Reinsurance Focus

The U.S. Court of Appeals for the Ninth Circuit held that the district court did not err by allowing non-signatories Jess Smith & Sons Cotton LLC (JSS) and J.G. Boswell Co. to invoke the arbitration clause in a license agreement between Tradeline Enterprises Pvt. Ltd. and the Supima Association of America. The court explained that state law controls whether federal courts may enforce arbitration agreements against signatories at the request of non-signatories. Arizona law controlled in this case. Pursuant to Arizona law, “a non-signatory may compel arbitration with a signatory to an arbitration agreement if the claims at issue are ‘intimately founded in and intertwined with the underlying contract obligations.'” The complaint filed by Tradeline alleged that JSS and Boswell caused Supima to breach and wrongfully terminate the license agreement. Therefore, the claims raised in the complaint were “intertwined” with Tradeline’s license agreement with Supima.

Tradeline Enters. Pvt. Ltd. v. Jess Smith & Sons Cotton, LLC, No. 18-56101 (9th Cir. July 2, 2019).

The Ninth Circuit affirmed an order granting a motion to compel arbitration and to dismiss, finding that a purchase order issued by the plaintiff to purchase goods from the defendant incorporated a binding arbitration clause encompassing the parties’ dispute. The arbitration clause was contained in terms and conditions expressly incorporated by reference into the defendant’s initial quotation. The plaintiff argued that it never received the terms and conditions — only the quotation — and thus that it could not have agreed to arbitrate. The Ninth Circuit disagreed, finding that the arbitration clause became part of the contract because the terms and conditions were “readily available” to the plaintiff, and the plaintiff therefore “acquiesced” to the arbitration provision by failing to reject it upon issuing its purchase order. The court also rejected the plaintiff’s argument that the arbitration clause was unconscionable, finding that the parties were both business entities with equal bargaining power and that they negotiated their agreement for months. The plaintiff’s final argument that the defendant waived its right to arbitrate was similarly rejected. The court held that the plaintiff failed to carry its “heavy burden” of showing that the defendant acted inconsistently with a known right to compel arbitration and that the plaintiff was prejudiced as a result.

Cunico Corp. v. Custom Alloy Corp., No. 18-55047, 2019 WL 2895148 (9th Cir. July 3, 2019).

Melody Shan was employed by Sabre GLBL. Shan entered into an employment agreement with Sabre, which prohibited Shan from disclosing confidential information and competing with Sabre for its employees, contractors, and customers, both during and after her employment. The employment agreement was governed by Texas law. Shan started a competing company while still employed by Sabre and solicited Sabre employees and customers. Shan thereafter resigned from Sabre and continued to work on her competing company. Sabre sued Shan in New Jersey state court, alleging that Shan breached the employment agreement by misusing confidential information, stealing employees, soliciting customers, and competing with Sabre. Shan removed the action to federal court and moved to compel arbitration pursuant to the employment agreement. The district court granted the motion, and Sabre initiated an arbitration before the Judicial Arbitration and Mediation Services (JAMS) in Dallas, Texas. The arbitrator found in favor of Sabre and awarded $200,000 in disgorgement-of-salary damages and $1,173,318 in “head start” damages based on Shan’s equity interest in the competing company. The district court affirmed the award, and Shan appealed.

The U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision. The court explained that its review of an arbitration award is “extremely deferential” and can only be vacated in a select few instances. The court explained that the damages were not awarded in a “manifest disregard of the law” as Shan did not identify any clearly governing principle of Texas law that the arbitrator was aware of and chose to ignore in awarding these damages. The court further declared that the arbitrator did not exceed his powers in his damages award. The court explained that the arbitrator’s award, which fully explained his reasoning, was sufficient under the standard despite the arbitrator’s failure to address Shan’s mitigation defense. The court also found that the arbitrator was not guilty of “misbehavior by which the rights of any party have been prejudiced.” Even though Sabre did produce its expert report after the deadline, Shan was not prejudiced because the arbitrator permitted Shan to present expert rebuttal testimony at the hearing without a written expert report. Lastly, the court stated that the arbitrator did not act with partiality as Shan failed to show any bias.

Sabre GLBL, Inc. v. Shan, Nos. 18-2079, 18-2144 (3d Cir. July 3, 2019).

We have been tracking an ongoing reinsurance matter in which Odyssey Reinsurance Co. obtained a $3.2 million default judgment against Cal-Regent Insurance Services Corp. and Pacific Brokers Insurance Services (PBIS) as a result of fraudulent transfers made between the two companies and the owner/officers of both companies, Richard and Diane Nagby. As we previously reported, Odyssey obtained a judgment against Cal-Regent in 2015 for $3.2 million to recover the amount of return commissions it was owed. The Nagbys, however, had previously formed PBIS and caused Cal-Regent to transfer substantially all of its assets to PBIS. Three months before judgment was entered in Odyssey’s initial action against Cal-Regent, the Nagbys caused PBIS to sell substantially all of its assets to AmTrust for $5 million, which the Nagbys agreed to divide among themselves.

Odyssey filed the present action on March 21, 2017, alleging liability under California’s Uniform Fraudulent Transfer Act (UFTA) and alter ego and successor liability law. The court previously granted default judgments as well as preliminary injunctions against the Nagbys enjoining them from disposing the AmTrust proceeds. On October 27, 2017, the court entered a judgment as to Cal-Regent and PBIS, including a monetary award against PBIS of $3,219,482.68, the amount owing on the District of Connecticut judgment against Cal-Regent. On March 5, 2018, the court certified the judgment as final, and no appeal was taken.

The court has now granted Odyssey’s motion for summary judgment seeking to recover from the Nagbys the money transferred to them from the sale of PBIS to AmTrust. Odyssey’s theory of liability under the UFTA was based on constructive fraud, which does not require a showing of fraudulent intent by the Nagbys. The court found that the Nagbys were liable because: (1) Cal-Regent transferred its assets to PBIS (Cal-Regent transferred at least 75% of its relationships with insurance brokerage firms) and was rendered insolvent; (2) PBIS then sold all of its assets to AmTrust; (3) the initial proceeds of the sale and a subsequent payment by AmTrust were distributed to the Nagbys; and (4) these distributions rendered Cal-Regent and PBIS insolvent in that they were left unable to pay off their debt owed to Odyssey.

The court further found that Odyssey demonstrated that it was a creditor of PBIS under California’s standard for successor liability, finding that Odyssey showed that there was no adequate consideration given by PBIS for Cal-Regent’s assets, that Cal-Regent’s debts were left unpaid, and that Mr. Nagby owned both Cal-Regent and PBIS. Finally, the court also found that Odyssey could recover the full amount owing on the District of Connecticut judgment from Mr. Nagby under Nevada corporate law because Mr. Nagby’s authorization for the unlawful distributions left PBIS unable “to pay its debts as they became due in the usual course of business” and left PBIS with assets “less than the sum of its total liabilities.”

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. July 2, 2019).