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New Hampshire Insurance Company v. Magellan Reinsurance Company, Ltd.

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Andrew D. Shapiro, Jonathon C. Raffensperger

Date Promulgated: March 2, 2013

Issues Decided: (1) Whether reinsurer’s non-breach of contract claims were within the scope of the arbitration clause in the parties’ reinsurance agreement; and, (2) Whether cedant was judicially estopped from compelling arbitration as a result of cedant’s prior opposition to resinsurer’s attempts to arbitrate in prior litigation.

In New Hampshire Ins. Co. v. Magellan Reins. Co., Ltd., the Court of Appeals of Texas held that although Magellan’s claims of fraud, breach of fiduciary duty, conversion, accounting, and theft fell within the scope of the parties’ arbitration agreement, it nonetheless affirmed the trial court’s order denying New Hampshire’s motion to compel arbitration after finding that New Hampshire was judicially estopped from compelling arbitration because New Hampshire had previously successfully argued in other litigation that the claims were not arbitrable.

Background

New Hampshire Insurance Co. (“New Hampshire”), the cedant, and Magellan Reinsurance Co, Ltd. (“Magellan”), a reinsurer, entered into a reinsurance agreement (“Agreement”) under which Magellan was required to establish a trust account from which New Hampshire was authorized to withdraw funds to secure payments under the Agreement. The Agreement also contained an arbitration clause providing that all disputes “arising out of the interpretation of this Agreement” would be arbitrated in New York.

Beginning in April 2002, a dispute arose concerning New Hampshire’s claims handling and accounting practices and Magellan’s obligation to continue depositing funds into the trust account. Claiming that Magellan was required to deposit an additional $1.4 million into the trust account, New Hampshire filed a petition in August 2004 in the Turks and Caicos Islands (“TCI”) to “wind up” Magellan’s business for failure to pay the debt. Magellan moved to compel arbitration, but the TCI court agreed with New Hampshire’s contention that the dispute did not involve interpretation of the Agreement and was thus not subject to arbitration.

While the TCI litigation was pending, Magellan initiated a proceeding in New York state court seeking to enjoin the TIC litigation and compel arbitration in New York. New Hampshire once again argued that Magellan’s “statutory insolvency” under TCI law was not a dispute that required interpretation of the Agreement. The New York court agreed and declined to compel arbitration.

In September 2005, also while the TCI litigation was pending, Magellan sued New Hampshire in Texas state court seeking a declaratory judgment on nine issues regarding the parties’ rights “under the Reinsurance Agreement.” New Hampshire successfully moved to abate the Texas action pending resolution of the TCI litigation, arguing that the issues the court had been requested to decide mirrored those raised, litigated and pending in the TCI court. The TCI litigation concluded in July 2009 when the court refused to wind up Magellan’s business. Subsequently, litigation resumed in Texas, where, for the first time, New Hampshire moved to compel arbitration on Magellan’s declaratory judgment claims. Magellan countered that New Hampshire was estopped from compelling arbitration, and, before the hearing on New Hampshire’s motion, filed a second amended petition replacing its requests for declaratory judgment with claims for breach of contract, fraud, breach of fiduciary duty, conversion, accounting, and theft pursuant to Texas statute. The trial court denied New Hampshire’s motion to compel arbitration and New Hampshire appealed.

Holding

I. Arbitrability of Magellan’s Claims

The parties agreed that Magellan’s breach of contract claims were subject to arbitration. As to Magellan’s claims of fraud, breach of fiduciary duty, conversion, accounting and theft, the appellate court, focusing on the factual allegations of each claim and resolving all doubts in favor of arbitration, held that each claim, to at least some extent, implicated New Hampshire’s duties and responsibilities under the Agreement. As a result, the appellate court was unable to “conclude with positive assurance that Magellan’s non-breach of contract claim do not require – or at a minimum, touch upon in some way – the interpretation of the Reinsurance Agreement.” Accordingly, the appellate court found that the claims fell within the scope of the arbitration agreement.

II. Magellan’s Judicial Estoppel Defense to Arbitration

Although all of Magellan’s claims were found to be subject to the parties’ arbitration agreement, the appellate court nonetheless agreed with Magellan that New Hampshire was judicially estopped from compelling arbitration of those claims. In both the TCI litigation and the New York proceeding, New Hampshire successfully argued that the scope of the dispute did not involve any interpretation of the Agreement, and thus the dispute was not subject to arbitration. Indeed, in seeking to abate the Texas litigation, New Hampshire contended that the issues raised by Magellan “mirrored” those raised, litigated, and currently pending in the TCI litigation, thus arguing for a broad construction of the TCI proceedings to include all of Magellan’s declarations seeking to interpret multiple parts of the Agreement. Yet several years later, after the TCI litigation had concluded, New Hampshire changed course by moving to compel arbitration of Magellan’s claims. In short, New Hampshire successfully argued against arbitration of Magellan’s claims in the TCI litigation and New York proceeding before subsequently seeking to compel arbitration. The appellate court found New Hampshire’s revised position to be “the precise conduct that judicial estoppel is meant to prohibit.”

The appellate court rejected New Hampshire’s “hypertechnical perspective” that estoppel should not apply because Magellan’s complaint in the Texas action alleged new causes of action that were not at issue in the TCI and New York proceedings. Relying on the correspondence between the parties and the record of the various stages of the dispute, the court found that “[n]either New Hampshire’s varying characterizations of the proceedings nor the labels attached to the claims alleged by Magellan in its petitions define the essence of the dispute … [it] has always centered around, and continues to entail, each party’s rights and duties and compliance or noncompliance under the Reinsurance Agreement.” It concluded that the claims in Magellan’s petition “involve facts and issues that are no different than the issues contested by the parties in the other forums. Because New Hampshire, “on more than one occasion, in one form or another” argued against arbitrability of the dispute, the Court found its past conduct to be “overwhelmingly inconsistent with its present attempt to compel arbitration.” Therefore, it held that New Hampshire was judicially estopped from compelling arbitration, and affirmed the decision of the trial court.

* Andrew D. Shapiro is a Partner and Jonathon C. Raffensperger is an Associate at Butler Rubin Saltarelli & Boyd LLP, where they specialize in reinsurance litigation and arbitration.