Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Concludes That Bankruptcy Discharge Does Not Affect Arbitration Clause

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The Eastern District of Pennsylvania recently granted a creditor’s request to compel arbitration over a plaintiff’s argument that the arbitration agreement he had signed was void as a result of a bankruptcy court discharging the loan that was governed by the agreement. The court held that the bankruptcy ruling discharged the plaintiff’s debt obligations, not his other obligations under the agreement such as his obligation to arbitrate claims related to the agreement.

Soldon Winton entered into a loan agreement with OneMain Financial Group LLC. That agreement contained an arbitration clause. Winton subsequently filed for bankruptcy, and the bankruptcy court discharged Winton’s debt to OneMain. Winton allegedly discovered that his credit report still included an outstanding debt to OneMain. He therefore brought suit against OneMain, Trans Union LLC, and other defendants for violations of the Fair Credit Reporting Act.

OneMain responded by moving to compel arbitration under the agreement. Winton opposed OneMain’s motion. Although there was no dispute that Winton’s claim was within the scope of the arbitration agreement, Winton claimed that the bankruptcy ruling discharged all of his obligations under the agreement. Winton also sought to avoid arbitration on several other grounds or, in the alternative, to require OneMain to cover all of the costs of the arbitration.

The district court rejected Winton’s arguments. It held that the bankruptcy court had discharged Winton’s debt obligations, not his other obligations, including his obligation to arbitrate disputes related to the loan agreement. The court also rejected Winton’s arguments that it would be unfair to require him to pursue his claims in two different forums (in arbitration against OneMain and in court against the other defendants). Finally, the court denied without prejudice Winton’s request that OneMain bear the costs of arbitration. Among other issues, the arbitration agreement allowed Winton to request that OneMain bear Winton’s costs. Winton had apparently not done so, and the court determined that he should do so before seeking judicial relief.

Winton v. Trans Union, LLC, No. 2:18-cv-05587 (E.D. Pa. Aug. 27, 2019).

District of Connecticut Enforces Amex Arbitration Clause Where Cardmember Did Not “Opt Out”

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In a dispute involving fraudulent charges, the District of Connecticut required American Express and the cardmember to resolve their issue in arbitration, pursuant to the cardmember agreement, as amended. AmEx provided notice of the arbitration provision in a document titled “Important Changes to Your Account Terms,” which explained the changes to the arbitration provision and stated that cardmembers have the opportunity to reject the provision, which the cardmember here did not. The cardmember “claimed to have no recollection of any Arbitration Provision contained in his Cardmember Agreement nor any recollection of receiving any particular amendment to his Cardmember Agreement which imposed an Arbitration provision, or which required him to opt out of an Arbitration participation.” Nonetheless, the cardmember admitted that, at all times relevant, “he and his accounts were subject to the terms of a Cardmember Agreement.”

The cardmember did not deny receipt of the amendment or refute any evidence provided by AmEx “that he was, in fact, mailed the various amendments to his Cardmember Agreements.” Accordingly, the court determined that the cardmember’s use of his credit card after receiving the various amendments to his cardholder agreement constituted acceptance of their terms, including the arbitration provisions contained therein.

Errato v. Am. Express Co., No. 3:18-cv-01634 (D. Conn. Aug. 23, 2019).

UK High Court Declines to Sanction Transfer of Annuity Portfolio

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The High Court of Justice Business and Property Courts of England & Wales refused to sanction a scheme proposed by Prudential Assurance Co. and Rothesay Life PLC to transfer approximately 370,000 annuity policies from Prudential to Rothesay. The scheme was proposed under Part VII of the Financial Services and Markets Act 2000. As part of the scheme, Prudential and Rothesay entered into a reinsurance agreement to transfer the majority of the economic risk and reward of Prudential’s annuity business covered by the agreement from Prudential to Rothesay. Although the scheme would not change any terms of any policies, the court found that the scheme offered no benefits to the transferred policyholders, who would no longer be entitled to look to Prudential to pay or service their annuities and instead would need to look solely to Rothesay in these respects. The court noted that the scheme was “strenuously opposed” by a number of policyholders, who contended that they selected Prudential as their annuity provider based specifically on its long history as a leading UK insurer, its size, reputation, and financial strength and resources.

On balance, the court concluded that a number of factors weighed heavily against exercising its discretion to sanction the scheme. It emphasized, among other things, the overall fairness of the scheme as between all affected persons, the annuity policyholders in particular. The court found that it was entirely reasonable for policyholders to have chosen Prudential based on its history and reputation, among other factors, and for policyholders to have assumed that Prudential would not seek to transfer their policies to another provider. The court rejected Rothesay’s contention that it would be prejudiced by any decision not to sanction the scheme by refusing it the benefits of the reinsurance agreement with Prudential referenced above, finding that Rothesay entered into the reinsurance agreement knowing the scheme was subject to the court’s sanction and thus was not guaranteed to be approved.

In re Prudential Assurance Co. Ltd. [2019] EWHC (Ch) 2245 (Eng.).

Court Holds Arbitration Provision Does Not Violate California’s McGill Rule

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The plaintiffs brought a class action suit against Extra Space Storage Inc. for false advertising, unfair competition, and violation of the California Consumers Legal Remedies Act. After the case was removed to the U.S. District Court for the Northern District of California, Extra Space moved to compel arbitration based on the rental agreements signed by the class members. The plaintiffs argued that the arbitration provision, which stated that a signatory “will only pursue arbitration on an individual basis and will not pursue arbitration or any other claim on a class-wide, representative, or consolidated basis,” violated California’s McGill rule. The McGill rule provides that a contractual agreement purporting to waive a party’s right to seek public injunctive relief in any forum is unenforceable. The court granted Extra Space’s motion and explained that arbitration provision did not violate the McGill rule because it does not prevent an arbitrator from awarding injunctive relief at large. The court further explained that an action seeking public injunctive relief is not a “representative action.”

Ionescu v. Extra Space Storage Inc., No. 4:19-cv-02226 (N.D. Cal. Aug. 23, 2019).

Court Stays Yacht-Wreck Coverage Action Pending Concurrent Proceeding to Vacate Arbitration Award in Favor of Insurers

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Taunia Kittler, through Galilea LLC, owned a 60-foot sailing yacht named Galilea. In June 2015, the Galilea crashed off the coast of Panama and was deemed a complete loss. Kittler and Galilea LLC sought insurance coverage from the insurer-defendants, which denied the claim on the ground that the accident had occurred outside the covered cruising area. The insurers then commenced arbitration against Galilea in New York.

In June 2018, while the arbitration was pending, Kittler and Galilea commenced a separate action in Montana federal court, asserting claims that were identical to the counterclaims they asserted in the arbitration proceeding. The insurers moved to dismiss and/or stay the case pending final resolution of the arbitration, and, in March 2019, certain of Kittler and Galilea’s claims were dismissed. The remainder of the insurers’ motion was referred to the magistrate judge for resolution. One month later, the arbitrators issued an award in favor of the insurers, finding that Kittler and Galilea were not entitled to coverage for the Galilea wreckage. In June 2019, while the insurers’ motion to dismiss and/or stay was still pending, Kittler and Galilea moved to vacate the arbitration award in the Southern District of New York.

In the most recent development, the Montana district court agreed with the insurers to stay the case pending the outcome of Kittler and Galilea’s motion to vacate the arbitration award. Because Kittler and Galilea’s claims in the case were identical to those asserted in the arbitration proceeding – which was resolved against Kittler and Galilea – and because Kittler and Galilea have challenged the arbitration award, the court held that the award was not “final.” As such, it determined that a stay of the case was required, citing the “liberal federal policy favoring arbitration.” Given the significant overlap of issues, the court also noted that the case may be rendered moot by the outcome of the proceedings in the Southern District of New York, and that absent a stay of the case, any decisions therein may result in inconsistent rulings.

Galilea, LLC v. Pantaenius Am. Ltd., No. 1:18-cv-00131 (D. Mont. Aug. 26, 2019).