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Bankers Conseco Life Ins. Co. v. Feuer

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Cecilia Froelich Moss, David Byowitz

Date Promulgated: March 15, 2018

Bankers Conseco Life Ins. Co. v. Feuer, 2018 WL 1353279 (S.D.N.Y. Mar. 15, 2018)

Court: United States District Court for the Southern District of New York (Ramos, J.).

Issue Decided: Whether non-signatories to an arbitration agreement may invoke equitable estoppel to compel arbitration.

Factual Background

Individual defendants, along with their company, Beechwood Capital Group (collectively, “Defendants”), told plaintiff insurance companies that they were forming a reinsurance company, Beechwood Re.  Plaintiffs signed Reinsurance Agreements with Beechwood Re containing arbitration clauses which referred “all disputes or differences between the Parties” to arbitration.

Plaintiffs filed suit in the Southern District of New York, alleging Civil RICO/RICO Conspiracy, Fraud/Fraudulent Inducement/Concealment and state law claims.  Specifically, Plaintiffs alleged that Defendants misrepresented the financial situation and corporate structure of Beechwood Re and that Defendants used trust assets that Plaintiffs had assigned to Beechwood Re for their personal enrichment.  Plaintiffs also filed an arbitration demand against Beechwood Re with similar allegations.

Defendants moved to compel arbitration, arguing that Plaintiffs were equitably estopped from avoiding arbitration.  Plaintiffs opposed arbitration, arguing that, as non-signatories to the Reinsurance Agreements, Defendants could not compel arbitration.

Key Holdings

The Court granted Plaintiffs’ motion to compel arbitration.  The Second Circuit employs a two-part “intertwined-ness” test to determine whether a non-signatory may invoke equitable estoppel.  Under that test, the court considers: (i) whether the signatory’s claims arise under the same subject matter of the agreement; and (ii) whether the non-signatory has a “close relationship” to a signatory.

The court held that the subject matter prong was satisfied because the Reinsurance Agreement arose out of the individual defendants’ business arrangement with Plaintiffs in their capacity as corporate officers of Beechwood Re, and the bulk of the claims in the Complaint arose from the formation, execution, and existence of the Reinsurance Agreements.  Further, the formation of Beechwood Re was essential to Plaintiffs’ claims of RICO violations, as Beechwood Re constituted the necessary “enterprise.”  Finally, the court noted that the substantial similarities between the Arbitration Demand and the Complaint supported a finding that the subject matters were “inextricably linked.”

The court also found the requisite “close relationship” between the individual defendants and Beechwood Re, based primarily on Plaintiffs’ allegations that Defendants were connected.  As the court explained, “Plaintiffs cannot make conspiracy allegations connecting signatories and non-signatories and then avoid arbitration by claiming those parties do not possess the requisite close relationship” (citing Denney v. BDO Seidman, LLP, 412 F.3d 58, 70 (2d Cir. 2005)).

Finally, the court addressed Plaintiffs’ argument that the “unclean hands” doctrine, which bars a party accused of fraud from obtaining equitable relief, prevented defendants from invoking equitable estoppel.  The court rejected this argument, noting that “unclean hands” bars arbitration only where the party seeking equitable relief has committed fraud on the court, or where it has tortiously interfered with the agreements at issue.

 

 

Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation.  Ms. Moss also handles large scale commercial disputes in court and in international arbitration.

David Byowitz is an associate of Chaffetz Lindsey LLP, and has experience representing clients in reinsurance disputes and commercial litigation.