Opinion
No. 04 Civ. 4605 (TPG).
March 31, 2005
OPINION
Defendant Global moves for an order dismissing or staying this action and compelling the parties to arbitrate their dispute. Plaintiff American opposes Global's motion, and moves for summary judgment. American also moves to strike Global's answer for failure to provide the required security.
Global's motion is granted. American's motions are denied.
FACTS
American is a property and casualty insurance company. Global is a reinsurer. American filed this action seeking to enforce this Court's earlier judgment confirming an arbitration award. The following facts are drawn from the parties' filings, and are not in dispute. The Prior Arbitration
The two parties entered into a contract, effective July 1, 1997, under which Global agreed to reinsure American. The contract was contained in a Binder of Reinsurance. Global agreed to reimburse American for certain losses and loss adjustment expenses paid by American under a number of previously issued excess liability insurance policies. Global was also required to fund a trust account in favor of American to secure Global's future obligations under the contract. The Binder requires arbitration of "any issue arising out of the interpretation, performance or breach of this Agreement."
In 2001 Global issued a reservation of rights letter and ceased payments under the contract. Global contended that American had misrepresented material facts relating to the likely occurrence of future losses. Global also contended that American had gone through a series of corporate transactions that breached a contractual provision prohibiting "Change in Administrative and Claim Practices." Global was, in effect, seeking to rescind the contract. American responded, arguing that such a provision was not part of the contract, and that, even if it were, American's conduct did not constitute a breach.
The parties issued cross-demands for arbitration pursuant to the arbitration clause in the Binder. The parties proceeded to arbitration, which culminated in a seven day hearing in October 2003. Following its deliberations, the arbitration panel issued two orders: a Final Order and Award dated December 16, 2003, and a subsequent Clarification and Explanation of Final Order and Award dated January 16, 2004.
In its Final Order, the panel found that the parties had entered into a valid contract, and denied Global's request for rescission. The panel also found that, subsequent to the signing of the Binder, the parties had agreed to include other terms in the contract. Those terms were attached to a December 19, 1997 fax from Global to American, and included the final wording of the arbitration clause and the provision prohibiting "Change in Administrative and Claim Practices." The panel then found that American's corporate transactions had breached the "Change in Administrative and Claim Practices" provision.
As a remedy for the breach, the panel mandated that "all losses and loss adjustment expenses paid by [American] from 1/1/02 through the date of this order only on contracts which were not commuted during such period shall be reduced by 30%." The panel also modified the amount of security required to be paid by Global into a trust account created to ensure Global's payment of future obligations under the contract. The panel required that the amount Global owed to the trust account "shall be recalculated taking into account (1) payments made by [American] during the fourth quarter of 2003 and (2) [American's] good faith estimate of any reserve increases or decreases as of 12/31/03." Following the recalculation, Global was to cover any shortfall in the funding of the trust account. Finally, the panel ruled that "[t]hereafter, the provisions of the Binder shall control except to the extent modified by this Order."
The panel concluded the Final Order with a footnote, which read:
Although [American] has sought declarative relief for reimbursements of loss payments and loss adjustment expenses subsequent to the date of this order, the Panel declines to grant such relief on various grounds including but not limited to questions concerning the power of the Panel to grant such relief. Nevertheless, the Panel wishes to note as a matter of dicta and for the future guidance of the parties that in the Panel's view a "Transfer and Assumption Agreement" between [American] and any other insurer (affiliated or unaffiliated) would violate both the Assignment Provision and the Conduct of Business Provision of the Binder unless [Global] consented thereto. Similarly, we note that the existing breach is not necessarily permanent; in our view it could be cured prospectively.
The panel also stated that it would retain jurisdiction until December 31, 2003, solely in order to resolve any disputes with respect to the above calculations required by the order.
Following the issuance of the Final Order, American requested that the panel retain jurisdiction for an additional 90 days in order to consider the effects of American's corporate restructuring, which was to be completed by December 31, 2003. By its letter dated December 19, 2003, American specifically sought "a supplemental ruling that, as a result of the restructuring, [American] has prospectively cured its breach and that the `reduction formula' in the Final Order will have no effect on and after the effective date of that restructuring." Global objected to this request on the grounds that the panel lacked jurisdiction and that the issue was not yet ripe for adjudication.
In an email to the parties on December 24, 2003, the panel agreed to extend its jurisdiction with respect to any issues regarding the required calculations until January 16, 2004. However, the panel expressly denied "all other relief requested in [American's] December 19th request."
In a letter dated January 13, 2004, American again requested that the panel "confirm that the breach it found has now been cured, with the result that the discount award will not continue on a prospective basis." Global again objected to this request, noting that the panel had twice declined to decide the issue.
Following its deliberations, the panel issued its Clarification and Explanation of Final Order and Award on January 16, 2004, which reads, in relevant part:
1. The Panel's retention of jurisdiction was for the limited purpose of resolving "any issues with respect to the calculations required by Part 3 of this Order." Additionally, the Panel's footnoted reference to a possible prospective cure of the breach was specifically denominated as dicta. Accordingly, the Panel believes that it is inappropriate for it to attempt to rule on whether [American's] breach of the Binder has in fact been cured.
The parties then submitted a Stipulation and Order and Judgment Confirming Arbitration Award to the Court, which the Court signed on April 5, 2004.
The Current Dispute
Following the arbitration, American billed Global for its outstanding paid losses and loss adjustment expenses due as of the end of the third quarter of 2003, subject to the 30% discount as provided in the award. Global promptly paid this amount. In January 2004, American billed Global for those amounts due as of the end of the fourth quarter of 2003, again subject to the 30% discount as provided in the Award. Global promptly paid this amount.
However, when American submitted its bill for outstanding paid losses and loss adjustment expenses due as of the end of the first quarter of 2004, it did not apply the 30% discount. Global refused to pay the undiscounted amount. Global demanded that American apply the 30% reduction to that bill.
American also requested that Global cover a shortfall of $278,845.48 in the trust account as of the end of the first quarter of 2004. Global declined to put the requested amount of funds into the trust account. The amount Global paid into the trust account reflects Global's position that the 30% discount continues to apply to American's billings.
On June 18, 2004 American brought this suit seeking to enforce the Court's judgment confirming the prior arbitration award, arguing that the panel's ruling provides prospective relief requiring Global to meet its contractual obligations without any further discount, and that the judgment should be construed as giving effect to that relief.
American moves for summary judgment. American also moves for an order striking Global's answer on the grounds that Global has failed to post security pursuant to New York Insurance Law § 1213©).
Global moves for an order dismissing or staying this action and compelling arbitration. Global claims that there is a new contract dispute which must be submitted to arbitration. Global's position is that American has remained in breach of the contract despite its December 2003 corporate restructuring, and that Global is entitled to a 30% discount to remedy that subsequent breach.
DISCUSSION
The Federal Arbitration Act requires the Court to stay an action if the parties have agreed in writing to arbitrate an issue or issues underlying the action. 9 U.S.C. § 3; see McMahan Sec. Co. v. Forum Capital Markets L.P., 35 F.3d 82, 85 (2d Cir. 1994). In such an instance the FAA also mandates that the Court shall direct the parties to proceed to arbitration on issues covered by the arbitration agreement. See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985). When a party has failed to abide by a valid arbitration agreement and filed a complaint, the Court may issue an order compelling arbitration in accordance with the terms of the agreement. 9 U.S.C. § 4. If all the issues underlying the action are subject to arbitration, the Court has the discretion to dismiss the entire action and compel arbitration. Hale v. First USA Bank, N.A., 00 Civ. 5406 (JGK), 2001 WL 687371, at *8 (S.D.N.Y June 19, 2001).Since American is suing to enforce the Court's judgment, the first question is whether Global's refusal to pay the undiscounted bill for the first quarter of 2004 is in fact a violation of that judgment.
American cites the phrase in the panel ruling "[t]hereafter, the provisions of the Binder shall control." American argues that this means that the Binder as written controls and that this prevents application of any 30% discount. American also argues that the panel specified certain recalculations applying to future payments by Global to the trust account, and these recalculations did not allow for a 30% discount.
Although these provisions would appear to relate to the future, past the time of the arbitration orders, nevertheless the panel elsewhere, as quoted earlier, expressly declined to rule on issues arising in the future and specifically refused to determine whether American's breach had been cured.
The pronouncements of the arbitration panel are somewhat ambiguous. But the more specific statements by the panel are those which decline to cover future conduct of the parties and decline to declare American's breach cured.
This means that there is now a dispute which must again be submitted to arbitration. It is surely unfortunate that Global objected to American's request to have the issues resolved with finality, and it is further unfortunate that the panel declined to do so, thus making it necessary for a virtually immediate return to the arbitration process.
However, there is no escaping the need for further arbitration.
CONCLUSION
Defendant's motion for an order dismissing this action and compelling arbitration is granted.Plaintiff's motions for summary judgment and to strike plaintiff's answer are denied.
SO ORDERED.