Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Third Circuit Compels Arbitration Despite Dispute About Whether Assignment of Loan Containing Arbitration Clause Was Lawful

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The Third Circuit Court of Appeals recently held that a district court should have granted a motion to compel arbitration even though there was a dispute about the legality of an assignment of a loan agreement that contained the arbitration clause at issue. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.

OneMain Financial Group, a nonbank finance company that issues consumer loans, issued a loan to Benjamin Zirpoli pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. That loan contained an arbitration clause that provided that “You or We have an absolute right to demand that any Claim be submitted to an arbitrator in accordance with this Arbitration Agreement.” “We” was defined to include OneMain’s “assignees.” “Claim” was meanwhile defined to include “anything related to … the arbitrability of any Claim pursuant to this Agreement” and “anything related to … any alleged violation [of a state statute], including without limitation … usury … laws.”

OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that purchases consumer debt. The “CDCA prohibits CDCA licensees from ‘selling contracts to a … corporation not holding a license … without the prior written approval of the Secretary of Banking,’” but Midland apparently “did not possess a CDCA license or request approval from the Department of Banking” to acquire Zirpoli’s account.

Midland sued Zirpoli to collect the debt but later dismissed the suit and then allegedly reported Zirpoli’s delinquent debt to various consumer agencies, which purportedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action alleging that because Midland did not have a CDCA license and did not obtain approval from the Department of Banking, it was not lawfully permitted to purchase his loan or the other CDCA-governed loans it acquired.

Midland moved to compel arbitration. The district court ultimately denied Midland’s motion based on the purported illegality of the transfer from OneMain to Midland.

The Third Circuit (with one judge dissenting) vacated the district court’s decision and remanded the case with instructions to grant Midland’s motion to compel arbitration.

After holding that “party” under section 4 of the Federal Arbitration Act “refers to a party to a litigation” and that it therefore had jurisdiction to consider Midland’s motion on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid arbitration agreement and that agreement applied to OneMain’s assigns, which included Midland. The Third Circuit acknowledged that there was a dispute about the legality of OneMain’s assignment to Midland but explained that its analysis was limited to the threshold question of whether there was a valid agreement to arbitrate in light of the delegation clause delegating issues of arbitrability to the arbitrator and that it was therefore prohibited from analyzing the merits of the dispute regarding whether that agreement should be invalidated because it violated the CDCA.

The Third Circuit alternatively held that even if it considered the merits of Zirpoli’s claim, it would reject his contention that the assignment was invalid. OneMain had “charged-off” Zirpoli’s loan, which meant that the “assignment falls outside of the CDCA’s purview.”

Zirpoli v. Midland Funding, LLC, No. 21-2438 (3d Cir. Sept. 1, 2022).

Third Circuit Affirms Dismissal of Complaint With Prejudice After Plaintiff Failed to Initiate Arbitration Proceedings

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Plaintiff R&C Oilfield Services appealed from an order of the U.S. District Court for the Western District of Pennsylvania. The district court granted defendant American Wind Transport Group’s motion to compel R&C to arbitrate the parties’ commercial dispute, having determined that the arbitration clause was not a contract of employment between the parties as R&C contended and was thus enforceable. The district court stayed the case pending arbitration and denied R&C’s motion for reconsideration. More than a year later, the district court ordered the parties to submit a joint status report. The report included confirmation that “Plaintiff had not commenced an arbitration, and did not plan to do so.” American Wind then moved to dismiss R&C’s complaint with prejudice pursuant to Federal Rule of Civil Procedure 41(b) based on R&C’s refusal to initiate arbitration proceedings. The district court weighed the factors for dismissal with prejudice set forth in Poulis v. State Farm Fire & Casualty Co. and granted the motion to dismiss R&C’s complaint with prejudice.

The Third Circuit Court of Appeals affirmed the district court’s dismissal order, noting that “[c]ourts possess inherent power to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” The court observed that R&C had “multiple avenues to seek appeal of the District Court’s order to stay the proceedings and compel arbitration” and did not seek interlocutory review under the Federal Arbitration Act. The court further noted that R&C failed to initiate arbitration proceedings and instead “sat on its rights for a year and a half and told the District Court that it did not intend to comply with the order, leaving the Court no choice but to involuntarily dismiss the complaint.” The Third Circuit concluded that the district court did not abuse its discretion in dismissing the case with prejudice pursuant to Rule 41(b) under these circumstances, and the district court “soundly exercised its discretion in dismissing this case.”

R&C Oilfield Services, LLC v. American Wind Transport Group, LLC, No. 21-2742 (3d Cir. Aug. 15, 2022).

SDNY Compels Arbitration Pursuant to ADR Provision in Contract Governing Disputed Commercial Transaction

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Applying the Federal Arbitration Act and recognizing that it “reflects a liberal federal policy favoring arbitration agreements,” the U.S. District Court for the Southern District of New York granted the defendant’s motion to compel arbitration, finding that the arbitration provision at issue was as expansive as similar clauses that the Second Circuit has previously described as the “paradigm of a broad clause establishing a presumption of arbitrability.”

Plaintiff Kuehne + Nagel Inc., a logistics service provider that arranges the transportation of freight, and defendant Baker Hughes were parties to a global air freight transportation contract, which included an alternative dispute resolution provision that applied “[i]n the event of any dispute between the Parties hereto arising from or relating to this contract.” After a shipment of cargo was seized by customs authorities at its destination in Brazil, Baker sent a demand letter to Kuehne to commence the claim process so Baker could be compensated for its losses. Efforts to mediate the dispute were unsuccessful and Kuehne filed an action in federal court seeking, among other relief, a declaratory judgment that the agreement did not apply to the claims at issue with Baker. Baker then moved to compel arbitration, contending that the ADR provision requires the submission of all disputes concerning the agreement to arbitration. Kuehne raised several arguments in opposition to the motion, including: (i) the issue of arbitrability should be decided by the court; (ii) the language “either party may refer the dispute to arbitration” means that the ADR provision is not mandatory; and (iii) the agreement did not apply to the transportation services at issue in the case.

The court rejected Kuehne’s arguments, finding that the ADR provision was expansive and that because the claims at issue “touch matters covered by” the agreement, the underlying dispute fell within the scope of the agreement’s ADR provision. The court also found that the agreement incorporated procedural rules that expressly empowered the arbitrator to determine the issue of arbitrability and concluded that although the agreement did not expressly address the matter, the parties intended to delegate the question of arbitrability to the arbitrator. Finally, the court noted the “overwhelming balance of authority in this Circuit and elsewhere” confirms that, absent language that an arbitration provision is intended to trigger “permissive” arbitration, provisions that state either party “may” refer the dispute to arbitration trigger mandatory arbitration. The court then concluded that the arbitration clause of the ADR provision of the agreement was mandatory and that the merits of Kuehne’s claims must be decided by the arbitrator. The court granted Baker’s motion to compel arbitration but denied its motion to dismiss, deciding instead to stay the case.

Kuehne + Nagel Inc. v. Baker Hughes, No. 1:21-cv-08470 (S.D.N.Y. June 23, 2022).

Seller Wins “Battle” to Apply FAA Over VUAA to Arbitration Dispute, but Loses “War” Over Award Confirmation

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The case involved a seller of a 91% interest in a Virginia-based government contractor that provides overseas staffing and logistics support to government agencies. The parties’ sale contract contained a choice-of-law provision that stated the agreement “shall be governed by and construed in accordance with the internal laws of the Commonwealth of Virginia without giving effect to any choice or conflict of law provision or rule.” The contract also included an arbitration provision applicable to disputes related to any adjustment payments after the closing of the sale. The parties ultimately could not agree on the amount of a post-closing adjustment payment and proceeded to arbitration. The arbitrator awarded the buyer approximately $3.1 million, after which the parties filed cross-motions to confirm and to vacate the arbitration award. In support of its motion to vacate, the seller included an argument that the award was in “manifest disregard” of the applicable law.

The federal district court first noted that “manifest disregard” is recognized by the Fourth Circuit as a valid basis under federal arbitration common law to vacate an arbitration award, but it is not under Virginia law. As a result, the court was required to determine whether the contract’s general choice-of-law provision selecting Virginia law resulted in the application of the Virginia Uniform Arbitration Act to the parties’ dispute. Again relying specifically on controlling Fourth Circuit precedent, the court found that “a contract’s general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce.” Rather, the parties “may displace the FAA only by specifying that state law should apply specifically to arbitration proceedings.” Neither party disputed that the contract involved interstate commerce. As such, the contract’s choice-of-law provision was sufficient to invoke Virginia law for issues of contract interpretation, but not for purposes of displacing the FAA, because the agreement did not specifically address the law that would govern arbitration disputes.

Having won the argument that federal arbitration law applied to the parties’ dispute regarding confirmation or vacatur of the arbitration award, the seller then lost its argument that the arbitrator “manifestly disregarded” the applicable law. The court noted that, under federal arbitration law, a party moving to vacate an arbitration award faces a “heavy burden” and that the scope of a federal court’s review of an arbitration award is “among the narrowest known at law.” The court’s review is limited to “whether the arbitrators did the job they were told to do — not whether they did it well, or correctly, or reasonably, but simply whether they did it.” Pursuant to Fourth Circuit precedent, an arbitrator’s determination is not in manifest disregard and must be upheld “so long as it draws its essence from the agreement.” An award “fails to draw its essence from the agreement only when the result is not rationally inferable from the contract.”

After analyzing the seller’s claim, the court found that, “[d]istilled to its essence, the Seller’s argument does nothing more than challenge the arbitrator’s interpretation of applicable law.” As this argument was “plainly insufficient” to support a claim of “manifest disregard” of the law, the court confirmed the arbitration award.

Vogel v. Gracias Juan, LLC, No. 1:21-cv-01355 (E.D. Va. Aug. 9, 2022).

Second Circuit Concludes Suit to Recover on Defaulted Foreign Bonds Was Untimely

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The Second Circuit Court of Appeals recently concluded that a claim to recover on defaulted bonds issued by a foreign sovereign was untimely under New York’s six-year statute of limitation.

Bainbridge Fund Ltd. owned several bonds issued by the Republic of Argentina. Argentina defaulted on those bonds in 2001. In 2016, Bainbridge sued to recover on those bonds. The Southern District of New York concluded that Bainbridge’s suit was barred by New York’s six-year statute of limitation for most breach of contract actions. Bainbridge appealed.

On appeal, Bainbridge argued that (1) a 20-year statute of limitation for recovery of certain bonds applied to its claim and (2) even if the six-year statute of limitations applied, it had been tolled because Argentina had “acknowledged” the debt it owed on the bonds.

The Second Circuit rejected both arguments and affirmed the district court’s dismissal.

First, the Second Circuit held that the 20-year statute did not apply to the bonds issued by Argentina because that statute applied only to bonds issued by “the state of New York or … any person, association or public or private corporation,” and Argentina, a foreign sovereign, was not a “person” or other qualified entity under the statute. The six-year statute therefore applied.

Second, the Second Circuit held that the six-year statute had not been tolled. Although the Second Circuit acknowledged that the statute could be tolled where a debtor makes a written acknowledgement from which a promise to pay may be fairly implied, Argentina had made no such acknowledgement. To the contrary, quarterly financial statements issued by Argentina did not manifest an implied promise to pay defaulted bonds and Argentina had “repeatedly stated that it would not repay bonds not submitted to [an] exchange [program] and that these bonds ‘may remain in default indefinitely.’” Because tolling did not apply, Bainbridge’s claim was time barred.

Bainbridge Fund Ltd. v. Republic of Argentina, Nos. 21-37, 21-38 (2d Cir. June 22, 2022).