Davies Howe Partners LLP

On February 3, 2012, the U.S. Court of Appeals for the Second Circuit issued its decision in Scandinavian Reinsurance Company Limited v. St. Paul Fire & Marine Insurance Co.  The court reversed the lower court’s evident partiality ruling and denied Scandinavian Re’s petition to vacate the award.

The facts are interesting.  The dispute arose over the failure of the umpire and one of the party-arbitrators to disclose that they were serving as panel members in another arbitration.  The other arbitration was a dispute over some similar issues, involved related parties, and included a common witness who testified in both proceedings – in a contradictory fashion.  The federal district court found that there was a material conflict of interest and that the arbitrators’ failure to disclose this conflict of interest warranted vacating the arbitral award.

In reversing the lower court, the Second Circuit unanimously held that evident partiality as that term is used in the Federal Arbitration Act § 10(a)(2) may be found only ‘where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.  It ruled that Scandinavian Re had not met the burden of establishing that the arbitrators’ failure to disclose their role in the two arbitrations was indicative of bias and constituted a conflict of interest that should lead to vacating the arbitral award.  Their concurrent service in these arbitrations, according to the court, did not automatically suggest that they were not impartial nor did it show a predisposition to rule in a particular way in the arbitration even if the issues in the other concurrent arbitration were similar.

Even though Scandinavian Re argued that it was misled by the arbitrators’ repeated assurances to the parties that they understood themselves to be obligated to make thorough and ongoing disclosures, the Second Circuit disagreed that vacating the award was appropriate because an arbitrator failed to consistently live up to his or her announced standards for disclosure or to conform in every instance to the parties’ respective expectations regarding disclosure. 

The Court observed, it would have been better for the arbitrators to have disclosed the fact of their involvement in the other case but that the remedy of vacating the award was not necessary. Despite the outcome in this case, the court did offer the following comment on the importance of timely and full disclosure by arbitrators:  Disclosure not only enhances the actual and apparent fairness of the arbitral process, but it helps to ensure that that process will be final, rather than extended by proceedings like this one.

Scandinavian Reinsurance Company Limited v. Saint Paul Fire and Marine Insurance Company, Docket No. 10-0910-cv, 2012 U.S. App. LEXIS 2082 (2nd Cir. Feb. 3, 2012), rev’g 732 F. Supp. 2d 293 (S.D.N.Y. 2010).

Ava Kanner

 A US Bankruptcy Judge has approved a $90 million settlement of a class action lawsuit against Lehman’s former CEO and 13 other executives.  

The Judge was not persuaded by the objections made by other Lehman officers who argued that the release of insurance funds to effect the settlement might not leave enough money to cover settlements of other investor lawsuits (see In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).

The settlement still must be approved by the federal judge overseeing the class action case.

For further information, see: http://www.reuters.com/article/2011/10/19/lehman-idUSN1E79I0YB20111019

David Cherepacha

An interesting legal dispute is taking shape among different groups of former directors and officers associated with Lehman Brothers Holdings Inc. and its affiliates.

Seven former directors – from Structured Asset Securities Corp, Lehman’s mortgage-backed securities issuer – are objecting to a proposed settlement of $90 million to settle a class action investor lawsuit against Lehman’s former CEO and 13 other executives, to be funded by a directors’ and officers’ liability insurance policy.   The objecting directors are concerned that the settlement may not leave sufficient insurance proceeds to settle a separate class action lawsuit brought against them.    The insurance policy reportedly has limits of US $250 million.

The dispute will come before a U.S. Bankruptcy Court Judge, who has been asked to authorize the release of the funds (In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).  

The case gives rise to difficult priority and equity issues among insured directors and officers given that there may well not be sufficient insurance limits under the policy to defend and settle all the outstanding claims.  For this reason, it will be interesting to see how the Court resolves these conflicting claims to the available insurance proceeds. 

For further information, see: http://www.reuters.com/article/2011/09/09/us-lehman-idUSTRE78801420110909

 David Cherepacha

In Med-Chem Health Care Ltd. v. Misir (2010), 103 O.R. (3d) 769, the Ontario Court of Appeal agreed with the motion judge’s decision requiring a corporation to provide an indemnity to  former directors for legal costs.  The former directors were defending themselves against an action brought by a shareholder of the corporation (by way of a derivative action).   It was alleged that the former directors and a secured lender had breached their duties of care to the corporation, causing the company to file for bankruptcy.

The appellant company agreed that it was obligated to provide an indemnity to the former directors under its By-laws and Section 136 of the Ontario Business Corporations Act.  However, it argued that its obligation to pay legal fees did not arise until after the conclusion of the lawsuit.   The action was still at the pleadings stage.  The former directors sought an order requiring the company to advance an indemnity for legal fees from time to time.

Justice Goudge for the Court of Appeal stated, in part:

Section 136(2) of the OBCA allows the corporation (subject to a specified repayment condition) to pay advances of the legal expenses that the corporation may indemnify under s. 136(1). More importantly, s. 136(4.1), under which these proceedings are brought, allows the corporation to do the same (with the court’s approval), if the action is brought by or on behalf of the corporation itself and the individuals are made parties to it by virtue of their association with the corporation. Thus, s. 136 provides for advancement of the same legal costs, charges and expenses that may be indemnified by the corporation. In short, the legislature has made advancement a part of the statutory indemnification scheme, recognizing the reality that requiring an individual to fund his or her costs of litigation until its conclusion before being provided with indemnification would seriously impair the objective of indemnification itself.

From a directors’ and officers’ insurance perspective, the decision is interesting because the Court of Appeal expressly rejected the appellant’s argument that the motions judge should have considered whether there was proof of an inability on the part of the former directors to pay for the litigation without the advances and, in particular, the presence of insurance to fund the former directors’ defence.

David Cherepacha

In a recent American case – W3i Mobile, LLC v. Westchester Fire Insurance Company, 2011 WL 500213 (C.A.8 (Minn.)) – the US Court of Appeals for the 8^th Circuit considered a “Products Exclusion” in a Business and Management Indemnity Policy.

W3i Mobile, a provider of mobile content to cellular phone users, sued its insurer for failing to defend and provide an indemnity for the expenses associated with two class actions brought by users of its mobile content.   The lawsuits alleged that W3i Mobile billed cellular telephone users for unauthorized mobile content in violation of various state consumer protection statutes, among other allegations.

The Court of Appeals found that the products exclusion in the directors and officers section of the policy applied to preclude coverage for the claims.   This exclusion provided that the insurer was not liable for any claims,

. . . alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving . . . any goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by [W3i Mobile].

The Court of Appeals noted that the class action claims alleged that customers were billed erroneously or without authorization for mobile content, being W3i Mobile’s “product”.   The Court rejected M3i Mobile’s characterization of the claims as being merely billing disputes.  In particular, the Court emphasized the words “in any way involving” in the products exclusion clause wording.

Sometimes, broadly worded exclusion clauses are “read down” and/or are found to be ambiguous by courts.   However, this decision is a good example of an American appeal court giving effect to a broadly worded exclusion clause.

David Cherepacha