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Arbitration / Court Decisions

COURT CONFIRMS ARBITRATION AWARD, BUT REVERSES PANEL’S DECISION TO REFUSE TO DISBAND

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KX Reinsurance Company (“KX”) arbitrated certain disputes with North Star Reinsurance Corporation (“North Star”) and General Reinsurance Company (“Gen Re”) (North Star and Gen Re had each initiated separate arbitral proceedings against KX, but all parties agreed to consolidate the proceedings as they involved interrelated issues). The arbitral panel ruled against KX on North Star’s and Gen Re’s contract claims, and awarded North Star and Gen Re interest and attorneys fees pursuant to the parties’ respective contracts. The Panel ruled in KX’s favor on North Star’s and Gen Re’s bad faith claims.

During the course of the proceedings, North Star and Gen Re also sought an interim order requiring KX to post security in the form of letters of credit pertaining to certain other potential future contract disputes. KX argued that letters of credit pertaining to potential future claims were beyond the scope of the arbitral submission. North Star and Gen Re argued that their respective submissions broadly included future potential claims. The panel ruled against KX and issued the interim order, which it later incorporated into the final award. It also included in the award an explicit retention of jurisdiction over potential future disputes. KX thereafter sought to confirm the award in the district court, except for that aspect of the final award which purported to allow the panel to retain jurisdiction over potential future disputes under the parties’ contracts, which it sought to vacate.

The district court ruled in KX’s favor, confirming the undisputed aspects of the final award, and vacating the panel’s decision to retain jurisdiction insofar as it exceeded the scope of the submission and was violative of KX’s right under its contracts with North Star and Gen Re to select an arbitrator of its choosing pertaining to any future disputes under the contracts. The Court noted that any contrary interpretation of that contractual right would create arbitral panels with unlimited jurisdiction over the course of the parties’ future contractual relations, a result not supported by the public policy underlying the Federal Arbitration Act. KX Reinsurance Co. v. North Star Reinsurance Corp., Case No. 08-7807 (USDC S.D.N.Y. Nov. 14, 2008).

This post written by John Pitblado.

SANCTIONS AWARDED AGAINST PARTY ISSUING SUBPOENA FOR ARBITRATION

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When plaintiff, in a case submitted to arbitration, issued a third party subpoena using the court’s caption and case number, without advising the opposing party, the arbitrator, or the court, the court granted defendant's motion for sanctions, awarding him attorney's fees associated with filing the motion. The court found that the subpoena issued by plaintiff's counsel to a third party was blatantly improper because: (1) the court had fully stayed the case pending arbitration and placed the case on the suspense calendar; (2) only arbitrators, and not parties, have authority to issue subpoenas; (3) plaintiff failed to give proper notice as required by Rule 45(b)(1); and (4) the subpoena sought documents that the arbitrator had already ruled were not discoverable. The court declined to enjoin plaintiff from issuing additional subpoenas. Kenney, Becker LLP v. Kenney, Case No. 06-2975 (USDC S.D. N.Y. Mar. 6, 2008).

This post written by John Black.

SIXTH CIRCUIT VACATES ARBITRATION AWARD BASED UPON MANIFEST DISREGARD OF LAW

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This procedurally complicated dispute arises out of a franchise agreement for a Coffee Beanery cafe. As a result of disputes about the negotiation of the agreements for the café and its operation, the franchisee demanded arbitration, later withdrew the demand and filed suit in federal court, followed by the franchisor demanding arbitration and the Maryland Securities Commissioner issueing an Order to Show Cause, contending that the franchisor had violated the disclosure and anti-fraud provisions of the Maryland franchise act. An arbitration proceeded to a final award in favor of the franchisor. A request to vacate the award was denied, and an appeal followed.

The Sixth Circuit issued two opinions in this appeal. Both opinions held that because an officer of the Coffee Beanery failed to disclose a prior felony conviction for grand larceny, the agreement was in violation of the Maryland Franchise and Registration Act. As such, the court found that the arbitration award should be vacated because the arbitrator showed “a manifest disregard of the law.” The first opinion did not discuss Hall Street Associates LLC v. Mattel Inc., 28 S.Ct 1396 (2008). The amended opinion discusses Hall Street, finding that it did not clearly eliminate the manifest disregard of law doctrine. The opinion states that “[i]n light of the Supreme Court’s hesitation to reject the manifest disregard doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle.” The court found that since the franchisee was deprived of a statutorily required notification of prior felony convictions, it was fraudulently induced and not bound by the arbitration provision, and could pursue a claim to rescind the franchise agreement in its federal court lawsuit. Coffee Beanery, LTD v. WW LLC, No. 07-1830 (6th Cir. November 14, 2008).

This post written by John Black.

UPDATE: COURT SHOOTS DOWN ERC TWICE MORE

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On September 2, 2008, we reported that the District Court for the Western District of Missouri granted summary judgment against Employers Reinsurance Corporation, finding that their contract with Mass Mutual did, in fact, contain a clear “follow the fortunes” clause. ERC subsequently moved for the court to reconsider its ruling, or in the alternative, to certify the “follow the fortunes” issue for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

The court ruled that ERC’s motion for reconsideration amounted to little more than a reassertion of its arguments on summary judgment. The court interpreted ERC’s motion as arguing that the court committed a manifest error of law simply because the court disagreed with ERC’s arguments. Noting that Fed. R. Civ. P. 60(b) did not list “manifest error of law” as a reason sufficient for reconsideration, the court denied ERC’s motion.

The court additionally denied ERC’s motion to certify the “follow the fortunes” issue for immediate interlocutory appeal, finding that it was an issue of interpretation of the contract, and not a pure question of law, which was required for an interlocutory appeal certification. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Co., Case No. 06-0188 (USDC W.D. Mo. Oct 23, 2008).

This post written by John Black.

INSURANCE UNDERWRITER LACKED THIRD-PARTY BENEFICIARY STATUS UNDER REINSURANCE AGREEMENT; COUNTERCLAIMS DISMISSED

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TIG Insurance entered into an agreement with Titan Underwriting for Titan to act as managing general underwriter, soliciting and procuring stop-loss health and life insurance insureds for policies to be issued by TIG. Titan was also obligated to obtain reinsurance to cover the stop-loss policies issued by TIG. Chubb Re reinsured TIG, and TIG received a percentage of the ceding commission of the gross premiums ceded to the reinsurer, a portion of which Titan received as compensation. Subsequently, TIG terminated the stop-loss program and sued Titan for, among other things, breach of contract and fraud. TIG also sent a letter to state insurance commissioners requesting information that Titan refused to produce to TIG. In response, Titan counterclaimed for breach of the Chubb reinsurance agreement, tortious interference with a contract, tortious interference with its business relationships with policyholders, defamation and negligence. The trial court dismissed each of the counterclaims and the court of appeals affirmed the dismissal.

The appellate court found that Titan, which was not a party to the reinsurance agreement, could not sue in the capacity of a third-party beneficiary. Although Titan was entitled to receive a percentage of the ceding commission, the contract contained a provision disclaiming any intent to create a third-party beneficiary. The tortious interference with a contract claim failed because it was legally impossible for TIG to interfere with its own contract (the reinsurance agreement). The tortious interference with business relationships claim failed because Titan failed to establish that it had existing relationships with the policyholders, whose relationships were insurance policies with TIG. The defamation claim, which was based on TIG’s letter to the insurance commissioners, also failed since the letter was not alleged to contain statements that could be “reasonably construed to disgrace or injure Titan’s reputation in the community or subject Titan to public ridicule and contempt.” Finally, the negligence claim failed since Titan failed to establish, as it was required to do, that TIG owed Titan a duty of care. TIG Insurance Co. v. Titan Underwriting Managers, LLC, No. M2007-01977-COA-R3-CV (Tenn. Ct. App. Nov. 7, 2008).

This post written by Brian Perryman.