Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT UPHOLDS ATTORNEY-CLIENT PRIVILEGE DESPITE ADVICE OF COUNSEL DEFENSE IN TAX CASE INVOLVING REINSURANCE TRANSACTIONS

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This case involves a tax dispute centering on whether certain “purported” insurance and reinsurance transactions “lacked economic substance.” Following an in camera review of communications identified in Respondents’ privilege logs, the Court denied Petitioner’s motion to compel the production of communications between Respondents’ and counsel. Petitioner’s argued the privilege was waived upon Respondents’ assertion of the advice of counsel defense, and that the substance of the insurance transactions were put in issue, including all underlying facts claimed protected by the attorney-client privilege. Respondents’ argued the subject matter in the withheld emails is not related to the reasonable cause and good-faith defense raised in their petition before the Tax Court.

The Court, looking at “counsel, ownership history, management, insured operation/ownership, and personnel” and the “real-world structure of the relationships, including the joint retention of the law firm and need for legal advice on identical issues and concerns”, found a common-interest privilege existed “despite the separate ownership of the later captives”, and thus, there was no third-party waiver.

With respect to whether Respondents’ advice of counsel or “reasonable cause” defense put the communications at issue, the Court held that, because the Tax Court litigation is in an early stage, if Respondents persist in asserting the “reasonable cause” defense, then “disclosure of privileged documents may later result before the Tax Court. This, however, is a strategic choice that must be made by Respondents in the Tax Court proceedings at some later point in time. Should Respondents make the strategic choice to persist with their ‘reasonable cause’ defense and produce the privileged communications setting forth the legal advice they purportedly relied on, the Tax Court will be in a far better position to determine which of these emails are related to the legal advice.” United States of America v. Owensboro Dermatology Assocs., P.S.C., et al., 4:16-mc-00003, 00004, 00005 (USDC W.D. Ky. July 7, 2017)

This post written by Nora A. Valenza-Frost.

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PENNSYLVANIA FEDERAL COURT GRANTS MOTION TO DISMISS BASED ON LACK OF SUBJECT MATTER JURISDICTION

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Plaintiff RAD Manufacturing, LLC (“RAD”), a Delaware corporation with its principal place of business in Pennsylvania, and its insurer and reinsurer (as subrogees) brought an action in federal court in Pennsylvania against Advanced Fabrication Services, Inc. (“AFS”), a Pennsylvania corporation with its principal place of business in Pennsylvania. The underlying dispute involves allegations that RAD had hired and contracted with AFS to design, install and service a boiler control system on its premises, and the boiler dry-fired and caused damage to RAD’s property. RAD filed a motion to dismiss primarily based on lack of subject matter jurisdiction.

The Pennsylvania federal court noted that RAD’s presence in the action destroyed complete diversity and that RAD, the insured, is a necessary party and thus an indispensable party, and thus cannot be dismissed from the action to cure the jurisdictional defect. In particular, the court noted that there is another state court action pending involving the same parties. Thus, the court was particularly concerned with RAD’s ability to protect its interest in the state court if the federal action proceeded without RAD and was resolved first, and thus would likely have a res judicata effect on that state court action.

Thus, the Pennsylvania federal court held that RAD, the insured/subrogor, is an indispensable party and that the action cannot proceed without RAD, and as such, the complaint was dismissed for lack of subject matter jurisdiction.

RAD Manufacturing LLC, et al. v. Advanced Fabrication Services, No. 3:16-2138 (M.D. Pa. June 20, 2107).

This post written by Jeanne Kohler.

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EIGHTH CIRCUIT HOLDS THAT QUESTION OF CLASS ARBITRATION IS FOR COURTS, NOT ARBITRATORS, TO DECIDE

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In this case, the question presented was whether a court or an arbitrator should determine whether an arbitration agreement authorizes class arbitration. The U.S. Supreme Court has not yet resolved this issue. Several circuit courts of appeal have considered this issue, but this was the first time it was presented in the Eighth Circuit.

The Eighth Circuit held that courts, not arbitrators, should answer the “who decides” question when the arbitration agreement at issue is silent on the subject, joining the Third, Fourth, and Sixth Circuits. In so holding, the court concluded that the question of “who decides” is a substantive question of arbitrability rather than a preliminary procedural question. Therefore, according to the Eighth Circuit, courts are the proper authority to answer the question, whereas arbitrators decide preliminary procedural questions. The Eighth Circuit noted that courts must play a threshold role to determine whether parties have submitted a particular dispute to arbitration because such issues presumptively lie with the courts. The Eighth Circuit also expressed some concerns about class arbitration, including the loss of confidentiality, due process concerns, and the lack of appellate review. Thus, the Eighth Circuit reversed the district court’s order denying plaintiff-appellant’s motion for summary judgment because the district court erred when concluding that the question of class arbitration was procedural rather than substantive. The court also remanded to the district court to determine whether there was a contractual basis for class arbitration.

Catamaran Corporation v. Towncrest Pharmacy et al., No. 16-3275 (8th Cir. July 28, 2017).

This post written by Jeanne Kohler.

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COURT DECLINES TO DETERMINE WHETHER REINSURANCE SYNDICATE FOR WHICH A COMPANY FRONTED SHOULD BE INVOLVED IN AN ARBITRATION

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The parties in this case presented to a court the issue of whether a reinsurance syndicate for which Federal Insurance acted as “a front” was a real party in interest and should be involved in an arbitration between Federal Insurance and its reinsured. Although the Petitioner and Respondent agreed that the parties’ dispute was governed by an arbitration clause, the parties differed as to whether the reinsurer syndicate would have a role in the arbitration and, if so, the parameters of that role. With respect to that issue, Respondent’s cross-petition requested, in part, that the Court order Petitioner to arbitrate “which entities are the real parties in interest in the arbitration”.

Relying on the Supreme Court’s decision in PacifiCare Health Sys., Inc. v. Book, the Court stated that “[w]hether this issue will ever arise, whether [the syndicate’s] involvement will raise an issue of arbitrability that should be resolved by the Court, and whether the arbitrator will ever rule on it, is entirely speculative at this juncture.” The Court compelled arbitration, and declined to decide whether Respondent’s hypothetical motion would raise an issue of arbitrability. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Federal Ins. Co., 1:16-cv-08821 (USDC S.D.N.Y. June 8, 2017)

This post written by Nora A. Valenza-Frost.
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TENTH CIRCUIT DECLINES TO DISTURB ARBITRAL AWARD GRANTING FEES AND COSTS IN WRONGFUL DEATH SUIT AGAINST NURSING HOME

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The Tenth Circuit recently upheld a district court’s confirmation of an arbitral award ordering a nursing home (“THI”) to pay fees and costs associated with the arbitration of a wrongful death claim. A personal representative (“Lovato”) of Guadalupe Duran’s estate prevailed in an arbitration of her wrongful death claim against THI that resulted in nearly a half million dollars in compensatory damages, as well as almost $250,000 in arbitration fees, costs, pre-, and post-judgment interest granted in a post-arbitration motion pursuant to the New Mexico Uniform Arbitration Act (“NMUAA”).

THI argued that the arbitrator exceeded his authority by awarding fees and costs under the NMUAA where the arbitration agreement designated the Federal Arbitration Act (“FAA”)—which does not authorize recovery of costs and interest—as the governing law. Citing the high burden a challenging party faces in attempting to overturn an arbitral award, the Tenth Circuit rejected this argument. First, THI did not establish that the FAA prohibits costs and interests, only that the FAA does not expressly authorize such an award. Second, the FAA displaces conflicting state law (such as the NMUAA) only to the extent the state law actually conflicts with or undermines the goals of the FAA—which the NMUAA costs and interest provision did not. Finally, the court found the arbitration agreement’s terms supported the award of costs and interest by delegating broad authority to the arbitrator and by invoking the National Arbitration Forum Code of Procedure, which allows any legal, equitable, or other remedy or relief to be granted.

The Tenth Circuit swiftly dismissed THI’s second argument that the arbitrator manifestly disregarded the law. In rejecting it, the court assumed without deciding the manifest disregard exception’s continuing validity. Harkening back to its analysis in rejecting THI’s first argument, the court noted the arbitrator did not exceed his authority. Furthermore, there was no evidence he was willfully inattentive to governing law.

THI of N. M. at Vida Encantada, LLC v. Lovato, No. 16-2041 (10th Cir. July 25, 2017).

This post written by Thaddeus Ewald .

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