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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

COURT CONFIRMS INTERIM ARBITRATION AWARD REQUIRING POSTING OF PRE-HEARING SECURITY

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Respondent moved for an immediate stay of an arbitration of claims relating to the purchase of insurance and to vacate the panel’s interim award requiring the posting of pre-hearing security.  Petitioner moved to confirm the interim award.

Respondent’s sole basis for vacating the interim award was that the panel issued its interim award without conducting a full hearing on the merits of its defenses.  It predicated this request upon 9 U.S.C. § 10(a)(3), contending that the arbitrator refused to hear evidence pertinent and material to the controversy, relying on Home Indem. Co. v. Affiliated Food Distributors, Inc., 1997 WL 773712 (S.D.N.Y. Dec. 12, 1997).  The panel distinguished Home Indemnity, in which the arbitration panel had “specifically conditioned . . . discovery on [the] posting of security,” and refused “even a threshold review of the underlying dispute,” finding instead that the panel in this matter had “expressly ordered that discovery proceed while the motion for pre-hearing security was litigated” and that Petitioner “produced over 40,000 pages of discovery… prior to the interim award… unlike the panel in Home Indemnity, the panel here provided [Respondent] with adequate opportunity to present its evidence and argument,” including “extensive briefing and oral argument.”

The court further commented that “[b]y its very nature, … a request for pre-hearing security is made on a limited record at an early stage of the arbitration proceedings and may be ordered before a full hearing on all defenses.” The court confirmed the panel’s interim award.  Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Source One Staffing LLC, Case No. 16-6461 (USDC S.D.N.Y. May 17, 2017).

This post written by Nora A. Valenza-Frost.
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COURT MUST RULE ON MOTION TO COMPEL ARBITRATION FIRST

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Plaintiff sued his former employer in a putative class action alleging that a payroll practice violated Pennsylvania law. The defendant filed a motion to compel arbitration and a separate motion to dismiss. The district court opted to “delay ruling” on the motion to compel arbitration and proceeded to deny the motion to dismiss. The former employer appealed. The Court of Appeal found that the district court erred in not ruling on the motion to compel arbitration first, vacated, and remanded for the district court to consider the motion to compel arbitration in the first instance.

The Court held that the Federal Arbitration Act requires that the gateway issue of arbitrability must be addressed first. Therefore, once a motion to compel arbitration is filed the court must refrain from further action until it determines arbitrability.  The court noted that there is an exception if the record is unclear as to the agreement to arbitrate, in which case limited discovery should be permitted limited to the issue of arbitrability. Since the plaintiff did not deny receipt of and consent to the agreement to arbitrate, and did not seek discovery with respect to arbitrability, the district court should have proceeded to consider the motion to compel arbitration before considering the pending motion to dismiss. Silfee v. Automatic Data Processing, Inc., No. 16-3725 (3rd Cir. June 13, 2017).

This post written by Rollie Goss.
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BANKRUPTCY COURT REQUIRES AN MF GLOBAL HOLDINGS BERMUDA REINSURER TO POST $15 MILLION BOND BEFORE DECIDING MOTION TO COMPEL ARBITRATION

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In the most recent decision in an ongoing dispute between MF Global Holdings Ltd. and its (re)insurers, the Bankruptcy Court for the Southern District of New York ordered Allied World to post a $15 million bond before the court would consider its pending motion to compel arbitration. As previously reported on this blog, the Bankruptcy Court found the Bermuda Insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions. Following that decision the Bermuda Insurers dismissed the Bermuda actions and the anti-suit injunctions were lifted. MF Global Holdings has since reached a settlement with one Bermuda Insurer and has been able to respond to another Bermuda Insurer (Allied World)’s pending motions to dismiss and to compel arbitration in Bermuda.

In response MF Global Holdings argued that, pursuant to New York Insurance Law § 1213, Allied World was required as an unauthorized foreign insurer to post a bond sufficient to secure payment of any possible final judgment (or procure a license to do insurance business in the state) before it filed any pleading in the proceeding against it. Allied World contended that its motions are not “pleadings” covered by the statute, its policy was not issued or delivered in New York (and thus not subject to section 1213), and that the statute is preempted by the New York Convention. Concluding that Allied World cannot “so easily avoid” the protections provided by New York Insurance Law, the Bankruptcy Court rejected each of those arguments in an opinion dated June 12, 2017.

First, the court rejected the reading of the term “pleading” offered by Allied World. Allied World claimed the statute covered only pleadings that defend against the complaint on the merits, such as an answer, but the court relied on precedent interpreting the bond requirement broadly to include motions to dismiss or compel within the definition of “pleading.” Second, the court rejected the notion that Allied World delivering the insurance policy to MF Global’s Bermuda broker meant that it did not deliver a policy in New York and come under the purview of New York Insurance Law. To accept that argument would allow foreign unlicensed insurers to subvert the law’s intent of regulating such insurers, the Court found, by using a broker or intermediary to physically deliver a policy that the insurer knew would provide coverage to a New York company insuring risks in New York. Finally, the court found no conflict between section 1213 and the New York Convention.

The court, however, did not require a bond in the full $60 million amount requested by MF Global. Instead, the court used its discretion to fix the bond amount at $15 million—the policy limit of Allied World’s policy—before it would consider the insurer’s pending motion to compel arbitration or to dismiss.

In re: MF Global Holdings Ltd., Case No. 16-01251 (Bankr. S.D.N.Y. June 12, 2017)

This post written by Thaddeus Ewald .

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FIRST CIRCUIT FINDS FAA APPLICABILITY A QUESTION FOR COURT AND HOLDS FAA EXEMPTION APPLICABLE TO INDEPENDENT-CONTRACTOR RELATIONSHIP

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The case presented two issues to the court: 1) whether a court must determine the applicability of the FAA to the case when asked to compel arbitration, where parties delegated questions of arbitrability to the arbitrator; and 2) whether the FAA’s transportation worker exemption applies to independent contractors. The court answered both questions in the affirmative.

Oliveira, a truck driver, participated in an apprenticeship program established by New Prime (“Prime”), a trucking company. Upon completion of the program, Prime told Oliveira that he would make more money as an independent contractor than as a company driver. Thereafter, Oliveira signed an independent contractor operating agreement with Prime. Oliveira brought suit against Prime for violation of the Fair Labor Standards Act (FLSA). He claimed that the FAA transportation worker exemption covers his contract, and Prime moved to compel arbitration under the FAA arguing that applicability of the FAA exemption is a question the parties had delegated to the arbitrator. The district court held that the applicability question was for the court and that the section 1 exemption does not apply to independent contractors. Prime appealed.

On the first issue, Prime relied on the Eighth Circuit’s holding that “application of the FAA’s transportation worker exemption is a threshold question of arbitrability” which the parties delegated to an arbitrator. However, the court found the Eighth Circuit’s characterization of the issue as “a question arbitrability” a flawed premise. In doing so, the court borrowed the reasoning of a Ninth Circuit case and explained that for a district court to compel arbitration, the FAA must first apply to the case and confer on a district court the authority to compel arbitration. Following this reasoning, the First Circuit held that the question of the court’s authority to act under the FAA is an antecedent determination for the district court before it can compel arbitration.

On the second issue, Prime argued that the exemption does not apply to independent contractors, citing numerous district court decisions. The First Circuit disagreed, noting that statutory interpretation is not simply a “numbers game.” The court explained that the ordinary meaning of “contracts of employment” is simply “agreements to do work,” which encompasses works of independent contractors and that such interpretation is consistent with Congress’s concern with transportation workers and their necessary role in the free flow of goods at the time Congress enacted the FAA. As such, the court affirmed denial of Prime’s motion to compel arbitration. Oliveira v. New Prime, Inc., Case No. 15-2364 (1st Cir. May 12, 2017).

This post written by Rollie Goss.

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COURT DECLINES TO QUASH SUBPOENA ISSUED TO SOUTH CAROLINA DEPARTMENT OF INSURANCE IN COMPANION PROPERTY CASE

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We previously reported on this case on January 5, 2016, June 28, 2016, July 20, 2016, and December 14, 2016. The case concerns Companion Property and Casualty Insurance Company’s participation in a fronted insurance program with two reinsurers. Reinsurance collateral trusts were established for Companion’s benefit and maintained by defendant U.S. Bank as trustee. In 2015, Companion filed a complaint against U.S. Bank, alleging that, it, as trustee, negligently permitted the reinsurers to replace $180 million in assets held in trust accounts with worthless and defective assets. Companion asserted that U.S. Bank was liable for these substitutions because certain assets in the trust accounts violated the terms of the Trust Agreements. U.S. Bank then made claims against several third-parties, some of which have since been dismissed from the case.

Recently, Companion moved to quash U.S. Bank’s subpoena to the South Carolina Department of Insurance requesting production of “all documents and communications” related to information about Companion’s finances that it reported to the SC DOI. Companion argued that the subpoena sought confidential information protected as privileged by the South Carolina Insurance Holding Company Regulatory Act (the “Act”), as well as the production of documents and materials that were overly broad and previously produced. The court declined to quash the subpoena, but did modify its terms. The court found it significant that both parties stipulated that the Act did not protect as privileged a number of requested documents. The court also found that the South Carolina Department’s promise to review the documents prior to production and ensure that privileged documents were not produced was insufficient to adequately address Companion’s concerns. The Court accorded Companion reasonable time to review the documents that the Department identified as responsive to the subpoena and raise document-specific objections to the production of documents that it determined were privileged under the Act. Companion Prop. & Cas. Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:15-cv-01300 (USDC D.S.C. Apr. 10, 2017).

This post written by Gail Jankowski.

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