Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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

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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

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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

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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)

Eighth Circuit Vacates Confirmation Over Lack of Personal Jurisdiction

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The Eighth Circuit recently vacated a judgment confirming an arbitration award after concluding that the district court lacked personal jurisdiction over the defendant.

Federated Mutual Insurance Co., a Minnesota insurer, owns various trademarks containing the word “Federated.” A Florida insurer changed its name to Federated National Holding Co. After Federated Mutual expressed concern about possible confusion related to its marks, the insurers entered into an agreement requiring Federated National to adopt a new name, inform Federated Mutual of its new name, and provide Federated Mutual with an opportunity to object. Federated National adopted the name “FedNat,” continued to use the name Federated National as well, and failed to give Federated Mutual the required notice and opportunity to object. Federated Mutual initiated arbitration.

The arbitrator allowed FedNat to continue using FedNat, but ordered it to stop using “Federated.” Federated Mutual filed a petition to confirm the award in the U.S. District Court for the District of Minnesota. Federated Mutual’s petition was successful.

FedNat appealed, and the Eighth Circuit vacated the award and remanded with instructions to dismiss the petition based on a lack of personal jurisdiction over FedNat. It ruled that the agreement between the parties, despite being relevant, did not give rise to personal jurisdiction merely because the agreement contained a Minnesota choice-of-law provision. The court also explained that FedNat had no meaningful connection to Minnesota: It did not do business or have a physical presence there, and the fact that FedNat’s name disrupted Federated Mutual’s business in Minnesota did not create contacts on the part of FedNat with Minnesota. Finally, the panel disagreed with the district court’s conclusion that the agreement between the parties contemplated regular communications in Minnesota. The agreement only required notice of Federated National’s new name and was silent as to where the notice was to be given. Such sporadic communications were not enough to establish personal jurisdiction in Minnesota.

Federated Mut. Ins. Co. v. FedNat Holding Co., No. 18-2430 (8th Cir. June 27, 2019).

Fifth Circuit Reverses Ruling That Procedural Unconscionability Is Decided by Arbitrator

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The plaintiff challenged the formation of an arbitration clause contained in her employment contracts and acknowledgment of employee handbooks, arguing: (1) there was no “meeting of the minds” and therefore there was not the mutual assent necessary for contract formation; and (2) the agreement was procedurally unconscionable because the plaintiff’s “assent was obtained through misrepresentation, she never had a meaningful opportunity to bargain, and there was a gross disparity in the parties’ bargaining power.” A Mississippi federal court rejected the plaintiff’s first argument, finding that there was a meeting of the minds, but deferred the procedural unconscionability argument to the arbitrator under the agreement’s delegation clause.

The Fifth Circuit upheld the ruling on contract formation, as the district court “correctly found that the electronic communications transmitting the Arbitration Agreement clearly identified an arbitration agreement as the subject of the communications … [and the plaintiff] was given the opportunity to read the Agreement and certified” that she had done so. The plaintiff’s “unilateral lack of diligence” in failing to do so “does not preclude contract formation under Mississippi law.”

However, the Fifth Circuit reversed with respect to procedural unconscionability, as that “objection challenges the formation of the Arbitration Agreement itself, the district court had the duty to resolve this challenge.” Thus, the case was remanded to the district court to resolve the issue.

Bowles v. Onemain Fin. Grp., LLC, No. 18-60749 (5th Cir. June 19, 2019)