Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Court Declines to Compel Arbitration Based on Third-Party Agreement

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The U.S. District Court for the Southern District of Florida recently refused to compel arbitration in a putative class action based on an arbitration clause a plaintiff agreed to on a third party’s website he used to book a rental car from the defendant.

Ancizar Marin used Orbitz to book a rental car from rental car company Sixt. During that process, he agreed to Orbitz’s terms of use. Those terms included an arbitration clause that provided: “You and Orbitz agree that any and all Claims will be resolved by binding arbitration, rather than in court.” Marin subsequently picked up and returned his rental car from Sixt. After he returned his car, he received an email claiming that the car had been damaged. Marin filed a putative class action against Sixt claiming violations of Florida’s Deceptive and Unfair Trade Practices Act and Consumer Collection Practices Act. Sixt sought to compel arbitration.

The district court denied Sixt’s motion.

The court explained that Sixt was not a party to the arbitration clause between Orbitz and Marin. The clause said: “You and Orbitz agree …” Nor was Sixt a third-party beneficiary to that agreement. Although Sixt argued that it was a “supplier” under Orbitz’s terms of use and that this rendered it a beneficiary, the court concluded that Sixt was included in a different category of companies that worked with Orbitz (travel services), and that category was not mentioned in the arbitration clause. Therefore, Sixt could not invoke the arbitration clause.

Even if Sixt could invoke the arbitration clause, the clause did not cover the dispute between Marin and Sixt. Rather, it “cover[ed] disputes between Orbitz’s customers and Orbitz.” Marin’s dispute concerned alleged misconduct by Sixt unrelated to Orbitz.

Calderon v. Sixt Rent A Car, LLC, No. 0:19-cv-62408 (S.D. Fla. Feb. 12, 2020).

Third Circuit Affirms Confirmation of Arbitration Award Despite Challenge That Damages Figure Was Completely Irrational

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In a challenge to an arbitration award on the basis that the arbitrators exceeded their powers in determining damages, the Third Circuit affirmed the District of New Jersey’s confirmation of the award.

First, the appellant argued that the arbitrator erred by using sales data instead of supply data in arriving at a damages figure. The court stated that this “is precisely the type of decision we have no authority to second-guess under the Federal Arbitration Act. … All that matters is that the arbitrator’s decision had some basis in the record.”

Second, the appellant argued that the arbitrator manifestly disregarded the law in ordering quarterly royalty payments be made to the appellee, since the appellant cannot be made to pay royalties until its claims regarding patent invalidity and unenforceability have been adjudicated. The court noted that the “arbitrator clearly grappled with the import of the Lear decision” and found the appellee’s arguments to be more persuasive. “That good faith effort is more than enough to demonstrate that he did not manifestly disregard Lear.”

PNY Technologies, Inc. v. NETAC Technology Co., No. 19-1635 (3d Cir. Feb. 10, 2020).