Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Eleventh Circuit Affirms Confirmation of Arbitration Award Over Claims of Fraud, AAA Rule-Breaking, and Lack of Jurisdiction

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The Eleventh Circuit recently affirmed the confirmation of an arbitration award in a dispute involving a contract to obtain signatures for a Florida solar energy ballot initiative over claims that the prevailing party engaged in fraud, violated AAA rules, and that the arbitrator lacked jurisdiction to add attorneys’ fees to his award months after the arbitration hearing.

PCI Consultants Inc. contracts with entities and organizations to obtain signatures for petitions for ballot initiatives in exchange for a fee. In 2015, PCI contracted with Floridians for Solar Choice Inc. and Solar Alliance for Clean Energy Inc. (together, the Solar parties) to obtain signatures to support a proposed ballot initiative for a solar energy amendment to the Florida Constitution. A dispute arose regarding payment. The Solar parties believed they paid PCI what it was due, but PCI withheld 217,000 signed petitions due to purported nonpayment. The dispute concerned additional expenses for a different ballot initiative concerning medical marijuana. PCI claimed the Solar parties agreed to share expenses with the medical marijuana campaign while the Solar parties disputed that they agreed to cover those expenses.

Floridians for Solar Choice sued alleging various claims in a U.S. District Court in Florida and moved to compel arbitration. The court granted that motion, and Solar Alliance subsequently appeared in the arbitration. After a three-day hearing, the single arbitrator who heard the dispute ruled in favor of the Solar parties and awarded $1,271,250 in damages. Several months later, the arbitrator also tacked on interest, costs, and fees for a total award of approximately $2,015,900.

The district court confirmed the award over PCI’s motion to vacate, agreeing that the award of interest, costs, and fees was proper. PCI appealed to the Eleventh Circuit.

On appeal, PCI claimed (1) the Solar parties committed fraud during the arbitration proceedings by altering their damages analysis; (2) the Solar parties violated AAA rules that PCI claimed required the appointment of three arbitrators rather than one; and (3) the arbitrator lacked jurisdiction to award fees months after the arbitration hearing.

The Eleventh Circuit rejected all of PCI’s claims and affirmed the award’s confirmation.

First, PCI claimed that the Solar parties committed fraud by increasing their claimed damages in their post-hearing brief. The Eleventh Circuit disagreed, noting that the requirements of the test it applied for the FAA’s fraud exception were not satisfied. The court noted that PCI cited no case holding that “a change in damages theory constitutes ‘fraud’ or ‘undue means’ under” the FAA’s fraud exception. The Solar parties’ post-hearing demand for more than $1,000,000 was supported by the record even though they initially sought less than $500,000. (The Solar parties apparently initially sought partial reimbursement for the per-signature fee of the 217,000 withheld petitions, but later successfully argued they were entitled to full reimbursement for those petitions.)

Second, the court rejected PCI’s contention that it was entitled to a three-arbitrator panel, noting that AAA rules allowed the parties to agree on one or three arbitrators and provided that if the parties were unable to agree and the claim involved more than $1 million, then the matter would be heard by three arbitrators. The facts established that PCI had agreed to a single arbitrator knowing that this case potentially involved more than $1 million. In its statement of claim, Floridians for Solar Choice demanded $500,000 to $1 million-plus punitive damages, and when Solar Alliance was added as a party it sought additional damages. Despite being on notice that the claimed damages exceeded $ million, PCI did not request a three-arbitrator panel and instead stipulated to one arbitrator.

Third, the Eleventh Circuit rejected PCI’s contention that the arbitrator lacked jurisdiction to award fees when he did so several months after the arbitration because the arbitrator lost jurisdiction over the case 30 days after the hearing. The court noted that it has rejected the notion that arbitrators act outside their authority merely because they do not follow the AAA’s rules regarding the time for issuing decisions. It also noted that several other circuits have held that whether an arbitration award was timely is not a jurisdictional issue. In this case, the parties also stipulated that all motions for attorneys’ fees would be resolved after the hearing.

Floridians for Solar Choice, Inc. v. Paparella, No. 18-12907 (11th Cir. Mar. 3, 2020).

California District Court Confirms Arbitration Award Properly Conducted Under ICC Rules

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The defendant sought to vacate an arbitration award, arguing that the arbitrator prejudiced the defendant by refusing to order discovery it requested and failed to apply California law to the analysis of attorneys’ fees and costs. The Southern District of California disagreed with the defendant’s argument and confirmed the award.

As to the defendant’s argument concerning discovery, the court recognized that the arbitrator issued a series of procedural orders specifically addressing discovery and ordering the disclosure of documents. The court found that the defendant “failed to demonstrate that the arbitrator’s refusal to order disclosure of certain requested documents demonstrated deprived the defendant of an adequate opportunity to present its evidence and arguments” and concluded that the “arbitrator’s refusal to order disclosure of certain requested documents was not done in bad faith and was not so gross as to amount to affirmative misconduct.”

As to the defendant’s argument that the arbitrator failed to apply California law to the award of attorneys’ fees, the court found that the arbitrator did not exceed its authority by applying ICC rules to the award of costs and fees. The parties’ agreement provided that the arbitration “shall be conducted in accordance with the Rules of Conciliation and Arbitration of the ICC.” California law permits the parties to incorporate by reference into their contract the terms of another document. Here, the reference to the application of the ICC rules was “clear and unequivocal.” Moreover, the parties’ agreement provided that the arbitration award “may include an award of costs, including reasonable attorney’s fees and disbursements.” The court determined, “pursuant to the parties’ agreement, the award of attorneys’ fees in the arbitration award is governed by ICC Rules” and concluded that the arbitrator did not exceed its authority.

Aeryon Labs, Inc. v. Datron World Communications, Inc., No. 3:19-cv-02168 (S.D. Cal. Mar. 4, 2020).

Northern District of New York Refuses to Change Credibility Determination Regarding Bench-Trial Testimony by Attorney Involved in Underlying Settlement Negotiations

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The U.S. District Court for the Northern District of New York recently denied an insurer’s attempt to compel the court to change a credibility decision it rendered following a bench trial in reinsurance litigation between Utica Mutual Insurance Co. and Munich Reinsurance America Inc. that we’ve been following closely.

We’ve previously written about this litigation (multiple times, not counting related litigation, which we’ve also written about multiple times). But even with all the hype, a quick overview is in order. Utica issued primary policies to insured Goulds Pumps Inc. that, in the Second Circuit’s words, “had a glaring omission: they did not include aggregate limits of liability.” The results of that omission were potentially catastrophic for Utica because Goulds could potentially select a primary policy to apply to all asbestos claims that would never exhaust or trigger excess policies. Thus, in the underlying litigation, Goulds wisely argued there were no aggregate policy limits while Utica insisted the policies had such limits and that the fact that they did not actually appear in the policies “was a mere ‘scrivener’s error.’” Goulds and Utica ultimately settled the underlying dispute. The settlement agreement provided that the primary policies “have … an aggregate limit of liability.” Utica attorney and vice president Bernard Turi was involved in the settlement negotiations and the drafting of the settlement agreement.

Litigation between Utica and Munich regarding Utica billings to Munich under facultative reinsurance certificates Munich issued to Utica in 1973 followed.

During a ten-day bench trial, Turi testified that during the settlement negotiations with Goulds, Utica did not bargain for Goulds’ agreement that the primary policies had aggregate limits. Turi testified that Goulds agreed that the policies had such limits and always had.

Following the trial, the U.S. District Court for the Northern District of New York ruled in favor of Munich in one case (Utica I) and Utica in another (Utica II). With respect to Turi, the court concluded that Turi’s testimony “that Utica did not bargain for Goulds’ agreement that the primary policies had aggregate limits as part of its settlement with Goulds” was not credible. The court noted that Turi had conceded on cross-examination that “getting Goulds to agree to aggregate limits in the primary policies had value to Utica.”

Utica appealed the court’s ruling against it and filed a Rule 52(b) motion to amend the court’s finding regarding Turi’s credibility regarding settlement negotiations. Utica specifically claimed that the court failed to distinguish between whether the policies “in fact” had aggregate limits, which Utica claimed was not bargained for, and whether Utica nevertheless compromised with Goulds to resolve a disagreement about that fact, which Utica agreed it had.

The court denied Utica’s motion. It noted that Goulds had claimed in the underlying litigation that the policies did not have aggregate limits, that there was an enormous risk to Utica if the court were to accept that position, and that Goulds ultimately agreed in the settlement agreement that the policies had aggregate limits. The court explained that its findings regarding Turi’s credibility was not premised on whether the policies actually had aggregate limits and that the court did not find that Utica had bargained for “the fact” of aggregate limits as Utica claimed the court had. Instead, the court reaffirmed its decision that, under the circumstances, any contention that Utica had not bargained for Goulds’ agreement that the policies contained aggregate limits was not credible. The court noted that the high standard for succeeding on a Rule 52(b) motion was not satisfied and declined to amend its findings of fact.

Munich believed that Utica’s Rule 52(b) motion was so meritless that it sought sanctions, but the court declined to award them, concluding that the standard for sanctions was not met.

Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., No. 6:12-cv-00196, 6:13-cv-00743 (N.D.N.Y. Feb. 27, 2020).

Court Upholds Arbitration Provision Despite Allegations of Fraud in Contract’s Execution

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The dispute involved the potential trade-in of a car and the purchase of a pickup truck by two customers at a car dealership. During the course of the transaction, one of the customers signed a document that he later learned was a contract including an arbitration provision. Before the transaction was completed, the customers had second thoughts and requested the return of their trade-in and deposit. The dealership refused, insisting that the customers had a binding contract to buy the truck. The customers sued the dealership and certain employees, alleging common law fraud and violations of state consumer protection laws. The defendants moved to dismiss and compel arbitration.

The court granted the motion to compel arbitration and stayed the case. As to the customer who signed the contract containing the arbitration provision, the court found that, although the customer contended that he was deceived into signing the contract, the arbitration provision would be enforced. The provision included a delegation of issues involving arbitrability to the arbitrator. Upon review of New Jersey and federal case law, the court held that unless a plaintiff challenges the validity of the arbitration provision itself, the dispute over the validity of the contract as a whole must be arbitrated. The court found that “precedent compels only one conclusion,” namely, that the arbitrator must decide the validity of their sales contracts and the arbitrability of the dispute.

The court also rejected the argument that the court should permit discovery on the issue of whether the signing customer was fraudulently induced into signing the contract. The court observed, “Importantly, [the customer] is arguing he was fraudulently induced into entering the entire contract, and not just the arbitration provision. A challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court.”

Last, the court stayed the second customer’s claims that were not subject to arbitration because if “the arbitrator finds that the contract, including the arbitration agreement, is invalid, then he will likely return to litigate in this Court, where his action is stayed. In the event that this occurs, it would be sensible for [the two customers] to litigate their claims together, as they initially attempted to do, to avoid inconsistent rulings.” The court therefore stayed the entire case.

Lomonico v. Foulke Management Corp., No. 1:18-cv-11511 (D.N.J. Feb. 20, 2020).

“Grossly Excessive” Arbitration Award Overturned Due to “Evident Material Miscalculation”

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An arbitration award rendered pursuant to section 301 of the Labor Management Relations Act (LMRA) was overturned upon a finding that the award was “grossly excessive” and based on an “evident material miscalculation.” The award stemmed from a collective bargaining agreement that required an employer to submit to audits to determine whether the employer had made required contributions to certain ERISA funds. Upon the employer’s alleged failure to submit to the audits, the CBA assumed the employer to be delinquent and provided a procedure for estimating the amount of the deficiency.

The prescribed calculation estimated the employer’s deficiency at approximately $1.7 million, which ultimately yielded an arbitration award of approximately $2.3 million when interest, liquidated damages, and fees were included. After the union filed a motion to confirm the arbitration award, the parties notified the court that they were working together to perform the audit of the employer’s books that had initially triggered the dispute. Upon completion of the audit, the parties expected to settle based on the audit amount. The audit then revealed the employer’s actual deficiency to be $116,369.60, approximately 6.7% of the estimated deficiency ($1.7 million) and just 5% of the total arbitration award ($2.3 million).

The court’s analysis of the petition began by noting that the case was brought under the LMRA and, as such, the Federal Arbitration Act (FAA) did not apply. Judicial review under the LMRA is “very limited,” and courts are “not authorized to review the arbitrator’s decision on the merits despite allegations that the decision rests on factual errors or misinterprets the parties’ agreement.” Further, under the LMRA, “unless the award is procured through fraud or dishonesty, a reviewing court is bound by the arbitrator’s factual findings, interpretation of the contract, and suggested remedies.”

However, the court also noted that “federal courts have often looked to the FAA for guidance in labor arbitration cases.” Section 11 of the FAA permits modification of an arbitration award to “effect the intent” of the award and “promote justice between the parties” when there is an “evident miscalculation of figures.” Although the court did not find any mistake related to the application of the arbitration agreement’s prescribed method of calculating the employer’s deficiency, the court nevertheless found that the huge disparity between the actual deficiency and the estimated amount demonstrated that the award suffered from “an evident material miscalculation.” “The difference is striking, and it is clear that the estimated deficiency cannot be considered an approximation because it is roughly fifteen times the actual deficiency.”

Therefore, despite the strictures applied to judicial review under the LMRA, the court denied the petition to confirm and remanded the case to the arbitrator. In so doing, the court relied in part on the union’s statements that it would “agree to vacate the arbitration award upon completion of the new audit” and the parties’ multiple representations that they intended to settle based on the audit amount. The court also found that remand furthered the LMRA’s policy of “promoting industrial stabilization” by “discouraging awards that parties agree are obviously erroneous in light of objectively ascertainable facts.”

Trustees of the New York City District Council of Carpenters Pension Fund v. Carolina Trim LLC, No. 1:17-cv-06485 (S.D.N.Y. Feb. 26, 2020).