Jurisdiction Issues

FEDERAL COURT WEIGHS PERSONAL JURISDICTION IN RETROCESSION DISPUTE

March 22, 2016 by Carlton Fields

A New Jersey federal district court recently weighed whether it had personal jurisdiction over a foreign corporation in a reinsurance and retrocession dispute. The case involved insurance coverage for Companhia Siderurgica Nacional, S.A. (“CSN”), one of the largest conglomerates in Brazil with interests in steel, iron ore, mining, and various other operations. The direct coverage was provided by Brazilian insurance corporations, which reinsured through IRB Brasil Resseguros S.A. (“IRB”); in turn, IRB sought retrocessional coverage from National Indemnity Company (“NICO”) through a reinsurance broker in New Jersey, Catalyst Re Consulting, LLC (“Catalyst Re”).

The dispute involved nearly $200 million in retrocessional coverage provided to IRB by NICO. When IRB indicated that it may not be able to make a $9 million premium payment on time, NICO issued an extension on the premium payment based on a personal guarantee by CSN. Then, CSN filed a claim for coverage under the direct policies and initiated a lawsuit against IRB for failure to acknowledge that it was the reinsurer of that direct coverage. CSN and IRB settled this dispute, with IRB agreeing to “help CSN retrieve the $9 million premium that CSN paid to NICO” to secure the retrocessional agreement.

As a result, NICO filed suit in New Jersey seeking a declaration that the retrocessional agreement was binding and enforceable, and that CSN had no right to the premium. NICO further alleged tortious interference with a contractual relationship, unjust enrichment, injurious falsehood, and civil conspiracy against CSN. CSN, a Brazilian corporation, moved to dismiss for lack of personal jurisdiction. The court explained that “specific jurisdiction analysis is claim-specific,” and it must therefore “consider whether the defendant’s contacts with the forum arise under or relate to each claim alleged.” The court found that it had jurisdiction over CSN on the declaratory actions because it had acted through a New Jersey reinsurance broker to secure coverage and guarantee payment to NICO. However, the court found that it did not have jurisdiction over CSN related to the actions for damages because those involved actions between two Brazilian corporations and lawsuits and settlement agreements effectuated in Brazil. Thus, NICO will only be able to pursue the declaratory action against CSN in the United States, and will likely have to file any suit for damages against CSN in Brazil. National Indem. Co. v. Companhia Siderurgica Nacional, S.A., Case No. 15-cv-00752-JLL (D.N.J. Feb. 8, 2016).

This post written by Zach Ludens.

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FEDERAL COURT FINDS THAT THE MCCARRAN FERGUSON ACT BARS PLAINTIFF’S RICO CLAIMS ARISING FROM CERTAIN REINSURANCE TRANSACTIONS

March 8, 2016 by Carlton Fields

In a putative class action seeking damages for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) arising from certain reinsurance transactions, the United States District Court for the Western District of Missouri held that Plaintiff’s claims were barred by the McCarran-Ferguson Act, granting defendants’ motion to dismiss. Plaintiff Dale Ludwick and others purchased annuities from F&G Life Insurance Company, which was acquired by Harbinger Group, Inc. Plaintiff brought suit alleging that F&G, Harbinger and Harbinger’s chairman and CEO engineered a fraudulent accounting scheme to hide F&G’s liabilities, artificially inflate its reported assets, and create a false appearance of capital adequacy through reinsurance transactions with certain entities, including defendants Raven Reinsurance Company and Front Street Re (Cayman), Ltd, in violation of RICO.

Defendants moved to dismiss the action, arguing that plaintiff’s RICO claims impermissibly interfered with state statutory and regulatory insurance schemes, and were thus barred by the McCarran-Ferguson Act. The court granted defendants’ motion, finding that: (a) RICO does not specifically relate to the business of insurance, thus satisfying this prong of McCarran-Ferguson’s criteria; (b) the states relevant to the transactions at issue – Missouri and Iowa – have statutory schemes which regulate the business of insurance and governed said transactions; and (c) the application of RICO to the subject claims would intrude upon the insurance regulatory schemes in those states, and thus “invalidate, impair or supersede” the schemes in violation of McCarran-Ferguson. Moreover, the court rejected plaintiff’s argument that its common law claims negated the effect of McCarran-Ferguson and that such claims were not barred by the statute, as the transactions at issue were subject to the states’ insurance codes. Ludwick v. Harbinger Group, Inc., No. 15-cv-00011 (USDC W.D.MO. Feb. 12, 2016).

This post written by Rob DiUbaldo.

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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.
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