Rob DiUbaldo

TENTH CIRCUIT FINDS THAT ARBITRATION AGREEMENT GOVERNS DISPUTE

May 4, 2017 by Rob DiUbaldo

The Tenth Circuit has determined that an arbitration agreement included as part of a set of agreements executed in connection with the purchase of a pickup truck applied to a dispute over a replacement set of agreements that the parties executed after the lender rejected the originally contemplated financing, despite the fact that the second set of agreements did not include or refer to the arbitration agreement.

Plaintiff and defendant Big Red Kia executed a retail purchase agreement (“RPA”) and a retail installment sale contract ( “RISC”) related to the purchase of the truck, pursuant to which Big Red was the creditor but assigned its rights to defendant Exeter Finance Corp. Plaintiff and Big Red also executed an agreement to arbitrate any disputes regarding the purchase and “any financing obtained in conjunction with the transaction, and any other dispute related to the purchase/lease transaction.” Two days after plaintiff took possession of the truck, Exeter declined to finance the full amount provided for in the loan, and Big Red and plaintiff executed new documents with somewhat different terms, including a new RPA and a new RISC, but not a new arbitration agreement. Two years later, plaintiff sued Big Red and Exeter for violations of various consumer protection laws in connection with the purchase, and defendants moved to compel arbitration. Plaintiff objected, arguing, inter alia, that the arbitration agreement did not apply to the second and operative RISC and RPA, but instead only applied to the original – and now rescinded – RISC and RPA. The district court agreed, leading to this appeal.

The appellate court reversed. Key to this outcome was the appellate court’s determination that the parties entered into one transaction, not two as plaintiff had argued and the district court found. The appellate court held that no transaction was completed the day the first set of agreements were executed, because the original RPA made the purchase contingent upon plaintiff obtaining satisfactory financing, which he failed to do until the second set of agreements were executed. This contingent nature, the appellate court concluded, “suggests the parties continued the same transaction” through the execution of the second RPA and RISC, making those agreements subject to the arbitration agreement. As a result, the appellate court found that plaintiff’s legal claims related to the transaction covered by the arbitration agreement and that arbitration should thus be compelled. Mooneyham v. BRSI, LLC, No. 165-6221 (10th Cir. March 17, 2017)

This post written by Jason Brost.

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DISTRICT COURT CONFIRMS ARBITRAL AWARD AGAINST VENEZUELA IN DISPUTE OVER GOLD DEPOSITS CONTRACT

May 3, 2017 by Rob DiUbaldo

A federal district court in Washington, D.C. recently confirmed a $1.2 billion arbitral award in favor of Crystallex International Corp. against Venezuela after the country’s Ministry of Environment denied a necessary permit to allow Crystallex to develop gold deposits in the country. Canada—Crystallex’s home country—and Venezuela have a bilateral investment treaty (“BIT”) to give “fair and equitable treatment” to investments by investors of the respective nations, which includes the countries’ unconditional consent to international arbitration of disputes brought under the BIT. After the Ministry informed Crystallex that it was prepared to “hand over” the relevant permit, the company announced it had fulfilled the requirements to receive the permit. However, the Ministry delayed and eventually denied the permit allowing the government to exploit the gold deposits instead. Crystallex initiated arbitration proceedings against Venezuela claiming the country breached the BIT by denying fair and equitable treatment of the company’s investments and expropriating those investments. The arbitral panel found that Venezuela breached the treaty, and awarded Crystallex $1.2 billion. Crystallex filed suit to confirm the award under the New York Convention.

At the outset, the court held that it had jurisdiction over the case as one filed against a foreign state to confirm an award made pursuant to the BIT, and that a deferential standard of review applied. Next, the court considered Venezuela’s substantive challenges to the award: that the arbitrators exceeded the scope of Venezuela’s consent to arbitrate, the award was contrary to public policy, and the arbitrators manifestly disregarded the law.

First, the court rejected the contention that the award exceeded the scope of Venezuela’s consent to arbitrate because the claims based on breach of contract and because the panel’s valuation methods departed from the BIT’s instructions. The court reviewed the panel’s conclusions deferentially and declined to disturb its finding that that Crystallex’s claims were for a violation of the BIT’s fair and equitable treatment requirement rather than a violation of the underlying agreement with Venezuela. Further, the court declined to disturb the panel’s methodology for calculating damages over objections.

Second, the court rejected the contention that confirming the award would violate United States public policy because the rejection of the permit was intended to protect Venezuela’s environment. Venezuela failed to meet the demanding threshold showing that the award would violate the “most basic notions of morality and justice” because the panel doubted how seriously Venezuela’s environmental concerns motivated the rejection and because the award would not interfere with the country’s environmental rules; it would only compel compensation.

Finally, the court rejected the contention that the panel acted with manifest disregard for the law. Assuming the doctrine of manifest disregard is still a valid basis to challenge an arbitral awrd, the court found it inapplicable here because the principles of law underlying Venezuela’s arguments were not well-defined, explicit, or clearly applicable, and the panel engaged and considered the case law supporting those positions. With no viable reason to vacate, modify, or correct the award, the court confirmed it.

Crystallex Int’l Corp. v. Bolivarian Republic of Venez.a>, Case No. 16-0661 (USDC D.D.C. Mar. 25, 2017).

This post written by Thaddeus Ewald .

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DISCOVERY OPINIONS SHOW LIMITS OF PRIVILEGE AND BROAD STANDARD OF RELEVANCE

May 2, 2017 by Rob DiUbaldo

Three recent opinions issued by courts highlight the scope and limitations of a party’s right to discovery of reinsurance, reserve and allegedly privileged information in insurance coverage disputes.

The first case involved allegations that defendant Mt. Hawley Insurance Company (“Mt. Hawley”), an excess commercial liability insurer, denied plaintiff Contravest Inc.’s (“Contravest”) insurance claim in bad faith. The court made three significant rulings on discovery. First, applying South Carolina law, the court compelled production of allegedly privileged communications in Mt. Hawley’s claims file, because it asserted that it did not act in bad faith in analyzing coverage, thus putting the legal advice it received at issue in the court’s view. Second, the court found that Mt. Hawley’s communications with its reinsurer were relevant to the bad faith claim, and thus discoverable, as they might contain Mt. Hawley’s reasons for denying Contravest’s claim. The court also rejected as unsupported Mt. Hawley’s argument that these communications were privileged. Third, the court found that information regarding Mt. Hawley’s reserves was discoverable to the extent this “information reveals defendant’s assessment of the validity of” Contravest’s claims for coverage. Mr. Hawley argued that this information was protected by the work product doctrine, but the court found that Mt. Hawley failed to show that it was prepared in anticipation of litigation. Contravest Inc. et al. v. Mt. Hawley Insurance Company, No. 19:15-cv-00304-DCN (D.S.C. Mar. 31, 2017)

In the second case, plaintiff Baxter International, Inc. (“Baxter”) sued defendant AXA Versicherung (“AXA”), an insurer, seeking indemnification for losses arising from a product liability MDL. The discovery dispute centered on Baxter’s requests for production of communications between AXA and it co-insurers and reinsurers, including notices of the underlying litigation and communications in which AXA described the coverage available to Baxter under AXA’s policy. AXA argued that the notices from AXA were irrelevant, but the court found that they might contain admissions by AXA regarding the scope of coverage under its policy, and it compelled their production. AXA also argued that all of its communications regarding the coverage available to Baxter were protected attorney work product, but the court found that AXA had failed to show that the litigation with Baxter was the primary motivating factor for creating these documents and that they were not created in ordinary course of business. However, in part due to Baxter’s delay in requesting these documents, the court declined to compel their production, holding instead that Baxter could raise this issue in the future. Finally, and somewhat in contrast to the opinion in Contravest discussed above, the court found that AXA could redact the amount of its reserves and related information from which those reserves could be calculated from any of the documents it was compelled to produce, finding that this information was irrelevant. Baxter International, Inc. v. AXA Versicherung, Case No. 44-cv-9131 (N.D. Ill. March 30, 2017)

In the third case, the central issue was whether discovery would be permitted in order to show that the plaintiff Applied Underwriters, Inc. (“Applied”) should be compelled to arbitrate the matter, despite the fact that the court had previously denied a motion to dismiss and compel arbitration on the basis that Applied was not a party to the reinsurance agreement containing the arbitration clause that defendant Top’s Personnel, Inc. (“Top’s”) argued required the matter to be arbitrated. Applied had sued Top’s for breach of a promissory note. The reinsurance agreement was between Top’s Personnel and AUCRA, a subsidiary of Applied, and Applied argued that the reinsurance agreement was irrelevant to the litigation. However, Top’s argued that AUCRA was acting as Applied’s alter ego when the reinsurance agreement was executed, and the court found that Top’s was entitled to discovery regarding the relationship between Allied and AUCRA and the connection between the promissory note and the reinsurance agreement in order to determine if the agreement’s arbitration clause was implicated. The court refused Top’s motion to compel the deposition of Allied’s counsel, however, finding that Top’s had failed to show that it had no other means of obtaining the information. Applied Underwriter’s Inc. v. Top’s Personnel, Inc., No. 8:15CV90 (D. Neb. March 31, 2017)

This post written by Jason Brost.

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U.S. COURT CONFIRMS LONDON-BASED ARBITRAL AWARD AGAINST BELIZE, FINDING ALLEGEDLY PARTIAL ARBITRATOR DID NOT VIOLATE U.S. PUBLIC POLICY

May 1, 2017 by Rob DiUbaldo

The D.C. Circuit recently upheld a district court order confirming a London-based arbitral award against the Belize government over objections that enforcement of that award would violate U.S. public policy regarding the alleged evident partiality on one of the arbitrators. The former Prime Minister of Belize entered into a secret agreement offering Belize as a guarantor for a Belizean health services provider’s bank loan, on which it subsequently defaulted. The Belize government entered into a settlement agreement to pay the debt, but eventually refused to make payments after the agreement became public and protests erupted. When the bank began arbitration proceedings in London, Belize largely refused to participate and an arbitrator was appointed on its behalf. The panel ultimately issued an award finding Belize liable for breach of its settlement agreement and ordering payment to the bank. After unsuccessful attempts to enforce the award in Belize, the bank filed a petition in the U.S. federal court to confirm and enforce the award, which the district court granted.

On appeal, Belize renewed challenges to the appointed arbitrator’s alleged impartiality on the grounds that another member of the arbitrator’s English “chambers” had previously advised a partial owner of the bank in other matters and represented interests adverse to Belize. The D.C. Circuit gave short shrift to all of the challenges except one: that the enforcement of the arbitral award violated the New York Convention because the alleged partiality was contrary to U.S. policy.

First, the court rejected the argument that the alleged partiality violated Federal Arbitration Act standards for vacatur of arbitral awards. The claim failed because the alleged conduct did not constitute improper motives on behalf of the arbitrator as required under the FAA and because the New York Convention provided the exclusive grounds on which the court could enforce an international arbitration award.

Next, the court rejected the contention that the alleged partiality violated U.S. public policy sufficient to invoke the New York Convention’s public policy defense to enforcement. Belize’s argument turned on a comparison between English “chambers”—groups of independent practitioners operating together under a common name—and American law firms—partnerships in which confidential client information, assets, and liabilities are shared. The court found the alleged partiality did not violate the “most basic notions of morality and justice” necessary to invoke the public policy defense because, even replacing foreign ethical standards with U.S. conflicts of interest rules, the factual differences between English chambers and American firms remained. Barristers are self-employed and the chambers model is designed to protect their independence. Furthermore, the arbitrator’s membership in the relevant chambers did not threaten the neutrality of the arbitration process, as the chambers system was historically familiar to Belize and it had previously been involved in a proceeding in which members of the same chambers appeared on opposite sides of the same appeal without objection.

Belize Bank Ltd. v. Gov’t of Belize, No. 16-7083 (D.C. Cir. Mar. 31, 2017).

This post written by Thaddeus Ewald .

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ARKANSAS REVISES REGULATION OF CAPTIVE INSURANCE COMPANIES TO CREATE INCORPORATED PROTECTED CELLS AND DORMANT CAPTIVE INSURANCE COMPANIES

April 13, 2017 by Rob DiUbaldo

Arkansas has amended its statutory regulation of captive insurance companies in two significant ways. First, following the lead of several other states and foreign jurisdictions, the amendment provides for the creation of “incorporated protected cells,” which it defines as “a protected cell that is established as a corporation or other legal entity separate from the sponsored captive insurance company or producer reinsurance captive insurance company of which it is a part.” Second, it provides for the designation of a captive insurance company as a “dormant captive insurance company.”

Under the new regulation, the creation of an incorporated protected cell requires the prior written approval of the Arkansas insurance commissioner, and a protected cell may be converted into an incorporated protected cell “without affecting the protected cell’s assets, rights, benefits, obligations, and liabilities.” Once created, an incorporated protected cell may enter into its own contracts, and counterparties have no recourse against the sponsored captive insurance company and its assets “other than against assets properly attributable to the incorporated protected cell that is a party to the contract or obligation.”

The law defines “dormant captive insurance company” as “a pure captive insurance company, sponsored captive insurance company, or industrial insured captive insurance company that has: (1) Ceased transacting the business of insurance, (2) No remaining liabilities associated with insurance business transactions, or insurance policies issued before the filing of its application.” Such a company must apply for a certificate of dormancy, which is subject to renewal every five years. Once granted this certificate, a dormant captive insurance company must maintain unimpaired, paid-in capital and surplus of $25,000 and pay a periodic license renewal fee, but it is not subject to Arkansas’ minimum premium tax. Before it may resume issuing insurance policies, it must get approval from the commissioner of insurance.

This amendment made two other changes. First, it removed restrictions on the corporate forms that captive insurance companies may take, which were previously limited to domestic stock insurers, stock insurers with their capital divided into shares and held by shareholders, mutual insurers without capital stock, and reciprocal stock insurers, depending on the type of captive. Under the new law, any “captive insurance company may be formed and operated in any form of business organization authorized under Arkansas law and approved by the Insurance Commissioner.” Second, it gave the commissioner discretion to determine whether business written by a sponsored captive insurance company must be fronted by an insurance company, something that was previously mandatory. 2017 Arkansas Laws Act 370 (H.B. 1476)

This post written by Jason Brost.

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