Ario v. The Underwriting Members Of Syndicate 53 At Lloyds For The 1998 Year Of Account

Decision Date18 August 2010
Docket NumberNo. 09-1921,09-2991.,09-2989,09-1921
PartiesJoel S. ARIO, Insurance Commissioner of the Commonwealth of Pennsylvania, in his official capacity as the statutory liquidator of Legion Insurance Company (in liquidation);*Pepper Hamilton, LLP, Appellant (09-1921)v.The UNDERWRITING MEMBERS OF SYNDICATE 53 AT LLOYDS FOR the 1998 YEAR OF ACCOUNT, Cross-Appellants (09-2991).*(Pursuant to F.R.A.P. 12(a) (09-2989 only)).Joel S. Ario, Insurance Commissioner of the Commonwealth of Pennsylvania, in his official capacity as the statutory liquidator of Villanova Insurance Company (in liquidation);*Pepper Hamilton, LLP, Appellant (09-1922)v.The Underwriting Members of Syndicate 53 at Lloyds for the 1998 Year of Account, Cross-Appellants (09-2992).*(Pursuant to F.R.A.P. 12(a) (09-2990 only)).
CourtU.S. Court of Appeals — Third Circuit






Deborah F. Cohen, Esquire (Argued), Joann Hyle, Esquire, Kassem Lucas, Esquire, Thomas B. Schmidt, III, Esquire, Philadelphia, PA, for Appellant/Cross-Appellee Joel S. Ario.

Nancy J. Gellman, Esquire (Argued), Conrad O'Brien PC, Philadelphia, PA, for Appellant Pepper Hamilton LLP.

Joseph M. Donley, Esquire, Thorp, Reed & Armstrong, Philadelphia, PA, David M. Raim, Esquire (Argued), Washington, DC, for Appellees/Cross-Appellants of Syndicate 53.

Before AMBRO, SMITH, and ALDISERT, Circuit Judges.


AMBRO, Circuit Judge.

We confront here the interplay between the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) adopted June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3, and the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq. We also address the propriety of sanctions awarded in the related litigation. For the reasons that follow, we affirm the judgments of the District Court confirming the arbitration award and denying one of the requested Rule 11 sanctions, but we reverse its judgment awarding the other Rule 11 sanction.

I. Factual and Procedural HistoryA. The reinsurance treaties

Two Pennsylvania insurers, Legion Insurance Company and Villanova Insurance Company (collectively, the “primary insurers”), entered into reinsurance treaties 1 with the Underwriting Members of Syndicate 53 at Lloyd's for the 1998 Year of Account (the “reinsurers”).2 The primary insurers are now in liquidation, and they are represented in these actions by their statutory liquidator, Joel S. Ario, the Insurance Commissioner for the Commonwealth of Pennsylvania.3

Four reinsurance treaties are at issue here, all with identical language in the relevant provisions, differing only in the limits and types of coverage provided. The first relevant provision governs arbitration, and it is reproduced here in its entirety:

As a condition precedent to any right of action hereunder, any dispute or difference between the [primary insurers] and the Reinsurers relating to the interpretation or performance of this Agreement, including its formation or validity, or any transaction under this Agreement, whether arising before or after termination, shall be submitted to binding arbitration, with the exception of matters requiring resolution by way of injunctive relief.
Upon written request of any party, each party shall choose an arbitrator and the two chosen shall select a third arbitrator. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after receipt of the written request for arbitration, the requesting party may appoint a second arbitrator. If the two arbitrators fail to agree on the selection of a third arbitrator within thirty (30) days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the selection of the third arbitrator from those remaining named individuals shall be named by the Federal District Court for the Eastern District of Pennsylvania. All arbitrators shall be disinterested in the outcome of the arbitration. Each party shall submit its case to the arbitrators within thirty (30) days of the appointment of the third arbitrator.
The parties hereby waive all objections to the method of selection of the third arbitrator, it being the intention of both sides that the third arbitrator be chosen from those submitted by the parties.
The arbitrators shall have the power to determine all procedural rules for the holding of the arbitration[,] including but not limited to inspection of documents, examination of witnesses[,] and any other matter relating to the conduct of the arbitration. The arbitrators shall interpret this Agreement as an honorable engagement and not as merely a legal obligation, they are relieved of all judicial formalities and may abstain from following the strict rules of law. The arbitrators may award interest and costs, but in no event shall punitive or exemplary damages be awarded. Each party shall bear the expense of its own arbitrator and shall share equally with the other party the expense of the third arbitrator and of the arbitration.
Arbitration hereunder shall take place in Philadelphia, Pennsylvania unless both parties otherwise agree. Except as hereinabove provided, the arbitration shall be in accordance with the rules and procedures established by the Uniform Arbitration Act as enacted in Pennsylvania.

J.A. 141, 156, 173, 187. The second relevant provision is the service-of-suit provision, reproduced in part below:

It is agreed that in the event of the failure of Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Reinsured, will submit to the jurisdiction of a Court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of Reinsurers' rights to commence an action in any Court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States.

J.A. 142, 156, 173, 188.

B. The coverage dispute and arbitration

Years after the reinsurance treaties were signed, a dispute arose between the primary insurers and the reinsurers. The reinsurers asserted that the primary insurers were not underwriting the business as described in the initial placement materials ( i.e., the pool risks were not what the reinsurers expected them to be based on the primary insurers' prior representations). The reinsurers alleged that the primary insurers underwrote their business in a manner that, while increasing premium volume for the primary insurers, also exposed the reinsurers to increased risk. A September 2005 audit by the reinsurers purportedly exposed these problems.

The reinsurers argued that they had suffered substantial losses as a result of the primary insurers' misconduct, and they refused to pay the claims of the primary insurers. The primary insurers responded by demanding arbitration on September 18, 2006, in the hope of recovering their share of losses under the reinsurance treaties ( i.e., what the primary insurers believed was owed to them by the reinsurers under the treaties).

The parties agreed that the dispute was arbitrable, and they proceeded to arbitration. The primary insurers asked the arbitration panel to award it the full amount due under the reinsurance treaties, plus interest. The reinsurers argued that the treaties should be rescinded (and thus, their obligations to pay the primary insurers extinguished) based on eight separate legal theories. 4 The primary insurers denied the contentions. Broad discovery was conducted, resulting in document production, depositions, and expert reports; the parties submitted briefs; and a nine-day evidentiary hearing was held in which both parties made opening and closing statements, and thoroughly examined and cross-examined 11 witnesses.

The testimony of one witness in particular, Ian Crane, though only a small part of the arbitration proceedings, factors prominently in our case. Crane was an employee of the managing agent for the reinsurers, and he participated in the underwriting of the treaties at issue here. He testified to the circumstances under which he received the placement materials from the primary insurers and the effect of those materials on underwriting. However, he did not specifically recall the precise communications between the primary insurer and the reinsurers, and he did not recall his exact knowledge and thoughts at the time of the reinsurance underwriting. Instead, he based his testimony on documents (including three documents that are not part of or cited in the reinsurance treaties, but are communications between the primary insurers and the reinsurers and their agents) 5 that he saw years ago during the placement process.

Following the discovery, briefing, and evidentiary hearing, the arbitration panel issued an award rescinding three of the four treaties. On the rescinded treaties, the reinsurers were relieved of any obligation to pay losses owing; on the remaining treaty, the reinsurers were ordered to pay losses owing. This award was a so-called unreasoned award, as the panel neither provided the rationale for its decision nor gave any indication of the evidence on which its decision was based.

C. Post-arbitration litigation

The primary insurers have been in liquidation proceedings in the Commonwealth Court of Pennsylvania since mid-2003. Following the arbitration award, on August 6, 2008, Ario (as liquidator on behalf of the primary insurers) filed a motion to confirm in part, and to vacate in part, the award as part of the liquidation proceedings. Shortly thereafter, the reinsurers removed the case to the District Court for the ...

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