Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

D.C. Circuit Affirms Award of Fees

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This case arose out of an employment dispute between Preeminent Protective Services Inc., which provides security services in and around the District of Columbia, and the Service Employees International Union Local 32BJ. When Preeminent took over a contract, it refused to hire two guards who had previously worked there. The union claimed the refusal violated a collective bargaining agreement.

The union filed a petition to compel arbitration of that claim in federal court in the District of Columbia. In May 2018, the district court granted summary judgment to the union and ordered the parties to arbitrate. After Preeminent stalled the arbitration for more than a year, the district court held Preeminent in contempt for failing to comply, and awarded $51,000 in costs and attorneys’ fees to the union based on a “lodestar” figure, reflecting the number of hours worked by each union lawyer multiplied by a reasonable hourly rate for each lawyer.

Preeminent appealed all three orders of the district court: the motion to compel arbitration, the contempt order, and attorneys’ fees. However, the D.C. Circuit lacked jurisdiction to review the arbitration and contempt orders, which were final decisions not timely appealed. On appeal, Preeminent raised three challenges to the fee award.

First, Preeminent argued it was impermissibly punitive to use prevailing market rates as opposed to actual rates. The D.C. Circuit rejected that argument, noting that the court has repeatedly upheld the use of prevailing market rates in determining appropriate awards under statutory fee-shifting provisions.

Second, Preeminent claimed that the district court miscalculated the prevailing market rates. The D.C. Circuit again rejected that argument, finding that although the union’s attorneys charged discounted rates, they were nevertheless worthy of market rates given their experience and credentials.

Finally, Preeminent argued the district court should have lowered the award to account for Preeminent’s inability to pay. The D.C. Circuit rejected that argument based on contradicting evidence that showed Preeminent had active contracts worth more than $2.5 million.

The D.C. Circuit therefore affirmed the district court’s fee award on the merits.

Service Employees International Union Local 32BJ v. Preeminent Protective Services Inc., No. 19-9157 (D.C. Cir. May 18, 2021).

Second Circuit Affirms Denial of Vacatur of Employment Arbitration Award Due to Failure to Provide Evidence of Alleged Perjury in Arbitration Proceedings

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The district court had denied a motion filed by a former employee of a department store for vacatur of an arbitration award that rejected a grievance filed by the employee’s union against the store. On appeal, the employee argued that the district court erred when it denied vacatur because the award was obtained by fraud, namely, false testimony. The Second Circuit affirmed, holding that, because the employee provided no record evidence of the arbitration testimony, and only repeated “unsupported allegations,” the appellant failed to show (1) the existence of fraudulent activity; (2) that, even with the exercise of due diligence, he could not have discovered the fraud prior to the award issuing; and (3) that the fraud materially related to an issue in the arbitration. The court concluded: “Without providing at least the challenged testimony, [the appellant] has failed to show that any perjury occurred or even that the testimony he wishes to challenge was materially related to the arbitrator’s decision.” The court affirmed, ruling that the employee failed to demonstrate any error with the denial of the motion for vacatur.

Bright-Asante v. Saks & Co., No. 20-1280 (2d Cir. May 14, 2021).