The Insurance and Reinsurance Report

11th Circuit Upheld Award of Fees and Costs Despite Bifurcated Arbitration

White Spring Agric. Chems., Inc. v. Glawson Invs. Corp.  (11^th Cir. Fla. Oct. 17, 2011)

White Springs Agricultural Chemicals, Inc. (“White Springs”), a mining company, appealed the confirmation by the United States District Court for the Middle District of Florida of an arbitration award in favor of Glawson Investments Corp. (“Glawson”), a land owner, granting attorneys’ fees, expert fees, and prejudgment interest.  White Springs sought to vacate or modify the arbitration award under sections 10 and 11 of the Federal Arbitration Act (“FAA”).

White Springs and Glawson did business together pursuant to two agreements: an Operating Agreement and Settlement Agreement.  The agreements contained identical arbitration clauses.  When a property dispute arose between the parties Glawson filed a demand for arbitration with the American Arbitration Association (“AAA”).  It was stipulated that the arbitration would be divided into two parts: Phase I consisting of non-monetary claims and injunctive relief, and Phase II consisting of all other disputes and claims, including damages. 

The arbitration panel ruled in favor of Glawson on its Phase I claims.  Thereafter, in preparation for Phase II, the parties filed a joint list of issues to be resolved in Phase II.  Additionally, Glawson filed a separate motion seeking to clarify that it was also seeking attorneys’ fees as part of it damages in Phase II.  Over White Springs’ objection, the arbitration panel decided to allow evidence of attorneys’ fees and costs as damage elements in Phase II.  Ultimately, after hearing the Phase II claims, the panel determined that Glawson was entitled to attorneys’ fees and costs.  The District Court confirmed and White Springs appealed.

The court noted that sections 10 and 11 of the FAA provide the exclusive means by which a federal court may upset an arbitration panel’s award.  Section 10 empowers the court to vacate an arbitration award where the arbitrators exceed their powers, or so imperfectly execute them that a mutual, final, and definite award upon the subject matter submitted is not made.  Section 11 allows for modification of an award where the arbitrators have awarded upon a matter not submitted to them.  According to the court, because these sections are the exclusive means for upsetting an arbitration award, a panel’s incorrect legal conclusion is not grounds for vacating or modifying the award.

White Springs argued that the award must be vacated because it exceeded the powers of the arbitration panel.  The court took the position that because arbitrators derive their powers from the agreement between the parties, the court must look to the terms of the governing arbitration clause to determine the powers of the arbitration panel.  As between White Springs and Glawson, the governing clause allowed for awards of attorneys’ fees and costs.  In the court’s view, White Springs could not overcome the “high hurdle” necessary for vacating an arbitration award when there is a plain basis for the panel’s award in the parties’ agreement.

White Springs also argued that the issue of attorneys’ fees was not properly submitted to the panel.  There was no dispute that Glawson presented the issue to the arbitration panel in its motion prior to Phase II.  The court considered whether this motion effectively submitted that claim to the panel and ultimately concluded that the issue was properly submitted.  It was clear to the court that the panel plainly believed that the issue had been submitted and had reviewed the positions of Glawson and White Springs with respect to the issue before making its decision.

The court noted that the timing of Glawson’s request for attorneys’ fees is not determinative of proper submission.  It did not matter to the court that Glawson did not demand attorneys’ fees in its initial complaint.  Although the panel never explicitly ruled that the claim could proceed, it did grant the relief sought therein, which the court viewed as a strong indication that the panel had indeed consented to that claim.  It did not matter to the court that Phase I attorneys’ fees were sought in Phase II because the parties had stipulated that all other disputes would be resolved during Phase II.  For the court, the arbitration was continuous, and the parties’ agreement to conduct the arbitration in two distinct phases did not restrict the rights of either party to assert monetary claims in Phase II.

For a copy of the decision click here

Jeffrey Kingsley and Troy Bataille

 

Eleventh Circuit Prohibits Insurer from Arbitrating Class Action Refund Suit

Lawson v. Life of the South Insurance Co. (11^th Cir. (Ga.) Aug. 10, 2011)

The Eleventh Circuit recently rejected an insurer’s attempt to arbitrate a putative class action lawsuit charging the insurer with failing to refund unearned premiums to policyholders that paid off loans early.

Plaintiffs Barbara and Jerry Lawson purchased a used 2000 Chevrolet Blazer from a Georgia car dealership. The couple financed the purchase by entering into a loan agreement that granted them the right to pay off the loan early. The loan agreement contained a clause entitled “Agreement to Arbitrate Disputes” that provided that either the buyer or the car dealership could opt to resolve any dispute through binding arbitration.

The Lawsons then executed a credit life insurance policy with defendant Life of the South that provided that Life of the South would pay the balance the Lawsons owed on the car loan if either of the Lawsons died before the loan was paid off. The policy provided that Life of the South would refund any remaining premium if the loan was paid off early.

The Lawsons paid off their loan two-and-a-half years early and, without having requested a refund from Life of the South or notifying it that they had paid off the loan, filed a nationwide consumer class action against Life of the South. On behalf of themselves and the purported class, the Lawsons sought a refund of the unearned premium due under the insurance policy because of the early termination of the loan, as well as damages under several contract and tort theories.

Life of the South filed a motion to compel arbitration based on the arbitration clause in the loan agreement, which provided the car dealership and the Lawsons with the right to force arbitration of any dispute arising from or relating to that agreement. The district court denied the motion on the ground that Georgia law prohibits the arbitration of disputes involving insurance. The Eleventh Circuit affirmed, holding that “the loan agreement does not show, on its face or elsewhere, an intent to allow anyone other than the Lawsons, the car dealership, Chase Manhattan, and the assignees of the dealership or Chase Manhattan to compel arbitration of a dispute, and Life of the South is none of those.” In addition, the Eleventh Circuit rejected Life of the South’s argument that the doctrine of equitable estoppel applied. To this end, the Eleventh Circuit stated that the Lawsons’ claim did not arise directly out of the loan agreement which contained the arbitration agreement.

For a copy of the decision, click here

Carrie Appler and Dan Gerber

 

 

District Court Denied Motion For Injunctive Relief Regarding Arbitrators' Qualifications

B/E Aeropsace, Inc., v. Jet Aviation St. Louis (S.D.N.Y., July 1, 2011)

Plaintiff sought a temporary restraining order and preliminary injunction staying its upcoming arbitration with defendant.  The arbitration is administered by defendant The American Arbitration Association (“AAA”) and stems from a dispute involving allegedly incorrect engineering data plaintiff provided to defendant.  The crux of plaintiff’s complaint is that the arbitrators selected by defendants do not meet the requisite qualifications for arbitrators of disputes between plaintiff and defendant as set forth in the arbitration clause of their contract. 

The court has jurisdiction to hear this matter under Section 4 of the Federal Arbitration Act.  Specifically, the court held that where the “parties have agreed to arbitrate, but disagree as to the operation or implementation of that agreement, under the [FAA] it is properly a matter for the court. 

In order to obtain a preliminary injunction, an applicant must show “(1) irreparable harm in the absence of the injunction and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant’s favor.”

The court held that plaintiff is unlikely to succeed on the merits of his claim.  Specifically, the court held that the two arbitrators at issue were qualified as defined by the arbitration clause.  The arbitration clause only required arbitrators that are “professional business persons knowledgeable of the aircraft industry.” 

With respect to the first arbitrator he conducts a full-time dispute resolution practice where he arbitrates and mediates complex business disputes, as well as being a former judge, processor, and name partner of a law firm.  That qualifies him as a professional business person.  In addition, with regards to knowledge of the aircraft industry, his current alternative dispute resolution practice focuses on the aircraft industry.  He has resolved claims involving aircrafts, including manufacturing defects, inaccuracies in manuals, and other related issues.  These experiences serve to make him knowledgeable of the aircraft industry.

With respect to the second arbitrator he qualifies as a professional business person because he is a name partner at a law firm and also has experience providing professional alternative dispute resolution services.  In addition, for two years he served as outside counsel to Piper Aircraft which also qualifies him as a person who is knowledgeable of the aircraft industry.

Since plaintiff cannot prove that he will likely succeed on the merits of his claim, he cannot meet the elements for an injunction.

For a copy of the decision click here

Sarah Fang and Michael Glascott

Insurer’s lack of candor to arbitration panel results in complete loss of attorney’s fees awarded by arbitrators

Virginia Surety Company, Inc. v. Certain Underwriters at Lloyd’s, London, Case No. 1-10-1753 (App. Ct. Ill. Apr. 20, 2011)

 

Virginia Surety (“VS”) demanded arbitration against Lloyd’s relating to payments allegedly due from Lloyd’s under two insurance treaties, a 1996 and a 1998 Treaty, in which Lloyd’s agreed to reinsurer VS’s risk on certain automobile extended warranty contracts. The parties’ arbitration agreement did not require a reasoned award, but the parties agreed that they would prefer such an award if the panel was willing to provide one. An arbitration hearing was conducted and, on the last day of the hearing, the parties settled their dispute with respect to the 1996 Treaty, leaving only the dispute over the 1998 Treaty to be resolved by the arbitrators. The parties agreed to pay their own attorney’s fees with respect to the 1996 Treaty only.

The panel later issued its award in which it found that Lloyd’s relied on a material misrepresentation in VS’s insurance application, entitling it to rescission and relieving it of any obligation under the 1998 Treaty. Lloyd’s was ordered to repay $2 million in principal, plus interest, minus the amount of attorney’s fees and costs, to be determined by an in camera review of Lloyd’s billing statements. After such review, the panel issued its decision, awarding VS a total of $759,000 after deducting $2 million in attorney’s fees and expenses.

VS then filed a petition to vacate the adverse cost award of $2 million, arguing that the arbitration panel exceeded its powers and because the adverse cost award was not permitted by law, appeared to be punitive, appeared to include costs relating to the 1996 Treaty and because the panel failed to issue a reasoned award. VS also argued that Lloyd’s committed a fraud on the panel by submitting billings for expenses relating to the 1996 Treaty. Lloyd’s cross-moved for confirmation of the award.

The trial court granted VS’s petition, vacating a portion of the arbitrators’ award relating to adverse costs because it appeared Lloyd’s committed a fraud on the panel by submitting expenses relating to the 1996 Treaty in spite of the agreement that each party would bear its own costs as to the 1996 Treaty. The trial court also found the arbitration was fundamentally unfair because VS never had an opportunity to review the expense evidence submitted by Lloyd’s to the panel. The trial court refused to remand back to the arbitration panel for clarification of the expense issue.

The appellate court agreed with the trial court’s finding that Lloyd’s had acted with an intent to deceive because Lloyd’s admitted that it submitted billing statements relating to both the 1996 and 1998 Treaties when only the 1998 Treaty was at issue and when the panel expressly directed Lloyd’s to submit billings only for the 1998 Treaty matter. The appellate court affirmed the trial court’s refusal to remand to the panel for clarification of the expense award, instead explaining that such remand would give similarly situated parties an incentive to engage in fraud in the future.

As a result, Lloyd’s was ordered to refund the $2 million in premiums, plus interest, from the 1998 Treaty. Further, the award of attorney’s fees to Lloyd’s was stricken altogether, with no further award of fees granted. Consequently, by improperly submitting billing statements for both the 1996 and 1998 Treaties, Lloyd’s ultimately was awarded zero dollars in attorney’s fees and expenses.

For a copy of the decision click here 

Patrick Omilian and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/patrick-b-omilian

http://www.goldbergsegalla.com/attorneys/joanna-m-roberto

Supreme Court Concluded that FAA Does Not Permit Class Arbitration

AT&T Mobility LLC v. Concepcion, (U.S. Supreme Court, April 27, 2011)

Although arbitration provisions have generally been upheld by the courts, certain clauses have been closely scrutinized.  One such clause is a class-action waiver which requires arbitrations to be conducted on an individual basis.  The Supreme Court has now addressed the propriety of such clauses in arbitration provisions and whether state law can void the clause.

In AT&T Mobility LLC v. Concepcion, customers brought a putative class action suit against a cellular telephone service provider in a federal district court alleging false advertising and fraud.  The provider filed a motion to compel arbitration pursuant to the arbitration provision in its service contract.  The contract precluded class arbitration.  After the federal district court denied the provider’s motion to compel arbitration, the Ninth Circuit federal appellate court affirmed.  The Ninth Circuit found that the arbitration provision was unconscionable under California's Discover Bank rule, which provided that class action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money. 

After granting certiorari, the Supreme Court held that the Federal Arbitration Act (FAA) preempted the Discover Bank rule.  Specifically, the Supreme Court held that the savings clause under the FAA did not permit application of the California rule and nothing in the savings clause suggested an intent to preserve state law rules that stood as an obstacle to the accomplishment of the FAA's objectives.  The Court noted that the overarching purpose of the FAA was to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.  Requiring the availability of class arbitration would be inconsistent with the FAA.

For a copy of the decision click here

Bryan Richmond and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/bryan-d-richmond

http://www.goldbergsegalla.com/attorneys/sharon-angelino

Arbitration Award Vacated In Part by District Court

W & J Harlan Farms, Inc. v. Cargill, Inc. (S.D. Ind. April 21, 2011)

The parties entered into a grain storage contract whereby plaintiff sold defendant a specific amount of corn at set prices for three years and defendant delivered a storage system at no charge.  When floods destroyed 2,400 acres of plaintiff’s corn and plaintiff sought to postpone delivery under the contract, defendant informed plaintiff that it charged $1 per bushel carrying charge to carry the contract over one year.  Plaintiff sought to cancel the contract because the carrying charge policy was contrary to its expectations under the contract.  When defendant demanded damages, plaintiff filed suit.  Defendant initiated arbitration with the National Grain and Feed Association (“NGFA”) and this action was stayed.

The NFGA found in favor of defendant, awarding defendant $238,050 in damages, plus interest.  Defendant moved to dismiss the lawsuit and confirm the arbitration award.  Plaintiff cross-moved to vacate the arbitration award.

Plaintiff argued that the arbitrators failed to find on plaintiff’s claims for fraud and fraudulent inducement and as such, the award is neither final nor definite.  Plaintiff claimed that defendant orally represented that an “Act of God” would excuse non-delivery of one year’s production in case of natural disaster if delivery of an equivalent quantity was made in a subsequent crop year, and that based on this representation, plaintiff entered the contract.  The court held that it was not clear whether the arbitrators considered this claim and the decision must be vacated and remanded to the arbitrators for either clarification of their decision regarding the fraud claim or resolution of that claim.

Plaintiff also argued that the arbitration panel exceeded its authority by determining the case in accordance with instructions in the Guidelines for NGFA Arbitration Committee Members to the extent those guidelines were not incorporated into the arbitration agreement or provided to plaintiff prior to the arbitration.  Plaintiff argued that the guidelines prevented the arbitrators from considering its fraud claim to the extent that the guidelines require the arbitrators to interpret the parties’ contract, and the fraud claim was not found in the parties’ contract.  The court rejected this challenge, holding that the guidelines square with the common law rules of contract interpretation, and plaintiff overstated the import and effect of the guidelines.

Plaintiff also argued that the arbitrators’ decision should be vacated for evident partiality for several reasons, including that employees of defendants sit on the NGFA Arbitration Committee and served as NGFA Arbitration Secretary, NGFA Arbitration Committee members and arbitrators are employees of companies that engage in buying grain from farmers and the MGFA precludes individual farmers from serving as arbitrators.  The court rejected these arguments, stating that precedent expressly rejected concerns about structural bias when there was a prior business association between an arbitrator and a party.

Plaintiff also argued that the arbitrators’ failure to determine its claim for fraud and fraudulent inducement and their disregard of the legal principles incorporated into the contracts are sufficient to vacate the arbitration decision for manifest disregard of the law.  The court rejected this argument, because there was no allegation that the arbitrators’ decision instructed the parties to violate the law.

Accordingly, the court denied defendant’s motion to confirm the arbitration award, and granted plaintiff’s motion to vacate the arbitration award in part.

For a copy of the decision click here

Toni Frain and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/toni-l-frain

http://www.goldbergsegalla.com/attorneys/jeffrey-l-kingsley

Insurer sue three reinsurers to recover amounts paid in loss settlements for asbestos-related injuries on behalf of ACandS.

Travelers Casualty and Surety Co. v. Nationwide Mutual Ins. Co., Case No. 3:11-cv-00107 (D. Conn. Jan. 19, 2011).

On January 19, 2011, Travelers Casualty and Surety Company (“Travelers”) filed suit in the U.S. District Court for the District of Connecticut against three reinsurers who allegedly failed to pay valid claims. Travelers seeks a declaration of coverage and damages for breach of contract. The suit involves reinsurance treaties referred to as Travelers Blanket Excess of Loss Reinsurance Agreements, covering April 1976 through April 1979.

In its Complaint, Travelers alleges that the reinsurance treaties obligated the reinsures to indemnify Travelers for all losses paid out by Travelers and that the treaties considered all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin to be considered as having resulted from a single accident or occurrence. The treaties further provided that the reinsurers would not second-guess settlements made by Travelers, would abide by the loss settlements of Travelers, and would pay amounts to Travelers immediately upon proof of loss settlement by Travelers.

At issue in the Complaint are loss settlements for asbestos-related injury claims made against Travelers’ insured, Armstrong Contracting and Supply Company (“ACandS”). Travelers made indemnity and defense payments on behalf of ACandS for pre-1976 policies until such policies’ limits were exhausted. Then, in 2007, Travelers settled post-1976 liability by paying $449 million to the ACandS Asbestos Settlement Trust. Travelers submitted the $449 million settlement as a single loss under the reinsurance treaties, but, Travelers alleges, the reinsurers wrongly refused to pay their respective shares of Travelers’ loss settlements as they were obligated to do under the reinsurance treaties. By its Complaint, Travelers alleges Nationwide is liable for $2.7 million, National Casualty is liable for $2.76 million, and Wausau is liable to it for $693,000 under the treaties.

For a copy of the complaint click here

Patrick Omilian and Thomas Segalla

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

Insurer cannot avoid stay of litigation in favor of arbitration where arbitration agreement was between the insured-contractor and owner of construction project and arbitration was demanded immediately after answers were filed.

The Law Company, Inc. v. The United Drywall Group, LLC, Case No. 10-1241-JTM, 2011 U.S. Dist. LEXIS 1344 (D. Kan., Jan. 6, 2011).

An insured contractor entered into a construction contract with a project owner. The parties’ contract included an arbitration agreement. The insurer issued payment and performance bonds on the project but had no arbitration agreement with the project owner. The owner filed suit in federal court against the contractor and its insurer, then sought a stay of the proceeding to compel arbitration with the contractor. The insurer opposed the motion, arguing the Federal Arbitration Act (“FAA”) did not apply because the dispute did not “involve commerce,” it was not a party to the arbitration agreement, and the owner waived its right to arbitration by filing the lawsuit.

The District of Kansas flatly rejected the insurer’s argument that the contract for construction services did not “involve commerce.” The FAA’s “involving commerce” language is construed broadly to mean “affecting commerce” and signals the broadest permissive exercise of Congress’ Commerce Clause power. The parties’ construction contract fell within the ambit of the FAA.

The Court also held that the insurer was not entitled to a stay of the proceeding even though it was not a party to the arbitration agreement between its insured contractor and the project owner. Federal policy favoring arbitration is sufficiently strong that it may be invoked to stay a proceeding even where all parties to the proceeding are not party to the arbitration agreement.

Finally, the Court concluded the owner did not waive its right to arbitration by filing first filing the lawsuit. The Court reviewed federal law which allows a party to initiate a legal proceeding in order to preserve a statute of limitations and then demand arbitration shortly thereafter. In instances where a party files a lawsuit, litigates for a length of time, then attempts to invoke arbitration “on the eve of trial”, it might be precluded from invoking an arbitration agreement. But here, the owner filed suit and immediately demanded arbitration. The insurer’s request to oppose arbitration was denied.

For a copy of the decision click here

Court Concludes that Arbitration Clause is Broad Enough to Cover Dispute

Joiner v. Performance Insurance Services, Inc, 2010 U.S. Dist. Lexis 133358 (S.D. MS. December 16, 2010)

In a dispute over whether to compel arbitration, an insurance agent in Mississippi entered into a producer agreement with an Indiana company pursuant to which it solicited and submitted 80 insurance policies.  After a complaint was made by the agent to the Mississippi Department of Insurance regarding the Indiana company’s practice of charging an inspection fee on each policy regardless of whether or not an inspection was being performed, the Indiana Company sent a letter stating that it was terminating the agreement.  The agent subsequently filed a suit in federal court in Mississippi for tortuous interference with contractual relations and breach of duty of good faith and fair dealing, alleging that the Indiana company improperly terminated the agreement to punish the agent for filing the complaint.

The Indiana company sought to dismiss the action without prejudice and an order that the agent must submit its claims to arbitration pursuant to the agreement’s mandatory arbitration clause.  The clause provides as follows:

            In the event of any dispute, claim or controversy concerning, arising out of or     relating to this agreement, its effect, the breach thereof, or the transactions   contemplated  by it, the same shall be settled by arbitration in accordance with the             Commercial Arbitration Rules of the American Arbitration Association.

The arbitration clause stated that the arbitration proceedings must take place in Indiana and that the results of the arbitration shall be final and binding.  There were no exceptions or limitations to the agreement's arbitration clause.  The agent contended that the arbitration clause did not apply to their claims because they did not bring a breach of contract action.

Citing the acceptance and enforceability of such arbitration clauses under 9 U.S.C.A § 2, the court noted that the agreement was valid and did not limit its application to breach of contract claims.  The court held that broad arbitration provisions such as the one in this action are deemed to cover all possible claims that might arise.  Determining that it would not be unconscionable to compel arbitration, the court further held that there were no legal constraints to prevent it from enforcing the arbitration.

For a copy of the decision click here

Bryan Richmond and Jeffrey Kingsley

Third Circuit Determined That Arbitrators Exceeded Authority by Rewriting Parties’ Contract; Award Vacated.

PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-3963, 2010 U.S. App. LEXIS 23222 (3^rd Cir., Nov. 8, 2010).

The Third Circuit affirmed a District Court’s vacatur of an arbitration award on the grounds that the arbitrators, by granting unrequested relief and rewriting the parties’ contract, exceeded their authority. PMA Capital (“PMA”) is an insurance company and Platinum Underwriters (“Platinum”) is a reinsurance company. Platinum and PMA entered into a contract by which Platinum indemnified PMA for obligations arising from its insurance policies. The contract included a “deficit carry forward provision” that entitled Platinum to reimbursement for losses carried from one year to the next. A dispute arose concerning the scope of the carry forward provision. The parties submitted the matter to arbitration, requesting the arbitrators to interpret and apply the carry forward provision with respect to a specified time frame. The contract also included an “honorable engagement” provision allowing arbitrators to make an award effecting the general purpose of the contract in a reasonable manner rather than in accordance with a literal interpretation of the agreement.

The arbitrators granted PMA an award of $6,000,000 payable within thirty days, struck the carry forward provision from the contract, and extinguished all future rights or claims under the contract which require a deficit carry forward. PMA successfully petitioned for vacatur of the award.

The Court of Appeals, on review, determined the arbitration panel clearly exceeded its authority by striking from the contract the very provision that it was called on to implement. The parties had sought arbitration requesting the provision be interpreted and implemented with respect to a disputed carry forward amount over certain years. The Court determined, even considering that the honorable engagement clause allows the arbitrators to stray from judicial formalities, the award exceeded the panel’s authority and must be vacated.

For a copy of the decision click here

Patrick Omilian and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

District Court Affirms Arbitration Award In Reinsurance Dispute Holding Motion To Vacate Decision Was Untimely And Lacked Merit

R&Q Reinsurance Co. v. American Motorist Ins. Co.  (United States District Court, Northern District of Illinois, October 14, 2010)

Petitioner sought to vacate an underlying arbitration award stemming from a reinsurance contract dispute between R&Q and Lumbermens regarding a series of Blanket Excess of Loss Reinsurance Contracts.  Lumbermens demanded arbitration against R&Q seeking to recover amounts billed under the contract relating to three claims totaling approximately $1.5 million. 

The Panel's Final Award, which it issued on February 5, 2010, closely resembled the draft award Lumbermens submitted. The Panel found in favor of Lumbermens and awarded it $1,454,989.80, plus interest. The Panel did not include a specific interest figure in its Final Award. Instead, the Panel ordered Lumbermens to provide R&Q and the Panel "with a written worksheet accounting of interest so awarded" within 5 business days. The Panel gave R&Q an additional 5 business days to "to review and comment upon the amounts claimed." The Final Award further stated that "[t]he panel will then issue an Order Directing Payment of Interest Awarded that, once issued, will form part of and be incorporated by reference into this Final Award." In its Final Award, the Panel cited to the relevant contractual clause in the Treaties, the Aggregate Extension Clause that it found required payment of the $1,454,989 award by R&Q. 

On March 15, 2010, after receiving and reviewing the documentation regarding the appropriate interest calculation, the Panel issued an "Order Directing Payment of Interest Awarded." In that order, the Panel directed R&Q to pay Lumbermens $350,000.00 in interest. The Panel further stated that "[a]s provided by the Final Award, this Order forms a part of and is hereby incorporated into the Final Award." The Panel did not provide any further explanation for how it arrived at the $350,000.00 interest.

R&Q argued that the February 5, 2010 Final Award and the March 15, 2010 order must be vacated pursuant to 9 U.S.C. § 10(a)(3) and 10(a)(4) because R&Q was prejudiced by the Panel's misconduct and its decision to exceed its powers by failing and refusing to issue a "reasoned award" pursuant to the agreement and instructions of the parties. R&Q further argues that the March 15, 2010 order violated the terms of the February 5, 2010 Final Award by incorrectly calculating Lumbermens' interest.

As an initial matter, the court held that R&Q’s motion to vacate the award was untimely as it exceeded the three-month deadline prescribed by the statute.  Specifically, the motion to vacate was served on May 6, 2010, one day after the three-month deadline as set forth in Section 12. R&Q argued that the three months should be interpreted as ninety days; however, the court disagreed holding that the statute unambiguously prescribes three months, noting the period must be applied as written pursuant to applicable 7^th Circuit case law.  Thus, the motion was ruled untimely.

Notwithstanding the foregoing, the court also ruled on the merits of the motion holding that the Panel’s award fell within the broad spectrum of a reasoned award.  Specifically, R&Q argued that its motion to vacate should be granted because (1) the Panel failed to issue a "reasoned award"; (2) in failing to issue a "reasoned award" the panel was guilty of misconduct and exceeded its powers; and (3) R&Q was prejudiced by the Panel's misconduct.  In noting the reasonableness of the decision, the court concluded that the final award did more than simply provided a one-line finding that one party won and one party lost, but rather included six paragraphs of contractual clauses and factual findings that drove the award decision.  As such, the court held the Panel issued a “reasoned award,” and further, there was no evidence of misbehavior on the part of the Panel under Section 10(a)(3).

For a copy of the decision click here

Paul Steck and Daniel Gerber

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Case provided courtesy of Lexis

 

District Court vacates confirmation of arbitration award entered in favor of U.S. company against Brazilian state-owned entity for lack of jurisdiction

Aurum Asset Managers, LLC v. Banco Do Estado Do Rio Grande Do Sul, Misc. Action No. 08-102, 2010 U.S. Dist. LEXIS 109577 (E.D. Pa., Oct. 13, 2010)

Aurum, a Pennsylvania company, sought Court approval of an arbitration award against Banrisul, a state-owned financial institution organized under the laws of the Federal Republic of Brazil with its principal place of business in Brazil. Banrisul owned Uniao, an entity that contributed to GESB, a reinsurance pool of Brazilian insurance companies. In 1997, Banrisul sold Uniao to Bradesco, another Brazilian company, but remained responsible for Unaio’s responsibilities stemming from the GESB. From 1976 to 1981, as a member of the GESB, Uniao was contractually obligated to remit payments to Summit relating to participation in the GESB. Uniao stopped paying Summit in 1982. In 2006, Aurum acquired the rights to Summit’s accounts receivables. Aurum then submitted a demand for arbitration relating to the Uniao payments owed to Summit. Banrisul did not participate in the arbitration, which resulted in an award in favor of Aurum against Banrisul.

Aurum then filed a petition in federal court in Pennsylvania to confirm the arbitration award, which was granted. Banrisul moved to vacate the court order on the basis of lack of subject matter jurisdiction, asserting that it was a state-owned Brazilian entity doing business in Brazil and was immune from suits in the U.S. pursuant to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1330 et seq. The FSIA provides that a foreign state is immune from suit in U.S. courts unless one of the enumerated exceptions applies, including where an action is based on a commercial activity carried on in the U.S. by the foreign state or upon an act performed in connection with commercial activity outside the U.S. in which the action is brought to enforce an agreement made by the foreign state relating to a submission to arbitration.

The Court determined that Banrisul was a state-owned entity that conducted business solely in Brazil under Brazil law. Its contractual agreement to sell shares of Uniao to Bradesco, another Brazilian company, was not activity in or in connection with the U.S., nor did it have a direct effect on the U.S. Further, although Uniao had entered into an arbitration agreement, Banrisul was a non-signatory to this agreement. The Court found no basis, through agency, alter ego, estoppel, or similar grounds to bind Banrisul to the arbitration agreement and thereby extend its jurisdiction to Banrisul under the FSIA.

Consequently, no exception within the FSIA applied and Banrisul was immune to suit within the U.S. The Court vacated confirmation of the arbitration award as it applied to Banrisul.

For a copy of the decision click here

Patrick Omilian and Tom Segalla

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

Petition to compel arbitration in federal court dismissed after state court had already made determination on the issue

Kaplan v. Divosta Homes, L.P., 2010 U.S. Dist. LEXIS 107454 (M.D. FL Oct. 7, 2010)

 In a suit for rescission of a contract for the purchase of a house, fraud, discrimination in the enforcement of covenants and restrictions, and a claim of personal injury, a Florida state court issued an order compelling arbitration of the rescission and fraud claims, but denying arbitration on the discrimination and the personal injury claims. This decision was affirmed by a Florida state appellate court.

 The discrimination and personal injury claims proceeded in state court.  However, the arbitration process ordered for the rescission and fraud claims had not commenced.  The state court judge ruled that he had no jurisdiction over the portion of the case relating to rescission and fraud.

In a subsequent federal action brought to compel the arbitration of the rescission and fraud claims, the parties pointed the finger at one another as to why the arbitration process had not begun despite the orders of the state courts.  Although holding that the federal court had subject matter jurisdiction, the federal district court held that the issue of whether arbitration is required has been decided by a final judgment of the state courts.  Since the essential elements of issue preclusion under Florida res judicata law were satisfied as to the issue of compelling arbitration under the contract, dismissal of the federal case seeking the same determination was warranted.  The federal court noted that, what the parties are actually quarreling about is the enforcement of the state courts’ orders.  The federal court held that since the state court has compelled arbitration, there is no basis for a federal court to interfere with its orders or jurisdiction.  The federal petition was therefore dismissed.

 For a copy of the decision click here

Bryan Richmond and Tom Segalla

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

case provided courtesy of Lexis

 

District Court Confirmed Arbitration Award Despite Party’s Argument that Arbitrator Exceeded Scope of Its Authority

IKE America, LLC v. Kredit Karte, Inc., 2010 U.S. Dist. LEXIS 91290 (E.D. PA Sept. 1, 2010)

A credit card processing company, Kredit Karte, entered into an agreement under which it agreed to pay referral commissions to IKE America for referring merchants to it for processing services.  The agreement contained an arbitration clause which provides that any “dispute shall be settled in arbitration in Pennsylvania under the Commercial Arbitration Rules of the American Arbitration Association.” 

After IKE America filed for arbitration alleging that Kredit Karte breached the referral agreement by refusing to pay all of the required fees, an arbitrator ruled in favor of IKE America an award was rendered.  The award included sums related to an account processed by Open Network, a separate credit card processing company which has its own referral agreement with IKE America.  Kredit Karte moved to vacate the award, arguing that the arbitrator exceeded the scope of its authority by holding it responsible for the actions of a distinct third party that was not a party to the arbitration.

The court held that arbitrator’s decision was not irrational and did not exceed the scope of its authority.  Noting that both credit card processing companies have the same president, the court referred to testimony given by him noting that the account might have been transferred to Kredit Karte.

For a copy of the decision click here

Bryan Richmond and Michael Glascott

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

Fifth Circuit Concludes It Lacks Inherent Authority to Impose Sanctions for Conduct During Arbitration

 

Positive Software Solutions, Inc. v. New Century Mortgage Corp.

(5^th Cir. (Tx.) September 13, 2010)

 

In 2003, Positive Software Solutions, Inc. sued New Century Mortgage Corporation for allegedly infringing telemarketing software licensed to New Century.  The case was ordered to arbitration.  During arbitration, Ophelia Camina, a partner at Susman Godfrey LLP, advised New Century on various discovery matters.  The arbitrator had a previous professional relationship with Camina, which caused the district court to vacate the arbitration award.  The United States Court of Appeals for the Fifth Circuit reversed the vacatur and remanded.

 

After remand, New Century declared bankruptcy.  During those proceedings, plaintiff settled its claims against New Century.  Pursuant to the settlement, New Century waived and assigned to plaintiff its attorney-client and work-product rights.  The district court granted plaintiff’s demand that Susman Godfrey LLP turn over its files for use by plaintiff in pursuing sanctions.  In February 2009, the district court sanctioned Camina $10,000, representing a portion of plaintiff’s attorneys’ fees.  Camina appealed.

 

The Fifth Circuit Court of Appeals reversed.  The court noted that a district court has the inherent authority to impose sanctions in order to control the litigation before it.  However, this authority is not unlimited.  It may be exercised only if essential to preserve the authority of the court.  A district court’s inherent power to impose sanctions does not extend to collateral proceedings that do not threaten the court’s own judicial authority or proceedings.

 

In this case, arbitration, as an alternative method of dispute resolution, is a collateral proceeding.  The fact that the court ordered the parties to arbitrate does not change the collateral nature of arbitration.  The court held that “[t]reating arbitration as if it were an appendage to adjudication is a mistake that would undermine the very purpose of arbitration – the provision of a relatively quick, efficient and informal means of private dispute settlement.”  Because the district court imposed sanctions not on account of any direct violation of a court order, but only because it found that Camina had exhibited four particular instances of bad faith during arbitration, the sanction was beyond the reach of the district court’s inherent authority.

 

The sanction award was also contrary to the Federal Arbitration Act.  Under the FAA, the district court has the authority to determine (1) whether arbitration should be compelled and (2) whether an arbitration award should be confirmed, vacated, or modified.  Beyond these narrowly defined powers, the district court has no authority to interfere with an arbitration.  A district court’s retention of jurisdiction over a case stayed pending arbitration does not create the inherent power to sanction arbitration conduct.

 

The court also held that the district court’s sanction order unduly threatened to inflate the judiciary’s role in arbitration.  The FAA provides for minimal judicial involvement in resolving arbitrable disputes.  By using its power to sanction, a district court could seize control over substantive aspects of arbitration and become a roving commission to supervise a private method of dispute resolution, encroaching on the authority reserved to the arbitrator.  Such an expansion of a district court’s inherent authority would threaten the integrity of federal arbitration law by “filling a gap that does not exist” by allowing courts to delay the resolution of disputes through alternative means.

 

Accordingly, the court reversed the sanction award and remanded the case for further proceedings. 

 

For a copy of the decision click here 

 

Toni Frain and Jeffrey Kingsley

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

 

case provided courtesy of Lexis

Failure to Show Arbitrator Understood Law Precludes Vacatur of Arbitration Award Based on “Manifest Disregard” of Law

Wachovia Sec., LLC v. Brand

(D. S.C. Aug. 26, 2010)

 

A federal court in South Carolina recently refused to vacate an arbitration award on the ground that the arbitrators made the award in “manifest disregard” of the law. The court noted that even if it accepted the plaintiff’s allegations as true, the plaintiff failed to show that the arbitrators understood the statute under which they awarded attorneys’ fees and costs against the plaintiff, a requirement for overturning an award for “manifest disregard” of the law.

 

The plaintiff’s suit arose from defendants’ alleged misappropriation of plaintiff’s confidential and proprietary documents and information. The dispute arose after the plaintiff merged with A.G. Edwards & Sons, Inc. and A.G. Edward’s employees became plaintiff’s employees. The parties were required to arbitrate any dispute arising out of their business activities as members of the Financial Regulatory Authority (“FINRA”). At the conclusion of the arbitration, the arbitrators dismissed all of the plaintiff’s claims, ordered the plaintiff to pay defendants treble damages, and awarded the defendants attorneys’ fees and costs under the South Carolina Frivolous Civil Proceedings Act (“FCPA”).

 

The plaintiff moved to vacate the arbitration award partly on the ground that the arbitrators made the award in “manifest disregard” of the law. Specifically, the plaintiff argued that the arbitrators acted in “manifest disregard” of the law when they awarded attorneys’ fees and costs under the FCPA insofar as the FCPA allegedly does not apply to arbitration proceedings. The court noted that in order to overturn an arbitration award on the basis of the arbitrator’s “manifest disregard” of the law, the party pursuing that effort must sustain a heavy burden, and is obliged to show that the arbitrator knowingly ignored applicable law when rendering his or her decision. Furthermore, a decision will be overturned for “manifest disregard” of the law only if it is shown that the arbitrator, in making his ruling, was aware of the law, understood it correctly, found it applicable to the case before him and yet chose to ignore it in propounding his decision.

 

The court found that the plaintiff failed to show that arbitrators understood the law correctly yet ignored it. To this end, the court noted the difficulty that one who challenges an award based on “manifest disregard” of the law faces when an arbitrator does not detail its reasons for making an award. As a result, the court refused to vacate the arbitration award.

 

For a copy of the case, click here

 

Carrie Appler and Jeff Kingsley

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

 

case provide courtesy of Lexis

Fifth Circuit Declares that Arbitrability of Dispute is to be Determined by Arbitraton Panel

Allen v. Regions Bank

(5^th Cir., August 11, 2010)

 

Minnie and Kenneth Allen obtained a home equity loan from First American National Bank in October 1999. First American withheld funds from the loan to purchase credit life and disability insurance. In December 1999 AmSouth Bank became the successor to First American. In 2001, the Allens opened a deposit account with AmSouth. An agreement signed by the Allens in conjunction with opening their deposit account required arbitration of all disputes relating to any account or transaction with AmSouth. The agreement provided, in part, that a “dispute regarding whether a particular controversy is subject to arbitration, including any claim of unconscionability and any dispute over the scope or validity of this agreement to arbitrate disputes or of this entire Agreement, shall be decided by the arbitrator(s).” In 2004, Mr. Allen made a claim under the disability policy. AmSouth denied there was any disability insurance policy. AmSouth was subsequently succeeded by Regions Bank. In 2008, Mr. Allen was diagnosed with cancer and made another claim which was denied.

 

In 2009, the Allens filed suit in federal court alleging misrepresentation, fraud, bad faith, and breach of the insurance agreement. Regions Bank responded by moving to compel arbitration under the arbitration agreement executed by the Allens upon opening their deposit account in 2001. The district court denied the motion finding the deposit account agreement did not unambiguously modify the Allens’ loan agreement. The district court found, although there was an enforceable arbitration agreement as to deposit accounts, it was unenforceable as to loan accounts.

 

The Fifth Circuit reversed, explaining that challenges to the validity of an arbitration agreement may be heard by a court rather than an arbitrator. However, the Allens did not dispute the validity of the arbitration agreement. Rather, they disputed the applicability of the arbitration agreement to their dispute. The Fifth Circuit held, where the validity of an arbitration agreement is not in question but instead the issue involves the applicability of an arbitration provision to a particular dispute, if the parties clearly agreed that an arbitrator is to decide the arbitrability of a dispute, such agreement is enforceable. The court determined the Allens’ agreement clearly contemplated an arbitrator was to determine the issue of arbitrability of any dispute. Consequently, whether the Allens’ dispute over the loan agreement was within the scope of the arbitration agreement executed in conjunction with their deposit account was for the arbitrator to decide, not a court. The court reversed denial of the bank’s motion to compel.

 

For a copy of the decision click here 

 

Pat Omilian and Joseph Oliva

 

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Oliva.html

Professional Relationship Between Arbitrator’s Wife and Defense Counsel Not Ground to Vacate Arbitration Award

Johnson v. Gruma Corp.

(9^th Cir. (Cal.) Aug. 13, 2010)

 

The Ninth Circuit recently refused to vacate an arbitration award on the ground that the arbitrator failed to disclose his wife’s former professional relationship with the law firm ultimately retained to represent the defendant in the arbitration.

 

The plaintiff filed suit against Gruma Corporation in 2001, alleging that Gruma misrepresented to the plaintiff and other class members that they were independent contractors when they were, in fact, Gruma employees. The complaint contained causes of action sounding in breach of contract, labor code violations, and unfair business practices. Upon Gruma’s motion, the district court ordered the claims submitted to binding arbitration. The arbitrator found for Gruma, concluding that the class members were properly classified as independent contractors rather than employees. The district court confirmed the arbitration award and the plaintiff appealed.

 

The plaintiff argued that the arbitration clause in the parties’ agreement required the district court to apply the California Arbitration Act (“CAA”) disclosure and vacatur standards rather than those of the Federal Arbitration Act. The Ninth Circuit agreed, finding that the arbitration clause in the parties’ agreement was more than a general choice-of-law provision and indicated that the parties intended to be governed by the CAA’s rules.

 

The plaintiff next argued that a mandatory vacatur of the arbitration award was required because the arbitrator failed to disclose that his wife had been a partner at the law firm that became Gruma’s counsel five years into the arbitration. The court concluded that the arbitrator complied with the CAA’s rules governing initial disclosures since his wife’s former law firm was not counsel for Gruma when the arbitration commenced in 2002.

 

As for supplemental disclosure, the court noted that the CAA’s supplemental disclosure rules did not require the arbitrator to disclose the relationship between Gruma’s counsel and his wife. To this end, the court found that the arbitrator’s wife ended her employment at the subject law firm two years before the law firm (and her former colleague) became involved in the arbitration. The court also noted that the plaintiff failed to demonstrate that the relationship between Gruma’s counsel and the arbitrator’s wife would create a reasonable impression of partiality on the part of the arbitrator. Even if it did, however, the court held that the plaintiff waived his objection to the disclosure by not raising it until after the arbitration award was issued despite knowing of the relationship “a year or two” before the arbitrator rendered his decision.

 

For a copy of the case, click here

 

Carrie Appler and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Dismissal of Lloyd’s Suit for Lack of Subject Matter Jurisdiction Reversed

Underwriters at Lloyd’s, London v. Carol Osting-Schwinn

(11^th Cir. (Fla.) August 5, 2010)

 

Carol Osting-Schwinn’s son was riding a dirt bike when it collided with an all-terrain vehicle driven by Michael Rockhill, who was insured by a policy underwritten at Lloyd’s.  Osting-Schwinn and the underwriting syndicates at Lloyd’s agreed to settle the case and the syndicates sent settlement checks, affidavits and a copy of the policy.  Osting-Schwinn rejected the settlement, claiming the syndicates failed to properly disclose information about other known insurers and to send an adequate copy of the insurance policy.  Osting-Schwinn then filed a negligence action on her son’s behalf against Rockhill.  In turn, the underwriting syndicates commenced a diversity action in the United States District Court for the Middle District of Florida seeking a declaratory judgment that the parties had reached a valid settlement.

 

Osting-Schwinn moved to dismiss the declaratory judgment action on the basis that the underwriting syndicates filed to establish diversity jurisdiction because the syndicates only disclosed the lead underwriter’s citizenship.  The District Court denied the motion to dismiss for lack of subject matter jurisdiction and granted summary judgment for Lloyd’s on the settlement issue.  Osting-Schwinn appealed.

 

The Eleventh Circuit Court of Appeals reversed.  The court explained that the Society of Lloyd’s, London is not an insurance company, but rather a British organization that provides infrastructure for the international insurance market.  Lloyd’s itself does not insure any risk.  Individual underwriters, known as “Names” or “members” assume the risk of the insurance loss.  Names can be people or corporations and underwrite insurance through administrative entities called syndicates.  The syndicates are not incorporated, but are generally organized by Managing Agents, which may or may not be corporations.  The syndicates are mere administrative structures that bear no risk on the policies they underwrite.  The Names are not liable for the risks that other Names assume.  Lead underwriters serve as the public face for particular syndicates and are usually the only Name disclosed on the policy.  Each Name’s liability is several, not joint.  The individual Names, not the syndicate, are the ones directly liable in the event of a loss.  

 

The court held that a wealth of Supreme Court precedent requires the conclusion that the Lloyd’s syndicates, as unincorporated associations, must plead the citizenship of each of their members.  The court held that federal law has drawn a sharp distinction between corporations and virtually every other form of association for purposes of determining diversity of citizenship.  Corporations are considered legal persons whose citizenship does not depend on that of their shareholders.  Unincorporated associations do not have citizenship, but must prove the citizenship of each of their members, regardless of the corporation-like features or other business realities of the association.  Lloyd’s could not avoid this rule simply by characterizing one member of the association as the only real party to the controversy. 

 

The court held that the Lloyd’s syndicates are classic examples of unincorporated associations because they are “bodies of persons acting together, without a charter, but upon the methods and forms used by corporations, for the prosecution of some common enterprise.”  Supreme Court precedent requires them to plead the citizenship of each of their member Names to establish diversity of citizenship.  Because the syndicates did not do so, they failed to establish subject matter jurisdiction. 

 

Accordingly, the Court of Appeals reversed the District Court’s judgment and remanded the case for further proceedings.

 

A copy of the decision can be found here

 

Toni Frain and Jonathan Kuller

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Kuller.html

Supremacy Clause and Federal Arbitration Act Supersedes Michigan Statute Prohibiting Out-of-State Arbitrations

Binder v. Medicine Shoppe International, Inc.

(E.D.Mich. July 20, 2010)

In a dispute between a franchisor and the franchisee, the franchisee sought to arbitrate.  The relevant agreement between the parties was entered into in Michigan and provided that the parties would arbitrate any disputes in Missouri.  In a separate document, Michigan's law prohibiting out of state arbitrations was set forth. 

The franchisee sought to arbitrate in Missouri.  The individual shareholders of the franchisor, participated as representatives of the franchisor, but not insisted they did not appear in their personal capacities.  Ultimately, the franchisor and the shareholders filed a suit in Michiganstate court.  The franchisee removed the suit to federal court, and sought to compel arbitration. The franchisors opposed the petition to compel arbitration on the basis thatMichigan law prohibited arbitration; and that they reasonably relied on the document provided by the franchisee setting forth the Michiganlaw.  The franchisee argued that at worst, the franchisors were aware they would have to arbitrate, but believed that it would be in Michigan.

Holding that the arbitration agreement was enforceable because the Michiganstatute was trumped by the FAA and Supremacy Clause, the court also held that the franchisors reasonably relied on the document setting forth the Michiganstatute.  At the same time, noting that the franchisors were savvy businesspeople, the court held that the franchisors should have anticipated that they would be called upon to arbitrate, but in Michigan.

The court also found that the individual officers and shareholders were bound by the arbitration agreement because they personally assumed the liabilities of the company and derived significant personal benefit from the arbitration agreement.

For a copy of the decision click here

 

Sarah Delaney and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

 

Case provided courtesy of Lexis

Applying Supreme Court's Standard in Hall Street, District Court Rejected Claims That Arbitration Panel Manifestly Disregarded The Law

International Brotherhood of Teamsters, Local 701 v. Stroehmann Bakeries,(D.N.J. June 22, 2010)

Local 701 and Stroehmann entered into a collective bargaining agreement (“CBA”) which, among other things, prohibited private agreements between Stroehmann and its employees and provided instead that all agreements must be between Stroehmann and Local 701. John Cash, a Stroehmann employee and member of Local 701 was terminated for poor attendance. Cash was diagnosed with cancer. Stroehmann entered into a “last chance agreement” (“LCA”) with Cash whereby Cash was permitted to return to work and required him to submit medical documentation for any absence. Cash was repeatedly absent, failed to submit medical documentation, and was fired. A grievance was submitted to arbitration under the CBA and, based on Cash’s violation of the LCA, the arbitrator upheld Cash’s termination.

Local 701 filed a complaint to vacate the arbitration award arguing that the LCA was a private agreement in violation of the clear terms of the CBA. The District Court affirmed the arbitrator’s award finding the LCA was not a prohibited private agreement because a union business agent was present for and participated in the negotiations between Cash and Stroehmann concerning the LCA. Local 701 argued the arbitrator disregarded the language of the CBA but the Court noted that the arbitrator’s opinion quoted the exact language of the CBA regarding private agreements and interpreted the facts in light of the CBA. The court concluded the arbitrator’s award “drew its essence from the CBA” was supported by the record and therefore did not manifestly disregard the law. Where an arbitration award has some support in the record and the arbitrator has not manifestly disregarded the law, the award must be affirmed. Stroehmann’s motion to dismiss was granted.

For a copy of the decision, click here

Patrick Omilian and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

11th Circuit Compels Arbitration in Contract Dispute Between Bank and Law Firm Despite Contention that Bank Waived its Right to Elect Arbitration by Participating in the Action

Citibank v. Stok & Assoc.

(11^th Cir. [FL], July 20, 2010)

In an action for breach of contract and breach of fiduciary duty by a law firm against a bank, the bank sought to compel arbitration pursuant to the terms of the contract governing their banking relationship.  The law firm had deposited a client’s cashier’s check into its account with the bank.  After the bank accepted the check and made the funds available, it discovered that the check was counterfeit and restricted access to the funds.  The law firm subsequently filed suit in state court for its alleged damages resulting from the banks actions.  Thereafter, the bank served its answer in state court which made no reference to any request for arbitration or the arbitration clause in the contract.  In the week after the bank filed its answer, the law firm served the bank with an offer of judgment, made a demand for the production of documents, and filed a reply to the bank’s answer.  The state court also set a trial date.  Twenty-four days after serving its answer, the bank sent the law firm a letter requesting arbitration pursuant to the terms of the contract.  After the request for arbitration was rejected, the bank filed a motion in federal court to compel arbitration.  The trial court denied the bank’s motion.  It held that the bank’s right to elect arbitration was waived when the bank filed its answer, thereby acting inconsistently with its right to compel arbitration.  The 11^th Circuit appellate court reversed the trial court’s decision.  It held that while the bank’s participation in the state court action may have been sufficiently substantial to demonstrate that it did not intend to avail itself of the arbitration provision, the law firm failed to demonstrate that it was prejudiced by the bank’s participation during the brief twenty-four day period.  The court recognized that Circuit courts have declined to find waiver in cases with similar or more extensive litigation activity and even longer delays.

For a copy of the decision, click here

Bryan Richmond and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Case provided courtesy of Lexis

Relying on the Supreme Court's holding in Stolt-Nielsen, Second Circuit Determines that Class Arbitration Clause is Unconscionable

Fensterstock v. Education Finance Partners, et al.

(2^nd Cir. (N.Y.) July 12, 2010)

 

Plaintiff commenced this action asserting state law claims on behalf of himself and others similarly situated, alleging that defendants engaged in fraudulent and deceptive practices in connection with the solicitation, consolidation, and servicing of student loans.  Plaintiff alleged that defendants intentionally failed to disclose to borrowers that unless their payments were received on the precise day of the month on which they were due, defendants would alter the Amortization Schedule’s prescribed apportionment of the payment between interest and principal, diverting the entire payment to themselves as interest and preventing borrowers from paying off the principal of their loans.

 

Defendants moved for an order staying the action and compelling plaintiff to submit his claims to arbitration, pursuant to an arbitration clause contained in his promissory note, and to pursue them on an individual, rather than a class, basis.  The United States District Court for the Southern District of New York denied the motion, ruling that under California law, the arbitration clause of the agreement is unconscionable and therefore unenforceable.

 

Defendants appealed, arguing that the arbitration clause is not unconscionable under California law, or that if it is, then California law is preempted by the Federal Arbitration Act.  The United States Court of Appeals for the Second Circuit affirmed.  The court rejected defendants’ contention that the Federal Arbitration Act preempts California principles as to the conscionability of class arbitration waivers since California law places arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration. 

 

Additionally, the court applied California’s three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) whether the agreement is a consumer contract of adhesion drafted by a party that has superior bargaining power; (2) whether the agreement occurs in a setting in which disputes between the contracting parties predictably involve small amounts of damages; and (3) whether it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  The court held that the record in this case satisfied this test and concluded that the promissory note’s class action and class arbitration waiver clause was unconscionable.

 

For a copy of the decision click here

 

Toni Frain and Dan Gerber

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Fourth Circuit Determines That Legally Objectionable Behavior By Counsel Is Not Enough To Overturn Arbitration Award

MCI Constructors v. City of Greensboro

4^th Cir. (N.C.), July 1, 2010

 

This appeal arises from a contract dispute concerning the construction of a wastewater treatment plant.  All concerned parties agreed to submit to an arbitration which yielded an award to defendant.  The district court then granted the defendant’s motion to confirm this award and this appeal followed.  Plaintiffs claims, among other things, that the district court should have vacated the awards because the liability award was obtained through undue means. 

 

In order for a court to vacate an arbitration award, the moving party must sustain the heavy burden of showing one of the grounds specified in the Federal Arbitration Act.  Plaintiffs’ difficulty is that no court has ever suggested that the term undue means should be interpreted to apply to actions of counsel that are merely legally objectionable.  While there is some evidence in the record to support plaintiffs’ assertions that the defendant presented its main arguments on rebuttal and at least on one occasion referred to evidence outside the record, plaintiffs failed to establish that these actions led to the procurement of the award.  The FAA does not provide for vacatur in the event of any fraudulent conduct, but only where the award was procured by corruption, fraud or undue means.  Since plaintiffs failed to proffer any evidence that the undue means in dispute actually factored into the arbitration panel’s liability determinations, plaintiffs’ motion to remand is denied and the district court’s decision is affirmed.

 

For a copy of the decision click here

 

Sarah Fang and Jeffrey Kingsley

 

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

 

case provided courtesy of Lexis

Sixth Circuit Determined that Bank Waived Arbitration Agreement By Actively Litigating Dispute

Hurley v. Deutsche Bank Trust Company

(6th Cir. (Mich.) July 1, 2010)

 

The mortgagor received a loan from the lender and executed a mortgage on the property.  A rider entitled "Arbitration of Disputes" was attached to the mortgage.  It required that all disputes between the parties be arbitrated.  Sometime thereafter, the mortgagor, who was a member of the National Guard, was called up for service in Iraq. While he was gone, the property was foreclosed. 

The mortgagor filed suit in 2007. Thereafter, the lender filed its answer to an amended complaint, made motions to dismiss and for partial summary judgment, and successfully moved the court to transfer venue of the case. In 2009, the lender filed a motion to compel arbitration.

 

Noting that "strong federal policy in favor of arbitration," and that it would "not lightly infer a party's waiver of its right to arbitration," the court nonetheless found that the lender had waived its right.  A party may waive an agreement to arbitrate by engaging in two courses of conduct: (1) taking actions that are completely inconsistent with any reliance on the arbitration agreement; and (2) delaying in its assertion to such an extent that the opposing party incurs actual prejudice.

 

The court found that both factors indicating waiver were present.  First, the lender engaged in litigation for more than two years, including filing multiple dispositive and non-dispositive motions, and proactively selecting the forum via the change of venue motion.  The court held that the lender's actions were completely inconsistent with any reliance on the arbitration agreement.

 

Second, the court found that the mortgagor was prejudiced by the lender's delay in asserting the right to arbitrate.  The mortgagor incurred the costs of active litigation, employed four attorneys, undergone extensive discovery and been subjected to various motions at the lender's request. 

 

A copy of the decision is found here

 

Sarah Delaney and Jeffrey Kingsley

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Connecticut Appellate Court Confirms Propriety of Remanding Case to Arbitration Panel for Clarification Rather than Vacating Award

Hartford Steam Boiler Inspection and Ins. Co. v. Underwriters at Lloyd’s

(CT App. May 11, 2010)

An insurance company sought to vacate an arbitration award surrounding an explosion at a coal fired electrical generating facility in Arkansas caused more than $28 million in damage.  The owners of the facility submitted claims to its insurance providers, the parties to the arbitration. Hartford provided a policy of boiler and machinery insurance and Lloyd’s provided "all risks" property insurance for the policyholder.  Both insurers denied coverage.  Hartford claimed that the cause of the loss was an explosion of gas or unconsumed fuel, which was excluded from its coverage and covered under the all risks policy.  Lloyd’s contrarily contended that the loss was caused by the breakdown of a fired vessel, excluded from the coverage provided by the all risks policy because the event did not involve a combustion explosion that would otherwise render it, in whole or in part, a covered loss.  

 

Faced with those denials, the policyholder invoked the "Loss  Adjustment Endorsements" provisions contained in both policies, which enabled the insureds to recover the total losses caused by the explosion by collecting one half of the amount in dispute from each insurer.  The loss adjustment endorsements also contained a provision enabling the insurers to submit any dispute as to respective liability to arbitration.  As a result, the coverage dispute between Hartford and Lloyd’s was submitted to a panel of three arbitrators who issued an award apportioning approximately $14 million of the loss to Hartford’s policy and $7 million of the loss to Lloyd’s.

 

Thereafter, Hartford filed an application to vacate the arbitration award upon the grounds that the arbitrators failed to be sufficiently specific in its decision.  In its decision, the court agreed, concluding that "[t]he findings are not sufficiently specific or comprehensive to comply with the requirement that all liability and allocation issues and all coverage issues be resolved, nor do the findings contain sufficient findings of fact and conclusions regarding the interpretation of the insurance policies that are the subject of this arbitration as necessary to support the award."  However, in assessing the proper remedy, the court noted its reluctance "to vacate the award because that would mean starting over again, and the parties would lose all the work, effort, etc., that covered six years of this arbitration.  In the interest of economy of the parties, the panel and judicial economy, it would appear that a remand to the arbitrators would be more practical and a better remedy than vacating the awards."  Accordingly, the court remanded the matter to the arbitration panel for a rehearing to clarify the award so as to include the findings of fact and interpretations of the policies required by the governing procedures.

The arbitration panel thereafter reconvened  and issued its "Clarified Decision of Arbitrators."  That decision contained detailed findings of fact and conclusions regarding the interpretation of the insurance policies at issue that clarified how the panel reached its original allocation of expenses between the parties.  Significantly, the decision did not alter the terms of the original award.

 

On appeal, Hartford challenged the propriety of the court's order remanding the matter to the arbitration panel for clarification of its award.  It was Hartford’s position that the United States Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396 (2008), overruled the body of federal precedent permitting a remand to an arbitration panel for clarification.  Although noting that Hartford failed to preserve this claim before the trial court, the appellate court questioned the correctness of Hartford’s argument.  The court noted that “our research reveals no decision, federal or otherwise, indicating that Hall Street Associates, L.L.C., overruled the body of precedent permitting a remand to an arbitration panel for clarification or outlawed that procedure. Rather, the procedure remains viable…In short, if the United States Supreme Court intended to overrule that body of precedent in Hall Street Associates, L.L.C., it would have said so.”

 

A copy of the decision can be found here

 

Bryan Richmond and Michael Glascott

 

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

 

 

Ninth Circuit Refuses to Vacate $6M Arbitration Award

 

Lagstein v. Certain Underwriters at Lloyd’s, London

(9^th Cir. (Nev.) June 10, 2010)

 

The Ninth Circuit reversed a district court’s vacatur of an arbitration award totaling more than $6 million, finding that vacatur was unwarranted under § 10(a) of the Federal Arbitration Act. That section permits a court to vacate an arbitration award only where the award was procured by corruption or fraud, where there was evident partiality in the arbitrators, where the arbitrators were guilty of misconduct which prejudiced the rights of a party, or where the arbitrators exceeded their powers.

 

The plaintiff physician sued the defendant disability insurer after he received no benefits or decision with respect to a disability claim he submitted nearly two years earlier. The lawsuit was stayed pending binding arbitration required by the plaintiff’s disability policy. The arbitrators concluded that the defendant insurer breached the insurance contract and acted unreasonably. The arbitrators awarded the plaintiff the full value of his policy ($900,000) and $1.5 million for emotional distress. Two months later, the arbitrators awarded the plaintiff $4 million in punitive damages.

 

The defendant insurer filed a motion in district court to vacate the arbitration award on several grounds, including that two of the arbitrators failed to disclose a prior ethics controversy and that the arbitrators exceeded their jurisdiction by holding a separate punitive damages hearing after the initial arbitration award. The district court granted the motion to vacate, concluding that the size of the awards was excessive and in manifest disregard of the law, and that the punitive damages award contravened public policy and exceeded the panel’s jurisdiction.

 

On appeal, the Ninth Circuit reversed the district court’s vacatur. Specifically, the Ninth Circuit noted that the district court erred by vacating the arbitration award simply because it disagreed with its size. The court also held that the arbitrators did not exceed their power by “manifestly disregarding the law.” To vacate an arbitration award on that ground, it must be clear that the arbitrators recognized the applicable law and then ignored it. The Ninth Circuit held that the district court’s vacatur on that ground should be reversed because the district court failed to cite any applicable law that the panel recognized and ignored.

 

The Ninth Circuit also held that the punitive damages award should not have been vacated on the ground that the arbitration panel no longer had jurisdiction over the dispute after issuing the initial arbitration award. Examining the arbitration agreement and its governing rules, the Ninth Circuit held that the arbitration panel plausibly interpreted them as permitting an additional hearing for punitive damages. Finally, the court held that the defendant insurer failed to demonstrate evident partiality by the arbitrators requiring vacatur of the award. In this regard, the Ninth Circuit found that although two of the arbitrators were involved in an ethics controversy, the alleged misconduct occurred more than a decade before the arbitration award was issued and concerned neither of the parties to the arbitration.

 

For a copy of the case, click here

 

By Carrie Appler and Jeff Kingsley

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

 

case provided courtesy of Lexis. 

Supreme Court Asks for Solicitor General’s Opinion in Insurance Arbitration Case

Lousiana Safety Ass’n of Timbermen v. Certain Underwriters at Lloyd’s, London (U.S. May 17, 2010) 

The Supreme Court recently invited the Solicitor General to file a brief expressing the views of the United States in Louisiana Safety Ass’n v. Certain Underwriters at Lloyd’s, London, a case centering on whether the Federal Arbitration Act preempts the McCarran-Ferguson Act, which grants states the authority to regulate insurance. In Louisiana Safety, the Fifth Circuit held that the McCarran-Ferguson Act does not authorize state law to reverse-preempt international treaties, including the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The McCarran-Ferguson act allows Congress to pass laws that regulate the “business of insurance.”

It also provides that federal acts that do not expressly purport to regulate the “business of insurance” will not preempt state laws or regulations that regulate the “business of insurance.” Federal courts have consistently backed state prohibitions on arbitration agreements in insurance contracts as laws that regulate the “business of insurance” under the McCarran-Ferguson Act and, therefore, are protected from preemption. Courts have applied this rule to reinsurance agreements as well.

The Fifth Circuit, however, split with other federal courts in finding that the McCarran-Ferguson Act does not reverse-preempt the international arbitration convention. The Fifth Circuit’s decision created a circuit split because the Second Circuit previously held that a state law can reverse preempt the Convention Act under the McCarran-Ferguson Act. While the Supreme Court has not decided whether to hear the dispute, it appears that the Solicitor General’s brief on the subject may persuade the justices whether to consider it. Given the recent nomination of Solicitor General Elena Kagan to the Supreme Court, it is unclear when the Solicitor General’s office will file a brief.

For a copy of the decision, click here

Carrie Appler and Dan Gerber

http://www.goldbergsegalla.com/attorneys/Gerber.html

http://www.goldbergsegalla.com/attorneys/Appler.html

 Case provided courtesy of Lexis

 

A Detailed Examination of the Supreme Court's Decision in Stolt-Nielsen v. Animalfeeds, Inc. Which Limited the Ability of An Arbitrator to Impose Class Arbitration

Stolt-Nielsen S. A. v. Animalfeeds Int'l Corp. (U.S. S.C. April 27, 2010)

A class of purchasers of parcel tanker transportation services sought arbitration in their antitrust suit against a shipper for price fixing.  Although the charters contained an arbitration agreement, the agreement was silent as to whether a class arbitration was permitted.  The parties agreed to submit the question whether their arbitration agreement allowed for class arbitration to a panel of arbitrators, who would  be bound by the class rules developed by the American Arbitration Association.  The parties selected an arbitration panel, designated New York City as the arbitration site, and stipulated that their arbitration clause was silent on the class arbitration issue. The panel determined that the arbitration clause allowed for class arbitration.  However, the U.S. District Court vacated the award, concluding that the arbitrators' award was made in “manifest disregard” of the law, for had the arbitrators conducted a choice-of-law analysis, they would have applied the rule of federal maritime law requiring contracts to be interpreted in light of custom and usage.  

The Second Circuit reversed, holding that because petitioners had cited no authority applying a maritime rule of custom and usage against class arbitration, the arbitrators' decision was not in manifest disregard of maritime law; and that the arbitrators had not manifestly disregarded New York law, which had not established a rule against class arbitration.   The United States Supreme Court vacated the arbitration award, holding that imposing class arbitration on parties who have not agreed to authorize class arbitration is inconsistent with the Federal Arbitration Act (FAA).  Because the parties agreed that their agreement was silent on the class arbitration issue, the arbitrators' proper task was to identify the rule of law governing in that situation. Rather than inquiring whether those bodies of law contained a default rule permitting an arbitration clause to allow class arbitration absent express consent, the panel proceeded as if it had a common-law court's authority to develop what it viewed as the best rule for such a situation.  Ultimately the panel imposed its own conception of sound policy and permitted class arbitration. Since the arbitration panel exceeded its powers by imposing its own policy choice instead of identifying and applying a rule of decision derived from the FAA or from maritime or New York law, the decision was vacated pursuant to the FAA on the ground that the arbitrator strayed from interpretation and application of the agreement and effectively “dispense[s] his own brand of industrial justice.”  

Addressing the merits of the inquiry concerning class arbitration where the agreement is silent, the Supreme Court held that imposing class arbitration is inconsistent with the FAA which follows the basic precept that arbitration “is a matter of consent, not coercion.”  The FAA requires that a written provision in any maritime transaction calling for the arbitration of a controversy arising out of such transaction “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” and permits a party to an arbitration agreement to petition a federal district court for an order directing that arbitration proceed “in the manner provided for in such agreement.”  Accordingly, the FAA's central purpose is to ensure that “private agreements to arbitrate are enforced according  to their terms.”  Whether enforcing an agreement to arbitrate or construing an arbitration clause, courts and arbitrators must “give effect to the [parties'] contractual rights and expectations.” 

The Court recognized that the parties’ intentions control, and the parties are “generally free to structure their arbitration agreements as they see fit.”  They may agree to limit the issues arbitrated and may agree on rules under which an arbitration will proceed.  The Court held that in this action the arbitration panel imposed class arbitration despite the parties’ stipulation that they had reached no agreement on that issue. The panel’s conclusion is contrary to the foundational FAA principle that arbitration is a matter of consent.  An implicit agreement to authorize class action arbitration is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate.  The differences between simple bilateral and complex class action arbitration are too great for such a presumption.

A copy of the decision can be found here

Bryan Richmond and Jeffrey L. Kingsley

http://www.goldbergsegalla.com/attorneys/Kingsley.html

http://www.goldbergsegalla.com/attorneys/Richmond.html

 

BREAKING NEWS: U.S. SUPREME COURT REVERSES SECOND CIRCUIT DECLARING THAT AN ARBITRATION PANEL CANNOT IMPOSE CLASS ARBITRATION ON PARTIES WHICH DID NOT EXPRESSLY AGREE TO AUTHORIZE CLASS ARBITRATION

Stolt-Nielsen v. Animalfeed Int'l Corp. (U.S. Supreme Court, April 27, 2010)

In a 5-3 decision, the U.S Supreme Court reversed the Second Circuit ruling that an arbitrator had an inherent right, pursuant to the Federal Arbitration Act, to force parties to class arbitration even if they did not agreed to such an authorization. In analyzing the FAA, the majority concluded that  "a party may not be compelled ... to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  As a result, the arbitrators' award was made in "manifest disregard of the law."   

Interesting decision which may have ended the minority opinion on "manifest disregard" standard used by the Second Circuit.  

A copy of the decision can be found:  here

Jeffrey L. Kingsley

District Court Finds that Arbitration Clause is Enforceable and Valid

Franz v. Allegheny Investments, Ltd. (N.D. Ohio February 11, 2010)

A former employee sought brought suit against his former employer for the employer's alleged failure to promptly notify the relevant insurance carrier and provide defense coverage to the employee for claims made against him and the employer in a Financial Industry Regulatory Authority arbitration.  As a result of employer's failures, the employee ultimately had to retain counsel to defend him in the arbitration.  At the underlying arbitration, the employer successfully defended the claim, but the former employee was found liable.

The employer asserted that the claims had to be dismised because they were subject to mandatory arbitration.  The employee, as part of his professional registration process, agreed to arbitrate claims arising out of his employment.  With regard to the suit, however, he asserted that the arbitration agreement did not apply because (1) FINRA excepts insurance disputes, (2) the dispute did not arise out of his employment and therefore outside the scope of the arbitration provision and (3) the employer waived its right to compel arbitration.

The court found that the insurance exception did not apply because the employer was not formally acting as an insurer.  The court also found that because the underlying claim related to his employment and no party had sued the insurance carrier, the dispute did relate to employment and therefore was arbitrable.  Further, while the court noted it was displeased with the employer's late demand for arbitration, it also found that the employer had not waived the arbitration provision.

A copy of the decision is attached here

Sarah Fang and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Arbitration Clause In Insurance Contract Enforceable under the Federal Arbitration Act

Duke University v. National Union Fire Ins. Co.

M.D. N.C., February 4, 2010

 

This action involves a dispute by plaintiff policyholder against defendant insurer alleging breach of an insurance policy by the insurer’s failure to advance and/or pay all of the policyholder’s defense costs.  Defendant insurer then instituted a third-party action against United Educators, claiming that it was entitled to contribution, subrogation and declaratory relief.

 

The policy between the policyholder and third party defendant included an arbitration agreement and third party defendant sought to stay the trial of the main action pending arbitration.  Defendant insurer opposed, claiming that it was not bound by the arbitration agreement because it was not a party to the agreement and an arbitration agreement in an insurance contract is not enforceable under the Federal Arbitration Act (“FAA”).

 

The district court held that the phrase “involving commerce” in the FAA has been interpreted broadly by the Supreme Court.  Therefore, insurance policies issued by a foreign corporation to citizens of particular states involve commerce and are subject to the FAA. 

 

In addition, if defendant insurer seeks to hold third party defendant to the agreement, it is equitable to hold defendant insurer to the arbitration clause in the agreement because defendant insurer cannot claim the benefit of the contract and simultaneously avoid its burden.  Therefore, the trial is stayed pending arbitration.

 

A copy of the decision is attached here

 

Sarah Delaney and Dan Gerber

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Second Circuit Affirms Enforceability Of Arbitration Agreement In Employment Discrimination Case

Ragone v. Atlantic Video, ESPN et. al.

(United States Court of Appeal, Second Circuit, February 17, 2010)

 

Plaintiff-appellant appealed from an order of the district court which granted the motions of Atlantic Video and ESPN dismissing the complaint and compelling arbitration in a Title VII employment discrimination and sexual harassment action.  In affirming the trial court decision, the court of appeals upheld the enforceability of the arbitration agreement against claims that it is was both procedurally and substantively unconscionable. The court also properly compelled plaintiff to arbitrate with ESPN in spite of the fact that ESPN was not a party to the employment contract or arbitration agreement.

 

Specifically, plaintiff initiated the Title VII action that while employed as a make-up artist for Atlantic Video (AVI) (a service supplier to ESPN), she was terminated as a result of her numerous complaints of sexual harassment.  The subject appeal considered whether the district court correctly held that plaintiff’s claims should be arbitrated pursuant to the agreement signed at the time of plaintiff’s hiring.  Plaintiff asserted that several of the provisions were unconscionable and therefore unenforceable.

 

As to the status of ESPN, the court of appeals held that while it is undisputed that ESPN was not a signatory to the arbitration agreement, plaintiff’s complaint contains numerous allegations which supported the trial court’s conclusion that plaintiff’s “claims of unlawful harassment and retaliation … relied on the concerted action of both defendants and are therefore substantially interdependent.”  As such, the court held that ESPN likewise was subject to the agreement, citing case law precedent allowing non-signatories to enforce arbitration agreements where the issues are sufficiently intertwined

 

Upon its de novo review of the detailed arbitration provisions and the underlying facts, the circuit court concluded that the arbitration agreement was not procedurally unconscionable merely because it was a condition of her employment, nor because she failed to read and understand the document.  The court further explained that New York law does not absolve one of its obligation to read the document simply because one does not have a college degree and has no experience or background in business or human resources. 

 

Likewise, the court of appeals also held that the arbitration agreement was not substantively unconscionable as the defendants had agreed to waive certain burdensome provisions including the statute of limitations and fee shifting provisions.  The court further rejected plaintiff’s argument that the district court ruled in an improper “piecemeal” approach in considering the waiver issue and allowing the severability clause to save the agreement that is “permeated by unconscionability.”  Specifically, the court held that severability clause was not relevant because the district court never found any provision contrary to the law.  Rather, it resolved all questions of potentially unenforceable terms by holding that these terms were either moot, or would be interpreted in a manner consistent with the Federal Arbitration Act (“FAA”) or had been waived. Thus, it held that the district court did not trigger any application of the severability clause.  The court of appeals further held that New York law would allow for the enforcement of the arbitration agreement as modified by the defendants’ waivers.  Thus, as the defendants’ waiver allowed the plaintiff to “vindicate her statutory causes of action in the arbitral forum,” the court of appeals affirmed the lower court decision upholding the enforceability of the agreement.

A copy of the decision is attached here

Paul Steck and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Kingsley.html

http://www.goldbergsegalla.com/attorneys/Steck.html

Court Awards Attorneys’ Fees Arising from Enforcement of Arbitration Award

Gentle Wace Shipping S.A. v. Transfield Shipping Inc.

(S.D.N.Y. Feb. 16, 2010)

 

A federal judge has awarded attorneys’ fees to a party attempting to enforce a previously-determined arbitration award. In Gentle Wave, a panel of two members of the London Maritime Arbitrators Association issued an arbitration award in favor of petitioner Gentle Wave and against respondent Transfield. Transfield failed to pay the award, forcing Gentle Wave to commence an action to confirm the award, enter judgment, and award attorneys’ fees.

 

The court granted Gentle Waves’ motion for attorneys’ fees and expenses, noting that Transfield failed to oppose the motion. In addition, the court held that the award of attorneys’ fees was reasonable because Gentle Wave supported its application with contemporaneous time records specifying the attorney, date, hours expended, and nature of the work performed. The court also noted that the award was reasonable given that Gentle Wave was required to research and argue the issue of arbitrator’s partiality under the New York Convention, English law, and the Federal Arbitration Act.

 

A copy of the decision is attached here 

 

Carrie Appler and Joanna Roberto 

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

 

Case is provided courtesy of Lexis. 

 

 

Confidentiality Agreement Executed as Part of Arbitration Not Subject to Arbitration

Trustmark Insurance Company v. John Hancock Life Insurance Company

(N.D.Ill. January 21, 2010)\

 

The parties to a reinsurance contract disagreed regarding whether certain retrocessional business was part of the reinsurance contracts.  As a result, they entered into arbitration.  As part of the arbitration, the parties entered into a Confidentiality Agreement under which documents and the ultimate findings were subject to confidentiality.  The arbitrators also signed the Confidentiality Agreement.

 

After that arbitration, another dispute arose and the parties again turned to arbitration.  One of the parties selected an arbitrator from the first arbitration. The arbitrator was subject to the Confidentiality Agreement.  While the second party was concerned with the arbitrator's ability to honor the agreement and the arbitrator himself expressed concern that it might be difficult to segrate the information, he was ultimately appointed.

 

At arbitration, the party prevailing in the first arbitration sought to "authorize use of all  materials from the First Arbitration," and prohibit the matters resolved by the first panel from being relitigated.  The common arbitrator did not recuse himself from those deliberations, and the Second Panel determined that the Confidentiality Agreement extended to the second arbitration. The party aggrevied by the first arbitration (and breach of the Confidentiality Agreement) sought to enjoin the second arbitration on the basis that the Confidentiality Agreement was not subejct to arbitration, and that the common arbitrator breached the Confidentiality Agreement by ruling on extending the Confidentiality Agreement.

 

The court held that because the Confidentiality Agreement contained no arbitration clause, the parties could not be forced to arbitrate issues that it did not agree to arbitrate and granted the injunction.

 

A copy of the decision is found here

 

Sarah Delaney and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

 

 

Arbitration Compelled Regarding GAP Coverage

Sawyers v. Herrin-Gear Chevrolet Co., Inc.

(Miss., January 7, 2010)

 

The Mississippi Supreme Court held that it has jurisdiction to consider the merits of an interlocutory appeal regarding whether a claim arising from GAP coverage should be arbitrated.  Plaintiff filed a complaint alleging fraud, breach of contract and bad faith, against an auto dealer and an insurance company who provided “GAP Asset Protection Deficiency Waiver Addendum.”   The defendants made a motion to compel arbitration, which was granted by the trial court.  Plaintiff then filed a petition for interlocutory appeal, which was granted.

 

Plaintiff argued that the arbitration agreement between she and the auto dealer is unconscionable and unenforceable because it is to aid an illegal enterprise of selling and administering unregistered insurance.  In addition, plaintiff argues that the insurer was not a party to the agreement and should not be equitably estopped from pursing her claims against it in court.   The defendants argue that the Court has no jurisdiction to consider the appeal under the Federal Arbitration Act, because the trial court’s order was not final. 

 

The court held that an order compelling arbitration is a final decision and that it had jurisdiction to decide on the merits of the appeal.  Under a de novo review, the Court found that the agreement was enforceable and, relying on a bulletin issued by the Mississippi Insurance Department, determined that the GAP product was not insurance.  The court also held that because the plaintiff relied on the arbitration agreement in her claims against the insurer, the insurer was entitled to arbitration. 

 

A complete copy of the Court’s decision can be found here

 

Kim Whistler and Dan Gerber

 

http://www.goldbergsegalla.com/attorneys/Whistler.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Seventh Circuit Dismisses Appeal Regarding Arbitration for Lack of Jurisdiction

Sherwood v. Marquette Transp. Co., LLC

(7^th Cir. (Ill.) Nov. 23, 2009)

 

The Seventh Circuit recently dismissed an employer’s appeal to overturn a district court’s decision refusing to stay an employee’s pending litigation in favor of arbitration. Bluegrass Marine, whose vessels ply the Mississippi River, was sued by an employee injured while working as a deckhand. Bluegrass asked the district court to stay the suit, arguing that the employment contract between the parties required that all disputes be arbitrated under the Illinois Arbitration Act. The district court denied Bluegrass’s motion to stay, holding that the Federal Arbitration Act preempts any state law that concerns arbitration.

Bluegrass appealed, relying on § 16(a)(1)(A) of the Federal Arbitration Act, which authorizes interlocutory review of any order “refusing a stay of any action under section 3 of this title.” The Seventh Circuit held that Bluegrass could not rely on § 16 because that section does not apply when state rather than federal law is the source of the obligation to arbitrate. The Seventh Circuit also rejected Bluegrass’s attempt to rely on the collateral-order doctrine, noting that a district court’s refusal to stay, dismiss, or transfer a case under a forum-selection clause is not appealable as a collateral order because the issue can be appealed from the final decision. Finally, the Seventh Circuit found that the district court’s order was not appealable under 28 U.S.C. § 1292 as the denial of an injunction. In this regard, the Seventh Circuit noted that the pending suit sought damages, not an injunction. The court further opined that the expense of litigation is not “irreparable injury.” As a result, the Seventh Circuit dismissed Bluegrass’s appeal for lack of jurisdiction.

 

For a copy of the decision click here

 

Carrie Appler and Richard Cohen

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

Fifth Circuit Held That The McCarran-Ferguson Act Does Not Authorize State Law to Reverse-Preempt International Treaties

Safety National Casualty Corporation v. Certain Underwriters at Lloyd’s London

 (5^th Cir. (La.) November 9, 2009)

 

The Fifth Circuit has held that the McCarran-Ferguson Act does not authorize state law to reverse-preempt international treaties, i.e. the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The McCarran-Ferguson act allows Congress to pass laws which will regulate the “business of insurance.” It also provides that federal acts that do not expressly purport to regulate the “business of insurance” will not preempt state laws or regulations that regulate the “business of insurance.” Neither the Convention nor the federal laws implementing the Convention are specific to insurance. 

 

A self-insured workers’ compensation obtaining excess insurance through Lloyd’s by reinsuring claims that exceeded an SIR.  Another insurer, Safety National, asserted that it also provided excess workers compensation to the insured, and that the insured assigned its rights under the reinsurance agreements to it.  A dispute arose as to whether the assignments were valid. 

 

Safety sued Lloyd’s in federal court.  Lloyd’s sought a stay and sought to compel arbitration.  That was granted, but the parties could not agree on how arbitrators were to be selected. Lloyd’s then filed a motion to lift the stay and add the insured as a party, and made a motion to compel arbitration to resolve how to compose an arbitration panel.  The insured moved to quash the arbitration, citing a Louisiana statute that has been applied to prohibit arbitration, and that the statute reverse-preempted the convention based on the McCarran-Ferguson Act.

 

The Fifth Circuit held that the Convention, whether self-executing or not, was an international treaty, not subject to the McCarran-Ferguson Act, noting that “[t]he fact that a treaty is implemented by Congress does not mean that it ceases to be a treaty and becomes an ‘Act of Congress’.”

 

A copy of the decision can be found here

 

Sarah Delaney and Dan Gerber

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

 

New York Appellate Court Denies Plaintiff's Motion to Stay Arbitration on Arbitrability Grounds

Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s

(New York Appellate Division, 1^st Dept., October 13, 2009)

 

A New York appellate court upheld a denial of plaintiff’s motion to stay or enjoin arbitration before the American Arbitration Association.  The agreement provides that all disputes be referred to arbitration under the AAA.  While arbitrability is often a judicial determination, the court held because the parties incorporated by referenced the AAA rules, which allows the tribunal to rule on its own jurisdiction, the arbitrators were permitted to determine arbitrability.    The plaintiff argued that the language included in the agreement giving the parties the right to challenge the arbitrator’s determination based on errors of law was an impermissible expansion of the scope of judicial review under the Federal Arbitration Act.  The court rejected plaintiff’s argument finding the issue is included in the arbitrability issues, which the tribunal is permitted to determine.  In addition, the court noted that policy favors arbitration as a means to conserve time and resources.

For a copy of the decision click here

Kim Whistler and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Whistler.html 

http://www.goldbergsegalla.com/attorneys/Angelino.html

The Growing Authority of Arbitrators Under the Federal Arbitration Act

In the world of reinsurance, agreements, or Treaties, the inclusion of provisions mandating arbitration is a well-established industry standard. Despite the potential exposure inherent in reinsurance disputes, such Treaties and their corresponding arbitration provisions are not particularly expansive and, in fact, oftentimes rely upon “boiler plate” language.  Here is an article examining a series of recent cases in which a court has expanded an arbitration panel's authority.

 

For a copy this article click here

 

Sharon Angelino and Brian Biggie

 

 

Second Circuit Remands $34 Million Jury Verdict Against Reinsurer Back to Lower Court to Address Which Claims Should Be Arbitrated

AXA Versicherung AG v. New Hampshire Insurance Co.

(2^nd Cir. [NY] October 14, 2009)

 

An action was filed against a reinsurer relating to two reinsurance contracts.  The plaintiff alleged that the reinsurer misrepresented or failed to disclose certain material facts in connection with the negotiation of these contracts and sued for intentional misrepresentation, negligent misrepresentation, material nondisclosure, and breach of the duty of utmost good faith.  After an arbitration proceeding was stayed, the matter was tried before a jury in the District Court for the Southern District of New York and the reinsurer was found liable for more than 34 million dollars, including punitive damages of 5.7 million.

On appeal to the Second Circuit Court, the reinsurer argued that the claims should have been arbitrated pursuant to the agreements because they sound in contract rather than fraud.  The Second Circuit held that the District Court failed to give this argument sufficient consideration and remanded the matter back to the lower court to address which allegations sound in contract as opposed to fraud and should have been arbitrated.

 

For a copy of the decision, click here

 

by Bryan Richmond and Jeffrey Kingsley

 

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Second Circuit Remands $34M Jury Verdict Against AIG

AXA Versicherung AG v. New Hampshire Ins. Co.

(S.D.N.Y. Oct. 6, 2009)

 

A federal judge remanded a $34 million jury verdict against AIG and its subsidiaries for fraudulent inducement involving reinsurance facilities. On appeal, AIG argued that the verdict could not stand because the plaintiff’s claims should have been arbitrated or, alternatively, that they should have been tried by the bench, not a jury. The plaintiff countered that AIG waived its right to arbitration. It also argued that a jury trial was appropriate because its claims sounded in fraud, not contract.

 

AIG argued that the plaintiff’s claims did not sound in fraud because, even if AIG secretly intended to treat the plaintiff’s facilities as facultative rather than facultative obligatory, such conduct reflected an undisclosed intention to breach the contract, not a collateral misrepresentation that could form the basis of a fraud claim. The Second Circuit held that it was unclear whether the lower court considered if the plaintiff’s claims sounded in fraud or contract and, therefore, whether a bench or jury trial was warranted. As a result, the case was remanded.

 

The Second Circuit also held that the lower court left unanswered whether AIG waived its right to arbitration in the first instance. Thus, the court remanded the case for creation of a record and resolution of the plaintiff’s waiver argument.

 

For a copy of the decision, click here

 

By Carrie Appler and Richard Cohen

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

7th Circuit Affirms Arbitration Award Despite Substitution of Arbitrator

WellPoint, Inc. v. John Hancock Life Insurance Co.

(7^th Circuit, August 7, 2009)

 

Pursuant to an arbitration clause in the transaction agreement, two insurers were required to submit their dispute to an arbitration panel to determine their rights and obligations under the contract.  Each insurer selected an arbitrator and a third one was selected by the American Arbitration Association as the “umpire” arbitrator.  However, before the arbitration was set to begin, the arbitrator chosen by on one of the parities resigned.  A replacement was chosen from a list of three arbitrators selected by the remaining panel.

 

The district court confirmed the arbitration award, and the losing insurer appealed, arguing that since the arbitration agreement did not expressly address the process for replacing a panel member, the entire arbitration process should begin anew.

 

The Court of Appeals rejected the argument and held that there is no such inflexible and wasteful rule in the law of arbitration.  In addition, the Court of Appeals held that the replacement process was suggested by the appealing party’s arbitrator and an objection was never raised until the sum was awarded.

 

For a copy of this decision click here

 

By Sarah X. Fang and Richard J. Cohen

 

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/Cohen.html