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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

NEW JERSEY STATE COURT REFUSES TO BIND PLAINTIFFS TO A BERMUDA COURT JUDGMENT WHERE THEY WERE NOT PARTIES TO THAT ACTION

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A New Jersey state court recently held that the former shareholders of an insurance holding company suing its E&O insurers were not bound by a Bermuda court’s prior judgment where they were not parties to the suit in which the judgment was issued.

Raydon Underwriting Management Company (“Raydon”), as a managing general agent, purportedly gave bad advice to two operating companies (“Clarendon”) held by Lion Holding, Inc. Plaintiffs were former shareholders of Lion Holding. Plaintiffs sued Raydon in a Bermuda court for the allegedly bad advice that led to millions in losses. Shortly before the Bermuda court issued a judgment in that case, Travelers and ERSIC—Raydon’s E&O insurers—informed plaintiffs that they would not be covering the claims against Raydon. Thereafter, the E&O insurers filed suit in Bermuda against Raydon seeking a declaration that the E&O policy were void, and prevailed on that suit.

Plaintiffs filed the present action against the E&O insurers regarding the E&O insurance coverage, and the E&O insurers defended the suit by claiming plaintiffs were bound by the judgment in the Bermuda action. The court disagreed, holding that the Bermuda judgment was not binding against the plaintiffs because they were not made parties to the suit. The court applied the general rule that a party cannot be bound by a judgment in a case in which it was not a party, finding none of the six exceptions laid out in Taylor v. Sturgell applicable. It noted that the plaintiffs’ interests were not adequately represented in the Bermuda case and in fact were inimical to the E&O insurers’ interests in that case.

Furthermore, the court refused to apply the doctrine of collateral estoppel to plaintiffs’ claims because the issues were not identical. In the Bermuda case, the issue was whether the E&O coverage was procured by fraud in the inducement. In this case, the issue was whether Travelers should be compelled to provide coverage.

Lastly, the court refused to decline jurisdiction under forum non conveniens, finding that the lower court had erroneously weighed the factors based on the assumption that the Bermuda judgment was binding on plaintiffs. The factors were split, but there was no basis for finding New Jersey a demonstrably inappropriate venue.

Ferguson v. Travelers Indem. Co., Case No. A-0028-15T1 (N.J. Super. Ct. App. Div. Mar. 10, 2017)

This post written by Thaddeus Ewald .

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NEW YORK FEDERAL COURT DENIES CROSS MOTIONS FOR SUMMARY JUDGMENT ON FOLLOW THE SETTLEMENTS DOCTRINE

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In a lengthy February 24, 2017 opinion, a New York federal court denied cross motions for summary judgment on the Follow the Settlements Doctrine, filed by Utica Mutual Insurance Company and Utica’s reinsurer, Fireman’s Fund Insurance Company. Utica sought to enforce certain reinsurance contracts against FFIC with respect to $35,000,000 Utica spent in settling a dispute with its insured, Goulds, regarding coverage for thousands of asbestos claims filed against Goulds in the 1990s. It is undisputed that, in settling the case, Utica and Goulds agreed that there were aggregate limits in Utica’s primary policies, which would allow penetration of the umbrella policy (this was a central issue in the underlying case, as the primary policies, dated 1966-1972, had been lost) and that the $325,000,000 settlement would come from Utica’s umbrella policy, thereby triggering the reinsurance policies.

Under the Follow the Settlements Doctrine, “as long as the cedent settles in good faith, reasonably, and within the applicable policies, the reinsurer is bound by the settlement and cannot relitigate the underlying coverage issues.” A cedent’s motive to reach reinsurance, while singularly unimportant, may, however, invalidate the follow the settlement protection if it causes the cedent to make an unreasonable settlement allocation.

Utica argued that the undisputed facts established a reasonable basis for the settlement, while FFIC argued that they established Utica’s bad faith. The court disagreed with them both, finding that, while the central facts were undisputed, reasonable inferences could lead to either conclusion and, as such, summary judgment was inappropriate. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., Case No. 6:09-cv-00853 (USDC N.D.N.Y. Feb. 24, 2017).

This post written by Brooke L. French.

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NINTH CIRCUIT HOLDS PAGA CLAIMANTS MAY BE COMPELLED TO ARBITRATE

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Terminix appealed from a district court order denying its motion to compel arbitration of a former employee’s representative claim under California’s Private Attorneys General Act (PAGA) alleging that Terminix failed to provide workers with proper breaks, payment, and pay stubs. On appeal, the Ninth Circuit reversed and remanded. It found persuasive Terminix’s argument that the district court erred in concluding that PAGA claims categorically cannot proceed to arbitration. Specifically, the district court reasoned that a PAGA claim “belongs to the state, and the state has not waived the judicial forum” even where an employee signs an employment contract requiring arbitration of PAGA claims. The Ninth Circuit disagreed and found that individual employees can bind the state to an arbitral forum. Specifically, the court reasoned “[a]n individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration” and clarified that the California Supreme Court’s Iskanian ruling holds only that a complete waiver of the right to bring a PAGA claim is invalid. Valdez v. Terminix Int’l Co. Ltd. P’ship, Case No.15-56236 (9th Cir. Mar. 3, 2017).

This post written by Gail Jankowski.

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SECOND CIRCUIT FINDS DISTRICT COURT ERRED IN DECISION ON ENFORCEMENT OF INTERNATIONAL ARBITRATION AWARD

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The factual and procedural background of this case can be found here. In sum, beginning in the 1990s, the appellants, a group of Brazilian companies (collectively, “CBF”) entered into a series of contracts with Primetrade AG, a Swiss company, for the purchase and sale of pig iron. Primetrade transferred its assets, including the contracts with CBF, to another Swiss company, Steel Base Trade, AG (“SBT”), which “began operating with the same officers and directors as Primetrade AG and at the same offices.” AMCI International Gmb (“AMCI”) later acquired SBT. The following year, CBF entered into additional purchase and sale contracts with SBT that did not purport to bind any assigns or successors-in-interest. The contracts each contained an arbitration clause which provided for arbitration in Paris. In 2008, as commodity prices fell, SBT defaulted on its obligations under the contracts with CBF. CBF then commenced arbitration. During the course of arbitration, CBF alleged that SBT stalled the arbitration while it was fraudulently transferring its assets to Prime Carbon, a shell company formed and operated by the principals of SBT. In 2010, SBT filed for bankruptcy in Switzerland, and in 2011, SBT’s bankruptcy administrator informed the arbitration panel that the company had insufficient funds to participate in the arbitration and conceded CBF’s claims against SBT. The arbitration panel later issued a final award in favor of CBF for the amount of $48 million plus interest and costs. The award further held that CBF “did not introduce sufficient evidence . . . to demonstrate the existence of fraud in the bankruptcy proceedings.” In 2013, CBF commenced an action in New York federal court against various individuals and corporate entities alleged to be the “alter egos” and “successors in interest” of SBT. CBF sought to enforce the award and to assert various state law fraud claims relating to the underlying dispute. The New York district court dismissed the action because: (i) the award had not been first confirmed by a court of competent jurisdiction; and (ii) the fraud claims were barred by the doctrine of issue preclusion because the arbitration panel had denied similar claims. The appellants appealed.

On appeal, the Second Circuit vacated the district court’s judgment on two grounds: (i) the lower court erred by requiring the appellant, an award debtor, to bring a confirmation action prior to enforcement in a secondary jurisdiction; and (ii) the fraud claims were not barred by the doctrine of issue preclusion.

First, the Second Circuit held that there was no requirement to confirm an arbitration award at the arbitral seat of the arbitration before enforcing it in a secondary jurisdiction. The Second Circuit explained that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) eliminated the “double exequatur” requirement, which mandated confirmation at the seat as a precondition to the enforcement of arbitral awards abroad. Under the Convention, the Second Circuit noted that CBF needed only to commence a summary, single-step proceeding to achieve recognition and enforcement of the award in a court in the United States. Thus, the Second Circuit held that the district court erred in holding that appellants were required to confirm their foreign arbitral award at the seat of the arbitration before they would be allowed to enforce it.

Next, the Second Circuit noted that the liability of the appellees for satisfaction of the arbitration award would be determined under the applicable law in the New York district court. Thus, as there were further legal and factual inquiries on the question of veil-piercing and alter ego liability, the Second Circuit remanded the case back to the district court to consider the issues under the applicable law in the New York district court.

Finally, with respect to issue preclusion, the Second Circuit noted that the doctrine is applicable to issues resolved by an earlier arbitration, but that the doctrine’s application is constrained by equity. The Third Circuit then noted that CBF claimed that it was denied a full and fair opportunity to litigate the fraud claims before the arbitration panel because the appellees deliberately misled the panel as to the extent of their fraud. Thus, the Second Circuit held that the grant of issue preclusion was inappropriate and that CBF should be afforded the opportunity to conduct discovery on its fraud claims, and that the appellees may be given the opportunity to re-raise the issue preclusion issue after discovery at the district court’s discretion.

CBF Indústria De Gusa S/A, et al. v. AMCI Holdings Inc., et al., No. 15-1133 (2nd Cir. Mar. 2, 2017).

This post written by Jeanne Kohler.

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ELEVENTH CIRCUIT LOOKS TO ALABAMA’S DOCTRINE OF “INTERTWINING” TO DETERMINE NON-SIGNATORY CANNOT BE COMPELLED TO ARBITRATE

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Under Alabama law, “arbitration may be compelled under the doctrine of ‘intertwining’ where arbitrable and nonarbitrable claims are so closely related that the party to a controversy subject to arbitration is equitably estopped to deny the arbitrability of the related claim. But if the language of the arbitration provision is party specific and the description of the parties does not include the nonsignatory, the inquiry is at an end and the claims against the non-signatory cannot be submitted to arbitration.”

The Eleventh Circuit Court of Appeals held that a non-signatory cannot be compelled to arbitrate because the language of the agreements to arbitrate is party specific, does not include the non-signatory, and expressly states that all other disputes are not subject to arbitration.

The Court did, however, stay the action against the non-signatory, overturning the decision of the District Court for abuse of discretion in refusing to grant the stay, as the claims against the non-signatory and signatories “are based on the exact same factual allegations, the vast majority of which relate to the [signatories] only.”

Variable Annuity Life Insurance Company, et al. v. Brett Laferrera, et al., No. 16-14519 (11th Cir. Feb. 27 2017)

This post written by Nora A. Valenza-Frost.

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