Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

D.C. Circuit Affirms Dismissal of Claims Against Reinsurers

by

The D.C. Circuit recently affirmed a judgment in favor of reinsurers in a suit brought by an insured after concluding that the insured could not assert breach of contract and related claims against the reinsurers because the insured had no direct relationship with the reinsurers.

Vantage Commodities Financial Services I LLC hired Equifin Risk Solutions LLC to create a captive insurance entity (Assured Risk Transfer PCC LLC (ART)) to manage risk associated with its business of financing retail energy companies. Equifin found several reinsurers to reinsure ART. One of the companies to which Vantage loaned money (Glacial Energy Holdings) defaulted. Vantage submitted a claim to ART. An arbitrator ruled in Vantage’s favor, but ART could not cover the loss. The reinsurers then informed ART that any claim would be denied because ART had failed to notify them of Vantage’s claims or provide proof of Vantage’s losses within the time limit required in the reinsurance agreements.

Vantage then filed suit against ART, the reinsurers, and companies involved with the formation and management of ART (“Willis Defendants”). Vantage asserted claims for breach of contract and sought a declaratory judgment regarding the reinsurers’ duties and further asserted claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The district court dismissed Vantage’s breach of contract claim and request for declaratory relief against the reinsurers and then granted summary judgment to the reinsurers on the remaining claims.

The D.C. Circuit affirmed. With respect to Vantage’s breach of contract and declaratory judgment claims, the court held that “Vantage failed to plead facts sufficient to show a contractual relationship with the Reinsurers.” The court noted that reinsurers generally do “not have a direct contractual relationship with the original insured unless the terms of the reinsurance agreement create such a relationship,” and the agreements in this case created no such relationship. There were “no allegations that the Reinsurers dealt directly with Vantage or otherwise treated Vantage as if it were directly insured by them.” Turning to Vantage’s remaining claims, the court explained that there was “no record evidence of any consideration to support [Vantage’s] alleged implied contract with the Reinsurers.” The consideration had been between ART and the reinsurers. Vantage’s promissory estoppel and unjust enrichment claims meanwhile suffered “from the absence of any evidentiary support.” The claims “depend[ed] on the existence of an agency relationship between the Reinsurers and either ART or the Willis Defendants,” but “Vantage point[ed] to no evidence of statements or conduct by the Reinsurers that authorized ART or the Willis Defendants to act on their behalf.” The reinsurance binders meanwhile “merely disclose[d] the existence and terms of a reinsurance agreement between ART and the Reinsurers.” Finally, Vantage’s claims against the Willis Defendants for negligence were barred by the “economic loss doctrine” because Vantage sought “to recover purely economic losses” and no exception applied.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, No. 21-7033 (D.C. Cir. Apr. 22, 2022).

Second Circuit Concludes That Workers Who Deliver Baked Goods Are Not Transportation Workers and Must Arbitrate Their Claims

by

A divided panel of the Second Circuit recently held that independent distributors who distribute bakery products were not transportation workers and therefore were not exempt from the Federal Arbitration Act (FAA). The Second Circuit therefore concluded that the transportation workers were bound by an arbitration clause in their agreements.

The plaintiffs were “independent distributors” who “own[ed] distribution rights” to distribute baked goods in Connecticut. The plaintiffs contracted with subsidiaries of Flowers Foods Inc. for those rights. They would “pick up” “baked goods from local Connecticut warehouses and deliver the goods to stores and restaurants within their assigned territories.” The plaintiffs “earn[ed] the difference between the price at which” they “acquire[d] the bakery products” “and the price paid by the stores and restaurants.” “In their roles as independent distributors, the plaintiffs” sought to “maximize sales; solicit new locations [to make sales]; stock shelves and rotate products; remove stale products; acquire delivery vehicles; maintain equipment and insurance; distribute Flowers’ advertising materials and develop their own (with prior approval by Flowers); retain legal and accounting services; and hire help.” The plaintiffs could also sell their distribution rights for a profit and carry other goods but did not carry any other goods.

The plaintiffs filed a putative class action alleging violations of the Fair Labor Standards Act and Connecticut wage laws. The defendants moved to compel arbitration pursuant to an arbitration clause in the distribution agreements. The plaintiffs sought to avoid arbitration by arguing that they were transportation workers and were therefore exempt from arbitration under the FAA’s exclusion for “seamen, railroad employees, [and] any other class of workers engaged in foreign or interstate commerce” (i.e., transportation workers). The district court concluded that the plaintiffs were not “transportation workers” and therefore compelled arbitration.

A Second Circuit panel affirmed with one judge concurring and one judge dissenting. The Second Circuit defined “transportation workers” “by affinity” (i.e., by looking to the examples of transportation workers in the FAA’s exemption: Seamen and railroad employees). Both seamen and railroad employees, the court noted, work in the transportation industry. The Second Circuit concluded that “an individual works in a transportation industry if the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers, and the industry’s predominant source of commercial revenue is generated by that movement.”

Applying that standard to the facts before it, the Second Circuit concluded that the plaintiffs were “in the baking industry,” not the transportation industry. Although the plaintiffs spent “appreciable parts of their working days moving goods,” “the stores and restaurants [were] not buying the movement of the baked goods, so long as they arrive.” “The charges [were] for the baked goods themselves, and the movement of those goods [was] at most a component of total price. The commerce [was] in breads, buns, rolls, and snack cakes — not transportation services.”

The Second Circuit also noted that the distributor agreements identified the industry that the distributors worked in as the “baking industry,” not the transportation industry.

Because the plaintiffs worked in the baking industry, not the transportation industry, they were not exempt from the FAA, and the district court therefore properly compelled arbitration.

Bissonnette v. LePage Bakeries Park St., LLC, No. 20-1681 (2d Cir. May 5, 2022).

 

 

Delaware Federal Court Confirms Arbitration Award, Holds Arbitrator Did Not Exceed Authority in Finding Unambiguous Contract Provision Was Unconscionable

by

QAD Inc. petitioned the Delaware federal court to confirm an arbitration award it obtained against Block & Company Inc. Block cross-moved to vacate the award. The arbitrator awarded QAD more than $740,000 in connection with a contract dispute between the parties. In moving to vacate the award, Block claimed the arbitrator exceeded his authority in declaring that a limit of liability provision in the contract was unconscionable, despite also finding the contract language itself was unambiguous. Block argued that QAD drafted the provision, and there was no evidence of a gross imbalance between the two sophisticated parties in negotiating the term. The court nonetheless confirmed the award, and denied Block’s motion to vacate, finding Block had not satisfied its “heavy burden” under FAA section 10(a)(4) to show that the award was not “rationally derived from the agreement or supported by the record.” Even if the arbitrator had erred in his interpretation of the case law on unconscionability, the court explained that its power to vacate the award would be constrained because “[e]xceeding one’s powers … is not synonymous with making a mistake.” Because the arbitrator based his assessment of unconscionability on the facts on the record and applicable law, the court held that it could not re-litigate the merits of the unconscionability ruling, regardless of whether the arbitrator reached the correct decision.

QAD, Inc. v. Block & Co., Inc., No. 1:21-mc-00370 (D. Del. Apr. 25, 2022).

Virginia Supreme Court Declines to Enforce Arbitration Clause in a Trust, Agrees Trusts Aren’t “Contracts” Under FAA and Virginia Law

by

Linda Anderson sued Sarah Boyle alleging that Boyle breached her duties as trustee of an irrevocable trust to which Anderson and Boyle were beneficiaries. Boyle moved to compel arbitration, citing an arbitration clause in the trust. The lower court denied the motion and Boyle appealed.

The Virginia Supreme Court granted the appeal solely to decide whether the Virginia Uniform Arbitration Act (VUAA) or the Federal Arbitration Act (FAA), each of which requires arbitration for “contracts,” compels enforcement of an arbitration provision in a trust. The court explained that a trust is, in general, a “donative instrument,” not an “agreement between two or more persons which creates an obligation to do or not to do a particular thing.” As such, the court held that a trust is not a “contract,” as required to fall within the ambit of both the VUAA and the FAA. While the VUAA also compels arbitration for certain “written agreements,” the court disagreed with Boyle that a trust qualifies as an “agreement.” Further, even if it did, the court noted that an arbitration clause would not be enforceable under the VUAA as it relates to claims between a trustee and a beneficiary, the latter of whom is not a party to any “written agreement to submit any existing controversy to arbitration.” The court therefore affirmed the lower court order denying Boyle’s motion, agreeing that neither the VUAA nor the FAA compels arbitration.

Boyle v. Anderson, No. 210382 (Va. Apr. 14, 2022).

District Court’s Order Details 28 USC § 1782 Requirements for Granting Ex Parte Petition for Discovery of Documents in Foreign Proceeding

by

The U.S. District Court for the Southern District of New York granted an ex parte petition under 28 U.S.C. § 1782(a) for the discovery of documents held by Aimbridge Hospitality, Norton Rose Fulbright, and White & Case for use in a proceeding in the British Virgin Islands. In so doing, the court noted that such ex parte petitions are “routinely grant[ed].”

A district court has the authority to grant a section 1782 petition where:

  1. The person from whom discovery is sought resides or is found in the district of the district court to which the application is made;
  2. The discovery is for use in a foreign proceeding before a foreign or international tribunal; and;
  3. The application is made by a foreign or international tribunal or any interested person.

The court also described the following discretionary factors that the court may consider:

  1. Whether the person from whom discovery is sought is a participant in the foreign proceeding, in which case the need for section 1782(a) aid generally is not as apparent;
  2. The nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign court or agency abroad to U.S. federal court judicial assistance;
  3. Whether the section 1782(a) request conceals an attempt to circumvent foreign proof-gathering restrictions; and
  4. Whether the request is unduly intrusive or burdensome.

The petition, supported by declarations and memoranda of law, satisfied the required section 1782 criteria, where the petitioner averred that the respondents all resided in or were found in the Southern District, and the documents would be used to “strengthen [the petitioner’s] position” in ongoing litigation in the British Virgin Islands, which the petitioner had initiated, making it an “interested party.” In addition, each of the discretionary factors, including the fact that courts in the Southern District “routinely grant § 1782 applications for discovery for use in the BVI,” also weighed in favor of granting the petition.

In re Application of Tethyan Copper Co. Pty. Ltd., No. 1:21-mc-00377 (S.D.N.Y. Apr. 28, 2022).