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You are here: Home / Archives for Week's Best Posts

Week's Best Posts

RELEASE OF CLAIMS HELD TO CONFER EXCLUSIVE JURISDICTION ON ENGLISH COURTS TO DECIDE ACTIONS OF “FRAUD”

January 20, 2009 by Carlton Fields

This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.

Filed Under: Jurisdiction Issues, Reinsurance Claims, UK Court Opinions, Week's Best Posts

COURT TO PARTIES: START ARBITRATION OVER

January 19, 2009 by Carlton Fields

Petitioners, Insurance Co. of North America and INA Reinsurance (collectively “INA”), and Respondent, Public Service Mutual Insurance Co. (“PSMIC”), came before the Southern District of New York on the question of whether an arbitration proceeding halted in medias res upon resignation of one party-appointed panelist may continue or whether under such circumstances the arbitration must commence anew. Under the terms of the parties’ arbitration agreement, each party was to choose their own arbitrator and then together select a third arbitrator to comprise a three person panel. After the arbitration had commenced and the panel had issued a Summary Judgment Order, one of the arbitrators was forced to withdraw for health considerations. PSMIC demanded that INA appoint a replacement arbitrator; INA demanded the arbitration commence anew. This case followed.

As a general rule, under Marine Products v. MT Globe Galaxy, 977 F.2d 66 (2d Cir. 1992) if a member of a three person arbitration panel dies before the rendering of an award, and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a new panel. The arbitration does not have to start over, however, if the panel has issued a “partial final award” and “was without power to revisit that question.” Here, the court determined that the original arbitration panel’s Summary Judgment Order did not “conclusively decide every point” and instead only rule on the applicability and effect of case law on INA’s primary defense. The court noted that the Summary Judgment Order was an interim decision on a matter of law and did not conclusively deal with all aspects of the case, including liability and damages. Further, the court determined that since the arbitration was fairly straightforward and not, as in Zeiler v. Deitsch, 931 F.3d 157 (2d Cir. 2007), “ongoing and complex arbitration.” As a result, the partial final award exception did not apply, and the court ordered arbitration to commence anew, with each party appointing its own arbitrators. The court further denied PSMIC’s motion to confirm the original panel’s Summary Judgment Order because the order did not “finally dispose of a separate, independent claim.” Ins. Co. of North Am. v. Public Service Mutual Ins. Co., Case No. 08-7003 (USDC S.D.N.Y. Dec. 10, 2008).

This post written by John Black.

Filed Under: Arbitration Process Issues, Week's Best Posts

SECOND CIRCUIT AFFIRMS DISMISSAL OF INSUREDS’ CONSTRUCTIVE TRUST COUNTERCLAIM OVER REINSURANCE BANKRUPTCY SETTLEMENT PROCEEDS

January 13, 2009 by Carlton Fields

The “Ades” and “Berg” groups of investors (the “Ades Berg Group”), were parties who joined in the bankruptcy proceedings of the Bennett Funding Group, Inc. and related companies (the “Bennett Group”), based on claims that, among other things, the Bennett Group had defrauded them in an investment scheme. The Bennett Group was insured under a reinsurance contract issued by Sphere Drake Insurance PLC (“Sphere Drake”). A settlement was reached in the course of the bankruptcy proceedings between some groups of investors and Sphere Drake. As part of the settlement, Sphere Drake made some payments to certain parties, and held remaining policy proceeds for distribution to remaining parties in the bankruptcy.

Richard Breeden, as bankruptcy Trustee of the Bennett Group, asserted declaratory claims within the context of the bankruptcy proceeding against Sphere Drake and the Ades Berg Group pertaining to the distribution of unallocated policy proceeds. The Ades Berg Group asserted a counterclaim against Mr. Breeden, seeking the imposition of a constructive trust over any remaining insurance proceeds. Mr. Breeden sought dismissal of the counterclaim, arguing that the imposition of a constructive trust would inequitably interfere with his duties as Trustee to distribute proceeds to remaining debtors in accordance with applicable federal bankruptcy law. The bankruptcy court agreed, dismissing the counterclaim, with prejudice, based in part on principles embodied in the federal bankruptcy laws. The Second Circuit Court of Appeals affirmed, finding that the New York state law equitable principles urged by The Ades Berg Group did not conflict with the purposes of the federal bankruptcy laws, and that the bankruptcy court’s ruling thus did not run afoul of recent U.S. Supreme Court precedent cited by the Ades Berg Group, which reaffirmed the principle that constructive trusts should be determined with reference to state law. In re Ades and Berg Group Investors, No. 07-3464 (2d Cir. Dec. 16, 2008).

This post written by John Pitblado.

Filed Under: Reorganization and Liquidation, Week's Best Posts

NAIC TO HOLD PUBLIC HEARING ON ACLI PROPOSALS FOR LIFE INSURER CAPTIAL AND SURPLUS RELIEF, INCLUDING REINSURANCE COLLATERAL PROPOSAL

January 12, 2009 by Carlton Fields

The National Association of Insurance Commissioner’s consideration of proposals made by the ACLI is progressing, according to a release from the NAIC. The NAIC Executive Committee and Plenary on a January 2, 2009 conference call considered the Working Group’s recommendation, and decided to expose the recommendation for public comment (with a January 23, 2009 comment deadline) in advance of a January 27, 2009 public hearing in Washington, DC. The Working Group recommended adopting five of the ACLI’s nine proposals, including the one relating to reinsurance collateral requirements. The reinsurance proposal is now the subject of a proposed guidance letter.

This post written by Rollie Goss.

Filed Under: Accounting for Reinsurance, Reinsurance Regulation, Reserves, Week's Best Posts

COURT TO PARTIES: YOU ARE ARBITRATING

January 6, 2009 by Carlton Fields

On behalf of an aggrieved union member, the International Brotherhood of Electrical Workers brought a grievance against Verizon for declaring the employee medically unfit to drive a company van. A collective bargaining agreement provided for mandatory arbitration for all disputes under the agreement. Verizon alleged in arbitration that the dispute fell under the Federal Motor Carrier Safety Act (“FMCSA”) rather than the Collective Bargaining Agreement. The arbitrator issued an Interim Award ordering the parties to submit to FMCSA dispute procedures before continuing arbitration. The American Arbitration Association cancelled an arbitration hearing and has since administratively closed the parties file. The FMCSA review process remains ongoing.

IBEW subsequently filed suit in the US District Court, alleging that Verizon’s failure to reschedule an arbitration hearing was in breach of the Collective Bargaining Agreement’s arbitration clause. IBEW moved for summary judgment on whether the underlying issue was arbitrable and whether Verizon was in violation of the arbitration agreement. The Court held that the crux of the matter was whether Verizon acted capriciously or arbitrarily when it found the employee medically unqualified to operate the motor vehicle, which would be a violation of the Collective Bargaining Agreement. Disputes under the Agreement are subject to arbitration. The Court also stated that because the arbitrator ordered the parties to submit to FMCSA procedures, arbitration was in fact still ongoing. The Court noted that arbitrators naturally were empowered to consider federal law in making their rulings so the arbitrators’ order to submit to FMCSA procedures was not in error. Int’l Brotherhood of Electrical Workers v. Verizon North, Inc., Case No. 07-3194 (USDC C.D. Ill. Dec. 3, 2008).

This post written by John Black.

Filed Under: Arbitration Process Issues, Week's Best Posts

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