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Arbitration / Court Decisions

First Circuit Affirms That Assignee May Compel Arbitration

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The First Circuit Court of Appeals recently affirmed that a debt collection company defendant could compel arbitration where it was assigned rights from a credit card company.

Jackeline Barbosa opened a credit card with Barclays Bank Delaware. She later had an overdue, unpaid balance. Barclays bundled Barbosa’s unpaid balance with other such balances and sold it to Midland Funding LLC, a shell entity that assigned its rights to Midland Credit Management Inc. (MCM), which retained the law firm of Schreiber/Cohen LLC “to assist in MCM’s debt collection efforts.” Midland Funding filed a claim for the debt in Boston Municipal Court, but that court held that “Midland Funding had not proved it owned the subject debt” and ruled in favor of Barbosa. Barbosa and two other plaintiffs then brought a federal putative class action against MCM and Schreiber/Cohen alleging, among other things, violations of the Fair Debt Collection Practices Act. MCM and Schreiber/Cohen moved to compel arbitration. A magistrate judge recommended the court compel arbitration and the district court agreed. Barbosa appealed.

The First Circuit affirmed. It rejected Barbosa’s claim that MCM and Schreiber/Cohen did not have the contractual authority to compel arbitration. The court explained that Barclays had expressly assigned its rights to Midland Funding and that MCM “is the servicer and agent of Midland Funding” and “Schreiber/Cohen is Midland Funding’s agent.” The cardmember agreement Barbosa had signed “included an assignment provision giving Barclays permission to ‘at any time assign or sell [Barbosa’s] Account’” and that “‘the person(s) to whom [Barclays] make[s] any such assignment or sale shall be entitled to all of our rights under [the] Agreement.’”

Barbosa v. Midland Credit Management, Inc., No. 19-1896 (1st Cir. Nov. 25, 2020).

Third Circuit Affirms Order Unsealing Arbitration Award

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The Third Circuit Court of Appeals recently affirmed an order unsealing an arbitration award because the award had been filed with the district court as part of confirmation proceedings and the recipient of the award had not demonstrated a specific harm sufficient to overcome the presumption of public access to documents filed with the courts.

Pennsylvania National Mutual Casualty Insurance Co. arbitrated whether it “was entitled to proceeds based on insurance claims it made to [two of its] reinsurers.”

The arbitration panel issued an award in Penn National’s favor, and Penn National petitioned the district court to confirm that award. As part of the confirmation process, Penn National filed the award with the court, which granted Penn National’s motion to seal the award.

The parties settled before the court confirmed the award.

After the settlement, Everest Reinsurance Co. moved to intervene and unseal the award. The district court originally denied that motion, but the Third Circuit remanded the case after concluding that the court had applied the wrong standard.

On remand, the district court granted Everest’s motion.

The Third Circuit affirmed. It rejected Penn National’s argument “that the arbitration award [was] not a judicial record to which the common-law right of access applies,” explaining that “Penn National filed the arbitration award on the docket with the District Court as part of its motion to confirm the award. Thus, according to [the Third Circuit’s] precedents, the award became a judicial record subject to the common-law right of access.” The court also held that the district court did not err by “holding that [Penn National] did not demonstrate a specific harm sufficient to overcome the presumption of public access.” The Third Circuit explained that an affidavit submitted by one of Penn National’s officers that “other reinsurers might choose to forego paying Penn National and contest their contractual obligation to pay if they learned of the contents in the arbitration award” was insufficient because the court “could not ‘determine how many possible relationships could be impacted, the amount of money that could be at stake, the types of actions other parties may pursue, or the likelihood that any such actions would be successful.’”

Pennsylvania National Mutual Casualty Insurance Co. v. New England Reinsurance Corp., Nos. 20-1635 & 20-1872 (3d Cir. Dec. 24, 2020).

Texas Federal Judge Declines to Rule on Procedural Issues in Multiple Successive Arbitrations Filed by Same Parties, Leaving Dispute to Arbitrators

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This litigation involved 21 parties spread across six different arbitrations in front of six different arbitrators. The litigation arose out of a dispute between two doctors, their business entities, and captive insurers (the plaintiffs), and a lawyer, law firm, and its affiliates (the defendants). The doctors engaged the defendants to create captive insurers and tax shelters for the doctors. After the U.S. Tax Court issued a ruling with negative consequences for the shelters, the doctors asked the defendants to “liquidate and wind down” the doctors’ program, but the defendants refused.

The Arbitrations

Both sides sought arbitration: the defendants brought the first arbitration in Houston, Texas, before Judge Dorfman, and the plaintiffs brought the second arbitration in Louisiana before Judge Duval. The plaintiffs also commenced a lawsuit against the defendants in Texas state court, alleging breach of contract, breach of fiduciary duty, tort, legal malpractice, and breach of professional obligations, which was removed to the U.S. District Court for the Southern District of Texas, in which the defendants moved to compel the doctors’ business entities’ participation in the Texas arbitration. The plaintiffs responded with a cross-motion to compel the defendants to join in the Louisiana arbitration and to challenge the Texas arbitration, while also seeking a stay of the Texas arbitration pending a ruling on the motions. The defendants then initiated a third arbitration before Judge Baker in Houston Texas, asserting additional claims that the defendants were denied leave to supplement their arbitration demand in the first arbitration.

The district court granted the defendants’ motion to compel and ordered the parties to arbitrate two of their disputes before Judge Dorfman and Judge Baker in Houston, relying on a written arbitration agreement between the parties that required all arbitrations to be conducted in Houston. The district court denied the plaintiffs’ motion to compel arbitration in Louisiana and stayed the arbitration pending before Judge Duval and the related proceedings in the federal litigation so that the Texas arbitration could go forward. The plaintiffs appealed the district court’s decision to stay the litigation.

While the district court was making its decision to stay the litigation, the plaintiffs filed a fourth arbitration before arbitrator Robert Kutcher in Louisiana. The plaintiffs thereafter filed a fifth arbitration, based on allegedly newly discovered facts, before Judge Medley in Louisiana, and a sixth arbitration before Judge Gill-Jefferson in Louisiana, but the plaintiffs requested that the new arbitrations be held in Houston.

Defendants’ Emergency Motion to Lift the Stay

After the district court issued its decision to stay the litigation, the defendants filed an emergency motion asking the district court to lift its stay and enjoin the fourth, fifth, and sixth arbitrations, arguing that these Louisiana arbitrations were proceeding in an improper venue and were inefficient “copycat” arbitrations seeking to resolve the same “core dispute” at issue in the Judge Baker and Judge Dorfman arbitrations in Texas.

The district court found no appropriate circumstances justifying an order lifting the stay in the case or staying the recently filed fourth, fifth, and sixth arbitrations. The district court recognized the interesting procedural questions that arose with respect to whether only the final hearing, or also interim hearings, must occur in Houston — as the arbitrators in these later-filed arbitrations were hearing disputes virtually via Zoom and some had issued interim decisions from Louisiana, but none had required the parties to travel to Louisiana. The district court also rejected the defendants’ argument that the fourth, fifth, and sixth arbitrations were inefficient “copycat” arbitrations, noting that the arbitration agreement did not preclude the parties from proceeding with separate arbitrations for disputes involving overlapping but different facts.

However, the district court concluded that while the more recently filed arbitrations must “proceed” in Houston under the arbitration agreement, the required location for interim hearings, the manner in which arbitrators must appear in a location, and permissible consolidation procedures are disputes about procedural questions that are best left for the arbitrators to address, not the court.

Defendants’ Motion to Confirm the Final Award

After the emergency motion was filed, Judge Dorfman issued a final award in the first arbitration, finding that the defendants were not required to immediately wind down and liquidate the captive insurers. The defendants moved to confirm that award before the district court.

The plaintiffs argued that the district court lacked jurisdiction to lift the stay it imposed in the litigation and confirm the award by Judge Dorfman because the plaintiffs were appealing the district court’s decision allowing arbitration before Judge Dorfman. Rejecting the plaintiffs’ argument that it lacked jurisdiction to lift the stay, the district court noted that this case involved several arbitrations that were not implicated by the plaintiffs’ appeal, and thus it had jurisdiction to lift the stay to address issues in arbitration proceedings not implicated by the plaintiffs’ appeal.

The district court, however, agreed with the plaintiffs that their appeal targeted Judge Dorfman’s appointment and his ability to preside over the parties’ arbitration. Because the defendants were asking the district court to confirm an award Judge Dorfman granted, which would require the district court to decide that Judge Dorfman had the power to grant an arbitration award, the district court recognized that such a decision may conflict with a decision of the appellate court. The district court therefore declined to exercise jurisdiction over issues currently on appeal.

The district court explained that these proceedings were “inefficient and messy” when it compelled arbitration back in August 2020, but since “the parties applied their contract to make this mess but agreed that arbitration would resolve their disputes, no matter how messy,” the district court was not going to “step in to clean it up and risk making it worse.” The district court simply refused to interfere.

Sullivan v. Feldman, No. 4:20-cv-02236 (S.D. Tex. Dec. 4, 2020).

New York Court Finds the Term “Exhaustion” in Excess Policy Was Ambiguous, Rules That Full Limits of Underlying Insurance Need Not Be Paid for Excess Policy to Attach

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Fireman’s Fund Insurance Co. sued OneBeacon Insurance Co. for breach of a facultative reinsurance certificate. Fireman’s Fund settled claims with its insured and allocated a portion of the settlement to a Fireman’s Fund excess policy reinsured by OneBeacon. OneBeacon denied Fireman’s Fund’s claim, arguing that its reinsurance obligations did not attach until all insurance underlying the Fireman’s Fund policy were exhausted in payment of the full limits of the underlying policies. The Fireman’s Fund policy stated that it applies “only after all underlying insurance has been exhausted,” but did not define “exhaustion.” The reinsurance certificate provided that OneBeacon’s liability shall follow Fireman’s Fund’s, that the terms of the certificate shall be subject “in all respects” to the Fireman’s Fund policy, except as stated in the certificate, and that “all claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on [OneBeacon].”

On cross-motions for summary judgment, the court agreed with Fireman’s Fund that the term “exhaustion” was ambiguous as used in the Fireman’s Fund policy, as the policy did not specify whether the full limits of underlying insurance must actually be paid before the Fireman’s Fund policy attaches. Applying Second Circuit precedent established in Zeig v. Massachusetts Bonding Co., 23 F.2d 665 (2d Cir. 1928), the court held that once the underlying insurer settled and discharged the claims against the insured, Fireman’s Fund was within its right to treat the underlying limits as “exhausted,” even though the underlying insurer did not actually pay the full limits of its policy. In addition, based on the follow-the-fortunes and follow-the-settlements doctrines, the court found it was barred from second-guessing Fireman’s Fund’s post-settlement allocation decisions. The court therefore granted Fireman’s Fund’s motion for summary judgment and denied OneBeacon’s cross-motion.

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 1:14-cv-04718 (S.D.N.Y. Oct. 19, 2020).

District Court Transfers Consideration of Motion to Quash Pursuant to Rule 45(f)

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An Ohio district court invoked Rule 45(f) of the Federal Rules of Civil Procedure in response to a motion to quash by the Ohio Department of Insurance (ODI). The subpoena was issued in connection with a reinsurance-related litigation pending in the U.S. District Court for the Southern District of New York. ODI had produced documents in response to the subpoena, but objected to further compliance. While noting it was questionable whether the information sought was relevant to the New York action in the first instance, the court found “exceptional circumstances” warranted transferring the issue to the SDNY pursuant to Rule 45(f). Aside from the SDNY being in a better position to assess relevancy, the court also noted that discovery in the New York action already closed, and the judge was reluctant to extend the discovery period. The court also found transferring under Rule 45(f) has been deemed appropriate under similar circumstances, such as where ruling on a discovery motion would disrupt the issuing court’s case schedule.

Ohio Dept. of Insurance V. RPM Mortgage, Inc., No. 2:20-mc-00043 (S.D. Ohio Nov. 18, 2020).