Integrity Ins. v. American Centennial Ins. Co.

• Decision Date: 07 April 1995
• Docket Number: No. 95 Civ. 1010 (SAS).,95 Civ. 1010 (SAS).
• Citation: 885 F. Supp. 69
• Parties: In the Matter of the Arbitration Between INTEGRITY INSURANCE COMPANY, IN LIQUIDATION, Claimant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, Respondent.
• Court: U.S. District Court — Southern District of New York

885 F. Supp. 69

In the Matter of the Arbitration Between INTEGRITY INSURANCE COMPANY, IN LIQUIDATION, Claimant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, Respondent.

No. 95 Civ. 1010 (SAS).

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

April 7, 1995.

Thomas J. Lennon, Hackensack, NJ, for petitioners Thomas Lennon, and Eugene McGee.

Brendan M. Kennedy, Werner & Kennedy, New York City, for claimant Integrity Ins. Co. In Liquidation.

Eugene Wollan, Ronald J. Theleen, Mound, Cotton & Wollan, New York City, for respondent American Centennial Ins. Co.

OPINION AND ORDER

SCHEINDLIN, District Judge.

Thomas Lennon and Eugene McGee petition this Court to quash subpoenas duces tecum issued by an arbitrator pursuant to a dispute between Integrity Insurance Company, in liquidation ("Integrity"), and American Centennial Insurance Company ("ACIC"). The subpoenas were issued by the arbitrator at the request of ACIC, and direct the petitioners to appear for pre-hearing depositions and to produce documents.

BACKGROUND

The dispute between Integrity and ACIC arises from a number of reinsurance agreements.¹ See Affidavit of Brendan M. Kennedy ("Kennedy Aff."), Attorney for Integrity, at ¶ 2. The Liquidator instituted arbitration proceedings against ACIC pursuant to those agreements. Id. Separate and apart from the arbitration proceeding, the Liquidator has filed an action in New Jersey on behalf of Integrity's policyholders, creditors, reinsurers and others, against former officers and directors of Integrity, including petitioner McGee ("D & O action").² See Affidavit of Eugene Wollan, Attorney for ACIC, in Support of Petition ("Wollan Aff.") at ¶ 8. McGee is a former Vice President of Integrity and Lennon is McGee's attorney in the D & O action. Petition ("Pet.") at ¶¶ 3-4. Lennon also represents Leonard Stern, a former President of Integrity and a defendant in the D & O action. Wollan Aff. at ¶ 8. Discovery in the D & O action has been stayed pending the outcome of settlement negotiations. Pet. at ¶ 7.

Neither petitioner is a party to the arbitration proceeding. The subpoenas require them to appear for a deposition and to produce all relevant documents relating to the reinsurance agreements at issue between ACIC and Integrity. The subpoenas further require production of documents relating to the D & O action. Wollan Aff. at ¶ 8. Additionally, ACIC seeks to depose Lennon in order to learn the whereabouts of Stern, so that Stern can be served with a deposition subpoena. Lennon has refused to voluntarily disclose Stern's address, claiming that it is privileged. Wollan Aff. at ¶ 9; Brief in Support of Petition at 9.

Petitioners request that this Court quash these subpoenas, on the grounds that an arbitrator has no authority to compel a nonparty to appear at a deposition prior to an arbitration hearing. Petitioners also question the materiality of the information sought.

DISCUSSION

A. Depositions of Nonparties

The issue of whether an arbitrator has the authority to compel a nonparty to appear at a pre-hearing deposition appears to be a case of first impression within this district.³ This Court recognizes that federal policy strongly favors arbitration as an alternative dispute resolution process, see Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), and that courts should interpret the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq., so "as to further, rather than impede, arbitration." Bigge Crane and Rigging Co. v. Docutel Corp., 371 F.Supp. 240, 246 (E.D.N.Y.1973).

Arbitration is, however, a creation of contract, bargained for and voluntarily agreed to by the parties. The petitioners, who are not parties to the arbitration agreement, never bargained for or voluntarily agreed to participate in an arbitration. After weighing the policy favoring arbitration against the rights and privileges of nonparties, this Court concludes that an arbitrator does not have the authority to compel nonparty witnesses to appear for pre-arbitration depositions.

To determine the extent of an arbitrator's authority, one must begin with the source of that authority. An arbitrator's power over the parties derives from both the arbitration agreement and the FAA. Arbitrators can exert no more control over parties than that which the parties, through their agreements, granted to the arbitrators. The four reinsurance agreements contain different arbitration clauses. Agreements 1080 and 4013 state "the arbitrators ... are relieved of all judicial formalities and may abstain from following the strict rules of law." Agreements 1021 and 978 state: "the arbitrators will not be obliged to follow judicial formalities or the rules of evidence except to the extent required by the state law of the site of arbitration.... Except as provided above, arbitration will be based upon the procedures of the American Arbitration Association ("AAA")." The rules of the AAA state that "an arbitrator or other person authorized by law to subpoena witnesses or documents may do so upon the request of any party." American Arbitration Association, Commercial Arbitration Rules, Rule 31 (1993). Thus, there is nothing within the reinsurance agreements that explicitly limits the power of an arbitrator to order discovery. See Chiarella v. Viscount Indus. Co. Ltd., No. 92 Civ. 9310, 1993 WL 497967 (S.D.N.Y. Dec. 1, 1993).

Because the parties to a contract cannot bind nonparties, they certainly cannot grant such authority to an arbitrator. Thus, an arbitrator's power over nonparties derives solely from the FAA. The contested subpoenas were issued by the arbitrator pursuant to section 7 of the FAA.

The arbitrators ... may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.... If any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.

9 U.S.C. § 7.

Implicit within the power to compel compliance with an arbitrator's summons must be the power to quash that summons if it was improperly issued. Oceanic Transport Corp. v. Alcoa S.S. Co., 129 F.Supp. 160 (S.D.N.Y.1954) (rejecting petition to sanction nonparty for failure to comply and vacating subpoena because evidence sought was not material). The court may also consider a petition to quash; there is no requirement that a petition to compel be made first. See Commercial Metals Co. v. International Union Marine Corp., 318 F.Supp. 1334 (S.D.N.Y.1970) (denying motion to quash subpoena duces tecum issued by arbitrator because evidence sought by arbitrator — documents from a party — was relevant to inquiry).

Though the language of the statute speaks only to the arbitrators power to summon a witness to "attend before them," i.e. at the hearing, the courts have permitted arbitrators to order prehearing discovery of parties. See, e.g., In re Technostroyexport, 853 F.Supp. 695, 697 (S.D.N.Y.1994) (pre-hearing discovery between parties is "a matter governed by the applicable arbitration rules (as distinct from court rules) and by what the arbitrator decides."); Chiarella v. Viscount Indus. Co. Ltd., No. 92 Civ. 9310, 1993 WL 497967 (S.D.N.Y. Dec. 1, 1993) (arbitrators did not exceed authority by ordering the parties "to mutually exchange all documents and witness lists (i.e. full discovery)"). Two cases from other districts address discovery from nonparties and appear to be the most closely analogous to the instant case.

In Stanton v. Paine Webber Jackson & Curtis, Inc., 685 F.Supp. 1241 (S.D.Fla.1988) the arbitrator, at the request of the defendants, had issued subpoenas to nonparties, requiring prehearing production of documents. The plaintiff objected, contending that issuance of the subpoenas was improper, and constituted impermissible pre-hearing discovery. The court held that:

the plaintiffs ... are asking the court to impose judicial control over the arbitration proceedings. Such action by the court would vitiate the purposes of the Federal Arbitration Act: `to facilitate and expedite the resolution of disputes, ease court congestion, and provide disputants with a less costly alternative to litigation.' Recognition Equip., Inc. v. NCR Corp., 532 F.Supp. 271, 275 (N.D.Tex.1981).

Furthermore, the court finds that under the Arbitration Act, the arbitrators may order and conduct such discovery as they find necessary. See Corcoran v. Shearson/American Express, Inc., 596 F.Supp. 1113, 1117 (N.D.Ga.1984); Mississippi Power Co. v. Peabody Coal Co., 69 F.R.D. 558 (S.D.Miss.1976).... Plaintiff's contention that § 7 of the Arbitration Act only permits the arbitrators to compel witnesses at the hearing, and prohibits prehearing appearances, is unfounded.

Stanton, 685 F.Supp. at 1242-43. Stanton differs from the instant case in two significant ways. First, the objections to the subpoenas in Stanton were made by one of the parties to the arbitration, not by the subpoenaed nonparty. Second, the subpoenas in Stanton were for the production of documents, and did not require pre-hearing depositions.

When contracting parties stipulate that disputes will be arbitrated, they agree to submit to arbitration procedures rather than court procedures.

Full scale discovery is not automatically available in arbitration, as it is in litigation. Everyone knows that is so; thus the unavailability of the full panoply of discovery devices, with their attendant burdens of time

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