Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Third Circuit Affirms Arbitration Award for Employee’s Breach of Employment Agreement

by

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).

Court Refuses to Treat Unopposed Petition to Confirm Arbitration Award as a Motion for Default Judgment, Reviews the Merits of the Petition, and Enters Order Confirming the Award and Legal Fees

by

The case involved an AAA arbitration centering on the lack of performance under an exclusive distributorship agreement (EDA) that a medical supplier signed with a product manufacturer. The supplier failed to order sufficient amounts of the product under the EDA, but contended that the manufacturer fraudulently induced the supplier to enter into the EDA by making representations that the product was unique. The EDA, however, included an integration clause stating that the agreement constituted the entire agreement between the parties. The arbitrator ruled in favor of the manufacturer, finding that the supplier was barred by the parol evidence rule from asserting that it was fraudulently induced into signing the EDA.

The manufacturer then filed a petition with a district court to confirm the award. Although the supplier failed to file a response to the manufacturer’s petition, the court refused to simply enter a default judgment, holding that a default is not appropriate on a petition to confirm an arbitration award. The court then found that the evidence and the law showed that the arbitrator’s decision was more than “colorable” and confirmed the award. Included in the award was an award of attorneys’ fees. On review, the court found that the manufacturer’s attorneys complied with evidentiary requirements, including submission of an affidavit describing their experience, rate, amount of time spent on the case, and a statement that the requested rates are reasonable in their community. As a result, the district court confirmed the requested amount of fees in their entirety, noting specifically that the supplier had not presented any evidence to the contrary.

Intellisystem, LLC v. McHenry, No. 2:19-cv-01359 (E.D. Pa. June 26, 2019).

Odyssey Reinsurance Obtains Summary Judgment in Fraudulent Transfer Case Against Owners of Agency Involved in Reinsurance Arrangement

by

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).

Court Compels Arbitration Based on Text Message Agreement

by

A district court has granted a motion to compel arbitration based on an arbitration clause in an agreement sent via text message and agreed to via a reply text.

Lexington Law Firm, a debt collection company, was sued in a putative class action under the Electronic Funds Transfer Act after purportedly deducting funds without consent.

Lexington moved to compel arbitration. It had sent the named plaintiff a text message agreement that contained an arbitration clause requiring him “to arbitrate all disputes and claims between [him] and Lexington on an individual basis only.” The plaintiff responded with a text that said: “Agree.” The plaintiff opposed Lexington’s motion. He claimed, inter alia, that there was no mutual assent and that the arbitration clause was unconscionable because it was a contract of adhesion and because it was so broadly worded. The district court disagreed.

The plaintiff had been given the agreement and had agreed to it. The court distinguished, among other things, cases involving “browsewrap” agreements in which a website user “agreed” to terms and conditions merely by using a website. Although the court found the agreement minimally procedurally unconscionable because it was a contract of adhesion, that did not render the agreement unconscionable as a whole. The agreement was not substantively unconscionable merely because it was broadly worded, at least where, as here, the plaintiff’s claims were related to the agreement he signed. The court therefore dismissed the putative class action.

Starace v. Lexington Law Firm, No. 1:18-cv-01596 (E.D. Cal. June 27, 2019).

Florida Federal Court Compels Arbitration of Coverage Dispute Under the New York Convention

by

The plaintiff sought coverage for property loss due to Hurricane Irma, and the defendant successfully moved to compel arbitration. The plaintiff opposed arbitration, arguing that the subject policy was unsigned and thus did not constitute a signed written agreement to arbitrate. As Florida law recognizes that an insurance application and the policy together “form the contract of insurance,” the district court found that the plaintiff’s signature on its insurance application “is sufficient to constitute a signature on a written agreement to arbitrate.”

The district court further rejected the plaintiff’s arguments that: “(1) it had no knowledge of the arbitration provision and (2) the Policy’s Service of Suit clause supersedes the arbitration provision or renders it ambiguous.” The plaintiff was instructed to carefully read the entire policy and “cannot now contend that it was unaware of the arbitration provision.” Furthermore, “[t]he Policy mandates arbitration and the Service of Suit Clause merely provides a means for the parties to go to court to either compel arbitration or enforce an arbitration award. Indeed, courts consistently read arbitration clauses and service of suit clauses as compatible.”

Gold Coast Prop. Mgmt. Inc. v. Certain Underwriters at Lloyd’s London, No. 1:18-cv-23693 (S.D. Fla. June 14, 2019)