The United States Court of Appeals for the Fifth Circuit recently dismissed an appeal of an Order which addressed venue and transfer issues in a matter filed seeking to vacate an arbitration award under the Federal Arbitration Act (“FAA”). The Court held that since the FAA can not itself be a basis for federal question jurisdiction, and there were insufficient jurisdictional allegations to establish diversity jurisdiction, the federal courts lacked jurisdiction of the matter, and remanded the case with instructions that it be dismissed for lack of subject matter jurisdiction. Other courts have also held that the FAA does not itself confer subject matter jurisdiction upon a federal court. Oteeva, LP v. X-Concepts LLC, No. 06-11181 (5th Cir. Nov. 2, 2007).
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COURT DENIES INSOLVENT INSURER’S MOTION TO DISMISS; ACTION TO BAR ARBITRATION WILL PROCEED
Plaintiff, Midwest Employers Casualty Company (“MECC”) filed an action to bar Legion Insurance Company (“Legion”) from arbitrating forty-three reinsurance contracts, which MECC claimed did not contain arbitration provisions. MECC also sought a declaration of its liability under those contracts. Legion filed a motion to dismiss on four separate grounds. The court denied the motion to dismiss.
First, Legion, which is in liquidation, argued that because the Pennsylvania court had in rem jurisdiction over its assets, the Missouri federal court could not exercise jurisdiction. The court disagreed, finding that while the liquidation action was in rem, the present action was in personam. Second, Legion argued that the case was “reverse preempted” by the McCarran-Ferguson Act. The court disagreed on the basis that the ultimate issue in the case was a standard contract dispute, and did not involve the state’s regulation of insurance. Third, Legion argued that the court should abstain from deciding the case under Burford v. Sun Oil Company. In Burford, the Supreme Court held that abstention is appropriate where “exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” The district court concluded that abstention under Burford was not appropriate because this case did not affect complex state administrative processes and would not impair the liquidation process. Finally, Legion argued that full faith and credit and the principle of comity required the court to defer to the liquidation proceedings. The court disagreed, finding that those principles did not prevent its exercise of jurisdiction. Midwest Employers Casualty Co. v. Legion Ins. Co., Case No. 4:07-cv-00870, (USDC E.D. Mo. Nov. 11, 2007).
SEVENTH CIRCUIT CLARIFIES CRITICAL DATES FOR PURPOSES OF FAA’S THREE-MONTH LIMITATIONS PERIOD
The Seventh Circuit has addressed important issues relating to the commencement of efforts to vacate an arbitration award. The relevant facts are found in the district court's Order. An arbitration award was entered against Webster under the rules of the American Arbitration Association (“AAA”). Under the Federal Arbitration Act (“FAA”), 9 U.S.C. section 12, when a party moves to vacate, confirm or modify an arbitration award, notice “must be served upon the opposing party or his attorney within three moths after the award is filed or delivered.” The district court found Webster's attempt to vacate the award was one day late, and hence barred, and the Seventh Circuit affirmed. The courts held that the award was “filed or delivered” within the meaning of the FAA and the AAA's rules when it was both e-mailed and mailed by the arbitrator to counsel for the parties, regardless of when counsel received the mailed version or opened his e-mail. The court noted that a request to vacate an award is a motion, rather than a new action, under the Federal Rules of Civil Procedure, and the plain language of section 12 of the FAA speaks in terms of “service” rather than “filing.” Since Webster's counsel filed a Complaint seeking to vacate the award one day prior to the three month deadline, but did not serve the action on his opponent until one day after the three month deadline, the request to vacate the award was untimely under the FAA. The Court rejected Webster’s argument that the FAA’s limitation period was tolled with the filing of the action, stating instead that there was “nothing ambiguous about § 12’s provision that the statute of limitations is tolled when notice of a motion to vacate is ‘served upon the opposing party or his attorney.’” (emphasis added). This is a critical principle for parties seeking to vacate or confirm an award under the FAA. Webster v. A.T. Kearney, Inc. & Electronic Data Systems Corp., No. 06-3094 (7th Cir. Nov. 2, 2007).
MOTION TO COMPEL PRODUCTION OF REINSURANCE AGREEMENT DENIED, WITHOUT PREJUDICE
This discovery dispute arose out of defendant’s failure to answer certain of plaintiffs’ interrogatories and requests for production of documents relating to defendant’s reinsurance. Defendant, United States Fidelity & Guaranty Co. (“USF&G”), acknowledged having reinsurance, but objected to identifying its reinsurer and producing the reinsurance agreement based on relevancy. Plaintiffs filed a motion to compel. The Court denied Plaintiffs’ request, without prejudice, because the defendant had not notified the reinsurer of the claim. However, the court stated that if the defendant did notify the reinsurer of the claim, then it would be required to supplement its initial disclosures and produce a copy of the reinsurance agreement. Turnell Corp. v. United States Fidelity & Guaranty Co., Case No. 4:07-cv-1169 (USDC E.D. Mo. Sept. 10, 2007). Background on this matter is found in the Motion to Compel.
INTERESTING DECISIONS ON ARBITRATION AWARDS
Four recent opinions address interesting issues in the confirmation of arbitration awards:
- In Extendicare Health Services, Inc. c. District 1199P Service Employees International Union, No. 06-4768 (3d Cir. Oct. 26, 2007), the court affirmed a district court decision finding that the reinstatement of an employee by an arbitrator in a labor arbitration was not contrary to public policy. This opinion contains a rather extended discussion of the public policy issue analysis.
- In Lagstein v. Certain Underwriters at Lloyds of London, Case No. 03-1075 (USDC D. Nev., Aug. 15, 2007), an insurance bad faith case, the arbitration panel awarded $900,000 in compensatory damages, $1.5 million in bad faith compensatory/emotional distress damages, $4 million in punitive damages and $350,000 in attorneys’ fees. The district court found that this award “shocks the Court’s conscience, is biased, and cannot stand.” The court further found that the damages were unsupported by the record and in manifest disregard of law, that the punitive damage award exceeded the jurisdiction of the arbitration since it awarded damages for a time period that the parties had expressly agreed was beyond the scope of the arbitration, and that the size of the punitive damage award was excessive.
- In Hendrik Delivery Service, Inc. v. St. Louis Post-Dispatch LLC, Case No. 07-1516 (USDC E.D. Mo. Oct. 19, 2007), the court confirmed an arbitration award of $892,000 in compensatory and $750,000 of punitive damages in a business dispute. The losing party sought to vacate the award, essentially arguing that the arbitrator made the wrong decision. The court found no manifest disregard of law, and refused to vacate the award.
- In Van Pelt v. UBS Financial Services, Inc., Case No. 05-477 (USDC W.D. N.C. Oct. 12, 2007), the court denied a motion to vacate an arbitration award of $2.4 million for wrongful termination of a financial advisor. The employer contended that the award should be vacated because: (1) the award was not drawn from the essence of a contract; (2) the panel manifestly disregarded the law; (3) the panel exceeded its power in making the award; and (4) the award violated public policy. The court denied the request to vacate the award. The critical point in this opinion is that since the award was not a reasoned award, and hence the panel did not explain the bases for its decision, there was an insufficient record upon which to vacate the award.