Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Remands Arbitration Award to Arbitrator for Clarification

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Three Brothers Trading LLC d/b/a Alternative Execution Group (AEXG) and Generex Biotechnology Corp. entered into a contract whereby AEXG would secure investors for Generex’s business and, in exchange, Generex would pay AEXG a percentage of the funds received by any investor AEXG had referred. The contract included a “sixty-day ‘No Shop’ exclusivity provision,” which barred Generex from entering “into any financing transaction other than with existing shareholders” or with investors referred by AEXG. The contract required any disputes to be resolved through arbitration. Generex allegedly breached the contract by entering into a financial transaction with a party who was not referred by AEXG. AEXG commenced an arbitration.

The arbitrator determined that Generex violated the no-shop provision and awarded four separate awards to AEXG. AEXG brought a petition to confirm the award, and Generex in turn brought a motion to modify, vacate, and remand the award.

The court explained that it “uses an extremely deferential standard of review for arbitral awards.” However, an award may be remanded to the arbitrator if the “award is incomplete or ambiguous” and the court “is unable to discern how to enforce it.” Pursuant to 9 U.S.C. § 11, remand should not be granted when the court can resolve any alleged ambiguities in the award by modification. The court held that the terms of the second award were ambiguous as there were several interpretations of the award that yielded very different outcomes for the parties. As such, the court was unable to modify the award and remanded the case to the arbitrator for clarification.

Three Bros. Trading, LLC v. Generex Biotechnology Corp., No. 1:18-cv-11585 (S.D.N.Y. July 31, 2019).

Court Denies Reinsurer’s Motion to Compel, Finding No Basis to Decide Issues Concerning Costs for Which Cedent Has Not Requested Payment

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Lamorak Insurance Co. issued excess policies to Olin Corp. and also reinsured those policies with the defendants, Certain Underwriters at Lloyd’s, London. After Lamorak and Olin settled a declaratory judgment action concerning coverage for underlying environmental property damage suits against Olin, Lamorak sought payment from Lloyd’s under the relevant reinsurance contracts. Lloyd’s disputed the reinsurance billings, and Lamorak commenced the instant action. In response, Lloyd’s sought a declaration that it is not obligated to pay expenses that Lamorak incurred in connection with its declaratory judgment action against Olin, even though Lamorak never asked to be reimbursed for such costs. Lloyd’s moved to compel discovery regarding the declaratory judgment costs, for an order setting a deadline for Lamorak to request reimbursement of such costs, or, alternatively, for an order barring Lamorak from ever making such a request. The court denied the motion in its entirety, finding no basis for compelling Lamorak to produce documents about costs it had not asked Lloyd’s to reimburse, nor for setting an arbitrary deadline for Lamorak to assert such a claim in the future. The court also refused to affirmatively bar Lamorak from pursuing a claim for the declaratory judgment costs, as doing so would be to decide a hypothetical legal question before it is arises.

Lamorak Ins. Co. v. Certain Underwriters at Lloyd’s, London, No. 1884CV00200BLS2 (Mass. Super. Ct. June 19, 2019).

Third Circuit Holds That Statute of Limitations Was Not Extended for Class Action Lawsuit

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In 2005 and 2006, Christopher Blake and James Orkis took out mortgages from JP Morgan to buy homes. Then in 2013, they filed a class action against JP Morgan under the Real Estate Settlement and Procedures Act (RESPA), alleging a scheme to refer homeowners to mortgage insurers/reinsurers in exchange for streams of kickbacks. RESPA has a one-year statute of limitations that runs from the date of the violation. 12 U.S.C. § 2614.

Blake and Orkis argued that each kickback separately violates the Act and has its own limitations period. The court disagreed and held that the kickbacks ended more than a year before they sued, so the Act’s one-year limitations period would still bar their claims.

Blake and Orkis further argued that the statute of limitations had also been extended by a 2011 lawsuit filed over the same conduct in a California federal court, Samp v. JP Morgan Chase Bank, N.A. The Third Circuit again disagreed and held that a pending class action tolls the time only for putative class members’ individual claims, not their class claims. The court explained that tolling class actions would cause problems in three ways. First, it would encourage duplicative lawsuits instead of reducing them. Second, tolling new class actions would be inequitable. Third, it would encourage repetitive claims and allow class claimants to stack their claims forever.

Blake v. JP Morgan Chase Bank NA, 927 F.3d 701 (3d Cir. June 19, 2019).

Court Confirms Arbitration Award, Finding It Was Based in Part on “Plain Error,” but Did Not Amount to Manifest Disregard of the Law

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The plaintiff commenced an arbitration proceeding with the Financial Industry Regulatory Authority (FINRA) against two of his former investment brokers and their former employers — Concorde and Westminster. The plaintiff claimed that the brokers falsely inflated his account balance, ultimately causing him to unknowingly deplete his entire retirement account. After a four-day hearing, the panel issued an award against the brokers, but it denied the plaintiff’s claims against the former employers, finding that they were not liable under a respondeat superior theory.

The plaintiff moved in district court to confirm the award against the brokers, which was confirmed. The plaintiff also moved to vacate the award in favor of the former employers, arguing that it was based on a manifest disregard of the law. The court denied the motion to vacate in both respects but found the question to be more complex as to Concorde, which is where the brokers worked for a significant portion of the relevant events. While concluding that the panel’s decision not to hold Concorde vicariously liable constituted “plain error,” the court held that the plaintiff failed to meet the “extremely high” burden of proving manifest disregard of the law. The court explained that such a finding would require a showing that the award was “based on reasoning so palpably faulty that no judge … ever could conceivably have made such a ruling.” Noting that the First Circuit has cautioned district courts not to correct even “painfully clear” arbitrator error, and that the panel here appeared to have acted more so out of a failure to appreciate the significance of the issue — it not being made a focal point of the hearing — the court found no evidence that the panel consciously ignored applicable law regarding Concorde’s vicarious liability.

Separately, the court refused to vacate the award against one of the individual brokers who did not participate in the arbitration hearing or even learn about the award until after it was issued. Instead, the court granted the plaintiff’s motion to confirm the award as against her, finding that she was properly served with the statement of claim and received adequate notice of the hearing.

Ebbe v. Concorde Inv. Servs., LLC, No. 1:19-cv-10289 (D. Mass. July 18, 2019).

Fifth Circuit Determines That Louisiana Nonresident Attachment Statute Allows for Attachment in Aid of Arbitration

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On second rehearing and after submitting a question to the Louisiana Supreme Court, the Fifth Circuit determined that the Louisiana nonresident attachment statute allows for attachment in aid of arbitration. The underlying case involved competing claims from creditors for the pig iron on board a ship anchored in New Orleans. The Louisiana Supreme Court answered the certified question by stating that the statute “allows for attachment in aid of arbitration if the origin of the underlying arbitration claim is one pursuing money damages and the arbitral party has satisfied the statutory requirements necessary to obtain a writ of attachment.”

Louisiana’s attachment statute permits a writ of attachment to be obtained “in any action for a money judgment, whether against a resident or a nonresident, regardless of the nature, character, or origin of the claim, whether it is for a certain or uncertain amount, and whether it is liquidated or unliquidated.” The Fifth Circuit found the underlying action seeking to compel arbitration to be an “action for a money judgment” as the plaintiff had “made it clear from the outset” that it was pursuing a money judgment. “The ‘nature, character, or origin of the claim’ just happens to be arbitration.” Since the plaintiff had brought an action for a money judgment (in this case, an arbitration), the statute permitted the issuance of a writ of attachment, and therefore the requirements of the nonresident attachment statute had also been met, per the Louisiana Supreme Court’s guidance.

Stemcor USA Inc. v. Cia Siderurgica do Para Cosipar, No. 16-30984 (5th Cir. June 25, 2019).