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New reinsurance-related and arbitration developments from Carlton Fields

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FIRST CIRCUIT AFFIRMS DISTRICT COURT’S CONFIRMATION OF ARBITRATION AWARD UNDER THE “LOOK-THROUGH” TEST

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The background of this matter could be found here. In sum, Plaintiffs Dr. Luis Ortiz-Espinosa and his wife Maritza Soto-Garcia, the conjugal partnership they formed, Espinosa-Soto, and Luis Ortiz-Espinosa, as trustee of Centro Dermatologico San Pablo PSC Retirement Plan (“Plaintiffs”) had two sets of brokerage investment accounts with defendant BBVA Securities of Puerto Rico, Inc. Plaintiffs’ accounts were opened in 2006 with over $2.6 million, and by 2009, the accounts had suffered losses of over $2.049 million. Believing that BBVA and the securities broker employed by BBVA who managed their accounts were responsible for the losses, Plaintiffs commenced arbitration before the Federal Industry Regulatory Authority (“FINRA”) against BBVA and the securities broker, asserting several claims under both federal and Puerto Rico law.

A FINRA arbitration panel conducted seventeen hearing sessions in Puerto Rico, and then issued an award, denying Plaintiffs’ claims. Plaintiffs then filed a complaint in Puerto Rico court, requesting that the court vacate or modify the arbitration award under the Puerto Rico Arbitration Act. Defendants removed the case to Puerto Rico federal court, arguing that the district court had federal question jurisdiction and also had supplemental jurisdiction over the state law claims. Plaintiffs moved to remand the case to Puerto Rico court for lack of jurisdiction. The federal district court denied the motion to remand after applying the look-through approach, a test which the Supreme Court had previously determined applies under the FAA with respect to motions to compel arbitration. Under this approach, a court may “look through” the motion to compel to determine if it is predicated on an action that “arises under federal law.” Thus, the district court “looked through” the motions to confirm and vacate and determined that the underlying statement of claim in the arbitration alleged claims based on federal securities laws. The district court subsequently denied Plaintiffs’ petition to vacate or modify the arbitration award and granted the petition to confirm the award, noting that disturbing the arbitration award was “not warranted” under either under the Federal Arbitration Act (“FAA”) or Puerto Rico law. Plaintiffs appealed to the First Circuit.

The First Circuit first found that the FAA applied to this case.as it involves an arbitration agreement in a transaction involving commerce. It then held that the look-through approach is the correct test in arbitration award enforcement proceedings, noting that federal courts have an important role in enforcing arbitration agreements post awards, and thus, it would not make sense to exclude federal question jurisdiction over those cases. The First Circuit also noted that the look-through approach is the only possible approach that would provide such federal jurisdiction. The First Circuit also determined that federal jurisdiction existed as there was no question that Plaintiffs’ claims in the arbitration involved federal securities laws arising under federal laws. Finally, the First Circuit found that the district court did not err in refusing to vacate the award and in confirming it. Thus, the First Circuit affirmed the Puerto Rico federal district court’s confirmation of the arbitration award.

Ortiz-Espinosa v. BBVA Securities of Puerto Rico, Inc., No. 16-1122 (1st Cir. 2017).

This post written by Jeanne Kohler.

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PETITION TO VACATE ARBITRATION AWARD SERVED BY EMAIL DID NOT CONSTITUTE SERVICE UNDER FED. R. CIV. P. 5

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The Second Circuit has affirmed a decision finding email insufficient for service, absent consent to such method. In the underlying district court, the Petitioner emailed a copy of his petition to one of Respondent, Deutsche Bank’s attorneys asking whether counsel would accept service on Deutsche Bank’s behalf. Counsel agreed to accept service if Petitioner would give Deutsche Bank 90 days to respond. Petitioner did not respond, and instead personally served Deutsche Bank after the three-month period to vacate the award had expired. The Second Circuit affirmed the SDNY’s decision dismissing the petition for failure to serve notice as required by 9 U.S.C. § 12 and Fed. R. Civ. P. 5. Martin v. Deutsche Bank Securities Inc., No. 16-456 (2d Cir. Jan. 19, 2017)

This post written by Nora A. Valenza-Frost.

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HAWAII BILL PROPOSES PARAMETRIC DISASTER INSURANCE PILOT PROGRAM

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On January 23, 2017, Hawaii lawmakers introduced a bill to establish a pilot parametric disaster insurance program aimed at preventing potential liquidity gaps between federal assistance and total economic losses in the event of a serious natural disaster. Parametric or index-based insurance programs peg claims to specific characteristics of natural disasters rather than the usual insurance arrangement basing payouts on actual losses sustained. The bill lists one example of a metric to determine whether coverage under a parametric disaster program would be triggered—if the maximum wind speed of a hurricane as it passes through a specific part of the islands reaches a certain threshold, coverage attaches.

If passed, H.B. 791 would establish a three-year parametric disaster insurance pilot program and empower the state to research and purchase parametric disaster insurance. A parametric disaster insurance special fund would be financed with interest earned on the principal in the currently existing hurricane reserve trust fund, any money paid out under parametric disaster insurance policies, and any appropriations made by the state legislature. The bill further requires a report to the legislature on the pilot program due by December 1, 2019, and calls for the repeal of the program on June 30, 2020. A companion bill, S.B. 799, was introduced in the state senate on January 20, 2017.

This post written by Thaddeus Ewald .

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COURT AFFIRMS RULING DENYING MOTION TO COMPEL ARBITRATION ON THE BASIS THAT CONTRACT WAS INVALIDATED BY FRAUD

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The Ninth Circuit, in an unpublished opinion, has found that a contract, and therefore an arbitration clause within it, was unenforceable due to fraud in the inception, despite the fact that both parties had ample opportunity to review the contract in its entirety. This result was required, the court found, because, assuming the allegations of the complaint to be true, the plaintiff did not know that by signing the contract it was agreeing to be a victim of defendants’ scheme.

In the complaint, plaintiff alleged that it was misled into agreeing to a consulting agreement that the defendants used as part of a wide-ranging scheme of fraud, involving forging financial documents, destroying plaintiff’s relationships with clients and creditors, and falsely representing that an employee of one of the defendants had been hired for a non-existent position in order to get plaintiff to issue paychecks for that position. The dissent argued that such fraudulent conduct in the performance of the agreement did not constitute fraud in the inception because plaintiff did not allege that plaintiff signed the contract based on a misunderstanding of its contents or that the arbitration clause was fraudulently induced. The majority disagreed, however, citing a California Court of Appeals decision for the proposition that it was enough that defendants, as the party drafting the contract, drafted the contract “‘in such a way as to not apprise’ the other party of its intentions.” DKS, Inc. v. Corporate Business Solutions, Inc., 15-16589 (9th Cir. Jan. 17, 2017)

This post written by Jason Brost.

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COURT AFFIRMS DISMISSAL OF CEDENT’S CLAIMS ASSERTING REINSURANCE PREMIUM FRAUD SCHEME, BASED ON EXPIRATION OF LIMITATIONS PERIOD

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The appellant (Guarantee Trust) had forwarded reinsurance premiums to the reinsurer to be held in a custodial account for the payment of claims. Guarantee Trust initially sued Kribbs, the founder of the reinsurer, alleging that he acted in concert with an employee inside Guarantee Trust’s organization to improperly obtain the funds from the account for Kribbs’ own use. During depositions (six years after filing suit), Guarantee Trust discovered the identity of two of its own employees, whom Guarantee Trust named in its re-filed action after having voluntarily dismissed the initial complaint. To address the running of the statute of limitations, Guarantee Trust argued that the limitations period was tolled due to fraudulent concealment. The trial court, however, dismissed Guarantee Trust’s claims, finding that Guarantee Trust provided no reason why it could not have discovered its claims against the two employees sooner through reasonable diligence.

On appeal, the court addressed the tolling issue under both the discovery rule and fraudulent concealment, and affirmed the circuit court’s decision. The court found it was significant that Guarantee Trust knew at the time it filed its original complaint that one of its own employees was involved in the alleged wrongdoing, and that Guarantee Trust had been provided in 2008 with discovery responses disclosing a short list of potential witnesses that included the two employees later addressed at depositions. The court concluded that the trial court correctly determined that Guarantee Trust failed the “reasonable diligence” test. The Court also found no fraudulent concealment during discovery that would toll the statute of limitations. Guarantee Trust Life Ins. Co. v. Kribbs, Case No. 15 L 11262, (Ill. App. Ct. Dec. 29, 2016).

This post written by Gail Jankowski.

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