In a colorful U.S. Court of Appeals for the Seventh Circuit opinion, the three-judge panel held that, despite an absence of a fixed deadline in the Federal Arbitration Act ("FAA") for filing a motion to remand an arbitral award for the purposes of obtaining a clarification, such motions must be filed within a "reasonable time" after the award, and in this case, 8 years was not a reasonable time.
In 1995, an arbitration panel awarded the cedent $7.8 million against its reinsurers for asbestos-related losses arising under certain reinsurance contracts. The award provided that the reinsurers, including the Uruguayan state-owned reinsurer, El Banco de Seguros del Estado ("Banco"), pay their shares of the award plus interest and attorneys' fees within 45 days. Any reinsurer who failed to do so was to post an irrevocable letter of credit ("LOC") with the cedent for $9 million "to secure payment of the ultimate liability in this matter." All of the reinsurers except Banco paid their shares within 45 days.
Although Banco acknowledged its obligation to pay its $181,000 share of the award plus interest and attorneys' fees, it obstinately resisted payment for over 6 years despite a court-issued writ of execution. Banco also steadfastly refused to post the $9 million LOC, arguing that the panel only required the LOC to secure payment of Banco's share of the award due at the time of the arbitration and not as security for future debts against it under the contracts. While the subsequent procedural history is convoluted, the upshot was that the cedent ultimately confirmed the award in federal district court and sought to collect against Banco in both Wisconsin and New York.
In 2001, a Wisconsin federal district court ordered Banco to post the $9 million LOC and to pay its share of the award. Notwithstanding Banco's appeal to the Seventh Circuit (which subsequently affirmed), it eventually paid the $181,000 award plus interest and attorneys' fees (by that time totaling more than $1.5 million) but still refused to post the LOC.
Collaterally attacking the panel's award, Banco demanded arbitration on the issue of whether the panel had intended Banco to post the LOC as security against future debts owed to the cedent under the reinsurance contracts or, as Banco contended, merely to provide security until such time as Banco satisfied its debt to the cedent, an obligation it had now discharged. The cedent then sought post-judgment relief from the federal district court, which enjoined the arbitration, awarded $240,000 in additional attorneys' fees to the cedent, and imposed civil contempt sanctions on Banco for disobeying its LOC order starting with a $2,000 per day penalty that rose in stages to $4,000 per day until Banco complied.
On appeal to the Seventh Circuit, the three-judge panel agreed that there was a legitimate disagreement between the parties over the intent of the panel's LOC order but ruled that there was no legal basis for Banco's demand for clarification of the award 8 years later. Acknowledging that the FAA did not fix a specific deadline for filing a federal court motion to remand the award for clarification by the arbitrators, the Seventh Circuit inferred that any such motion must be filed within a "reasonable time." It noted that one of the arbitrators had died in the interim and that the panel would likely be unwilling to clarify an award after it had been challenged in federal court and enforced unless directed to do so by the court.
Turning to the issue of whether Banco must post the $9 million LOC, the Seventh Circuit found that the trial court had left the LOC issue open for adjudication and concluded that the panel intended it to secure payment of the debt their award created, i.e., Banco's $181,000 share, and not its future asbestos liability. Hence, Banco, having by this time satisfied its liability pursuant to the award, need not post the LOC.
Citing Banco's "impressive record of obstinacy," the Seventh Circuit refused to lift the $4,000 per day sanction imposed by the court below until such time as Banco paid all amounts due the cedent, including all the cedent's reasonable attorneys' fees incurred in defending against this appeal and all subsequent proceedings in district court required to extract any monies due. And just in case those mounting sanctions were insufficient motivation, the Seventh Circuit concluded with the following admonition: "Further obduracy by Banco will result in the imposition of additional sanctions that will make $4,000 a day seem like the touch of a feather."
Employers Insurance of Wausau v. El Banco de Seguros Del Estado, Nos. 03-2484, 03-2771, 2004 U.S. App. LEXIS 1565 (7th Cir. Feb. 3, 2004).
TELEPHONE: (203) 227-9431
FAX: (212) 208-3003