Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Alleged Witness Coaching via Text in Deposition Was “Discoverable” in Arbitration Proceeding and Could Not Support Vacatur of Arbitration Award

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The Fifth Circuit Court of Appeals affirmed the confirmation of an arbitration award over protests from a pro se litigant that the award was procured by undue means as a result of opposing counsel “coaching” a witness via text during a remote deposition.

The plaintiff claimed that USAA had wrongfully terminated him in violation of the Family and Medical Leave Act because he had taken several months of FMLA leave. During the ensuing arbitration proceedings, the plaintiff remotely deposed a USAA employee. While the deposition was ongoing, plaintiff’s counsel discovered the witness was texting with USAA’s attorney. Counsel for both parties then contacted the arbitrator off the record and agreed that the witness would thereafter keep her phone out of reach for the remainder of the deposition. Both the witness and USAA’s attorney immediately deleted the text messages.

The arbitrator subsequently rendered an award in favor of USAA. USAA filed a motion in district court to confirm the award. Plaintiff’s counsel sought and was granted permission to withdraw, while the plaintiff proceeded pro se to seek vacatur of the award, claiming, among other things, that the award was procured by undue means under 9 U.S.C. § 10(a)(1) because the arbitrator considered the witness’s deposition testimony despite the texting.

The district court confirmed the award, explaining that the plaintiff was not entitled to vacatur under section 10(a)(1) because he could not show that the improper behavior of USAA was “not discoverable by due diligence before or during the arbitration hearing,” as required by the statute. In fact, the improper behavior not only was discoverable but actually was discovered before the arbitration hearing. Therefore, the plaintiff could not show any undiscoverable improper behavior to support his section 10(a)(1) claims.

On appeal, the Fifth Circuit affirmed the district court’s denial of the motion for vacatur and the court’s confirmation of the award.

Rodgers v. United Services Automotive Association, No. 21-50606 (5th Cir. July 8, 2022).

Second Circuit Concludes That Nigerian Ruling on Enforcement of Arbitration Award Is Entitled to Comity

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The Second Circuit Court of Appeals recently partially refused to enforce a foreign arbitration award on the ground that it was required to give comity to a foreign court decision concerning that award.

Esso Exploration and Production Nigeria Ltd. entered into a contractual agreement with the Nigerian government to develop Nigerian oil fields. The agreement provided that the Nigerian National Petroleum Corp. (NNPC) was entitled to obtain (“lift”) portions of the extracted oil. The agreement also included an arbitration clause requiring arbitration in Nigeria.

A dispute arose regarding whether NNPC was “lifting” more than it was allowed. Esso and NNPC arbitrated that issue in Nigeria and the arbitration panel awarded Esso approximately $1.8 billion plus interest. NNPC challenged that award in Nigerian courts. A Nigerian court set aside part of the award. Esso meanwhile petitioned the U.S. District Court for the Southern District of New York to confirm its arbitration award in full. The district court denied Esso’s petition in full, concluding that it was required to give comity to the Nigerian court decision.

The Second Circuit affirmed in part. It agreed that the district court was required to give comity to the Nigerian court’s decision but noted that the Nigerian court had only set aside the arbitration award in part. There was therefore nothing preventing U.S. courts from enforcing the aspect of the award that Nigerian courts had not vacated.

Esso Exploration & Production Nigeria Ltd. v. Nigerian National Petroleum Corp., No. 19-3159 (2d Cir. July 8, 2022)

Tenth Circuit Affirms Tax Court’s Decision That Captive Insurance Arrangement Did Not Qualify for Tax Exemption

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The Tenth Circuit Court of Appeals recently affirmed the tax court’s decision that a captive insurance arrangement that reinsured a number of other captive insurers did not qualify for a tax exemption.

Reserve Mechanical Corp. issued a number of insurance policies to Peak Mechanical Corp. Reserve and Peak had the same owners, and the arrangement was a form of captive insurance. The arrangement may have been an attempt to obtain tax benefits pursuant to a program that allowed both the deductibles and premiums to be exempt from taxation.

To attempt to qualify for that program, Reserve tried to ensure that at least 30% of its premiums came from companies not affiliated with it. It therefore arranged, among other things, through Capstone Associated Services Ltd. to reinsure a number of other captive insurers that worked with Capstone. Capstone also arranged for each captive insurer it worked with to assume a small percentage of risk from coinsuring thousands of vehicle service contracts.

The IRS concluded that this arrangement did not qualify for an exemption and assessed taxes.

The Tenth Circuit affirmed. It agreed with the IRS that Reserve had not satisfied its burden to demonstrate that its purported insurance transactions were truly arrangements for insurance. Although Reserve complied with some, but not all, of the formalities for insurance companies and went through some of the motions associated with pricing insurance premiums, the record reflected that no “experience, expertise, or studies supported the need for Peak to obtain the policies” and the “premiums for [certain] additional insurance were not supported by any study of similar commercially available policies or careful analysis of Peak’s risks of loss.”

With respect to the reinsurance agreements, the Tenth Circuit concluded that those agreements “did not create any meaningful risk for Reserve” and noted that “Reserve did not satisfy even the distribution threshold that Capstone set for it — obtaining 30% of its insurance premiums by insuring unaffiliated risks.”

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, No. 18-9011 (10th Cir. May 13, 2022).

Ninth Circuit Confirms Arbitration Award Finding FAA Disallows Judicial Review of Whether Arbitrator’s Factual Findings “Are Supported by the Evidence in the Record”

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Plaintiff Annette Serna appealed from an order of the U.S. District Court for the Central District of California. Serna had brought wrongful termination and related claims against Northrop, including under California’s Fair Employment and Housing Act (FEHA), in the Superior Court of California, Los Angeles County. Northrop removed the matter to the U.S. District Court for the Central District of California and then moved to compel arbitration pursuant to Northrop’s 2010 arbitration policy, which explicitly covered “future” claims between Serna and Northrop. The district court compelled arbitration and stayed the action pending arbitration. The arbitrator dismissed Serna’s claims under FEHA, concluding that Serna was not a qualified individual under the statute. Thereafter, the district court denied Serna’s motion to vacate the arbitrator’s decision. The Ninth Circuit affirmed.

The Ninth Circuit concluded that the district court did not err when it compelled arbitration given that the 2010 policy expressly stated that “any claim, controversy, or dispute, past, present, or future” between Serna and Northrop would be subject to binding arbitration. The court rejected Serna’s argument that she was no longer bound by the 2010 policy because it was “superseded” by an updated policy in 2013, finding that nothing in the 2010 policy stated that a revised policy would nullify Serna’s agreement in 2010 to arbitrate all claims, including future claims arising out of her employment with Northrop. The Ninth Circuit also found that the district court did not err when it denied Serna’s request to vacate the arbitrator’s decision on the basis that Serna was not a qualified individual under FEHA, holding that the arbitrator’s factual findings on that issue are beyond the scope of judicial review allowed by the FAA. Finally, the court found that the arbitrator did not exhibit a “manifest disregard of the law,” concluding that the arbitrator did in fact identify the relevant legal standards and applied them, and noted that “because he did so, we may not second-guess his interpretation or application of the law.”

Serna v. Northrop Grumman Systems Corp., No. 21-55238 (9th Cir. July 12, 2022).

Third Circuit Confirms Arbitration Award Finding Award Was Consistent With Controlling Authority and Arbitrator Did Not Manifestly Disregard Parties’ Agreement

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Defendants Jeffrey M. Smith and Sarah A. Smith appealed from an order of the U.S. District Court for the District of the Virgin Islands. The district court denied the Smiths’ motion to vacate the arbitration award entered against them, concluding that the arbitrator made a good faith attempt to interpret and apply the agreement between the parties, which included the arbitration clause. The Third Circuit affirmed.

The Smiths entered into an agreement, which included an arbitration provision, with plaintiff Bayside Construction LLC wherein Bayside was to perform repair work on the Smiths’ home located on St. Thomas, in the Virgin Islands. The Smiths declared Bayside in default for defects in the repair work but did not allow Bayside to cure the alleged defaults before declaring default, as required under the agreement. Bayside filed a demand for arbitration for amounts due and the Smiths filed a counterclaim for alleged overpayment for work performed. The arbitrator concluded that the Smiths had breached the agreement and entered an award in favor of Bayside, which included a modest reduction for “shoddy” work to the amount that Bayside had claimed.

The Smiths argued that the arbitrator “manifestly disregarded” Virgin Islands law and exceeded his powers by issuing an award to Bayside. The Third Circuit rejected the Smiths’ arguments and agreed with the district court’s finding that, while the arbitrator did not cite Virgin Islands law in the award, it was consistent with authority in the territory addressing both the “opportunity to cure” before terminating an agreement and the application of set-offs for defects in construction cases. The Third Circuit concluded it was “immaterial” that the arbitrator cited an arbitration rule rather than case law from the Virgin Islands in the award since the award would have been no different under Virgin Islands law. The Third Circuit also held that since the award was consistent with authority in the Virgin Islands, the arbitrator had not “manifestly disregarded” the law or the parties’ agreement, and did not exceed his powers.

Bayside Construction LLC v. Smith, No. 21-2716 (3d Cir. July 8, 2022).