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Northwestern National Insurance Co. v. Insco

October 3, 2011

NORTHWESTERN NATIONAL INSURANCE COMPANY, PLAINTIFF,
v.
INSCO, LTD., DEFENDANT.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

I. INTRODUCTION

Northwestern National Insurance Company ("NNIC") and Insco, Ltd. ("Insco") are parties to a pending arbitration concerning disputes arising from a reinsurance agreement in effect between March 1, 1978, and April 1, 1979 (the "Agreement"). Before the Court is NNIC's motion to reopen this case and disqualify the law firm of Freeborn & Peters, LLP ("Freeborn") from representing Insco in the arbitration.

NNIC asserts (1) that issues of attorney disqualification are properly decided by the Court; and (2) that because of arbitration panel deliberations acquired by Freeborn, they must be disqualified from further representing Insco in the arbitration. Because Freeborn's behavior in the circumstances described below constituted a serious breach of its ethical duties and has tainted the arbitration proceedings, NNIC's motion is granted.

II. BACKGROUND

A. The Arbitration

In 1978, Insco and NNIC executed the Agreement whereby Insco agreed to reinsure a certain percentage of NNIC's liabilities in exchange for premium payments.*fn1 The Agreement provided that any disputes arising between the parties should, upon written request of the parties, be submitted to arbitration.*fn2

In June 2009, NNIC commenced arbitration against Insco for amounts owed under the Agreement as well as interest and attorneys' fees.*fn3 Pursuant to the Agreement, NNIC selected Diane Nergaard as its party appointee, Insco selected Dale Diamond as its party appointee, and an impartial umpire, Martin Haber, was selected by lottery.*fn4 Throughout these proceedings NNIC has been represented in both the arbitration and the related court matters by Barger & Wolen LLP ("Barger"), and Insco has been represented by Freeborn.

On February 2, 2010, the arbitration panel held an organizational meeting to discuss the case.*fn5 At that meeting, the parties dealt with confidentiality issues, scheduling matters and other procedural issues.*fn6 The parties agreed that they could communicate with their "party appointeds," however they could not discuss any issues relating to pending motions after those motions had been fully briefed and were pending before the panel.*fn7 The panel also made disclosures to the parties about potential conflicts of interest, and they promised to continue to update their disclosures throughout the arbitration.*fn8 By February 2011, there had been extensive motion practice before the panel,*fn9 as well as numerous interim orders issued by the panel.*fn10

B. Freeborn Obtains Arbitration Panel Communications

In the Fall of 2010, Freeborn was informed by Insco's party appointee, Diamond, that he was concerned about Nergaard's close relationship with Barger and that "she was too dependent on Barger & Wolen as a source of business."*fn11 Diamond continued to express such concerns to Freeborn through February 2011.*fn12 In December 2010, Insco became aware of rumors that Nergaard had failed to disclose additional appointments by Barger to arbitration panels and other potential conflicts of interest.*fn13 Upon Insco's request for updated disclosures, Nergaard disclosed multiple arbitration appointments, including two arbitration appointments by Barger that she had failed to disclose.*fn14 At that point, Haber informed the parties of additional disclosures and asserted that full disclosures had been made by the panel.*fn15

On February 11, 2011, Diamond shared certain private e-mail communications among panel members with Freeborn because they had "bothered him for some time."*fn16 Specifically, the e-mails concerned Nergaard's frustration with Insco and its attorneys "attacking" and "slandering" her about her additional arbitration appointments by Barger.*fn17 The communications show that Nergaard was upset about Insco's challenge as to whether she could decide the "case fairly on the merits."*fn18

On February 15, 2011, Insco sent a letter to the panel and NNIC demanding that all of the arbitrators resign immediately because of "evident partiality."*fn19 Diamond immediately resigned informing the panel that (1) he did not want NNIC to have a basis to appeal the panel's final ruling because of any alleged conflict of interest that Diamond had with Insco, and (2) he believed the hearing had been unfair and that "NNIC has successfully twisted the entire arbitration process."*fn20 Insco then asked the panel to (1) preserve all communications "regarding this arbitration," and (2) turn over any communications that Nergaard had with Barger, NNIC or any third party.*fn21

Subsequently, Joseph McCullough, an attorney at Freeborn, spoke to Diamond who "volunteered to provide documents he said would demonstrate that Ms. Nergaard was under the control of NNIC and its counsel."*fn22 McCullough agreed, and Diamond turned over to Freeborn 182 pages of panel e-mails, including approximately 130 e-mails (duplicates excluded) in total, approximately thirty of which were from Haber.*fn23 Freeborn's attorneys personally reviewed all the information contained in the e-mails and shared them with Insco.*fn24

NNIC's attorneys expressed suspicion in February 2011 that Diamond had disclosed panel communications after receiving letters from Insco that referenced these panel discussions.*fn25 Insco did not directly address NNIC's concern at the time, but engaged in a flurry of communications accusing Nergaard of partiality and demanding further disclosures as well as her resignation based on numerous undisclosed conflicts of interest pursuant to accepted American Arbitration ...


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