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Arbitration / Court Decisions

COURT DENIES DISMISSAL OF PUTATIVE CLASS ACTION ALLEGING KICKBACKS ACCEPTED BY LENDER VIA ITS CAPTIVE REINSURER

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A breach of contract claim survived dismissal in a potential class action lawsuit by homeowners against a mortgage lender for alleged kickbacks obtained when the lender required the homeowners to pay for force-placed insurance (FPI) on mortgaged properties. The homeowners contended that the lender breached its contractual duty of good faith and fair dealing by funneling back to itself a portion of the premiums paid by the homeowners for the FPI by, among other things, providing reinsurance through its own captive insurance company. While the court held that the contract claim could proceed against the lender, the court dismissed other claims for unfair and deceptive trade practices, and for unjust enrichment. Montanez v. HSBC Mortgage Corp. (USA), Case No. 11-4074 (USDC E.D. Pa. July 18, 2012).

This post written by Michael Wolgin.

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FEE-SHIFTING PROVISION IN ARBITRATION CLAUSE UNENFORCEABLE WHEN CERTAIN FEDERAL STATUTORY RIGHTS ARE AT ISSUE

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In an employment dispute, a Magistrate Judge issued a Report and Recommendation which broadly interpreted the arbitration provision in an employment agreement in favor of arbitration. The judge interpreted the term providing that either party “may submit the matter to arbitration” (emphasis added) to mean that once one party elects to arbitrate, the arbitration becomes mandatory with respect to the other party. The judge also interpreted the term which explains that the arbitration clause applies to “any disputes . . . in connection with [Plaintiff’s] rights and obligations under this agreement” (emphasis added) to cover plaintiff’s sex and pay discrimination claims. The district court adopted the Report and Recommendation, except that it granted an objection to a fee-shifting provision of the arbitration clause, requiring that it be severed, finding it to be unenforceable and not essential to the arbitration clause. The fee-shifting provision required the losing party to pay attorneys’ fees. The court found the provision to be unenforceable because the claimant would not have to pay attorneys’ fees to vindicate her federal statutory rights under Title VII and the Equal Pay Act in court, and requiring the claimant to be exposed to that risk to vindicate her rights in an arbitral formum was not consistent with the statute. The district court specifically declined to follow cases from other circuits, which have held that fee-shifting provisions are generally too speculative to prevent a plaintiff from vindicating his or her federal statutory rights in an arbitral forum. Smith v. AHS Oklahoma Heart, LLC, Case No. 11-00691 (USDC N.D. Okla. Aug. 3, 2012).

This post written by Abigail Kortz.

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DELAWARE COURT OF CHANCERY’S CONFIDENTIAL ARBITRATION PROCEEDING DECLARED UNCONSTITUTIONAL

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In 2009 Delaware adopted a rather unique process for the arbitration of business disputes by a sitting judge of the Court of Chancery, which was intended “to preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes, particularly those involving commercial, corporate, and technology matters.” Del. H.B. 49, at 4 (2009). A public interest group filed suit challenging the section of the new statute requiring that the proceedings be considered “confidential and not of public record.” 10 Del C. § 349(b). The federal district court in Delaware recently held that since the arbitration process essentially functions like a civil trial the confidentiality provision violates the qualified right of access to criminal and civil trials protected by the First Amendment. The court concluded that the proceedings function like a non-jury trial because: 1) the Chancellor, not the parties, selects the judge; 2) the Chancery Court discovery rules apply instead of the rules for arbitration discovery, and 3) a sitting judge of the Chancery Court, rather than a third party arbitrator, presides. The arbitration process remains in force in all other respects. Delaware Coalition for Open Government v. Strine, Case No. 1:11-01015 (USDC D. Del. Aug. 30, 2012).

This post written by Abigail Kortz.

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FACT QUESTIONS PREVENT SUMMARY JUDGMENT IN INDEMNITY ACTION BY ACQUIRER OF REINSURER OF AIRPLANES INVOLVED IN 9/11 ATTACK

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An acquirer of a reinsurance company sued the former parent company of the reinsurer under the relevant stock purchase agreement (SPA) for indemnification of $13.1 million in “losses” allegedly owed in connection with reinsurance contracts that covered the airplanes that were involved in the attack on the World Trade Center on 9/11. The acquirer contended that the reinsurer misrepresented the extent of its 9/11 liabilities by setting its reserves based on one “terrorism” event under the governing contracts, rather than a higher liability for two “hijacking” attacks. The acquirer argued that the reinsurer was required to reserve for two attacks because the cedents had done so, and because the reinsurer had received broker advices for two losses. The court denied the parties’ cross-motions for summary judgment, holding that factual questions existed as to whether the reinsurer’s alleged fraud constitutes a “loss” under the SPA, and if it does, whether the “loss” was caused by the falsity of the reinsurer’s misrepresentations. The court’s findings included: (1) that the SPA’s provisions providing indemnity for “loss” were ambiguous, such that the court could not determine whether indemnity was limited to only amounts paid in excess of the reinsurer’s reserves; and (2) that conflicting testimony of the parties’ experts as to whether the reinsurer misrepresented that its reserving practices complied with “U.S. generally accepted actuarial standards” created disputed issues of fact. The court also held that benefit of the bargain damages were not available under the SPA, which contained broad waivers of “all causes of action related to the transactions contemplated” by the agreement, and of consequential, indirect, and incidental damages. WT Holdings, Inc. v. Argonaut Group, Inc., Case No. 600925/2009 (N.Y. Sup. Ct. July 10, 2012).

This post written by Michael Wolgin.

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COURT HOLDS THAT UNDERWRITER CONVERTED PREMIUM THAT IT FAILED TO REMIT TO INSURER

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Everest Reinsurance Company entered into an agreement with International Aerospace Insurance Services, Inc. (“Inter-Aero”) whereby Inter-Aero would underwrite space and aviation risks, submit premium to Everest, less commission, and, in addition, share in a percentage of Everest’s profit from the business Inter-Aero generated. A dispute arose regarding Inter-Aero’s entitlement to profit sharing. Inter-Aero responded by withholding a substantial purported “profit share payment” from premiums due to Everest. Everest filed an action in federal court claiming conversion and breach of fiduciary duty. The court granted Everest’s motion for summary judgment, holding that Inter-Aero converted the portion of premiums that it withheld and that it must remit them to Everest. It denied Everest’s motion on its breach of fiduciary duty claim as duplicative of the conversion count. Everest Reinsurance Co. v. International Aerospace Insurance Services, Inc., Case No. 3:11-cv-05332 (USDC D.N.J. Aug. 22, 2012).

This post written by Ben Seessel.

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