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Arbitration / Court Decisions

SECOND CIRCUIT ENFORCES ARBITRATION AGREEMENT IN FAVOR OR NON-PARTY WHOSE AGENT ENTERED INTO THAT AGREEMENT

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The Second Circuit has affirmed an order compelling a plaintiff-employee to arbitrate his employment related claims against Carnival Cruise Lines, despite the fact that the one page employment agreement that he signed did not contain an arbitration clause and did not mention Carnival.

The plaintiff sued Carnival in connection with injuries allegedly suffered while working on one of their ships, and Carnival moved to compel arbitration. The plaintiff argued that he should not be required to arbitrate his claims because his employment contract did not contain an arbitration clause or expressly incorporate any other document, and Carnival was not a party to or even mentioned in that agreement. The Court disagreed.

First, the Court noted that incorporation by reference was a matter of law and thus for the court to decide. Second, it found that the language – stating that the “herein terms and conditions in accordance with POEA Governing Board Resolution No. 09 and Memorandum Circular No. 10 … shall be strictly and faithfully observed,” was sufficient to incorporate those documents, which contained an arbitration clause. Third, the Court found that it did not matter that the plaintiff was unaware of the arbitration clause, as he was bound by the terms of his contract and the incorporated documents, regardless of whether he had actually read them. Finally, the court held that the company with which the plaintiff had entered into a contract was acting as an agent for Carnival, and that Carnival had the power to enforce an arbitration agreement made by its agent.

Pagaduan v. Carnival Corporation et al., No. 16-465 (2d Cir. Sept. 18, 2017)

This post written by Jason Brost.

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BANKRUPTCY COURT GRANTS MF GLOBAL HOLDINGS’ MOTION TO RECONSIDER DECISION TO COMPEL ARBITRATION IN BERMUDA, BUT REACHES SAME RESULT

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On September 6, 2017, the Bankruptcy Court for the Southern District of New York issued the latest order in the ongoing coverage battle between MF Global Holdings (“MF Global”) and Allied World Assurance Company regarding the former’s bankruptcy. The decision stemmed from MF Global’s motion to reconsider the court’s August 24, 2017 order compelling arbitration in Bermuda. While the court initially granted the motion to reconsider, it reached the same result and granted Allied World’s motion to compel arbitration.

MF Global’s request for reconsideration was based on the court’s alleged failure to address its argument that the global bankruptcy plan explicitly retained jurisdiction over adversary proceedings, a provision which should have superseded the underlying insurance contract’s arbitration provision which formed the basis of the court’s decision to compel arbitration. The court noted that while its decision mentioned the argument, it did not address the merits of the argument, so the court granted the motion to reconsider.

On reconsideration, the court was unpersuaded by MF Global’s argument that the bankruptcy court retained jurisdiction pursuant to the global bankruptcy plan. In a short opinion, the court distinguished the principal authority upon which MF Global relied: Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304 F.3d 753 (7th Cir. 2002). That case addressed an adversary proceeding that commenced before the bankruptcy plan and a plan provision which retained jurisdiction over pending adversary proceedings. Here, the adversary proceeding was not filed until after the plan was confirmed, and, the court concluded, the plan language retaining jurisdiction of pending adversary proceedings should not be interpreted to supersede the contractual arbitration provision in the pre-petition contract without explicit instruction in the plan as to that interpretation. Furthermore, Allied World had not waived its right to demand arbitration at any point in the proceedings.

Thus, even though the court granted MF Global’s motion to reconsider, it ultimately reached the same conclusion and granted Allied World’s motion to compel arbitration and denied MF Global’s motion to stay the arbitration.

In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Sept. 6, 2017).

This post written by Thaddeus Ewald .

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PROCEDURAL ARBITRABILITY QUESTIONS ARE FOR THE ARBITRATOR, NOT THE JUDGE, UNLIKE SUBSTANTIVE ARBITRABILITY QUESTIONS

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Allegations of failure to follow the contractually-required dispute resolution procedure raise “procedural questions,” which must be asked of the arbitrator. In contrast, “substantive arbitrability questions,” also referred to as “gateway questions” of arbitrability, are for the court to decide. Questions of substantive arbitrability address two issues: whether the parties have a valid arbitration agreement, and whether the issue is within the scope of the arbitration agreement.

In determining whether an issue is within the scope of a valid arbitration agreement, the court must initially decide whether the arbitration clause is “broad” or “narrow.” Clauses that provide for arbitrating “any claim arising out of or relating to the contract” are considered broad as a matter of law. When answering questions of scope, courts “must liberally construe a valid arbitration clause, ‘resolving doubts in favor of arbitration. . . .” As a result, even where claims sound in tort, rather than contract, they will be determined to be within the scope of a broad arbitration clause if the claims “touch matters covered by the arbitration clause.”

Finding that plaintiff’s claims against defendant were within the scope of the parties’ agreement, and that questions raised about arbitrability were procedural, and thus for the arbitrator to decide, the Court granted defendant’s motion to compel arbitration.

Dlorah, Inc. v. KLE Constr., Inc., Civ. 16-5102-JLV (W.D.S.D. July 17, 2017).

This post written by Benjamin E. Stearns.

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ILLINOIS DISTRICT COURT DISMISSES CASE FILED BY INSURANCE DEPARTMENT, AS REHABILITATOR, AGAINST REINSURER

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The District Court for the Northern District of Illinois dismissed a complaint filed by Plaintiff-Rehabilitator, the Illinois Director of Insurance, against Defendant-Reinsurer, Twin Rivers, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and a violation of the Real Estate Settlement Procedures Act (RESPA).

The underlying reinsurance agreement stemmed from a previous “rehabilitation” proceeding under which the Illinois Department of Insurance was appointed as the rehabilitator for a now-defunct insurer, Triad, and as such was authorized to “bring any action, claim, suit or proceeding against any person with respect to that person’s dealings with Triad.” The present dispute concerns a reinsurance arrangement by which Twin Rivers agreed to reinsure certain private mortgage insurance (PMI) policies issued by Triad on mortgages originated by banks affiliated with Twin Rivers. In exchange for the reinsurance, Triad would pay a certain percentage of each referred borrower’s PMI premiums to Twin Rivers. These so-called “ceded” premiums were deposited into a trust account and invested and used to fund any payments due to Twin Rivers under the reinsurance agreement. Twin Rivers would periodically receive dividends out of the trust account for the benefit of itself and its affiliated banks. A balance of approximately $1,741,655 remained in the trust account as of the filing of the original complaint in this action.

With regard to the breach of contract claim, the Illinois Director of Insurance alleged that Twin Rivers breached its agreement by failing to provide certain disclosures to borrowers whose PMI policies it would be reinsuring consistent with U.S. Department of Housing and Urban Development (HUD) regulations requiring the disclosure of the benefits that Twin Rivers was receiving through the captive reinsurance arrangement. In its motion to dismiss, Twin Rivers argued that no provision in the agreement obligated it to provide HUD disclosures to borrowers and, in any event, the Illinois Department of Insurance was not harmed by the absence of disclosures. The Director argued that language in the agreement requiring that Twin Rivers not violate any “agreement with, or condition imposed by, or consent required by… any governmental… body” imposed a continuing commitment on the part of Twin Rivers to provide the HUD disclosures. Ultimately, the Court found the language “fairly susceptible to Defendant’s interpretation, but not [to] Plaintiff’s.” In so finding, the Court found more plausible the meaning attributed by Twin Rivers, that the language was merely a representation that, at the time of contracting, it was not specifically and individually subject to any legal constraints that would preclude it from agreeing to and fulfilling its obligations under the agreement.

The Court also dismissed the good faith and fair dealing claim, citing the Director’s failure to allege that Twin Rivers exercised its discretion in bad faith, unreasonably, or in a manner inconsistent with the reasonable expectations of the parties. The RESPA claims were also dismissed on account of statute of limitations, and the unjust enrichment claim was dismissed in light of the express contract governing the relationship between the parties.

State of Illinois ex rel. Hammer v. Twin Rivers Ins. Co., No. 16 C 7371 (USDC N.D. Ill. Jul. 5, 2017).

This post written by Gail Jankowski.

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APPLIED UNDERWRITERS, INC., LOSES ARGUMENT TO ENFORCE MANDATORY FORUM SELECTION CLAUSE IN REINSURANCE CONTRACT

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On September 12, the District Court for Connecticut denied a motion to transfer predicated on a mandatory forum selection clause in a reinsurance contract. The contract was one of several entered into by Applied Underwriters, Inc., and its affiliates (collectively “Applied”) with Aiello Home Services (“Aiello”) for a “novel [workers’ compensation] insurance product known as ‘EquityComp,’ which required participation by the insured in a reinsurance facility. Applied’s relations with Aiello broke down when Applied sent Aiello a statement “assessing an additional premium charge of $195,786.52, and reporting total estimated costs nearly $200,000 higher than the previous month’s total cost estimate.” Aiello filed suit alleging violations of the Connecticut Unfair Trade Practices Act and other statutory violations. Applied removed the case to federal court and sought to transfer to the District of Nebraska based on the forum selection clause.

The court denied the motion to transfer. The court found that the bulk of Aiello’s claims arose from statutory violations, not the contract, and therefore were not within the scope of the forum selection clause. The fact that Applied’s defenses relied primarily on the contract was insufficient to bring the statutory claims within the scope of the clause.

The court also analyzed whether the clause would be enforceable under the law of the chosen forum state (Nebraska). As part of that analysis, the court had to determine if Aiello had sufficient minimum contacts to establish personal jurisdiction in Nebraska. “[T]here is a clear distinction between conventional commercial contracts and those that arise in the business of insurance.” While an insurance company that markets policies to residents of a given state establishes sufficient minimum contacts within that state, the insureds do not simultaneously establish sufficient contacts with the insurer’s home state. As a result, the court refused to enforce the clause.

Charter Oak Oil Co., Inc. v. Applied Underwriters, Inc., No. 3:17-cv-00689 (SRU) (USDC D. Conn. Sept. 12, 2017).

This post written by Benjamin E. Stearns.

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