Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Texas Federal Judge Declines to Rule on Procedural Issues in Multiple Successive Arbitrations Filed by Same Parties, Leaving Dispute to Arbitrators

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This litigation involved 21 parties spread across six different arbitrations in front of six different arbitrators. The litigation arose out of a dispute between two doctors, their business entities, and captive insurers (the plaintiffs), and a lawyer, law firm, and its affiliates (the defendants). The doctors engaged the defendants to create captive insurers and tax shelters for the doctors. After the U.S. Tax Court issued a ruling with negative consequences for the shelters, the doctors asked the defendants to “liquidate and wind down” the doctors’ program, but the defendants refused.

The Arbitrations

Both sides sought arbitration: the defendants brought the first arbitration in Houston, Texas, before Judge Dorfman, and the plaintiffs brought the second arbitration in Louisiana before Judge Duval. The plaintiffs also commenced a lawsuit against the defendants in Texas state court, alleging breach of contract, breach of fiduciary duty, tort, legal malpractice, and breach of professional obligations, which was removed to the U.S. District Court for the Southern District of Texas, in which the defendants moved to compel the doctors’ business entities’ participation in the Texas arbitration. The plaintiffs responded with a cross-motion to compel the defendants to join in the Louisiana arbitration and to challenge the Texas arbitration, while also seeking a stay of the Texas arbitration pending a ruling on the motions. The defendants then initiated a third arbitration before Judge Baker in Houston Texas, asserting additional claims that the defendants were denied leave to supplement their arbitration demand in the first arbitration.

The district court granted the defendants’ motion to compel and ordered the parties to arbitrate two of their disputes before Judge Dorfman and Judge Baker in Houston, relying on a written arbitration agreement between the parties that required all arbitrations to be conducted in Houston. The district court denied the plaintiffs’ motion to compel arbitration in Louisiana and stayed the arbitration pending before Judge Duval and the related proceedings in the federal litigation so that the Texas arbitration could go forward. The plaintiffs appealed the district court’s decision to stay the litigation.

While the district court was making its decision to stay the litigation, the plaintiffs filed a fourth arbitration before arbitrator Robert Kutcher in Louisiana. The plaintiffs thereafter filed a fifth arbitration, based on allegedly newly discovered facts, before Judge Medley in Louisiana, and a sixth arbitration before Judge Gill-Jefferson in Louisiana, but the plaintiffs requested that the new arbitrations be held in Houston.

Defendants’ Emergency Motion to Lift the Stay

After the district court issued its decision to stay the litigation, the defendants filed an emergency motion asking the district court to lift its stay and enjoin the fourth, fifth, and sixth arbitrations, arguing that these Louisiana arbitrations were proceeding in an improper venue and were inefficient “copycat” arbitrations seeking to resolve the same “core dispute” at issue in the Judge Baker and Judge Dorfman arbitrations in Texas.

The district court found no appropriate circumstances justifying an order lifting the stay in the case or staying the recently filed fourth, fifth, and sixth arbitrations. The district court recognized the interesting procedural questions that arose with respect to whether only the final hearing, or also interim hearings, must occur in Houston — as the arbitrators in these later-filed arbitrations were hearing disputes virtually via Zoom and some had issued interim decisions from Louisiana, but none had required the parties to travel to Louisiana. The district court also rejected the defendants’ argument that the fourth, fifth, and sixth arbitrations were inefficient “copycat” arbitrations, noting that the arbitration agreement did not preclude the parties from proceeding with separate arbitrations for disputes involving overlapping but different facts.

However, the district court concluded that while the more recently filed arbitrations must “proceed” in Houston under the arbitration agreement, the required location for interim hearings, the manner in which arbitrators must appear in a location, and permissible consolidation procedures are disputes about procedural questions that are best left for the arbitrators to address, not the court.

Defendants’ Motion to Confirm the Final Award

After the emergency motion was filed, Judge Dorfman issued a final award in the first arbitration, finding that the defendants were not required to immediately wind down and liquidate the captive insurers. The defendants moved to confirm that award before the district court.

The plaintiffs argued that the district court lacked jurisdiction to lift the stay it imposed in the litigation and confirm the award by Judge Dorfman because the plaintiffs were appealing the district court’s decision allowing arbitration before Judge Dorfman. Rejecting the plaintiffs’ argument that it lacked jurisdiction to lift the stay, the district court noted that this case involved several arbitrations that were not implicated by the plaintiffs’ appeal, and thus it had jurisdiction to lift the stay to address issues in arbitration proceedings not implicated by the plaintiffs’ appeal.

The district court, however, agreed with the plaintiffs that their appeal targeted Judge Dorfman’s appointment and his ability to preside over the parties’ arbitration. Because the defendants were asking the district court to confirm an award Judge Dorfman granted, which would require the district court to decide that Judge Dorfman had the power to grant an arbitration award, the district court recognized that such a decision may conflict with a decision of the appellate court. The district court therefore declined to exercise jurisdiction over issues currently on appeal.

The district court explained that these proceedings were “inefficient and messy” when it compelled arbitration back in August 2020, but since “the parties applied their contract to make this mess but agreed that arbitration would resolve their disputes, no matter how messy,” the district court was not going to “step in to clean it up and risk making it worse.” The district court simply refused to interfere.

Sullivan v. Feldman, No. 4:20-cv-02236 (S.D. Tex. Dec. 4, 2020).

New York Court Finds the Term “Exhaustion” in Excess Policy Was Ambiguous, Rules That Full Limits of Underlying Insurance Need Not Be Paid for Excess Policy to Attach

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Fireman’s Fund Insurance Co. sued OneBeacon Insurance Co. for breach of a facultative reinsurance certificate. Fireman’s Fund settled claims with its insured and allocated a portion of the settlement to a Fireman’s Fund excess policy reinsured by OneBeacon. OneBeacon denied Fireman’s Fund’s claim, arguing that its reinsurance obligations did not attach until all insurance underlying the Fireman’s Fund policy were exhausted in payment of the full limits of the underlying policies. The Fireman’s Fund policy stated that it applies “only after all underlying insurance has been exhausted,” but did not define “exhaustion.” The reinsurance certificate provided that OneBeacon’s liability shall follow Fireman’s Fund’s, that the terms of the certificate shall be subject “in all respects” to the Fireman’s Fund policy, except as stated in the certificate, and that “all claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on [OneBeacon].”

On cross-motions for summary judgment, the court agreed with Fireman’s Fund that the term “exhaustion” was ambiguous as used in the Fireman’s Fund policy, as the policy did not specify whether the full limits of underlying insurance must actually be paid before the Fireman’s Fund policy attaches. Applying Second Circuit precedent established in Zeig v. Massachusetts Bonding Co., 23 F.2d 665 (2d Cir. 1928), the court held that once the underlying insurer settled and discharged the claims against the insured, Fireman’s Fund was within its right to treat the underlying limits as “exhausted,” even though the underlying insurer did not actually pay the full limits of its policy. In addition, based on the follow-the-fortunes and follow-the-settlements doctrines, the court found it was barred from second-guessing Fireman’s Fund’s post-settlement allocation decisions. The court therefore granted Fireman’s Fund’s motion for summary judgment and denied OneBeacon’s cross-motion.

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 1:14-cv-04718 (S.D.N.Y. Oct. 19, 2020).

District Court Transfers Consideration of Motion to Quash Pursuant to Rule 45(f)

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An Ohio district court invoked Rule 45(f) of the Federal Rules of Civil Procedure in response to a motion to quash by the Ohio Department of Insurance (ODI). The subpoena was issued in connection with a reinsurance-related litigation pending in the U.S. District Court for the Southern District of New York. ODI had produced documents in response to the subpoena, but objected to further compliance. While noting it was questionable whether the information sought was relevant to the New York action in the first instance, the court found “exceptional circumstances” warranted transferring the issue to the SDNY pursuant to Rule 45(f). Aside from the SDNY being in a better position to assess relevancy, the court also noted that discovery in the New York action already closed, and the judge was reluctant to extend the discovery period. The court also found transferring under Rule 45(f) has been deemed appropriate under similar circumstances, such as where ruling on a discovery motion would disrupt the issuing court’s case schedule.

Ohio Dept. of Insurance V. RPM Mortgage, Inc., No. 2:20-mc-00043 (S.D. Ohio Nov. 18, 2020).

Second Circuit Declines to Vacate Foreign Arbitral Award Under New York Convention Absent Valid Reason

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In this case, plaintiff Rodrigo Pagaduan was injured while serving as a motorman on a Carnival Cruise Line ship. The Second Circuit previously affirmed the Eastern District of New York’s order compelling arbitration, and the case was ordered to be arbitrated in the Philippines. The Philippine labor arbiter’s decision granted Pagaduan $5,100 in “sickness allowance,” plus attorneys’ fees of 10% of the award, but declined to provide other relief. Pagaduan filed a motion seeking nonenforcement and/or vacatur of the award, which was denied by the district court.

Pagaduan appealed the district court’s denial, invoking the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which provides that a court “shall confirm [a foreign arbitral] award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” Pagaduan argued that the award should not be confirmed based on two grounds of the New York Convention.

First, Pagaduan argued that article V(1)(b) of the New York Convention applied, which allows for nonenforcement where “[t]he party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case.” Pagaduan argued that he had not been given proper notice of the proceedings and was unable to present his case. The Second Circuit rejected Pagaduan’s argument, finding that Pagaduan submitted multiple lengthy briefs, medical records, and affidavits before the labor arbiter, but chose to focus his arguments almost entirely on whether the arbiter had jurisdiction over the case, which left him limited room to argue the merits of his case (such as how the Jones Act or Philippine law would provide a greater recovery). Although Pagaduan pointed to errors in the arbitration proceedings, the Second Circuit found that none of them suggested that he was denied the opportunity to be heard in a meaningful time or manner. Therefore, the Second Circuit did not believe that the first ground applied.

Second, Pagaduan argued that article V(2)(b) of the New York Convention applied, which allows for nonenforcement where “[t]he recognition of enforcement of the award would be contrary to the public policy of that country.” Pagaduan argued that the lesser remedies available under Philippine law contravene U.S. policy to provide special solicitude to seamen under the Jones Act. The Second Circuit again rejected Pagaduan’s argument, finding the fact that the award was arguably smaller than Pagaduan might have recovered under the Jones Act was not so contrary to public policy as to “violate our most basic notions of morality and justice.” As federal public policy is not violated “merely because foreign law would provide a lesser or different remedy in a particular area of the law,” the Second Circuit declined to set aside the award and affirmed the order of the district court.

Pagaduan v. Carnival Corp., No. 19-3400 (2d Cir. Nov. 25, 2020).

Federal Court Refuses To Compel Arbitration or Appoint Arbitrators Where No Party Had Refused To Arbitrate and Both Parties Were Working on Selecting Arbitrators

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A federal court recently refused to compel arbitration after it concluded that there had been no refusal to arbitrate. The court also refused to appoint arbitrators for the parties.

Linda L. Allen claimed Horter Investment Management, LLC’s “representatives sold fraudulent and unregistered investments.” She claimed those claims were subject to arbitration pursuant to a clause in a client agreement that provided that “[c]lient and [a]dvisor both agree that all controversies which may arise between them concerning any transaction or construction, performance or breach of this agreement that cannot be settled, be submitted to binding arbitration.”

Allen and her fellow plaintiffs moved to compel arbitration or, in the alternative, for the appointment of arbitrators. Horter responded that the plaintiffs lacked standing because it had not refused to arbitrate and was participating in the selection of arbitrators.

The United States District Court for the Southern District of Ohio (Western Division) agreed with Horter. Although the plaintiffs “initiated arbitration with the AAA, but the AAA declined to administer the clams because of [Horter’s] past actions,” the court did “not find that [Horter’s] acts amount to an unequivocal refusal to arbitrate. Instead, Defendant has expressly acknowledged the agreement to arbitrate. The parties have been working together in the Bruns case and this case to reach an agreement regarding the selection of arbitrators. The Court notes that some of the delay in this process is attributable to Plaintiffs’ change in position regarding consolidated arbitration.” The court also declined to appoint arbitrators because “[b]oth parties are amenable to private arbitration and the names of specific arbitrators have been exchanged.”

Linda L. Allen, et al. v. Horter Investment Management, LLC (S.D. Oh. Sept. 30 2020).