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On Time Staffing, LLC v. National Union Fire Insurance Company of Pittsburgh, PA

Issue Discussed: Security

Submitted by Thomas J. Kinney, Michael T. Carolan*

Date Promulgated: May 11, 2011

 

On Time Staffing, LLC v. Nat. Union Fire Ins. Co., 784 F.Supp.2d 450 (S.D.N.Y. 2011)

Court: Southern District of New York

Issues Decided: Whether an arbitration panel’s decision to order pre-hearing security without first holding a full evidentiary hearing exceeded its powers under the arbitration agreement or constituted misconduct as defined by Federal Arbitration Act §10(a)(3).

 

In On Time Staffing, LLC v. National Union Fire Insurance Company of Pittsburgh, PA, the Southern District of New York upheld an arbitration panel’s order directing an employer to post pre-hearing security, finding that the panel’s actions were within its inherent powers under the arbitration agreement and that it was not misconduct to issue such an order without holding a full evidentiary hearing.

The Arbitration

The underlying dispute arose when National Union asserted that On Time Staffing (“On Time”) had failed to make payments totaling over $900,000.00 under their retroactive coverage agreement.  After the parties were unable to resolve the dispute on their own, the matter was submitted to binding arbitration.

The parties’ agreement included several provisions specifying the form and function of any arbitration, including, inter alia, that: (1) the final decision was to be based upon a full evidentiary hearing, with both parties permitted to introduce evidence and conduct cross-examination; (2) the panel was relieved from all judicial formalities, including the rules of evidence; (3) the panel must interpret the parties’ agreement as an “honorable engagement”; and (4) any award the panel issued must effect the “general purpose” of the agreement.

Prior to a hearing, National Union filed a motion for pre-hearing security raising questions regarding On Time’s financial condition and ultimate ability to pay an award.  After reviewing On Time’s financial statements from the previous fiscal years and hearing oral arguments on the motion, the panel issued a unanimous order directing On Time to post security in the amount of $312,188.00.  That order also required the parties to meet and hold good faith settlement talks.

The District Court Opinion

Rather than posting security, On Time filed a motion to vacate the panel’s order, asserting that the panel was not authorized to award pre-hearing security under the terms of the parties’ agreement, or, alternatively, that it was entitled to a full and fair hearing before any such award.  A divided panel issued an amended order on December 17, 2010, denying the motion to vacate and reaffirming the order to post pre-hearing security.  The dissenting arbitrator disagreed, asserting that On Time was entitled to a full hearing before it could be ordered to post security and that his original decision to agree with the majority was intended to encourage a settlement.

On Time then filed a petition before the U.S. District Court for the Southern District of New York, arguing that: (i) the award of pre-hearing security was outside the scope of the panel’s authority; (ii) the failure to conduct a full evidentiary hearing before ordering pre-hearing security constituted “misconduct” within the meaning of §10 (a)(3) of the Federal Arbitration Act (“FAA”); and (iii) the award constituted misconduct because it was “plainly” motivated by the panel’s desire to force a settlement.

The District Court found all three of On Time’s arguments unavailing and confirmed the arbitration panel’s order.

With respect to the first argument, the court found that prior to rendering a final decision, and absent express language to the contrary, an arbitration panel possesses the inherent authority to preserve the integrity of the arbitration process.  In doing so, the court relied on the Second Circuit’s decision to uphold an arbitration panel’s award of pre-hearing security in Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003), as necessary to ensure a meaningful final award.  The court also found that the power to order a party to post pre-hearing security was within a panel’s “inherent authority to preserve the integrity of the arbitration process,” noting that to hold otherwise would mean that “an arbitration panel with a well-founded concern that a party was financially unable to satisfy an eventual award would have no recourse to protect itself against the risk that its significant expenditures of time and effort would be for naught.”

As to the second argument, the court noted that nothing in the FAA required the panel to conduct a full evidentiary hearing before ordering pre-hearing security.  The court further noted that the parties’ agreement expressly exempted the panel from all judicial formalities or the strict rules of law, and merely required the holding of a full hearing before the issuance of the final decision.  The court stressed that the pre-hearing order was not a final decision of the panel, only preliminary relief aimed at ensuring a meaningful final award.  The court also noted that in Banco de Seguros the Second Circuit had previously held that a pre-hearing security order under a comparable arbitration agreement was consistent with FAA §10(a)(3).

The court also dismissed On Time’s third argument, explaining that although the original order for pre-hearing security compelled the parties to meet and discuss settlement possibilities in good faith, there was insufficient evidence to establish that the panel’s motivation was to “force” a settlement.  The court further noted that the panel’s second order reaffirmed the pre-hearing security directive in spite of the fact that settlement talks had proven fruitless.

 

* Thomas J. Kinney and Michael T. Carolan are associate and partner, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.