Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

LOUISIANA LOSES BID TO VACATE DENIAL OF RECONSIDERATION OF ARBITRAL DECISION IN FEMA ASSISTANCE DISPUTE

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FEMA denied a request by the Louisiana Department of Natural Resources (“LDNR”) for assistance restoring barrier islands following Hurricanes Rita and Katrina. LDNR appealed the decision via arbitration, but the arbitral panel upheld FEMA’s denial and dismissed the arbitration entirely. LDNR moved for reconsideration on the grounds the panel did not provide LDNR an opportunity for oral presentation and did not have all the available evidence at the time it made its decision. The panel denied reconsideration because LDNR failed to indicate any new evidence it intended to produce or prove that any such evidence would be material and change the arbitral outcome.

In a lawsuit, LDNR sought vacatur of the panel’s denial of reconsideration—not the underlying arbitral award. The district court refused to vacate the decision and LDNR appealed. The Fifth Circuit declined to disturb the district court’s decision. Because LDNR did not challenge the arbitral panel’s merits decision, the court narrowly reviewed the denial of reconsideration for whether the panel deprived LDNR of a fair hearing. The court concluded that LDNR failed to show the arbitral panel refused to hear any of its evidence, failed to claim any of that evidence was even material, and failed to demonstrate any prejudice as a result.

La. Dep’t of Natural Res. v. Fed. Emergency Mgmt. Agency, No. 17-30140 (5th Cir. Jan. 29, 2018).

This post written by Thaddeus Ewald .

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SECOND CIRCUIT REBUFFS ATTEMPT TO ADDRESS IN FEDERAL COURT ACTION RELIEF PREVIOUSLY DENIED IN STATE COURT SUIT

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The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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GENTLEMEN’S CLUB CANNOT COMPEL ARBITRATION WHERE IT ACTIVELY LITIGATED MERITS OF DISPUTE

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The Fourth Circuit upheld a district court’s decision refusing to compel arbitration in a labor dispute between a gentlemen’s club (“Crazy Horse”) and a putative class of entertainers because of Crazy Horse’s extensive merits-based litigation conduct. Plaintiff Degidio, an entertainer at Crazy Horse, sued the club under the FLSA and South Carolina labor laws for allegedly misclassifying entertainers as independent contractors rather than employees.

Crazy Horse answered the complaint, participated in discovery, filed several merits-based motions for summary judgment, opposed Degidio’s motions for certification of class and collective actions, and repeatedly moved to certify state law questions to the South Carolina Supreme Court. In the midst of this conduct and without informing the court, Crazy Horse began entering into arbitration agreements with its new entertainers. Three years after the litigation had commenced, Crazy Horse moved to compel arbitration against a handful of plaintiffs who had recently joined the suit. The district court declined to enforce the arbitral agreements.

On appeal, the Fourth Circuit affirmed. Under the Federal Arbitration Act (“FAA”), a party waives its right to compel arbitration when it has “so substantially utilized the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” The court emphasized that Crazy Horse engaged in substantive litigation maneuvers for over three years, including extensive and substantive motions practice that indicated it was hoping for a favorable ruling on the merits. More, those same issues Crazy Horse pursued in court would need to be reargued before an arbitrator if the court were to compel arbitration. Thus, the court concluded the “only possible purpose” of the arbitration agreements was to grant Crazy Horse another “bite at the apple” if it lost on the merits in court.

Crazy Horse argued it could not have moved for arbitration earlier because the entertainers with whom it had entered arbitration agreements had only recently joined the case. The court rejected this argument because Crazy Horse failed to notify the court of the agreements as they occurred, thereby avoiding court supervision, and because compelling arbitration here would give perverse incentives to parties to delay the motion to compel arbitration as long as possible. The court also denounced Crazy Horse’s conduct in entering the arbitration agreements because they gave false impressions and the secretive manner in which Crazy Horse implied it sought to avoid the court’s supervisory role.

Degidio v. Crazy Horse Saloon & Rest. Inc., No. 17-1145 (4th Cir. Jan. 18, 2018).

This post written by Thaddeus Ewald .

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THIRD CIRCUIT UPHOLDS ARBITRATION AGREEMENT IN RETAIL INSTALLMENT AGREEMENT BETWEEN USED CAR BUYER AND DEALER

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This dispute stemmed from a complaint filed by Edmondson, alleging claims under the Federal Odometer Act and the Magnuson-Moss Warranty Act, as well as state law claims for fraud, in relation to her purchase of a used car from Lilliston Ford, Inc. That purchase was made pursuant to a Retail Installment Agreement (the “Agreement”), whereby Edmondson agreed to trade a 2004 Lincoln LS for an $800 credit towards the purchase of a used Ford Focus. Despite Edmondson experiencing problems with the Ford Focus shortly after her purchase, Lilliston refused her attempt to return the car and demanded title to the Lincoln or reimbursement for the $800 credit that Edmonson received for the purchase. The parties progressed to arbitration pursuant to the Agreement, where a AAA arbitrator issued an award dismissing all of Edmondson’s claims and ordering her to vest clear title to the Lincoln to Lilliston within 14 days, or to refund the $800 and remove the Lincoln from Lilliston’s property. The District Court for the District of New Jersey confirmed the award, and this appeal ensued.

On appeal, the Third Circuit affirmed the District Court’s confirmation of the award and attorneys’ fees and costs to Lilliston. Reviewing the legal conclusions de novo and factual findings for clear error, the court found unpersuasive Edmonson’s argument that the arbitration clause was invalid because of Lilliston’s failure to register the arbitration provision with the American Arbitration Association (“AAA”) and because Lilliston had previously stated that it had “severed all ties” with the AAA. In rejecting this argument, the court found irrelevant Lilliston’s ties with the AAA, since the AAA administers arbitrations even where there is no AAA clause between the parties. What is more, the AAA did not require businesses to register arbitration clauses with the AAA until after Edmonson filed her initial complaint. As such, the Third Circuit affirmed. Edmonson v. Lilliston Ford, Inc., Case No. 17-1991 (3d Cir. Jan. 11, 2018).

This post written by Gail Jankowski.

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WYOMING ENACTS LEGISLATION AND ADOPTS NEW REGULATIONS GOVERNING CREDIT FOR REINSURANCE AND TERM AND UNIVERSAL LIFE INSURANCE RESERVE FINANCING

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New regulations relating to credit for reinsurance and term and universal life insurance reserve financing took effect in Wyoming on November 30, 2017. The regulations implement amendments to Wyoming statutes that took effect last July, which were summarized by the Wyoming Legislative Service Office.

The statutory amendments revised requirements for insurers assuming liabilities of Wyoming domestic insurers in order for those domestic insurers to count the reinsurance as an asset. They also authorized the Insurance Commissioner to reduce an assuming insurer’s reserve requirements subject to certain conditions and granted her discretion to allow domestic insurers to take credit for reinsurance without posting 100% collateral. The Wyoming Department of Insurance revised Chapter 50 of the Department’s regulations to account not only for these statutory changes, but also to make the remainder of Chapter 50 consistent with the current NAIC model regulation.

In addition, the Department promulgated an entirely new chapter, Chapter 69, relating to term and universal life insurance reserve financing, so as to fully implement the statutory changes rendered last summer. The new Chapter 69 is also based on the associated NAIC model regulation. These changes ensure that the Wyoming Department of Insurance maintains its financial accreditation with the NAIC. Wyoming credit for reinsurance reg effective 1.5.1

This post written by Benjamin E. Stearns.
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