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