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Arbitration / Court Decisions

ARBITRATOR TO DECIDE WHETHER ARBITRATION AGREEMENT’S BAN OF CLASS ACTIONS IS UNCONSCIONABLE

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In a dispute centered on retroactive credit card interest-rate increases, Mr. and Mrs. Puleo, on behalf of those similarly situated, appealed the District Court’s decision that the enforceability of an Arbitration Agreement’s ban on class actions was a question of arbitrability for the court to decide. The Puleos argued that the District Court should never have addressed the unconscionability of the class action waiver and instead should have left the issue to be decided by the arbitrator. The Third Circuit Court of Appeals, following the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 US 79, 84 (2002), concluded that the challenge to the class action waiver in the concededly valid arbitration agreement did not raise an issue of arbitrability, and thus should have been decided by the arbitrator. The Court reasoned that the parties’ agreement provided that all disputes should be arbitrated, and that this agreement included the claim that the agreement’s waiver of class arbitration was unconscionable. The Court noted that its decision was consistent with the Supreme Court’s recent opinion in Stolt-Nielsen S.A. v. AnimalFeeds, because it gave effect to the terms of the parties’ arbitration agreement. Puleo v. Chase Bank USA, N.A., Case No. 08-3837 (3d Cir. May 10, 2010).

This post written by John Black.

TRIAL COURT’S PREMATURE DISCHARGE OF BOND RELATING TO REINSURANCE AGREEMENT EXCUSES SURETY FROM PAYING ON BOND DEMAND

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Petitioner, Founders Insurance Company, sought a preliminary injunction to enjoin the respondents from drawing down on a $32,000,000 trust account created for their benefit under the parties’ reinsurance agreement pending the outcome of the arbitration of a dispute. The preliminary injunction was granted, and Founders posted a bond in the amount of $1.6 million as a condition for the injunction, which was fully secured by cash. Great American Insurance Company was the surety on the bond. The injunction was subsequently reversed on appeal. On remand, the trial court indicated on the record that it “vacated” the bond and, at the same time, also awarded respondents damages in the amount of $389,282.74 for lost income as a result of the improper injunction.

Relying on the trial court’s statement that the undertaking was vacated, Founders contacted Great American and requested the return of the cash collateral, and Great American released the collateral. Subsequently, respondents contacted Great American and demanded disbursement from the bond of the amount of lost income damages fixed by the trial court. Upon learning that the bond had been cancelled, respondents moved for an order resettling and clarifying the court’s earlier order. The court granted the motion to the extent of directing Founders to post another bond in the amount of $500,000. Respondents appealed the decision of the trial court ordering Founders to post the second bond rather than directing Great American to make immediate payment of the lost income, contending that the order “failed to adequately remedy the consequences of its ill considered statement that it was vacating the undertaking [the first bond].” The appellate court found that Great American had fulfilled its obligation as surety, since it had released the collateral relying in good faith upon the trial court’s “vacated” statement. Great American, therefore, could not be held liable on the first bond for respondents’ damages. Founders Insurance Co. Ltd. v. Everest National Insurance Co., Index No. 600523/07 (N.Y. App. Div. May 4, 2010).

This post written by Brian Perryman.

U.S. SUPREME COURT REQUESTS ADVICE FROM SOLICITOR GENERAL TO ASSIST IN CERT DECISION ON FAA CASE

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The United States Supreme Court has invited the U.S. Solicitor General to file a brief in an arbitration case in order to assist the Court in deciding whether to grant a petition for a writ of certiorari. The case, which is the subject of a December 7, 2009 Special Focus post in this blog, presents an FAA jurisdictional question with implications for an international treaty. Petitioners are seeking review of a Fifth Circuit decision, which held that the McCarren Ferguson Act of 1945 does not authorize state law to ‘reverse-preempt’ the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or its implementing legislation (Convention Act). The Court has asked the Solicitor General to offer the government’s views on whether the FAA is a federal law that seeks to regulate insurance, and thus overrides any conflicting state law on insurance regulation. Louisiana Safety Association of Timberman Self Insurers Fund v. Certain Underwriters at Lloyd’s London, No. 09-945.

This post written by Lynn Hawkins.

STRIKE THREE: COURT DECLINES TO REWRITE ARBITRATION AGREEMENT TO PROVIDE METHODOLOGY FOR APPOINTMENT OF UMPIRE

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In 2009, the parties in this matter were ordered to proceed in arbitration, pursuant to the terms of an arbitration clause contained in an insurance policy which was the subject of the dispute. Each side selected a party-appointed arbitrator, but the two arbitrators were unable to reach agreement on an umpire. The arbitration agreement provided that if the party-arbitrators could not agree, then “either [arbitrator] or either of the parties may apply to the appointer for appointment of a third arbitrator.” The ‘appointer’ was further defined as the President of the Chartered Insurance Institute or the Vice President of the Institute if the President is unavailable.

Despite this language, the Petitioner in this case alleged that an ambiguity existed in the process and requested that the Court establish a method for the appointment of the third arbitrator. The Court declined to do so, finding that the agreement “set forth a clear method.” As such, the Court denied the motion and dismissed the matter sua sponte. R.A. Wilson & Assoc. v. Certain Interest Underwriters at Lloyd’s London, 10-cv-2232 (USDC EDNY May 26, 2010)

This post written by Lynn Hawkins.

COURT COMPELS DISCLOSURE OF REINSURANCE POLICY

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Federal Rule of Civil Procedure 26(a)(1) requires parties to disclose certain information at the outset of the case, including “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” Pursuant to this rule, a federal magistrate judge recently ordered the American Red Cross to disclose a copy of its reinsurance policy, which the Red Cross had resisted on grounds that the damages claimed in the suit would not reach the $1,000,000 threshold to trigger any potential reinsurance coverage. The Court granted the plaintiff’s motion to compel production of a copy of the entire reinsurance policy. The Court discredited Red Cross’s counsel’s valuation of the case based on certain factual allegations in the complaint as speculative, particularly given claims for punitive damages and attorneys fees, noting that even a remote possibility of exposure to a risk warrants disclosure of an applicable insurance policy. Hartman v. American Red Cross, 1:09-cv-01302 (USDC C.D. Ill. May 11, 2010).

This post written by John Pitblado.