Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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New York Federal Court Curbs 30(b)(6) Topics and Quashes Non-Party Seeking the Same Testimony

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Defendants wanted to examine GEICO’s Rule 30(b)(6) witness about GEICO’s special investigation unit practices, protocols and guidelines, as well as its resources and procedures devoted to claim verification and fraud detection, as GEICO’s complaint alleged the defendants engaged in insurance fraud. The Court allowed few topics to proceed.

Rule 30(b)(6) depositions are intended to discover the facts and it is improper to use them in order to “ascertain how a party intends to marshal the facts and support its legal theories.” The topics that required GEICO to marshal the evidence GEICO believes constitutes or supports any potential defense to the Complaint were not allowed, nor were topics unrelated to the defendants’ claims or issues in the case.

GEICO also moved to quash two non-party subpoenas it believed was a “back-door attempt by defendants to improperly seek information that was previously requested in counsel’s Fed.R.Civ.P. 30(b)(6) Notice.” GEICO stated the non-parties had no involvement in investigating the insurance claims at issue and the Court agreed, finding the subpoenas to be harassing and unwarranted, granting the motion to quash.

Gov’t Employees Ins. Co. v. Lenex Services, Inc., et al., 16-cv-6030 (USDC EDNY Mar. 16, 2018)

This post written by Nora A. Valenza-Frost.

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Fourth Circuit Finds Employer Cannot Compel Arbitration of Former Employee’s Discrimination Claims

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The U.S. Court of Appeals for the Fourth Circuit recently ruled that two employment-related arbitration clauses did not “clearly and unmistakably” govern a former employee’s discrimination claims, and that the arbitrability of those claims is rightfully decided by the court, rather than an arbitrator.

Plaintiff signed two arbitration agreements with Rent-A-Center (RAC), his former employer, one when he was initially hired in 2002, and a second when he applied for a new position in 2012. Plaintiff was ultimately hired for a different position in 2013, but did not sign a new arbitration agreement with RAC at that time. Plaintiff later filed this action against RAC for discrimination arising out of his 2013 employment. RAC moved for summary judgment and to compel arbitration, arguing Plaintiff’s claims were subject to the 2002 and 2012 arbitration agreements. The district court denied the motion, however, and the Fourth Circuit affirmed.

Citing seminal arbitrability decisions by the U.S. Supreme Court, including one involving RAC, the Fourth Circuit found the parties did not “clearly and unmistakably” intend to arbitrate claims relating to Plaintiff’s 2013 employment. To the contrary, the court found a reasonable juror could conclude from the parties’ actions that they agreed to modify the arbitration agreements to exclude any disputes relating to Plaintiff’s 2013 employment. Given this uncertainty, the court held that the district court, not an arbitrator, had the authority to decide questions of arbitrability (i.e., whether Plaintiff’s claims were subject to arbitration pursuant to the 2002 and 2012 arbitration agreements). For the same reason, the court also affirmed the district court’s denial of summary judgment, finding a genuine issue material fact as to the parties’ intent to arbitrate these particular claims.

Kabba v. Rent-A-Center, Inc., No. 17-1595 (4th Cir. April 13, 2018)

This post written by Alex Silverman.

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New York Federal Court Largely Denies Motions for Summary Judgment on Issues in Breach of Facultative Reinsurance Certificate Dispute But Grants Dismissal of Quasi-Contract Claims

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Defendant, Munich Re, moved for summary judgment relating to defense costs and allocation and Plaintiff, Utica, moved for summary judgment as to Munich Re’s claim for reimbursement. The Court denied the motions with the exception of Utica’s motion for summary judgment with respect to Munich Re’s quasi contract claims.

Munich Re argued Utica’s breach of contract claim should be dismissed because Utica allegedly never notified Munich Re it had added a defense endorsement to an umbrella policy issued to Goulds Pumps Inc. Utica asserted that the follow-the-fortunes doctrine prohibited Munich Re’s argument, and that even if it didn’t, notice would not have been required because issuance of the defense endorsement was an immaterial change that did not prejudice Munich Re. Finding no follow-the-fortunes clause in the reinsurance certificate, the Court looked at the parties’ contract modification argument, finding there to be a question of fact as to whether Munich Re reinsured the defense endorsement.

Munich Re moved for summary judgment regarding defense costs, arguing it had no duty to indemnify Utica for defense costs Utica paid in addition to the umbrella’s limits. Utica opposed the motion and moved for summary judgment on the allocation of defense expenses, arguing that Munich Re had “no valid defense to payment as a matter of law.” The Court found that questions of material fact precluded summary judgment, ruling that the insurance certificates language concerning the payment of expenses and their connection to the umbrella policies was “sufficient to render the Certificate ambiguous.”

Utica argued that, even assuming that reinsurance is unavailable unless the umbrellas themselves provide for defense costs in addition to the limits, Utica was still entitled to summary judgment on the defense costs because the umbrellas provide such coverage and follow-the-fortunes would require Munich Re to pay its share. Munich Re opposed, stating the certificates did not contain a follow-the-fortunes provision and even if they did, “Utica would not be entitled to defense under follow the fortunes because its payment of defense costs in addition to the limits was clearly beyond the scope of the Umbrellas and not in good faith.” After much discussion on the law on follow the fortunes/follow the settlements, the Court declined to imply such a clause into the reinsurance certificates at issue and denied the requests for summary judgment.

Utica also moved for summary judgment dismissing Munich Re’s quasi-contract claims. Munich Re argued there was a basis for finding that the reinsurance certificate did not encompass the events at issue because they did not have any provision providing for reimbursement. The Court disagreed, finding that the claims at issue, including Munich Re’s obligation to pay defense expenses, are governed by the terms of the reinsurance certificate, dismissing Munich Re’ quasi-contract claims.

Additional arguments on various issues raised in the summary judgment motions can be read in the Court’s order.

Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc., 6:13-cv-00743 (NDNY Mar. 20, 2018)

This post written by Nora A. Valenza-Frost.

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