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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

NINTH CIRCUIT RULES FEDERAL ARBITRATION ACT IS SUBJECT TO EQUITABLE TOLLING, PERMITTING CHALLENGE TO AN ARBITRAL AWARD OUTSIDE THE TIME PERIOD SET FORTH IN THE FAA

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The Ninth Circuit, as a matter of first impression, ruled that the Federal Arbitration Act (“FAA”) is subject to equitable tolling. Plaintiff Move, Inc. (“Move”) moved to vacate an arbitration panel’s adverse decision, claiming it was prejudiced by the chairperson’s fraudulent misrepresentation that he was a licensed attorney (when he was not), and that such criteria was required for the chairperson’s service on the panel. Move did not discover the chairperson’s misrepresentation until four years after the arbitral award, and thus outside the FAA’s three month timeline for an aggrieved party to petition to vacate an arbitration decision. The court analyzed the FAA’s text, purpose, and structure, concluding that they did not preclude the application of equitable tolling with respect to vacatur of the award or bar Move’s application based on timeliness.

The court then determined that the arbitrator’s misrepresentation constituted sufficient grounds to vacate the panel’s decision. Move had made clear throughout the arbitrator selection process how important it was that the chairperson of the arbitration panel be an experienced, licensed attorney. Even though it was impossible to determine whether the imposter’s presence influenced other panel member’s decisions, or the outcome itself, the prejudice came from his inclusion on the panel as chairperson, when his misrepresentation should have disqualified him from the list of eligible arbitrator candidates.

Move, Inc. v. CitiGroup Global Markets, Inc., No. 14-56650 (9th Cir. Nov. 4, 2016).

This post written by Thaddeus Ewald .

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TENTH CIRCUIT AFFIRMS REFUSAL TO COMPEL ARBITRATION WHERE AGREEMENTS CONTAINED CONFLICTING ARBITRATION PROVISIONS

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Mr. Ragab sued two financial companies and a corporate officer for misrepresentation and for violating several consumer credit repair statutes. There were six agreements between the parties, including, for example, a consulting agreement, a purchase agreement, and an operating agreement. Each agreement contained arbitration provisions, but they varied in material ways, including: (1) which rules governed, (2) how the arbitrator would be selected, (3) the notice required to arbitrate, and (4) entitlement to attorney’s fees. The district court refused to compel arbitration, concluding that there was no meeting of the minds on essential terms, and therefore no actual agreement to arbitrate. On appeal, a divided panel of the Tenth Circuit affirmed, distinguishing cases where the contracts provided for a solution to resolve conflicting provisions, or where contracts failed to spell out the requirements for arbitration; where, as here, there are multiple, specific, conflicting arbitration provisions with no agreed way to resolve them, “there was no meeting of the minds with respect to arbitration.” The court also rejected the defendants’ argument that the district court should have granted a summary trial to decide whether the parties agreed to arbitrate. The court held that in this case there were no material factual disputes, leaving only an issue of law for the court to resolve. Ragab v. Howard, Case No. 15-1444 (10th Cir. Nov. 21, 2016).

This post written by Michael Wolgin.

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EIGHTH CIRCUIT UPHOLDS ARBITRAL IMMUNITY IN CHALLENGE TO AAA’S REMOVAL OF ARBITRATOR

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Owens, a terminated CEO, engaged in a AAA arbitration with his former company before a three-member panel. In the course of the proceeding, the company sought to remove an arbitrator for making an incomplete disclosure regarding conflicts of interest. The AAA removed the conflicted arbitrator without holding a hearing or consulting the panel, and the remaining two arbitrators ultimately awarded Owens $3 million. The company then successfully moved for dismissal of the award in the district court. Following dismissal, Owens sued the AAA for breach of contract, unjust enrichment, and tortious interference, but his claims were dismissed by the court based on arbitral immunity. On appeal, the Eighth Circuit affirmed, explaining that the reason courts extend immunity to arbitrators is to protect them and the arbitration process from undue influence and attacks from dissatisfied litigants. The Court concluded that “the removal of arbitrators is similarly protected by arbitral immunity because it is just as much a part of the arbitration process as the appointment of arbitrators.” Owens v. American Arbitration Association, Inc., Case No. 16-1055 (8th Cir. Nov. 18, 2016).

This post written by Gail Jankowski.

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SECOND CIRCUIT UPHOLDS CONFIRMATION OF ARBITRATION AWARD FINDING THE PENALTY PROVISION IN CONTRACT DID NOT VIOLATE PUBLIC POLICY

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Although unable to revisit the arbitration panel’s fact-finding or legal reasoning behind an arbitration award, the Second Circuit Court of Appeals upheld confirmation of the award itself, as it did not violate public policy. The arbitration panel, which acknowledged the policy against contract penalties, nevertheless found the policy inapplicable because it construed the contract clause at issue as a termination provision, rather than as a liquidated damages provision. Petitioners pointed to no laws nor legal precedents indicating that the contract’s termination provisions “setting the terms for ending a joint venture are contrary to well defined and dominant public policy.” Thus, the Court upheld the Southern District’s confirmation of the award.

PDV Sweeny, Inc., et al. v. Conocophillips Co., et al., No. 16-170-cv (2d Cir. Nov. 7, 2016)

This post written by Nora A. Valenza-Frost.

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IRS TREATS CAPTIVES WITH SECTION 831(B) ELECTIONS AS “TRANSACTIONS OF INTEREST”

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On the heels of Congress’ amendments last year to Section 831(b) of the Internal Revenue Code to curb perceived abusive use of so-called “micro” captive insurance companies, the IRS recently issued Notice 2016-66 officially classifying such uses as “transactions of interest” as of November 1, 2016. Such classification means that any taxpayers engaging in a transaction similar to the one described in the Notice on or after November 1, 2006 must disclose such participation. Material advisors may also have disclosure and list maintenance obligations under Sections 6111 and 6112. Failure to disclose such a transaction exposes the taxpayer to penalties under Section 6707A of the Code. Other penalties may also apply upon audit.

Section 2.01 of the Notice describes specific attributes of the transaction. They include a person who owns a business entity acting as the Insured. A Captive owned by such person, the Insured, or related persons enters into purported insurance or reinsurance contracts with the Insured. The Captive makes an election under Section 831(b), which allows the Captive to exclude from its income net written premium. The person, the Insured, or related persons own at least 20 percent of the Captive’s stock. Finally, one or both of the following is true:

  • Total liabilities assumed by the Captive for insured losses and administrative expenses during the “Computation Period” is less than 70 percent of:
    • Premiums earned by the Captive during the “Computation Period,” less
    • Policyholder dividends paid by the Captive during the Computation Period; or
  • The Captive has made a loan or otherwise conveyed assets to the person, the Insured, or a person related to such person or Insured in a manner claimed to be tax free.

The Notice defines the “Computation Period” as the most recent five taxable years of the Captive or, if the Captive has been in existence for less than five taxable years, the entire period of the Captive’s existence. This means that, for most taxpayers, immediate dissolution of a Captive will not avoid the disclosure obligations. Anyone with a captive arguably within the ambit of Notice 2016-66 should contact a tax professional for further advice.

This post written by Richard Euliss.

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