Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Tax Counsel Ordered To Produce Documents Related To Odyssey Reinsurance’s Continuing Quest To Collect $3.2 Million Default Judgment Against Richard And Diane Nagby

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Odyssey Reinsurance Company (“Odyssey”) has obtained an order compelling John Scannell to produce subpoenaed documents related to Odyssey’s efforts to collect a $3.2 million judgment rendered against Richard and Diane Nagby. The judgment stems from a reinsurance contract between Odyssey and Cal-Regent Insurance Services. We previously wrote about this dispute here.

Scannell objected that the documents were protected by California’s taxpayer privilege. California courts have determined the state’s taxation statutes provide the privilege “to encourage the voluntary filing of tax returns and truthful reporting of income,” thereby facilitating tax collection. The privilege may be overcome where it is intentionally waived, the gravamen of the lawsuit is inconsistent with the privilege, or by a public policy “greater than that of the confidentiality of tax returns.”

The court found the privilege was overcome in this matter, which it described as an effort by Odyssey “to recover that money from sources that it contends have actively endeavored to thwart collection efforts.” As such, the Nagby’s privacy concerns “shrink in the shadow of the public policy subversion” that would result if their effort to hide behind the privilege were successful.

In addition, the court determined that Scannell had waived any objection to the subpoena under Federal Rule of Civil Procedure 45 by failing to raise it within 14 days of service of the subpoena. The waiver may be overcome by demonstrating that the failure to assert the objection was due to unusual circumstances and a good cause, but Scannell could not meet either requirement. Odyssey Reinsurance Co. v. Nagby, Case No. 16-CV-3038-BTM (USDC S.D. Cal. March 29, 2018).

This post written by Benjamin E. Stearns.

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Kansas Enacts Captive Insurance Act

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On April 12, 2018, Kansas Governor Jeff Colyer signed into law SB 410– a bill establishing the Captive Insurance Act, which creates two new types of captives – branch and special purpose – and specifies the regulatory structure for each. The bill also raises the minimum capital and surplus requirements a pure captive insurance company must possess and maintain from $100,000 to $250,000.

The bill also creates the Captive Insurance Regulatory and Supervision Fund within the State Treasury and amends current insurance laws relating to companies subject to premium taxes by specifying the tax rate for direct premiums and assumed reinsurance premiums, as well as the maximum tax for each year, and requiring the tax to be calculated annually unless prorated for multi-year policies or contracts.

The bill also permits the insurance commissioner to adopt rules and regulations establishing standards for pure captives. KS SB 410 (April 12, 2018) (regulation and legislative analysis).

This post written by Gail Jankowski.

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Decade-Long Battle Between Policyholder, Reinsurer, And Retrocessionaire To Continue As Reinsurer Files Notice Of Appeal

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A Brazilian mining and steelmaking company (Companhia Siderurgica Nacional, S.A. (“CSN”)), a Brazilian insurance company (IRB Brazil Resseguros, S.A. (“IRB”)), and an American insurance company (National Indemnity Company (“NICO”)) have been locked in battle for a decade over liability stemming from a $167 million loss suffered by CSN. We have previously written about this litigation here.

On January 23rd, the Southern District of New York ordered IRB to pay NICO $5 million pursuant to an arbitration award. On February 22, 2018 IRB appealed this order to the Second Circuit. On March 26th a $5.55 million supersedeas bond was filed with the court on behalf of IRB to stay execution of the order pending the outcome of the appeal. National Indemnity Co. v. IRB Brazil Resseguros, S.A., No. 15-CV-3975 (USDC S.D.N.Y. Feb. 22, 2018 & March 26, 2018).

This post written by Benjamin E. Stearns.
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Fifth Circuit Affirms Federal Court’s Injunction Of State Court Proceeding That Attempted To Stay Arbitration

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The case originated from the alleged violation of a noncompete and nonsolicitation agreement between the Shaw Group, later partially acquired by Aptim Corporation, and Dorsey McCall, its former employee. Shaw originally filed the case in state court, but after Aptim’s acquisition, Shaw moved to dismiss its state action while Aptim pursued a federal court action to enforce the arbitration clause in McCall’s employment contract Aptim initiated arbitration, but the state court ordered the arbitration stayed, finding that Shaw and Aptim waived arbitration by filing suit in state court. The district court for the Eastern District of Louisiana, however, declined to abstain from proceeding with its case, and then compelled arbitration and entered an order staying the state court proceeding. McCall appealed.

On appeal, the Fifth Circuit explained that “[w]hether to abstain is not a question answered by the recitation of ‘a mechanical checklist’ but instead rests ‘on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction.’” The Fifth Circuit weighed the factors and affirmed the district court’s decision against abstention based in part on the strong federal policy favoring arbitration. Notably, the Fifth Circuit was not persuaded by the fact that the state court’s order staying arbitration preceded the federal court’s ruling compelling arbitration, as the former was not a final judgment. The Fifth Circuit also agreed with the district court that Aptim had not waived arbitration since Aptim demanded arbitration only one month after the state court action had begun, and McCall could not demonstrate the he was prejudiced. Aptim Corp. v. McCall, Case No. 17-30772 (USDC E.D. La. Apr. 17, 2018).

This post written by Gail Jankowski.

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New York State Court Denies Motion To Enjoin Arbitration By Non-Party To Arbitration

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In this case, Royal Wine Corporation (“Royal”) moved for a preliminary injunction in a New York state court action to enjoin an arbitration filed by Cognac Ferrand SAS (“Cognac”), against Mystique Brands, LLC (“Mystique”) until the court has resolved the issues raised in Royal’s complaint filed against Cognac and Mystique, which seeks a declaratory judgment that Royal is not the alter ego of Mystique, and a permanent injunction barring Cognac from maintaining an arbitration against Mystique.

The background of the dispute is as follows. In 2008, Cognac and Mystique entered into a five-year contract (the “Agreement”), which granted Mystique the exclusive right to import certain of Cognac’s products to the North American market. Prior to its expiration, Cognac terminated the Agreement due to Mystique’s insolvency. Royal demanded that Cognac pay a $238,000 termination fee. Mystique then initiated an arbitration to obtain the termination fee, and Cognac filed counterclaims for fraud and breach of contract in that matter (the “First Arbitration”). The arbitrator dismissed the claims of Mystique and granted Cognac’s counterclaims, leaving only the issue of damages to be determined. Prior to a resolution as to Cognac’s damages, Mystique filed for bankruptcy, and the First Arbitration was stayed. According to the Bankruptcy Trustee’s Complaint, Royal funded Mystique’s unsuccessful First Arbitration and filed Mystique’s bankruptcy proceeding. Cognac then moved the Bankruptcy Court to lift the stay to permit Cognac to obtain a judgment for damages against Mystique and to proceed against Mystique’s principals on an alter ego theory of liability, which was denied. After the conclusion of Mystique’s bankruptcy action in 2017, Cognac filed a new arbitration against Mystique (the “Second Arbitration”), in which Cognac raised claims nearly identical to its counterclaims in the First Arbitration and sought to recover over $5 million in damages. Royal then filed the instant action in New York state court.

With respect to its motion for a preliminary injunction, Royal argued that Mystique is a defunct entity, that “serial arbitrations” are prohibited, and that the Second Arbitration is untimely. The New York court denied the motion, finding that Royal has no standing to stay the arbitration and is not entitled to assert Mystique’s defenses to the arbitration because Royal is not a signatory to the arbitration agreement between Cognac and Mystique. It further found that Royal failed to satisfy the elements necessary to obtain injunctive relief. In order to obtain injunctive relief, Royal was required to establish (1) a likelihood of success on the merits of its claim, (2) the danger of irreparable harm in the absence of a preliminary injunction, and (3) the balance of the equities favors it. The New York court found that Royal failed to establish a likelihood of success on the merits because it is not entitled to advance arguments on Mystique’s behalf while denying that it is Mystique’s alter ego. In this regard, the court noted that although “serial arbitrations” may be prohibited, such an argument belongs to Mystique, which had yet to be served with notice of the Second Arbitration. Royal also claimed that it will suffer irreparable harm if it is unable to assert Mystique’s defenses because Mystique is a defunct entity and Royal, the alleged alter ego, faces a potential default judgment for over $5 million. By contrast, Royal argued that Cognac would suffer no harm if the arbitration was delayed while the court determined the issue of Royal’s alter ego status.

The court rejected Royal’s argument, finding that if it denied the motion for preliminary injunction and Royal is later successful in its lawsuit, Royal will establish that it is not Mystique’s alter ego and will moot the issue of whether Royal may raise Mystique’s defenses. Accordingly, the court declined to find that extraordinary irreparable harm compensates for Royal’s deficiencies as to the applicable factors for obtaining a preliminary injunction. Thus, the court denied Royal’s motion to stay the Second Arbitration.

Royal Wine Corp. v. Cognac Ferrand SAS, No. 650249/2018 (N.Y. Sup. Ct. Feb. 26, 2018).

This post written by Jeanne Kohler.
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