Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT CONFIRMS ARBITRATION AWARD, BUT REVERSES PANEL’S DECISION TO REFUSE TO DISBAND

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KX Reinsurance Company (“KX”) arbitrated certain disputes with North Star Reinsurance Corporation (“North Star”) and General Reinsurance Company (“Gen Re”) (North Star and Gen Re had each initiated separate arbitral proceedings against KX, but all parties agreed to consolidate the proceedings as they involved interrelated issues). The arbitral panel ruled against KX on North Star’s and Gen Re’s contract claims, and awarded North Star and Gen Re interest and attorneys fees pursuant to the parties’ respective contracts. The Panel ruled in KX’s favor on North Star’s and Gen Re’s bad faith claims.

During the course of the proceedings, North Star and Gen Re also sought an interim order requiring KX to post security in the form of letters of credit pertaining to certain other potential future contract disputes. KX argued that letters of credit pertaining to potential future claims were beyond the scope of the arbitral submission. North Star and Gen Re argued that their respective submissions broadly included future potential claims. The panel ruled against KX and issued the interim order, which it later incorporated into the final award. It also included in the award an explicit retention of jurisdiction over potential future disputes. KX thereafter sought to confirm the award in the district court, except for that aspect of the final award which purported to allow the panel to retain jurisdiction over potential future disputes under the parties’ contracts, which it sought to vacate.

The district court ruled in KX’s favor, confirming the undisputed aspects of the final award, and vacating the panel’s decision to retain jurisdiction insofar as it exceeded the scope of the submission and was violative of KX’s right under its contracts with North Star and Gen Re to select an arbitrator of its choosing pertaining to any future disputes under the contracts. The Court noted that any contrary interpretation of that contractual right would create arbitral panels with unlimited jurisdiction over the course of the parties’ future contractual relations, a result not supported by the public policy underlying the Federal Arbitration Act. KX Reinsurance Co. v. North Star Reinsurance Corp., Case No. 08-7807 (USDC S.D.N.Y. Nov. 14, 2008).

This post written by John Pitblado.

SANCTIONS AWARDED AGAINST PARTY ISSUING SUBPOENA FOR ARBITRATION

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When plaintiff, in a case submitted to arbitration, issued a third party subpoena using the court’s caption and case number, without advising the opposing party, the arbitrator, or the court, the court granted defendant's motion for sanctions, awarding him attorney's fees associated with filing the motion. The court found that the subpoena issued by plaintiff's counsel to a third party was blatantly improper because: (1) the court had fully stayed the case pending arbitration and placed the case on the suspense calendar; (2) only arbitrators, and not parties, have authority to issue subpoenas; (3) plaintiff failed to give proper notice as required by Rule 45(b)(1); and (4) the subpoena sought documents that the arbitrator had already ruled were not discoverable. The court declined to enjoin plaintiff from issuing additional subpoenas. Kenney, Becker LLP v. Kenney, Case No. 06-2975 (USDC S.D. N.Y. Mar. 6, 2008).

This post written by John Black.

SIXTH CIRCUIT VACATES ARBITRATION AWARD BASED UPON MANIFEST DISREGARD OF LAW

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This procedurally complicated dispute arises out of a franchise agreement for a Coffee Beanery cafe. As a result of disputes about the negotiation of the agreements for the café and its operation, the franchisee demanded arbitration, later withdrew the demand and filed suit in federal court, followed by the franchisor demanding arbitration and the Maryland Securities Commissioner issueing an Order to Show Cause, contending that the franchisor had violated the disclosure and anti-fraud provisions of the Maryland franchise act. An arbitration proceeded to a final award in favor of the franchisor. A request to vacate the award was denied, and an appeal followed.

The Sixth Circuit issued two opinions in this appeal. Both opinions held that because an officer of the Coffee Beanery failed to disclose a prior felony conviction for grand larceny, the agreement was in violation of the Maryland Franchise and Registration Act. As such, the court found that the arbitration award should be vacated because the arbitrator showed “a manifest disregard of the law.” The first opinion did not discuss Hall Street Associates LLC v. Mattel Inc., 28 S.Ct 1396 (2008). The amended opinion discusses Hall Street, finding that it did not clearly eliminate the manifest disregard of law doctrine. The opinion states that “[i]n light of the Supreme Court’s hesitation to reject the manifest disregard doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle.” The court found that since the franchisee was deprived of a statutorily required notification of prior felony convictions, it was fraudulently induced and not bound by the arbitration provision, and could pursue a claim to rescind the franchise agreement in its federal court lawsuit. Coffee Beanery, LTD v. WW LLC, No. 07-1830 (6th Cir. November 14, 2008).

This post written by John Black.

UPDATE: COURT SHOOTS DOWN ERC TWICE MORE

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On September 2, 2008, we reported that the District Court for the Western District of Missouri granted summary judgment against Employers Reinsurance Corporation, finding that their contract with Mass Mutual did, in fact, contain a clear “follow the fortunes” clause. ERC subsequently moved for the court to reconsider its ruling, or in the alternative, to certify the “follow the fortunes” issue for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

The court ruled that ERC’s motion for reconsideration amounted to little more than a reassertion of its arguments on summary judgment. The court interpreted ERC’s motion as arguing that the court committed a manifest error of law simply because the court disagreed with ERC’s arguments. Noting that Fed. R. Civ. P. 60(b) did not list “manifest error of law” as a reason sufficient for reconsideration, the court denied ERC’s motion.

The court additionally denied ERC’s motion to certify the “follow the fortunes” issue for immediate interlocutory appeal, finding that it was an issue of interpretation of the contract, and not a pure question of law, which was required for an interlocutory appeal certification. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Co., Case No. 06-0188 (USDC W.D. Mo. Oct 23, 2008).

This post written by John Black.

UPDATE: COURT ENTERS DEFAULT JUDGMENT AWARDING COMPENSATORY DAMAGES PLUS INTEREST

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On December 20, 2007, we reported that claims arising out of allegedly purposeful undercapitalization of a captive reinsurer survived a motion to dismiss. Since that time, the plaintiff (rehabilitator for Frontier Insurance Co.) moved for entry of a declaratory judgment and an award of compensatory damages plus prejudgment interest by default.

The Southern District of California concluded that plaintiff met the standards for entry of a default judgment, adequately alleged both an enforceable contract and a breach of contract by ASIL (the captive reinsurer), and that the default was not due to excusable neglect. ASIL indicated to Frontier that it would “allow judgment to be entered by default and pay all the available funds to Frontier.” The court granted the motion for entry of default and entered a judgment finding ASIL liable to plaintiff for $577,966.33 in compensatory damages and $91,511.33 in prejudgment interest (calculated at 10% per annum). Mills v. Ramona Tire, Inc., Case No. 07-0052 (USDC S.D. Cal., Sept. 23, 2008).

This post written by John Black.