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Certain Underwriters at Lloyd's London v. Argonaut Insurance Co.

September 24, 2009

CERTAIN UNDERWRITERS AT LLOYD'S LONDON, PETITIONER,
v.
ARGONAUT INSURANCE COMPANY, RESPONDENT.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Between 1959 and 1973, Respondent Argonaut Insurance Company, ("Argonaut"), a California-based insurer, entered into a series of reinsurance contracts with Petitioner Certain Underwriters at Lloyd's London ("Underwriters"), a syndicate of reinsurers whose participants include citizens of the United Kingdom. In 2004, after settling a claim with one of its insureds, Argonaut sought to recover under its contracts with Underwriters. When Underwriters sought to inspect the claim file, Argonaut demanded arbitration but missed a deadline for designating its desired arbitrator, with the result that Underwriters was able to appoint two arbitrators to the three-person panel. Argonaut's objections to the arbitration panel were overruled, see Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., 444 F. Supp. 2d 909 (N.D. Ill. 2006), aff'd 500 F.3d 571 (7th Cir. 2007), and Argonaut narrowly avoided an award of sanctions under Rule 11 of the Federal Rules of Civil Procedure for prosecuting an unsuccessful effort to stay the arbitration proceedings. Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., No. 04-5852, 2006 WL 3486882 *5 (N.D. Ill. Nov. 29, 2006).

Having prevailed in arbitration and won an award of attorneys' fees from the arbitrator, Underwriters now seeks an order confirming the award. Argonaut, for its part, asks the court to vacate the arbitral award of attorneys' fees, contending that the arbitrators exceeded their authority and that Judge Filip's denial of sanctions raises a res judicata bar to Underwriters' recovery of fees.

For the reasons set forth here, Underwriters' petition is granted and Argonaut's motion to vacate the award of fees is denied.

BACKGROUND

As the dispute between the parties has been described in detail in earlier opinions, see Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., 500 F.3d 571, 572-74 (7th Cir. 2007), the court merely summarizes the facts here briefly. Underwriters and Argonaut executed a series of reinsurance contracts, or "treaties," prior to 1973. (D.E. 1 ¶ 6; D.E. 26 ¶ 2, 6.)*fn1 Some time in 2004, Argonaut settled a claim made by two of its insureds, Western MacArthur and Western Asbestos (collectively, "Western") and then sought to recover some portion of these payments from Underwriters under the reinsurance agreements. (D.E. 26 ¶¶ 5-6.) Underwriters responded by requesting supporting information and the opportunity to inspect Argonaut's claim files relating to the settlement. (Id. ¶ 7.) Rather than provide such information, Argonaut invoked the arbitration provision of the reinsurance agreement, issuing a demand for arbitration on August 4, 2004. (Id. ¶ 8.)

Argonaut's demand triggered certain obligations and a contractual deadline for naming the panel of arbitrators. The arbitration clauses state, in relevant part:

If any dispute shall arise between the Company and the Underwriters with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, this dispute shall be referred to three arbitrators, one to be chosen by each party and the third by the two chosen. If either party refuses or neglects to appoint an arbitrator within thirty days after the receipt of written notice from the other party requesting it do so, the requesting party may nominate two arbitrators, who shall choose the third . . . . The arbitrators shall consider this agreement an honorable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following strict rules of law. The decision of a majority of the arbitrators shall be final and binding on both the Company and the Underwriters. (D.E. 26 ¶ 9; D.E. 21-3 at 1; D.E. 53-2, at 31.) Underwriters timely appointed its first arbitrator by facsimile letter dated September 3, 2004. (D.E. 26 ¶ 12.) On August 6, 2004, Underwriters requested that Argonaut designate its preferred arbitrator within 30 days, as required by the arbitration provision. (Id. ¶ 8.) The thirtieth calendar day from the date of Underwriters' request fell on Sunday, September 5, 2004, the day before Labor Day; Labor Day is a national holiday in the United States but an ordinary business day in the United Kingdom, where Underwriters is based. Argonaut failed to name an arbitrator by September 5, 2004. Accordingly, on September 7, 2004, Underwriters appointed a second arbitrator as contemplated by the arbitration clause. Argonaut refused to proceed to arbitration, contending that Sunday and Labor Day should not be counted, but Judge Filip of this court disagreed, and his decision was upheld on appeal.

During the pendency of its appeal from Judge Filip's ruling, Argonaut moved for an order staying the enforcement of the district court's summary judgment-that is, deferring arbitration proceedings pending the resolution of Argonaut's appeal. (Motion to Stay, Ex. E to Resp.'s Mot.) The district court denied that request, concluding that Argonaut had failed to make the required showings of irreparable harm and likelihood of success on the merits. Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., No. 04-5852, 2006 WL 3486882 *5 (N.D. Ill. Nov. 29, 2006). Underwriters contended that Argonaut's motion for a stay violated Rule 11(b) and (c) of the Federal Rules of Civil Procedure, and sought sanctions. (Petitioner's Response, Ex. F to Resp.'s Mot. at 5-8.) Although Judge Filip denied Underwriters' motion for procedural reasons-Underwriters had not given Argonaut notice and opportunity to respond, as required by Rule 11-he considered imposing sanctions of attorneys' fees on his own motion. Certain Underwriters, 2006 WL 3486882 *6. In the end, the court concluded that Argonaut's attempts to distinguish controlling precedent were "weak--quite weak--but they [were] not sufficiently enfeebled as to lead the Court to exercise its discretion so as to impose sanctions." Id. Judge Filip said, "The issue is a close one, and the Court believes the propriety vel non of sanctions is an issue on which discretion could be fairly exercised in either direction, but given Argonaut's attempts to distinguish contrary precedent, the Court will exercise leniency and decline the request for sanctions here." Id.

Following the court's ruling, the dispute proceeded to arbitration under the terms of the arbitration agreement. In the context of that arbitration, each of the parties sought to recover the attorneys' fees expended litigating over the constitution of the panel. (Argonaut's Pre-Hearing Reply Brief, Ex. J to Resp.'s Mot.at 33-35; Underwriters' Pre-Hearing Brief, Ex. I to Resp.'s Mot. at 33-36.) Underwriters contended that it was entitled to attorneys' fees because Argonaut had acted in "bad faith" before and throughout the arbitration by unnecessarily prolonging the process. (Underwriters' Pre-Hearing Brief, Ex. I to Resp.'s Mot. at 33.) In its brief to the panel, Underwriters noted that Argonaut "hastily demanded arbitration, then filed a frivolous motion in federal court to prolong the dispute after it failed to make a timely appointment of an arbitrator, then played games during the discovery process of this arbitration, all at significant and unnecessary cost to Underwriters." (Id.) Without lengthy explanation, the arbitration panel awarded Underwriters "all reasonable legal fees incurred" during the period from October 6, 2004 until May 1, 2007, "arising out of the disputes relating to this arbitration and the constitution of the Panel," to be paid by Argonaut. (Arbitration Findings and Award, Ex. H to Resp.'s Mot. at 10.) This time frame covers the entire litigation over the constitution of the panel, culminating in Argonaut's motion to stay enforcement of Judge Filip's ruling.

On November 13, 2008, Argonaut moved to vacate the arbitrators' award of attorneys' fees. Argonaut contends that the award is inconsistent with Judge Filip's November 29, 2006 ruling and therefore exceeded the arbitrators' power and violated principles of res judicata. Underwriters has petitioned for the court to confirm the arbitral award. (D.E. 53, D.E. 73.) As neither party has addressed the arbitrators' substantive ruling, the fee award is the only issue before the court.

DISCUSSION

In asking the court to vacate the arbitral award, Argonaut faces a stiff burden. The Federal Arbitration Act explains that an award may be ...


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