Jurisdiction Issues

FOLLOWING REVERSAL OF ARBITRABILITY RULINGS ON APPEAL, COURT DISMISSES REINSURANCE LITIGATION BASED ON FORUM SELECTION

February 29, 2016 by Carlton Fields

On August 15, 2014, we reported on a Tennessee district court finding unenforceable an arbitration clause in a Reinsurance Participation Agreement (RPA) between an insured and a reinsurer. The insured had filed a lawsuit seeking to reform the RPA, and the reinsurer sought to compel arbitration. The court refused to compel arbitration, finding that the arbitration clause was invalid. Subsequently, the Sixth Circuit vacated this ruling, finding that the parties manifestly intended to submit the threshold question of arbitrability to the arbitrator and not the court. On remand to arbitration, the arbitrator then determined that the matter was not arbitrable based on the RPA’s forum selection clause. In response to that ruling, the reinsurer moved to vacate it, and to dismiss the lawsuit altogether based on the choice of a Nebraska forum in the RPA’s forum selection clause.

The court has now granted dismissal, holding that the forum selection clause was unambiguous, and it was mandatory. The court also found that the insured failed to demonstrate that the clause was obtained by fraud, duress or other unconscionable means, that a Nebraska court would not handle the suit properly, or that Nebraska was seriously inconvenient to the insured. The insured also failed to show that “public-interest” factors disfavored a dismissal. Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Case No. 1:13-CV-01069 (USDC W.D. Tenn. Feb. 2, 2016).

This post written by Barry Weissman.

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NEW YORK FEDERAL BANKRUPTCY COURT FINDS INSURANCE INSOLVENCY PROCEEDING DOES NOT “REVERSE – PREEMPT” BANKRUPTCY COURT JURISDICTION

February 2, 2016 by John Pitblado

In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).

This post written by Jeanne Kohler.

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ELEVENTH CIRCUIT CONCLUDES IT LACKS JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION BUT CONFIRMS ORDER CONFIRMING ARBITRATION AWARD

January 12, 2016 by Carlton Fields

This appeal is from two orders by a district court in Alabama. The first order in June 2012 compelled arbitration of a dispute between the parties, the Union and Wise Alloys. The second order in December 2014 enforced the resulting arbitration award in the Union’s favor, but denied the Union’s request for attorneys’ fees. Wise Alloys appealed both the June 2012 and December 2014 orders, and the Union appealed the aspect of the December 2014 which denied its motion for attorneys’ fees. The procedural history and issues involved in the underlying case can be found here.

The Eleventh Circuit held that it lacked jurisdiction over the appeal of the June 2012 order which compelled arbitration because no notice of appeal was filed within 30 days of that order. The Court noted that the June 2012 order was a final decision and was appealable, and the fact that the order stayed the litigation (and did not dismiss it) did not impact the finality of the order compelling arbitration. Thus, because Wise Alloys did not file its notice of appeal within 30 days of the order, the Court had no jurisdiction over that aspect of the appeal.

With respect to Wise Alloys’ appeal of the December 2014 order and its challenge to the arbitration award based on its view that the arbitrator exceeded his authority, the Eleventh Circuit noted that its judicial review of arbitration awards is limited and that it specifically reviews a labor arbitration award for “whether [it] is irrational, whether it fails to draw its essence from the collective bargaining agreement or whether it exceeds the scope of the arbitrator’s authority.” Thus, under this standard, the Eleventh Circuit agreed with the district court that the arbitrator’s interpretation of the agreement, even if incorrect, was not an impermissible amendment or change to the agreement. It also held that the arbitrator was permitted to resort to extrinsic evidence to interpret an ambiguity he concluded was in the agreement. Accordingly, the Court affirmed the district court’s December 2014 order, confirming the arbitration award. In addition, it also confirmed the portion of the order denying the Union’s request for attorneys’ fees. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Int’l Union, et al. v. Wise Alloys, LLC, No. 14-15744 (11th Cir. Dec. 8, 2015).

This post written by Jeanne Kohler.
See our disclaimer.

COURT HOLDS THAT SERVICE-OF-SUIT CLAUSE WAIVES RIGHT TO SEEK REMOVAL

January 11, 2016 by Carlton Fields

The Northern District of Illinois recently granted a motion to remand filed by an insolvent insurer’s assignee because the removal contravened the forum-selection clauses of the reinsurance agreements at issue. Pine Top Receivables of Illinois LLC (PTRIL) sued Transfercom Ltd. (Transfercom) in Illinois state court for breach of contract and certain state law claims. Pine Top Insurance Company’s rights to certain accounts receivable due from reinsurers were assigned to PTRIL when the insurer became insolvent. Transfercom was one of the reinsurers that was indebted to Pine Top Insurance Company.

Transfercom removed the case to the U.S. District Court for the Northern District of Illinois, and PTRIL filed a motion to remand. PTRIL argued, and the court agreed, that the reinsurance agreements contained an agreed-upon clause to accept plaintiff’s choice of forum. The court noted that this clause meant that Transfercom agreed to “submit to the jurisdiction of any Court of competent jurisdiction within the United States.” Further, the court held that “[t]his clause’s ‘plain and ordinary meaning’ constitutes a ‘clear and unequivocal’ waiver of Transfercom’s removal rights.” As a freely negotiated forum selection clause, the court held, the parties must be bound by it. Pine Top Receivables of Illinois, LLC. v. Transfercom, Ltd., No. 15-CV-8908 (USDC N.D. Ill. Dec. 14, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.
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COURT DENIES RECONSIDERATION OF ORDER STAYING ACTION TO COMPEL ARBITRATION

January 8, 2016 by Carlton Fields

A federal district court refused to reconsider its order staying Allstate’s action to compel arbitration against its insured, A.O. Smith. The case involved a Settlement/Coverage-in Place Agreement between A.O. Smith and Allstate regarding coverage for asbestos liability. Continental Casualty Company, another insurer for A.O. Smith, filed an action in Wisconsin state court against both A.O. Smith and Allstate arguing that the Agreement impermissibly limited its subrogation and contribution rights against Allstate. When Allstate and A.O. Smith asserted their defenses in the Wisconsin action, a dispute emerged between them as to the nature of the Agreement. Allstate attempted to compel arbitration against A.O. Smith in federal court and to stay the Wisconsin litigation pending the outcome of the arbitration. The federal court, however, refused to compel arbitration and instead stayed its own proceedings, in deference to the Wisconsin court’s determination of a pending motion for summary judgment that could impact arbitrability. In denying reconsideration of that ruling, the court explained that its stay was warranted because the Wisconsin litigation was further along, the Wisconsin court was “currently in a more informed position from which to address the issue of arbitrability, and a stay [was therefore] warranted on that basis.” Allstate Insurance Co. v. A.O. Smith Corp., Case No. 1:15-cv-06574 (USDC N.D. Ill. Dec. 11, 2015).

This post written by Barry Weissman.

See our disclaimer.