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Pine Top Receivables, LLC v. Banco De Seguros Del Estado: The Seventh Circuit Exorcises some Ghosts of Reinsurance Past, but has it Summoned an Erie Ghost of Reinsurance Future?    

November 19th, 2014 Appellate Jurisdiction, Appellate Practice, Arbitrability, Arbitration Practice and Procedure, Contract Interpretation, FAA Chapter 3, Foreign Sovereign Immunities Act, Insolvency Proceedings, Inter-American Convention on International Commercial Arbitration, McCarran-Ferguson Act, Nuts & Bolts: Reinsurance, Panama Convention, Practice and Procedure, Pre-Answer Security, Reinsurance Litigation, United States Court of Appeals for the Seventh Circuit, United States Supreme Court Comments Off on Pine Top Receivables, LLC v. Banco De Seguros Del Estado: The Seventh Circuit Exorcises some Ghosts of Reinsurance Past, but has it Summoned an Erie Ghost of Reinsurance Future?     By Philip J. Loree Jr.

In Pine Top Receivables, LLC v. Banco De Seguros Del Estado, ___ F.3d ___, Nos. 13-1364/2331, slip op. (7th Cir. Nov. 7, 2014) (per curiam) the United States Court of Appeals for the Seventh Circuit addressed a trio of issues that—once upon a time at least—arose fairly frequently in reinsurance litigation: pre-answer security; immunity from posting security, courtesy of the Foreign Sovereign Immunities Act (the “FSIA”), 28 U.S.C. § 1602-11 (2013); and the effect of the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-­15 (2013), this time whether a state pre-answer security statute can reverse preempt the FSIA.

It did so in the somewhat unusual context of Chapter 3 of the Federal Arbitration Act, which implements the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”). That raised an arcane issue of appellate jurisdiction, which appears to have been caused by Congress failing to amend the appellate jurisdiction provisions of Chapter 1 (codified at 9 U.S.C. § 16 (2013)) to reflect Congress’ enactment of Chapter 3.

Throw in an assignment agreement between the insolvent cedent and a contract interpretation dispute over whether the cedent’s assignee purchased the right to compel arbitration under the reinsurance treaties between the insolvent cedent and the Uruguay-owned reinsurance company, and we have something that might appear to resemble a perfect storm of reinsurance and arbitration-related issues.

As it turned out, the “perfect storm” was more like a tempest in a teapot. The Court affirmed the district court’s denial of the cedent’s assignee’s motions: (a) to strike the state-owned reinsurer’s answer for failure to post pre-answer security pursuant to the Illinois statute; and (b) to compel the reinsurer to arbitrate.

The case was decided by two very able judges: Circuit Judge Frank H.  Easterbrook and Circuit Judge Ann Claire Williams.  Circuit Judge Kenneth Francis Ripple, another very able jurist, recused himself based on circumstances arising after oral argument.  The opinion, however, was per curiam, that is, by the Court, without either participating judge taking authorship credit.

While the case presented many issues, for the most part they were matters that courts have dealt with before, and quite some time ago. One might call them ghosts of reinsurance past, and the Seventh Circuit properly laid them to rest once again. The notable exceptions were the oddball appellate jurisdiction issue, and the interpretation of the assignment agreement, which, like most other contract interpretation issues, was sui generis.

One of the ghosts of reinsurance past, the McCarran-Ferguson issue, was not decided on the merits but deemed forfeited because it was not preserved in the district court. The cedent’s assignee argued on appeal—but apparently not specifically enough in the district court—that the FSIA was reverse preempted by McCarran-Ferguson because Illinois’ pre-answer security statute was a state law regulating the business of insurance and the FSIA was not a federal law specifically regulating the business of insurance.

Before deeming the argument forfeited, however, the Court suggested that cedent’s assignee might not be correct on the merits. First, the Court noted that traditional, pre-FSIA common-law foreign sovereign immunity principles might apply, an observation that seems uncontroversial enough. See slip op. at 11. Second, it hinted that under the Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), line of cases, the state pre-answer security statute might not apply in federal court. See slip op. at 4, 11.

This possible Erie Doctrine twist is the ghost of reinsurance future that the Seventh Circuit might have summoned. It is interesting from the standpoint of both constitutional federalism and federal judicial power, but potentially a little frightening to cedents and insureds, whose ability to enforce easily a favorable judgment against an unauthorized reinsurer or insurer could depend on whether the cedent or insured can keep the case in state court.

The Erie issue was flagged twice by the Court. In one portion of the opinion the Court said “[a]lthough [Illinois’ pre-answer security requirement] is phrased as a pleading rule, the parties treat it as substantive and we do likewise without deciding whether the parties’ assumption is correct.” The Court noted parenthetically, however, that if the Illinois statute “is procedural, federal rules would control, and federal law does not require out-of-state insurers to post security.” See slip op. at 4.

Later in the opinion the Court, when directly addressing whether the McCarran-Ferguson argument would reverse preempt the FSIA, the Court said that “[m]aybe other considerations”—i.e., apart from pre-FSIA common-law foreign sovereign immunity principles—“would block the enforcement of the state [pre-answer security] statute.” See slip op. at 11. In support it cited Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), which held that, under the Judiciary Act of 1789, district courts have “no authority to issue a preliminary injunction preventing [a defendant] from disposing of [its] assets pending adjudication of [a plaintiff’s] contract claim for money damages.” See 527 U.S. at 333. As before, the Court did not purport to resolve the issue.

Taking the two references together, the Court suggested that state pre-answer security statutes might not be applicable in diversity actions under the Erie Doctrine because: (a) they may be procedural and are, in any event, not outcome determinative; (b) federal procedural rules and statutes do not authorize courts to require out-of-state insurers to post pre-answer security; and (c) under the Judiciary Act of 1789, which established the federal court system, the federal courts’ equitable powers do not extend to freezing assets of a defendant for purposes of securing the payment of a possible judgment on a claim that has yet to be adjudicated on the merits. The federal courts’ lack of implied power to impose prejudgment security measures coupled with the lack of any express power conferred by federal rule or statute to require out-of-state insurers to post security, means  that state pre-answer security statutes apply in diversity cases only if they are substantive or otherwise outcome determinative.

While we think there are some persuasive reasons why under the Erie Doctrine state pre-answer security statutes must be applied by federal courts in diversity cases, the Seventh Circuit has raised an important issue, which may have to be addressed in the future. Though we haven’t looked at the issue of the applicability of pre-answer security statutes in diversity cases in quite some time, our recollection is that the federal courts have, for the most part, taken their applicability for granted, without subjecting that assumption to a rigorous Erie analysis.

And so it appears that the ghost of reinsurance future may have been summoned. Whether it makes  an appearance and if so, just how Erie  it might be, remains to be seen.

We’ll  discuss what transpired in Pine Top in more detail in a subsequent post.




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