Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Second Circuit Affirms Denial of Motions to Compel Arbitration in Suit Against Trump Corp. and Trump Family

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The Second Circuit recently affirmed the denial of motions to compel arbitration filed by, inter alia, the Trump Corp. and a nonparty from whom the plaintiffs sought discovery.

Several anonymous plaintiffs filed a putative class action against the Trump Corp., former President Donald J. Trump, and members of his family asserting federal and state claims alleging that the defendants had fraudulently induced them to enter into business relationships with nonparty ACN Opportunity LLC. More specifically, the plaintiffs claimed that the defendants publicly represented that they were independent of ACN when they were actually allegedly accepting large payments from ACN. When the plaintiffs entered their business relationships with ACN, they signed arbitration agreements agreeing to arbitrate disputes.

When the plaintiffs filed suit, the defendants moved to dismiss the plaintiffs’ complaint and then the plaintiffs’ amended complaint. The defendants also filed a motion to compel arbitration pursuant to the arbitration clauses in the agreements between the plaintiffs and ACN.

The plaintiffs subsequently served ACN with a subpoena seeking various documents. In response, ACN objected and sought to compel arbitration of the discovery dispute.

The district court denied the motions to compel arbitration by the defendants and ACN, both of whom then appealed to the Second Circuit Court of Appeals.

The Second Circuit affirmed the denial of the motions to compel arbitration.

On appeal, the defendants primarily argued that arbitrability should have been decided by the arbitrator, not the district court, and that they were entitled to compel arbitration under equitable estoppel principles. ACN meanwhile principally argued that the district court had erred when the court concluded that it lacked jurisdiction to entertain ACN’s motion to compel.

With respect to the defendants, the Second Circuit first concluded that the defendants “did not adequately raise before the district court their argument that, under Contec [Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005)], the issue of arbitrability was for the arbitrator to determine or, more broadly, that the questions of equitable estoppel and waiver should have been determined by an arbitrator.” The Second Circuit noted that the defendants had asked the district court to resolve those questions and had only included a “casual citation,” “without further explanation or argument” on this issue.

On the merits, the Second Circuit held that the defendants were not entitled to compel arbitration under principles of equitable estoppel. To invoke equitable estoppel, the court explained that “there must be a close relationship among the signatories and non-signatories such that it can reasonably be inferred that the signatories had knowledge of, and consented to, the extension of their agreement to arbitrate to the non-signatories.” That standard was not met here. “There was no corporate relationship between the defendants and ACN of which the plaintiffs had knowledge, the defendants [did] not own or control ACN, and the defendants [were] not named in the [] agreements between ACN and the plaintiffs.” Indeed, the plaintiffs had alleged that the defendants had concealed their relationship with ACN and held themselves out as independent.

Turning to ACN’s motion, the court explained that there was “no actual case or controversy between the plaintiffs and ACN . . . and therefore no subject-matter jurisdiction.” The only “controversy” was a discovery dispute, which was insufficient to compel arbitration.

The Second Circuit also rejected ACN’s alternative argument that it was entitled to invoke arbitration under principles of equitable estoppel, explaining that ACN had not properly raised that argument before the district court and that ACN had therefore forfeited it.

Doe v. Trump Corp., Nos. 20-1228 & 20-1278 (2d Cir. July 28, 2021).

 

West Virginia Federal Court Refuses to Force Non-Signatory to Participate in Arbitration

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Mountain Valley Pipeline LLC (MVP) contracted with U.S. Trinity Energy Services LLC for the construction and installation of the Mountain Valley Pipeline across property in Greenbrier County, West Virginia. Trinity subcontracted with M.T. Bores LLC to furnish equipment to excavate a tunnel in connection with the installation of the pipeline. But before the installation was completed, MVP terminated the project.

M.T. Bores claimed that it was not paid in full for the excavation equipment and thereafter placed a mechanic’s lien against the property for the balance due. M.T. Bores then instituted an action in the Greenbrier County Circuit Court seeking enforcement of the mechanic’s lien against MVP’s real property. The case was removed to the U.S. District Court for the Southern District of West Virginia, and Trinity thereafter moved to compel arbitration under the arbitration clause in the subcontract between M.T. Bores and Trinity. M.T. Bores did not dispute that it was required to arbitrate its claims but rather sought to compel MVP to participate in the arbitration.

Although recognizing that MVP was not a party to the subcontract, M.T. Bores sought to compel MVP’s participation based on the doctrine of equitable estoppel and third-party beneficiary theory. M.T. Bores argued that MVP should be estopped from refusing to arbitrate because it directly benefitted from the subcontract since the equipment contributed to MVP’s pipeline. The district court declined to apply the doctrine of equitable estoppel where MVP had not asserted any claim against M.T. Bores arising from the subcontract but rather was only defending claims brought against it by M.T. Bores. The district court similarly rejected M.T. Bores’ argument that MVP was a third-party beneficiary of the subcontract insofar as it was the owner of the property that was the site of M.T. Bores’ performance under the subcontract, finding that there was no evidence that the subcontract was created for MVP’s sole benefit. The district court noted that “[a] project owner will doubtless receive incidental benefits from its contractor’s subcontracts; but those benefits alone will not render the owner a third-party beneficiary.”

M.T. Bores also argued that MVP should be compelled to arbitrate in the interest of judicial economy since the claims against MVP and Trinity were inextricably intertwined. Although the district court agreed that M.T. Bores’ claims against MVP and Trinity involved some overlapping legal and factual issues, the court found the claims were not so “inextricably intertwined” to justify requiring MVP to participate in an arbitration absent its consent.

The district court similarly found no merit to M.T. Bores’ argument that MVP was an essential party to the arbitration since Trinity’s payment obligations to M.T. Bores under the subcontract were linked to, and may have been contingent on, MVP’s payment to Trinity.

Even so, the district court noted that an express provision in the subcontract deprived M.T. Bores of the ability to compel MVP to arbitrate absent Trinity’s consent. The district court accordingly denied M.T. Bores’ motion to compel MVP to participate in the arbitration between Trinity and M.T. Bores.

M.T. Bores, LLC v. Mountain Valley Pipeline, LLC, No. 5:20-cv-00602 (S.D. W. Va. Aug. 2, 2021).

Federal Court Declines to Vacate Arbitration Award Absent Public Policy Against Requiring Reinstatement of Terminated Employee

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The plaintiff, ITT Engineered Valves LLC, sought to vacate an arbitration award finding it had improperly terminated its employee, Douglas Wood, and ordering that Wood be reinstated. While recognizing the general presumption in favor of enforcing arbitration awards, ITT claimed an exception to that rule applied here: “well-defined and dominant” public policies would be violated if the award were to be enforced. Specifically, it pointed to public policies against (1) racial/national origin harassment and discrimination and (2) threats of workplace violence. Wood’s labor union, the defendant in the action, argued that the so-called public policy exception is exceedingly narrow and did not warrant vacatur. The court agreed with the union.

The court explained that applying the public policy exception requires a two-step analysis. First, can a “well-defined and dominant” public policy be identified? If so, would enforcing the award violate that policy? The court noted that the exception is available only when the award creates an “explicit conflict with an explicit public policy.” Even assuming the public policies identified by ITT were “well-defined and dominant,” the court found enforcing the award would not thwart the purpose of either policy. As an initial matter, the court found ITT failed to demonstrate that any public policies required the discharge of an employee who engaged in discrimination or harassment and/or made threats of violence. The court also accepted the arbitrator’s conclusion that Wood’s conduct was neither discriminatory nor harassing and did not constitute a threat of violence in the first instance. Thus, while sympathizing with ITT’s desire to maintain a safe workplace, the court denied its motion for summary judgment and granted the union’s cross-motion.

ITT Engineered Valves, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int’l Union, No. 5:21-cv-00205 (E.D. Pa. Aug. 3, 2021).

Chinese Arbitration Award Confirmed Despite US Company’s Claim of Unfair Treatment Stemming From US-China Trade War

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The Northern District of New York confirmed this month an arbitration award made in June 2018 by the China International Economic and Trade Arbitration Commission (CIETAC) in favor of two Chinese companies and against a U.S. tool manufacturer. The Chinese companies had contracted to purchase and import machine tools used in the manufacture of automobile engines and other machine parts from New Monarch Machine Tool Inc., a company based in Cortland, New York. New Monarch allegedly defaulted on its delivery and installation obligations under the parties’ sales contracts, which required arbitration of any disputes to take place in Beijing before CIETAC.

The CIETAC panel ultimately awarded the Chinese companies approximately $2.4 million, plus interest, payable within 30 days. When New Monarch failed to pay, a petition for confirmation of the award was filed. New Monarch argued that the award should not be confirmed because the arbitration was not conducted per CIETAC’s own rules and that the award was against the public policy of the United States.

The New York Convention governs the enforcement of arbitral awards stemming from disputes that are commercial and not entirely between citizens of the United States. Article V of the convention provides the grounds for refusing to recognize or enforce a foreign arbitral award, which include the grounds raised by New Monarch. However, the party opposing enforcement of an arbitral award under the convention has the “heavy” burden of proving that one of the grounds applies.

New Monarch failed to meet that burden. It argued that CIETAC failed to follow its own rules by taking more than a year to render a decision despite the rules imposing a six-month deadline. The court noted that the rules permit the deadline to be extended if the panel receives permission from the president of the arbitration court, which the panel did in this case.

New Monarch also argued that the deterioration of U.S.-Chinese trade relations during the yearlong delay made it “impossible for an American company like New Monarch to get a fair shake before the Chinese-based CIETAC.” The court rejected this argument, noting that the public policy defense must be “construed very narrowly to encompass only those circumstances where enforcement would violate our most basic notions of morality and justice.” The court “boil[ed] down” this argument to an “assertion that the confirmation of a foreign arbitral award somehow hinges on the current state of trade relations between signatories to the New York Convention.” The court stated that such a finding would be contrary to the goals and purpose of the New York Convention, which is “to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.”

Chongqing Loncin Engine Parts v New Monarch Machine Tool, No. 5:21-cv-00084 (N.D.N.Y. Aug. 3, 2021).

Sixth Circuit Agrees Farmer Must Reimburse Crop Insurer for Overpayments Received Due to Farmer’s Poor Record-Keeping

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The Sixth Circuit Court of Appeals affirmed a Michigan district court order confirming an arbitration award for Farmers Mutual Hail Insurance Company of Iowa. The award ordered Edgar Miller to return the extra payments he received from Farmers Mutual after it was discovered that, due to Miller’s poor record-keeping, Farmers Mutual had overpaid him under his crop insurance policy. After the award was rendered in favor of Farmers Mutual, the parties had the overpayment issue considered by the Federal Crop Insurance Corp. (FCIC), a body created by Congress to establish and regulate rules for crop insurance coverage. The FCIC determined that Farmers Mutual was permitted to seek reimbursement from Miller, and Farmers Mutual subsequently filed a petition to confirm the arbitration award in Michigan federal court.

Where, as here, the FCIC provides an interpretation after the arbitrator has acted, the award must be reviewed to determine if it is consistent with the FCIC’s view. The award must be nullified if it is determined that any inconsistency materially affected the award. Here, the district court ruled, and the Sixth Circuit agreed, that the award was not inconsistent with the FCIC’s determination that a crop insurer may reject a claim for coverage based on poor record-keeping alone and may obtain retroactive reimbursement for an overpaid claim on that basis. The Sixth Circuit rejected Miller’s argument that the arbitrator nonetheless exceeded its authority by placing the burden of proof on him with respect to reimbursement. The court also rejected Miller’s claim preclusion argument, finding there had been neither a final decision on the merits nor an identical claim raised in two lawsuits.

Farmers Mutual Hail Insurance Co. of Iowa v. Miller, No. 20-1978 (6th Cir. July 20, 2021).