Contract Formation

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

April 16, 2019 by Alex Silverman

The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

Fifth Circuit Affirms Order Compelling Arbitration of Employment Discrimination Claims by Physician Against Medical Center

February 28, 2019 by Carlton Fields

Plaintiff, an emergency room physician, was employed by Defendants, a hospital and its affiliates, pursuant to an employment agreement and subsequent independent contractor agreement, both of which contained an arbitration clause providing for the arbitration of disputes arising out of those agreements. Following the termination of her employment, Plaintiff filed suit in the Northern District of Mississippi alleging claims under Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, as well as several state law claims including wrongful termination, intentional interference with contract, intentional interference with business relations, and fraud. Defendants filed a motion to compel arbitration, which the district court granted, rejecting Plaintiff’s arguments that the arbitration requirements were unconscionable, that further discovery was required, and that her wrongful termination claims were not subject to arbitration.

On appeal, the Fifth Circuit agreed with the district court and consequently affirmed, compelling arbitration of Plaintiff’s claims. Concerning Plaintiff’s procedural unconscionability allegation, the panel rejected Plaintiff’s claim that the inconsistency between the term sheet (which did not mention the arbitration provision) and the employment agreements (which contained the arbitration provision) rendered the arbitration provision unconscionable, deeming it “an issue that would have been remedied by simply reading the contract.” The panel also rejected Plaintiff’s argument that the arbitration clause was rendered substantively unconscionable due to the fact that the parties conceded that another provision in the employment agreement, the punitive damages waiver, was unconscionable. Instead, the panel found that the punitive damages waiver provision was severable and therefore the arbitration provision was unaffected. In addition, the panel found that Plaintiff’s wrongful termination claim was predicated on her contractual relationship with Defendants and therefore arose “out of” or “under” those contracts and subject to arbitration. Last, the panel rejected Plaintiff’s equitable estoppel argument that her tort claims against her supervising physician were not subject to arbitration because he was a non-signatory to the agreements containing arbitration provisions. The Panel reasoned that those claims similarly centered around interference with her contractual, employment relationship with Defendants.

Begole v. North Mississippi Med. Ctr. Inc., Case No. 18-60369 (5th Cir. Feb. 7, 2019).

Dismissal of Forced-Placed Insurance Cases Pursuant to Filed-Rate Doctrine Upheld by Eleventh Circuit

October 17, 2018 by John Pitblado

Borrowers’ complaints alleging their mortgage servicers breached loan contracts and the implied covenant of good faith and fair dealing by charging “inflated amounts” for “force-placed” or “lender-placed” insurance and receiving “rebates” or “kickbacks” from the force-placed insurer, which savings were not passed on to the borrowers, were dismissed as the insurance rates were filed with and approved by the relevant state regulators.

“The filed-rate doctrine forbids a regulated entity from charging rates for its services other than those properly filed with the appropriate regulatory authority. As a result, where the legislature has conferred power upon an administrative agency to determine the reasonableness of a rate, the rate-payer can claim no rate as a legal right that is other than the filed rate.” Thus, the filed-rate doctrine precludes suits: (1) directly challenging a filed-rate; and (2) facially-neutral challenges – “i.e., any cause of action that is not worded as a challenge to the rate itself” but where the damages awarded “would, effectively, change the rate paid by the customer… to one below the filed rate by other customers or would, in effect, result in a judicial determination of the reasonableness of that rate.”

Despite the borrowers’ assertions that they are not challenging the reasonableness of the insurance rates, they repeatedly stated they were challenging the premiums charged. As the Court noted, “since these premiums are based upon rates filed with the state regulators, [the borrowers] are directly attacking those rates as being unreasonable as well… Their complaints therefore contain textbook examples of the sort of claims that we have previously held are barred by the non-justiciabilty principle.”

Carlton Fields Jorden Burt, P.A. represented American Security Insurance Company in this matter.

Patel v. Specialized Loan Servicing, LLC, 16-12100, 16-6585 (USCA 11th Cir. Sept. 24, 2018)

This post written by Nora A. Valenza-Frost.

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SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

May 22, 2017 by Carlton Fields

Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.” The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
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ENGLISH HIGH COURT OF JUSTICE ANALYZES STANDARDS GOVERNING FRAUDULENT INDUCEMENT CLAIMS IN REINSURANCE DISPUTES

May 16, 2017 by Michael Wolgin

The Court of Appeal of England and Wales approved the judgment of the trial court in a reinsurance dispute between Axa and Arab Insurance Group (Arig) related to certain insured energy construction risks. The trial court had ruled in favor of Arig finding that, notwithstanding that an “unfair presentation of the risk” was made to Axa by Arig by failing to disclose past loss statistics, the latter failed to establish that its underwriter was induced to accept the ceded risks, i.e., Axa did not demonstrate that it “would have declined the risk if a fair presentation had been made” to it by Arig. The appellate court analyzed at length the evidence and testimony before the trial court related to the placement of the risks and the negotiation process. The court upheld the judgment, clarifying that the standard for evaluating non-disclosure includes both an objective component involving what a reasonable underwriter would conclude, and subjective components involving what the insured or broker would have said to the underwriter. The court made clear that whether the underwriter was induced turns on a subjective test; the fact that a reinsurer “could have been interested in something is irrelevant if in fact he would not have been.” Axa Versicherung Ag v. Arab Insurance Group, Case No. [2017] EWCA Civ 96 (Royal Courts of Justice Feb. 28, 2017).

This post written by Michael Wolgin.

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