Washington National Insurance Co. v. Obex Group LLC

Issue Discussed: Power of Arbitrators / Third-Party Issues

Submitted by Michael T. Carolan

Date Promulgated: January 18, 2019

Case: Washington National Insurance Co. v. Obex Group LLC, 2019 U.S. Dist. LEXIS 9300 (S.D.N.Y. Jan. 18, 2019).

Issue Discussed: Power of Arbitrators / Third-Party Issues

Court:  U.S. District Court for the Southern District of New York

Date Decided:  January 18, 2019

Issue Decided:  The principles that govern whether an arbitration panel may compel evidence from a non-party witness under Section 7 of the Federal Arbitration Act.

Submitted by Michael T. Carolan*

In Washington National Insurance Co. v. Obex Group LLC, the U.S. District Court for the Southern District of New York enforced two arbitration summonses issued by a reinsurance arbitration panel and ordered two non-parties to appear before the panel and produce documents required by the panel.

The underlying dispute involved Washington National Insurance Company’s allegation that it was fraudulently induced into a reinsurance agreement with Beechwood Re.  In support of evidence sought by Washington National, the arbitration panel issued non-party subpoenas to Obex Group and Randall Katzenstein, requiring them to appear as witnesses at a hearing and to produce documents.  Although Obex Group and Katzenstein produced some documents, Washington National asserted that they failed to produce others and the arbitration panel issued two summonses requiring Obex Group and Katzenstein to appear at a hearing in New York City and to bring additional documents, finding that the documents and information sought “are relevant” to the issues in the arbitration and that the summonses “should be enforced by a Court of appropriate jurisdiction.”  Washington National then filed a petition to enforce the summonses.

Obex Group and Katzenstein moved to dismiss or quash the subpoenas on multiple grounds.  For the motion to dismiss, they alleged the Court lacked jurisdiction because: 1) there was no diversity because the citizenship of the parties in the underlying arbitration controlled and those entities were both New York citizens; 2) the amount in controversy was less than $75,000 and the amount at issue in the underlying arbitration was immaterial; and 3) a majority of the arbitration panel was not sitting in the Southern District of New York.  For the motion to quash, they alleged that the summonses were impermissible pre-hearing discovery and that only the Court, not the arbitration panel, had the power to rule on the merits of their objections.

The Court disagreed on all counts.  On the diversity issue, the Court explained that under the Federal Arbitration Act, “Section 7 actions – unlike those involving Section 4 or Section 10 – involve different parties than those in the underlying arbitration” and that case law from the U.S. Court of Appeals for the Second Circuit “supports looking to the parties to the enforcement action – rather than the parties in the underlying arbitration – to determine whether diversity jurisdiction exists.”  Since diversity existed between Washington National and Obex Group and Katzenstein, the Court had jurisdiction.

On the amount in controversy issue, the Court held that “[i]n actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation.”  Because Washington National sought damages of at least $134 million in the underlying arbitration, the Court explained that “[e]ven if documents responsive to the summonses pertain to only a small fraction of that sum, the amount in controversy requirement would still be satisfied.”

Finally, on the issue of the situs of the arbitration panel, the Court explained: “Here, the summonses ordered respondents to appear at a hearing in New York City.  Thus, the arbitrators are sitting in the Southern District of New York, and the Court has the authority under Section 7 [of the FAA] to enforce the summonses.”  The Court further explained that “[n]othing in Section 7 requires an arbitration panel to sit in only one location” and that such a rule “would greatly circumscribe an arbitration panel’s ability to decide a case, potentially discourage litigants from arbitrating disputes involving nonparty witnesses in multiple locations, and thus contradict ‘the strong federal policy in favor of arbitration.’”

On the motion to quash, the Court noted that the question of whether a summons seeks impermissible pre-hearing discovery is governed by three factors: 1) whether the witnesses “were ordered to appear for depositions…outside the presence of the arbitrators”; 2) whether the arbitrators “heard testimony directly from the witnesses and ruled on evidentiary issues”; and 3) whether the testimony “became part of the arbitration record” such that the arbitration panel used it in determining the dispute.  Concluding that the summonses at issue were “proper” under Section 7 of the FAA, the Court explained: “The panel summoned respondents to a hearing before the arbitrators – not to a deposition” and that the panel’s order “stated that the panel was ‘prepared to receive testimony and documentary evidence…and the panel was prepared to rule on evidentiary issues,” with a court reporter “ready to record the hearing” so it would be part of the arbitration record used by the Panel.  While Obex Group and Katzenstein argued that Washington National’s willingness to waive the hearing and just receive documents meant that the arbitration panel’s hearing order “evidences a subterfuge,” the Court disagreed, averring that it would not “prejudice petitioner for its sensible willingness to negotiate.”

Finally, the Court held that even if it had the authority to “independently assess” the materiality of the summonses, courts in the Second Circuit generally declined to exercise that authority and instead deferred to the arbitrators, and that it would do the same.  It was enough for the Court that the arbitration panel “stated the evidence was relevant and that the summonses should be enforced by a court of appropriate jurisdiction.”

* Michael T. Carolan is a partner in the Washington, D.C. office of Troutman Sanders LLP