Banco Bradesco S.A. v. Steadfast Insurance Company et al
Filing
25
MEMORANDUM AND ORDER denying 4 Motion to Vacate Arbitration; granting 15 Motion to Confirm Arbitration. For the reasons stated above, the Court denies Petitioner's Mot. to Vacate [dkt. no. 4] and grants Insurers' Cross-Pet. to Confirm the Arbitration Award against both HSBC Brasil and Bradesco [dkt. no. 15]. The Court enters judgment confirming the October 16, 2017 Award. The Clerk of Court is directed to enter judgment forthwith and terminate the above docket entries. (Signed by Judge Loretta A. Preska on 9/7/2018) (mro) Transmission to Orders and Judgments Clerk for processing.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
BANCO BRADESCO S.A. as
successor in interest to HSBC
BANK BRASIL S.A. - BANCO
MULTIPLO, GRAND CAYMAN BRANCH
Petitioner,
18 Civ. 00331
-againstSTEADFAST INSURANCE COMPANY and
INRONSHORE SPECIALTY INSURANCE
COMPANY.,
(LAP)
MEMORANDUM AND ORDER
Respondents.
LORETTA A. PRESKA, Senior United States District Judge:
Before the Court is a motion to vacate an arbitration award
(the "Award") dated Oct. 16, 2017, submitted by Petitioner Banco
Bradesco S.A.
("Petitioner") as successor in interest to HSBC
Bank Brasil S.A.
("HSBC Brasil"), Banco Multiplo S.A., Grand
Cayman Branch. 1
(See Mem. of Law in Supp. of Pet's. Mot. to
Vacate the Arb. Award,
no. 5] .)
("Mot. to Vacate"), Jan. 1, 2018,
[dkt.
The Award was published in favor of Cross-Petitioners
and Respondents Steadfast Insurance Company ("Steadfast") and
1
Bradesco alleges that on July 1, 2016, during the arbitration,
HSBC sold its shares to Bradesco and that subsequent to this
transaction Bradesco became HSBC's successor in interest.
Insurers argue that Bradesco offers the Court no evidence of its
successorship to HSBC Brasil's rights as respects the Policy or
Award. Insurers bring their petition to confirm the Award
against their arbitration counter party, HSBC Brasil, as well as
against Bradesco.
1
Ironshore Specialty Insurance Company ("Ironshore")
(collectively, the "Insurers").
William R. Bennett,
2018,
[ dkt. no.
Deel. of
("Bennett Deel."), Ex. A, Jan. 12,
III,
6] . )
(Id. at l; see Award,
On Feb. 12, 2018, the Insurers responded
with a cross-petition to confirm the Award and in opposition to
the Mot. to Vacate.
(See Cross-Pet. to Confirm Arbitration Award
and in Opp. to Pet. to Vacate Arbitration Award,
Feb. 12, 2018,
("Cross-Pet.") ,
[dkt. no. 15]; see Mem. of Law in Supp. of Cross-
Pet. to Confirm Arbitration Award and in Opp. to Pet. to Vacate
Arbitration Award,
12, 2018,
("Mem. of Law in Supp. of Cross-Pet."), Feb.
[dkt. no. 17].)
On March 9, 2018, Petitioner filed a
Mem. of Law in Further Supp. of the Mot. to Vacate and in Opp.
to Respondents' Cross-Pet.
(See Mem. of Law in Further Supp. of
the Mot. to Vacate and in Opp. to Respondents' Cross-Pet.,
("Mem. of Law in Further Supp. of Mot. to Vacate"), March 9,
2018,
[dkt. no. 21].)
On March 30, 2018,
Insurers replied with
a memorandum of law in further support of the Cross-Petition to
Confirm Arbitration Award.
(See Reply Mem. of Law in Further
Supp. of Cross-Pet. to Confirm Arbitration Award,
( "Reply Mem.
of Law in Further Supp. of Cross-Pet."), March 30, 2018,
[dkt.
no. 2 3] . )
Petitioner moves pursuant to Sections 10 and 12 of the
Federal Arbitration Act
("FM"),
9 U.S.C. §§ 10, 12, for an
order vacating the arbitration Award for "manifest disregard of
2
the law" and granting Petitioner such other relief as may be
just and equitable.
(See Mot. to Vacate at 7.)
petition the Court pursuant to Title 9 U.S.C.
(a) an order confirming the Award;
Award;
§§
Insurers
9, 207, for:
(b) a judgment upon the
(c) denial of Petitioner's motion to vacate the Award;
and (d) any other such relief as the Court deems just and
proper.
The Court finds Petitioner
(See Cross-Pet. at 9.)
fails to satisfy either prong of the "manifest disregard of law"
doctrine, yet alone both, as required.
For the reasons stated
below, the Court grants Insurers Cross-Pet. to confirm the
Arbitration Award [dkt. no 15] and denies Petitioner's Mot. to
Vacate [dkt. no 4].
I .
BACKGROUND
a. The Application for Insurance and the Insurance
Policy
On June 26, 2012, HSBC Brasil, through its insurance
broker, contacted the Insurers seeking to purchase a
Comprehensive Credit Insurance Policy (the "Policy") .
Cross-Pet. at 3; see Mot. to Vacate at 1.)
(See
The Policy was for a
Credit Agreement ("Credit Agreement") pursuant to which HSBC
Brasil had agreed to extend $50 million in credit to Casablanca
International Holdings Ltd.
(the "Obliger"), the repayment of
which was guaranteed by Schahin Engenharia S. A.
"Guarantor") .
(See id.)
(the
On August 31, 2012, Casablanca, as
3
borrower, and HSBC Brasil, as lender, entered into the Credit
Agreement.
(See Mot. to Vacate at 2.)
As a condition precedent
to the issuance of the Policy, the Insurers required that HSBC
Brasil complete an application of insurance (the "Application").
(See Mem. of Law in Supp. of Cross-Pet. at 2.)
At Paragraph 10
of the Application, HSBC Brasil was asked to confirm, and did
confirm, that each of the following was true:
A. Neither the Obligor nor the Guarantor has
defaulted on any senior obligations, including
guarantee obligations, during the last five
years.
C. The Obligations of the Obligor, and the
Guarantor have consistently been met within 90 days of
their due dates, during the last five years.
D. Repayment difficulties have not led to a
refinancing or rescheduling of the debts of the
Obligor or of the Guarantor, during the last five
years.
(See Cross-Pet. at 3-4.)
On August 30, 2012,
Insurers issued the Policy to HSBC
Brasil which provided coverage up to a $45 million limit of
liability (being 90% of HSBC Brasil's $50 million credit) in the
event of the failure or refusal of Schahin, the Guarantor, to
honor its payment obligations under the Credit Agreement.
(See
Mot. to Vacate at 3; see Cross-Pet. at 4.)
Between August 31, 2012, and February 25, 2013, Casablanca
made seven Advance Requests
("Advances") under the Credit
4
Agreement.
(See Mot. to Vacate at 3.)
Petitioner honored all
seven requests, totaling just over $50 million.
(Id.)
Under
the terms of the Credit Agreement the Advances were to be repaid
no later than 360 days after disbursement, so that all seven
Advances would have been repaid between August 26, 2013, and
February 20, 2014.
(Id.)
However, Casablanca requested a one
year extension of its time to repay the Advances so that
repayment would be between August 21, 2014, and February 18,
2015.
(Id.)
HSBC Brasil agreed to extend the repayment terms,
and Insurers committed to similarly extend insurance coverage.
(Id.)
In August 2014, when the first repayment became due under
the extended period, Casablanca defaulted under the Credit
Agreement.
HSBC Brasil sent Casablanca a timely notice of
default in November 2014.
On April 17, 2015, both
(Id.)
Casablanca and Schahin Engenharia filed bankruptcy proceedings
in Brazil.
(Id.)
On May 12, 2015, upon expiration of the "waiting period"
under the Policy, HSBC Brasil submitted a Notice of Claim and
Proof of Loss to Insurers, together with documents supporting
Petitioner's claim under the Policy.
at 5.)
(Id. at 4; see Cross-Pet.
Pursuant to Article 6 of the Policy, the Insurers sought
additional information necessary to adjust the loss, which HSBC
Brasil refused to produce.
(Id.)
5
By letter dated November 17,
2015,
Insurers stated that an impasse had been reached.
Mot. to Vacate at 4.)
(See
On December 7, 2015, pursuant to the
terms of the Policy, HSBC Brasil commenced arbitration
proceedings against the Insurers.
(See id.; see Cross-Pet. at
5. )
b. The Arbitration
A panel of arbitrators was duly appointed (the "Paneln).
(See Cross-Pet. at 5.)
HSBC Brasil selected Louis P. Sheinbaum,
an experienced litigator and arbitrator, as its party-appointed
arbitrator.
(Id. )
Insurers selected Lawrence W.
Pollack, a
member of JAMS and former partner of a large New York law firm,
as their party-appointed arbitrator.
(Id.)
The Arbitrators and
the Parties agreed that retired Judge John S. Martin, who served
as a United States District Judge for the Southern District of
New York for 13 years, would act as Umpire.
(Id. )
Discovery took place from June to November 2016.
to Vacate at 4.)
(See Mot.
By the fall of 2016, a significant discovery
dispute had developed.
(See Cross-Pet. at 5-6.)
Insurers
sought information concerning what HSBC Brasil knew about the
financial condition of the Obligor and Guarantor at the time of
the Application.
(Id. at 6.)
HSBC Brasil revealed that this
information was contained in "Credit Review Reportsn
(Id. )
HSBC Brasil refused, however,
6
("CRRsn).
to produce the CRRs without
substantially redacting them to conceal all financial
information.
(Id. )
Insurers moved to compel the production of the CRRs.
Cross-Pet. at 6.)
(See
At an in person hearing before the Panel
held on September 30, 2016, the following exchange took place
between the Umpire, Judge Martin, and counsel for HSBC Brasil:
Judge Martin: What is the reason for the
redactions?
Mr. Bennett: It doesn't relate to Casablanca or
Schahin Engenharia. It relates to subsidiaries in
the Schahin Group.
Judge Martin: Why wouldn't that be relevant?
Mr. Bennett: Because the underwriters didn't
ensure the subsidiaries, and the credit agreement
doesn't reflect the subsidiaries. Those are
nonparties.
Judge Martin: But it would seem to me if there
were substantial questions about the
subsidiaries, that may well impact the judgment
as to the parent.
(See Mem. of Law in Supp. of Cross-Pet. at 5.)
Thereafter, the Panel unanimously ruled that HSBC Brasil
was obligated to produce complete and unredacted copies of the
CRRs as they existed in the period prior to HSBC Brasil's
Application for insurance.
(Id. )
Once discovery was completed, the Parties exchanged prehearing briefs and witness statements.
4; see Cross-Pet. at 6-7.)
(See Mot. to Vacate at
A Hearing was conducted in New York
City over the course of four days.
(See Cross-Pet. at 6-7.)
From June 5 through June 7, 2017, the Panel heard opening
7
statements and examinations of witnesses.
(Id.)
At the
conclusion of the witness testimony, the Parties submitted posthearing briefs and post-hearing reply briefs.
(Id.)
Closing
arguments were presented by counsel on September 7, 2017, in New
York, New York.
c. The Award
On October 16, 2017, the Panel unanimously issued the
Award, dismissing HSBC Brasil's claims on the basis that HSBC
Brasil had "made material misrepresentations in the policy and
in the application for the insurancen and that "the
misrepresentations rendered the policy void ab initio.n
Cross-Pet. at 7, Ex. A.)
(See
Specifically, the Panel stated that at
Article four of the Policy, HSBC Brasil had made material
misstatements to Insurers including, "[a]s of the date of the
execution of this insurance policy,
[HSBC Brasil] has no
knowledge of any circumstance which could give rise to or
increase the likelihood of a loss.n
(See Mem. of Law in Supp.
of Cross-Pet., Ex. A. at 2.)
The Panel noted the significance of the CRRs in finding
that HSBC Brasil made material misstatements to Insurers
concerning their knowledge of the financial condition of the
Obligor and the Guarantor:
8
In the course of discovery in this arbitration
proceeding, Petitioner was compelled to produce a
series of documents known as CRRs which reflect
Petitioner's internal evaluation of the credit
worthiness of Schahin and its subsidiaries. These
documents, which had not been shared previously with
Respondents, reflect that in December 2011, before
issuance of the policies, the Schahin group's credit
rating by Petitioner was downgraded 'from CRR 6.2 to
7.2 and transference to SRU.'
Another credit
review, apparently prepared in early 2012, contains
the statement 'the interest payments for Tranche A are
overdue for two months, according to the company, due
to the contractual changes proposed by Petrobras and
not yet signed by the banks. According to the
management these interests will be paid as soon as the
assignment is regularized but we should also consider
the possibility that in fact the company is facing
cash flow problems to repay the obligations.'' .
The same document states: "close monitoring is
required on this period of delicate cash flow
management.
" These documents also reflected the
fact that payments due under the Tranche A Loan from
February to December 2012 had been rescheduled to
2013.
(See Deel. of Michael A. Knoerzer in Supp. of Cross-Pet., Ex. A,
Feb. 12, 2018,
[dkt. no. 16] at 2.)
Regarding the issue of the materiality of the concealed
information, the Panel found that, "[t]he standard for
determining whether a misstatement or failure to disclose is
material was set forth by the New York Court of Appeals in Geer
v. Union Mut. Life Ins. Co., 7 N.E.2d 125, 127 (N.Y. 1937) as
follows:
where an applicant for insurance has notice that
before the insurance company will act upon the
application, it demands that specified information
shall be furnished for the purpose of enabling it to
9
determine whether the risk should be accepted, any
untrue representation, however innocent, which either
by affirmation of an untruth or suppression of the
truth, substantially thwarts the purpose for which the
information is demanded and induces action which the
insurance company might otherwise not have taken, is
material .
. The question in such case is not
whether the insurance company might perhaps have
decided to issue the policy even if it had been
apprised of the truth, the question is whether failure
to state the truth where there was duty to speak
prevented the insurance company from exercising its
choice of whether to accept or reject the application
upon a disclosure of all the facts which might
reasonably affect its choice.ff
(See Mem. of Law in Supp. of Cross-Pet., Ex. A. at 3.)
Furthermore, the Panel stated that the sworn testimony of
Insurers' underwriters made clear that had the information
contained in the CRRs been disclosed, Insurers' "underwriting
decisions would certainly have been affected.ff
(Id.)
The Panel, in responding to HSBC Brasil's argument that
Insurers' testimony was "self-serving and that none of the
undisclosed information would have affected the underwriting
decisionff stated, "in assessing this argument, it is worthwhile
to look at what the application for insurance might have looked
like had Petitioner not checked the boxes indicating that the
statements in Section 10 A, C and D of the Application were
correct.
The Application provided:
'if any of the statements in
Section 10 are not checked please explain.ff
Panel continued:
10
(Id. at 3-4.)
The
A candid explanation [by HSBC Brasil in response to
Application Paragraph 10] would have said, 'in the
fourth quarter of 2011, we downgraded the credit
rating of the Schahin group and monitoring of all
credit advances to the group was transferred to our
Special Risk Unit because Deep Black Drilling LLP, a
wholly-owned subsidiary of Casablanca failed for three
months to make payments on the Tranche A Loan, a $300
million financing guaranteed by Engenharia.
Ultimately, payments due on this loan from February
2012 on were rescheduled to 2013. According to the
Company's management, the failure to make the payments
resulted from a readjustment of a contract that it has
with Petrobras but we also consider it possible that
in fact the company is facing cash flow problems to
repay the obligations.
It is hard to believe that such a statement that the
bank itself had downgraded the credit rating of the
borrowers and had transferred the accounts to a
Special Risk Unit would not have been something that
the underwriters would have taken into consideration
in establishing the terms under which they would
ensure a loan to [the Obligor] guaranteed by [the
Guarantor].
Thus, there is no basis on which we can
reasonably reject the testimony of the underwriters
that the undisclosed information was material to their
decision-making.
(Id. at 4.)
The Panel rejected HSBC Brasil's argument that Section 10
of the Application was ambiguous and did not apply because
different Schahin affiliates were the primary debtors on the
Tranche A Loan:
In its own internal reviews, Petitioner evaluated
creditworthiness of the Schahin group as a whole
because it recognized that the financial stability of
each of the subsidiaries was interdependent.
Even
though only Deep Black Drilling had defaulted on its
obligations, it was the overall financial condition of
the Schahin group that caused Petitioner to place the
11
group on the watch list.
Given its own internal
recognition that the credit worthiness of any member
of the Schahin group had to be accessed by looking at
the financial condition of each of the component
corporations, there can be little doubt that
Petitioner understood that the failure of any one
component of the group to meet its financial
obligations was something that had to be considered in
determining whether to advance funds to any other
member of the group.
Moreover, Deep Black Drilling
was a wholly-owned subsidiary of Casablanca which in
turn was a subsidiary of Schahin. Given these facts,
Petitioner must have understood that the information
upon which it relied in making its credit decisions
was information that Respondents were seeking in
Section 10 of the application.
(Id.)
Additionally, the Panel rejected HSBC Brasil's argument
that the Application did not compel disclosure of the
information contained in the CRRs,
finding:
Given the fact that Section 10 of the application
posed three separate questions concerning defaults by
the borrower or the guarantor, a sophisticated banker
like Petitioner should have understood that the
questions posed were designed to elicit information
relevant to the assessment of the creditworthiness of
Casablanca and Schahin and that the default by a
subsidiary of Casablanca on a loan guaranteed by
Schahin was something the insurer would want to
consider in deciding on terms of a loan to Casablanca
guaranteed by Schahin.
Since the default with respect
to the Tranche A Loan were the reason Petitioner put
the Schahin group on the watch list and downgraded its
credit rating, Petitioner could not have failed to
recognize that it was obligated to disclose this
information to the insurers.
In any event, the failure to disclose the information
reflected in the CRR's constitutes a breach of
Petitioner's representation in Article 4.E of the
12
Policy that it was not aware of any circumstance that
could increase the risk of a Loss.
(Id.at5.)
For the above reasons, the Panel declared the Policy
rescinded based upon HSBC Brasil's material misrepresentations.
The Panel ordered the Insurers to refund the "full
(Id.at8.)
amounts of the premiums they received with interest at a rate of
9% per annum from the date those payments were made."
(Id. )
Pursuant to instructions received from HSBC Brasil,
Insurers delivered return premium plus interest (accruing
through the dates Insurers remitted the funds) to HSBC Brasil in
the amount of $3,501,794.24, which HSBC Brasil has accepted and
retained.
II.
(See Mem. of Law in Supp. of Cross-Pet. at 10.)
LEGAL STANDARD
"Petitioner is not asserting vacatur under the FAA."
in Further Supp. of Mot. to Vacate at 4.)
Rather,
(Mot.
Petitioner
argues that the Award should be vacated "because the holding
conflicts squarely with New York state law."
1.)
(Mot. to Vacate at
Specifically, Petitioner claims that "the Panel []
disregard[ed]
the law of the State of New York on the
issue of what is material when underwriting an insurance risk"
and, therefore, "Petitioner seeks to vacate the Award under the
'manifest disregard of the law' standard long recognized by the
13
Second Circuit."
(Mot. to Vacate at 9; See Mot. in Further
Supp. of Mot. to Vacate at 1.)
The Court of Appeals "has long held that "[a]n arbitration
award may be vacated if it exhibits 'a manifest disregard of the
law.',, Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004)
(quoting Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216
(2d Cir. 2002)).
However, the Court of Appeals has also
been quick to add that manifest disregard of law as
applied to review of an arbitral award is a severely
limited doctrine.
Indeed, we have recently described
it as a doctrine of last resort-its use is limited
only to those exceedingly rare instances where some
egregious impropriety on the part of the arbitrators
is apparent, but where none of the provisions of the
FAA apply. Accordingly, we have said that the
doctrine gives extreme deference to arbitrators.
An arbitral award may be vacated for manifest
disregard of the law only if a reviewing court finds
both that (1) the arbitrators knew of a governing
legal principle yet refused to apply it or ignored it
altogether, and (2) the law ignored by the arbitrators
was well defined, explicit, and clearly applicable to
the case. We have emphasized that an arbitral panel's
refusal or neglect to apply a governing legal
principle clearly means more than error or
misunderstanding with respect to the law. A federal
court cannot vacate an arbitral award merely because
it is convinced that the arbitration panel made the
wrong call on the law.
On the contrary, the award
should be enforced, despite a court's disagreement
with it on the merits, if there is a barely colorable
justification for the outcome reached.
Wallace, 378 F.3d at 189-90 (quotation marks and citations
omitted)
(second emphasis in original).
14
III. DISCUSSION
"A motion to vacate filed in a federal court is not an
occasion for de novo review of an arbitral award."
Id. at 189.
Rather, "[i]t is well established that courts must grant an
arbitration panel's decision great deference.
A party
petitioning a federal court to vacate an arbitral award bears
the heavy burden of showing that the award falls within a very
narrow set of circumstances delineated by statute and case
law."
Id.
(quoting Duferco Int'l Steel Trading v. T. Klaveness
Shipping A/S, 333 F.3d 383, 388
(2d Cir. 2003).
Here, "Petitioner seeks to vacate the Award under the
'manifest disregard of the law' standard."
(See Mot. to Vacate
at 9; see Mot. in Further Supp. of Mot. to Vacate at 1.)
Petitioner invokes this standard to challenge the Panel's Award
based on two incorrect premises:
(1) pursuant to New York law,
testimony of an insurers' witness cannot be the only basis to
prove materiality, and therefore Insurers failed to establish
materiality under New York law; and (2) the Panel relied solely
upon the unsupported testimony of the underwriters,
unsubstantiated by any documentation, in order to determine that
the Insured's representations were material.
(See Mem. of Law
in Further Supp. of Mot. to Vacate at 4; see Reply Mem. of Law
in Further Supp. of Cross-Pet. at 2.)
15
Regarding the first premise, Petitioner argues that the
Panel manifestly disregarded the law of the State of New York on
what is material when underwriting an insurance risk.
of Law in Further Supp. at 1.)
(See Mem.
New York law holds that "[t]he
issue of materiality is generally a question of fact for the
jury" or, as in the present case, an arbitration panel.
Parmar
v. Hermitage Ins. Co., 21 A.D.3d 539, 540 (2d Dep't 2005); Alaz
Sportswear v. Pub. Serv. Mut. Ins. Co., 195 A.D.2d 357, 358
Dep't 1993)
(1st
("The materiality of a particular nondisclosed fact
is generally a question of fact for the jury.").
The cases cited by Petitioner in support of the proposition
that mere testimony by an underwriter is not sufficient to prove
materiality under New York law are cases involving motions for
summary judgment.
Vacate at 5-6.)
(See Mem. of Law in Further Supp. of Mot. to
A party moving for summary judgment is required
to prove that there are no genuine issues of material fact to be
tried.
United Nat'l Ins. Co. v. Program Risk Mgmt. Inc., No.
13-CV-741, 2016 WL 1275047, at *10 (N.D.N.Y. Mar. 31, 2016)
(finding that "[w]hen analyzing a summary judgment motion, the
court 'cannot try issues of fact,
there are issues to be tried.'")
Ctrs. Corp., 43 F. 3d 29,
it can only determine whether
( quoting Chambers v. TRM Copy
36 (2d Cir. 1994))
Petitioner).
16
(cited by
Consistent with obtaining rescission of an insurance policy
in the context of a summary judgment motion, Petitioner's cases
consider an insurer's burden of showing materiality as a matter
See Mem. of Law in Further
of law, not as a matter of fact.
Supp. of Mot. to Vacate at 5-6); Parmar, 21 A.D.3d at 540
(though "[t]he issue of materiality is generally a question of
fact," insurer must establish materiality as a matter of law on
motion for summary judgment to establish right to rescind an
insurance policy).
Therefore, consistent with Petitioner's
cases, when an insurer seeks rescission on a summary judgment
motion it cannot rely solely upon its underwriter's testimony the underwriter's testimony must be supported by documentation
in order to establish materiality as a matter of law.
See,
e.g., Alfie's Original Souliers, Inc., v. Phoenix Assur. Co. of
N.Y., 245 A.D.2d 179, 179-80 (1st Dep't 1997)
(finding that the
insurer's evidence, consisting of conclusory deposition
testimony and underwriting practices not in effect at the time
of the application, was insufficient to establish materiality as
a matter of law and a fact question remained for the jury).
Here, Petitioner's cases regarding summary judgment motions
are inapposite.
Where, as here,
Insurers did not move for
summary judgment in the arbitration, but conducted a hearing on
the merits with the Panel serving as trier of fact, the Insurers
were not required to prove materiality as a matter of law.
17
See
Alaz Sportswear, 195 A.D.2d at 358.
This is why, when a party
seeks rescission by summary judgement but fails to prove
materiality other than by the unsubstantiated testimony of its
underwriter, the rescission action is not dismissed, but
referred to the trier of fact, a jury. 2
In such a case as here,
a jury or an arbitration panel can declare that a
misrepresentation or concealment was material without it having
been proven as a matter of law. 3
Therefore, it was entirely
appropriate for the Panel to consider underwriters' testimony
even if unsupported by any other documentation - in order to
determine whether information concealed or misrepresented was
material, in determining whether to rescind the Policy.
Petitioner has therefore failed to satisfy the first prong
of the "manifest disregard of law" doctrine: that this is one of
"the rare instances in which the arbitrator knew of the relevant
legal principle, appreciated that this principle controlled the
outcome of the disputed issue, and nonetheless willfully flouted
2
See, e.g., Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307
A.D.2d 435, 438 (3d Dep't 2003) (finding that because the
insurer had no written underwriting guidelines and presented
only conclusory affidavits, it failed in establishing
materiality as a matter of law, but finding a fact question
concerning materiality remained).
3 If on a summary judgment motion the court concludes that
materiality was not established as a matter of law, the matter
is referred to trial for resolution of the question of fact.
See, e.g., Alfie's Original Souliers, Inc., 245 A.D.2d at
179-80.
18
the governing law by refusing to apply it."
Stolt-Nielsen S.A.
v. AnimalFeeds Int'l Corp., 548 F.3d 85, 95 (2d Cir. 2008)
(internal citations and quotation marks omitted), rev'd, StoltNielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 130 S.
Ct. 1758, 176 L. Ed. 2d 605 (2010).
Moreover, even if the Court found that the Panel
incorrectly interpreted New York law on the issue of what
constitutes materiality when underwriting an insurance risk,
"[a] federal court cannot vacate an arbitral award merely
because it is convinced that the arbitration panel made the
wrong call on the law."
Wallace, 378 F.3d at 189.
"On the
contrary, the award 'should be enforced, despite a court's
disagreement with it on the merits, if there is a barely
colorable justification for the outcome reached."
Id.
(quoting
Banco de Sequeros del Estado v. Mut. Marine Office, Inc., 344
F.3d 255, 260 (2d Cir. 2003))
(emphasis in original).
Here, the
Panel's decision was fully justified in its finding of
materiality as a matter of fact.
Accordingly, the Court finds that the Panel did not act in
manifest disregard of New York law regarding the issue of
materiality.
Therefore, there is no basis under the "manifest
disregard of law" doctrine to vacate the Award.
Additionally, regarding Petitioner's second faulty premise,
even if Insurers were required by New York law to introduce to
19
the Panel evidence of materiality beyond underwriters'
testimony, the Court finds this requirement satisfied.
agree that as part of the underwriting process,
Parties
Insurers
presented a non-binding indication ("NBI") of their interest in
providing coverage to HSBC Brasil.
(See Ex. Q to the March 30,
2018 Reply Declaration of Michael A. Knoerzer ("Reply Deel.").
The NBI reads: "Subject to: Application."
(Id.)
Therefore, the
issuance of the Policy was expressly conditioned upon HSBC
Brasil's completion of the Application and Insurers'
satisfaction with the information contained therein.
(Id.)
Recall paragraph ten of the Application, which contains three
questions, also identified by the Panel as particularly
relevant:
A. "Neither the Obligor nor the Guarantor has
defaulted on any senior obligations, including
guarantee obligations, during the last five
years.
"
C. "The obligations of the Obligor and the Guarantor
have consistently been met within 90 days of their due
dates, during the last five years."
D. "Repayment difficulties have not led to a
refinancing or rescheduling of the debts of the
Obligor or of the Guarantor, during the last five
years."
Underwriters for Insurers testified before the Panel that
they reviewed the Application, including the above questions,
and relied upon Petitioner's answers in issuing the Policy.
(See Reply Mem. of Law in Further Supp. of Cross-Pet. at
20
6) (citing Ex. 0 to Reply Deel., Insurers'
22.)
Post-Hearing Brief, at
This testimony is buttressed by the language of the Policy
itself, which states expressly that the Policy was issued "in
reliance upon the written statements made to the Insurer by the
Insured in the application.
"
Further Supp. of Cross-Pet. at 6)
(citing Ex. Eat ZUR014053)
(emphasis added).
(See Reply Mem. of Law in
Thus, consistent with Insurers' testimony
before the Panel, the plain text of the Policy reflects the
Parties' agreement as to the materiality of HSBC Brasil's
representations regarding the accuracy and completeness of its
disclosures:
This policy has been issued in reliance upon
information supplied to the Insurers named herein by
the Insured. In accepting this policy, the Insured
represents to the Insurers that (a) statements made to
the Insurers and information provided to the Insurers
which were used by the Insurers in underwriting this
policy are accurate and complete and (b) that, to the
best of the Insured's knowledge all information
relevant to the underwriting of this policy was
provided to the Insurers.
(Id. )
Moreover, New York law is well-settled regarding the
materiality of responses to insurance applications: An insurer's
specific inquiry into a matter indicates that such inquiry is
material to the risk and "not for the insured to pass over as
trifling." See Jenkins v. John Hancock Mut. Life Ins. Co., 178
N.E. 9, 10 (N. Y. 1931).
21
In effect the company states to the applicant that the
answers to those questions are intended to guide the
company in deciding whether to accept or reject the
application.
By posing the question the insurer has
indicated that it wants to know the facts and that it
intended and expected the applicant to speak the truth
so that it may acquire information concerning them.
Any misrepresentation which defeats or seriously
interferes with the exercise of such a right cannot
truly be said to be an immaterial one.
Geer v. Union Mut. Life Ins. Co., 7 N.E.2d 125, 127 (N.Y. 1937)
Recently, the Court of Appeals stated, "[t]his Circuit
will only find a manifest disregard for the law where
there is no colorable justification for a panel's conclusion."
Pfeffer v. Wells Fargo Advisors, LLC, 723 Fed. App'x 45,47
Cir. 2018)
(summary opinion)
(emphasis added).
(2d
Here, there was
far more than a "colorable justification" for the Panel to
conclude that HSBC Brasil's concealments and misrepresentations
were material.
The Panel relied on more than mere underwriters'
testimony in examining evidence of materiality, including:
review of the plain text of the Policy and the Agreement; the
CRRs; the underwriters' testimony that the answers to Question
10 of the Application were material to them; and New York law
which states that when an insurer asks a question such as those
in the Application seeking information about the risk, "any
misrepresentation which defeats or seriously interferes with the
exercise of such a right cannot truly be said to be an
immaterial one."
Geer, 7 N.E.2d at 127; see also Zilkha v Mut.
22
Life Ins. Co. of N.Y., 287 A.D.2d 713, 714
(2001)
(finding "[a]
misrepresentation is material if the insurer would not have
issued the policy had it known the facts misrepresented").
Moreover, Court of Appeals "cases demonstrate that [they]
have used the manifest disregard of law doctrine to vacate
arbitral awards only in the most egregious instances of
misapplication of legal principles."
(2d Cir. 2004)
(emphasis added).
Wallace, 378 F.3d at 190
Here, Petitioner has failed to
demonstrate any misapplication of legal principles by the Panel,
let alone an "egregious instance[]" necessary to trigger the
high-threshold application of the manifest disregard doctrine.
Accordingly, for the reasons stated above, the Court denies
Petitioners' Mot. to Vacate [dkt. no. 4].
Regarding Insurers' Cross-Pet. seeking an order confirming
the Award, it is granted.
Because the Policy and the Award are commercial in nature
and involve a party from a country other than the United States,
they are subject to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the "New York
Convention").
9 U.S.C. § 202.
Under the New York Convention,
"any party to the arbitration may apply to any court having
jurisdiction" for "an order confirming the award against any
other party to the arbitration."
9 U.S.C. § 207.
"The court
shall confirm the award unless it finds one of the grounds for
23
refusal or deferral of recognition or enforcement of the award
specified in the said Convention.n
(Id.)
(emphasis added).
As stated in Section 207, grounds for refusal or deferral
include:
(1) incapacity of a party;
(2) lack of notice;
(3) resolution of a non-arbitral dispute;
composition of the arbitration panel;
binding;
(4) improper
( 5) an award that is not
(6) subject matter of the arbitration that is not
capable of settlement by arbitration under the law of the
country where enforcement of the award is sought; or (7) a
violation of public policy arising from recognition of the
award.
See New York Convention Art. V § 207; Yusiif Ahmed
Alghanim & Sons v. Toys "Rn Us,
Inc., 126 F.3d 15, 19 (2d Cir.
1997) .
Petitioner does not mention the New York Convention in its
papers and fails to argue that any of the above grounds for
refusal or deferral apply.
Accordingly, the Court finds that
none of the above grounds for refusal or deferral are satisfied,
and, pursuant to the New York Convention, the Court must confirm
the Award.
Finally, the New York Convention permits "a court in the
country under whose law the Arbitration was conducted to apply
domestic arbitral law, in this case the FAA, to a motion to set
aside or vacate that arbitral award.n
Sons, 126 F.3d at 21.
Yusuf Ahmed Alghanim &
Thus, where an "[a]rbitration was entered
24
in the United States . . . the domestic provisions of the FAA
also apply, as is permitted by Articles V(l) (e) and V(2) of the
New York Convention.
The FAA and the New York Convention work
in tandem, and they have overlapping coverage to the extent that
they do not conflict."
Scandinavian Reins. Co. Ltd. v. St. Paul
Fire
668 F.3d 60, 71
&
Marine Ins. Co.,
(2d Cir. 2012)
(citations and internal quotation marks omitted).
Under the statutory requirements of the FAA, an arbitration
award may only be vacated if it is the product of:
(1)
fraud or
undue means;
(2) evident partiality or corruption in the
arbitrators;
( 3) arbitrator misconduct;
( 4) the arbitrators
exceeding their powers; or (5) evident material miscalculation
or mistake.
See 9 U.S.C.
§§
l0(a) (1)-(4)
&
ll(a).
Petitioner does not "seek to vacate the award under the
FAA" and fails to satisfy any of the above statutory bases for
vacating an arbitration.
Mot. to Vacate at 1.)
(See Mem. of Law in Further Supp. of
Accordingly, there is no basis to vacate
the Award under either the FAA or the New York Convention.
IV.
CONCLUSION
For the reasons stated above, the Court denies Petitioner's
Mot. to Vacate [dkt. no. 4] and grants Insurers' Cross-Pet. to
Confirm the Arbitration Award against both HSBC Brasil and
Bradesco [dkt. no. 15].
The Court enters judgment confirming
25
the October 16, 2017 Award.
The Clerk of Court is directed to
enter judgment forthwith and terminate the above docket entries.
SO ORDERED.
Dated:
New York, New York
September
2018
7,
~t(;u
O
VJ'
,
~
LORETTA A. PRESKA
Senior United States District Judge
26
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