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NATIONAL UNION FIRE INSURANCE CO. v. DANA CORP.

April 12, 2005.

NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PENNSYLVANIA, Petitioner,
v.
DANA CORP., Respondent.



The opinion of the court was delivered by: DENNY CHIN, District Judge

MEMORANDUM DECISION

In this diversity case, petitioner National Union Fire Insurance Co. of Pittsburgh, Pennsylvania ("National Union") seeks to confirm an arbitration award against respondent Dana Corp. ("Dana") pursuant to §§ 9 and 13 of the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 9, 13. Dana contends the award should be vacated because the arbitration panel exceeded its authority by ignoring the language of and adding a new term to the underlying insurance policy. For the reasons set forth below, the petition to confirm the award is granted and respondent's petition to vacate the award is denied. The award is confirmed. BACKGROUND

  A. The Facts

  The parties' agreement to arbitrate stipulated that the underlying facts, recounted below, are not in dispute.

  National Union is an insurance company organized and licensed under the laws of Pennsylvania, with its principal place of business in New York. (Verified Petition ¶ 1). Dana is an automotive components' manufacturer organized and licensed under the laws of Virginia, with its principal place of business in Ohio. (Id. ¶ 2; Award at 2).

  In 1968, Dana established a company, Danaven, to manufacture products for the local Venezuelan automotive market. (Award at 2). By 1976, Dana had sold 51% of its shares in Danaven to a Venezuelan holding company. (Id. at 2-3). In or about October 2000, Danaven's board of directors learned that Danaven's executive director, Alberto Satine, had orchestrated a pattern of false financial reports and projections. (Id. at 3).*fn1 Relying on Satine's misrepresentations, Danaven's board of directors had authorized an extensive, debt-based capital project in 1999. (Id.). Later circumstances caused the board of directors to approve a restructuring of Danaven's debt, and as part of that restructuring, Dana was required to provide a letter of assurance for a $70 million secured term loan facility led by Citibank. (Id.).

  Satine's resignation was accepted on November 13, 2000, but the revelation of errors in Danaven's financial reports and projections in October 2000 threatened the company's continued operations. (Id.). To save Danaven, Dana bought out the Venezuelan holding company's interest in Danaven, supplied additional capital, and replaced the secured term loan facility. (Id.).

  Claiming substantial losses, Dana filed a claim under a CrimeGuard policy (the "policy") issued by National Union. (Id.). Under the terms of the policy, Dana was entitled to indemnification of up to $20 million for "loss of assets unless otherwise excluded by the terms and conditions." (Verified Petition Ex. A at 1). The policy period was from December 31, 1997 to December 31, 2000. (Id. at Item 4).

  The policy defines "loss" as "the direct deprivation of the insured by a single act or a series of related acts resulting from dishonesty, dissolution or forgery." (Id. at 2). "Assets" are defined as "money, securities or other property for which the insured is legally liable, or which is owned or held by the insured in any capacity, whether or not the insured is legally liable therefore." (Id. at 1). "Dishonesty" is defined as "the theft by any employee of any insured acting alone or in collusion with others." (Id.). "Dissolution" is defined as "the wrongful abstraction of assets resulting from theft by any natural person other than an employee." (Id.). "Theft" is defined as the "unlawful taking, including by violence or threat of violence, of assets to the deprivation of the insured." (Id. at 2).

  The policy authorized Dana to appoint an investigative specialist to examine the underlying facts and quantum of loss and issue a report detailing its findings. (Id. at 7). Dana hired Dempsey, Myers and Company, LLP to investigate and issue a report on the alleged fraud by Satine. (Award at 1). Dempsey initiated an investigation, assisted by forensic auditors Deloitte & Touche and Professor Joshua Rosen. Dempsey issued a report (the "Dempsey Report") on May 28, 2003. (Id.). The Dempsey Report set forth the facts leading to the dispute and found the "total quantum of loss" to be $31,166,933. (Id. at 3-4). This "loss," however, did not consist of any funds stolen or wrongfully taken by Satine. Rather, the "quantum of loss" was Dana's share of (1) the difference in actual controllable costs versus the projected controllable costs for 2000 and 2001, which were significantly understated because of the inaccuracies in Satine's reports and (2) the increase in interest expense because additional loans were required. (Dempsey Report at 23-25).

  The parties could not reach agreement on liability under the policy and eventually National Union denied coverage. (Id. at 1). As required under the policy, the parties submitted the dispute to arbitration. (Verified Petition Ex A). B. The Arbitration Proceeding and Award

  Pursuant to the agreement to arbitrate, the parties submitted the dispute to arbitration before a mutually-selected panel, consisting of three former judges: Hon. John J. Gibbons, Hon. George C. Pratt, and Hon. Robert E. Tarleton (the "Arbitrators" or the "panel"). (Award at 1). Under the terms of the agreement to arbitrate, Dempsey's factual findings and quantum of loss were not disputed. (Id. at 4). The sole issue to be resolved by the Arbitrators was:
Is there coverage for Dana's claim under the policy as respects the facts and quantum of loss described in the Dempsey Report?
(Id. at 2). The agreement to arbitrate also stipulated that because the Dempsey Report was definitive as to facts and quantum of loss, the arbitration hearing would consist of oral argument, without the testimony or affidavits of witnesses. (Id.). Both parties submitted pre-arbitration briefs prior to the arbitration hearing. (Id.; Alenstein Aff. Exs. D, E). The Arbitrators heard argument on October 18, 2004, and issued a twelve-page decision and award on December 14, 2004 (the "Award"). (Award at 2, 12).
  The Award found "no coverage under National Union's CrimeGuard policy . . . as respects the facts and quantum of loss described in the Dempsey Report." (Id. at 12). Specifically, the Award found:
Dana's analysis does not hold up under Dempsey's findings. In the first place, referring to Dana's claim that it lost $70 million from its guarantee of the credit facility, loaned Danaven an additional $10 million, stood to [lose] substantial tax benefits, and faced an uncertain future with two key customers, placing Dana's entire investment in Danaven in jeopardy, Dempsey concluded, "[T]hose losses have not come to fruition. Danaven, now wholly owned by Dana, continues to operate. The export credit facility was replaced with other financing. The funds invested in Danaven have not been `lost' per se, but rather deployed in what continues to be a struggling business. Accordingly, even though it is clear that Satine's actions caused Dana to make decisions and investments that would not have been made but for Satine's dishonesty we do not believe that potential losses should be part of the quantum of loss". . . . There is no finding that Dana was ever called upon to make good on the letter of assurance. On the contrary, after Dana bought full control of Danaven it simply replaced the export facility with other financing.
(Id. at 9 (quoting the Dempsey Report at 23) (emphasis in original)). The Arbitrators found it "significant" that the Dempsey Report did not find any of the excess expenses by Satine to be illegal. (Id. at 9-10). According to the Award:
The worst that could be said, based on Dempsey's findings, is that those expenses were imprudent, possibly reckless, given the underlying realities. But Dempsey "found no evidence of embezzlement, payroll fraud, or vendor fraud," and even if those crimes occurred, it was still Danaven's money, not Dana's, that would have been stolen or embezzled.
(Id. at 10 (quoting the Dempsey Report at 13)).

  The Arbitrators rejected Dana's argument that the circumstances surrounding Satine's fraud qualified as "loss" under the policy, triggering coverage. (Id.). Dana argued that Satine's fraudulent conduct caused the bank to lend the $70 million, and that under the letter of assurance Dana was "legally liable" for the money. (Id.). Responding to this contention by Dana, the Award concluded that "[e]ven if Dana is correct that Satine's conduct constituted `theft' . . . obtaining the loan from Citibank is not a `theft' such as is defined in ...


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