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Catalina Holdings (Bermuda) Limited, v. Jennifer Hammer, Director of Insurance of the State of Illinois, as Liquidator of Legion Indemnity Company

Issue Discussed: Reverse preemption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act under the McCarran-Ferguson Act.

Submitted by Sylvia Kaminsky

Date Promulgated: March 22, 2019

Case: Catalina Holdings (Bermuda) Limited, v. Jennifer Hammer, Director of Insurance of the State of Illinois, as Liquidator of Legion Indemnity Company

Issue Discussed:  Reverse preemption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act under the McCarran-Ferguson Act.

Court:  United States District Court, N.D. Illinois, Eastern Division, Case No. 2018 Civ. 05642

Date Decided:  March 22, 2019

Issued Decided: Whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act are reverse-preempted by the McCarran-Ferguson Act such that a federal court lacks jurisdiction to confirm an arbitration award against the Director of Insurance of the State of Illinois acting as Liquidator for Legion Indemnity Company pursuant to Illinois liquidation statutes.

Submitted by Sylvia Kaminsky*

This case involves whether the the Convention on the Recognition and Enforcement of Foreign Arbitral Awards governed under Chapter 2 of the Federal Arbitration Act (“FAA”) and the FAA are reverse-preempted under the McCarron-Ferguson Act where the State Insurance Director is acting as Liquidator for an insurance company operating under state laws regulating an insurance company in liquidation proceedings.

The Director of Insurance of the State of Illinois as Liquidator of Legion Indemnity Company (‘Liquidator”) brought an arbitration proceeding against Catalina Holdings (a Bermuda company with its principal place of business in the United Kingdom) (“Catalina”) as successor to Alea Group Limited which provided reinsurance to Legion Indemnity Company (“Legion”) seeking outstanding balances on ceded claims.  Shortly after the reinsurance contract was entered into, Legion went into liquidation.   The arbitration provision in the reinsurance contract provided that the Pennsylvania Uniform Arbitration Act (“Pa UAA”) would dictate the rules and procedures that governed the arbitration. Catalina counterclaimed for unpaid premiums and attorney’s fees.  An arbitration panel ruled in favor of Catalina which then filed a petition to confirm the panel’s award under 9 U.S.C. Sec. 9 of the FAA and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. Sec. 201 et seq. (“Convention”).  The Liquidator moved to dismiss Catalina’s motion arguing that the FAA and the Convention are reverse-preempted by the McCarron Ferguson Act and that the federal Court lacks subject matter jurisdiction to confirm the award.  The Director alternatively sought that the Court abstain from the case under Burford v. Sun Oil, 319 U.S. 315 (1943) or stay the matter pending completion of the liquidation proceedings.

In deciding that it had jurisdiction to review Catalina’s motion, the Court first noted that the Convention and not the Pa UAA governed its review of subject matter jurisdiction. The Pa UAA only controlled the arbitration procedures and rules and not the Court’s review of the award. Under the Convention the Court found that where an agreement arises out of a commercial relationship such as the reinsurance contract in issue and is an agreement as described under Sec. 2 of the FAA, the Convention grants district courts original jurisdiction to decide issues between citizens of the U.S. and the United Kingdom under such a case.

The Court next addressed the merits of the Liquidator’s contention that the Convention and FAA are reverse-preempted by the McCarron-Ferguson Act (‘Act”).  The Act provides: “no act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance…unless such Act specifically relates to the business of insurance.” In deciding that neither the FAA nor the Convention are reverse-preempted under McCarran-Ferguson, the Court undertook a 3 prong analysis and considered the following: 1) does the federal statute specifically relate to the business of insurance; 2) was the state statute enacted for the purpose of regulating the business of insurance; and 3) would application of the federal statute invalidate, impair or supersede the state law.

The Court held that neither the FAA nor the Convention specifically relate to the business of insurance.  Further, that confirming the arbitration award would not invalidate, impair or supersede the Illinois liquidate statutes, frustrate any state policy or interfere with the state’s administrative regime. While the state statutes mandate that Sangamon and Cook County have exclusive jurisdiction over the liquidation of an insurer, the Court did not find that such statutes prohibit a contractual dispute from being resolved somewhere else.  The Court noted that the Liquidator had no problem in proceeding with the arbitration but only raised concerns about the award after a decision of the panel was rendered against Legion. Further, the Court noted that the Liquidator’s general reference to the Illinois insurance liquidation statutes did not establish that the panel’s award frustrated the Liquidator’s  ability to marshal the remaining funds and pay policyholders and creditors or interfered with Illinois’s insurance regime.  “Confirmation of the award will not decide the existence of liability and amount the Liquidator owes to Catalina which was decided by the panel, but only requires a limited review to confirm that the decision of the panel was not reached in violation of the FAA or the Convention.”  The Court found that the award perfected a claim that Catalina may now use to obtain payment in the liquidation court and that it is not in contravention of the liquidation proceedings but exits alongside and is consistent with those proceedings.

The Liquidator alternatively argued that the Court should abstain from the exercise of federal review where it would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.  The essential elements of this type of Burford abstention provide that the state must offer a forum where the claims can be litigated and that the forum must stand in a specific relationship of technical oversight and evaluation of the claims. The Court held that abstention would be inappropriate stating that the cause of action is exclusively federal and there were no difficult or unusual state laws in issue but only the matter of confirming the panel’s award and not reconsidering its merits. “The Court can not engage in the type of second guessing that the Liquidator believed would invade the province of the Illinois liquidation court.”  Further, the Court stated that the petition did not require the Court to determine any issue that is directly relevant to Illinois’s policies regarding the regulation of insurance or the priority of Catalina’s claim.  Since all the petition called for was for the Court to vacate or confirm the award, the decision provides for the Liquidator to proceed before the liquidation court as that court and the State of Illinois see fit.  Further, while a special forum does exist for the adjudication of insurance claims, it is not an exclusive specific forum for all matters.

The Liquidator’s request for a stay on the federal court proceeding was also denied as the Court saw no showing of any reason to wait for the developments in the liquidation proceedings.  The Court also found that while the liquidation order prohibits claims or suits from being brought against the Liquidator except in the liquidation proceedings, it did not preclude this Court from deciding a petition to confirm an arbitration award.

 

*Sylvia Kaminsky is an attorney and a certified ARIAS arbitrator and umpire.  She is a member of the ARIAS Board of Directors and is the co-chair of the ARIAS Law Committee.