Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Western District of Washington Reverses Course and Compels Arbitration

by

Following unsuccessful motions to dismiss, the defendants moved to compel arbitration, arguing that they had not moved to compel the matter to arbitration earlier because the plaintiffs had not yet completed all stages of the dispute resolution procedures required before the parties could arbitrate. The court found that Aliera Companies, Inc. and Aliera Healthcare, Inc. (collectively, “Aliera”) demonstrated it had not waived its right to compel arbitration, as Aliera’s initial motion to dismiss did not seek to dismiss the matter on the merits, and thus, Aliera did not act inconsistently with their right to compel arbitration.

As to Trinity HealthShare, Inc. (“Trinity”), the court found that Trinity’s motion to dismiss the complaint as a matter of law with prejudice did seek a resolution on the merits, and thus Trinity acted inconsistently with its right to compel arbitration. Notwithstanding, the court found that the plaintiffs were not prejudiced by Trinity’s action, and thus could not establish that Trinity waived its rights to arbitration. The court’s prior decision denying the defendants’ motion to compel arbitration was vacated, and the parties required to arbitrate.

Jackson, et al. v. The Aliera Companies, Inc., 2:19-cv-01281 (W.D. Wash. Oct. 6, 2020)

Eastern District of California Grants Partial Summary Judgment to Plaintiffs in Reinsurance Mortgage Kickback Class Action; Reinsurer May Still Prevail

by

The Eastern District of California recently granted partial summary judgment to a class of plaintiffs suing a reinsurer and related entities with respect to a reinsurance arrangement regarding private mortgage insurance that allegedly involved illicit kickbacks. The reinsurer and its related entities may still prevail, however, because the court concluded it could not rule on whether or not the reinsurer and its related entities were entitled to a safe harbor that negates liability.

Home buyers who cannot put down 20% of the purchase price on their house are generally required to purchase private mortgage insurance (PMI) from a mortgage insurer (MI). Mortgage lenders usually direct home purchasers (borrowers) to one of the lender’s preferred MIs.

MIs began transferring some of the risk they took on through PMI by obtaining reinsurance. Mortgage lenders, in turn, created affiliate reinsurers that provided reinsurance to MIs. Through captive reinsurance agreements (CRAs), the MIs allegedly purchased reinsurance from the reinsurers affiliated with the lenders in exchange for PMI referrals from those lenders.

For example, PHH Mortgage Corporation (“PHH Mortgage”), a lender, owns Atrium Insurance Corporation (“Atrium”), a reinsurer that has agreements with MIs to which PHH Mortgage refers a great deal of its borrowers in order for the borrowers to obtain PMI. The MIs then cede a portion of the premiums obtained from PMI to Atrium through captive reinsurance agreements.

The potential problem with that arrangement is that the Real Estate Settlement Procedures Act (RESPA) prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise [in relation to the referral of] a real estate settlement service involving a federal related mortgage loan.” RESPA also contains a safe harbor that provides that it does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

A class of plaintiffs sued PHH Mortgage, Atrium, and related entities claiming that the arrangement PHH Mortgage had with Atrium and certain MIs violated RESPA by effectuating kickbacks on mortgage loans. The parties eventually cross-moved for summary judgment.

After addressing Daubert motions, the court granted in part the plaintiffs’ motion for summary judgment and denied the defendants’ motion for summary judgment, finding that the plaintiffs had established a prima facie case of a RESPA violation based on the reinsurance arrangement. They concluded that a genuine issue of fact existed as to whether the defendants were protected by RESPA’s safe harbor. Specifically, the court concluded that plaintiffs had satisfied the three elements of a prima facie case: (1) because the “MIs ceded a percentage of their PMI premiums to Atrium pursuant to the CRAs, and those ceded premiums constituted a payment or thing of value,” the requirement that a payment or exchange of a thing of value was satisfied; (2) “payments were made pursuant to an agreement to refer real estate settlement services” involving federally-related mortgage loans because substantial evidence established that “PHH had a practice of referring PMI business to MIs that had agreed to CRAs with Atrium, and that the captive MIs ceded premiums to Atrium pursuant to the CRAs”; (3) a referral occurred because it was “undisputed that PHH directed the vast majority of its borrowers who needed PMI to one of the four captive MIs” and “at no point during the class period did PHH direct less than 80% of its retail PMI business to the captive MIs” (i.e., the ones that obtained reinsurance from Atrium).

The court then turned to RESPA’s safe harbor, which required it to determine whether the MI’s “payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer?” The answer to that question turned on whether the payments to Atrium were “more than the reasonable market value of the reinsurance” obtained. The court found that, although there was “substantial evidence” supporting the plaintiffs’ theory that “no real risk was transferred, and thus, Atrium did not provide actual reinsurance services” (there was evidence that Atrium procured substantial profits and that its dividends far surpassed its reinsurance claims, though the court noted that was not necessarily determinative), there also was evidence that Atrium suffered losses during several book years and thus that the reinsurance agreements had actually transferred real risk to Atrium. Thus, the court concluded that there was “a sufficiently genuine dispute . . . that the court [could not] resolve on summary judgment [as to] whether Atrium provided actual reinsurance services to the captive MIs.” PHH Mortgage and Atrium may, therefore, still prevail in this class action.

The court also rejected the defendants’ defenses regarding compliance with governing law and the filed rate doctrine, standing arguments, and their motion for class decertification.

Efrain Munoz et al. v. PHH Mortgage Corp. et al., No. 1:08-cv-00759-DAD-BAM (E.D. Cal. August 12, 2020).

Ninth Circuit Affirms That Uber Driver Not Engaged in “Foreign or Interstate Commerce” for Purposes of Exemption to FAA

by

The Ninth Circuit denied a petition seeking to vacate an order compelling arbitration of an Uber driver’s putative class action. The district court held that rideshare drivers who pick up and drop off passengers at airports did not fall within an exemption in the Federal Arbitration Act (FAA) for workers engaged in foreign or interstate commerce, and therefore the petitioner may be judicially compelled to arbitrate in accordance with the terms of his employment contract. The Ninth Circuit affirmed, finding the decision was not clearly erroneous as a matter of law.

Section 1 of the FAA provides that arbitration clauses in “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” are “exempt” from the FAA’s coverage. In response to Uber’s motion to compel arbitration, the petitioner argued that he drives passengers engaged in interstate travel to and from airports, and thus qualifies for the exemption. The Ninth Circuit has interpreted section 1 as applying only to employees who “actually transport people or goods in interstate commerce,” although the court acknowledged that several recent federal court decisions have interpreted the clause more broadly. Notwithstanding the tension between those decisions and the district court’s ruling here, the court declined to find the district court’s decision was “clearly erroneous as a matter of law.” Analogizing the petitioner’s employment to that of local taxicab services, the court found that the petitioner never crossed state lines during his work, and cited no precedent holding that rideshare drivers, as a class, are “engaged in foreign or interstate commerce.” As such, the petition for a writ of mandamus was denied.

In re William Grice, No. 20-70780 (9th Cir. Sept. 4, 2020)

Fifth Circuit Holds “Tacit Acquiescence” Insufficient to Create Valid Contract to Arbitrate

by

This appeal concerns the validity of arbitration proceedings in a dispute between a seller of a power generator, Imperial Industrial Supply Company, and its buyer, Quintina Maria Thomas. In October 2018, Thomas’s home in Hawaii caught on fire, which she claimed was caused by a power generator purchased from Imperial.

Thomas initiated arbitration proceedings against Imperial. She began by sending Imperial an alleged agreement that purported to be a “binding self-executing irrevocable contractual agreement” evidencing Thomas’s acceptance of Imperial’s offer. The alleged agreement did not define what Imperial offered but stated that “a product sale-purchase agreement and warranty for the [generator] creat[ed] an ongoing contractual relationship between [Imperial] and [Thomas].” The alleged agreement further provided that Imperial would need to propound 15 different “Proofs of Claim” to Thomas in order to avoid (1) breaching the alleged agreement; (2) admitting, by “tacit acquiescence,” that the generator caused the fire; and (3) participating in arbitration proceedings.

Thereafter, Imperial received a notice of arbitration hearing and timely objected. Without responding to Imperial’s objections, the arbitration association sent Imperial the final arbitration award, which awarded Thomas $1.5 million for breach of the alleged agreement on the basis that Imperial consented to the arbitration by “tacit acquiescence.”

Imperial sued Thomas seeking to vacate the arbitration award. The United States District Court for the Southern District of Mississippi vacated the award, and Thomas appealed.

Applying Mississippi law, the Fifth Circuit panel held “tacit acquiescence” to the alleged agreement is insufficient to constitute a valid contract. The panel noted that tacit acquiescence between relative strangers ignores the basic tenets of contract law because, absent a long-standing relationship between the parties, silence or inaction does not constitute acceptance of an offer. “If Thomas’s argument was valid, it would turn the notion of mutual assent on its head in ordinary purchase cases like this one: buy an item from a dealer or manufacturer, then mail a letter saying ‘you agree if you don’t object,’ and you can have whatever deal you want if the dealer/manufacturer doesn’t respond,” the panel wrote.

Because Thomas offered no evidence of previous dealings with Imperial, the panel found that the conspicuous lack of mutual assent means that a valid contract was never formed. The panel did not address Thomas’ other challenges, finding them to be without merit, and affirmed the district court’s judgment vacating the arbitration award.

Imperial Indus. Supply Co. v. Thomas, No. 20-60121 (5th Cir. Sept. 2, 2020)

Washington Supreme Court Declines To Intervene in Ongoing Arbitration, Finding Judicial Authority Under FAA Limited To “Gateway” Disputes and Review of Final Awards

by

Evette Burgess and Lithia Motors were arbitrating an employment dispute when, during the proceedings, Burgess filed a motion with the court seeking to terminate the arbitration and to rescind the arbitration agreement. The motion alleged that Lithia breached the agreement by failing to comply with discovery deadlines and that the arbitrator did so by failing to enforce applicable procedural rules. The superior court denied the motion for lack of jurisdiction and certified the issue to the Supreme Court of Washington. The Court affirmed the order, concluding that judicial review under the Federal Arbitration Act (FAA) is limited to disputes over “gateway” issues (i.e., enforceability of the arbitration clause in the first instance), and to the review of final awards.

Burgess argued that interlocutory challenges during arbitration proceedings is permitted by section 2 of the FAA. Lithia disagreed, arguing judicial review under the FAA is limited to the “bookends” of the arbitration: initial enforceability and review of the final award. The Court noted that the majority of federal circuit courts that have addressed the issue have agreed with Lithia, and that Burgess cited no case in which a court provided relief once the arbitration commenced. The Court also agreed with Lithia in this regard, explaining that sections 2, 3, and 4 of the FAA authorize courts to decide gateway arbitrability disputes, while sections 9, 10, and 11 allow courts to confirm, vacate, modify, or correct a final arbitration award at the conclusion of proceedings. The Court relied on a Sixth Circuit decision involving similar facts, where the court found it significant that the FAA is silent on judicial review between gateway disputes and review of final awards. Finding other circuit courts have likewise interpreted this silence as precluding interlocutory review, the Court affirmed the superior court decision declining to intervene and rescind the arbitration agreement while the subject arbitration was ongoing.

Evette Burgess v. Lithia Motors, Inc., et al., No. 98083-7 (Wash. Sept. 3, 2020)