Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Eleventh Circuit Reverses NLRB Order, Enforcing Individualized Arbitration Clause in Employee Agreement

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A pizza delivery driver employed by Domino’s Pizza franchisee Cowabunga Inc. filed a collective action under the Fair Labor Standards Act with the National Labor Relations Board. Cowabunga moved to dismiss, or in the alternative, to stay and compel arbitration based on the employment agreement’s individualized arbitration clause. The day before he dismissed his FLSA lawsuit, the employee filed an unfair labor charge with the NLRB, alleging that Cowabunga violated the National Labor Relations Act by (1) prohibiting Cowabunga employees from filing collective action lawsuits and instead forcing the employees to individually arbitrate such claims, and (2) causing Cowabunga employees to reasonably believe that they were prohibited from filing unfair labor charges with the NLRB. The NLRB granted summary judgment to the employee on both claims.

Cowabunga petitioned the Eleventh Circuit for review of the NLRB panel’s order. With regard to the employee’s first claim, the Eleventh Circuit relied on the U.S. Supreme Court’s recent decision in Epic Systems Corp. v. Lewis which held that individualized arbitration agreements do not violate the NLRA and that those agreements should be enforced as written pursuant to the FAA. With regard to the second claim, the court explained that after the NLRB panel issued its order, it refashioned its test for determining whether an employer’s allegedly facially neutral policy, such as the arbitration provision here, would reasonably lead an employee to believe that he could not file an unfair labor charge with the NLRB. The Court therefore granted Cowabunga’s petition for review and reversed the NLRB panel’s order as to the employee’s first claim and vacated and remanded the order as to the second claim. Cowabunga, Inc. v. Nat’l Labor Relations Bd., Case No. 16-10932 (11th Cir. June 26, 2018).

This post written by Gail Jankowski.

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Court Orders Compliance with Arbitral Subpoenas, Deferring to the Panel’s Assessment of the Value of the Requested Testimony

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In a case that had been filed and then stayed in a New York federal district court in connection with an ongoing arbitration involving alleged violations of federal securities laws, the plaintiffs filed a motion to enforce two subpoenas issued by the arbitrators. The arbitral subpoenas were issued to two non-party witnesses who were refusing to appear to testify at the arbitration hearings. The defendants and the non-parties did not challenge the subpoenas as being invalid, improperly issued by the arbitrators, or improperly served. Instead, they argued that the court should apply its discretion and determine that the requested testimony would be improper rebuttal, duplicative, and overly burdensome. The court rejected defendants’ and the non-parties’ arguments and found that if the arbitration panel, which had sat through more than thirty days of hearings over two years, believed that the non-parties’ testimony was appropriate, the court could find no basis to quash either subpoena. Notwithstanding that the court had the authority to assess the value of the requested testimony, it was not obligated to make that assessment and was not sufficiently informed to do that here. The court found that the arbitrators were best-suited to do so, and ordered compliance with the subpoenas. Shasha v. Malkin, Case No. 1:14-cv-09989 (USDC S.D.N.Y. July 5, 2018).

This post written by Michael Wolgin.

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Two Federal Appellate Courts Decline to Find “Evident Partiality” Due to Trivial Omissions in Arbitrator’s Disclosures

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In two separate appellate decisions, two circuit courts of appeal declined to overturn orders enforcing arbitration awards where the appellants had challenged the respective awards based on “evident partiality” under the FAA. In Republic of Argentina v. AWG Group Ltd., Argentina contended that there was evident partiality by one of the arbitrators who did not disclose that she at one time (more than a year before the arbitration panel found Argentina liable) sat on the board of directors for a company with investments in two of the parties. Argentina appealed, but the appellate court affirmed, reasoning that the company on whose board the arbitrator sat had only trivial interest in the parties, and therefore, the arbitrator’s interests in the parties were insignificant.

Similarly, in Ploetz v. Morgan Stanley Smith Barney LLC, an arbitrator had submitted a disclosure report stating that he was currently serving as an arbitrator in two other cases that had Morgan Stanley as a party and that he had served as an arbitrator in eight closed cases in which an affiliate of Morgan Stanley had been a party. However, the arbitrator failed to disclose that he had once served as a mediator in another case, which was unsuccessful, in which an arbitration panel (on which he did not sit), ultimately found that Morgan Stanley owed the claimant $75,000 in damages. Despite this omission, the appellate court affirmed the order denying vacatur of the award. The appellate court reasoned that because the arbitrator timely disclosed the ten other cases he arbitrated where a member of the Morgan Stanley family was a party, his undisclosed mediation of the omitted case represented at most a trivial and inconsequential addition to that relationship. Republic of Argentina v. AWG Group Ltd., Case No. 1:15-cv-01057 (D.C. Cir. July 3, 2018); Ploetz v. Morgan Stanley Smith Barney LLC, Case No. 17-2405 (8th Cir. July 2, 2018).

This post written by Gail Jankowski.

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U.S. Tax Court Finds Captive Insurer Is Not an “Insurance Company” Under the Internal Revenue Code

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In this case, Reserve Mechanical Corp. (“Reserve”), a captive insurer incorporated under the laws of Anguilla, sued the Commissioner of Internal Revenue in the U.S. Tax Court regarding the Commissioner’s findings of $477,261 in deficiencies in Reserve’s federal income tax for the tax years 2008 through 2010. During those years, 100% of Reserve’s stock was owned by Peak Casualty Holdings LLC (“Peak”), a Nevada limited liability company.

The U.S. Tax Court held that Reserve failed to qualify as an insurance company for federal income tax purposes under the Internal Revenue Code section 501 (a), (c)(15), which provides for the tax-exempt treatment of income received by insurance companies that meet certain criteria. Because Reserve did not qualify as an insurer, the Court also determined that Reserve is not eligible to make an election under section 953 to be subject to U.S. federal income tax as a U.S. company.

In determining whether Reserve could be considered an “insurance company,” the U.S. Tax Court looked at risk distribution, focusing on the number of insureds and the number of risk exposures to determine whether Reserve distributed risks. For 2008, Reserve issued 13 direct written insurance policies with Peak and two other named insureds. For 2009, Reserve issued 11 policies and, for 2010, Reserve issued 11 policies involving the same parties. The policies covered between $8 and $13 million in potential losses. Each policy listed PoolRe Insurance Corp. as the stop loss insurer. For each of the years at issue, Reserve and PoolRe executed a joint underwriting stop loss endorsement, which by its terms applied to all of the policies Reserve issued. PoolRe executed reinsurance agreements designed to redistribute them to entities of Capstone Partners, a Texas limited partnership. For each of the tax years, the Court noted that Reserve and the Capstone entities each executed a quota share reinsurance policy with PoolRe, and Reserve also executed a credit insurance coinsurance contract with PoolRe, under which Reserve agreed to assume a small portion of risk that PoolRe had agreed to assume from an unrelated company, CreditRe Reassurance Corp. Ltd.

As for the direct policies, the Court found that ‘‘the number of insureds and the total number of independent exposures were too few to distribute the risk that Reserve assumed.’’ The Court held that it was not a bona fide insurance company and that there was no legitimate business purpose for the policies that Reserve issued for the insureds, noting: ‘‘[t]he direct written policies increased Peak’s insurance coverage and expenses for the tax years in issue, when it also continued to hold policies with third-party insurers. In the light of all the facts and circumstances the premiums charged for the policies were unreasonable.’’ Therefore, the Court ruled that Reserve’s transactions were not insurance transactions. The Court also found that Reserve’s quota share policies with PoolRe were not bona fide insurance agreements because the quota share arrangement involved ‘‘a circular flow of funds’’ and that the ‘‘premiums were not negotiated at arm’s length.’’ The Court noted that it found no evidence that the premiums the insureds paid PoolRe and the premiums that PoolRe paid Reserve ‘‘were actuarially determined.’’ Thus, the Court held that PoolRe’s activities as they relate to the policies were not those of a bona fide insurance company.

Therefore, as a result of its finding that Reserve did not qualify as an “insurance company”, the Court held that for the tax years at issue, Reserve is not eligible to make an election under section 953(d). Thus, the Court concluded that Reserve was subject to the 30 percent withholding tax on the premium it had received under section 881 (a) of the Internal Revenue Code and that Reserve did not provide proof to the court that these amounts should not be considered fixed, determinable, annual, periodical income. The Court rejected Reserve’s contention that the amounts it received during the tax years were capital contributions or nontaxable deposits. It also found that Reserve is not entitled to deductions, explaining that Reserve failed to establish that ‘‘it was engaged in or received income treated as income effectively connected with a trade or business within the United States.’’

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, No. 14545-16 (U.S. Tax Ct. June 18, 2018).

This post written by Jeanne Kohler.

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California Federal Court Finds Defendant Did Not Wave Right to Arbitrate Despite Delay in Initiating Arbitration

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Plaintiff argued that Defendant’s basis for removal was not applicable because Defendants waived their right to arbitration or because the case is not related to the agreement containing an arbitration provision. Finding the subject matter of the action related to the agreement, the Court looked at whether Defendants waived their right to arbitrate. Looking at the various factors articulated by the Ninth Circuit, the Court found Defendants had not waived their arbitration rights, and was “mindful of the presumption that waiver of the right to arbitrate is disfavored.” The Court’s key inquiry was “whether Plaintiff was prejudiced by Defendants’ action” in delaying bringing arbitration because of ongoing settlement negotiations. “[C]ourts have declined to find waiver in analogous cases where arbitration was not sought immediately, even after years of delay.”

Assad v. Josefsson, 18-cv-02470 (USDC C.D. Cal. June 19, 2018)

This post written by Nora A. Valenza-Frost.

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