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

Week's Best Posts

Federal Court Denies Bifurcation of Contract Claims and Uberrimae Fidei and Late Notice Defenses in Reinsurance Dispute

January 7, 2019 by John Pitblado

A Michigan federal court declined to bifurcate a case involving a contract dispute between a ceding insurer, Amerisure, and its reinsurer, Transatlantic Re, in a case arising from underlying asbestos claims dating back to the early 1980’s.

Amerisure sued TransRe alleging that it failed to reimburse Amerisure under a facultative reinsurance agreement covering losses and loss expenses arising from underlying asbestos claim liabilities insured by Amerisure. For its part, TransRe alleged that Amerisure breached the “duty of utmost good faith” by failing to apprise TransRe of all relevant information in its underwriting of the facultative agreement, thereby voiding the agreement. TransRe also claimed that Amerisure’s claim is barred due to late notice.

Amerisure filed a motion to bifurcate the proceedings to address the contract issues first. TransRe opposed the motion arguing that even if the contract issues were resolved, the breach of duty of utmost good faith and late notice issues would remain to be addressed, and thus bifurcation would not result in a more efficient proceeding.

The trial judge referred the issue to a special master, who found that bifurcation was inappropriate, as a phased proceeding would not result in convenience to the parties or judicial efficiency. The report noted that much of the discovery involved on the contract issues would overlap with the issues involved in TransRe’s defense based on breach of the duty of utmost good faith, such as the underwriting intent and meaning of the applicable policy or reinsurance language. The report concluded, therefore, that phasing the proceedings might ultimately be less efficient, rather than more efficient, and recommended denial of the motion.

The judge accepted the special master’s recommendation and denied Amerisure’s motion.

Amerisure Mut. Ins. Co. v. Transatlantic Reinsurance Co., No. 2:18-cv-11966 (USDC E.D. Mich., Nov. 29, 2018 (Report and Recommendation of Special Master), Dec. 20, 2018 (adopting report)).

This post written by John Pitblado.

See our disclaimer.

Filed Under: Contract Interpretation, Reinsurance Claims, Week's Best Posts

Covered Agreements: Covered Agreement Reached With UK; Implementation of Covered Agreement With EU Slows

December 31, 2018 by Carlton Fields

On December 11, 2018, the Secretary of the Treasury and the United States Trade Representative sent the Chairs and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Finance, the House Committee  on Financial Services, and the House Committee on Ways and Means the text of a new Covered Agreement agreed to by the United States and the United Kingdom concerning the business of reinsurance, with the notification letters required for such agreements by the Dodd-Frank Act.  A press release also was issued describing the new US-UK Covered Agreement.

The substantive terms of the US-UK Covered Agreement appear to be materially the same as the terms of the previously existing US-EU Covered Agreement.  The implementation provisions of the US-EU Covered Agreement were a bit complicated, and the provisions of Article 9 (“Implementation of the Agreement”) and Article 10 (“Application of the Agreement”) of the new US-UK Covered Agreement also are complicated.  For example, the agreement becomes applicable the later of the date it enters into force or 60 months from September 22, 2017.  September 22, 2017 was the date that the US-EU Covered Agreement was officially signed.  More curious is the provision of Article 9 paragraph 3.(a) of the new US-UK Covered Agreement that “[f]rom the date of entry into force of this Agreement, the United States shall encourage each U.S. State to promptly adopt the following measures: (a) the reduction, in each year following 7 November 2017, of the amount of collateral required by each State to allow full credit for reinsurance by 20 percent of the collateral that the U.S. State required as of 1 January 2017 ….”  Perhaps these provisions reflect a desire that the two covered agreements become applicable at the same time, with no resulting advantage or disadvantage to reinsurers domiciled in either the EU or the UK post-Brexit.

Meanwhile, the implementation of the US-EU Covered Agreement has slowed somewhat.  Consideration of final approval of the proposed amendments to the Credit for Reinsurance Model Act and Model Regulation, which is part of the implementation process, was on the agenda for the December 19, 2018 telephonic meeting of the NAIC Executive Committee and Plenary, but at the end of the meeting NAIC President McPeak, who was moderating the meeting, announced without comment that the consideration of the revisions to the Models was being deferred to a later date to allow for the consideration of late comments on the proposed Model revisions received from the US Treasury and the US Trade Representative.  Neither the substance of those comments nor a revised timeline for consideration of the proposed Model revisions was provided during that meeting.  It remains to be seen what the next step will be in the consideration of the proposed amendments to the Models.

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

Fifth Circuit Finds Waiver of Arbitration Where Motion to Dismiss Argued Merits, Omitted Mention of Arbitration, and Created Prejudice

December 24, 2018 by Carlton Fields

A consumer (Forby) filed a proposed class action in Illinois state court alleging that One Technologies, L.P. (One Tech) failed to adequately disclose that consumers who accessed their “free” online credit score on the company’s website would be enrolled in a credit monitoring program and be charged a monthly fee. The case was removed and then transferred to the Northern District of Texas. One Tech filed a motion to dismiss in the Texas district court, seeking dismissal of all of Forby’s claims but omitting any mention of arbitration. After the district court partially denied One Tech’s motion to dismiss, Forby served requests for production, which prompted One Tech to file motions to compel arbitration and to stay discovery. After the court granted these motions, Forby appealed to the Fifth Circuit, arguing that the court erred in finding that One Tech did not waive its right to arbitration. The Fifth Circuit agreed with Forby and reversed the district court’s order compelling arbitration, finding that One Tech substantially invoked the judicial process by seeking a full dismissal on the merits, and caused prejudice to Forby by waiting thirteen months before moving to compel arbitration and by forcing Forby to re-litigate in arbitration the matters already decided by the district court in her favor. The court reasoned: “[a] party does not get to learn that the district court is not receptive to its arguments and then be allowed a second bite at the apple through arbitration.” Forby v. One Technologies, L.P., Case No. 17-10883 (5th Cir. Nov. 28, 2018).

This post written by Gail Jankowski.

See our disclaimer.

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

California Appellate Court Holds Parties Cannot Contract Around Service Requirements of Hague Service Convention

December 19, 2018 by John Pitblado

Changzhou Sinotype Technology Co., Ltd. (“Changzhou”) is a Chinese company that develops fonts. Changzhou and Los Angeles-based investment firm Rockefeller Technology Investments (Asia) VII (“Rockefeller”), entertained the idea of a joint venture to create a Silicon Valley-based company to develop and market international fonts.

The parties signed what Rockefeller characterized as a memorandum of understanding, and which Rockefeller believed was binding. However, Changzhou characterized the document as a “bei wang lu,” a type of memorandum understood in Chinese to merely record the current state of negotiations, and that the signing of a “bei wang lu” “does not create a binding contract.

After negotiations ultimately broke off, Rockefeller initiated an arbitration, citing the memorandum’s arbitration provision. Changzhou did not respond to the demand for arbitration, nor did it appear or participate in the arbitration Rockefeller filed in California. The arbitrator entered a default award in excess of $414 million against Changzhou.

Rockefeller brought an action to confirm the award in California state court. It effected service on Changzhou in China via mail, as had been “agreed” in the memorandum. Changzhou did not appear in the action, and judgment confirming the award entered in Rockefeller’s favor.

Approximately 15 months later, Changzhou moved to set aside the judgment on the grounds that it had never entered into a binding contract with Rockefeller, had not agreed to contractual arbitration, and had not been served with the summons and petition to confirm the arbitration award in the manner required by the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Hague Service Convention”).

The court denied Changzhou’s petition to vacate, finding service was effective in the action to confirm the award, even though it had not complied with the Hague Service Convention, as the parties were free to contract around the Convention, and had done so.

Changzhou appealed and a California intermediate appellate court reversed, finding that parties may not ‘contract around’ the Hague Service Convention. “[T]he Hague Service Convention does not permit Chinese citizens to be served by mail, nor does it allow parties to set their own terms of service by contract. [Changzhou] therefore was never validly served with process.”

The Appellate Court also did not credit the argument that Changzhou waited too long to challenge service, finding that a lack of personal jurisdiction is not curable, and that “[t]here is a wealth of California authority for the proposition that a void judgment is vulnerable to direct or collateral attack ‘at any time.’” (emphasis added).

Rockefeller Technology Investments (Asia) VII v. Changzhou Sinotype Technology Co., Ltd., No. B272170 (Cal. Ct. App. June 1, 2018)

This post written by John Pitblado.

See our disclaimer.

Filed Under: Arbitration Process Issues, Confirmation / Vacation of Arbitration Awards, Jurisdiction Issues, Week's Best Posts

Fourth Circuit Reverses Dismissal, Finding Federal Question Jurisdiction for Review of Arbitral Award

December 17, 2018 by John Pitblado

The Fourth Circuit Court of Appeals reversed a Virginia federal court’s dismissal of a challenge to an arbitration award. The underlying dispute arose out of a lawsuit filed by Alvin Moore against his email service provider, America Online, Inc. (“AOL”), for divulging information about his account to law enforcement who sought the information as part of an investigation into a claimed imminent threat. Moore sued AOL in state court, alleging a claim under Title II of the Electronic Communications Privacy Act of 1986 (known as the Stored Communications Act), 18 U.S.C. § 2701 et seq., for divulging the information about him without a warrant, a subpoena, or his consent. Moore also alleged that AOL had, without his consent, deleted all his emails, causing him damages in the amount of $74,999 (presumably just under the jurisdictional requirement for diversity jurisdiction in order to avoid removal to federal court).

However, AOL successfully compelled arbitration under its service provider agreement with Moore, and prevailed in the arbitration. Moore filed a petition to vacate the award in Virginia federal court, alleging both federal question and diversity jurisdiction. The court granted AOL’s motion to dismiss the petition for want of jurisdiction, finding it did not satisfy the amount in controversy requirement to sustain diversity jurisdiction. It did not address the issue of whether it had federal question jurisdiction due to the fact that the subject of the arbitration included a claim under the federal Stored Communications Act.

The Fourth Circuit reversed and remanded, for a merits consideration of Moore’s petition, given its finding that the district court has jurisdiction. It sided with the First and Second Circuits in a circuit split about whether the enforcement mechanisms under the FAA §§ 10 and 11 required the court to “look through” the petition to determine if the underlying dispute could have been brought in federal court, absent the arbitration agreement. Other Circuits have held in favor of an approach treating petitions to vacate or confirm as strictly matters of contract under an arbitration agreement, regardless of the subject matter of the dispute, and thus governed by state law, providing no independent basis for federal question jurisdiction. The Fourth Circuit explicitly rejected that approach, based on U.S. Supreme Court precedent adopting the “look through” approach with respect to petitions to compel arbitration under FAA § 4, and finding no reason that this approach should not also apply to the FAA’s enforcement mechanisms under §§ 10 and 11.

McCormick v. America Online, Inc., No. 17-1542 (4th Cir. Nov. 29, 2018).

This post written by John Pitblado.

See our disclaimer.

Filed Under: Jurisdiction Issues, Week's Best Posts

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