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Confirmation / Vacation of Arbitration Awards

New York Federal Court Confirms Arbitration Award in Credit Insurance Dispute Over Material Misrepresentations Based, In Part, on Underwriters’ Testimony of Materiality

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The Southern District of New York federal confirmed an arbitral award related to a credit insurance policy claim over claims of manifest disregard of the law related to the materiality of misrepresentations in the insurance application. In the underlying credit agreement, HSBC Bank Brasil (“HSBC”) agreed to extend $50 million in credit to Casablanca International Holdings (“Casablanca”) with repayment guaranteed by Schahin Engenharia S.A. (“Schahin”). The credit insurers required HSBC to complete an application that included questions regarding past defaults, history of late payments, and repayment difficulties in the course of insuring the credit agreement if Schahin failed or refused to honor its guarantor obligations. When Casablanca eventually defaulted on its obligations and both Casablanca and Schahin filed bankruptcy, HSBC submitted a claim to the insurers. An arbitrator dismissed HSBC’s claims after finding that it made material misrepresentations in the insurance application that rendered the policy void ab initio, where HSBC denied knowledge of any circumstances that would raise the likelihood of loss.

The central dispute was whether the arbitrator manifestly disregarded the law on materiality of misstatements in an insurance application, specifically whether underwriters’ testimony alone can prove materiality.

First, the court found the arbitrator’s decision did not manifestly disregard the law on materiality. The court distinguished the cases cited by HSBC’s successor-in-interest because those cases all addressed the sufficiency of underwriters’ testimony in the context of motions for summary judgment. In the context of a summary judgment standard, the issue is whether underwriters’ testimony alone demonstrates materiality as a matter of law. In the present context, however, the parties did not move for summary judgment and instead conducted a full hearing on the merits. Therefore, the insurers in this setting were not required to prove material misrepresentation as a matter of law, but merely a matter of fact to the fact-finder. Furthermore, the court noted that even if the arbitrator incorrectly interpreted the law, he had a colorable justification sufficient to preclude vacatur.

Next, the court concluded that even if the insurers were required to introduce additional evidence of materiality beyond the underwriters’ testimony, it was satisfied they had done so. Specifically, the court noted that the issuance of the policy was “expressly conditioned” upon completion of the insurance application and the insurers’ satisfaction with the answers contained therein. Additionally, the court pointed to the plain text of the insurance policy, credit agreement, and insurance application, credit review reports produced, and New York law as all supporting the arbitrators’ determination that the misrepresentations were material.

Finally, the court granted the cross-motion to confirm the arbitral award. Pursuant to both the New York Convention and the Federal Arbitration Act, there are limited grounds that justify refusal to confirm an arbitral award. The court found none of the grounds articulated under either framework were satisfied in this case, and thus confirmed the award.

Banco Bradesco S.A. v. Steadfast Ins. Co., Case No. 18-331 (USDC S.D.N.Y. Sept. 7, 2018).

This post written by Thaddeus Ewald .

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Minnesota Federal Mutual Court Adopts “Look Through” Basis for Federal Question Jurisdiction in FAA Section 9 Disputes

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The District of Minnesota issued several opinions this summer in a dispute between two insurance companies, Federated Mutual Insurance Co. (“Federated Mutual”) and Federated National Holding Co. (“Federated National”), regarding the similarities between the two companies’ names. Federated Mutual owned the trademark rights to several iterations of the word “Federated” related to insurance. The parties resolved their trademark dispute in 2013 with a co-existence agreement under which Federated National agreed to stop using the term “Federated” in its name within 7 years and minimize industry confusion. By 2016 Federated Mutual initiated arbitration against Federated National because of the latter’s failure to abide by the agreement. An arbitrator concluded that Federated National had indeed breached the agreement but denied a trademark infringement claim asserted by Federated Mutual. Federated Mutual moved to confirm the arbitral award and Federated National responded by moving to confirm the award related to the denial of the trademark infringement claim and to vacate the award otherwise. On June 22, 2018, the court issued a decision on Federated National’s motion to dismiss the petition and Federated Mutual’s petition to confirm.

First, the district court resolved a circuit split on the appropriate approach when courts assess subject matter jurisdiction in the context of FAA Section 9 petitions. Rejecting the approach that courts should consider the face of the petition alone, the court concluded it should “look through” the petition to the underlying arbitration to determine whether a federal question exists. Here, the court “looked through” the petition and because the underlying arbitration involved a federal trademark claim, federal question jurisdiction existed.

Second, the court held that even if federal question jurisdiction did not exist, the court had diversity jurisdiction over the dispute. Even though Federal Mutual primarily sought injunctive relief, the court decided the value of the “object of the litigation”—resolving the confusion surrounding the names in the insurance industry—satisfied the $75,000 jurisdictional minimum.

Third, the court determined it could not exercise general jurisdiction over Federated National but it could exercise specific jurisdiction based on the particular contacts with Minnesota regarding the co-existence agreement. While Federated National did not exercise sufficient control or domination over its subsidiaries with Minnesota contacts to warrant general jurisdiction, the court found specific jurisdiction because the co-existence agreement was governed by Minnesota law and contemplated performance that affected Federated Mutual’s business in the state.

Fourth, the court found proper venue in Minnesota where Federated National was subject to personal jurisdiction there, and therefore deemed to reside in the state. Likewise, the court rejected Federated National’s request to transfer the case to Illinois where it had filed a case to vacate the award.

Fifth, the court confirmed the arbitral award. It noted the limited circumstances under which a court can vacate an award pursuant to the FAA and that Federated National did not assert any of the applicable bases—instead, the court dismissed the argument as Federated National merely disagreeing with the arbitrator’s analysis.

After the court issued its June 22, 2018 opinion, Federated National appealed and moved to stay the court’s decision pending appeal.  In a September 11, 2018 opinion, the District of Minnesota denied that motion. Federated National moved on the grounds that there were substantial questions of law regarding the “look through” basis for Federated Mutual question jurisdiction, doubt that the injunctive relief satisfies the amount in controversy requirement, and whether Federated National had sufficient Minnesota contacts. The court denied the motion largely because Federated National failed to make a strong showing that it was likely to succeed on the merits. All of Federated National’s arguments regarding “substantial questions of law” presented merely the possibility of success on the merits that fail to satisfy the high burden to warrant a stay pending appeal. Additionally, Federated National did not establish any irreparable injury absent a stay, a stay would further injure Federated Mutual by delaying resolution, and the public interest did not support a stay.

This post written by Thaddeus Ewald .

See our disclaimer.

Ninth Circuit Upholds Lower Court Rulings on Nurse Staffing and Work Break Arbitration Awards

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The Ninth Circuit recently decided two cases related to arbitration awards arising out of a settlement agreement between the Washington State Nurses Association (WSNA) and MultiCare Health System governing nurses’ breaks and staffing plans. The settlement agreement required MultiCare to adopt practices such that each nurse receives a 15-minute break every four hours of work, but also to ensure that such practices do not violate the staffing plan. An arbitrator agreed that MultiCare had violated these requirements and ordered MultiCare cease using the “buddy system” as a practice to provide breaks and required assignment of a reserve or floating nurse to ensure compliance. The district court vacated the award as to the buddy system but did not address the reserve or floating nurse component.

First, the Ninth Circuit held that the lower court erred in its conclusion that the settlement agreement did not allow the arbitrator to eliminate the practice of using the buddy system. Citing precedent severely restricting vacatur where the arbitrator even arguably construed the contract, the court found the arbitrator appropriately considered the buddy system and the settlement and determined that the buddy system violated the essence of the settlement agreement.

Second, the court found no reason to vacate the award regarding the use of reserve or float nurses where the district court declined to rule on MultiCare’s objection because it had already vacated the award regarding the use of the buddy system. Even if there was ambiguity in the basis of the award, the court noted, that would not be grounds to vacate the award.

Finally, the court affirmed the lower court’s finding that MultiCare failed to show any bias, partiality, or other wrongdoing on the arbitrator’s behalf to warrant reassigning the case to a different arbitrator for any further proceedings.

Multicare Health Sys. v. Wash. State Nurses Ass’n, No. 16-36048 (9th Cir. July 23, 2018).

This post written by Thaddeus Ewald .

See our disclaimer.

Eighth Circuit Upholds Confirmation of Arbitration Award Directing Payment of Attorney’s Fees and Expenses Unrestricted by Contractual Limit on Liability

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In a case concerning a contract for the construction of a pipe conveyor system, ProEnergy Services, LLC, and its surety Western Surety Company (collectively, “ProEnergy”), appealed a judgment confirming an arbitration award that included payment of attorneys’ fees and expenses to Beumer Corporation and Beumer Kansas City, LLC (collectively, “Beumer”). ProEnergy appealed, specifically questioning the arbitrator’s conclusion that the contract’s limitation on liability did not extend to attorney’s fees, and that an award of damages plus attorneys’ fees could exceed the cap.

The Eight Circuit affirmed the district court’s confirmation, concluding that the arbitrator acted within the scope of his authority and did not, as ProEnergy argued, “specifically and expressly disregard[] an unequivocal choice-of-law provision.” Instead, the court found that the arbitrator cited applicable Missouri law throughout his order, and moreover, reasoned that even “[i]f the arbitrator mistakenly overlooked Missouri decisions that favored a contrary result, then he might have made an error of law in applying the contract, but such an error of law does not justify vacating the award.” As such, the Eighth Circuit affirmed. Beumer Corp. v. ProEnergy Servs., LLC, Case No. 17-2862 (8th Cir. Aug. 8, 2018).

This post written by Gail Jankowski.

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Court Construes Reinsurance Participation Agreement, Rejects Venue Objection, and Confirms Arbitration Award

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O’Connell Landscape Maintenance, Inc. (O’Connell) and Applied Underwriters Captive Risk Assurance Co. (AUCRA) entered into a reinsurance participation agreement (RPA). After a dispute arose related to the agreement, the parties entered arbitration in California, which resulted in an award to AUCRA of $38,960 in attorney fees and $43,170.44 in costs. AUCRA petitioned a California federal district court to confirm the award, but O’Connell opposed the petition, arguing that the RPA selected Nebraska as the exclusive jurisdiction for enforcing the award. The court disagreed, finding that the RPA obligated only O’Connell to submit to the jurisdiction of Nebraska. The RPA did not designate Nebraska as the exclusive jurisdiction for AUCRA to seek enforcement of the award. The court rejected an additional argument by O’Connell regarding the service of the petition, and confirmed the award. O’Connell noticed its appeal on July 6, 2018. Applied Underwriters Captive Risk Assurance Co., Inc. v. O’Connell Landscape Maintenance, Inc., Case No. 18-cv-00683 (USDC C.D. Cal. June 25, 2018) (order) & (USDC C.D. Cal. July 6, 2018) (notice of appeal).

This post written by Gail Jankowski.

See our disclaimer.