Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NEW JERSEY SUPREME COURT AFFIRMS VAILIDITY OF CONTRACTUAL BAR TO JUDICIAL REVIEW OF ARBITRATION AWARDS, WITH ONE EXCEPTION

by

In an opinion that runs just over one page long, the New Jersey Supreme Court has affirmed the decision of the Appellate Division that upheld a provision of an arbitration agreement entered into by two “sophisticated business parties” which foreclosed appellate court review of the decision of an arbitrator, but finding the provision invalid to the extent that it foreclosed the right to initial judicial review, which would have deprived a court of the ability to vacate the award if it violated public policy. The contractual provision stated that the arbitrator’s decision would be “final, binding and conclusive” and “not subject to an appeal to any authority in any forum.” “Additionally, the parties forswore any legal action other than one to confirm or enforce (but not to vacate) the arbitration award.” After an award was entered, a trial court judge confirmed the award, and an appeal was filed. A motion to dismiss the appeal was filed, on the basis that the parties had expressly waived any right to appeal. The Appellate Division panel denied the motion to dismiss, and entered an opinion examining the award and upholding its validity, finding the absence of any grounds under the New Jersey Arbitration Act for vacating an award on the basis of public policy. In a single sentence, the Court mentioned that the “rare circumstances” that might justify an appellate court in vacating an arbitration award on public policy grounds might include bias or misconduct of the trial judge or unconscionability in the formation of the contract, and that none of these bases were present. The Court affirmed “substantially for the reasons expressed in” Appellate Division’s opinion. Van Duren v. Rzasa-Ormes, No. A-52-07 (N.J. June 19, 2008).

This post written by Rollie Goss.

UK COURT OF APPEALS AFFIRMS INJUNCTION AGAINST ACTION IN US COURTS

by

In an August 28, 2007 post, we reported on the decision of the UK Commercial Court granting a permanent injunction against an insurer seeking to challenge a UK arbitration award, which was governed by New York law, in US courts. The UK Court of Appeals has denied an appeal, affirming that decision, in a situation in which: (1) the contract was a Bermuda insurance form; (2) the contract provided that it was governed by New York substantive law; and (3) the contract provided that any arbitration would occur in London, subject to UK arbitration law. The decision turned on the interpretation of the insurance contract, with the Court of Appeals agreeing with the analysis and conclusion of the Commercial Court judge. The Court of Appeal found that disputes as to the confirmation or vacation of an award had to be brought in the UK courts, and that a permanent injunction barring the insurer from challenging the award in US courts was appropriate. C and D [2007] EWCA Civ. 1282 (Dec. 5, 2007).

This post written by Rollie Goss.

COURTS ARE OBLIGED TO DEFER TO ARBITRATOR’S FACTUAL FINDINGS EVEN WHEN EVALUATING AN AWARD FOR VIOLATION OF PUBLIC POLICY

by

In a published opinion issued on June 16, the Ninth Circuit reversed a district court that had vacated an arbitral award as contrary to public policy. The circumstances leading to the arbitration stemmed from a “no-match” letter sent by the Social Security Administration to the plaintiff, Aramark, indicating that information for 48 of Aramark’s employees did not match the Administration’s database. Suspecting immigration violations, Aramark gave the employees three days to prove they had begun an application for a new Social Security card, and fired 33 of the employees who did not timely comply. The defendant labor union filed a grievance on behalf of the employees, alleging violations of the governing collective bargaining agreement. The arbitrator ruled for the union, and awarded back pay and reinstatement to the employees. Thereafter, Aramark successfully moved in district court to vacate the arbitration award on public policy grounds, arguing that the “no-match” letter put it on constructive notice that it was employing illegal workers, and that the award would force it to violate immigration law. On appeal, however, the Ninth Circuit independently determined that Aramark had not established constructive knowledge of immigration law violations and that, in any event, it was obliged to defer to the arbitrator’s factual findings. It reversed the district court’s judgment and confirmed the award. Aramark Facility Services v. Service Employees International Union, Local 1877, AFL CIO CLC, No. 06-56662 (9th Cir. June 16, 2008).

This post written by Brian Perryman.

COURT REVIEWS ARBITRAL AWARD UNDER BOTH NEW YORK CONVENTION AND FAA RULES

by

In 1990, Anthony LaPine, founder of a California disk drive company called LaPine Technology Corporation (“LTC”), filed an arbitration proceeding against Kyocera, a Japanese corporation, and Prudential accusing them of destroying the value of LTC. The arbitration was stayed pending the resolution of a related arbitration. Shortly after the arbitration resumed in 2007, the arbitration panel dismissed all of LaPine’s claims, concluding that his fraud claims were barred by the statute of limitations, he lacked standing to raise the contract and corporate mismanagement claims, and, as an additional basis for dismissal, that his claims were barred by the doctrines of waiver and estoppel. LaPine brought this action against Kyocera asking the court to vacate the arbitration award.

The Court denied LaPine’s request and confirmed the arbitration award. Having concluded that the arbitration agreement and arbitral award fell under the New York Convention, the Court addressed the heart of the parties’ dispute, namely whether the grounds for review enumerated in Article V of the Convention were exclusive, or whether the award could also be reviewed under the standards set forth in the FAA. The court concluded (in the absence of guidance from the Ninth Circuit) that the appropriate standard of review was under both Article V of the Convention and the FAA. The court analyzed LaPine’s arguments under both sets of rules, but found no grounds to overturn the panel’s award. LaPine v. Kyocera Corp., No. C 07-06132 (USDC N.D. Cal. May 23, 2008).

This post written by Lynn Hawkins.

BANKRUPTCY COURT DISMISSES FRAUD CLAIMS AGAINST ALPHASTAR’S FORMER SHAREHOLDERS, DIRECTORS AND OFFICERS

by

AlphaStar Insurance Group Ltd. (“AlphaStar”) (f/k/a Stirling Cooke Brown Holdings Ltd) was a group of companies which provided, among other services, reinsurance brokerage and intermediary services through companies in London, Bermuda and the United States. The companies collapsed and eventually declared bankruptcy, largely as a result of their involvement in the personal accident reinsurance market. Richard E. O'Connell, the chapter 7 trustee (the “Trustee”), commenced this proceeding against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs. Goldman Sachs essentially controlled AlphaStar prior to its 1997 initial public offering. By 1999, special investigations revealed that the activities of the companies “were run or had been run by or associated with unsavory, dishonest people who had engaged in questionable transactions,” and that the businesses “were rife with fraud; its subsidiaries had made material misrepresentations to counterparties, who were thus entitled to rescind their contractual obligations; most of AlphaStar’s assets were impaired; its businesses were no longer viable; it could not afford to defend against the recent onslaught of litigation claims and it ‘faced a probable loss of staggering proportions.’” Prior management was terminated, but the litigation exposure arising out of their activities matured into a series of lawsuits and arbitrations with disastrous results. The thrust of the allegations in the Trustee's Amended Complaint was that the defendants, in light of these problems, used fraudulent and other improper means to continue AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. Another words, the Amended Complaint contended that the defendants should have pulled the plug instead of attempting to clean up the companies. The defendants moved to dismiss the Amended Complaint with prejudice.

The court concluded that the efforts to shift the losses of the companies to third parties was unsupported by any evidence, and that the claims were based upon information that allegedly was concealed by the defendants, but which the public knew. “In the end, his conscious misbehavior claim is impermissibly based on 20/20 hindsight, as he candidly admitted.” Motions to dismiss were granted, except that the motions to dismiss the avoidance claims were denied, and the motion to dismiss the contract claim was granted, but with leave to replead. In dismissing the trustee’s fraud based claims, the Court concluded that the Amended Complaint did not allege facts that gave rise to a strong inference of fraudulent intent, and that the motives alleged by the Trustee were insufficient as a matter of law, and failed to identify specific information that would support the inference of conscious misbehavior. The Court also dismissed the breach of fiduciary duty cause of action concluding that, under Bermuda law, no fiduciary duty existed. In re AlphaStar Ins. Group Ltd., No. 03-17903 (Bankr. S.D.N.Y., Feb. 19, 2008).

This post written by Lynn Hawkins.