Arbitration Process Issues

DISPUTE PENDING IN COURT MAY NOT BE MADE SUBJECT TO ARBITRATION

June 3, 2014 by Carlton Fields

An individual had a dispute over work-related issues while working at a Citicorp call center. His employment agreement required arbitration of individual disputes but did not require the arbitration of class claims. The employee filed a class action lawsuit, and left Citicorp’s employ. In what the Sixth Circuit called “a confluence of improbable circumstances,” the former employee was rehired by Citicorp while the class action lawsuit was still pending, but this time signed an employment agreement which required the arbitration of both individual and class claims. The issue was whether he could be compelled to arbitrate the pending class claims. The Court interpreted the second arbitration provision to be prospective only, designed to head off new lawsuits rather than cut off existing lawsuits. This was a question of the interpretation of the arbitration agreement, and despite the general interpretation rule favoring arbitration, the Court found that there was “no doubt” as to the scope of the arbitration provision in the new employment agreement. Therefore, the employee was not required to arbitrate the pending class claims. The Court noted that there was an ethical issue of Citicorp dealing with an employee who was represented by counsel in a pending lawsuit concerning the subject matter of the lawsuit, but found it unlikely that Citicorp’s lawyers intended the provision to be provided to parties to pending litigation. Russell v. Citigroup, Inc., No. 13-5994 (6th Cir. April 4, 2014).

This post written by Rollie Goss.

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COURT HOLDS THAT ARBITRATOR SHOULD DECIDE WHETHER AN ARBITRATION PROVISION SURVIVES THE COMMUTATION OF A REINSURANCE AGREEMENT

June 2, 2014 by Carlton Fields

A federal judge in the District of Connecticut recently analyzed whether the arbitration provision in a reinsurance agreement was extinguished by a subsequent commutation agreement. The case involved an agreement between the reinsurer, Trenwick America Reinsurance Corporation, and its reinsured Commercial Casualty Insurance Company of Georgia (CCIC). The reinsurance agreement had a “cut through” provision, permitting a direct action by CCIC’s insureds against Trenwick if CCIC became insolvent. In 2004, CCIC became insolvent, and eight years later, one of CCIC’s insureds invoked the cut-through provision and billed Trenwick directly for a claim. Shortly thereafter, Trenwick and the estate of CCIC entered into a commutation agreement under which all reinsurance obligations between Trenwick and CCIC were commuted and extinguished. After Trenwick failed to pay the claim, the insured demanded arbitration, and Trenwick filed suit in federal court seeking to enjoin the arbitration.

The court refused to enjoin the arbitration and granted the insured’s motion to compel arbitration, rejecting Trenwick’s argument that the commutation agreement extinguished the arbitration provision. The court ruled that whether the insured’s claims are subject to arbitration is a question for the arbitrator. It is up to the arbitrator to decide whether the contract containing the arbitration provision was terminated and the effect, if any, of the commutation agreement on the arbitration provision. The court ruled that because the insured was not a party to the commutation agreement, that agreement’s effect on the insured’s rights must necessarily be determined by interpreting the original reinsurance agreement, which is the responsibility of the arbitrator. Trenwick America Reinsurance Corp. v CX Reinsurance Co. Ltd., Case No. 3:13cv1264 (USDC D. Conn. May 23, 2014)

This post written by Catherine Acree.

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COURT QUASHES SUBPOENA SEEKING UNISSUED ARBITRATION AWARD

May 28, 2014 by Carlton Fields

After striking the affirmative defense of failure to mitigate, a court quashed a subpoena issued to an arbitrator seeking an unissued arbitration award in a dispute between certain defendants and their reinsurer. The case involved a lawsuit by a state-appointed receiver, Jo Ann Howard & Associates, against numerous defendants stemming from a scheme to defraud consumers in connection with pre-need funeral services contracts issued by Lincoln Memorial. After Howard was appointed, the receivership court stayed the arbitration proceedings between Lincoln Memorial and its reinsurer, Hannover Life Reassurance Company of America. One of the issues pending in the arbitration at the time was Lincoln Memorial’s claim for damages against Hannover arising from Lincoln Memorial’s allegations that Hannover’s arbitration-related conduct had brought Lincoln Memorial to the brink of insolvency.

Two of the other defendants, both banks, raised as affirmative defenses Howard’s failure to mitigate damages. The banks alleged Howard’s decision not to pursue Lincoln Memorial’s claims against Hannover caused Howard’s damages. The banks subpoenaed the arbitrator in the Lincoln/Hannover arbitration to obtain a copy of the unissued arbitration award. The court granted Howard’s motion to strike the banks’ failure to mitigate defense, finding the defense legally insufficient. The defense was not causally related to Howard’s damages claim because Howard’s claims against Lincoln Memorial arose from Lincoln Memorial’s handling of pre-need trust accounts, and not from Lincoln Memorial’s insolvency. Further, a receiver’s ability to recover assets or damages for wrongdoing is important to the public, and allowing such an affirmative defense would encumber a receiver’s ability to perform these functions. Jo Ann Howard & Associates, P.C. v. J. Douglas Cassity, Case No. 4:09CV01252 ERW (USDC E.D. Mo. May 9, 2014).

This post written by Leonor Lagomasino.

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CLAUSE WHERE PARTY DEMANDING ARBITRATION IS NOT A PARTY TO ALLEGEDLY TERMINATED REINSURANCE AGREEMENT

May 27, 2014 by Carlton Fields

A federal district court has taken under advisement plaintiff’s motion for injunction and defendant’s cross-motion to compel arbitration after conducting a hearing on the matter. The issue to be decided is whether CX can compel Trenwick to participate in an arbitration based upon a reinsurance agreement as to which CX was not a party and which, according to Trenwick, was terminated. At the core of this dispute is a reinsurance agreement under which Trenwick reinsured Commercial Casualty Insurance Company. CX argued the reinsurance agreement included a “cut-through” provision which gave CX the right to collect directly against Trenwick even though CX was not a party to the reinsurance agreement. Trenwick denied liability under this cut-through provision and further denied that the cut-through provision gave its beneficiaries, including CX, any rights under the agreement’s arbitration clause. Additionally, Trenwick argued that the reinsurance agreement was terminated further to a commutation agreement between Trenwick and CCIC’s Liquidator and, as a result, terminated any rights CX may have had under the cut-through provision and any requirement to arbitrate CX’s claims. CX responded that it was not a party to the commutation agreement, which could therefore not extinguish CX’s right to arbitrate. CX also argued that Trenwick’s termination defense must be arbitrated. Trenwick America Reinsurance Corp. v. CX Reinurance Company Limited, Case No. 3:13-cv-01264 (JBA) (USDC D. Conn. Apr. 28, 2014).

This post written by Leonor Lagomasino.

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DENIAL OF ARBITRATION REVERSED WHERE TRIAL COURT FAILED TO HOLD TRIAL TO RESOLVE DISPUTED QUESTIONS OF FACT

May 20, 2014 by Carlton Fields

The Tenth Circuit has pointedly reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ oral agreement remained. The case was brought as a class action against a propane gas company for overcharging customers. Despite multiple rounds of lengthy discovery, factual questions remained regarding the content of conversations between the parties, and when the “last act” of contract formation occurred for purposes of determining choice of state contract law. The Tenth Circuit concluded: “Summary-judgment-like motions practice may be a permissible and expedient way to resolve arbitrability questions when it’s clear no material disputes of fact exist and only legal questions remain. But when factual disputes may determine whether the parties agreed to arbitrate, the way to resolve them isn’t by round after round of discovery and motions practice. It is by proceeding summarily to trial. That is the procedure the [FAA] requires and the parties should have undertaken a long time ago – and it is the procedure they must follow now.” Howard v. Ferrellgas Partners, L.P., Case No. 13-3061 (10th Cir. April 8, 2014).

This post written by Michael Wolgin.

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