Sphere Drake Ins. Ltd. v. All American Life Ins.

• Decision Date: 06 February 2002
• Docket Number: No. 99 C 4573.,99 C 4573.
• Citation: 221 F.Supp.2d 874
• Parties: SPHERE DRAKE INSURANCE LIMITED, Plaintiff-Counterdefendant, v. ALL AMERICAN LIFE INSURANCE COMPANY, Defendant-Counterplaintiff.
• Court: U.S. District Court — Northern District of Illinois

221 F.Supp.2d 874

SPHERE DRAKE INSURANCE LIMITED, Plaintiff-Counterdefendant, v. ALL AMERICAN LIFE INSURANCE COMPANY, Defendant-Counterplaintiff.

No. 99 C 4573.

United States District Court, N.D. Illinois, Eastern Division.

February 6, 2002.

COPYRIGHT MATERIAL OMITTED

James I. Rubin, Renton Douglass Bond, Teresa Lynn Snider, Stanley Carlylle Sneeringer, Butler, Rubin, Saltarelli & Boyd, Chicago, IL, for plaintiff.

George N. Verdelja, Jr., John M. Heaphy, Chicago, IL, Andrew S. Amer, Kathleen L. Turland, Lanier Saperstein, Chet A. Kronenberg, Simpson, Thacher & Barltett, New York City, for defendant.

Laura Ann Smith, Holland & Knight LLC, chicago, IL, Donald Alan Murday, Tasha Jackson Brown, Peterson & Ross, LLC, Chicago, IL, for nonparty Lincoln Nat. Life Ins. Co.

MEMORANDUM OPINION AND ORDER

HART, District Judge.

I. PENDING CLAIMS

The underlying dispute in this case concerns whether plaintiff-counterdefendant Sphere Drake Insurance Limited,¹ an English corporation, is liable to defendant-counterplaintiff All American Life Insurance Company ("All American"), an Illinois corporation, on a retrocession policy known as the "Unicare Retrocession."² In its Amended Complaint, Sphere Drake seeks a declaration that the Unicare Retrocession is void because the Sphere Drake agent³ that issued the retrocession exceeded its authority and/or violated its fiduciary duty with the knowledge of or in conspiracy with All American's agents.⁴ All American counterclaims for a declaration that the Unicare Retrocession is valid and enforceable, compensatory damages for the amount due under the Unicare Retrocession, and an order that Sphere Drake post a letter of credit as required by the Unicare Retrocession (and related consequential damages due to the delay in posting the letter of credit).⁵ As an affirmative defense, All American alleges that the Unicare Retrocession contains an arbitration provision that makes some or all of Sphere Drake's claims subject to arbitration.

Earlier in this litigation, All American's motion to compel arbitration was denied and judgment was entered enjoining All American from proceeding with the arbitration it had initiated regarding the parties' dispute over the Unicare Retrocession. See Docket Entry 28 ("Sphere Drake I"). That determination was based on this court's construction of the Unicare Retrocession, which is in the form of a slip policy,⁶ as not containing or incorporating an arbitration provision. See id. at 4-11. On appeal, however, the Seventh Circuit construed the Unicare Retrocession as incorporating an arbitration provision contained in the underlying Unicare Reinsurance Policy. Sphere Drake Insurance Ltd. v. All American Insurance Co., 256 F.3d 587, 589 (7th Cir.2001) ("Sphere Drake II"). That, however, did not fully resolve the question of whether the parties' dispute was subject to arbitration. The then-pending original complaint contained the claim that the policy was void and unenforceable because EIU had exceeded the dollar limit of policies that it was authorized to issue on behalf of Sphere Drake (the "excess authority" claim). The original complaint did not contain the Amended Complaint allegations that the Unicare Retrocession was void because EIU, acting with the knowledge of or in conspiracy with WEB, the Stirling Cooke Subs, and Stirling Cooke Holdings, breached its fiduciary duty by issuing policies on Sphere Drake's behalf that were commercially unreasonable and/or designed to benefit WEB and the alleged coconspirators (the "fiduciary duty" claim).⁷ The Seventh Circuit held that the excess authority claim went to the issue of whether a contract (the Unicare Retrocession which incorporated the arbitration provision) came into being and therefore was for the court to decide before sending the dispute to arbitration if it was found that EIU had authority to issue the Unicare Retrocession. Sphere Drake II, 256 F.3d at 590-92.

Thus, the Seventh Circuit held that a remand was necessary so that the district court could resolve the issue of whether the Unicare Retrocession was void because EIU exceeded its authority. See id. at 592. If the Unicare Retrocession was found void on this ground, no enforceable arbitration provision existed and Sphere Drake was entitled to court relief in its favor declaring the Unicare Retrocession was void and that it was not liable to pay under its coverage provisions.⁸ See id. at 588, 592. If Sphere Drake's excess authority claim was rejected by the court, then an enforceable arbitration clause existed. However, the Seventh Circuit's impression was that "[t]he parties appear to . . . agree on the extent of Sphere Drake's liability if EIU had power to bind it." Id. at 588 (emphasis added). Thus, "[i]f EIU did have authority, then there appears to be no further dispute that needs to be resolved, by judge or arbitrator." Id. at 592 (some emphasis added). If the Seventh Circuit's assumptions as to appearances were true, there would be no need to order arbitration because the parties would be in agreement as to the appropriate relief once the excess authority issue is ruled upon by the court. The Seventh Circuit left open the possibility that an order of arbitration would be appropriate if "some additional issue for private dispute resolution surfaces later in the case." Id.

Because it "appeared" that the district court's prior denial of an arbitration order and enjoining of the pending arbitration would ultimately be appropriate relief, the Seventh Circuit labeled its ruling as an affirmance even though it remanded the case for further proceedings. "Accordingly, the judgment is affirmed (there will be no arbitration unless some additional issue for private dispute resolution surfaces later in the case) and the case is remanded with instructions to resolve the parties' only real dispute: the extent of EIU's authority." Id. It still appears that the parties may already agree or would be likely to reach agreement as to the appropriate relief if the Unicare Retrocession were to be found enforceable. However, an issue in addition to the excess authority claim has surfaced in the Amended Complaint.⁹ If Sphere Drake's excess authority claim is denied by the court, then the fiduciary duty claim would also have to be resolved; if Sphere Drake succeeds on its excess authority claim, though, there would be no enforceable contract and it would be unnecessary to reach the fiduciary duty claim. If the fiduciary duty claim is also an issue for the court, then the court could resolve that claim as well and there would still be no issue for arbitration, assuming the ruling was in Sphere Drake's favor or there was no disagreement as to appropriate relief. However, if the fiduciary claim should first be resolved in arbitration, denial of the excess authority claim would result in an order of arbitration for the remaining issues.¹⁰ Therefore, it must be considered whether the fiduciary duty claim is an issue for the court in determining whether there is an enforceable arbitration provision or an issue that is to be first decided by an arbitrator.

Another case brought by Sphere Drake contained claims that are very similar to the fiduciary duty claims in this case. See Sphere Drake Insurance Ltd. v. Clarendon National Insurance Co., 263 F.3d 26, 29, 33 (2d Cir.2001) (Cudahy, J., sitting by designation) ("Clarendon"). In Clarendon, the Second Circuit expressly followed Third Circuit and Ninth Circuit law while noting that the Seventh Circuit in Sphere Drake II had implicitly applied the same rule in that it approvingly cited the same Third Circuit and Ninth Circuit cases. See Clarendon, 263 F.3d at 31 (citing Sandvik AB v. Advent International Corp., 220 F.3d 99, 106-07 (3d Cir.2000); Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136, 1140 (9th Cir.1991); Sphere Drake II, 256 F.3d at 590-91). The rule followed in those cases is that there is a distinction between void and voidable contracts. If a contract containing an arbitration provision is claimed to be void ab initio, the issue of voidness is to be resolved by the court before the arbitration clause can be enforced. If the contract is claimed to be voidable, that issue is for the arbitrator unless the arbitration clause itself is voidable, not just the contract as a whole. Clarendon, 263 F.3d at 31-32. The fiduciary duty claims in Clarendon, which were governed by New York law, were found to go to the voidability of the contract as a whole and therefore were to be resolved by the arbitrator, not the court. Id. at 33-34. In this case, it is alleged that the third parties (All American and its agents) knew that EIU was breaching its fiduciary duty to Sphere Drake. Therefore, it must be determined whether, under Illinois law,¹¹ a breach of fiduciary duty known by a contracting third party makes the contract void ab initio or voidable. If the former, the fiduciary duty claim is for the court. If the latter, the fiduciary duty claim is for the arbitrator.

It is alleged that, instead of acting in Sphere Drake's interest, EIU (with the knowledge of the All American parties, but not Sphere Drake's knowledge) acted in the interest of itself and the All American parties in issuing a commercially unreasonable policy. Such conduct would be a breach of EIU's duty of loyalty. See Home Federal Savings & Loan Association of Chicago v. Zarkin, 89 Ill.2d 232, 59 Ill.Dec. 897, 432 N.E.2d 841, 846 (1982).¹² Where a fiduciary engages in self-dealing without the knowledge or permission of its principal, the transaction is voidable at the option of the principal. Id.; Bold v. Mid-City Trust & Savings Bank, 279 Ill.App. 365, 367 (1st Dist.1935). Other jurisdictions are in accord. See United States v. Dunn, 268 U.S. 121, 131, 45 S.Ct. 451, 69 L.Ed. 876 (1925); Koppel v. 4987 Corp., 2001 WL 47000 *8 (S.D.N.Y. Jan.19, 2001); Estate of Norman A. Helfan Litigation v. Capital Management Group, Inc., 2000...