Opinion
Case Nos. 92-B-41974 (PBA) through 92-B-41977 (PBA) and 92-B-44623 (PBA) Jointly Administered. Adversary Proceeding No. 97-8886-A (PCB).
April 18, 2001, Decided
Jonathan Greenblatt, Esq., Michael E. Hatchett, Esq., SHEARMAN & STERLING, New York, New York, for Scheme Administrators.
John M. Nonna, Esq., LeBOEUF, LAMB, GREENE & MacRAE, L.L.P, New York, New York, for Public Service Mutual Insurance Company.
This adversary proceeding arises out of a dispute between the plaintiffs, who are the scheme administrators for a group of British and Bermudan insurance companies and the defendant who was one of the plaintiffs' American reinsurers. The plaintiffs allege that the defendant has paid only a portion of the outstanding balance owed to them under the open reinsurance contacts. The plaintiffs have moved to stay this adversary proceeding and to compel arbitration in London pursuant to the terms of the reinsurance contracts. The defendant has opposed the request for arbitration and has cross-moved for fees and costs in the event that the plaintiffs' motion is granted. The defendant has also moved for leave to amend its answer.
The scheme administrators were formerly the foreign liquidators of Kingscroft Insurance Company Ltd., El Paso Insurance Company Ltd., Lime Street Insurance Company Ltd., Mutual Reinsurance Company Ltd. and Walbrook Insurance Company Ltd. (collectively, "KWELM" or the "KWELM Companies"). The KWELM Companies are foreign corporations incorporated in England or Bermuda with their principal places of business in England. The scheme administrators were appointed pursuant to schemes of arrangement put in place in England and Bermuda in December 1993. This court is where the foreign liquidators filed proceedings under Bankruptcy Code § 304 in furtherance of implementing the schemes in the United States.
For the reasons which follow, the court grants the plaintiffs' motion to compel arbitration and denies the defendant's cross-motion for fees and costs. The court also denies the defendant's motion for leave to amend its answer as moot.
FINDINGS OF FACTS
1. In August 1997, the Scheme Administrators commenced this adversary proceeding against the defendant, Public Service Mutual Insurance Company ("Public Service"), a property and casualty insurance company. Public Service is organized under the laws of New York State with its principal place of business in New York City. Public Service provides coverage to individuals and businesses in the United States. The complaint alleges that the KWELM Companies (prior to their insolvencies) and the Scheme Administrators (subsequent to the KWELM Companies' insolvencies) have recognized claims under the underlying policies in the amount of $ 1,817,782.66, which claims are reinsured by Public Service pursuant to certain reinsurance contracts entered into between the parties (the "Reinsurance Contracts"). Of the $ 1,817,782.66 the Scheme Administrators allege Public Service is required to reimburse, the Scheme Administrators allege that to date Public Service has paid only $ 246,363.41. See Complaint, A.P. Doc. No. 1A at P21.
2. Public Service entered into numerous reinsurance contracts with H.S. Weavers (Underwriting) Agencies Limited (the "Weavers Stamp"). Prior to its insolvency, the Weavers Stamp was an underwriting pool managed by H.S. Weavers through which KWELM and other insurance companies underwrote insurance and reinsurance. Under the Reinsurance Contracts, Public Service reinsured certain liabilities of KWELM arising under KWELM's underlying policies and participated in the Weavers' Excess of Loss Reinsurance Program. Public Service was but one of a number of reinsurers with which KWELM did business.
3. In accordance with the terms and conditions of each of the Reinsurance Contracts, Public Service agreed to reimburse each of the identified KWELM Companies a specific amount in excess of an agreed loss, for claims arising under the identified underlying policies. Throughout the years 1972 to 1985, the years encompassing the Reinsurance Contracts, numerous claims arose under the underlying policies which were subject to the Excess of Loss Reinsurance Program, and were therefore reinsured by Public Service pursuant to the Reinsurance Contracts. Prior to insolvency, KWELM paid many of these claims in accordance with the terms of the underlying policies and was reimbursed by Public Service.
4. There are approximately 300 Reinsurance Contracts at issue between KWELM and Public Service, all of which are governed by the laws of the United Kingdom. Each of the Reinsurance Contracts contains one of only three forms of arbitration clause. All three forms provide for arbitration in London.
The contracts are listed in Schedules 1, 2 and 3 to Exhibit 3 of the Affidavit of Michael E. Hatchett, Esq., sworn to December 6, 1999. A.P. Doc. No. 26A.
The text of each of the three arbitration clauses can be found in Exhibit 3 to the Hatchett Affidavit.
The first form of arbitration clause reads as follows:
"All disputes or differences between the parties or their respective Successors, Executors, Administrators or Assigns, or between one of them and the Successors, Executors, Administrators or Assigns of the other, arising out of the construction and/or performance of the present Reinsurance shall be referred to two Arbitrators, one to be chosen by each party and such Arbitrators shall first choose an Umpire before entering upon the reference. If either of the parties fails to appoint its Arbitrator within four weeks after the other has requested arbitration, or if the two Arbitrators fail to agree within a further period of four weeks upon a third to act as Umpire, then the Arbitrator or the Umpire as the case may be, shall be appointed by the Chairman or a Deputy Chairman of Lloyd's."
The second form of arbitration clause reads as follows:
"If any dispute shall arise between the Reinsured and the Reinsurers with reference to the interpretation of this contract or the rights with respect to any transaction involved, the dispute shall be referred to two Arbitrators, one to be chosen by each party and such Arbitrators shall first choose an Umpire. If they are unable to agree upon an Umpire, they shall appeal to the Chairman for the time being of Lloyd's to nominate him and in the event of said Arbitrators not agreeing, the decision of the said Umpire shall be final and binding upon all parties."
The third form of arbitration clause reads as follows:
"All matters in difference between the Reinsured and the Reinsurers (hereinafter referred to as 'the parties') in relation to this reinsurance, including its formation and validity, and whether arising during or after the period of this reinsurance, shall be referred to an arbitration tribunal in the manner hereinafter set out.
Unless the parties agree upon a single arbitrator within 30 days of one receiving a written request from the other for arbitration, the Claimant (the party requesting arbitration) shall appoint their arbitrator and give written notice thereof to the respondent. Within 30 days of receiving such notice the respondent shall appoint their arbitrator and give written notice thereof to the Claimant, failing which the Claimant may apply to the appointor hereinafter named to nominate an arbitrator on behalf of the respondent."
5. On October 28, 1997, Public Service filed its Answer to the Complaint. It admitted that it had entered into various reinsurance contracts with the Weavers Stamp and that it had made no payments on some claims and partial payments on other claims allegedly owed to KWELM under the Reinsurance Contracts. Public Service also asserted several boiler plate affirmative defenses in support of its refusal to perform under the Reinsurance Contracts, including but not limited to, laches, estoppel, and waiver. Public Service made no reference to the arbitration clauses.
6. Following the service of its answer, Public Service entered into discovery of the KWELM Companies' files. Given the volume of the files and the Scheme Administrators' view that certain discovery was duplicative, some discovery disputes arose. In particular, a dispute arose over whether Public Service could have access to a report prepared by its file auditor for another of the file auditor's clients. No substantive motions were made nor had the adversary proceeding been placed on this court's trial calendar.
7. On or about December 6, 1999, the Scheme Administrators served Public Service with a Notice of Arbitration and Notice of Appointment of Arbitrator. KWELM was joined by thirteen other insurance companies in making demand on Public Service for arbitration.
8. On December 7, 1999, the Scheme Administrators filed in this court a motion to compel arbitration and to stay the adversary proceeding pending arbitration ("Motion to Compel Arbitration"). On December 8, 1999, Public Service filed a motion for leave to file an amended answer ("Motion to Amend"). In the Motion to Amend, Public Service sets forth additional defenses of a substantive nature which include, but are not limited to, issues of underwriting, claims handling, premiums and fraudulent inducement.
In essence, these two motions were served simultaneously, although Public Service's motion was docketed later.
10. On or about January 27, 2000, Public Service filed a cross-motion in opposition to the Motion to Compel Arbitration and In Support of Recovery of Fees and Costs (the "Cross- Motion"). A.P. Doc. No. 28A.
11. In support of its Cross-Motion, Public Service offers the following letter written to its counsel on October 28, 1996 from Victor Earle (the "Earle Letter"), who was then the Scheme Administrators' general counsel:
"Confirming our telephone conversation of Friday (and what I earlier told your colleague, Pat Doyle), the Stamp Companies would expect to resolve another installment payment this time in the amount of $ 2(?) million, coupled with a schedule for the balance, by November 30, 1996. Presumably the actuarial audit that Michael Moody has been discussing with Mark Langridge can be completed by that date, If, on the other hand, a full commutation were worked out by then, so much the better.
I also explained, if the further payment or commutation is not achieved by November 30, we would initiate litigation either in the UK or the US essentially at your option. You expressed some surprise at this in light of the recent payment of $ 500,000: I [rechecked?] with Mark Langridge this morning who assured me that our current position is wholly consistent with the many discussions he has had with Mr. Moody." See Cross-Motion at Exhibit A. (emphasis added).
Public Service states that by virtue of the Earle Letter, the Scheme Administrators have expressly waived their right to arbitrate the dispute.
12. Alternatively, Public Service states that the Scheme Administrators implicitly waived their right to arbitrate this dispute by waiting over two and a half years to make the Motion to Compel Arbitration. Public Service states that it has been prejudiced by the time delay, expenses incurred and compromises it has made in connection with its discovery requests and document inspections to date.
13. Although this adversary proceeding was commenced approximately twenty-eight months passed before the arbitration demand was made, the progress of the litigation has been limited to discovery. Neither party has taken or scheduled any depositions. More specifically:
a. In February 1998, Public Service filed a First Request for Documents seeking 11 categories of documents. The Scheme Administrators filed a motion for a protective order because they objected to providing information which they believed they had already provided to Public Service prior to the first request. Prior to any ruling by the court the parties resolved their differences.
b. In June 1998, Public Service submitted to the Scheme Administrators a list of the matters upon which it sought further information. The letter outlined numerous potential defenses, including those based on premium payments, underwriting, claims handling and several defenses grounded in fraud, such as fraud in the inducement (the "June 1998 Letter").
The June 1998 Letter is attached to Exhibit B of the Cross-Motion.
c. In September 1998 the Scheme Administrators offered to permit Public Service to undertake a limited inspection of a sample of the KWELM Companies' voluminous claims files. In November 1998 the discovery proceeded, but the Scheme Administrators refused to permit Public Service's inspector to disclose information the inspector had obtained in inspections on behalf of clients other than Public Service.
d. In January 1999 Public Service filed a motion to compel discovery. The court did not rule on the motion. In March 1999 the Scheme Administrators agreed to provide Public Service with a significant portion of the information which it had sought.
e. The Scheme Administrators have received relatively little discovery. The Scheme Administrators have stated that in response to their request, Public Service has produced documents relating to previous inspection reports in its possession concerning the reinsurance treaties, its policies related to recognizing and paying claims, a prior commutation proposal exchanged between the parties, correspondence concerning the reinsurance treaties and its financial reports.
14. In September 1999, the parties met to discuss the discovery dispute ("the September 1999 Meeting"). At that time Public Service again raised additional reinsurance contractual defenses, including premiums calculation, the Scheme Administrators' disclosure of information, claims aggregation, and whether certain expenses are recoverable.
15. On February 8, 2000, the Scheme Administrators filed their reply and disputed the assertion that they expressly or implicitly waived their right to arbitrate. They assert that the issues in dispute are within the scope of all three arbitration clauses of the Reinsurance Contracts and that the arbitration contemplated will promote efficiency and judicial economy.
16. Public Service states that if its Motion to Amend its answer is granted, the fraudulent inducement defenses asserted fall outside the scope of two of the three arbitration clauses found in the Reinsurance Contracts. Public Service asserts that even if this court finds that the Scheme Administrators did not waive their right to arbitrate, Public Service's fraudulent inducement defenses are not arbitrable, and should be severed and litigated in this court.
17. On or about January 27, 2000, the Scheme Administrators filed their Objection to Public Service's Motion to Amend its answer stating that further proceedings in this adversary proceeding would be moot if their Motion to Compel Arbitration is granted.
DISCUSSION
Arbitration Is Strongly Favored Federal Policy
The lineage of what the Second Circuit once referred to as the "old judicial hostility to arbitration" is of ancient origin, extending back to those days when English judges opposed any innovation that would deprive them of their jurisdiction. Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 985 (2d Cir. 1942); Leadertex Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 24 (2d Cir. 1995); See Bernhardt v. Polygraphic Co., 350 U.S. 198, 211 n. 5, 100 L. Ed. 199, 76 S. Ct. 273 (1956) (Frankfrutter, J., concurring in part).
But, times have changed. Today both Congress, through its enactment of the Federal Arbitration Act ("FAA"), and the federal courts not only accept arbitration as a means of alternative dispute resolution, they strongly favor it. See 9 U.S.C. § 1 et seq.; Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477, 480-81, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989); Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir. 1998).
At issue in this adversary proceeding is whether arbitration is appropriate at this juncture of the case. Public Service argues that it is not and that the Scheme Administrators have both expressly and implicitly waived the right to arbitration. Public Service argues that too much time has elapsed since this adversary proceeding was commenced, that too much substantive litigation has taken place, and that as a result, Public Service will be "seriously prejudiced" if the court grants the Motion to Compel Arbitration.
The court notes that the Reinsurance Contracts date back to the years 1972 through 1985 and thus it is hard to see that Public Service had urgency about getting these claims resolved in the many years before the adversary proceeding was commenced.
The Scheme Administrators, on the other hand, argue that they never waived the right to compel arbitration, either expressly or implicitly, and that Public Service has not been prejudiced by the time which has elapsed since the commencement of this adversary proceeding. The Scheme Administrators also contend that no litigation has occurred to date other than disputes over discovery and that the discovery which has taken place has not resulted in prejudice to Public Service since the bulk of it has been taken by Public Service.
A motion to compel arbitration is governed by the FAA which provides:
"[a] written provision in any * * * contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contact or transaction * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
FAA § 2.
The FAA was enacted to promote the enforcement of privately entered agreements to arbitrate "according to their terms." Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 54, 131 L. Ed. 2d 76, 115 S. Ct. 1212 (1995). Through the FAA, Congress has declared a "strong federal policy favoring arbitration as an alternative means of dispute resolution." Oldroyd, 134 F.3d at 76. As a result, the Supreme Court has instructed that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Mem'l Hosp. V. Mercury Constr. Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). See also Leadertex, 67 F.3d at 25; Zwitserse Maatschappij Van Levensverzekering En Lijfrente; N.V. v. ABN Int'l., 996 F.2d 1478, 1479 (2d Cir. 1993); Kramer v. Hammond, 943 F.2d 176, 178-179 (2d Cir. 1991). This bias in favor of arbitration is even stronger in the context of international transactions. Deloitte Noraudit A/S v. Deloitte Haskins & Sells, 9 F.3d 1060, 1063 (2d Cir. 1993).
Since a Code § 304 case is only a limited case in aid of a foreign proceeding, no U.S. bankruptcy policy reasons intrude upon the determination to permit arbitration. In contrast, in an ordinary Chapter 11 case under the Code, the bankruptcy court must take account of the effect of allowing arbitration upon the case as a whole, including the Chapter 11 plan process.
In determining whether a particular dispute is arbitrable, the court must engage in a two-part inquiry: it must decide (1) whether the parties agreed to arbitrate, and, if so (2) whether the scope of that agreement encompasses the asserted claims. See Campaniello Imports, Ltd. v. Saporti Italia S.p.A., 117 F.3d 655, 666 (2d Cir. 1997).
The parties in the instant proceeding have executed numerous Reinsurance Contracts, each containing one of three arbitration clauses. See Finding 4, supra. There is no articulated dispute between the parties that the issues identified in the original pleading fall within the scope of the arbitration clauses. Public Service asserts, however, that its proposed amended answer does raise issues outside the scope of the various arbitration clauses.
The Scheme Administrators Have Not Expressly Waived the Right to Arbitrate
Public Service contends that the Earle Letter constitutes the Scheme Administrators' express waiver of the right to arbitrate. In support, Public Service argues that the Earle Letter states that if Public Service does not make further payment by a date certain, the Scheme Administrators "would initiate litigation" either in the United Kingdom or the United States at Public Service's choice. Public Service urges that in using this language the Scheme Administrators clearly intended to pursue litigation as their road to recovery and in expressly doing so, the Scheme Administrators eliminated arbitration as an alternative means of resolving the dispute. Public Service further suggests that by the Scheme Administrators expressly waiving the right to arbitrate, Public Service does not need to prove that it has been prejudiced by the Scheme Administrators' decision to commence this adversary proceeding. The court finds that Public Service's argument goes against the weight of Second Circuit authority.
It has long been settled Second Circuit law that the filing of a lawsuit is not an express waiver of the right to arbitrate. Chatham Shipping Co. v. Fertex S.S. Corp., 352 F.2d 291, 293 (2d Cir. 1965) (filing complaint does not create a waiver); Carcich v. Rederi A/B Nordie, 389 F.2d 692 (2d Cir. 1968) (mere participation in a lawsuit does not constitute waiver of the right to arbitrate); Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir. 1985) (waiver of the right to arbitrate by participating in litigation can only be found where there has been prejudice to the other party). If it is the case that commencing or participating in a lawsuit does not by itself constitute an express waiver of arbitration, then certainly the mere threat of a potential lawsuit is also insufficient to establish the express waiver of arbitration. See Lawrence v. Comprehensive Bus. Servs. Co., 833 F.2d 1159, 1165 (5th Cir. 1987) (statement that suggested a party would not arbitrate did not constitute action inconsistent with arbitration).
Public Service also cites two cases in support of its argument: Smith v. Petrou, 705 F. Supp. 183 (S.D.N.Y. 1989) and Gilmore v. Shearson/American Express, Inc., 811 F.2d 108 (2d Cir. 1987). The court finds that Public Service's reliance on these cases is misplaced since both cases stand for the proposition that when a party has taken a position with respect to arbitration (in Smith by opposing a motion to compel; in Gilmore by withdrawing a motion to compel), it has waived its right to arbitrate. Those cases do not address the question raised in this case - - whether the filing of and participation in a lawsuit constitutes a waiver. As stated supra, the Second Circuit has answered that question clearly: the filing of and participation in a lawsuit is not a waiver unless accompanied by prejudice to the opposing party. See Leadertex, 67 F.3d at 25; Rush, 779 F.2d at 887; Chatham, 352 F.2d at 293. As the Carcich court noted:
"As an abstract exercise in logic it may appear that it is inconsistent for a party to participate in a lawsuit * * * and later ask the court to stay the litigation pending arbitration. Yet the law is clear that such participation, standing alone, does not constitute waiver for there is an overriding federal policy favoring arbitration."
The court finds that the Scheme Administrators did not expressly waive their right to arbitrate.
The Scheme Administrators Have Not Implicitly Waived the Right to Arbitrate
Alternatively, Public Service argues that the Scheme Administrators' two and a half year delay in asserting their right to arbitrate is sufficient to support a finding of implied waiver. Again, the court disagrees.
The strong FAA preference for arbitration has led to an oft repeated corollary that "any doubts concerning whether there has been a waiver are resolved in favor of arbitration" and that a waiver of the right to arbitrate is not to be lightly inferred. PPG Industries, Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 107 (2d Cir. 1997).
In order to implicitly waive its right to arbitrate, a party must have engaged in protracted litigation that results in prejudice to the opposing party. Kramer, 943 F.2d at 180. In making this fact specific determination, courts have frequently focused their analysis on three discrete factors: (1) the time elapsed from the commencement of litigation to the request for arbitration, (2) the amount of litigation (including any substantive motions and discovery) that has occurred and (3) proof of prejudice to the party opposing arbitration. Thyssen Inc. v. M/V Markos N, 1999 U.S. Dist. LEXIS 12578, NO. 97 CIV 6181 (MBM), 1999 WL 619634, at *7 (S.D.N.Y. Aug. 16, 1999); see also Leadertex, 67 F.3d at 25; Kramer, 943 F.2d at 179.
Public Service argues that the Scheme Administrators' two and a half year delay in demanding arbitration in and of itself constitutes their implicit waiver of the right to arbitrate. Moreover, Public Service states that this delay was without justification, since the Scheme Administrators' originally asserted claims are concededly arbitrable and there has been no intervening change in the law. Public Service surmises that the reason for the twenty-eight month delay was nothing more than a belated reconsideration of litigation strategy.
The Scheme Administrators, on the other hand, state that at the time they commenced this adversary proceeding they did not know what defenses Public Service had for non-payment of KWELM's claims. Only when Public Service's defenses were put forth in the June 1998 Letter and later reiterated in the September 1999 Meeting did it become evident to them that the adversary proceeding was not simply a straight forward collection case. The Scheme Administrators further argue that because Public Service has retained the outstanding balance due under the Reinsurance Contracts while this action has been pending, Public Service has not been prejudiced by the time which has elapsed. The court agrees.
1. There Has Been No Substantial Litigation During the Time Elapsed From the Commencement of This Adversary Proceeding
The mere delay in seeking arbitration, absent prejudice to the opposing party, does not constitute waiver. Com-Tech Assocs. v. Computer Assoc. Int'l, 938 F.2d 1574, 1576 (2d Cir. 1991); Kramer, 943 F.2d at 180; Rush 779 F.2d at 888; Carcich, 389 F.2d at 696; Rosenthal A.G. v. Rosenthal, 1997 U.S. Dist. LEXIS 16859, No. 96 CIV. 8093 (WK), 1998 WL 698275, at *2 (S.D.N.Y. Oct. 7, 1998). Furthermore, the amount of time that has elapsed in a case is only deemed relevant to finding a waiver when it is accompanied by litigation of the substantive issues. See Thyssen 1999 U.S. Dist. LEXIS 12578 1999 WL at *8.
In the two and a half years since this adversary proceeding was commenced, it has moved at a snail's pace. Other than the filing of a complaint and an answer, not much has occurred. No substantive motions, under Federal Rules of Civil Procedure 12 or 56, as made applicable by Bankruptcy Rules 9012 and 7056, for example, have been made by either party and no decisions have been issued by the court addressing the merits of the case. In fact, only a few discovery related issues have been addressed by the court: (1) two discovery motions were filed, the resolution of which were ultimately negotiated by the parties; (2) the Scheme Administrators provided an inspection to Public Service (which certainly acted to Public Service's favor, not to its prejudice) and (3) minimal documentary discovery was obtained by the Scheme Administrators. Public Service argues that it provided the Scheme Administrators with "broad and complete" discovery and it only received "compromise discovery" from them. Thus, Public Service argues, granting the Motion to Compel Arbitration will severely prejudice Public Service's ability to defend itself in an arbitration.
The court finds that Public Service's description of the discovery which has taken place is misleading. In fact, it is unclear what discovery Public Service has actually produced to the Scheme Administrators and whether that discovery was completed. As for the "compromise discovery" provided by the Scheme Administrators, because there are thousands of claims, only a representative sample were reviewed and examined. This kind of sampling is consistent with trade practice. The "compromise discovery" was simply a way of reducing a voluminous and immeasurable pile of claims and supporting documentation to a more manageable one so the parties could take stock of the situation. The court finds that the limited discovery which has taken place does not rise to the level of the substantive and protracted litigation that the Second Circuit has deemed to be so prejudicial as to deny a motion to compel. See Salerno v. Aetna Life Ins. Co., 101 F.3d 109 (2d Cir. 1996) (holding participation in four months of discovery, including taking depositions and exchanging documents not substantial litigation prejudicing opposing party); Rosenthal A.G. 1997 U.S. Dist. LEXIS 16859, WL 698275 (finding no substantial litigation where defendant had filed a motion for judgment of the pleadings.)
The type of prejudice going to the merits that the Second Circuit has held to constitute waiver is engaging in extensive and protracted discovery - - both documentary and by deposition of the type that might not be available in an arbitration, Zwitserse, 996 F.2d at 1478, 1480, forcing an adversary to respond to substantive motions or on the eve of trial, Com-Tech, 938 F.2d 1574 at 1576-77.
Public Service points to no such prejudice in this case and its reliance on Satcom Int'l Group PLC v. Orbcomm Int'l Partners, L.P., PPG and Kramer illustrates the point. In each of these cases, the court found prejudice based upon protracted litigation which went to the merits of the case.
49 F. Supp. 2d 331, 341 (S.D.N.Y. 1999) stay granted at 55 F. Supp. 2d 231 (S.D.N.Y. 1999) and judgment aff'd at 1999 U.S. App. LEXIS 32546, NO. 99-7638, 1999 WL 1254091 (2d Cir. Dec. 15, 1999).
In Satcom, the plaintiff brought a motion to enjoin the defendant from terminating the underlying contract. In connection with the motion, the parties engaged in "vigorous" discovery, including numerous depositions and the exchange of voluminous documents, and conducted a three day hearing on the merits of the motion. After the plaintiff lost his motion for a preliminary injunction, he moved, for the first time, to compel arbitration. Finding that the parties litigated "nearly all substantive issues * * * extensively" and that the preliminary injunction hearing amounted to a "minitrial", the court denied the plaintiff's motion holding there was abundant evidence that the plaintiff had waived its right to arbitrate. Satcom, 49 F. Supp. 2d 331 at 340.
In PPG, the plaintiff brought two nearly identical suits against overlapping groups of defendants (the "Premium Litigation" and the "Webster Litigation"). The plaintiff filed a motion to compel arbitration in the Premium Litigation and at the same time filed other responsive pleadings to counterclaims. While its motion to compel was pending, plaintiff and defendants began exchanging substantial discovery in both the Premium Litigation and the Webster Litigation, including interrogatories and depositions. Some eight months after the commencement of the Webster Litigation, and with the Premium Litigation motion still pending, the plaintiff filed a motion to compel in the Webster Litigation. The district court then denied plaintiff's motion to compel in the Premium Litigation and litigation continued in both cases. After the cases were consolidated, the court denied the plaintiff's motion to compel in the Webster Litigation.
The court found significant that, once the plaintiff moved for arbitration in the Premium Litigation and lost, he did not appeal. The court held that failure to be a waiver. Moreover, the court found that the plaintiff had engaged in substantial litigation in both suits, including seeking prejudgment remedies, participating in discovery and responding to the defendant's counterclaims without raising the issue of arbitration. PPG, 128 F.3d at 106. Based upon the activities in both cases, the court held that to bifurcate the proceedings at such late stage would prejudice the defendants.
In Kramer, the plaintiff filed a suit in South Carolina claiming fraud. The defendant moved to dismiss for lack of personal jurisdiction. The district court denied the defendant's motion and the defendant appealed the decision to the state Supreme Court where the district court's decision was affirmed. At the same time, the plaintiff filed a second identical suit in New York, where it was plain the defendant would be subject to personal jurisdiction. The defendant answered in the New York proceeding and noticed the deposition on the plaintiff. After taking the plaintiff's deposition and asserting several counterclaims, the defendant moved for summary judgment. The New York court stayed the New York action pending the outcome of the defendant's appeal. After finally losing the jurisdiction battle, the defendant moved to compel arbitration in New York. Finding the defendant had waived his right to arbitrate, the court held that the defendant's conduct - - more than four years of litigation designed to wear down his opponent-- was precisely the type of protracted litigation going to the merits that established waiver. Kramer, 943 F.2d at 179.
The court finds that the parties have not engaged in the type of protracted litigation going to the merits that the Second Circuit requires to establish waiver. Indeed, the litigation in this proceeding has been minimal and has only addressed the scope of Public Service's inspection. It has not touched upon or considered any of the substantive issues raised in this dispute.
In the absence of prejudice, Public Service relies on nothing more than the passage of time, which the Second Circuit has consistently held does not constitute prejudice such that a party has waived its right to arbitrate. Sweater Bee By Banff, Ltd. v. Manhattan Indus., Inc., 754 F.2d 457 (2d Cir. 1985) (no waiver where motion to compel was filed two years after initial complaint was filed). See also Herko v. Metropolitan Life Ins. Co., 978 F. Supp. 141, 148 (W.D.N.Y. 1997) (holding no waiver where 18 months passed between filing of a complaint and filing of motion to compel); Thyssen (no waiver where 20 months has passed).
2. Expenses Incurred Are Not Prejudicial to Public Service
As its final argument, Public Service contends that sufficient prejudice exists to find an implicit waiver because the Scheme Administrators' pre-trial tactics have caused Public Service significant and unnecessary expense. The Second Circuit, however, has stated that "pretrial expense and delay -- unfortunately inherent in litigation -- without more, do not constitute prejudice sufficient to support a finding of waiver." Leadertex, 67 F.3d at 25; See also PPG, 128 F.3d at 108; Rush, 779 F.2d at 888 (prejudice weighing in favor of waiver must amount to more than pretrial incidents between the parties).
Public Service also argues that sending this matter to arbitration will cause it to incur significant additional expense. The court acknowledges that Public Service will most certainly incur some additional costs in preparing for a London based arbitration. However, there is no reason to believe that present counsel cannot continue to provide its services in some capacity. Given the volume of matters at issue, additional costs would have to be incurred regardless of whether the matter proceeds in London or in New York or whether counsel involved is British or American.
Moreover, the KWELM Companies constitute only a portion a larger group of insurance companies which were reinsured by Public Service on the same Reinsurance Contracts. Presently, London based arbitrations are underway in which both Public Service and the non-KWELM complainants have appointed their arbitrators. These London arbitrators will adjudicate virtually the identical issues as those raised in this adversary proceeding. Further, all of the Reinsurance Contracts on which the KWELM and other complainants claims are based are governed by the laws of the United Kingdom. Given that Public Service already has counsel to handle the London based non-KWELM arbitrations, the court is unconvinced that the cost of hiring additional London counsel to handle the KWELM arbitration amounts to the type of prejudice necessary to find that the Scheme Administrators have waived their right to arbitrate.
Finally, the court notes that Public Service's argument that it will be prejudiced by the expense it will incur in hiring British counsel is self defeating. There is no question that the London based arbitration against Public Service will continue to go forward even without KWELM's involvement. Thus, Public Service will be a participant in the London arbitration regardless of whether this particular adversary proceeding is permitted to join. If this court were to deny the Scheme Administrators' Motion to Compel Arbitration, Public Service would actually incur more substantial costs because it would be defending proceedings in two different countries, this one in the United States and the arbitrations against the other insureds in England. The continuation of this adversary proceeding concurrent with the London arbitrations could also lead to inconsistent results.
For the reasons set forth above, the court finds that Public Service has not demonstrated that it has suffered such prejudice that the Scheme Administrators have implicitly waive their right to arbitrate.
Motion to Amend
Public Service has made a Motion to Amend its answer (1) to withdraw certain of its affirmative defenses relating to laches, estoppel, waiver and lack of proper notice and (2) to assert additional affirmative defenses which include, but are not limited to, premium calculation, policy underwriting, loss aggregation, claims handling and fraudulent inducement. Public Service suggests that if this Court grants its Motion to Amend, the new affirmative defenses do not fall within the scope of the three forms of arbitration clauses found in the Reinsurance Contracts. Public Service also urges that even if the court grants the Motion to Compel Arbitration, the new defenses should be severed and permitted to go forward in this forum.
The Scheme Administrators object to the Motion to Amend on the grounds that the granting of their Motion to Compel Arbitration moots the issue.
The court believes that the London based arbitrators are better suited to making decisions about defenses grounded in British law, including the defense of fraudulent inducement, which the court finds is a proper subject of the arbitration. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967) (finding that the sole exception as to when a fraudulent inducement claim is not subject to arbitration is when the claim is directed to the arbitration clause itself); St. Paul Fire & Marine Ins. Co. v. Employers Reinsurance Corp., 919 F. Supp. 133, 134 (2d. Cir. 1996)(finding that since 1961, both the Supreme Court and the Second Circuit have taken an increasingly broad view of phrases like "arising under" and "arising out of" in arbitration agreements, and have concluded that fraudulent inducement claims generally fall within their scope); S.A. Mineracao da Trindade-Samitri v. Utah Int'l, Inc., 745 F.2d 190, 195 (2d Cir. 1984)(finding that unless excluded, claims of fraud in the inducement of a contract are arbitrable, especially when the dispute is between corporations of diverse nationality).
For the reasons set forth above, Public Service's Motion to Amend its Answer is denied as moot in light of the grant of the Motion to Compel Arbitration.
Public Service's Request for Fees and Expenses
Finally, Public Service has cross-moved to recover fees and expenses for the costs of litigating this adversary proceeding in the event that the Motion to Compel Arbitration is granted. Public Service relies on Code § 105(a) which gives the court broad discretionary powers to fashion relief appropriate to the circumstances. Public Service does not cite any other statutory or legal authority to support its claim. Instead, Public Service suggests that granting the Motion to Compel Arbitration will cause it to lose the benefit of the fees and costs it has already expended in this case over the past twenty-eight months.
The Court finds that an award of fees and costs to Public Service is not appropriate at this juncture. The majority of fees and costs expended by Public Service thus far are attributable to discovery taken on its behalf. Public Service has certainly benefitted from the discovery taken in this proceeding, as evidenced by the new substantive defenses it asserted in its amended answer -- defenses that Public Service will surely assert during the course of the London arbitration. As such, the Court will not exercise its discretionary power under Code § 105(a) to award fees and expenses to Public Service. The Cross-Motion is denied.
CONCLUSION
For the reasons set forth above, the court finds that the Scheme Administrators did not waive their right to arbitrate this adversary proceeding and their Motion to Compel Arbitration and stay this adversary proceeding is granted. The court denies Public Service's Motion to Amend its answer. Public Service's Cross-Motion for recovery of fees and expenses is also denied.
Settle Order.
Dated: New York, New York
April 18, 2001
/s/ Prudence Carter Beatty
United States Bankruptcy Judge