In a recent decision of the United States District Court for the Southern District of New York, Cooke & Partners, Ltd. v. Certain Underwriters at Lloyd’s, London, No. 08 Civ. 3435 (RJH) (S.D.N.Y. Mar. 26, 2009), the Court compelled the assignee of a liquidator’s claims to arbitrate its disputes with the reinsurers of the liquidated company.

The dispute arose from the liquidation of a non-party, Citizens Casualty Insurance Company. On June 17, 1971, at the request of the Superintendent of Insurance of the State of New York, the state court placed Citizens in liquidation and appointed the Superintendent as Liquidator. To close the estate, the Superintendent reached an agreement with plaintiff B.D. Cooke & Partners Limited, which represented a group of Citizens’ largest creditors. The Superintendent assigned to Cooke the remaining claims of the estate and, in return, Cooke agreed to surrender its claims to the estate. The liquidation proceeding terminated on April 9, 1998. In 2008, Cooke, as assignee of Citizens’ Liquidator, brought three claims in New York Supreme Court against defendants, Certain Underwriters at Lloyd’s, London (“Underwriters”), including claims for breach of contract and “account stated," requesting amounts allegedly owed to Cooke as assignee under the Underwriters’ excess of loss reinsurance contracts with Citizens. Underwriters removed the case to the District Court, alleging that the arbitration clauses in the excess of loss reinsurance contracts were governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), and thus removable. The parties agreed to brief defendants’ motion to compel arbitration and stay the state court action in parallel with the plaintiff’s motion to remand.

Cooke made three arguments in favor of remand back to the state court, each of which the District Court rejected. First, Cooke argued that the parties’ dispute was not within the scope of the arbitration clauses. The court found, however, that there was clearly a connection between the reinsurance contracts and each of Cooke’s claims. Second, Cooke argued that it should be exempt from arbitration under the assignment, on the basis that a statutory liquidator cannot be compelled to submit to arbitration under New York law. Cooke argued that “either operation of the arbitration clauses ceased upon the New York Supreme Court’s liquidation order, or the Superintendent assigned his exemption from arbitration to plaintiffs.” The Court held that Underwriters’ inability to compel the Liquidator to arbitrate did not imply an inability to compel Cooke to arbitrate, as nothing in the assignment purported to assign rights accruing to the Liquidator besides reinsurance recoverables or other rights Citizens possessed under its contracts. Third, Cooke argued that Underwriters waived their rights to removal to the District Court by the inclusion of a “Service of Suit” provision in the reinsurance contracts, which provided that the court of the reinsured’s choosing would decide whether to refer the matter to arbitration. The Court ruled that based on Third and Fifth Circuit case law, and the strong federal policy that federal courts should decide arbitrability issues under the Convention, waiver of arbitrability should be found only where it is explicit. Consequently, the Court granted Underwriters’ motion to compel arbitration in New York pursuant to the excess of loss reinsurance contracts.

Click here to review a copy of the District Court’s decision.