Jurisdiction Issues

NEBRASKA FEDERAL COURT APPLIES FIRST-TO-FILE RULE TO REINSURANCE BREACH OF CONTRACT DISPUTES, TRANSFERS CASE TO CONNECTICUT

March 14, 2018 by Rob DiUbaldo

The District of Nebraska recently ruled in favor of Charter Oak Oil Co. (“Charter Oak”)’s attempt to dismiss a breach of contract case by Applied Underwriters Captive Risk Assurance Co. (“AUCRA”) based on the first-to-file rule. AUCRA administered the investment component of a reinsurance participation plan with Charter Oak. Charter Oak moved to dismiss for improper venue based on concurrent litigation by Charter Oak against AUCRA in Connecticut federal court. AUCRA opposed the motion to dismiss, arguing that “compelling circumstances” and “red flags” existed sufficient to warrant an abrogation of the first-to-file rule. Specifically, AUCRA alleged it warned Charter Oak via a demand letter of its intent to file this lawsuit in Nebraska and Charter Oak raced to the Connecticut courthouse first. AUCRA further alleged that it was attempting to settle the dispute out of court by notifying Charter Oak of its intent to file suit.

The court, however, brushed off those arguments and held that “even assuming them to be true” the first-to-file rule still applied. It noted there was no evidence that Charter Oak knew the Nebraska lawsuit was imminent, that Charter Oak misled AUCRA to gain the advantages of filing first, or that Charter Oak made any prior assurances it would not file a complaint but then did anyway. Additionally, the court rejected AUCRA’s argument that jurisdiction did not attach in Connecticut because that court was still considering AUCRA’s motion to enforce a Nebraska forum-selection clause at the time this lawsuit was filed because the Connecticut court had since denied that motion. Finally, the court noted that while the Connecticut litigation included different allegations, the two complaints “substantially overlap” which strengthened the case for applying the first-to-file rule.

Procedurally, the court denied the dismissal of AUCRA’s breach of contract claim and asked AUCRA to decide whether it wished to dismiss the complaint without prejudice or transfer it to Connecticut. On January 16, 2018, the Court granted AUCRA’s request and transferred the case to Connecticut.

Applied Underwriters Captive Risk Assurance Co. v. Charter Oak Oil Co., Case No. 17-164 (D. Neb. Jan. 4, 2018).

This post written by Thaddeus Ewald .
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U.K. COURT FINDS ARBITRATION RESPONDENT DID NOT WAIVE OBJECTION TO JURISDICTION OF ARBITRATION TRIBUNAL

March 1, 2018 by John Pitblado

The Queen’s Bench Division of the U.K.’s High Court of Justice has reversed a partial award by a tribunal of the London Court of International Arbitration (“LCIA”), which held that an arbitration respondent lost its right to challenge the validity of a request for arbitration by failing to object until after serving its Response and shortly before its Statement of Defence was due. The court agreed with the tribunal that the request for arbitration violated LCIA Rules by seeking to join two disputes arising under separate contracts in a single proceeding. The court disagreed, however, with the conclusion that the respondent untimely challenged the tribunal’s jurisdiction based on the invalid request. Reading Section 31 of the 1996 Arbitration Act together with Article 23.3 of the LCIA Rules, the court found that objections to jurisdiction must be made no later than the time for the Statement of Defence.

A v. B, [2017] EWHC 3417 (Comm)

This post written by Alex Silverman.

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SECOND CIRCUIT REBUFFS ATTEMPT TO ADDRESS IN FEDERAL COURT ACTION RELIEF PREVIOUSLY DENIED IN STATE COURT SUIT

February 20, 2018 by Rob DiUbaldo

The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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INSURANCE RECEIVER’S PREEMPTION ARGUMENT UNDER MCCARRAN-FERGUSON FAILS TO AVOID ARBITRATION OF REINSURANCE DISPUTE

February 12, 2018 by Michael Wolgin

The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT CONSIDERS JURISDICTION TO HEAR APPEAL OF DECISION VACATING ARBITRATION AWARD AND REMANDING FOR A NEW ARBITRATION

January 30, 2018 by Carlton Fields

The Ninth Circuit has found that it had jurisdiction to hear an appeal of a district court decision vacating an arbitration award and remanding the case for a new arbitration.

The appeal arose out of a FINRA arbitration involving claims that a securities broker had mismanaged a client’s investment portfolio. The petitioner claimed damages of $100,000 in his complaint. Because FINRA rules only provide for three arbitrator panels for claims over $100,000, the case was assigned to a single arbitrator.

Shortly before the arbitration hearing, the petitioner filed a brief in which he claimed his damages were $125,500, but he did not amend his complaint. The respondent objected to proceeding with a single arbitrator, but the arbitrator considered and rejected this objection, proceeded to hear the case alone, and awarded petitioner $75,000. The respondent asked a district court to vacate this award on several grounds, which the court did on the basis that the arbitrator exceeded his powers by proceeding as a single arbitrator despite the increased damages claim. The district court then remanded the case for a new arbitration before a three arbitrator panel.

On appeal, the court considered two issues: (1) whether the district court’s decision remanding the case for a new arbitration meant that the appellate court lacked jurisdiction over the case; and (2) if jurisdiction was present, whether the arbitrator had exceeded his authority.

In answer to the first question, the court found that while the FAA does not directly address the circumstance of a case that has been remanded for a new arbitration, the fact that the district court had vacated an award was enough under the statute to create appellate jurisdiction. In doing so, the court followed the lead of every circuit to have considered this issue, including the First, Second, Third, Fifth, and Seventh Circuits.

Having found that it had jurisdiction, the court found that the arbitrator had not exceeded his authority. The court emphasized that in order to overturn an arbitral award on the basis that the arbitrator exceeded his powers, the objecting party must show not simply that the arbitrator erred in his interpretation of the law or the agreement to arbitrate, but also that the arbitrator’s decision was “completely irrational” or showed a “manifest disregard of the law.” Finding that the arbitrator’s interpretation of FINRA’s rules on when to use a three arbitrator panel, while arguably incorrect, was neither irrational nor showed a manifest disregard for the law, the court remanded the case so that the district court could consider the respondent’s other arguments in favor of vacating the arbitrator’s award.

Sanchez v. Elizondo, No. 16-17345 (9th Cir. Dec. 4, 2017).

This post written by Jason Brost.
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