Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NEW YORK APPELLATE DIVISION REVERSES ORDER COMPELLING ARBITRATION AND REINSTATES COMPLAINT BASED UPON TERMINATED AGREEMENT’S FORUM SELECTION CLAUSE

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New York’s First Department finds there was no clear manifestation parties had abandoned a forum selection clause by a later agreement which mandated arbitration in London. In 2000, the parties entered into two agreements: (1) the Quennington Agreement (with a U.S. forum selection clause); and, (2) the First Aurdeley Agreement (with an England forum selection clause). In 2009, the parties entered into two more agreements: (1) the Second Aurdeley Agreement (with an arbitration clause), which referenced both of the 2000 agreements and a merger clause, but only expressly terminated the First Aurdeley Agreement; and (2) the Quennington Termination Agreement (with an arbitration clause), which terminated the Quennington Agreement.

Plaintiffs commenced a lawsuit in New York Supreme Court for breach of fiduciary duty and breaches of the various agreements. Defendants moved for a stay of the action and an order compelling arbitration in London, as some of the claims arose under the 2009 agreements which both provided for arbitration. Alternatively, Defendants argued “only an arbitration tribunal could determine whether the forum selection clause” controlled.

On appeal, the Plaintiffs argued the claims alleged in the complaint related to conduct under the 2000 Quennington Agreement – which provided for litigation in the United States – and that they did not nullify the agreement’s forum selection clause “since they did not explicitly disavow it.” The Court agreed: “[t]he mere termination of a contract containing such a clause does not mean that the clause is not still effective”. At best, the parties intended only to arbitrate disputes that arose after 2009, when the agreements containing arbitration clauses were entered into. The Court also found the legal relationship established by the 2000 agreements survived, and since the complaint alleges a breach of fiduciary duty born out of that relationship, the forum selection clause survived. Moreover, any claims under the 2009 agreements were “inextricably bound together” with any claims subject to arbitration, and thus litigation of all claims was appropriate. Lastly, as to the issue of arbitrability, that question is for the court, as the parties did not “clearly and unmistakably” agree that the arbitrators should decide that issue.

Garthon Business Inc., et al. v. Kirill Ace Stein, et al., Index No. 653715/14 (N.Y.A.D. 1st Dep’t April 26, 2016).

This post written by Nora A. Valenza-Frost.

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FOURTH CIRCUIT CONSIDERS WHETHER ARBITRATION AGREEMENT WAS BINDING WHERE PARTIES MODIFIED CONTRACT THROUGH CONDUCT

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In early April, the Fourth Circuit Court of Appeals considered whether an arbitration agreement was “a written provision” for purposes of the Federal Arbitration Act where the parties modified the contract through their conduct. The case arose from an automobile loan, where the loan stated that “any change to this contract must be in writing and we must sign it.” After the borrower was having difficulties making payments, CitiFinancial sent an Amended Agreement for the borrower’s review and signature. In the Amended Agreement, CitiFinancial included an arbitration agreement and a class waiver. The borrower signed the Amended Agreement, but CitiFinancial raised the amount charged per month by 86¢–which the borrower proceeded to pay.

Sometime later, the borrower defaulted on the auto loan, and the new servicer repossessed the vehicle. The borrower initiated a putative class action lawsuit, and the loan holder sought to compel arbitration. The lower court compelled arbitration, but then dismissed the suit so that an immediate appeal could be taken. On appeal, the Fourth Circuit had to address whether there was an agreement between the parties and whether the arbitration clause was “in writing” for purposes of the FAA.

Under the principle of estoppel, the Fourth Circuit held that a proper contract existed between the parties. Moving on to the consideration of “in writing,” the Fourth Circuit held that because “the arbitration agreement was in writing and [the borrower] assented to be bound by that agreement when she made payments in the amount CitiFinancial requested, it does not matter, for purposes of enforceability under the FAA, that she also assented to other terms that may not have been in writing.” The Fourth Circuit reasoned that all that is required is that the arbitration agreement be in writing—not that there be any written assent to these obligations, following the lead of the Second, Sixth, and Eleventh Circuits. As such, the Fourth Circuit affirmed the dismissal so that the case could be taken to arbitration.

Galloway v. Santander Consumer USA, Inc., Case No. 15-1392 (4th Cir. Apr. 8, 2016).

This post written by Zach Ludens.

See our disclaimer.

FEDERAL COURTS COMPELS ARBITRATION OF CAPTIVE INSURANCE DISPUTE

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Plaintiffs Capstone Associated Services, Ltd. And Capstone Associated Services (Wyoming), Limited Partnership (collectively, “Capstone”) brought suit against various defendants concerning the use of and rights to certain intellectual property related to a captive insurance arrangement. The parties agreed to mediate their dispute, resulting in the execution of a Mediated Settlement Agreement (“MSA”) that covered all of the claims between the parties except the intellectual property claims pending the lawsuit. The MSA contained an arbitration provision.

Thereafter, Capstone moved to compel arbitration under the MSA. After the arbitrator designated by the MSA declined his appointment, Capstone sought arbitration pursuant an arbitration agreement in an engagement letter that was part of the operative contract they and their attorneys (“Feldman”) entered into with the defendants as part of the captive insurance arrangement. Capstone argued that the affirmative defenses asserted by the defendants in the lawsuit were encompassed by the arbitration provision because those defenses challenged the propriety of the services provided by Capstone and Feldman under the engagement letter. The defendants opposed arbitration under the engagement letter, arguing that the parties’ claims and affirmative defenses were not arbitrable under the relevant provision.

Applying the standard set forth in the Federal Arbitration Act, the court denied Capstone’s motion to compel arbitration under the MSA, ruling that because the designated arbitrator declined his appointment, compelling arbitration in an alternative manner would be inconsistent with the express terms of the MSA’s arbitration agreement. However, the court granted Capstone’s motion to compel pursuant to the arbitration clause in the engagement letter, holding that the arbitrability of the parties’ claims and defenses were to be decided in arbitration, and not by the Court, under the terms of the operative clause. Capstone Associated Services, Ltd., et al. v. Organizational Strategies, Inc., et al., No. H-15-3233 (USDC S.D.Tex. Apr. 8, 2016).

This post written by Rob DiUbaldo.

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NINTH CIRCUIT REVERSES HOLDING THAT ARBITRATION CLAUSE IN EMPLOYMENT AGREEMENT IS UNCONSCIONABLE

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In early April, the Ninth Circuit Court of Appeals reviewed a lower court’s holding that an arbitration clause in an employment agreement with JP Morgan was procedurally and substantively unconscionable. Because the arbitration agreement was adhesive in the employment agreement, the court held that it was “at least minimally procedurally unconscionable under California law.” However, the court continued to state that it was not substantively unconscionable for a variety of reasons, including where it excluded certain actions seeking only injunctive relief—where the court acknowledged that the carve out “does no more than recite the procedural protections” already afforded by California law. Additionally, where one party has the legal obligation to pay all of the costs unique to arbitration, the court held that it was not substantively unconscionable to have a non-mutual initiation provision. Next, the court determined that the employee could not challenge a confidentiality provision on the grounds that it “prevents others from observing and learning of Chase’s illegal policies and procedures” where no harm to himself was alleged. Finally, the court found that explicitly allowing an arbitrator to rule on summary judgment motions was not substantively unconscionable. As such, the Ninth Circuit reversed the lower court’s finding that the arbitration clause was unconscionable.

Ali v. J.P. Morgan Chase Bank, N.A., Case No. 14-15076 (9th Cir. Apr. 7, 2016).

This post written by Zach Ludens.

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ILLINOIS FEDERAL COURT TRANSFERS “LATE NOTICE” REINSURANCE DISPUTE TO PENNSYLVANIA

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R&Q Reinsurance Company issued a facultative reinsurance certificate to St. Paul Fire & Marine Insurance Company, which reinsured a policy issued by St. Paul to Walter E. Campbell, Co. The broker who placed the certificate was located in Chicago, as were the R&Q employees who executed the contract. St. Paul was located in Minnesota at the time the certificate was negotiated and entered into.

The certificate provided that St. Paul was to “promptly” advise R&Q of “any occurrence and any subsequent developments pertaining thereto” which, in St. Paul’s opinion, might implicate the reinsurance coverage afforded by the certificate. After St. Paul defended and indemnified Campbell in several asbestos personal injury lawsuits arising under the reinsured policy, it sent R&Q its first notice of loss and demanded payment under the certificate. The notice of loss was sent via the broker’s Hartford, Connecticut office. R&Q subsequently brought suit in the U.S. District Court for the Northern District of Illinois seeking a declaration that it was not obligated to indemnify St. Paul under the certificate because it failed to provide prompt notice of the subject loss. St. Paul then filed a parallel suit against R&Q in the Eastern District of Pennsylvania seeking coverage under the certificate, and moved to transfer the Illinois case to the latter forum. At the time the competing actions were filed, R&Q was a Pennsylvania corporation and St. Paul was a Connecticut corporation.

The parties did not dispute that venue was proper in both Illinois and Pennsylvania, but disagreed as to whether the transfer of the Illinois action to Pennsylvania served the convenience of the parties and the interests of justice. Analyzing these factors and others, the court granted St. Paul’s motion to transfer the case to Pennsylvania, because: (a) the bulk of the events material to St. Paul’s alleged late notice and R&Q’s purported breach of the certificate occurred in areas “much closer to Pennsylvania than Illinois, with some of the material events occurring in Pennsylvania”; (b) R&Q is based in Pennsylvania and St. Paul’s residence is closer to that forum than to Illinois; (c) the parties witnesses, and potential non-party witnesses, are located either in the Eastern District of Pennsylvania or closer to it than to the Northern District of Illinois; (d) the dispute was “more likely” to be resolved sooner in Pennsylvania than Illinois, given the relative speed by which cases in each forum typically reach trial or are disposed of prior to trial; (e) Illinois law was “unlikely” to govern the dispute; and (f) Illinois’ interest in the action is “weak relative to that of Pennsylvania”. R&Q Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., No. 15-cv-7784 (USDC N.D. Ill. Mar. 30, 2016).

This post written by Rob DiUbaldo.

See our disclaimer.