Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NEW YORK FEDERAL COURT CONSIDERS PROCEDURAL ATTACKS TO ARBITRATION CONFIRMATION PROCEEDINGS

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Late last month, a federal district court in New York tackled procedural challenges to an arbitration confirmation proceeding. The arbitration arose from a dispute between an insurer and its reinsurer over the amount due to the insurer following a claim. Following an arbitration in which the insurer was awarded over $1 million by the arbitrator, the reinsurer tried to procedurally attack the court’s ability to confirm the arbitration award, arguing that the court lacked subject-matter jurisdiction to hear the confirmation proceeding because: 1) the amount in controversy requirement for diversity jurisdiction was not met; 2) there was no controversy remaining; and 3) the arbitration agreement does not include consent to a confirmation proceeding.

As to the amount in controversy requirement for diversity jurisdiction, the court followed the “demand approach,” in which the amount demanded in the arbitration serves as the amount in controversy; thus, it found no merit in the argument. Regarding the mootness argument, the court found that there was still a dispute until the court had confirmed the award; thus, there was no merit in this argument either. Finally, the court found that because the Federal Arbitration Act allows confirmation, any parties that include an arbitration provision implicitly agree to confirmation of the same. National Casualty Co. v. Resolute Reinsurance Co., Case No. 15-cv-09440-DLC (USDC S.D.N.Y. Mar. 24, 2016).

This post written by Zach Ludens.

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NINTH CIRCUIT DISMISSES INTERLOCUTORY APPEAL OF ORDER DENYING MOTION TO STAY UNDER FEDERAL ARBITRATION ACT FOR LACK OF JURISDICTION

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Western Security Bank brought an action in the United States District Court for the District of Montana against certain doctors seeking to enforce commercial loan guaranties. The doctors asserted that a non-party, Meridian Surgical Partners, fraudulently induced them to guarantee the loan, and moved to stay the lawsuit pending the outcome of their separate arbitration with Meridian. The doctors based their motion, in part, on Section 3 of the Federal Arbitration Act, which provides that a court may stay an action where an issue involved is referable to arbitration pursuant to a written agreement. Significantly, however, the doctors did not actually seek to compel Western Security to arbitrate its claims against them.

After the district court denied the motion to stay, the doctors filed an interlocutory appeal under Section 16 of the Act, which permits an appeal “from…an order…refusing a stay of any action under section 3.” Relying on precedent from other federal circuit courts, the U.S. Court of Appeals for the Ninth Circuit dismissed the appeal for lack of jurisdiction. Specifically, the circuit court found that in order to invoke appellate jurisdiction under § 16(a), a party must “either move to compel arbitration and stay litigation explicitly under the FAA, or must make it plainly apparent that he seeks only the remedies provided for by the FAA—namely, arbitration rather than any judicial determination.” The court held that while the doctors styled their motion as one brought under Section 3, the motion plainly did not seek relief under the Act, as the doctors made clear they did not seek to compel Western Security to arbitrate any of the claims brought against them in the district court. Western Security Bank v. Winzenreid, No. 15-cv-35617 (9th Cir. Mar. 14, 2016).

This post written by Rob DiUbaldo.

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FEDERAL COURTS LACK JURISDICTION OVER ENFORCEMENT OF FOREIGN JUDGMENTS, EVEN WHERE JUDGMENT IS INCONSISTENT WITH EARLIER ARBITRATION AWARD OR AGREEMENT TO ARBITRATE

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Plaintiff Albaniabeg, power plant operator, sought enforcement of an Albanian judgment in a New York state court against defendant Italian power companies. Section 205 of the FAA permits removal of an action that relates to an arbitration award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The defendants sought to remove the case to federal court, claiming that the action related to the original arbitration because the Albanian judgment was obtained in violation of the parties’ arbitration clause and award. Albaniabeg moved to remand to state court due to lack of federal subject matter jurisdiction. The court held that removal was improper because the issue was unrelated to the arbitration agreement or the arbitral award; rather, the issue related to enforcement of a foreign judgment. The court held that, while certain defenses to the award may involve claims relating to the prior arbitration, the Convention does not provide subject matter jurisdiction over actions to enforce a foreign court’s judgment, even where a party contends that the foreign court’s judgment is inconsistent with an earlier arbitration award or agreement to arbitrate. Albaniabeg Ambient Sh.p.k. v. Enel S.P.A., Case No. 15 Civ. 3283 (USDC S.D.N.Y. Mar. 11, 2016).

This post written by Joshua S. Wirth.

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COURT LOOKS TO PRIOR RELATED REINSURANCE LITIGATION IN RULING THAT REINSURER MUST POST PRE-PLEADING SECURITY

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We previously reported on reinsurance litigation in Connecticut federal court between Travelers Indemnity Co. and Excalibur Reinsurance Corp, which the parties settled in May 2014. See prior post dated July 31, 2014. A year later, in May 2015, another reinsurance dispute in Connecticut federal court was filed by Travelers’s subsidiary, Select Insurance Co., against Excalibur. Initially, Excalibur sought to enjoin the Connecticut litigation, arguing that without the injunction, Excalibur would need to post security, which would deplete its corporate assets and seriously affect its liquidity. The injunction was denied, however, because Excalibur would not be “irreparably harmed” by posting security. See prior post dated July 8, 2015.

Just as Excalibur feared, the Connecticut court has now granted Select Insurance Co.’s motion for pre-pleading security pursuant to Conn. Gen. Stat. section 38a-27(a). The court looked to virtually identical rulings previously made in the prior cases involving Travelers, and rejected Excalibur’s opposition to posting a security. The court held that: (1) the statute requires that unauthorized insurers post security; (2) the statute applies, notwithstanding that Select Insurance Co. was not a citizen of Connecticut; (3) the statute applies, notwithstanding that the reinsurance agreements selected New York law, because the statute is procedural in nature; (4) an order of supervision by the Pennsylvania Insurance Commissioner purporting to prohibit Excalibur’s posting of security did not preempt the Connecticut law; and (5) security was necessary because Excalibur was unauthorized at the time of the litigation, notwithstanding that Excalibur was previously, for a limited period of time, authorized in Connecticut. Accordingly, the court ruled that Excalibur was required to post security in an amount to be determined following a hearing. Select Insurance Co. v. Excalibur Reinsurance Corp., Case No. 3:15-cv-00715 (USDC D. Conn. Mar. 24, 2016).

This post written by Michael Wolgin.
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NINTH CIRCUIT: ARBITRATION PROVISION CONTAINED IN SHAM AGREEMENT IS NOT ENFORCEABLE

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The Ninth Circuit reversed a district court ruling that had compelled arbitration, holding that a party may not enforce an arbitration agreement where the clause is contained in a nonbinding contract. The parties had entered into two contracts in Italy. The first contract was a commercial franchise agreement containing an arbitration clause. The second contract disclaimed any liability on the parties resulting from the first contract until a new franchise agreement was signed in the United States. The party seeking to avoid arbitration argued that the first contract was signed to allow them to obtain proper visas into the United States and not actually confer any contractual rights. The district court ruled that “the issue of whether the broad arbitration clause contained in the first contract survives after the second contract should be submitted to the arbitrator.” The Ninth Circuit, however, disagreed. Turning to traditional principles of contract interpretation, the appellate court held that the parties did not manifest express or implied consent to be bound to the original contract, because the original contract was a sham. The court concluded: “Because we find that the document the parties described as the Commercial Contract was a sham, the arbitration clause is no more enforceable than any other provision in that document.” Casa Del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, Case No. 13-56091 (9th Cir. Mar. 15, 2016).

This post written by Joshua S. Wirth.

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