Dinallo v. Dunav Ins. Co.

Issue Discussed: Other

Submitted by Nicole A. Vasquez

Date Promulgated: December 1, 2010

Issues Decided: Service-of-suit provision in reinsurance agreements served as a waiver of reinsurer’s right to remove the case to federal court.

In Dinallo v. Dunav Insurance Co., the Court of Appeals for the Second Circuit concluded that a service-of-suit provision in reinsurance agreements operated as a waiver of the reinsurer’s right of removal. No. 09-5235-cv, 2010 U.S. App. LEXIS 24583 (2d Cir. Dec. 1, 2010).

Background

On May 12, 2009, Eric R. Dinallo, New York’s Superintendent of Insurance (“Dinallo”), in his capacity as Midland Insurance Co.’s liquidator, sued Dunav Re a.d.o. (“Dunav”), a Serbian company, in the New York County Supreme Court. Dinallo v. Dunav Ins. Co., 672 F. Supp. 2d 368, 369 (S.D.N.Y. 2009).

Dinallo seeks $840,801.18 Dunav allegedly owes Midland under four agreements pursuant to which Dunav reinsured Midland. Id. Dinallo also sought an order for Dunav to post an irrevocable letter of credit for $2,177,961.18. Id.

Dunav removed the case on June 17, 2009 to the U.S. District Court for the Southern District of New York based on diversity jurisdiction, and Dinallo moved to remand to state court on July 21, 2009. Id. at 369, 371.

Dinallo argued that Dunav waived its right of removal to federal court because the service-of-suit provision in the reinsurance agreements required Dunav to submit to jurisdiction in any proper forum selected by the plaintiff. Id. at 369. The service of suit clause reads as follows:

ARTICLE XVIII

SERVICE OF SUIT

(Applies only to those Reinsurers who are domiciled outside the United States of America)

In the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of any Court of competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.

Id. at 370.

Dunav argued that the service-of-suit clause did not operate as a waiver of its right of removal because the language was ambiguous and any waiver of the right of removal must be clear and unequivocal. Id. at 370-71. The district court disagreed. On November 19, 2009, Judge Denise Cote granted Dinallo’s motion and held that the service-of-suit clause operated as a waiver of Dunav’s right to remove to federal court. Id. at 370.

Notably, however, Judge Cote distinguished cases where a defendant removed to federal court pursuant to the Federal Arbitration Act (the “FAA”), 9 U.S.C. § 205, rather than the general removal statute, 28 U.S.C. § 1441(a). Id. at 371. Judge Cote explained that, in cases where removal is sought pursuant to the FAA, “the insertion of an arbitration clause into reinsurance contracts create[s] an ambiguity upon which courts have relied to enforce removal rights . . . .” Id. In this case, however, the arbitration clauses in the reinsurance agreements became ineffective upon Midland’s liquidation. Id.at 371, n.6. As such, Judge Cote held that “the basis for the defendant’s removal is not the existence of an arbitration agreement enforceable in federal court under the Convention, but instead the general removal statute, 28 U.S.C. § 1441(a), supported by the existence of diversity jurisdiction. Here, there is no ambiguity preventing enforcement of the service of suit clause.” Id. at 371.

Dunav appealed to the Second Circuit.

Holding

On December 1, 2010, the Court of Appeals for the Second Circuit affirmed Judge Cote’s opinion, holding that the service-of-suit provision in the reinsurance agreements effectively waived Dunav’s right of removal. Dinallo v. Dunav Ins. Co., No. 09-5235-cv, 2010 U.S. App. LEXIS 24583, at *3 (2d Cir. Dec. 1, 2010).

*Nicole A. Vasquez is a litigation associate in the law firm of Milbank, Tweed, Hadley & McCloy LLP.