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B.D. Cooke & Partners Limited v. Certain Underwriters at Lloyd's

March 31, 2009

B.D. COOKE & PARTNERS LIMITED, AS ASSIGNEE OF CITIZENS COMPANY OF NEW YORK (IN LIQUIDATION),
v.
CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, DEFENDANTS.



REVISED MEMORANDUM OPINION AND ORDER

This action comes before the Court following defendants' removal of plaintiff's claims pursuant to 9 U.S.C. § 205. Plaintiff had originally brought its claims in New York Supreme Court and now moves to remand. Defendants simultaneously move to stay plaintiff's action and compel arbitration. For the reasons below, plaintiff's motion is denied and defendants' motion is granted.

BACKGROUND

The origins of the present dispute lie in the long, convoluted history of a nonparty's liquidation. That non-party, Citizens Casualty Insurance Company ("Citizens"), was declared insolvent almost 40 years ago by the New York Supreme Court. (Verified Complaint ¶¶ 1, 8.) As an insurance company incorporated in New York, Citizens's liquidation was governed entirely by New York law. (N.Y. INSURANCE LAW, ART. 74 (2009).) Hence, at the request of the Superintendent of Insurance of the State of New York (the "Superintendent"), the state court placed Citizens in liquidation on June 17, 1971, appointed the Superintendent as liquidator, and vested the Superintendent with "title to all property, contracts and rights of action of Citizens." (Verified Complaint ¶ 8.)

Citizens was involved primarily in the business of reinsurance. Reinsurance is a form of insurance where one insurer, the reinsurer, agrees to indemnify another insurer, the cedent, for losses under policies issued by the cedent. (N.Y. JUR. INS. § 570; B.D.

Cooke & Partners Limited v. Nationwide Mut. Ins. Co., No. 600655/02 (N.Y. Sup. Ct. Oct. 15, 2003).) As the reinsurer, Citizens would receive a share of the cedent's premiums in return for indemnification of a portion of cedent's payments under its policies. Citizens frequently did not keep all of the indemnification risk it procured, laying off some of it with other reinsurers, including defendants. (Verified Complaint ¶¶ 11-13, 16-17.) Although the general rule is that a cedent cannot recover from a reinsurer until the cedent has actually paid its claims, an estate's liquidator can usually recover from the estate's reinsurers notwithstanding the absence of such payment because standard contractual provisions usually provide for recovery in this instance. (N.Y. JUR. INS. § 2209.) Because such a clause existed in all of Citizens's contracts, the Superintendent acquired the right to collect on any reinsurance claims Citizens might have had, including those against defendants.

The complicated and protracted nature of Citizens's insolvency arose from its reinsurance of environmental concerns and asbestos exposure in particular. (B.D. Cooke & Partners Limited v. Nationwide Mut. Ins. Co., No. 600655/02, at 4 (N.Y. Sup. Ct. Oct. 15, 2003).) While Citizens' reinsurance contracts were effectively terminated as a result of the liquidation, Citizens remained liable for policies insuring injuries that occurred prior to its liquidation but were not discovered until years later. (Id.)Many asbestos injuries, of course, occurred before 1971 but were not discovered by the injured until years later. Hence, reinsurance creditors, i.e., insurance companies, continued to submit claims for decades after the liquidation began, and consequently additional claims vested with Citizens as cedent under its contracts with its fellow reinsurers with whom it had laid off its risk, including defendants. (Id.) By 1996, there were still claims being filed, and the Superintendent was looking for a way to close the estate. To achieve this goal, the Superintendent reached an agreement with a group of Citizens's largest creditors-a group represented by plaintiff B.D. Cooke & Partners Limited ("Cooke"). (See Tafuro Aff. Ex. 5.) The Superintendent agreed to assign to plaintiff the remaining claims possessed by the estate, and in return, plaintiff agreed to surrender its claims against the estate. (Id.)The New York Supreme Court approved the Superintendent's plan to close the estate, including the assignment of Citizens's claims to plaintiff, and the Superintendent's request that the court retain jurisdiction over any continuing disputes involving claims. (Tafuro Aff. Exs. 5, 14.) On April 9, 1998, the liquidation proceeding finally terminated. (Tafuro Aff. Ex. 4.)

Some time later, by complaint dated February 26, 2008, Cooke, as assignee of Citizens's liquidator, brought three claims in New York Supreme Court against defendants, certain underwriters at Lloyd's, London (the "Lloyd's Underwriters"). (Verified Complaint ¶¶ 36-51.) The first claim asks the court for a declaration that the assignment permits Cooke to pursue Citizens's claims against the Lloyd's Underwriters "without limitation". (Id. ¶¶ 37, 42, and Demand for Judgment.) Cooke alleges that defendants are wrong to contend that the assignment by the liquidator either caps the amount it can recover or that, in the alternative, the assignment constitutes a novation relieving defendants of liability altogether. (Id. ¶¶ 37-39.) Cooke's second and third claims are claims for "breach of contract" and "account stated", requesting the amounts owed plaintiff as assignee under the defendants' original "excess-of-loss" reinsurance contracts with Citizens. (Id. ¶¶ 43-51.) Cooke states that while it believes the dispute with defendants lies in the interpretation of other documents, to the extent it lies in the excess-of-loss contracts, Cooke reserves its right to arbitrate pursuant the arbitration clause found in these contracts. (Id. ¶¶ 44, 50.)

Defendants promptly removed the case to this Court, alleging in its notice of removal that the arbitration clauses found in the excess-of-loss reinsurance contracts were governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958 (the "Convention"), and its implementing legislation, Chapter Two of the Federal Arbitration Act, 9 U.S.C. § 201, et seq (the "FAA"), and that therefore the action was removable under the FAA. (Notice of Removal.) After conferring with the Court in conference, the parties agreed to brief plaintiff's motion to remand in parallel with defendants' motion to compel arbitration and stay the state action.

DISCUSSION

Defendants removed pursuant to 9 U.S.C. § 205, which instructs courts that "[w]here the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending." Of course, the grounds for removal are the same as the basis for this Court's jurisdiction, i.e., whether or not the state action falls under the Convention. 9 U.S.C. § 203 ("An action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States."). Whether or not a state action falls under the Convention depends on four factors: (1) the existence of a written agreement to arbitrate the dispute; (2) provision of arbitration in the territory of a signatory of the Convention; (3) the commercial nature of the dispute; and (4) the international nature of the dispute. Smith/Enron Cogeneration Limited Partnership, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 92 (2d Cir. 1999).

Plaintiff makes three arguments in favor of remand. First, it disputes the first factor bearing on the applicability of the Convention. It argues that while Citizens's contracts with defendants contain arbitration clauses, this dispute is not within the scope of those clauses. Second, even if the subject matter of its action falls under the Convention, remand is still appropriate because, having stepped into the liquidator's shoes by virtue of the assignment, it cannot be compelled to arbitrate under New York law. Third and finally, plaintiff argues that defendants have waived their removal rights pursuant to the "SERVICE OF SUIT" clause in their reinsurance contracts. The Court addresses each argument in turn.

I. The Parties Dispute is Within the Scope of the Arbitration Clause

The arbitration clauses in question are identical and read as follows: Any dispute arising under this Contract shall be submitted to a court of arbitration composed of two arbitrators, one to be appointed by the Reassured and the other by the Reinsurers. The arbitrators shall, before entering upon the reference, appoint an umpire. The arbitrators and the umpire shall consider this Contract an honourable engagement rather than merely a legal obligation [and] they are relieved of all judicial formalities and may abstain from following the strict rule of law. The award of the arbitrators or, in the event of their disagreement, of the umpire, shall be precedent to any liability or right of action of either party. The costs of the references and of the award shall be in the discretion of the arbitrators or umpire, as the case may be, who may direct to and by whom and in what manner the same shall be paid. The seat of arbitration shall be New York, N.Y. (Veach Aff. Ex. 4.)*fn1 The issue is therefore whether the current dispute "aris[es] under" the contracts.

As it does in its complaint, plaintiff argues that the dispute at issue concerns the scope of the liquidator's assignment and perhaps a related agreement not at issue. (Verified Complaint ¶¶ 37-38; Pl. Remand Br. at 21-23.) Plaintiff urges that defendants have conceded that there is a dispute over the assignment, (Pl. Remand Br. at 21-22), and failed to demonstrate any dispute over the terms of the contracts, (id. at 22). Plaintiff points to the fact that defendants have paid identical claims to other reinsureds under the same contracts, (McNamara Aff. ¶¶ 8-10), and that defendants had "agreed" to plaintiff's ...


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