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Arbitration / Court Decisions

FIRST CIRCUIT AFFIRMS DISTRICT COURT’S ORDER TO ARBITRATE AND ENFORCEMENT OF ARBITRAL AWARD

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In 2006, the federal district court in Maine confirmed an arbitration award in favor of Sleeper Farms (plaintiff potato farmers) arising out of a dispute with Agway, an agricultural cooperative. Plaintiffs, dissatisfied with their limited victory, appealed to the First Circuit. Plaintiffs argued that the district court erred in referring the dispute to the arbitrator in 2002, and erred again in 2006 when it confirmed the arbitrator’s award.

With respect to the 2002 order, Sleeper Farms argued that the order was unenforceable for two reasons: (1) that the contracts were illegal and (2) that Agway waived its right to arbitrate. The Court rejected both arguments finding that the illegality argument goes to the validity of the substantive provisions of the contract, not to arbitrability. Specifically, the court held that as a matter of federal law, the arbitration clause is unaffected even if the substance of the contract is otherwise void. Secondly, the court recognized that a claim of waiver may be a genuine challenge to arbitrability, but in this case the requirements of waiver were not met.

The First Circuit also rejected Sleeper Farms’ argument that the 2006 arbitration award should be vacated. Specifically, the court concluded that plaintiffs could not satisfy their claim that the arbitrator acted in manifest disregard of the law or that the arbitral award was contrary to public policy. Sleeper Farms v. Agway, Inc., No. 06-2694 (1st Cir. Nov. 2, 2007).

This post written by Lynn Hawkins.

INSURANCE COMPANY LOSES ARBITRABILITY ARGUMENT IN SECOND VENUE

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In a November 7, 2007 post to this blog, we reported on a decision of a US District Court compelling arbitration with respect to a reinsurance agreement. That opinion did not reveal that the Gaffer Insurance, the plaintiff/reinsured, had previously sued the same defendant on essentially the same claims in Pennsylvania state court. On May 22, 2006, the state trial court denied a request to compel arbitration of the disputes, finding that a service of suit provision made the arbitration provision permissive rather than mandatory. For an undisclosed reason, Gaffer Insurance then filed the federal court action on March 23, 2007, alleging different legal theories but the same basic wrongdoing, i.e., the refusal of the reinsurer, Discover Re, to partially release letters of credit securing the reinsurance obligation. Discover Re convinced the federal district judge to compel arbitration of the dispute. A Pennsylvania court of appeal recently reversed the state trial court decision, finding that the arbitration provision was mandatory, and that arbitration should have been compelled. The reasoning and analysis of the federal district court opinion and the state appellate court opinion are substantially the same, yet neither acknowledges the existence of the other lawsuit. One wonders whether the fact that there were two separate lawsuits pending between the same parties, involving the same issues, was disclosed to either court. Gaffer Ins. Co. v. Discover Reinsurance Co., 2007 Pa. Super 339, No. 1023 MDA 2006 (Super. Ct. Nov. 16, 2007).

This post written by Rollie Goss.

DISPUTE RELATING TO REINSURANCE IN SALE OF INSURANCE COMPANY TRANSFERRED TO COURT HEARING RELATED MATTER

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Conseco Insurance Company sold two insurance subsidiaries to JC Penney, and under the terms of the sale Conseco retained a certain portion of contingent indemnity liability on policies issued prior to the sale. A condition precedent to Conseco’s reimbursement obligation was the submission by Penney of claims on such policies to Transit Casualty Company under a reinsurance agreement. Disputes arose related to the sale and were heavily litigated in the United States District Court for the Central District of California and the Ninth Circuit. When certain claims were dismissed, with the suggestion that they be refilled by Conseco as a separate suit, Conseco refilled them in Indiana state court. After the claims were removed, Penney moved to dismiss, in part based upon the doctrine of forum non conveniens. The court treated the motion as a motion to transfer and transferred the case to the court in California, which is still hearing other claims relating to the sale. Conseco Insur. Co. v. J. C. Penney Life Ins. Co., Case No. 06-1229 (USDC S.D.Ind. Sept. 27, 2007).

This post written by Rollie Goss.

UK COURT OF APPEAL REVERSES JUDGMENT ORDERING THE POSTING OF SECURITY IN ARBITRATION-RELATED ACTION

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The UK Court of Appeals has allowed an appeal and reversed an Order for security for costs in favor of a party seeking to set aside the enforcement of an arbitration award rendered at the International Commercial Arbitration Court in Moscow, Russia. The analysis may be of interest to those involved in international arbitrations involving the New York Convention. The lower court’s decision was reported on in this blog on June 14, 2007. Gater Assets Ltd. v. Nak Naftogaz Ukrainiy [2007] EWHC 725 (CA Oct. 17, 2007).

This post written by Rollie Goss.

CLASS ACTION SHAREHOLDER LAWSUIT AGAINST SCOTTISH RE STAYS ALIVE, THOUGH NOT INTACT

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A New York federal district judge recently ruled on motions to dismiss filed by all defendants in a putative class action shareholder lawsuit against reinsurance company Scottish Re and others. The Complaint alleged violations of federal securities laws in connection with Scottish Re’s accounting for deferred tax assets in its financial statements and its certifications of the adequacy of the Company’s internal controls. The judge dismissed claims alleged against the accounting firm Ernst & Young (for failing to adequately establish scienter), but denied the remainder of the motions to dismiss. In re Scottish Re Group Securities Litigation, Case No. 06-5853 (USDC S.D.N.Y. Nov. 2, 2007).

This post written by Lynn Hawkins.