Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Holds the ACA and Implementing Regulations Do Not Preempt State Creditor Priority Laws in Reinsurance Debt Dispute

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In 2016, Colorado Health Insurance Cooperative Inc. was ordered into liquidation by a Colorado court. At the time, the federal government owed Colorado Health $24.5 million for reinsurance debts under the Affordable Care Act (ACA), while Colorado Health owed the federal government $42 million for risk adjustment debts pursuant to another program promulgated under the ACA. The government attempted to “leapfrog” other insolvency creditors by offsetting the amounts Colorado Health owed under one ACA program against the amounts the federal government owed the Colorado Health estate under the other federal program, rather than paying its debt to the estate in full and making a claim against the estate as an insolvency creditor. The trustee sued, and the U.S. Court of Federal Claims ordered the government to pay.

The U.S. Court of Appeals for the Federal Circuit affirmed. The court analyzed the explicit statutory and regulatory language and the structure and purpose of the federal scheme erected by the ACA and implementing regulations. The court found that, with specific regard to the prioritization of insolvency creditors, the text of the statutes and regulations was silent. The court also found that the structure of the law suggested that state law controlled creditor priority, and further that the purposes of the law did not evidence a preemptive intent that was otherwise absent from the text and structure of the federal scheme. As such, the federal scheme, collectively, did not demonstrate a “clear and manifest” intent to preempt state law fixing creditors’ rights during insolvency.

Therefore, applying the presumption against preemption, the court held that the federal scheme did not preempt Colorado’s creditor priority framework, and the federal government could not offset the amounts that were owed to it by Colorado Health rather than paying its debt to the estate and making a claim for the amounts it was owed, just as any other creditor would be required to do. 

Conway v. United States, No. 1:18-cv-01623 (Fed. Cir. May 17, 2021).

Court Confirms Arbitration Decision Concluding That Discrimination Claims Were Time-Barred

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A federal district court recently confirmed an arbitration decision concluding that a disgruntled former employee’s discrimination and retaliation claims under Title VII were time-barred because the former employee did not initiate arbitration in a timely fashion.

Clare Anagonye, a financial adviser, filed a charge with the EEOC claiming she was constructively discharged and discriminated and retaliated against on the basis of her race, color, and gender in violation of Title VII. The EEOC dismissed the charge on January 19, 2018, and advised Anagonye of the 90-day limitation period for filing a civil action at that time.

Anagonye filed a civil action within the 90-day time period, but her employment contract with her former employer contained an arbitration clause. The district court concluded that the clause was valid and enforceable and stayed Anagonye’s action pending arbitration. Anagonye subsequently filed a demand for arbitration on or about August 27, 2019.

Anagonye’s former employer argued that the arbitration clause in the employment contract required Anagonye to initiate arbitration, not a lawsuit, within 90 days of the EEOC’s dismissal.

An arbitrator panel of the American Arbitration Association (AAA) agreed and concluded that Anagonye’s demand for arbitration was time-barred and that it therefore lacked jurisdiction over her claim. Anagonye’s former employer moved to confirm the award and Anagonye, proceeding pro se, moved to vacate it.

The U.S. District Court for the Eastern District of Michigan confirmed the award. A magistrate judge concluded that Anagonye had “failed to establish any of the statutory grounds for setting aside the arbitration decision.” The judge noted that it had already rejected Anagonye’s primary claim that court, not arbitration, was the appropriate venue for her claims when it ordered a stay pending arbitration and that Anagonye had waived any challenge to that decision by failing to object to it. The judge also rejected Anagonye’s “conclusory statements and speculation” regarding alleged “corruption” by the AAA panel, noting that the record established that Anagonye had the opportunity to select arbiters despite her allegations to the contrary. Finally, the judge held that he was precluded from adjudicating the panel’s decision that Anagonye’s claim was time-barred because “the FAA does not provide for judicial review of an arbitrator’s legal conclusions.”

The district court adopted the magistrate judge’s recommendation.

Anagonye v. Mass Mutual Insurance Co., No. 2:18-cv-11170 (E.D. Mich. May 21, 2021).

SDNY Declines to Adopt Collateral Attack Doctrine, Grants Motion to Compel Arbitration

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Petitioners Credit Suisse AG and Lara Warner sought to permanently stay an arbitration commenced by respondent Colleen Graham, who cross-moved to compel the arbitration. The petitioners claimed the proceeding was an impermissible “collateral attack” on a prior, related arbitration in which Graham’s claims against different parties were dismissed. As it relates to the second arbitration against the petitioners, there was no dispute as to whether Graham’s claims were subject to arbitration, nor that any threshold arbitrability questions were to be decided by an arbitrator. In deciding the petitioners’ motion, the court therefore started from the baseline that Graham’s motion to compel must be granted, absent a valid basis to stay.

The petitioners argued the issues raised in Graham’s arbitration against them were already resolved in the first arbitration, pointing to several cases in which courts found a second arbitration could not collaterally attack the final determination made in a first arbitration. According to the petitioners, the “collateral attack doctrine” is not a question or arbitrability, but rather a legal question to be decided by a court. But the court disagreed and declined to adopt the collateral attack doctrine. Under the FAA, the court explained, its role is to decide whether an arbitration falls within the terms of a valid arbitration agreement, not whether it is estopped by a prior arbitration. If, as here, an arbitration falls within a valid arbitration agreement, the court found it is well established that any threshold procedural questions about the arbitration “are presumptively not for the judge, but for an arbitrator, to decide.” The court found its role was even more limited here, as the parties specifically agreed to delegate any gateway issues to the arbitrator. Comparing the petitioners’ “collateral attack” argument to the res judicata argument raised and rejected in a 2015 Second Circuit decision, the court ruled that the preclusive effect of Graham’s first arbitration, if any, should be decided by the arbitrator in the second arbitration. Graham’s motion to compel arbitration was thus granted, and the petitioners’ motion to stay was denied.

Credit Suisse AG v. Graham, No. 1:21-cv-00951 (S.D.N.Y. Apr. 7, 2021)

Minnesota District Court Grants Stay of Entire Action Pending Appeal of Order Denying Motion to Compel Arbitration

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This case arose from an interpleader action in the federal district court in Minnesota. Benchmark Insurance Co. appointed Sunz Insurance Co. to underwrite and issue large-scale deductible workers’ compensation insurance policies. The policies required the insured to post sufficient cash or cash-equivalent collateral to secure the insured’s obligations for claims within the deductible. Benchmark and Sunz entered into a reinsurance contract that required Benchmark to cede to Sunz all premiums and losses on the policies that Sunz issued on Benchmark’s behalf. Sunz thereafter informed Benchmark that Benchmark was holding too much deductible collateral and demanded it be released to Sunz. Benchmark calculated it was holding approximately $20.5 million in excess collateral of a number of its insureds.

On June 3, 2020, the district court ordered Benchmark to deposit those interpleader funds with the court’s registry. Most of the insureds named in the interpleader complaint disclaimed their interest in the funds, and the funds were subsequently withdrawn by Sunz. Certain insureds who did not disclaim their interests filed counterclaims against Benchmark, some of which also filed cross-claims against Sunz for breach of contract, asserting that the program agreements between each cross-claimant and Sunz were superseded by the insurance policies issued by Sunz to the cross-claimants and thus excluded the program agreement from application. The program agreements each required any dispute arising out of the program agreement to be submitted to binding arbitration.

In July 2020, Sunz moved to dismiss the cross-claims, or in the alternative, to compel arbitration. On February 23, 2021, the district court denied Sunz’s motion. Sunz appealed the portion of the February 23 order denying the motion to compel arbitration to the Eighth Circuit and moved before the district court to stay the entire action pending the appeal. Cross-claimants conceded that the matter should be partially stayed but that the district court should allow the parties to litigate whether the cross-claimants were entitled to the interpleaded funds.

In determining whether to grant a stay, the district court conducted a balancing test of the following four factors:

  • Whether the stay applicant has made a showing that it is likely to succeed on the merits;
  • Whether the applicant will be irreparably injured absent a stay;
  • Whether issuance of the stay will substantially injure the other parties interested in the proceeding;
  • Where the public interest lies.

The district court found that the factors weighed in favor of a stay, particularly because allowing the parties to litigate the issue of entitlement to the interpleaded funds risked inconsistent rulings and potential costs that should not be expended while the Eight Circuit resolved the issue of whether such issues will be arbitrated.

Benchmark Insurance Co. v. Sunz Insurance Co., No. 0:20-cv-00908 (D. Minn. May 12, 2021).

Illinois District Court Denies Motion to Vacate Arbitration Award and Imposes Sanctions, Citing “Outright Hostility” to Such Challenges in the Seventh Circuit

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The U.S. District Court for the Northern District of Illinois denied a former employee’s motion to vacate an arbitration award in favor of defendant AT&T Mobility Services LLC. The plaintiff claimed the arbitrator exceeded his powers or imperfectly executed them and that the award manifestly disregarded the law, so as to warrant vacatur under section 10(a)(4) of the Federal Arbitration Act. The court disagreed, finding as an initial matter that the plaintiff failed to explain how exactly the arbitrator exceeded his powers until his reply brief. Because the court cannot consider arguments first raised on reply, the motion to vacate was denied on this basis alone. But even considering the motion on its merits, the court found no evidence requiring vacatur, noting the grounds for doing so are “extremely limited” and that the plaintiff failed to cite a single decision in which an arbitration award was vacated. The court took particular issue with the “incoherent and unsupported arguments” in the plaintiff’s moving papers and the plaintiff’s evident attempt to take “another bite at the apple.” Finding there is “an outright hostility in the Seventh Circuit to parties challenging arbitration awards,” the court granted AT&T’s motion for sanctions and directed the plaintiff to pay $1,500.

Skuja v. AT&T Mobility Services LLC, No. 1:18-cv-07945 (N.D. Ill. May 25, 2021).