RECENT CASE LAW DEVELOPMENTS
WITH ARBITRATION IN U.S. RECEIVERSHIPS(1)
By
Robert M. Hall(2)
 

Since reinsurance is often the largest single asset of an insurer in receivership, receivers place a high priority on collection of reinsurance recoverables. Reinsurers place an equally high priority on their rights of setoff and arbitration to assure that they pay no more than is actually due to the estate.

Receivers generally seek to adjudicate all possible disputes in the state court supervising the receivership in order to: (1) make use of the court's acquired expertise; (2) avoid inconsistent rulings; and (3) avoid the expense of litigation in other venues. Reinsurers, in contrast, believe that receivers have a home court advantage in the receivership court. As a result, they often invoke their rights to federal jurisdiction through diversity of state citizenship and assert their contractual rights to have disputes arbitrated by a panel of industry experts. The three cases summarized below focus on the reinsurer's right of arbitration with insurers in receivership.

QUACKENBUSH V. ALLSTATE INSURANCE COMPANY

United States: United States Court for the Ninth Circuit, No. 96-56132, 1977 U.S. App. LEXIS 22781 (9th Cir. Aug. 28, 1997).

Background

Mission Insurance Company and certain of its affiliates (collectively "Mission") reinsured Allstate Insurance Company ("Allstate") under certain reinsurance contracts and Allstate reinsured Mission under others. When Mission became insolvent, Allstate filed proofs of claim in the receivership proceeding for amounts due to Allstate. These proofs of claim reserved Allstate's right to set off sums due to Mission against sums due from Mission to Allstate.

Mission filed suit in the receivership court against Allstate for reinsurance recoverables. Allstate removed the case to the federal district court and filed a motion to compel arbitration. Mission sought a stay of the federal court proceeding pending resolution of the setoff issues in the receivership proceeding. In addition, Mission sought to have the receivership court rule that the setoff claimed by Allstate in its proofs of claim were violative of state law. Allstate asked the federal district court to enjoin such a ruling by the receivership court.

The federal district court denied a stay against arbitration, denied an injunction against the state proceeding and issued an order compelling arbitration. The effect of this order was to allow both the federal and the state proceedings to continue. This decision was appealed to the circuit court.

Anti-Injunction Act

Federal courts are prohibited from enjoining state proceedings except as authorized by Congress or where necessary to protect their jurisdiction or their judgments. On appeal, Allstate argued that Mission's attempt to litigate the setoff issue in the receivership court challenged the jurisdiction of the federal court through removal since setoff was necessarily a matter to be addressed in the arbitration.

The circuit court disagreed with Allstate's argument and declined to enjoin the state proceeding. The circuit court observed that the state proceeding involved claims by Allstate against Mission whereas the federal proceeding involved claims by Mission against Allstate. As a result, Allstate's defense of setoff in the federal proceeding cannot be compromised by the state court proceeding since in the latter, Allstate is the claimant. Nonetheless, the court stated: "It is possible that the state court's decisions will have preclusive effect for Allstate's defenses in federal court (footnote omitted). However, this does not mean that the states court's judgment subverted Allstate's right of removal." Quackenbush, 1997 U.S. App. LEXIS 22781, at *17.

Arbitration Compelled

The court ruled that under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., the court has no discretion to deny arbitration with respect to contracts which contain arbitration clauses. Accordingly, the court upheld the order compelling arbitration.

The court rejected Mission's arguments that: (1) arbitration of unsettled matters of state receivership law is inappropriate; and (2) the Federal Arbitration Act is preempted under the McCarran-Ferguson Act, 15 U.S.C. § 1012, which allows state law regulating the business of insurance to preempt conflicting federal law under certain circumstances. The court found there to be no conflict between state and federal law on arbitration so McCarran-Ferguson preemption was not an issue.

The circuit court affirmed the lower court's rulings but in doing so allowed the somewhat unsatisfactory result of setoff between the same parties being addressed in both federal and state proceedings.

QUACKENBUSH V. ALLSTATE INSURANCE COMPANY

California: Court of Appeal of the State of California, Second Appellate District, Division One, unreported decision, No. B107839 (Cal. Ct. App. Aug. 28, 1997).

The unsatisfactory result remaining after the circuit court's decision in the above case was resolved in this decision in the state court proceeding on setoff referenced in the above summary. Under California law, if a court of competent jurisdiction orders arbitration of an issue which is involved in a proceeding before a California court, upon motion, such California court must stay the proceeding until the arbitration is completed. As a result, the court of appeal stayed litigation of the setoff issue between Allstate and Mission in the state proceeding.

HOWARD V. EVEREST REINSURANCE COMPANY

Texas: Texas Court of Appeals, Third District, No. 03-97-00035-CV, Tex App. LEXIS 4638 (Tex. Ct. App. Aug. 28, 1997).

Background

Everest Reinsurance Company ("Everest") reinsured Texas Employers' Insurance Association ("Employers'"). When Employers' became insolvent, an anti-suit injunction was entered by the receivership court which forbade commencing any action or arbitration against Employers'. When Employers' sued Everest for reinsurance recoverables, Everest answered the complaint asserting a right to arbitrate the dispute. Everest then removed the case to federal district court asking it to compel arbitration.

Employers' asked the receivership court to find that in removing the case and seeking arbitration, that Everest had violated the anti-suit injunction. The receivership court rendered a rather contradictory order that removal did not violate the anti-suit injunction but that Everest's request for an order compelling arbitration did violate it.

The Removal

Initially, the court ruled that removal of the case to the federal district court did not violate the anti-suit injunction. The injunction prohibited commencing or prosecuting an action against the estate and in this case, Everest merely responded to Employers' suit by removing it.

Second, the court ruled that removal did not violate a portion of the Texas receivership statute which granted the receivership court with exclusive venue to hear all proceedings related to the receivership. Exclusive venue does not confer exclusive jurisdiction and the federal district court has concurrent jurisdiction. There is no conflict between state and federal law which would bring into play the McCarran-Ferguson Act. Even if this were not the case, a venue statute does not regulate the business of insurance which is required for a McCarran-Ferguson Act preemption.

Arbitration

Turning to the receivership court's attempt to prohibit arbitration, the appellate court ruled that once the case is removed, the federal court acquires full and exclusive jurisdiction. Therefore, the receivership court was without jurisdiction to prohibit arbitration after the removal.

COMMENTS

While all avenues to avoid arbitration have not yet been blocked, it is becoming increasingly clear that receivers must accede to arbitration of many of their reinsurance disputes. Perhaps this will encourage receivers to reevaluate arbitration as a dispute resolution technique and to explore other techniques (e.g., commutation and mediation) which would serve to settle disputes prior to an arbitration proceeding.
 


ENDNOTES

1. * This case note was originally published in the International Journal of Insurance Regulation.

2. ** Mr. Hall practices insurance and reinsurance law, and acts as an arbitrator and mediator.  The views expressed in this article are solely those of the author, and do not represent the views of Mr. Hall's clients.  Copyright 1997-1998, Robert M. Hall.  Comments or questions may be addressed to robermhall@erols.com