Commercial Union Ins. v. Lines, Docket No. 03-7048.

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Writing for the Court: Feinberg
• Citation: 378 F.3d 204
• Parties: COMMERCIAL UNION INSURANCE COMPANY, Petitioner-Appellant, v. David E.W. LINES, Christopher Hughes, Peter C.B. Mitchell, as Joint Liquidators of Electric Mutual Liability Insurance Company, Ltd. (in Liquidation), Respondents-Appellees.
• Docket Number: Docket No. 03-7048.
• Decision Date: 05 August 2004

378 F.3d 204 COMMERCIAL UNION INSURANCE COMPANY, Petitioner-Appellant,
v.
David E.W. LINES, Christopher Hughes, Peter C.B. Mitchell, as Joint Liquidators of Electric Mutual Liability Insurance Company, Ltd. (in Liquidation), Respondents-Appellees. Docket No. 03-7048. United States Court of Appeals, Second Circuit. Argued: May 13, 2004. Last brief filed: May 27, 2004. Decided: August 5, 2004.

Appeal from the United States District Court for the Southern District of New York, Richard M. Berman, J.

Page 205

Mark A. Rabinowitz (Christopher D. Mickus, of counsel), Neal, Gerber & Eisenberg LLP, Chicago, IL (William F. Patry, William Nix, of counsel, Baker Botts LLP), for Petitioner-Appellant.

Thomas Martin (Joanna Shally, on the brief), Shearman & Sterling LLP, New York, NY, for Respondents-Appellees.

Before: FEINBERG and CABRANES, Circuit Judges.^*

FEINBERG, Circuit Judge.

Petitioner Commercial Union Insurance Company ("Commercial Union")¹ challenges a December 2002 order of the United States District Court for the Southern District of New York growing out of an arbitration proceeding between petitioner and Electric Mutual Liability Insurance Company, Ltd. ("EMLICO"). EMLICO is in liquidation and respondents are its three individual Joint Liquidators. The district court's order, among other things, (1) denied petitioner's motion to permanently enjoin further arbitration; (2) denied petitioner's motion to vacate part of an award rendered by the arbitration panel; and (3) granted respondents' cross-motion to confirm the award in its entirety. Petitioner Commercial Union claims that the district court's decision must be reversed because EMLICO obtained a change in governing law through fraud and deceit that benefitted it in arbitration.

Commercial Union, a reinsurance company, from 1975 to 1979 issued several reinsurance contracts to EMLICO, a mutual insurance company organized in Massachusetts. Commercial Union is also the successor-in-interest to Employers Surplus Lines Insurance Company, which issued reinsurance contracts to EMLICO from 1959 to 1967. These reinsurance contracts

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reinsured a portion of EMLICO's liability under policies EMLICO issued to General Electric Company ("GE"), EMLICO's only commercial policyholder.

Beginning in 1992, GE sought to recover from EMLICO its asbestos and environmental clean-up costs; in turn, EMLICO sought to recover these costs from Commercial Union under the reinsurance contracts. Pursuant to the arbitration clauses in those contracts, it appears from the record and from supplemental letter briefs submitted to us at our request that the parties thereafter mutually took steps to proceed to arbitration. Then, in February 1995, EMLICO submitted to the Massachusetts Commissioner of Insurance a reorganization proposal that included a transfer of domicile (redomestication) to Bermuda.

According to Commercial Union, EMLICO accomplished the redomestication through fraud. Commercial Union avers that EMLICO misrepresented that it was solvent to the Massachusetts Commissioner of Insurance, the Bermuda Registrar of Companies and the Bermuda Minister of Finance in order to accomplish redomestication, and then shortly after redomesticating, declared insolvency and initiated liquidation proceedings. EMLICO contends that the relevant regulatory bodies were aware that future insolvency was a possibility. In any case, Commercial Union and EMLICO agreed to arbitrate this fraud issue as well.

The parties proceeded to arbitration in November 1996 — almost a year after EMLICO filed a "winding-up" petition in the Bermuda courts — with the same arbitrators who had earlier been chosen.² The arbitrators decided to resolve the disputes between Commercial Union and EMLICO in three phases. Phase I would focus on Commercial Union's claim for rescission of the reinsurance contracts based, in part, on the ground that EMLICO fraudulently redomesticated to Bermuda to benefit GE and to the detriment of EMLICO's reinsurers. If the arbitrators decided not to rescind the contracts, Phases II and III would proceed. In Phase II, the arbitrators would decide what amount, if any, Commercial Union was obligated to pay EMLICO for asbestos liabilities. In Phase III, the arbitrators would consider what amount, if any, Commercial Union was obligated to pay for environmental liabilities.

After more than four years of arbitration proceedings, the arbitration panel issued an award in Phase I on October 31, 2001, denying Commercial Union's claims for rescission of the reinsurance contracts. The award stated, among other things, that while the Panel unanimously³ agreed that:

a) EMLICO deceived the Massachusetts Commissioner of Insurance and Bermuda authorities about its solvency, and

b) EMLICO moved to Bermuda to avoid being liquidated in Massachusetts, and

c) EMLICO intended to declare insolvency immediately after redomestication,

because this arbitration Panel is the final adjudicator, the Panel finds that [Commercial Union] is no worse off in Bermuda than in Massachusetts.

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On January 26, 2002, the Panel issued a clarification of its award, stating in pertinent part:

The deceit that the Panel found was in EMLICO's redomesticating to Bermuda so that its liquidation proceedings could be conducted in Bermuda rather than in Massachusetts.

When the Panel stated that it was the "final adjudicator" and that [Commercial Union] was "no worse off," its intent was that since the ultimate economic impact of the overall dispute between EMLICO and [Commercial Union] is to be decided by the Panel as part of this arbitration, the Panel will be in a position in latter phases to adjust for any differences that may have resulted from the deceitfully obtained change of jurisdiction from Massachusetts to Bermuda.... [W]hen the arbitration is completed, [Commercial Union] will end up in the same position as it would have been in had there been no redomestication.... So that not too much is made of the Panel's statement that it is the "final adjudicator," the Panel realizes that any decision it makes is subject to review by a Court.

In January 2002, Commercial Union brought the instant suit in the district court to enjoin further arbitration and to vacate that part of the award that acknowledged the panel was the "final adjudicator." Respondents cross-moved for, among other things, an order confirming the award. After the district court denied Commercial Union's motion...