United States District Court, S.D. New York
April 12, 2005.
NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PENNSYLVANIA, Petitioner,
DANA CORP., Respondent.
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
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
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 the policy."
(Id. at 11). Thus, according to the Arbitrators, "Satine's
conduct did not directly deprive Dana of any of its assets."
The Award also found additional factors that favored denying
When the $70 million "went out the door," it went to
Danaven, a corporation. There is no finding of
"theft" of any part of that money by a "natural
person" as would have been required for the necessary
act of dissolution under the policy. Moreover,
Dempsey made no findings that would support a
conclusion that there had been "an unlawful taking . . .
of assets to the deprivation of [Dana],"
something necessary to establish "theft" under the
policy. Nor do Dempsey's findings establish that Dana
suffered any "loss" of "assets". . . . Not only was
this not the type of "loss" that the policy undertook
to indemnify, but Dempsey found that "those losses
have not come to fruition."
(Id. at 11-12 (quoting Hearing Tr. at 35 and Dempsey Report at
23)). As the Arbitrators found no coverage under the policy, they
did not address the applicability of the various exclusions under
the policy. (Id. at 2).
C. The Instant Action
On January 11, 2005, National Union filed its petition to
confirm the award pursuant to §§ 9 & 13 of the FAA. On February 22, 2005, Dana filed a cross-motion to vacate the award
pursuant to §§ 10 and 12 of the FAA.
A. Applicable Law
Arbitration awards are subject to "very limited review" to
avoid undermining the goals of arbitration, namely, settling
disputes efficiently and avoiding lengthy and expensive
litigation. Willemijn Houdstermaatschappij, BV v. Standard
Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (quoting
Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir.
1993)). Accordingly, "the party seeking to vacate or modify an
arbitration award bears the burden of proof, and the showing
required of that party . . . to avoid summary affirmance of the
award is high." DeGaetano v. Smith Barney, Inc.,
983 F. Supp. 459, 461 (S.D.N.Y. 1997) (citation omitted); see also Folkways
Music Publishers, 989 F.2d at 111. In addition, "[t]he court's
function in confirming or vacating an arbitration award is
severely limited." Areca, Inc. v. Oppenheimer & Co.,
960 F. Supp. 52, 54 (S.D.N.Y. 1997) (quoting Amicizia Societa
Navegazione v. Chilean Nitrate & Iodine Sales Corp.,
274 F.2d 805, 808 (2d Cir. 1960)). This Circuit has held that an award
"must be confirmed if there is even a `barely colorable
justification' under the facts presented." Alberti v. Morgan
Stanley, Dean Witter Discover & Co., No. 97 Civ. 9385, 1998 WL
438667, at *3 (S.D.N.Y. July 31, 1998) (quoting Willemijn,
103 F.3d at 13), aff'd, 205 F.3d 1321 (2d Cir. 2000)). There are, however, limited circumstances under which an
arbitration award may be vacated. The FAA provides that an award
may be vacated if, inter alia, "the arbitrators exceeded
their powers, or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter submitted was
not made." 9 U.S.C. § 10(a)(4). The FAA's authorization to vacate
under § 10(a)(4) is "consistently accorded the narrowest of
readings . . . especially where that language has been invoked in
the context of arbitrators' alleged failure to correctly decide a
question which all concede to have been properly submitted in the
first instance." Westerbeke Corp. v. Daihatsu Motor Co.,
304 F.3d 200, 220 (2d Cir. 2002) (quoting In re Andros,
579 F.2d 691, 703 (2d Cir. 1978)). The "scope of authority of arbitrators
generally depends on the intention of the parties to an
arbitration, and is determined by the agreement or submission."
Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987)
Respondent asserts that the "[A]rbitrators exceeded their
authority," a claim under § 10(a)(4) of the FAA. (See Resp't
Mem. at 8, 11). It does not allege that the panel "manifestly
disregarded the law" or that the Award should be vacated under
other provisions of § 10(a). See, e.g., Halligan v. Piper
Jaffray, Inc., 148 F.3d 197, 202-03 (2d Cir. 1998), cert.
denied, 526 U.S. 1034 (1999). Respondent's claim is rejected
because (1) it is an improper attempt to reargue the merits of the issue presented to the Arbitrators, and (2) even
assuming the Court were to reach the merits, the Arbitrators'
interpretation of the policy was correct.
First, respondent does not assert that the Arbitrators decided
an issue that was not before them, but quarrels instead with the
Arbitrators' interpretation of the policy. Dana claims that the
award should be vacated because the Arbitrators modified the
language of the policy by giving "no meaning to the phrase
`property for which the insured is legally liable'" and by adding
a "new term to the policy limiting coverage to loss resulting
directly from the covered event." (Resp't Mem. at 9, 10). This
argument is an improper attempt by Dana to relitigate the merits
of the arbitration. An inquiry under § 10(a)(4) asks "whether the
Arbitrators had the power, based on the . . . arbitration
agreement, to reach a certain issue, not whether the arbitrators
correctly decided that issue." Westerbeke, 304 F.3d at 220
(quoting DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818,
824 (2d Cir. 1997)); see also Blue Bell, Inc. v. Western Glove
Works Ltd., 816 F. Supp. 236, 240 (S.D.N.Y. 1993).
Respondent asks this Court to apply the facts found by the
Dempsey Report to the policy, the exact question posed to the
Arbitrators. The Second Circuit addressed similar circumstances
in In re Andros, 579 F.2d at 703, and pointed "disappointed
parties" in arbitration proceedings to United Steelworkers v.
Enterprise Wheel & Car Corp.:
Justice Douglas's opinion concludes with a clear
warning to all disappointed parties to arbitral proceedings who may be tempted to relitigate
the merits in federal court: the question of
interpretation of the . . . agreement is a question
for the arbitrator. It is the arbitrator's
construction which was bargained for; and so far as
the arbitrator's decision concerns construction of
the contract, the courts have no business overruling
him because their interpretation of the contract is
different from his.
363 U.S. 593
, 599 (1960). Similarly, here it is the Arbitrators'
construction of the policy, not this Court's, that the parties
bargained for in their agreement to arbitrate. The Court's
"severely limited" function under § 10(a)(4) is to ensure that
the Arbitrators properly reached the issue presented to them.
This is not genuinely disputed, and in any event, the Court
concludes that the Award properly answers the question presented.
See Westerbeke, 304 F.3d at 220; Areca, 960 F. Supp. at 54.
Therefore, the Arbitrators did not exceed or imperfectly execute
Second, even if the Court were to reexamine the merits of the
underlying arbitration, the Court would reach the same conclusion
as the Arbitrators. The policy covered "loss of assets" on the
part of Dana due to (i) "theft" by an employee of Dana, or (ii)
the "wrongful abstraction of assets" resulting from "theft" by
any person other than a Dana employee, or (iii) forgery. "Theft"
is defined as the "unlawful taking" of assets. Here, there was no
theft or wrongful abstraction of assets or forgery. Rather,
Dana's "loss" resulted from the fact it had to expend additional
monies on its investment in Danaven, an affiliated company. As the Arbitrators found, the policy did not
cover this kind of loss.
In the arbitration, Dana took the position that the letter of
assurance was an "asset" under the policy. During oral argument
and in its Award, the panel was justifiably skeptical of this
unique position, which Dana had to take to show a "loss of
assets" to prevail on its claim of coverage. Understandably, the
Arbitrators did not accept Dana's contention. During one
exchange, Dana's counsel attempted to explain its position:
Judge Gibbons: Well, why was the letter of assurance
an asset, rather than a liability?
Mr. Thacker: [T]he letter of assurance may be a
liability, but under this policy, it is an asset. The
money that is the subject of the loan is an asset of
Dana's because Dana is liable for it under the clear
language of the agreement . . .
Judge Gibbons: That's a disconnect for me because
Dana is liable for it.
Mr. Thacker: It[']s counterintuitive, I agree.
(Hearing Tr. at 25).
There is some arguable support for Dana's position, but it is
not persuasive. The policy defines assets, inter alia, as
"property for which the insured is legally liable." (Verified
Petition Ex. A at 1). By issuing a letter of assurance to
guarantee the secured term loan facility, Dana could have been
"legally liable" for the $70 loan. As the Arbitrators concluded,
however, the Dempsey Report found that the losses asserted by Dana had "not come to fruition" and were only "potential losses."
(Dempsey Report at 23). Hence, according to the panel, although
"the value of Dana's investment in Danaven may have been
diminished because its costs were higher than they would
otherwise have been, Satine's conduct did not directly deprive
Dana of any of its assets." (Award at 11).
Thus, while Dana attempted to distinguish the "losses"
described in the Dempsey Report from the "loss of assets" for
which it was seeking coverage, the panel ultimately rejected this
position. The panel concluded that "Satine's conduct did not
directly deprive Dana of any of its assets." (Award at 11). This
conclusion is supported by the Dempsey Report and by the
applicable law submitted by both parties to the panel and to this
Therefore, as the parties properly submitted the question of
whether coverage existed for Dana's claim under the policy, and
the Arbitrators properly found no coverage in any event, the
Award cannot be vacated under § 10(a)(4). In addition, even if
the Court were to consider the merits of the underlying claim,
the Arbitrators' analysis was supported by the record and by the
underlying facts. The Award is confirmed. CONCLUSION
For the reasons set forth above, Dana's corss-motion to vacate
the Award is denied and National Union's petition to confirm the
Award is granted. The Award is confirmed, with costs. The Clerk
of the Court shall enter judgment accordingly.