Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT HOLDS ALLEGED INDUSTRY BIAS AMONG ARBITRATORS INSUFFICIENT TO VACATE AWARD

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The case concerned two purchase orders whereby defendant BJB LLC dba Agri Trading (Agri Trading) agreed to purchase corn oil from plaintiff Hardy Industrial Technologies, Inc. (Hardy). A dispute arose and was submitted for arbitration pursuant to language in the purchase orders incorporating the American Fats and Oils Association, Inc.’s (AFOA) trade rules. A three-member panel of the AFOA Arbitration Tribunal issued its award finding in favor of Agri Trading that both purchase orders were invalid.

Hardy moved to vacate, modify, or correct the arbitration award, principally relying on “evident partiality” on the part of the arbitrators, namely, that the arbitrators were biased in favor of Agri Trading. In support of its motion, Hardy argued that the arbitrators were biased because Agri Trading was a member of the AFOA but Hardy was not, and because the president of Agri Trading attended AFOA meetings with the arbitrators, worked on AFOA committee meetings, served on the AFOA Board of Directors, and socialized with them.

The Court rejected this argument, finding that Hardy failed to establish that the alleged partiality was direct, definite, and capable of demonstration, or that specific facts existed which indicated improper motives on the part of the arbitrators. The Court reasoned that Hardy’s claim was “one of institutional bias, which, at best, establishes an appearance of bias.” Furthermore, the Court noted that the AFOA’s arbitration rules, which required that three-member panels be comprised of one arbitrator designated as a buyer, one as a seller, and one as other, undermined Hardy’s argument that the arbitrators were biased. As such, the Court denied Hardy’s motion to vacate and affirmed the arbitration award. Hardy Indus. Tech., LLC v. BJB, LLC, Case No. 1:12-cv-3097 (USDC N.D. Ohio Dec. 16, 2016).

This post written by Gail Jankowski.

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COURT FINDS ARBITRATION AWARD THAT INCLUDED ATTORNEYS’ FEES WAS NOT A MANIFEST DISREGARD OF THE LAW

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The court confirmed an arbitration award entered in favor of Astanza Design, LLC against Giemme Stile, S.p.A. and Giemme USA, LLC (Giemme) in which the arbitrator awarded both damages and attorneys’ fees to Astanza in a dispute arising from the parties’ agreement that Astanza was to serve as the exclusive representative for Giemme’s furniture sales to the LDS Church. Among other things, Giemme contended that the arbitrator lacked authority to award attorneys’ fees. The court disagreed.

The parties’ contract contemplated that the AAA International Center for Dispute Resolution Rules of Procedure would apply, and Article 34 of those rules provides that the tribunal “shall fix the costs of arbitration in its award.” In confirming the award, the court noted that the parties’ “bargained for the arbitrator’s construction of their agreement”, and noted that an arbitration award “even arguably construing or applying the contract must stand, regardless of this court’s view of its merits.” The award “drew its essence from the contract and was far from a manifest disregard of the law.” Astanza Design, LLC v. Giemme Stile, S.p.A., Case No. 1:16CV1238 (USDC M.D.N.C. Dec. 15, 2016).

This post written by Brooke L. French.

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LONDON MARITIME ARBITRATION ASSOCIATION HELD TO BE A “FOREIGN TRIBUNAL” WITHIN THE MEANING OF 28 U.S.C. § 1782

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Kleimar N.V., the plaintiff in a London arbitration against defendant Dalian Dongzhan Group Co. Ltd. (Dailan), filed an ex parte application with the New York District Court seeking the issuance of a discovery order and subpoena on Vale S.A., a third-party entity located in the United States. The District Court granted the application permitting discovery and asked that any challenges to the order be brought in a motion to quash. Kleimar subsequently served Vale with the subpoena and Vale moved to vacate the discovery order and quash the subpoena.

The principal issue in the case was whether the London Maritime Arbitration Association was a “foreign tribunal” under 28 U.S.C. § 1782, which permits a U.S. district court to approve the discovery over a person or entity found in the U.S. for use in a proceeding in a foreign or international tribunal. Putting aside Second Circuit precedent which had excluded private foreign arbitrations, the district court relied upon the 2004 U.S. Supreme Court case of Intel Corp. v. Advanced Miro Devices, Inc., wherein the Supreme Court’s interpretation of § 1782 left open the possibility that a private foreign arbitration could fall within its scope. The Court also found that the third-party was located in New York for the purposes of § 1782 because it traded on the New York Stock Exchange, regularly filed forms with the Security and Exchange Commission and had significant ties to an American entity that conducted systematic and regular business in New York. As such, the Court deemed the requirements of § 1782 were met and denied Vale’s motions. In re Ex Parte Application of Kleimar N.V., Case No. 16–mc–355 (USDC S.D.N.Y. Nov. 16, 2016).

This post written by Gail Jankowski.

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NAIC DRAWS LINE IN CFPB SAND BOX

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The National Association of Insurance Commissioners has taken a firm stance on the Consumer Financial Protection Bureau’s proposed ban of “mandatory arbitration” clauses that make financial product consumers waive their right to join class actions.

Because consumer loans are generally financial products within the CFPB’s purview, the CFPB stated that the proposed ban would extend to arbitration clauses used for whole life insurance policy loans, if (a) the insurance company is a “creditor” under the Equal Credit Opportunity Act (ECOA) and (b) the activity is not the “business of insurance” under the Dodd –Frank Act. In a comment letter, however, the NAIC has urged the agency to remove altogether policy loan features from the scope of the rule.

In drawing a line between insurance policy loans and consumer finance, the NAIC argued that whole life policy loans do not make insurance companies ECOA “creditors.” Insurers do not extend, renew, or continue credit; nor do they arrange for such transactions. Rather, despite the use of the word “loan,” a policy loan is in substance an advance payment of the policy’s cash surrender value. It more closely resembles a structured temporary conversion from one type of asset into cash, particularly because, if a policyholder does not repay the loan, the insurance company’s recourse is simply to reduce the policy benefits by the outstanding balance of the loan.

Finally, the NAIC pointed to Dodd-Frank Act language stating that the bureau has no authority to alter, amend, or affect the authority of any state insurance regulator. Because states regulate the issuance of insurance policy loans and none of the CFPB’s enumerated statutes—like the Truth in Lending Act or Real Estate Settlement Procedures Act—expressly incorporates policy loans into their purview, the NAIC concluded that the CFPB’s purported encroachment into this territory is “beyond the appropriate jurisdiction of the bureau.”

For more analysis of this CFPB rule proposal, and how state insurance law is not the only area of regulation as to which it is engendering line-drawing controversies, see “CFPB Grabs for SEC/CFTC Turf.”

This post written by Sarah J. Auchterlonie.

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NINTH CIRCUIT APPLIES NEW YORK LAW IN DETERMINING ASSIGNMENT OF RIGHTS TO ARBITRATION PROCEEDS WAS NOT A MATERIAL BREACH OF SETTLEMENT AGREEMENT

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Finding the alleged breach of an anti-assignment provision in a Settlement Agreement was not material, the Ninth Circuit held that the FAA did not provide grounds for vacatur of an arbitration award. In so holding, the Court held the award was not procured by fraud; the arbitrator did not exceed his powers; and the plaintiffs-appellants cited no case wherein a court vacated an award based on an arbitrator’s failure to consider an argument the parties did not present during the arbitration.

The Central District of California previously held that, even if the assignment breached the Settlement Agreement, it did not relieve plaintiffs-appellants “of its duty to arbitrate because the agreement was merely a personal ‘covenant not to assign’ that ‘[gave] rise only to a right to sue for damages.’” The purpose of the Settlement Agreement was to resolve certain disputes between the parties, while reserving others for arbitration. “Under these facts, the alleged assignment of rights in one claim does not ‘defeat the purposes of the entire’ Settlement Agreement, which resolved $550,000 worth of other claims.”

The Ninth Circuit Court thus affirmed the District Court’s decision to deny the motion to vacate the arbitration award.

Watermill Ventures, Ltd. et al. v. Cappello Cap. Corp., No. 15-55145 (9th Cir. Dec. 1, 2016).

This post written by Nora A. Valenza-Frost.

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