Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Fifth Circuit Affirms Ruling That Policy’s Conformity Provision Does Not Negate the Agreement to Arbitrate Despite Statute Prohibiting Arbitration Agreements in Insurance Contracts Covering Property in Louisiana

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McDonnel Group LLC obtained a builder’s risk policy for a construction project on a property located in New Orleans, Louisiana. When the insured was denied coverage, it filed suit seeking damages for breach of contract and breach of the duty of good faith and fair dealing. The insurers responded by filing a motion to dismiss for lack of subject-matter jurisdiction and improper venue, invoking the contract’s arbitration provision under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The policy also contained a “conformity to statute” provision stating, “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” The insured “responded that any obligation to arbitrate under the Convention did not apply to the instant dispute because the policy’s arbitration agreement was, as a matter of law, invalid” as it was contrary to title 22, section 868(A)(2) of the Louisiana Revised Statutes, “which prohibits arbitration agreements in insurance contracts covering property located in the state.” The insured argued the conformity provision “amended” the arbitration provision out of the contract in order to “conform” with Louisiana law.

Relying on Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009), which held that the Convention superseded the Louisiana statute, the district court found that, because the “state statute was preempted by federal law … no conflict existed between the policy and state law so as to trigger the conformity provision of the policy.”

Although Safety National determined the Louisiana statute was preempted by the Convention, the Fifth Circuit now had to determine the impact of the conformity provision. The court held that because the statue does not and cannot apply to the policy, “there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.”

McDonnel Grp., LLC v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. May 13, 2019)

Third Circuit Interprets Unique Arbitrability Language in Arbitration Clause

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The Third Circuit determined that a former employee’s claim for retaliation against her employer was subject to arbitration per the arbitration clause in her employment agreement, which stated:

Except for actions for specific performance or injunctive relief, if a dispute or claim should arise that does not get resolved through negotiation of the parties, the parties will attempt in good faith to resolve the dispute or claim by mediation administered by the American Arbitration Association (AAA) under its Employment Mediation Rules, before resorting to arbitration.

The court noted that “[i]t does not appear that any federal court has addressed an arbitration agreement with language similar to this one. But in light of the presumption in favor of arbitrability, we think the phrase ‘if a dispute or claim should arise’ is best understood as functionally equivalent to more standard language that would expressly sweep in any claim relating to Dr. Monfared’s employment.”

The Eastern District of Pennsylvania’s decision confirming the arbitration award was affirmed.

Monfared v. St. Luke’s Univ. Health Network, No. 18-2850 (3d Cir. May 10, 2019)

California Court Denies Defendants’ Motions for Summary Judgment, Finding Evidentiary Support for Odyssey Re’s Fraudulent Transfer Claims

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A California district court issued its latest decision arising from Odyssey Reinsurance Company’s ongoing effort to collect a $3.2 million default judgment against insurance agency Cal-Regent, its successor PBIS, and their owners, Richard and Diane Nagby. We have been tracking the case on our blog, previously writing about it here, here, here, here, and here.

In this latest iteration, Claims Technology Services (CTS) and its CEO, David Dostalik, sought summary judgment on four causes of action against them. CTS and Dostalik allegedly conspired with Mr. Nagby to conceal funds that Cal-Regent and PBIS owed Odyssey by transferring them into accounts held by CTS. Dostalik also allegedly released portions of the funds directly to the Nagbys. Odyssey’s fifth and sixth causes of action were against CTS for unlawful transfers under California’s Uniform Fraudulent Transfer Act (UFTA). The seventh was against Dostalik for intentional fraudulent transfers. The 13th was against CTS as a “subsequent transferee” of unlawfully transferred funds. The court denied summary judgment on the fifth, sixth and seventh causes of action, but granted CTS summary judgment on the 13th.

Regarding the avoidable transfer claims, the court found sufficient evidence that Cal-Regent’s assets were fraudulently transferred, and that CTS and Dostalik acted in furtherance of the transfers. As to CTS, the evidence was deemed sufficient to support an avoidable transfer claim under either an intentional or constructive fraud theory. While Dostalik argued he had no involvement in an intentional fraud, the court found the evidence suggested otherwise and thus precluded summary judgment on the seventh cause of action. The court granted CTS summary judgment on the 13th cause of action, however, since Odyssey conceded that discovery produced no evidence that CTS was a “subsequent transferee” of funds derived from a sale of Cal-Regent and PBIS assets.

Odyssey Reinsurance Co. v. Richard Keith Nagby, et al., No. 16-3038, 2019 U.S. Distr. LEXIS 68950 (S.D. Cal. Apr. 22, 2019).

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).