Reinsurance Focus

As previously reported, the Northern District of Illinois recently held that the prejudgment security required by the Illinois Insurance Code is an “attachment” within the meaning of the Foreign Sovereign Immunities Act and was therefore not required of the foreign defendant in that case. The court denied plaintiff’s motion to strike and the plaintiff subsequently moved to amend or correct the court’s order. The court stood by its decision in two additional orders: 1) denying plaintiff’s motion to amend the order because plaintiff failed to establish any misapprehension of the case law, and 2) granting defendant’s motion to dismiss plaintiff’s complaint for an order compelling arbitration for failure to state a claim. The court determined that the plaintiff could not compel arbitration because the assignment agreement that gave plaintiff limited rights to collect certain debts did not also assign the rights and duties under the reinsurance treaties with the defendants, which included the arbitration clauses. The plaintiff has appealed the December 13, 2012 Order concerning pre-hearing security and the February 5, 2013 Order denying the request to amend the December Order to the United States Court of Appeals for the Seventh Circuit. Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, Case No. 12-6357 (USDC N.D. Ill.)

This post written by Abigail Kortz.

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The Texas Court of Appeals affirmed a trial court order denying New Hampshire Insurance Company’s motion to compel arbitration of Magellan Reinsurance Company’s nine common law and statutory claims. New Hampshire and Magellan entered into a reinsurance agreement whereby Magellan agreed to accept 100% of New Hampshire’s obligations under automobile dealer insurance policies. Pursuant to the agreement, Magellan established a trust account from which New Hampshire was authorized to withdraw funds to pay claims. A dispute arose after New Hampshire had emptied the trust account and demanded that Magellan make an additional $1.4 million deposit to replenish it. Magellan in turn questioned New Hampshire’s claims handling and accounting practices. New Hampshire responded by filing a petition in Turks and Caicos Island (TCI) courts seeking to wind up Magellan’s business, citing to the purportedly unpaid $1.4 million obligation and a TCI ordinance relating to a company’s inability to pay debt.

Several years of litigation in TCI, Texas, and New York courts ensued during which time, among other developments, New Hampshire successfully defeated Magellan’s attempt to stay the TCI litigation for arbitration. The TCI litigation, however, was ultimately concluded in Magellan’s favor in 2009 with a finding that New Hampshire was not a “creditor” of Magellan and thus could not wind up Magellan’s business. New Hampshire then sought to compel arbitration of Magellan’s action pending in Texas state court. The trial court denied the motion to compel. The Texas Court of Appeals affirmed holding that, because New Hampshire had convinced the TCI court to deny Magellan’s request to stay litigation for arbitration, New Hampshire was judicially estopped from seeking to arbitrate Magellan’s claims. New Hampshire Insurance Co. v. Magellan Reinsurance Co., No. 02-12-00196-CV (Tex. Ct. App. Feb. 14, 2013).

This post written by Ben Seessel.

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Current and former students filed a putative class action against an institution alleging that the institution misrepresented the quality of its education and the prospects for post-graduation employment. When the institution moved to compel arbitration, the students sought to challenge the enforceability of the arbitration clause in court, notwithstanding a delegation provision that provided for arbitrability to be decided by the arbitrators. The court initially refused to enforce the delegation clause, holding that the students presented a valid defense that arbitration would be cost-prohibitive for them. On reconsideration, however, the court compelled arbitration even on the issue of arbitrability, relying on Concepcion. The court explained, after reviewing the origins of the cost-prohibitiveness defense in state precedent, that the defense is a doctrine created in the specific context of arbitration agreements, and is therefore preempted by the FAA. Dean v. Draughons Junior College, Inc., Case No. 3:12-cv-0157 (USDC M.D. Tenn. Jan. 16, 2013).

This post written by Michael Wolgin.

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In a putative class anti-trust action brought by retail grocers against wholesale grocers, a divided panel of the Eighth Circuit recently reversed the lower court’s decision to compel arbitration under an equitable estoppel theory. The retailers had purposefully brought suit against wholesalers with whom they did not have supply and arbitration agreements. The lower court found that equitable estoppel could be applied to compel arbitration because the retailers’ claims against non-signatory wholesalers were so intertwined with the agreement containing the arbitration clause that it would be unfair to allow the retailers to rely on the agreement in formulating its claims but to disavow availability of the arbitration clause of that same agreement. The lower court reasoned that without the arbitration “agreements no wholesaler-supplier relationship would exist to be exploited by the alleged anti-trust conspiracy.” On appeal, the Eighth Circuit reversed this ruling, holding that the retailers’ claims were based on statutory rights that exist independent of the supply and arbitration agreements, and that since none of the contracts specified price terms, the retailers’ claims did not involve alleged violation of any contractual terms. The lower court’s analysis, the Eighth Circuit concluded, “focuse[d] too much on the relationship between the signatories, rather than on the relationship between the signatory’s claims against the non-signatory and the contract containing the arbitration clause.” In re Wholesale Grocery Products Antitrust Litigation, No. 11-3768 (8th Cir. Feb. 13, 2013).

This post written by Michael Wolgin.

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In a summary order, the Second Circuit Court of Appeals affirmed the district court’s confirmation of an arbitration award issued in favor of NCG Network Asia and the denial of PAC Pacific Group International’s motion to vacate. The court found that the arbitrator had properly disclosed a prior business relationship that indirectly linked him with NCG Network Asia, nothing about the relationship would compel a reasonable person to believe that the arbitrator was partial, and that PAC Pacific Group had thus not made the requisite showing to entitle it to post-arbitration discovery on the arbitrator’s alleged bias. The court also held that there was nothing inappropriate in denying PAC Pacific Group’s challenges to the arbitrator based on alleged impartiality, which denials complied with governing AAA rules and, further, that the arbitrator’s conclusion that there was no breach of the implied covenant of good faith and fair dealing was in accord with applicable law. NGC Network Asia, LLC v. PAC Pacific Group International, Inc., No. 12-0967 (2d Cir. Feb. 11, 2013).

This post written by Ben Seessel.

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Security Life Insurance Company was the successor to certain reinsurance agreements covering underlying life insurance risks. Pursuant to the agreements, the reinsurers created a trust in order to fund the required reserves. The trustee, INA Trust FSB, and the reinsurers thereafter allegedly created a new trust, transferred funds from the previous trust to one of the reinsurers, and/or its principal, but did not name Security Life as a beneficiary under the new trust, as allegedly required under the reinsurance agreements. The reinsurance agreements contained arbitration clauses. The trust agreements did not. Security Life brought suit against the trustee and the reinsurers and their principals in federal court. All the defendants moved to compel arbitration, or, in the alternative, stay the proceeding pending completion of arbitration. The court granted the motion to compel arbitration between Security Life and the defendants which were signatories to the arbitration agreement, and stayed the remainder of the action until completion of that arbitration. Security Life Insurance Co. of America v. Southwest Reinsure, Inc., Case No. 11-1358 (USDC D. Minn. Feb. 11, 2013).

This post written by John Pitblado.

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In an arbitration related to an uninsured motorist insurance claim, the insured twice challenged the arbitrators’ discovery rulings by filing declaratory relief actions in state court. The first time, the appellate court affirmed the lower court’s dismissal of the action for failure to first challenge the subject order with the arbitrators. The second time, after the appellant unsuccessfully challenged the orders with the arbitrators, the lower court dismissed the suit for lack of subject matter jurisdiction over interlocutory arbitration orders. On appeal, the appellate court affirmed the result, but disagreed with the lower court’s reasoning. The court held that a declaratory relief action is indeed a “justiciable” matter under state law, notwithstanding that the underlying issue involved interlocutory arbitration orders. The court ultimately concluded, however, that based on the legislative history of the Uniform Arbitration Act, the action still should have been dismissed for lack of ripeness. The court explained, “The meaning of [the legislative history] could not be clearer: if there is a dispute about an issue that is subject to the arbitration agreement, then the courts cannot review the arbitrator’s ruling on that issue until after the arbitration process is complete.” Klehr v. Illinois Farmers Insurance Co., Case No. 1-12-1843 (Ill. Ct. App. Jan. 22, 2013).

This post written by Michael Wolgin.

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Pine Top Receivables LLC (“PTR”) was formed when a buyer purchased the assigned rights under certain reinsurance contracts from the Illinois liquidator handling the Pine Top Insurance Company receivership. PTR then brought suit against reinsurer Banco De Seguros Del Estados, which had entered into reinsurance contracts with Pine Top. PTR alleged that Banco owed more than $2,000,000 in overdue balances on the contracts. PTR’s suit sought to compel arbitration. Banco filed a motion to dismiss on jurisdictional grounds. PTR moved to strike the motion, on the grounds that Banco had not paid prejudgment security under Illinois’ statute requiring security by a nonresident reinsurer. Banco resisted the motion, asserting that the Foreign Sovereign Immunities Act prohibited the assessment of any “attachment” on a foreign governmental entity. The Court agreed with Banco, finding that it is a government instrumentality of the Republic of Uruguay, and that pre-judgment security under the statute was effectively an “attachment” as the term is used in the Act. Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estados, No. 12 C 6357 (USDC N.D. Ill. Dec. 13, 2012).

This post written by John Pitblado.

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Petitioner American Home Assurance Company sought appointment of an umpire, or a third arbitrator under certain treaties, to preside over arbitrations of disputes arising under three reinsurance treaties with respondent Clearwater Insurance Company. The treaties provided that each side would select an arbitrator and the two would select an umpire or third arbitrator; the parties had each selected an arbitrator but the two arbitrators had not chosen an umpire or third arbitrator. The court granted petitioner’s request pursuant to New York CPLR 7504, which provides that a court shall appoint an arbitrator if the method the parties’ agreed upon “fails or for any reason is not followed.” In so holding, the court rejected respondent’s argument that CPLR 7504 did not apply because it was not mentioned in the reinsurance treaties, holding that the law was in existence at the time of the formation of the contracts and thus incorporated in them. The court also dispensed with respondent’s argument that the arbitrations should proceed before an umpire is selected, i.e., that an umpire need not be selected unless the two arbitrators failed to agree, reasoning that having an umpire present during the arbitrations to hear the proof is the more practical approach. The court ordered a specific selection process for the umpire (or third arbitrator) – a hybrid of the ARIAS-US ranking method and the “strike and draw” method. In re American Home Assurance Co., Case No. 653079/2012 (N.Y. Sup. Ct. Jan. 15, 2013)

This post written by Ben Seessel.

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Class Waiver Cases Addressing Concepcion

Gutierrez v. Wells Fargo Bank, NA, Case No. 10-16959 (9th Cir. Dec. 26, 2012) (refusing to vacate district court’s judgment, rejecting argument that interim ruling of Concepcion created new right to arbitrate in this particular class action banking dispute; defendant waived right to arbitrate by litigating to judgment while Concepcion was pending, notwithstanding permissive arbitration clause)

Natalini v. Import Motors, Inc., Case No. A133236 (Cal. Ct. App. Jan. 7, 2013) (affirming denial of petition to compel individual arbitration in putative class action lawsuit; class waiver arbitration clause in motor vehicle sales contract procedurally and substantively unconscionable, notwithstanding Concepcion)

Outland v. Macy’s Department Stores, Inc., Case No. A133589 (Cal. Ct. App. Jan. 16, 2013) (affirming dismissal of putative class action lawsuit in employment dispute, citing Concepcion; underlying employment agreement contained a class waiver arbitration clause which should be upheld under FAA, notwithstanding California Gentry, Franco, and Truly Nolen decisional law holding such class waivers unenforceable)

Claim Preclusion

Casady v. The Waffle, LLC, Case No. B235553 (Cal. Ct. App. Jan. 3, 2013) (affirming denial of requests to restore and recommence civil action after arbitration was dismissed for failure of the plaintiff failed to pay share of arbitrator’s fee; dismissal of arbitration was a sanction and constituted an award on the merits)

This post written by Michael Wolgin.

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