Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DISMISSES SECURITIES LAW CLAIMS AGAINST REINSURER, GRANTS LEAVE TO AMEND COMPLAINT

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PXRE Group Ltd. (“PXRE”) suffered significant losses following Hurricanes Katrina and Rita and sought to raise funds to pay out reinsurance claims through a public offering of common stock and a private offering of preferred shares. In October 2005, plaintiffs, a group of nineteen hedge funds, purchased preferred shares and were provided with a private placement memorandum in connection with the purchase. In February 2006, PXRE disclosed that actual losses were twice as much as previously announced. The plaintiffs then brought this action asserting claims for violations of sections 12(a)(2) and 15 of the Securities Act of 1933 and state law claims for fraud and negligent misrepresentation. The defendants subsequently filed a motion to dismiss.

On the section 12(a)(2) claim, which imposes liability for selling securities via a prospectus that includes a material misrepresentation, the court first ruled that this claim must fail because private offerings are not effected by means of a prospectus. Still, the plaintiffs sought to invoke the integration doctrine, arguing that the private offering of preferred shares was integrated with the public offering of common stock and therefore liability attached to the alleged misrepresentations in the private placement memorandum, but the court ruled that the plaintiffs failed to allege facts sufficient to invoke the integration doctrine. The court then dismissed the section 15 claim, which establishes control person liability for a violation of section 12(a)(2), and declined to exercise supplemental jurisdiction over the remaining state law claims. The district court thus granted the defendants’ motion to dismiss, but did grant the plaintiffs leave to amend the complaint. In a February 23, 2010 Order, the district court acknowledged receipt of the plaintiffs’ Second Amended Complaint and instructed the defendants to provide the court with a letter on whether the defendants intend to answer the complaint or renew their motion to dismiss. Anegada Master Fund, Ltd. v. PXRE Group Ltd., Case No. 08-10584 (USDC S.D.N.Y. Jan. 26, 2010).

This post written by Dan Crisp.

ASSETS UNFROZEN TO PAY LEGAL COUNSEL

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In a follow-up to a December 2, 2009 post regarding unauthorized insurance and reinsurance, funds previously frozen to ensure payment of a judgment in favor of plaintiff Everest National Insurance Co. were unfrozen to pay the judgment debtor/defendants’ legal fees. The funds were originally pledged as security for the defendants’ reimbursement obligation arising out of a letter of credit. When the security interest was released, Everest obtained an injunction restraining the defendants from transferring the funds so they would be available to satisfy the judgment. Before the injunction was entered, however, the funds were transferred to a trust account for the express purpose of paying legal fees. The court granted the defendants’ motion for an order authorizing release of the funds for the purpose of paying their legal fees. The defendants had no other source of cash to pay counsel, who threatened to withdraw if payment toward the accumulated legal fees could not be made. Everest National Insurance Co. v. Sutton, Case No. 07-722 (USDC D.N.J. Jan. 8, 2010).

This post written by Brian Perryman.

RECENT DECISIONS ON CONFIRMATION OF ARBITRATION AWARDS

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This post summarizes the salient issues and key points of recent decisions on arbitration awards:

  • In the latest development in Swiss Re v. Lincoln National, the Northern District of Indiana confirmed the entry of an uncontested arbitration award. Swiss Reinsurance Co. v. Lincoln Nat’l Reinsurance Co. (Barbados) Ltd., Case No. 09-cv-36 (N.D. Ind. Dec. 14, 2009).
  • In ConocoPhillips v. United Steel Workers, the Eastern District of Pennsylvania analyzed a labor arbitration award. The court determined that the arbitrator was not authorized to make a particular progressive discipline structure of his own creation part of the Collective Bargaining Agreement. The court confirmed the award, but modified the arbitrator’s opinion to make clear that the five-step progressive discipline structure described would only be illustrative rather than required by or part of the CBA. ConocoPhillips v. United Steel Workers Local 10-234, Case No. 09-3842 (E.D. Pa. Jan. 19, 2010).
  • Following an adverse arbitration award, plaintiff Jerry Broaddus moved the Middle District of Tennessee to vacate the award. Mr. Broaddus contended the award was in manifest disregard of the law because the arbitrator incorrectly defined an “adverse employment action” as a materially adverse change in the terms of conditions of employment in contravention of controlling case law. The court found that even if the arbitrator failed to correctly view the “adverse employment action,” the error was harmless. The award was confirmed. Broaddus v. Rivergate Acquisitions, Inc., Case No. 08-0805 (M.D. Tenn. Jan. 14, 2010).
  • In Kirby Morgan Dive Sys. V. Hydrospace Ltd., the Central District of California entered an order confirming an arbitration award in favor of Kirby Morgan Dive Systems. The court found that (1) it had subject matter jurisdiction over the petition; (2) personal jurisdiction over the defendant; (3) Kirby Morgan was permitted to proceed on a default basis; (4) and Kirby Morgan was not required to obtain a prior order compelling arbitration. Kirby Morgan Dive Sys. v. Hydrospace Ltd., Case No. 09-4934 (C.D. Cal. Jan. 13, 2010).
  • A Texas Court of Appeals conditionally granted Chevron USA’s motion for a writ of mandamus against the trial court judge compelling him to enter an order confirming three arbitration awards. Chevron additionally filed a notice of appeal from an order which, it argues, denies its motion to confirm the arbitration awards. The Court of Appeals dismissed the notice of appeal after determining that it lacked jurisdiction to hear the interlocutory appeal. In re: Chevron U.S.A., Inc., Case No. 08-00082 (Tex. Ct. App. Jan. 27, 2010).
  • Rhode Island Hospital moved to vacate an arbitration award in favor of Defendant United Nurses and Allied Professionals Local 5098. The Court held that the award was founded on a “plausible interpretation” of the collective bargaining agreement, and thus the court “must uphold it.” Rhode Island Hospital v. United Nurses and Allied Professionals, Local 5098, Case No. 09-226 (D. R.I. Jan. 22, 2010).
  • In Thomas Kinkade Co. v. Lighthouse Galleries, LLC, the Eastern District of Michigan vacated an arbitration award in favor of Lighthouse Galleries. The court, while noting the limited nature of judicial review of arbitration awards, found that the award violated the parties’ contract and disregarded undisputed evidence. Thus, the court ruled that intervention was appropriate and vacated the award. Thomas Kinkade Co. v. Lighthouse Galleries, LLC, Case No. 09-10757 (E.D. Mich. Jan. 27, 2010).
  • In a dispute related to construction work on the US Navy’s SPAWAR facility, the US District Court sitting in South Carolina denied plaintiff Coastal Roofing Company’s motion to vacate the arbitration award entered against it. The court found that even though the arbitrator failed to include a written explanation for his decision, the award should be confirmed. United States of America for the Use and Benefit of Coastal Roofing Co., Inc. v. P. Browne & Assoc., Inc., Case No: 07-3008 (D. S.C. Jan. 22, 2010).
  • Petitioners Thomas E. Collins, Jr. and Heather Collins moved to confirm an arbitration award issued by FINRA against Lawrence Joseph Ferrari, who had not filed a response or appearance in the action. The court found that petitioners carried their light burden of persuasion, and the award was confirmed. Collins v. Ferrari, Case No. 08-1274 (N.D. N.Y. Feb. 9, 2010).
  • In Schwartz v. Merrill Lynch, the Southern District of New York found that petitioner Robert Schwartz offered no legitimate grounds to support his motion to vacate the arbitration award entered in favor of Merrill Lynch. The court found specious Schwartz’s arguments that the arbitrator was biased and failed to consider relevant evidence. Schwartz v. Merrill Lynch & Co., Inc., Case No. 09-900 (S.D. N.Y. Feb. 8, 2010).

This post written by John Black.

STATE LEGISLATIVE ACTION REGARDING CAT FUNDS

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Following are legislative developments relating to State catastrophe funds:

S.B. 923 was introduced on February 8, 2010 in the Missouri State Senate. The bill would establish the Missouri Catastrophe Fund to help pay covered residential property damage insurance claims in the aftermath of an earthquake, which affects Missouri homeowners and their property/casualty insurers. The catastrophe fund, which would consist of premiums paid by insurers, bond revenues, and appropriated state funds, would provide a backstop for insurance companies to insure against covered catastrophic losses to avoid the collapse of the property insurance market in the wake of a major earthquake. The bill also would establish an advisory council to provide information and advice with regard to the fund and develop prevention and mitigation standards related to covered losses. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the General Assembly as to how the fund can coordinate with such programs.

S.B. 923 was referred on February 11, 2010 to the Small Business, Insurance and Industry Committee of the Missouri State Senate. Earlier this year, a companion bill (H.R. 1468) to S.B. 923 was introduced in the Missouri House of Representatives. No action has been reported with regard to H.B. 1468.

Also, on February 8, 2010, A1983 was introduced in the New Jersey General Assembly to implement the New Jersey Consumer Catastrophe Preparedness and Protection Act through an advisory council. The Act would establish the New Jersey Catastrophe Fund to help pay covered resident property damage insurance claims in the aftermath of a natural disaster or other catastrophe in the State, which affects New Jersey homeowners and their property/casualty insurers. The Act would appropriate from the General Fund $10 million for deposit in the fund. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the State legislature as to how to how the fund can coordinate with such programs.

This post written by Karen Benson.