Jurisdiction Issues

NEW JERSEY STATE COURT REFUSES TO BIND PLAINTIFFS TO A BERMUDA COURT JUDGMENT WHERE THEY WERE NOT PARTIES TO THAT ACTION

April 10, 2017 by Rob DiUbaldo

A New Jersey state court recently held that the former shareholders of an insurance holding company suing its E&O insurers were not bound by a Bermuda court’s prior judgment where they were not parties to the suit in which the judgment was issued.

Raydon Underwriting Management Company (“Raydon”), as a managing general agent, purportedly gave bad advice to two operating companies (“Clarendon”) held by Lion Holding, Inc. Plaintiffs were former shareholders of Lion Holding. Plaintiffs sued Raydon in a Bermuda court for the allegedly bad advice that led to millions in losses. Shortly before the Bermuda court issued a judgment in that case, Travelers and ERSIC—Raydon’s E&O insurers—informed plaintiffs that they would not be covering the claims against Raydon. Thereafter, the E&O insurers filed suit in Bermuda against Raydon seeking a declaration that the E&O policy were void, and prevailed on that suit.

Plaintiffs filed the present action against the E&O insurers regarding the E&O insurance coverage, and the E&O insurers defended the suit by claiming plaintiffs were bound by the judgment in the Bermuda action. The court disagreed, holding that the Bermuda judgment was not binding against the plaintiffs because they were not made parties to the suit. The court applied the general rule that a party cannot be bound by a judgment in a case in which it was not a party, finding none of the six exceptions laid out in Taylor v. Sturgell applicable. It noted that the plaintiffs’ interests were not adequately represented in the Bermuda case and in fact were inimical to the E&O insurers’ interests in that case.

Furthermore, the court refused to apply the doctrine of collateral estoppel to plaintiffs’ claims because the issues were not identical. In the Bermuda case, the issue was whether the E&O coverage was procured by fraud in the inducement. In this case, the issue was whether Travelers should be compelled to provide coverage.

Lastly, the court refused to decline jurisdiction under forum non conveniens, finding that the lower court had erroneously weighed the factors based on the assumption that the Bermuda judgment was binding on plaintiffs. The factors were split, but there was no basis for finding New Jersey a demonstrably inappropriate venue.

Ferguson v. Travelers Indem. Co., Case No. A-0028-15T1 (N.J. Super. Ct. App. Div. Mar. 10, 2017)

This post written by Thaddeus Ewald .

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ELEVENTH CIRCUIT LOOKS TO ALABAMA’S DOCTRINE OF “INTERTWINING” TO DETERMINE NON-SIGNATORY CANNOT BE COMPELLED TO ARBITRATE

March 27, 2017 by John Pitblado

Under Alabama law, “arbitration may be compelled under the doctrine of ‘intertwining’ where arbitrable and nonarbitrable claims are so closely related that the party to a controversy subject to arbitration is equitably estopped to deny the arbitrability of the related claim. But if the language of the arbitration provision is party specific and the description of the parties does not include the nonsignatory, the inquiry is at an end and the claims against the non-signatory cannot be submitted to arbitration.”

The Eleventh Circuit Court of Appeals held that a non-signatory cannot be compelled to arbitrate because the language of the agreements to arbitrate is party specific, does not include the non-signatory, and expressly states that all other disputes are not subject to arbitration.

The Court did, however, stay the action against the non-signatory, overturning the decision of the District Court for abuse of discretion in refusing to grant the stay, as the claims against the non-signatory and signatories “are based on the exact same factual allegations, the vast majority of which relate to the [signatories] only.”

Variable Annuity Life Insurance Company, et al. v. Brett Laferrera, et al., No. 16-14519 (11th Cir. Feb. 27 2017)

This post written by Nora A. Valenza-Frost.

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SIXTH CIRCUIT FINDS IT HAS NO JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION AND ENJOINING STATE COURT PROCEEDINGS

March 21, 2017 by Rob DiUbaldo

The Sixth Circuit has dismissed the appeal of an order granting a motion to compel arbitration and to enjoin certain state court proceedings, finding the order was not appealable because the district court stayed the matter pending arbitration rather than dismissing it.

The case began in state court where the administratrix of an estate brought various claims against a nursing home where the decedent had resided. The nursing home moved in federal court to compel arbitration and enjoin the administratrix from pursuing her claims in state court, which the district court granted.

The Sixth Circuit’s opinion hinged on the district court’s decision to stay the case pursuant to 9 U.S.C. § 3 rather than to dismiss it. The Sixth Circuit noted that, under 9 U.S.C. § 16(b)(1), such an order is not appealable except as provided for in 28 U.S.C. § 1292(b), which allows interlocutory orders to be appealed only if the district court states in writing that the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” As the district court made no such finding, the order was not appealable. Similarly, the Sixth Circuit found that it had no jurisdiction to review the district court’s order enjoining the state court proceeding, which was entered pursuant to the court’s power to direct arbitration provided by 9 U.S.C. § 4, as 9 U.S.C. § 16(b)(2) specifically prohibits appeals of such an interlocutory order.

Brandenburg Health Facilities v. Mattingly, Case No. 16-6161 (6th Cir. Feb. 24, 2017)

This post written by Jason Brost.

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KENTUCKY FEDERAL COURT ORDERS FURTHER BRIEFING ON WHETHER THE FEDERAL ARBITRATION ACT OR KENTUCKY LAW APPLIES IN DISPUTE INVOLVING AN INSOLVENT INSURER

March 8, 2017 by John Pitblado

The background of this case is as follows. State Insurance Commissioner Brian Maynard, acting as liquidator of the failed Kentucky Health Cooperative (“KYHC”), filed suit in Kentucky state court against CGI Technologies and Solutions, Inc. (“CGI”), KYHC’s administrator pursuant to an Administrative Services Agreement (the “Agreement”), which contained an arbitration clause. The suit alleged that CGI was “grossly negligent” in processing and paying claims and thus breached the Agreement. The state court action was removed to federal court. CGI commenced a separate federal action to compel arbitration, which was consolidated with the first action. The Liquidator made a motion to remand, challenging the Kentucky federal court’s power to decide the case.

In seeking to remand, the Liquidator claimed that Kentucky’s Insurers Rehabilitation and Liquidation Law (“IRLL”) vests exclusive jurisdiction in Kentucky state court, thus “reverse preempting” federal diversity jurisdiction, and in the alternative, argued that the federal court should abstain from exercising jurisdiction. The Kentucky federal court first found that the application of the IRLL’s exclusive jurisdiction directly conflicts with federal law, and thus that the IRLL’s jurisdiction provision was preempted by the federal removal and diversity subject matter jurisdiction statutes and the court had the subject matter jurisdiction required to decide the case. Next, the court found that because the case is really a contract action for damages and the court has subject matter jurisdiction, it should exercise the authority granted to it and refuse to exercise the discretion to abstain.

Finally, turning to the merits, the Kentucky federal court noted that the threshold issue was not whether there was a breach of the Agreement or whether the liquidation of KYHC was due to CGI’s actions or inactions, but rather what substantive law applies. CGI argued that the Agreement contains a “Dispute Resolution” clause which provided for all disputes to be resolved by mediation or arbitration, and that the Federal Arbitration Act (“FAA”) compels the court to enforce the binding arbitration clause. The Liquidator, on the other hand, argued that the IRLL provides for exclusive jurisdiction in state court, and thus under McCarran Ferguson, “reverse preempts” the FAA. The Liquidator also noted that the Agreement contained a “Governing Law” clause which provides that the Agreement is governed by Kentucky law. The Kentucky federal court denied the Liquidator’s motion to remand, but held that it required further briefing on which law shall apply. Thus, the court ordered the parties to submit briefing on the limited issues of : 1) Whether the IRLL allows enforcement of the Agreement’s “Dispute Resolution” clause; 2) Whether the FAA can apply in light of the parties “Governing Law” clause in the Agreement; and 3) Any other relevant argument which addresses choice of law.

Maynard v. CGI Technologies and Solutions, Inc., 16-cv-0037 (USDC E.D. KY Jan. 3, 2017).

This post written by Jeanne Kohler.

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BANKRUPTCY COURT HOLDS BERMUDA INSURERS VIOLATED BARTON DOCTRINE BY SEEKING ANTI-SUIT INJUNCTIONS IN BERMUDA COURTS

March 7, 2017 by Rob DiUbaldo

Two separate courts in the Southern District of New York have recently issued opinions relating to a complicated bankruptcy proceeding following the collapse of MF Global Holdings Ltd. in 2011. The underlying dispute involves MF Global Holdings and MF Global Assigned Assets’ (“Plaintiffs”) attempts to recover insurance proceeds from the defendants (“Bermuda Insurers”) under certain excess errors & omissions policies following a global settlement of MDL litigation in SDNY. In August 2016, the Bankruptcy Court for the Southern District approved the global settlement.

On November 8 2016, the Bermuda Insurers filed an adversary proceeding in the Supreme Court of Bermuda (“the Bermuda action”), obtaining ex parte anti-suit injunctions prohibiting Plaintiffs from prosecuting their insurance claims in the Bankruptcy Court and requiring them to arbitrate such disputes in Bermuda. On November 22—the same day the Bankruptcy Court entered an order to show cause why the Bermuda Insurers should not be held in contempt for filing the Bermuda action—they filed a motion to compel arbitration in the Bankruptcy Court, to which the Plaintiffs were unable to respond because of the Bermuda action’s anti-suit injunctions.

On December 21, 2016, the Bankruptcy Court entered a temporary restraining order barring the Bermuda Insurers from enforcing the Bermuda action’s anti-suit injunctions. On January 12, 2017, the court granted a preliminary injunction extending the TRO’s relief. The Southern District issued an opinion on February 10, 2017 denying the Bermuda Insurers’ motion for leave to appeal the TRO, which it filed shortly after the TRO was initially granted. The district court denied the motion seeking interlocutory appeal of the Bankruptcy Court’s TRO decision, because the subsequent issuance of the preliminary injunction rendered the appeal moot and because of the lack of a fully developed record.

On January 31, 2017, the Bankruptcy Court issued an opinion finding that the Bermuda Insurers violated the Barton Doctrine by initiating the Bermuda action and ordering them to dismiss that proceeding. The Barton Doctrine provides that suits may not be brought against receivers without leave of the receiver’s appointing court. The Bankruptcy Court surveyed case law extending this doctrine to other contexts including, most significantly, bankruptcy proceedings. It held that Plaintiffs were entitled to the protections of the Barton Doctrine by virtue of MF Global Holdings’ role as Plan Administrator, and MF Global Assigned Assets’ role as a company created to retain assets assigned in satisfaction of debtor claims. The court found the Bermuda action was effectively an attempt by the Bermuda Insurers to delay Plaintiffs’ administration of the bankruptcy estate, and as such, ran afoul of the Barton Doctrine. Following the Bankruptcy Court’s order on January 23, the Bermuda Insurers dismissed the Bermuda action.

This post written by Thaddeus Ewald .
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