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Case Note:
Insurance Co. of North America v. Public Service Mut. Ins. Co., No. 09-3640 (2nd Cir. June 23, 2010)

by ~ Michael F. Aylward (Email) (Web Site)

Absent Friends: Responding To The Loss of an Arbitrator

The process of arbitration is sometimes disrupted by the loss of a panel member, whether due to death or resignation. In an interesting new case that we spotlighted in our Summer 2009 issue when it was decided in the District Court, the Second Circuit has considered whether the general rule that it articulated two decades ago in Marine Products, requiring the formation of a completely new panel in the event of a memberís death, should extend to situations in which a member voluntarily resigns.

In Insurance Co. of North America v. Public Service Mut. Ins. Co., No. 09-3640 (2nd Cir. June 23, 2010), Public Service had commenced an arbitration proceeding against INA in 2007, seeking reimbursement for sums that it had paid to settle various pollution liability claims. The arbitration proceeded before a three-member panel consisting of arbitrators appointed by the parties and a neutral umpire. After receiving briefing and hearing oral argument on PSMICís motion for summary judgment on what it perceived to be INAís chief legal defense, the panel ruled 3-0 to grant PSMICís motion for partial summary judgment. INA moved for reconsideration and a briefing schedule was set. Before the motion for reconsideration could be heard and decided, however, Sullivan, INAís party-appointed arbitrator, was diagnosed with cancer and advised the panel that he did not believe that he could continue to perform in a professional or timely manner given his grueling upcoming course of medical treatment. The panel accepted his resignation.

During the next few months, INA and PSMIC wrangled with respect to how to proceed. Although the remaining panel members had asked INA to appoint a replacement for Sullivan, INA suggested that a new panel should be constituted. During this discussion, INA remonstrated with PSMIC for copying Sullivan on correspondence, stating that it was legally improper and ďmorally repugnantĀ to bother him given his dire health status.

Finally, after months of inconclusive discussions, INA filed a petition in the U.S. District Court for the Southern District of New York for a stay of arbitration and for an order disqualifying the panel and compelling the arbitration to start over with a new panel. This motion was granted by Judge Baer at the end of 2008. Soon thereafter, however, it came to the attention of PSMICís counsel that Sullivan had not only recovered from his bout with cancer but was actively soliciting reinsurance arbitration work and had, in fact, appeared at a two-day conference that counsel for INA had also attended shortly prior to the original District Court hearing on INAís motion for a stay. On the basis of this evidence, the U.S. District Court agreed to reconsider his decision and this time granted PSMICís motion to require INA to reappoint Sullivan or, if he was unwilling or unable to rejoin the panel, to require INA to appoint a new arbitrator. INA appealed.

Two issues were presented to the Second Circuit. First, should it follow its opinion in Marine Products Export Corp. v. MT Globe Galaxy, 977 F.2d 66 (2nd Cir. 1992) in holding that the loss of a panel member necessarily required that arbitration proceedings start fresh with an entirely new panel? Second, had the District Court abused its discretion in granting reconsideration in favor of Public Service and requiring INA to accept its former arbitrator or appoint a new one?

In Marine Products, the Second Circuit had ruled that absent ďspecial circumstances,Ā if a vacancy arises on an arbitral panel due to the death of an arbitrator prior to the rendering of an award, a new panel should be convened. The Second Circuit has never considered the application of this rule to instances of resignation although several lower courts have done so. On the other hand, the U.S. Courts of Appeal for the Seventh and Eighth Circuits have declined to apply Marine Products to cases involving resignation during the pendency of an arbitration, finding the rule ďinflexible and wasteful.Ā See e.g., Wellpoint, Inc. v. John Hancock Life Ins. Co., 576 F.3d 643, 646-47 (7th Cir. 2009). See also National American Ins. Co. v. Transamerica Occidental Life Ins. Co., 228 F.3d 462, 465-66 (8th Cir. 2003).

While recognizing the difficulties that a new arbitrator might face joining a panel mid-stream, the Second Circuit concluded that applying Marine Products in the context of a voluntary resignation created too large a risk of manipulation by a party who was not faring well in the arbitration and would like to start fresh by dismissing the existing panel members. The court noted that, ďThe rationale behind the Marine Products rule is that it is unfair to require a party to continue an arbitrable proceeding after its chosen arbitrator has died, because the party would be disadvantaged by having a substitute join the remaining panel members after they had worked together and been exposed to each otherís influence, and after the deceased arbitrator has had some subtle and knowable effect on them.Ā As against this risk, the court noted the potential for manipulation by a party that had received unfavorable interim rulings who would have an incentive to invite the member he designated to resign to forestall an anticipated ultimate defeat, as well as the inevitable waste in duplicating proceedings.

Under the circumstances, the court declined to apply Marine Products to cases involving resignation. Further, the Second Circuit held that the District Court had not erred in granting PSMICís motion for reconsideration, holding that it was not at fault for being unaware of the recovery of Sullivan, given INAís insistence that it not communicate with him as well as the dubious nature of INAís conduct with respect to its knowledge of his health. All rights reserved.burberry bags,replica watches,rolex watches for sale and replica cartier watches can be found here.

Michael Aylward can be reached at maylward@morrisonmahoney.com.
Ā 2010 Morrison Mahoney LLP.

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