Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

U.S. COMMODITY FUTURES TRADING COMMISSION GRANTS RELIEF FROM COMMODITY POOL OPERATOR OBLIGATIONS CONCERNING INSURANCE-LINKED SECURITIZATION (“ILS”) VEHICLES

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In CFTC Letter No. 14-145 Exemption (November 12, 2014) and CFTC Letter No. 14-152 No-Action (December 18, 2014), the U.S. Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) exempted entities engaging in insurance-linked securities (“ILS”) transactions from commodity pool operator registration requirements, subject to certain conditions as specified by each respective letter. The above-referenced letters requested no- action or exemption relief from the CFTC’s commodity pool obligations because the definition of “commodity interest” under Section 1a(10) of the Commodities Exchange Act (“CEA”) was expanded under the Dodd-Frank Act, to include swaps, and could subject an ILS Issuer to be considered a commodity pool and require registration with the CFTC. It is noteworthy that among the conditions for relief in each letter, active management of the assets and liabilities over the lifetime of the Issuer is prohibited.

This post written by Kelly A. Cruz-Brown.

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SECOND CIRCUIT REFUSES TO EMPLOY THE ALL WRITS ACT TO ENJOIN A SECOND ARBITRATION OF THE SAME CLAIMS

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The Second Circuit recently affirmed a district court’s refusal to enjoin an arbitration proceeding under the All Writs Act. The parties to the dispute had been involved in a prior arbitration that resulted in an award confirmed by the district court. While the confirmation judgment was on appeal, one of the parties instituted a second arbitration raising claims similar to those asserted in the first arbitration. The respondent, Citigroup, Inc., filed suit in the Southern District of New York, arguing that the All Writs Act should be applied to enjoin the second arbitration because the second arbitration amounted to an “assault” on the prior federal judgment confirming the first award. The district court rejected Citigroup’s argument, dismissed the federal court action, and compelled arbitration. The Second Circuit affirmed, holding that the FAA’s framework favoring the submission of disputes to arbitration precludes use of the All Writs Act to enjoin a subsequent arbitration of claims that one party asserts are barred by the prior arbitration. In reaching this decision, the Second Circuit noted that the prior federal judgment did not involve consideration of the merits of the underlying claims, but rather merely confirmed an arbitration award through a limited review. The Second Circuit concluded that a federal court’s interest in protecting the integrity of such a prior judgment does not authorize use of the All Writs Act.  Citigroup, Inc. v. Abu Dhabi Inv. Auth., No. 13-4825-CV, 2015 WL 161745 (2d Cir. Jan. 14, 2015).

This post written by Catherine Acree.

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NINTH CIRCUIT COURT OF APPEALS GRANTS WRIT OF MANDAMUS TO VACATE ORDER GRANTING DISQUALIFICATION OF ARBITRATOR

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In In Re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015), the Ninth Circuit determined that the district court erred in holding that its decision to intervene mid-arbitration was justified under Aerojet-General Corp. v. Am Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973). Specifically, the panel held that the district court erred in predicting that an award issued by the arbitrator would likely be vacated because of his evident partiality under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2). The panel determined that undisclosed facts regarding the arbitrator’s efforts to start a company to attract investors for litigation financing did not give rise to a reasonable impression that the arbitrator would be impartial toward either party. The panel, quoting Commonwealth Coatings v. Continental Cas. Co., 393 U.S. 145, 150 (1968) emphasized that an arbitrator must disclose facts showing that they might be reasonably biased against one litigant and favorable to another. In this case, the panel found that the arbitrator’s financial effort regarding his efforts to start a litigation finance company in relation to the parties and issues in the case were contingent, attenuated, and speculative. Furthermore, the panel held that even if the arbitrator’s activities created a reasonable impression of partiality, the district court’s equitable concern that costs and delays would result if the arbitration award were vacated was inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of arbitration.

This post written by Kelly A. Cruz-Brown.

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SOUTHERN DISTRICT OF NEW YORK: “IF YOU WANT STRICT APPLICATION OF THE LAW, DON’T AGREE TO ARBITRATION CLAUSES.”

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A federal judge in the Southern District of New York recently denied a motion to vacate an arbitration award in a reinsurance dispute, scolding the movant for complaining that the arbitrators reached a compromise verdict. The movant, the ceding insurer, argued that two of the three members of the arbitration panel had engaged in “manifest disregard of the law” by failing to properly apply the “follow the fortunes” doctrine when they disallowed reimbursement for several claims. The movant challenged a portion of the award holding that the reinsurer was not required to reimburse the movant for certain claims due to negligent claims handling and/or late notice. In a somewhat gruff opinion (“Petitioner’s argument is manifestly wrong . . . .”), the court stated that the movant “asks this court to do what it cannot do – review the award for correctness.” The court noted that all the relevant legal issues were placed squarely before the panel, that considerable evidence and argument was presented on those issues during a five-day hearing, and the evidence on the disputed issues “could be read either way.” In denying the motion to vacate and confirming the award, the court noted that the arbitrators were not required to follow “judicial formalities” in making their decision, and therefore were not required to predict what a court would hold. Rather, all that was required of them was that the decision have “colorable justification.” Apparently frustrated by the movant’s “manifest disregard of the law” argument, the court lectured: “If parties want the luxury of judicial review and reasoned results that require strict application of the law, without the sort of compromises that often characterize arbitral awards, they should not agree to arbitration clauses. Having done so, they should not be heard to complain when the arbitrators do what arbitrators so often do – reach compromise verdicts that can easily be justified by taking a particular view of the evidence.”

Associated Industries Ins. Co., Inc. v. Excalibur Reinsurance Corp., Case No. 1:13-cv-08239 (USDC S.D.N.Y November 26, 2014)

This post written by Catherine Acree.

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UTAH FEDERAL COURT STAYS PROCEEDINGS UNDER MILLER ACT PENDING ARBITRATION

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The core issue facing a federal court in Utah was whether it should stay the proceedings pending resolution of related arbitration proceedings involving sureties which issued payment bonds under the Miller Act. A dispute arose among various parties involved in the construction of a project called the Utah Data Center. Cache Valley Electric Company sued Truland Systems which subcontracted Cache to perform certain electrical work on the project. In accordance with the Miller Act, Truland, which had been subcontracted by the general contractor, obtained payment bonds for the labor and materials on the project. Cache sued to recover payment from the general contractor and from Truland’s sureties.

Truland’s sureties then moved to stay the proceedings pending the outcome of the arbitration proceeding between the general contractor, Truland, and Cache, arguing that the outcome of the arbitration proceeding would determine whether Cache performed its contractual responsibilities. Cache opposed the stay on the grounds that the purpose of the Miller Act would be violated if arbitration is compelled because the purpose of the payment bond required under the Act is to shift the ultimate risk of nonpayment from workmen and suppliers to the surety. Staying the case, Cache argued, would violate the Act’s prompt payment requirement. The court rejected Cache’s argument and stayed the proceedings. Even though Truland’s sureties were not parties to the arbitration proceedings and not technically bound by the Truland/Cache arbitration agreement, the case should nevertheless be properly stayed. A stay of the case would promote judicial economy, would avoid inconsistent results, and would create undue hardship for Cache which had the opportunity to defend itself in the arbitration. United States ex. rel Cache Valley Electric Co. v. Travelers Casualty & Surety Co. of America, Case No. 2:13-cv-01120-DN (USDC D. Utah Jan. 13, 2015).

This post written by Leonor Lagomasino.

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