On Tuesday, the United States Supreme Court granted certiorari in Stok & Associates PA v. Citibank NA, No. 10-514, a case on appeal from the 11th Circuit Court of Appeals. The question presented in the case is: Under the Federal Arbitration Act, should a party be required to demonstrate prejudice after the opposing party waived its contractual right to arbitrate by participating in litigation, in order for such waiver to be binding and irrevocable? According to the petition for certiorari, a conflict currently exists among the Circuits “as to whether a party must demonstrate prejudice.” (Links to the case documents courtesy of SCOTUS Blog.) The Court also denied certiorari in Ernst & Young LLP v. Clark, No. 10-693, on appeal from the Supreme Court of Kentucky. The question presented in the case was: Is the FAA “reverse preempted” by the McCarran-Ferguson Act, such that state law vitiates an arbitration agreement covering an ordinary tort suit between the rehabilitator of an insolvent insurer and an auditor? The Supreme Court of Kentucky held the FAA was “reverse preempted” by the McCarran-Ferguson Act and the auditor’s attempt to arbitrate was barred. Technorati Tags: arbitration, ADR, law, U.S. Supreme Court

by Philip J. Loree Jr. I. Introduction Part I (here) briefly discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011), and its implications on the pending Second and Fifth Circuit appeals in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), and Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010). This Part II examines in some detail Trustmark’s background and rationale, and Part III will focus on Trustmark’s implications on the Scandinavian Re and Dealer Computer appeals. II. Trustmark Background The following facts were gleaned from both the district court and Seventh Circuit opinions (the district court opinion is reported at 680 F. Supp. 2d 944 and can be found here): Pursuant to several contracts, Trustmark agreed to reinsure John Hancock, but not with respect to “London Market Retrocessional Excess of Loss Treaties,” which were excluded from the contracts. Each contract was subject to a broad arbitration agreement (the “arbitration agreement”), which said the arbitrators had to be “disinterested in the outcome.” A. The First Arbitration and Confidentiality Agreement A dispute arose concerning the scope of the “London Market Retrocessional Excess of Loss Treaties” exclusion, and the parties submitted the dispute to arbitration as required by the arbitration agreement. Pursuant to the agreement, each party selected an arbitrator, and the two arbitrators selected a neutral umpire. As is customary in reinsurance arbitration, the parties entered into a confidentiality agreement during the arbitration, which was executed by the parties and the panel members, and which prohibited Trustmark and Hancock from disclosing information concerning the proceedings and award, including evidence adduced. The confidentiality agreement did not contain an arbitration clause. (An example of a form of confidentiality agreement frequently used in reinsurance arbitration can be found here. Parties frequently amend this form to suit the needs of the case, and, in any event, the Trustmark opinions do not say whether the confidentiality agreement was based on this particular form.) In March 2004 the arbitration panel ruled in favor of Hancock, and the United States District Court for the Northern District of Illinois, Eastern Division, confirmed the award a few months later. Hancock, relying on its interpretation of the award, billed Trustmark for balances allegedly owed under the treaties, but Trustmark refused to pay. B. The Second Arbitration Hancock commenced a second arbitration in October 2004 to resolve the dispute that had arisen over the prior award and its reinsurance claims based on the award. As one would expect, Hancock selected the same arbitrator it had appointed in the prior arbitration. Trustmark, which had lost the prior arbitration, appointed a new arbitrator. The two arbitrators appointed a neutral umpire, who, like Trustmark’s arbitrator, had not served in the first arbitration. The parties knew from the outset that resolution of their dispute potentially implicated the confidentiality agreement, which Hancock’s arbitrator had signed, but which the umpire and Trustmark’s arbitrator had not. At an organizational meeting in 2005 Trustmark expressed concern about whether Hancock’s arbitrator could abide by the confidentiality agreement. Hancock’s arbitrator replied that although he “would scrupulously abide by confidentiality,” it might be “hard to segregate, difficult to deal with” knowledge obtained during first proceeding, which the other two panel members did not have. Trustmark asked some further questions and consented to the appointment of Hancock’s arbitrator. Not surprisingly, Hancock asserted that the panel should base its decision on the record of the prior arbitration. It asked the panel to “expressly authorize the use of all materials [from the prior arbitration], without limitation. . . .” Hancock argued that the confidentiality agreement prohibited disclosures to the outside world, but not disclosures in subsequent arbitration proceedings between the parties, even proceedings involving attorneys and arbitrators who were not parties to the agreement. Trustmark argued that the agreement covered all disclosures, including those made in subsequent proceedings to lawyers and arbitrators not involved in the original arbitration. The umpire and Hancock’s arbitrator, over the dissent of Trustmark’s arbitrator, ruled that the panel “accept[ed] and extend[ed] the confidentiality of [the prior arbitration] to the two members of the current arbitration. . . who were not parties to the previous arbitration.” Hancock also requested that the Panel prohibit Trustmark from litigating nineteen issues that Hancock contended had been decided in the first arbitration. A majority of the panel, over the dissent of Trustmark’s arbitrator, ruled that Trustmark was barred from relitigating several issues, including whether the retrocessional business on which Hancock’s claims arose was excluded from the treaties. (“Retrocessional business” is the reinsurance of other reinsurance business.) C. Trustmark Seeks an Injunction In 2009 Trustmark belatedly attempted to vacate the prior arbitration award, but presumably Trustmark recognized that the three-month deadline for vacating the award had expired long-ago, and that Fed. R. Civ. P. 60(b) did not authorize reopening the confirmation judgment. It accordingly recast its claim as one for injunctive relief. Trustmark argued that Hancock had obtained the prior award by fraudulently failing to produce four documents during discovery, and that the panel’s preclusion order was thus tainted by fraud. Trustmark requested an order enjoining further arbitration to prevent Hancock from furthering its alleged “fraudulent scheme.” Trustmark also sought an order enjoining: (a) further alleged breaches of the confidentiality agreement; (b) Hancock’s alleged obstruction of access to relevant documents; and (c) further arbitration before any members of the panel. In light of the four new documents Trustmark said should have been produced in the first arbitration, Hancock agreed to withdraw its preclusion claim and to participate in further discovery. This mooted in part Trustmark’s claims for injunctive relief, leaving for judicial resolution its confidentiality-agreement-based claim and its claim that no further arbitration should proceed before any of the panel members. As to the confidentiality agreement, Trustmark said the panel had no authority to resolve disputes […]

by Philip J. Loree Jr. Chief Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit is not only a brilliant judge, writer and law professor, but a master of (among many other things) arbitration law. He understands better than most judges how commercial arbitration is supposed to work, what the Federal Arbitration Act is supposed to achieve, and how to implement the Act to ensure the parties get not only what they bargained for, but also the potential to realize the benefits that private, voluntary dispute resolution can offer. His arbitration-law opinions are clearly written, imbued with common and commercial sense, and seem purposely designed to make sometimes elusive concepts readily understandable to courts, arbitrators, parties and counsel. They tend to ensure that the objective, reasonable expectations of the parties are enforced, not frustrated. The Chief Judge’s latest contribution to Federal Arbitration Act jurisprudence is Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011), and it is a welcome one. In a characteristically terse and well-written ten-page opinion, the Chief Judge articulated at least eight Federal Arbitration Act rules pertinent to reinsurance and other forms of commercial and industry arbitration. A few of these have been set forth before, while others are new: For the purposes of enjoining an arbitration proceeding, a party does not suffer “irreparable harm” simply because it must await the arbitration’s outcome before obtaining judicial resolution of arbitrability or arbitrator-qualification questions, see slip op. at 5-6; An arbitration agreement requiring arbitrators to be “disinterested” means the arbitrators must lack a “financial or other personal stake in [the arbitration’s] outcome,” see slip op. at 6; An “arbitrator’s interest in reemployment created” by an arbitration clause that allows parties to choose their own arbitrators is not a “personal stake in the outcome” disqualifying an arbitrator, see slip op. at 6-7; An arbitrator’s “knowledge about the dispute” is not a “disqualifying interest” in the arbitration’s outcome, see slip op. at 7-8; Courts should not “abet [a party’s] . . . strategy to eject the other party’s chosen arbitrator when that party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements. . . .,” see slip op. at 8; Under the procedural-arbitrability doctrine, an arbitration panel in a subsequent arbitration has the authority to interpret and apply the terms of a confidentiality agreement reached during a prior arbitration proceeding, even if the confidentiality agreement does not contain an arbitration clause, see slip op. at 8-10; Arbitrators have the authority to determine “the preclusive effect (if any) of an earlier [arbitration award,” see slip op. at 9-10; and The question whether arbitrators exceeded their powers based on the outcome of an award is not whether they interpreted the contract correctly, but whether they interpreted it at all. See slip op. at 10. Senior Circuit Judge Richard D. Cudahy and Circuit Judge Ilana Diamond Rovner joined in the Chief Judge’s opinion. Trustmark’s implications are many, particularly on the often interrelated topics of arbitrator qualifications and evident-partiality standards. The author believes the Chief Judge’s opinion should influence the outcome of pending appeals of two district court decisions vacating awards on the ground one or more arbitrators allegedly did not disclose (or fully disclose) service on a prior arbitration panel involving similar issues and contracts, or the same witness. One of these is the appeal of the controversial decision in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), which is pending in the United States Court of Appeals for the Second Circuit, and which was fully briefed and argued before Trustmark was decided. The other is the recently-filed appeal of Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010), which is pending in the United States Court of Appeals for the Fifth Circuit. Trustmark strongly suggests that the Second and Fifth Circuits should reverse the district court decisions in both Scandinavian Re and Dealer Computer. In each of those cases the district court vacated an award because one or more arbitrators, through their service in other cases, had access to information or ruled on issues that were allegedly relevant to the proceedings that led to the challenged award. Trustmark undermines the district courts’ reasoning in Scandinavian Re and Dealer Computer because it demonstrates that even had the arbitrators in those cases been federal judges — and therefore subject to more onerous neutrality requirements than those applicable to arbitrators — the knowledge and experience they obtained from hearing cases involving the same or similar issues or a common witness would not have rendered them “interested” in the outcome, partial to one of the parties, or otherwise unfit to serve. And if they could have served as federal judges in those matters, then the district courts unquestionably erred by holding that they lacked the requisite neutrality to serve as arbitrators. Scandinavian Re and Dealer Computer involved alleged non- or incomplete disclosure of arbitrator service on arguably similar or related matters, while Trustmark did not. But the disclosure issue is a red herring. Trustmark, construed in conjunction with Sphere Drake Insurance Ltd. v. All American Life Insurance Co., 307 F.3d 617, 622 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004) (Easterbrook, J.) – a case which the Chief Judge relied heavily on in Trustmark – demonstrates that the arbitrators in Scandinavian Re and Dealer Computer were not required to disclose their service in other arbitrations allegedly involving similar issues or a common witness. To fully understand the implications of Trustmark on other cases, one must first understand the background of, and rationale for, the decision. Part II of this post will therefore discuss in some detail what transpired in Trustmark, and Part III will explain in more detail why, in light of Trustmark the Second and […]

The Nevada Supreme Court has revised the state’s Foreclosure Mediation Program (FMP) which commenced on July 1, 2009 in an effort to address Nevada’s high home foreclosure rate. The rules were updated following a written comment period and public hearing held last December. According to the Supreme Court of Nevada, the revised rules will: Expand the time to file a petition for judicial review from 15 to 30 days after a party receives a mediator’s statement following mediation Simplify the process to suspend or terminate a mediator Tighten the process to protect homeowners when multiple notices of default are filed Permit homeowners to give power of attorney to someone to represent them providing the representatives are Nevada attorneys or qualified under NRS 645F.310, or there is no compensation provided Clarify the forms that must be provided by parties in mediations Address temporary modifications and require that agreements to relinquish a home must include a date when the owner-occupant will vacate the premises The updated rules also created a 14-member Advisory Committee which will meet regularly and recommend improvements and changes to the FMP. The Committee will “identify state and federal programs related to the foreclosure of residences in Nevada, the modification of residential home loans or the resolution of mortgage foreclosures, and make such recommendations to the Foreclosure Mediation Program and its mediators and participants as the Committee deems appropriate.” The Advisory Committee will be chaired by the current FMP Manager and will include: Two FMP mediators One title company representative or trustee on deeds of trust Two persons who regularly conduct residential mortgage lending in Nevada Two persons who previously participated as homeowners in the mediation process Two attorneys who represent lenders in mediations Two attorneys who represent homeowners in mediation Two real estate agents The revised rules will take effect on March 1, 2011. They are available for download here. You may read the entire Nevada Supreme Court press release here. Disputing has previously discussed foreclosure mediation in Nevada here and here. Technorati Tags: ADR, law, mediation