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Jurisdiction Issues

ROMANIAN GOVERNMENT DEFEATS EFFORT TO MAKE IT PICK UP THE TAB ON REINSURANCE OBLIGATIONS

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A plaintiff insurance company (General Star National Insurance Company) unsuccessfully moved for entry of a writ of execution and restraining notice against the Romanian Bank of Foreign Trade and its purported successors-in-interest. In an underlying action in an Ohio federal district court, General Star alleged that a Romanian company (Astra) acquired the reinsurance obligations a state-owned Romanian insurance company, but failed to remit funds owed to General Star under certain reinsurance contracts. The Ohio court found that the Romanian goverment was Astra’s alter ego and permitted General Star to attach the government’s assets to satisfy a default judgment in General Star’s favor.

Unable to satisfy its judgment in Ohio, General Star sought to execute the judgment in New York, arguing that the Romanian Bank of Foreign Trade and its successors were alter egos of the Romanian government. The argument was rejected, as General Star could not demonstrate grounds for disregarding the Bank of Foreign Trade’s or its successors’ corporate forms. Among other things, there was no proof the Romanian government exercised daily control over these entities. Moreover, although the corporate form may be disregarded if necessary to prevent fraud or injustice, General Star failed to persuade the Court that the equities weighed in favor of piercing the corporate veil. There was no showing that the corporate form was used by the Romanian government to avoid payment. The writ of execution and restraining notice were denied. General Star National Insurance Co. v. Administratia Asigurarilor de Stat, Case No. 18 MS 302 (USDC S.D.N.Y. May 12, 2010).

This post written by Brian Perryman.

No McCarran-Ferguson Reverse Pre-Emption Under State Insurance Insolvency Statutes

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Acting as Rehabilitator of Centaur Insurance Company, the Director of the Illinois Department of Insurance, Michael McRaith, brought suit against two reinsurers, seeking a declaration that they are obligated to reimburse Centaur for portions of a $32 million settlement it agreed to in resolving underlying asbestos litigation. The reinsurers had removed the case to federal court, but McRaith sought a remand based on the doctrines of McCarran-Ferguson reverse preemption and Burford abstention. The court denied the motion to remand under both theories, finding that none of the McCarran-Ferguson reverse preemption criteria had been met, as the state law issues pertaining to the rehabilitation proceedings did not specifically relate to the business of insurance, and there was not a clear conflict with federal law vis-à-vis state insurance solvency rehabilitation procedure. Burford abstention was also inappropriate because the dispute pertained less to the “complex [state] regulations pertaining to insolvent insurers” than to a simple breach of contract dispute between the parties under certain reinsurance certificates. McRaith v. American Re-Insurance Co., No. 09-C-4027 (USDC N.D. Ill. Feb. 17, 2010).

This post written by John Pitblado.

A HORSE RACE TO JUDGMENT

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Continental Casualty Corporation sued its reinsurer, AXA Global Risks (UK) Ltd., in Missouri federal court seeking, among other things, a temporary restraining order and preliminary injunction to prevent AXA from proceeding with a similar action AXA filed against Continental in a British court. The parties dispute AXA’s obligation to reinsure a portion of a $23,072,979 judgment against Continental in a coverage action between Continental and its insured, a construction company, under a certain reinsurance slip between Continental and AXA. In response, AXA moved to dismiss or stay the Missouri action in favor of the British lawsuit, which was filed approximately six weeks earlier than Continental’s suit. The Court rejected both parties’ arguments, refusing to enjoin prosecution of the British action, and refusing to stay or dismiss the case on its own docket. The court stated, citing Third Circuit precedent, that “when related cases are before two different sovereigns, the appropriate procedure is to permit both jurisdictions to proceed, with any decision of one becoming res judicata on the other.” Continental Cas. Corp. v. AXA Global Risks (UK) Ltd., Case No 09-00335 (USDC W.D. Mo. April 2, 2010).

This post written by John Pitblado.

SOVEREIGN IMMUNITY BARS LAWSUIT ALLEGING INTERNATIONAL REINSURANCE FRAUD

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The Second Circuit affirmed the dismissal of a lawsuit alleging that the Republic of Indonesia and its state-owned social security insurer, P.T. Jamsostek, negligently supervised Jamsostek employees who perpetrated an international commercial reinsurance fraud scheme against plaintiff Anglo-Iberia Underwriting Management Company. Indonesia and Jamsostek moved for dismissal for lack of subject matter jurisdiction under the Foreign Sovereign Immunities Act, arguing the defendants were not engaged in “commercial activity” under FSIA. FSIA abrogates sovereign immunity where a foreign state has engaged in commercial activity; a foreign state engages in commercial activity when it acts not as a regulator of a market, but in the manner of a private player within it. In ruling on the motion, the district court found, and the Second Circuit later agreed, that Jamsostek does not sell insurance to workers or employers “in any traditional sense,” and does not compete in the marketplace like a private insurer. Rather, as the default health insurer under Indonesia’s national social security program, Jamsostek provides a “floor” for health insurance, and ensures that certain Indonesian employers comply with the governmental mandate that they provide basic health insurance coverage to their workers. Thus, FSIA barred the suit. Anglo-Iberia Underwriting Management Co. v. P.T. Jamsostek (Persero), Case No. 08-2666 (2d Cir. Mar. 29, 2010).

This post written by Brian Perryman.

COLORADO RIVER ABSTENTION WHACK-A-MOLE

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A federal court in Iowa heard a motion to dismiss or stay brought by The Samuels Group, Inc., a design/build company who undertook a construction project in Wisconsin. Samuels had entered into a contract with the property owner, Alta Vista Properties, LC, to build a facility on one of its properties. Samuels subcontracted to Hatch Grading & Contracting, Inc. During the course of construction, a tornado destroyed the partially finished project. Hatch asserted a mechanic’s lien against the property to recover payment for the work it had done, and brought an action in state court to enforce the lien. It initially brought in both Alta Vista and Samuels, but ultimately, after various machinations by the parties, agreed to withdraw the petition as against Samuels, as Samuels and Hatch agreed to arbitrate corollary disputes that impacted the mechanic lien issue, and the state court proceedings were stayed. Samuels and Hatch arbitrated, with an award in favor of Hatch. Hatch thereafter sought to bring Samuels back into the state court action to confirm the arbitration award. Samuels filed a petition in federal court to vacate the award on various grounds. Hatch argued that Colorado River abstention applied, and that the action should be dismissed or stayed pending resolution of the state court action. Samuels argued Colorado River did not apply, in part because the FAA created a federal law basis requiring the federal court to maintain jurisdiction, and in part because the parties were not identical in the state court proceeding. The court generally rejected these arguments, noting that the parties were not identical in Colorado River itself, and that Samuels effectively had been part of the state court proceedings at various points. The court nonetheless agreed to maintain jurisdiction, but granted Hatch’s motion to stay the federal action pending the outcome of the state court proceeding. The Samuels Group, Inc. v. Hatch Grading and Contracting, Inc., No. 09-2058 (USDC N.D. Iowa March 23, 2010).

This post written by John Pitblado.