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On Nov. 7, 2014, Locke Lord lawyers secured two rulings in the Seventh Circuit that may impact future reinsurance disputes. Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, -- F.3d --, 2014 WL 5786951 (7th Cir. Nov. 7, 2014). The Seventh Circuit confirmed that under the Foreign Sovereign Immunities Act (FSIA), a foreign sovereign reinsurer need not comply with state pre-answer security statutes unless the foreign reinsurer “explicitly” waived its FSIA immunity by clear and unmistakable language. The Court also held in a matter of first impression that the assignee of the right to collect reinsurance receivables from the liquidator of an insolvent insurer did not acquire the right to collect those receivables via arbitration.
Between 1977 and 1984, defendant Banco de Seguros del Estado agreed to reinsure Pine Top Insurance Co. (Pine Top) under five different reinsurance contracts (the Pine Top-Banco Treaties). In 1986, Pine Top was placed into liquidation in Illinois and the Director of Insurance was appointed as Liquidator.
On July 31, 2008, the Liquidator sent a letter to Banco demanding payment of more than $2.3 million in alleged unpaid balances. Banco disputed the Liquidator’s demand.
In November 2010, plaintiff Pine Top Receivables of Illinois, LLC (PTRIL) purchased from the Liquidator all of Pine Top’s accounts receivables, including the balances purportedly owed by Banco. PTRIL attempted to collect from Banco but Banco refused to pay.
PTRIL demanded arbitration against Banco. Banco refused, arguing that PTRIL did not have the right to arbitrate against Banco under the Pine Top-Banco Treaties. PTRIL then filed a lawsuit against Banco asking the court to order Banco into arbitration.
The Trial Court
PTRIL moved to strike Banco’s answer to the complaint because Banco did not post pre-answer security for the full amount of the disputed debt as required by the Illinois Insurance Code. The district court held that the pre-answer security requirement of the Insurance Code is an “attachment” of the sort prohibited by the FSIA and Banco did not waive its FSIA immunity.
After denying PTRIL’s motion to strike, the district court turned its attention to Banco’s motion to dismiss PTRIL’s arbitration claims. The district court held that under the unambiguous terms of the assignment agreement between PTRIL and the Liquidator, PTRIL did not acquire the right to arbitrate against Banco.
The Seventh Circuit
The FSIA provides that the property of a foreign state shall be immune from “attachment” unless the foreign sovereign “explicitly” waived that immunity. 28 U.S.C. 1609, 1610.
On appeal, PTRIL argued that the word “attachment” as used in the FSIA means only the procedural device denominated as an attachment under state and federal rules of civil procedure. Thus, according to PTRIL, the FSIA does not prohibit the pre-answer security requirement of the Insurance Code, which is not labeled as an attachment.
The Seventh Circuit rejected PTRIL’s efforts to elevate form over substance. Citing two earlier opinions issued by the Second Circuit, the court noted that because both types of orders would require a foreign reinsurer to deposit funds with the court for an indefinite period of time, there is no material distinction between the Insurance Code’s pre-answer security requirement and a formal order of attachment. The court concluded that the FSIA’s prohibition against attachment applies broadly to forbid any measure that ties up the sovereign’s assets, including the imposition of pre-judgment security under the Insurance Code.
The Seventh Circuit also rejected PTRIL’s argument that Banco “explicitly” waived its FSIA immunity by agreeing to a reserves clause in the Pine Top-Banco Treaties. The court noted that by agreeing to the reserves clause, Banco agreed to set up a structure to ensure that it “maintains sufficient cash reserves to meet its ongoing obligations” during the term of the contract. This type of arrangement is materially different from an agreement “to surrender its assets to a court potentially long after the contract ends.”
In reaching its conclusion that a reserves clause is not an “explicit” waiver of FSIA immunity, the Seventh Circuit distinguished the oft-cited opinion in Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2d Cir. 2003), which affirmed a panel award requiring Banco to post security. The court noted that the Mutual Marine case came before the court in the context of an appeal of an arbitration award granting pre-judgment security. Because the court in Mutual Marine was required to affirm the arbitrator’s award if there was a “barely colorable” basis for the award, the decision did not persuade the Court to hold that a reserves clause is an explicit waiver of immunity.
The Seventh Circuit rejected PTRIL’s argument that the purchase agreement between PTRIL and the Liquidator transferred the right to demand arbitration under the Pine Top-Banco Treaties. The court focused its attention on § 5 of the purchase agreement, which divides PTRIL’s authority into two parts. Under § 5.1, PTRIL has the right to obtain information relating to the debts owed by Banco “to the same extent and under the same conditions as the Assignor could have done so in the exercise of its contractual right.” However, under § 5.2, the assignor limited PTRIL’s collection rights to the right to “demand, sue for, compromise and recover” the debts. As the court explained: “Not only is ‘demand arbitration’ not specifically included in the transferred rights, it is of an entirely different character. Ownership of a debt may imply the right to recover the debt absent some legal impediment, but it does not imply the right to use a means not otherwise established as a right under the law.”
The court held that the purchase agreement was unambiguous. Therefore, it declined to give any weight to two conclusory affidavits proffered by PTRIL for the proposition that the Liquidator intended to transfer arbitration rights to PTRIL. The court noted that “[n]either the affidavits nor anything else [PTRIL] proposed to offer concerns discussions during negotiations or the meaning of any concrete language in the documents.”
In the final analysis, insurers and businesses that purchase delinquent or run-off debts from insurance companies should view the Seventh Circuit’s decision in Pine Top Receivables as a warning that the right to demand arbitration under the underlying insurance contract is not a right that transfers automatically with the purchased debt. If a party would like the ability to recover its purchased receivables via arbitration, that party should make sure that the purchase agreement contains clear and unequivocal language that transfers the right to demand arbitration.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author.