Commerical Union Ins. Co. v. Lines, 02 CIV.0573 RMB.

• Decision Date: 18 December 2002
• Docket Number: No. 02 CIV.0573 RMB.,02 CIV.0573 RMB.
• Parties: COMMERCIAL UNION INSURANCE COMPANY, Petitioner, v. David E.W. LINES, Peter C.B. Mitchell, Christopher J. Hughes, as Joint Liquidators of Electric Mutual Liability Insurance Company, Limited (in Liquidation), Respondents.
• Court: U.S. District Court — Southern District of New York

239 F.Supp.2d 351

COMMERCIAL UNION INSURANCE COMPANY, Petitioner, v. David E.W. LINES, Peter C.B. Mitchell, Christopher J. Hughes, as Joint Liquidators of Electric Mutual Liability Insurance Company, Limited (in Liquidation), Respondents.

No. 02 CIV.0573 RMB.

United States District Court, S.D. New York.

December 18, 2002.

Order Denying Motion to Amend December 26, 2002.

John Finnegan, Cadwalader, Wickersham & Taft, New York City, for plaintiff.

Joanna Shally, Shearman & Sterling, LLP., New York City, for defendant.

ORDER

BERMAN, District Judge.

1. Introduction

On October 31, 2001, a three-member arbitration panel ("Panel") rendered an award ("Award") in a proceeding between Commercial Union Insurance Company ("Petitioner" or "Commercial Union") and David E.W. Lines, Peter C.B. Mitchell, and Christopher J. Hughes (collectively, "Respondents"), the joint liquidators of Electric Mutual Liability Insurance Company, Ltd. (in Liquidation) ("EMLICO").¹,² The Panel denied Commercial Union's request for rescission of certain contracts pursuant to which Commercial Union reinsured a portion of EMLICO's liabilities to General Electric Company ("GE").

On February 15, 2002, Petitioner moved in this Court for an order permanently enjoining further arbitration and vacating part of the Award ("Petitioner's Motion").³ On March 8, 2002, Respondents crossmoved for an order confirming the Award, imposing sanctions on Petitioner for "act[ing] unreasonably, vexatiously and in bad faith in [attempting] to enjoin the ongoing arbitration," and sealing the record (of the arbitration and court proceedings) ("Respondents' Cross-Motion"). On March 20, 2002, Petitioner submitted a reply ("Petitioner's Reply") and, on March 26, 2002, Respondents submitted a reply of their own ("Respondents' Reply").

For the reasons set forth below, the Court (i) denies Petitioner's motion to enjoin the arbitration; (ii) denies Petitioner's motion partially to vacate the Award; (iii) grants Respondents' Cross-Motion to confirm the Award; (iv) denies Respondents' motion to impose sanctions; and (v) grants in part Respondents' motion to seal the record.

II. Background

EMLICO is a mutual insurance company which was formed in Massachusetts in 1927. Petitioner's Motion at 6. EMLCO's sole commercial policyholder is GE. Id. Commercial Union, an insurance company based in Massachusetts, issued contracts to EMLICO reinsuring a portion of EMLICO's liability to GE ("Reinsurance Contracts"). Id. at 5. Beginning in 1992, pursuant to the Reinsurance Contracts, EMLICO sought to recover from Commercial Union amounts it had paid to GE for asbestos and environmental clean-up claims. Shally Decl. 114.

EMLICO was domiciled in Massachusetts until June 1995, when, with the authorization of the Massachusetts and Bermuda insurance regulatory authorities, it reorganized its business operations and moved its domicile to Bermuda (i.e. it "redomesticated"). Shally Decl. 115; Petitioner's Motion at 6-7. On October 20, 1995, EMLICO filed a "winding-up petition" in the Supreme Court of Bermuda ("Bermuda Court") declaring insolvency. See Winding-Up Petition dated October 20, 1995, Ex. 10 to Shally Decl. On September 12, 1996, the Bermuda Court appointed Respondents, as "Joint Permanent Liquidators," to manage EMLICO's "winding up" process. See Order of the Bermuda Court dated October 20, 1995, Ex. 11 to Shally Decl.

Arbitration

In or about November 1996, Petitioner and Respondents agreed to submit their disputes under the Reinsurance Contracts to arbitration. See Letter to the Panel dated November 6, 1996, Ex. 24 to Shally Decl. Pursuant to the Arbitration Clause, the Panel "consisting of ... executive officers of casualty insurance companies" was appointed. Arbitration Clause ¶ 1. "One arbitrator [was] chosen by [Commercial Union] and the other by [EMLICO]. The umpire [was] chosen by the two arbitrators." Id. 112. On April 28, 1997, the parties signed a confidentiality agreement with respect to the arbitration proceedings. See Stipulation and Agreement of Confidentiality dated April 28, 1997, Ex. 28 to Shally Decl. ("Confidentiality Agreement").⁴

On July 1, 1997, the Panel determined that the arbitration should proceed in three phases. Interim Order of Panel dated July 1, 1997, Ex. A to Affidavit of Lawrence I. Brandes dated February 14, 2002 ("Brandes Ml"). In Phase I, the Panel would "hear Commercial Union's global defenses under the reinsurance contracts," and determine whether the "reinsurance contracts [were to] be rescinded." Id. In Phases II and III, the Panel would "determine [Commercial Union's] liability to EMLICO for asbestos [and] environmental clean-up claims." Shally Decl. ¶ 15.

By order dated October 31, 2001 ("Phase I Order"), denied Commercial Union's claim for rescission of the Reinsurance Contracts. Phase I Order, Ex. B to Brandes Affidavit, at 2. Commercial Union had argued that the Reinsurance Contracts should be rescinded principally because "redomestication to Bermuda and the formation of EMLICO, Ltd. were fraudulent.... [EMLICO] moved to Bermuda to avoid being liquidated in Massachusetts[,] because [EMLICO] and GE... believed a liquidation in Bermuda would be more advantageous to them and more disadvantageous to reinsurers." Petitioner's Motion at 2.

The Award states:

1) "While the Panel is in unanimous agreement 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 CU is no worse off in Bermuda than in Massachusetts".

Id. at 1-2.

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

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, CU 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.

Letter from Panel dated January 26, 2002, Ex. Z to Brandes Aff.

III. Standard of Review

The scope of review of an arbitration award is generally "very narrowly limited," Americas Ins. Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64, 67 (2d Cir.1985), so as "to avoid undermining the twin goals of arbitration, namely settling disputes efficiently and avoiding long and expensive litigation." Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp. 103 F.3d 9, 12 (2d Cir.1997) (quoting Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir.1993)); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ("Questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration."). Under the Federal Arbitration Act ("FAA"), "the validity of an award is subject to attack only on those grounds listed in 9 U.S.C. § 10, and the policy of the FAA requires that an award be enforced unless one of those grounds is affirmatively shown to exist." Wall Street Assocs. L.P. v. Becker Paribas Inc., 27 F.3d 845, 849 (2d Cir.1994).

IV. Analysis

A. The Arbitration

Petitioner argues that Phases II and III of the arbitration should be enjoined because "[i]t is indisputable that EMLICO Ltd. obtained [the right to arbitrate]—indeed, EMLICO Ltd. even exists today—only because of, and as a direct result of, its ... immoral and illegal acts of defrauding the Massachusetts and Bermuda insurance regulatory authorities." Petitioner's Motion at 5. According to Petitioner, "it would clearly be against public policy ... to permit EMLICO Ltd. to enforce contractual rights it obtained solely by fraud." Id. at 17-18. Respondents counter that "EMLICO's rights [to arbitrate, among other things] under the reinsurance contracts arose when the contracts were signed in the 1960s. Those rights ... were unaffected by EMLICO's transfer of domicile." January 30, 2002 Letter at2.⁵

Petitioner's claim that the arbitration should be enjoined rests, in part, on the idea that EMLICO, domiciled in Bermuda, is a new legal entity, distinct from the EMLICO domiciled in Massachusetts prior to 1995. This does not appear to be the case. The redomestication application was made pursuant to the Bermuda Companies Act 1981 ("Companies Act") which states that "the registration of the continuance of a foreign corporation ... shall not be deemed to ... create a new legal entity." Companies Act § 132E(1), Ex. 8 to Shally Decl.⁶

Petitioner has not demonstrated that the Reinsurance Contracts—which contain arbitration provisions and give rise to the arbitration proceedings were obtained by fraud. Indeed, Petitioner does not even appear to seek vacatur of the Panel's finding that "Commercial Union is not entitled to rescission of the reinsurance contracts, ... because there is no lawfully recognized basis to do so." Petitioner's Motion at 4 n. 2. The Court perceives no basis in law (or public policy) to stop the arbitration process from going forward. As noted, the parties expressly agreed that "any dispute or difference ... arising with reference to the interpretation, application, or effect of the [Reinsurance Contracts], or any part thereof, shall be referred to a Board of Arbitration" and that "[t]he decision in...