Evan Smoak

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Court Confirms Arbitral Order of Pre-Hearing Security Against a Policyholder and in Favor of Insurer

by Evan L. Smoak and Kyle M. Medley

In a Barger & Wolen victory, the U.S. District Court in Manhattan has confirmed an arbitration panel’s interim order, which required a policyholder to post pre-hearing security in the amount sought by an insurer. On Time Staffing, LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 10 Civ. 9583 (JSR), 2011 U.S. Dist. LEXIS 50683 (S.D.N.Y. May 11, 2011).   

In On Time, the arbitration panel issued an interim order of pre-hearing security in favor of National Union against one of its policyholders, On Time. National Union had argued that the policyholder was financially unable or simply unwilling to pay on the amount National Union sought in the arbitration for premiums, fees, and expenses. 

The policyholder asked the court to vacate the order of pre-hearing security on two grounds. First, the policyholder argued that the panel had exceeded its authority by awarding pre-hearing security (under Section 10(a)(4) of the Federal Arbitration Act “FAA”). Second, the policyholder argued that the Panel’s order of pre-hearing security before a full evidentiary hearing constituted “misconduct” by the Panel (under Section 10(a)(3) of the FAA). Judge Jed S. Rakoff rejected both of the policyholder’s arguments.

First, the court found that the arbitration panel had not exceeded its authority, noting that the language of the arbitration clause gave the Panel broad authority to resolve “any” dispute and to make its award “final and binding”. The court stated:

Prior to the rendering of its final decision, the Panel, in the absence of language expressly to the contrary, possesses the inherent authority to preserve the integrity of the arbitration process to which the parties have agreed by, if warranted, requiring the posting of security. Otherwise, an arbitration panel with a well-founded concern that a party was financially unable to satisfy an eventual award would have no recourse to protect itself against the risk that its significant expenditures of time and effort would be for naught. 

On Time, 2011 U.S. Dist. LEXIS 50683 at *12 (underline added). 

Second, the court rejected the policyholder’s argument that the Panel had committed misconduct when it ordered security without a full evidentiary hearing. The court found that the arbitrators “need not follow all of the niceties observed by the federal courts”, but instead had to “merely grant a fundamentally fair hearing”. Id. at *13. In any event, the court found the policyholder had “an ample opportunity to oppose the motion for pre-hearing security, and did, in fact, vigorously oppose it”. Id. at *14.

This significant victory confirms a pre-hearing security order against a policyholder and in favor of an insurer.

For additional information about this decision, or the arguments considered by the court, please contact Evan Smoak (esmoak@bargerwolen.com) or Kyle Medley (kmedley@bargerwolen.com) in Barger & Wolen’s New York office (212-557-2800).

New Decision on Arbitrators' Authority

Recent Barger & Wolen Victory Answers Who Decides What to Do After Hall Street

by Evan L. Smoak and Alison J. Shilling

In March 2008, the United States Supreme Court held that parties may not contractually expand the scope of judicial review to include “errors of law.” Hall Street Assocs., LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008). Therefore, the Supreme Court declined to enforce an arbitration clause provision that allowed judicial review of an arbitrator’s errors of law. 

In the wake of Hall Street, parties have disputed whether an “error of law” provision in an arbitration clause invalidates the entire arbitration agreement, and whether such a dispute should be decided by the courts or by arbitrators.

A Barger & Wolen victory this month in a New York appellate court has answered who should decide the issue. See Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, __, N.Y.S.2d. __, No. 602934/08, 2009 WL 3255942 (1st Dep’t Oct. 13, 2009). That question is for the arbitrators where the arbitration clause incorporates AAA or similar rules.

In Life Receivables, the arbitration clause contained an “errors of law” provision. The appellants asked the court to enjoin pending arbitrations, arguing that Hall Street invalidated the arbitration clause. The motion court refused to enjoin the arbitrations, and the appellate court affirmed. The arbitration clause at issue provided for arbitration of all disputes and incorporated the AAA rules by reference. Noting that the AAA rules authorize arbitrators to determine the “existence, scope or validity” of an arbitration agreement, the appellate court held that the arbitrators would determine what to do in light of Hall Street, even though that question is usually for the court:

Although the question of arbitrability is generally an issue for judicial determination, when the parties’ agreement specifically incorporates by reference the AAA rules, which provide that the tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement, and employs language referring all disputes to arbitration, courts will leave the question of arbitrability to the arbitrators. Id. (internal citations omitted).

As a result, the appellate court ordered that the disputes return to arbitration, as Barger & Wolen’s client had argued.

For additional information about this decision, or the Hall Street arguments considered by the court, please contact Steven Anderson (sanderson@bargerwolen.com) or Evan Smoak (esmoak@bargerwolen.com) in Barger & Wolen’s New York office (212-557-2800).

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