United States District Court, S.D. New York
MEMORANDUM AND ORDER
ALISON J. NATHAN, District Judge.
Before the Court are five petitions, motions, or cross-motions: Petitioner Companion Property and Casualty Insurance Company ("Companion")'s petition to confirm an interim arbitration award, Dkt. No. 1; Respondent Allied Provident Insurance, Inc. ("Allied Provident")'s cross-motion to vacate or stay the interim arbitration award, Dkt. No. 9; Allied Provident's motion to disqualify the existing arbitral panel and appoint a new panel or stay the arbitration proceedings, Dkt. No. 16; Companion's cross-petition to compel Allied Provident to select a new party arbitrator, Dkt. No. 30; and Allied Provident's motion to strike portions of the declaration of Robert M. Hall, Dkt. No. 38. The Court will address the first two motions together, the second two motions together, and the last motion separately.
For brevity, the Court discusses the factual background and procedural history only as it is necessary to decide the motions. The facts are drawn from the parties' declarations and attached exhibits and are, unless otherwise noted, uncontested.
Companion is an insurance company with its principal place of business in South Carolina. Dkt. No. 1 ¶ 1. Allied Provident is an insurance company with its principal place of business in Barbados. Dkt. No. 1 ¶ 2. In April 2011, Companion and Allied entered into a written Private Passenger Automobile Liability Quota Share Reinsurance Agreement (the "Reinsurance Agreement"). Dkt. No. 1 ¶ 3. The Reinsurance Agreement was part of a "fronted" insurance program for non-standard private passenger auto insurance produced by Robert Moreno Insurance Services, a California insurance agency. Dkt. No. 34 at 3. As Companion explained,
"fronting" is an insurance industry term for a situation in which a U.S. licensed insurance company issues the policies but cedes (lays off) all or most of the insurance risk (as well as most of the premium) to another insurer called a reinsurer. Often, as is the case with Allied Provident, the reinsurer is not licensed in the U.S. This has both business and regulatory implications. If the unlicensed reinsurer does not pay its portion of the losses, the policy-issuing company has to pay 100% of the losses with only a small portion of the premium. It is for this reason that state laws and regulations require policy-issuing companies to obtain collateral from reinsurers for outstanding losses.
Dkt. No. 34 at 3 n.1 (citing Hall Decl. ¶ 5). At some point, Allied Provident allegedly failed to pay the amounts Companion claimed were due under the Reinsurance Agreement, prompting the present dispute between the parties. Dkt. No. 1 ¶ 7.
The Reinsurance Agreement contains an arbitration provision that requires the parties to resolve all disputes arising under the agreement through arbitration. Dkt. No. 1 ¶ 3. On October 2, 2012, Companion demanded arbitration by letter seeking, among other things, collateral to secure Allied Provident's obligations under the Reinsurance Agreement in an amount not less than $5 million. Dkt. No. 1 ¶ 8. As provided for in the Reinsurance Agreement, an arbitral panel was convened with each side appointing its own member of the three-person panel and the two party-appointed members appointing the third. Dkt. No. 1 ¶ 8.
The parties proceeded with arbitration without incident from October 2012 until August 2013. But in August 2013, Companion moved the panel for interim protection in the form of security for amounts allegedly owed and replenishment of amounts in the collateral reinsurance trust as required by the Reinsurance Agreement. Dkt. No 1 at ¶ 10; Dkt. No. 36 ¶ 7 (Christakos Decl.). At roughly the same time, Allied Provident's appointed arbitrator, Frederick G. Carroll, was diagnosed with a brain tumor that required surgery in September 2013. Dkt. No. 10 ¶ 4 (Caroll Decl.). There is dispute regarding the level of Carroll's participation in the arbitration proceedings from that point on, which will be discussed in detail below, but on October 2, 2013 the arbitral panel issued Panel Decision No. 4 granting Companion's motion (the "Interim Award"). Dkt. No. 1 ¶ 11. The Award states: "[Allied Provident] is hereby ordered (1) within 15 days, to post security for unreimbursed losses and expenses by placing funds in escrow under the control of the panel in the amount of $6, 606, 997, and (2) within 15 business days, to deposit to the reinsurance trust the amount of $2, 136, 755 or provide [Companion] an irrevocable letter of credit in that amount." Dkt. No. 1 ¶ 11.
Fifteen days following the Interim Order came and went with no compliance from Allied Provident. Dkt. No. 1 ¶ 13. On November 5, 2013, Companion filed a petition in this Court to confirm the Interim Award. Dkt. No. 1 at 4. Companion's petition sparked the resulting flood of motions and cross-motions now before the Court, with Allied Provident seeking to vacate or stay the Interim Award, disqualify the existing arbitral panel and appoint a new panel or stay the arbitration proceedings, and strike the declaration filed in this Court of one of the arbitrators, and Companion seeking to compel Allied Provident to select a new party arbitrator so that the arbitration can resume.
II. COMPANION'S MOTION TO CONFIRM THE INTERIM ARBITRATION AWARD AND ALLIED PROVIDENT'S CROSS-MOTION TO VACATE OR STAY THE INTERIM ARBITRATION AWARD
Companion petitioned this Court for a confirmation of the Interim Award pursuant to Section 9 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 9, and Allied Provident, in turn, moved to vacate the Interim Award pursuant to Section 10 of the FAA, 9 U.S.C. § 10. A petition to confirm or vacate an arbitration award under the FAA is "a summary proceeding that merely makes what is already a final arbitration award a judgment of the court." D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 110 (2d Cir. 2006) (internal quotation marks omitted) (quoting Florasynth, Inc. v. Pickholz, 750 F.2d 171, 176 (2d Cir. 1984)). Section 6 of the FAA provides that any application under the FAA to the district court "shall be made and heard in the manner provided by law for the making and hearing of motions...." 9 U.S.C. § 6. Therefore, a court may decide the merits of a petition to confirm or vacate an arbitration award "based solely on the papers submitted by the parties in support of their motions." Productos Mercantiles E Industriales, S.A. v. Faberge USA, 23 F.3d 41, 46 (2d Cir. 1994) (citing Legion Ins. Co. v. Ins. Gen. Agency, Inc., 822 F.2d 541, 541-43 (5th Cir. 1987)); U.S. Ship Mgmt., Inc. v. Maersk Line, Ltd., 188 F.Supp.2d 358, 363 (S.D.N.Y. 2002) ("Under the FAA's motion procedure, the Court may consider an arbitration action by summary proceeding on the basis of the fully briefed motion papers and without the requirement of a hearing." (citing Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174, 175 (2d Cir. 1998)); see also Fed.R.Civ.P. 43(c) ("When a motion relies on facts outside the record, the court may hear the matter on affidavits or may hear it wholly or partly on testimony or on depositions.").
Companion's motion to confirm the Interim Award and Allied Provident's cross-motion to vacate or stay the Interim Award raise two principal issues. First, does the Court have the power to confirm this Interim Award? Second, even if the Court has the power to confirm the Interim Award, should the Award be confirmed or vacated because of the way in which the Award was reached? For the reasons that follow, the Court holds that it may confirm the Interim Award and that it will not vacate the Award or stay its effect.
A. This Court Has the Power to Confirm the Interim Award
Generally, "a district court does not have the power to review an interlocutory ruling by an arbitration panel." Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 414 (2d Cir. 1980) (collecting cases). The policy reason behind this rule is that "[m]ost of the advantages inherent in arbitration are dissipated by interlocutory appeals to a district court." Id.
However, courts across the country have concluded that an exception to this rule is sometimes necessary to fulfill the general purposes of arbitration. An exception is required, for example, if a panel has granted "an award of temporary equitable relief such as a security award, separable from the merits of the arbitration...." British Ins. Co. v. Water St. Ins. Co., 93 F.Supp.2d 506, 514 (S.D.N.Y. 2000) (collecting cases). As the Second Circuit stated in Banco de Seguros del Estado v. Mutual Marine Office, Inc., "[i]t is not the role of the courts to undermine the comprehensive grant of authority to arbitrators by prohibiting an arbitral security award that ensures a meaningful final award." 344 F.3d 255, 262 (2d Cir. 2003) (citing Yasuda Fire & Marine Ins. Co. of Europe Ltd. v. Cont'l Cas. Co., 37 F.3d 345, 348 (7th Cir. 1994); Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1025 (9th Cir. 1991); Island Creek Coal Sales Co. v. City of Gainesville, Fla., 729 F.2d 1046, 1049 (6th Cir. 1984)). Indeed, "[d]istrict courts have not hesitated to confirm drastic interim security awards." Cragwood Managers, LLC v. Reliance Ins. Co., 132 F.Supp.2d 285, 288 (S.D.N.Y. 2001) (collecting cases). Thus, judicial confirmation of interim security awards is permitted when such confirmation is necessary to ensure the integrity of arbitration.
The arbitral panel in this case issued its Interim Award for prehearing security on October 2, 2013 and set a deadline of fifteen days from the issuance of the Award for Allied Provident to comply. More than a month after the decision was rendered, Allied Provident had still not complied with the panel's decision. Allied Provident did not seek reconsideration of the Award, nor did it file a motion to vacate the Award in any court of competent jurisdiction. Instead, Allied Provident simply ignored the ruling, leaving Companion with no choice but to petition this Court for confirmation of the Award. Without the ability to confirm such interim awards, parties would be free to disregard them, thus frustrating the effective and efficient resolution of disputes that is the hallmark of arbitration. Therefore, this Court holds that it has the power to confirm the arbitral panel's Interim Award for prehearing security in order to ensure the integrity of the arbitral process.
B. There Is More than a Barely Colorable Justification for the Award
Having concluded that the Court has the power to confirm the Interim Award, the Court next determines whether the Award should be confirmed. Guiding this review is the general principle that "[t]he scope of the district court's review of an arbitral award is limited." Banco de Seguros, 344 F.3d at 260 (citing Sperry Int'l Trade, Inc. v. Gov't of Israel, 689 F.2d 301, 304 (2d Cir. 1982)). "[T]he burden of proof necessary to avoid confirmation of an arbitration award is very high, and a district court will enforce the award as long as there is a barely colorable justification for the outcome reached.'" Kolel Beth Yechiel Mechil of Tarikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 103-04 (2d Cir. 2013) (hereinafter " Kolel Beth ") (citing Rich v. Spartis, 516 F.3d 75, 81 (2d Cir. 2008)).
Although the arbitral panel in this case did not provide a justification for its decision, other than to note that "[t]he panel reviewed and exchanged comments on the submissions of the parties in connection with Claimant's Motion for Pre-hearing Security and to Fund the Reinsurance Trust and Respondent's related Cross Motion, " Dkt. No. 1 at 49, such written justification is not needed for this Court to confirm the Interim Award. Rather, "[w]here an arbitrator has not set forth the specific rationale supporting the decision, the Court may confirm an award if a ground for the arbitrator['s] decision can be inferred from the case." British Ins. Co., 93 F.Supp.2d at 514-15 (quoting Lew Lieberbaum & Co. v. Randle, 85 F.Supp.2d 123, 126 (E.D.N.Y. 2000)); see also Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (hereinafter " Willemijn ") (noting "arbitrators are not required to provide an explanation for their decision" (citation omitted)).
Companion's briefing papers presented to the arbitral panel on the issue of prehearing security set forth the following argument:
[Allied Provident] stopped paying Companion's reinsurance claims in approximately the late summer of 2012, when premium income attributable to the Reinsurance Agreement ran dry, and has failed to keep the reinsurance trust required by Article 19 of the Reinsurance Agreement fully funded as required by the Reinsurance Agreement. No additional trust deposits or other collateral has been provided since May 2012, despite a significant increase in written premiums and loss reserves after that date. The relief requested is necessary to assure that funds are available and collectible in the event of a final award in favor of Companion.
Dkt. No. 23-2 at 2 (Christakos Decl. Ex. 2). Assuming the arbitral panel credited Companion's justification and factual support, a ground for the panel's decision can be inferred from the parties' moving papers. The Court need look no further to conclude that there is a "barely colorable justification" for the arbitral panel's decision to award prehearing security to Companion. Thus, absent a basis to vacate the Interim Award, it should be confirmed.
C. There Is No Basis to Vacate the Interim Award
The Court next determines whether, even though there is more than a barely colorable justification for the panel's decision, it should nonetheless vacate the Interim Award because of an infirmity with the process in reaching that decision. "A party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high." D.H. Blair & Co., 462 F.3d 95 at 110 (citing Willemijn, 103 F.3d at 12). Section 10 of the FAA provides four bases under which a party may move to vacate an award. 9 U.S.C. § 10(a). Allied Provident moved to vacate the Award on three of these grounds: (1) arbitrator misconduct, § 10(a)(3); (2) arbitrators exceeding their powers, § 10(a)(4); and (3) evident partiality of the arbitrators, § 10(a)(2). In its review of these arguments to vacate the Award, the Court bears in mind that "arbitration awards are subject to very limited review." Willemijn, 103 F.3d at 12.
1. Allied Provident Failed to Satisfy Its Heavy Burden of Showing that the Interim Award ...