Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

New York Federal Court Finds Vacatur of Arbitration Award Not Warranted

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Michael Miller (“Miller”) filed a petition to vacate an arbitration award against UBS Financial Services Inc. and UBS Credit Corp. (collectively “UBS”) claiming that “the award is unsound because two of the three arbitrators on the panel that issued the award failed to properly disclose relevant information during the arbitrator selection process.” Miller is a former employee of UBS. He received six loans from UBS, which were immediately due upon his termination from the company. Miller agreed to submit any disputes regarding the loans to arbitration. When Miller resigned, UBS filed a statement of claim against Miller in connection with the outstanding loan balance and proceeded with arbitration. The arbitration panel found in favor of UBS.

The court held that vacatur was not warranted under FAA § 10(a)(2) because the arbitrators did not exceed their powers. The court concluded that Miller failed to demonstrate a violation of FINRA Rule 13408, which governs the disclosures required of arbitrators in advance of arbitration and “thus failed to establish on these grounds that the arbitrators acted in excess of their powers in issuing the arbitration award.” Further, with respect to an alleged deficient disclosure on the Oath of Arbitration form regarding an arbitrator’s interest in UBS, the court explained that Miller waived the right to object on this basis. The court explained that the arbitrator’s affirmative answer on the Oath of Arbitration form gave Miller notice of a possible objection and “[w]here a party has knowledge of facts possibly indicating bias or partiality on the part of an arbitrator he cannot remain silent and later object to the award of the arbitrators on that ground.” The court also held that vacatur under FAA § 10(a)(2) on the basis of “evident partiality or corruption in the arbitrators” was not warranted because “the first two allegedly deficient disclosures identified [were] not suggestive of any bias on the part of the arbitrators, and because any objection premised on the third disclosure was waived.”

Miller v. UBS Financial Services, Inc., et. al., No. 18-CV-8415 (JPO)(S.D.N.Y. May 5, 2019)

Court Finds Arbitration Panel Did Not Exceed Powers or Manifestly Disregard the Law in Confirming Award in Dispute Over Leasing of Oil Lands

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The case relates to an arbitration award entered in a dispute between affiliated oil exploration and marketing companies, on the one hand, and owners of land leased to the oil companies, on the other hand. The leases at issue authorized the exploration company to produce and sell any oil and natural gas found there. In exchange, the owners of the land would receive royalties calculated as a percentage of the proceeds attributable to the production from each well. The owners objected to the amount of the royalties paid by the exploration company, which were calculated based on the exploration company’s sales of the oil and gas to its affiliated marketing company, instead of based on the higher amounts for which the marketing company would sell the oil and gas downstream to third parties. The dispute went to an arbitration, which found that the owners failed to provide evidence that the oil sales between the affiliated companies were less than what would occur in an arms-length transaction. The panel found that the exploration company had legitimately transferred title to the oil and gas, and received sufficient consideration from the affiliated marketing company.

The owners petitioned the court to vacate the award, arguing that the arbitrators “exceeded their powers” and “effectively dispensed their own brand of industrial justice,” and that they “manifestly disregarded the law.” The court rejected both arguments, disagreeing that the arbitrators “ignored the central question” in dispute. According to the court, the panel found that (1) title was transferred to the marketing company; (2) the exploration company marketed the oil and gas as required; (3) the exploration company made “legally sufficient accounting entries on their books and records to evidence transfer of title and consideration paid for the oil and gas”; (4) the leases permitted the exploration company to sell to an affiliate; and (5) the owners failed to provide evidence of any defects with the sales transactions. The court found, without expressing any opinion about whether the panel was correct, that the panel “stayed well within its powers to adjudicate the dispute and executed those powers appropriately.” The court further found that the panel did not manifestly disregard the law. The court explained that the panel “was asked to interpret contracts that were arguably inconsistent both internally and with one another, and it made an informed, careful judgment about how to do so.” The court therefore granted summary judgment in favor of the oil companies and confirmed the award in its entirety.

Hale v. Chesapeake Expl., LLC, No. 4:18-cv-02217 (N.D. Ohio Apr. 25, 2019).

Eleventh Circuit Finds Removal Jurisdiction Is Included Within Federal Subject-Matter Jurisdiction Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards

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In 2001, Del Monte International GmbH and Inversiones y Procesadora Tropical INPROTSA, S.A. entered into an agreement for the production, packaging, and sale of MD-2 pineapples, a variety of pineapple that Del Monte had developed and which subsequently became the most popular pineapple in the world. The contract included an agreement to arbitrate as well as an agreement that, upon termination of the contract, INPROTSA would either destroy or return its stock of pineapples to Del Monte. However, when the agreement expired in 2013, INPROTSA sold the MD-2 pineapples to third parties rather than destroy or return them to Del Monte.

Del Monte initiated arbitration and was ultimately awarded approximately $26 million and an injunction against INPROTSA’s continued sale of the MD-2 pineapple. INPROTSA filed a petition to vacate the award in Florida state court. Del Monte removed the case to federal court and filed a combined motion to dismiss the petition to vacate and cross-petition to confirm the award. After some “procedural detours,” the district court granted Del Monte’s cross-petition to confirm the award.

INPROTSA appealed, arguing that the district court lacked subject-matter jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, among other issues. INPROTSA argued that there are only two causes of action that may be brought under 9 U.S.C. § 203, the jurisdictional provision of the statute implementing the Convention: (1) an action to compel arbitration; and (2) an action to confirm an arbitral award. According to INPROTSA, because a petition to vacate an arbitral award is not one of the recognized causes of action, the federal court did not have subject-matter jurisdiction over the case.

INPROTSA conceded that the district court had removal jurisdiction under 9 U.S.C. § 205, but argued that the scope of the court’s removal jurisdiction was not coterminous with that of its subject-matter jurisdiction. Effectively, INPROTSA argued that federal courts should be required to remand any case removed to federal court under § 205 that did not also have a federal jurisdictional basis under § 203.

The Eleventh Circuit disagreed on all counts. First, the court held that the Convention does not provide an “exhaustive list of actions and proceedings falling under the Convention” such that the court must inquire whether the action is one of the two types recited above. Rather, the relevant inquiry for the court is whether the action or proceeding “falls under the convention.” The court stated that an action or proceeding falls under the Convention for purposes of § 203 when the action “sufficiently relate[s] to an agreement or award subject to the Convention, such that the agreement or award could conceivably affect the outcome of the case.”

Second, although the court agreed with INPROTSA that removal jurisdiction was not necessarily coterminous with subject-matter jurisdiction, the court nevertheless determined that Congress intended to provide a federal forum for resolving issues implicating the Convention. The court reasoned that it would “make little sense for Congress to specifically authorize removal of cases over which the federal courts would lack subject-matter jurisdiction. … It makes far more sense to conclude Congress intended § 203 to be read consistently with § 205 as conferring subject-matter jurisdiction over actions or proceedings sufficiently related to agreements or awards subject to the Convention.”

Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int’l GmbH, 921 F.3d 1291 (11th Cir. 2019).

Court Denies Reinsurers’ Attempts to Avoid Suit

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The U.S. District Court for the District of Columbia recently denied attempts by reinsurers to avoid a suit by moving to have the claims against them dismissed or, in the alternative, seeking to compel arbitration or stay the case pending a related arbitration.

Vantage Commodities Financial Services I, LLC sued various reinsurers. The court dismissed Vantage’s breach of contract claim but allowed Vantage to file an amended complaint in which it alleged breach of implied contract, promissory estoppel, and unjust enrichment claims. The reinsurers moved to dismiss those claims. They argued that express agreements foreclosed the claim that there was a breach of an implied contract. The court disagreed. It noted that Vantage was not a party to any agreement with the reinsurers. Thus, the court also rejected the reinsurers’ claim that Vantage’s claim was untimely under an agreement.

In the alternative, the reinsurers sought to compel arbitration. Because Vantage and the reinsurers were not parties to an agreement with Vantage, however, the court concluded that the parties had not agreed to arbitrate disputes under arbitration clauses in a related agreement.

The court then rejected the reinsurers’ request that Vantage revise its amended complaint, reasoning that the complaint was not unduly vague or ambiguous. Finally, the court denied the reinsurers’ request for a stay pending ongoing arbitration. The court recognized that there were “overlapping factual issues common to both the arbitration and [the] litigation,” but found that overlap was insufficient to justify a stay and that it would not be in anyone’s interest to allow the “case to languish” during a pending arbitration of undetermined length.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, No. 1:17-cv-01451 (TNM) (D.D.C. Apr. 26, 2019).

Northern District of New York Declines to Imply a Follow-the-Fortunes or Follow-the-Settlements Obligation in Reinsurance Certificate

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After a ten-day bench trial involving ten fact witnesses and five expert witnesses, the Northern District of New York found that certain facultative certificates did not implicitly contain follow-the-settlements or follow-the-fortunes provisions. Utica Mutual Insurance Co. was permitted to present evidence at trial as to whether the doctrines were, at the time the parties agreed to the certificates, so “fixed and invariable in the reinsurance industry as to be part of the Certificates.” We previously wrote about the court’s decision to permit such evidence here.

Utica presented three expert witnesses who testified that follow-the-settlements and follow-the-fortunes doctrines were “industry-wide concepts that did not need to be stated in reinsurance certificates to apply” but “acknowledged that not all reinsurers included these provisions” in their certificates — as was the case here. The court determined that Utica “failed to prove that follow the fortunes or follow the settlements were so ‘fixed and invariable’ in the facultative reinsurance industry as to warrant importing them into” the subject certificate.

As a result, Utica had to prove that the loss was specifically caused by a risk covered in the reinsurance contract. The court concluded that Utica did not meet that burden, and Munich Reinsurance America Inc. was not obligated to pay loss expenses incurred in investigating, adjusting, and litigating claims supplemental to the liability limits.

Munich Reinsurance Am., Inc. v. Utica Mut. Ins. Co., No. 6:13-cv-00743 (N.D.N.Y. Mar. 29, 2019)