In Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, --- F.3d. ---, 2014 WL 5786951 (7th Cir. Nov. 7, 2014), the United States Court of Appeals for the Seventh Circuit, applying Illinois and federal law, affirmed the denials of (1) a motion to strike a reinsurer’s answer for failure to post security under Illinois insurance law, and (2) a motion to compel the reinsurer to arbitrate. Id. at *1.
The reinsurer, an entity wholly owned by Uruguay, allegedly owed $2 million to an insurance company it reinsured. Id. When the insurance company became insolvent, its accounts were sold to the plaintiff, a company established for the purpose of collecting outstanding balances under the reinsurance contracts. Id. When the reinsurer disputed the amounts it owed, the plaintiff filed suit, seeking to compel arbitration and, in the alternative, judgment for breach of contract. Id.
The reinsurer filed an answer, but did not comply with Illinois’s statutory requirement that an insurer not specifically authorized to do business in Illinois post security sufficient to satisfy any final judgment before it may file a responsive pleading. Id. at *1-2. The district court denied the plaintiff’s motion to strike the answer for such noncompliance, and subsequently held that the plaintiff had “no right to arbitrate under the terms of the reinsurance treaties, because the assignment . . . gave . . . only limited rights to the collections of certain debts, not all rights and duties” possessed by the insolvent insurer. Id.
On interlocutory appeal, the Seventh Circuit held that the district court had properly denied the motion to strike for failure to post security. It explained that, under the Foreign Sovereign Immunities Act (FSIA), “‘property in the United States of a foreign state shall [generally] be immune from attachment arrest and execution.’” Id. at *2 (quoting 28 U.S.C. § 1609). Noting that no case from the circuit had addressed “whether prejudgment security is an ‘attachment’ for FSIA purposes,” it looked to the text of the FSIA. Id. Reading the statute as a whole, it concluded that § 1609 must encompass attachments “‘the purpose of [which] is to secure satisfaction of a judgment’” as well as those “to obtain jurisdiction over a foreign sovereign.” Id. at *2-3 (alteration in original) (citation omitted); see id. at *3 (“If we accepted [plaintiff’s] reading—that § 1609 deals exclusively with jurisdictional attachments—§ 1610(d) would accomplish nothing; it would allow waiver of immunity only for a class of property to which no immunity attached by virtue of the prior section.”). The court also found support for its conclusion in the rationale of the Second Circuit, “the only other circuit to consider a similar issue”: “‘The pre-judgment security requirement . . . would force foreign sovereign [reinsurers] to place some of their assets in the hands of the United States courts for an indefinite period. . . . All this is precisely the same result that would obtain if the foreign sovereign’s assets were formally attached.’” Id. at *3-4 (alteration in original) (citation omitted). Finally, the court agreed with the Second Circuit that, “not unlike many federal statutes incorporating different state procedures, a single unified term or group of terms [such as “attachment” in the FSIA] stands as a placeholder for a generic understanding rather than a reference to a particular state-law procedural vehicle or historical practice.” Id. at *4. Consequently, Illinois’s prejudgment security requirement for insurers was an “attachment” under the FSIA. Id.
Next, the Seventh Circuit rejected the arguments that the reinsurer had waived its immunity from the state statute by agreeing to a reserves clause in its reinsurance contracts and by choosing to transact reinsurance business in a state imposing a security requirement. Id. at *4-5. As to the former, it reasoned that a reserves clause “ensures the smooth operation of the [reinsurance] contract during its term; the statutory security provision requires a party to surrender its assets to a court potentially long after the contract ends.” Id. at *4. As to the latter, it reasoned that the reinsurer “may have been unaware of the security requirement, or it may well have agreed to transact business believing that the FSIA would protect it.” Id. at *5. In either event, such action could not be considered an “explicit” waiver of the FSIA’s protections. Id.
The Seventh Circuit refused to consider the plaintiff’s argument that the McCarran-Ferguson Act—which provides that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance,” 15 U.S.C. § 1012(b)—trumps the FSIA. 2014 WL 5786951, at *5. While expressing some doubt as to the merits of the plaintiff’s argument that the Illinois statute would thus apply, the court concluded that the plaintiff had “forfeited any argument resting on the McCarran-Ferguson Act” by failing to directly raise the issue below. Id. at *5-6.
Turning to the denial of arbitration, the Seventh Circuit concluded that the order was immediately appealable under the Panama Convention, resolving yet another issue that has “escaped the attention of our sister circuits” and, “in large measure, . . . commentators.”
Id. at *9.
Finally reaching the merits, the Seventh Circuit rejected the plaintiff’s arguments that the insurance company’s right to demand arbitration had been transferred to the plaintiff: “[Plaintiff] had absolutely no relationship to the underlying contracts other than an after-acquired right to collect certain debts. The validity and amount of those debts cannot be determined other than by looking to the terms of the agreement . . . . The reinsurance contracts . . . do not otherwise govern the current parties’ rights.” Id. at *13.
Pine Top Receivables is significant because by addressing the applicability of numerous federal and state laws to foreign sovereign reinsurers, the decision sheds light on many issues that have received little judicial attention to date.