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ACandS, Inc. v. Travelers Casualty and Surety Company

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Mary Kay Vyskocil

Date Promulgated: January 19, 2006

Issues Addressed: Impact of Automatic Bankruptcy Stay on Claims in Arbitration Proceedings

In ACandS, Inc. v. Travelers Casualty and Surety Co., the Third Circuit held that an arbitration award in favor of Travelers Casualty was void because it violated the automatic stay provision of the Bankruptcy Code even though the arbitration had been brought by the debtor, ACandS, against Travelers Casualty. Case Nos. 04-3926, 04-3929, — F.3d –, 2006 WL 133546 (3d Cir. Jan. 19, 2006).

ACandS was an installer of asbestos insulation that was insured by Travelers Casualty between 1976 and 1979. Pursuant to a 1988 letter agreement, the parties assigned 55% of all asbestos claims payments to the policies’ “products” coverage, and 45% to the policies’ operations coverage. In July 2002, three arbitrators were appointed at ACandS’s request to hear ACandS’s demand for a change of the allocation to near 100% operations coverage. In response, Travelers asserted that 0% should be allocated to operations coverage.

Thereafter, in September 2002, ACandS filed a Chapter 11 petition for bankruptcy. Four days later, ACandS wrote to the arbitrators that “the arbitration is not subject to the automatic stay provisions of Section 362(a) of the bankruptcy code.” The parties continued to arbitrate and, following an evidentiary hearing and oral argument, the arbitration panel issued an award holding that the allocation to operations coverage should be 0%. ACandS moved to vacate the award in the United States District Court for the Eastern District of Pennsylvania. The District Court denied ACandS’s motion, and ACandS appealed the decision to the Third Circuit.

On January 19, 2006, the Third Circuit declared, in an opinion by Judge Samuel A. Alito, Jr., that the arbitration award was void because it violated Sections 362(a)(1) and 362(a)(3) of the Bankruptcy Code. Citing Exxon Shipping Co. v. Exxon Seamen’s Union, 11 F.3d 1189 (3d Cir. 1994), the Third Circuit observed that “the automatic stay provision of the Bankruptcy Code promotes a public policy sufficient to preclude enforcement of an award that violates its terms or interferes with its purposes.” ACandS, 2006 WL 133546, at *3. Applying these principles, the Third Circuit found that the arbitration award violated Section 362(a)(1), which stays an “action or proceeding against the debtor.” While acknowledging that the arbitration’s “procedural flexibility” allowed Travelers to “make a colorable argument that it respected the stay by merely defending its interests” in an arbitration commenced by the debtor, the Third Circuit concluded that subsection (a)(1) was violated because Travelers’ argument that 0% should be allocated to operations coverage was analogous a counterclaim in the trial context.

The Third Circuit also found that the arbitration award constituted “an act to obtain possession of property of the estate” in violation of Section 362(a)(3). The Third Circuit determined that the “contractual right secured by the Letter Agreement allocating 45% of the asbestos claims to operations” constituted “property of [ACandS’s] bankruptcy estate.” As such, the award’s “grant of affirmative relief to Travelers” – i.e., the reallocation of claims under the Letter Agreement from 45% operations to 0% operations – was an “an act to obtain possession of ACandS’s contractual right to a 45% allocation” in violation of the automatic stay.

* Mary Kay Vyskocil is a partner at Simpson Thacher & Bartlett LLP. She has handled a number of leading insurance cases, including several jury trials (most recently the Silverstein WTC trial) and argued several precedentially important reinsurance cases. She is the co-author of Modern Reinsurance Law & Practice, and is listed in Chambers Guide to America’s Leading Business Lawyers, Euromoney’s Guide to the World’s Leading Insurance and Reinsurance Lawyers (as one of Top 10 Lawyers in U.S.), and NLJ’s America’s Top 50 Women Litigators.