Contract Formation

SECOND CIRCUIT AFFIRMS DISMISSAL OF LAWSUIT BASED ON ARBITRATION PROVISIONS BUT REFUSES TO ORDER SANCTIONS

November 28, 2012 by Carlton Fields

Ipcon Collections sued Costco over a dispute regarding a series of agreements in which Costco agreed to sell karaoke systems on a consignment basis on behalf of Ipcon’s predecessor in interest. Costco initiated arbitration and moved to dismiss the lawsuit based on arbitration clauses in the agreements, and for sanctions. The lower court granted Costco’s motion to dismiss in favor of the pending arbitration proceedings and denied its motion for sanctions. The Second Circuit affirmed. The Court of Appeals held that Ipcon’s argument that Costco “never intended to honor” the contracts sounded in fraud in the inducement, and it was up to the arbitrators to decided the merits of such claim. The court also rejected Ipcon’s alternative argument that there had been no “meeting of the minds,” holding that the executed contracts constituted objective evidence of a meeting of the minds. Though finding that Ipcon’s argument was “weak,” the court affirmed the decision not to award Costco sanctions “given the confusing nature of the division of responsibility between courts and arbitrators as to contract formation.” Ipcon Collections, LLC v. Costco Wholesale Corp., No. 11-3944 (2d Cir. Oct. 9, 2012).

This post written by Ben Seessel.

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U.S. INSURER AND BERMUDA CAPTIVE REINSURER NOT CONSIDERED ALTER EGOS

November 19, 2012 by Carlton Fields

In a dispute over a long-term care insurance contract, a court rejected the plaintiff’s allegation that five defendants “are an association of entities acting together for the purpose of providing long term care insurance under the name Ability Insurance and also act as the alter egos and/or agents of each other.” The defendants are Ability Reinsurance Holdings (a Bermuda-based holding company) and 4 subsidiaries, including Ability Resources Holdings, Ability Insurance (U.S. insurer), Ability Reinsurance (Bermuda-based captive reinsurer) and Ability Resources, Inc. The court granted a motion for judgment on the pleadings in favor of the Bermuda-based holding company, the Bermuda-based captive reinsurer, and Ability Resources Holdings for lack of personal jurisdiction based on the determination that they do not act as an alter ego for Ability Insurance. The court held that while regulators permitted Ability Insurance to purchase reinsurance from a member of the same corporate family, that fact “does not render the contractual relationship a ‘sham’ or otherwise make Ability Reinsurance (Bermuda) susceptible to suit in Iowa.” The court also dismissed the claims against Ability Resources, Inc., holding that simply alleging that Ability Resources is the alter ego of Ability Insurance, “without more,” failed to satisfy federal pleading requirements. Schultz v. Ability Insurance Co., Case No. 2:11-cv-01020-JSS (USDC N.D. Iowa Oct. 9, 2012).

This post written by Abigail Kortz.

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COURT DENIES DISMISSAL OF PUTATIVE CLASS ACTION ALLEGING KICKBACKS ACCEPTED BY LENDER VIA ITS CAPTIVE REINSURER

September 27, 2012 by Carlton Fields

A breach of contract claim survived dismissal in a potential class action lawsuit by homeowners against a mortgage lender for alleged kickbacks obtained when the lender required the homeowners to pay for force-placed insurance (FPI) on mortgaged properties. The homeowners contended that the lender breached its contractual duty of good faith and fair dealing by funneling back to itself a portion of the premiums paid by the homeowners for the FPI by, among other things, providing reinsurance through its own captive insurance company. While the court held that the contract claim could proceed against the lender, the court dismissed other claims for unfair and deceptive trade practices, and for unjust enrichment. Montanez v. HSBC Mortgage Corp. (USA), Case No. 11-4074 (USDC E.D. Pa. July 18, 2012).

This post written by Michael Wolgin.

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CRIMINAL CONVICTIONS RELATING TO GEN RE-AIG FINITE REINSURANCE TRANSACTION VACATED BY COURT OF APPEAL

August 2, 2011 by Carlton Fields

The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.

ALLEGED REINSURANCE-RELATED MORTGAGE KICKBACK CLASS ACTION SUIT DISMISSED BASED ON SUBSTITUTION OF FDIC AS RECEIVER FOR NOW-DEFUNCT LENDER

July 28, 2011 by Carlton Fields

On July 21, 2008 and August 20, 2008 we reported on the early stages of a class action lawsuit filed by mortgage loan borrowers against now-defunct Washington Mutual, Inc. (“WaMu”), for alleged violations of the Real Estate Settlement Procedures Act. The borrowers contended that WaMu collected illegal kickbacks from private mortgage insurance providers who had agreed to reinsure the borrowers’ mortgage insurance with WaMu’s captive reinsurer. After WaMu failed the court substituted as a party the FDIC in its capacity as receiver for WaMu. The court has now granted FDIC’s motion to dismiss the action. The court held that the relief sought by the borrowers, treble damages under RESPA, constitutes a penalty, which, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, may not be awarded against the FDIC in its capacity as receiver. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (USDC E.D. Pa. June 28, 2011).

This post written by Michael Wolgin.