “clear and unmistakable evidence” of an intent to arbitrate the instant litigation-conduct waiver issue.

Last, regarding PLS’s argument that the district court erred in concluding that PLS waived its right to arbitrate by submitting the subject affidavits to the court, the panel found plausible Plaintiffs’ allegation that PLS waived arbitration through such conduct. In so finding, the panel determined that Plaintiffs had demonstrated prejudice from PLS’s submission of the worthless check affidavits, and that by submitting those affidavits, PLS “invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate.”

Vine v. PLS Fin. Servs., Inc., No. 16-50847 (5th Cir. May 19, 2017).

This post written by Thaddeus Ewald .

See our disclaimer.