Petersen-Dean, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA.

Background

Petersen-Dean filed a petition under the Federal Arbitration Act seeking to vacate a prehearing security award issued by a three-arbitrator panel. National Union filed a cross-petition seeking confirmation of the award.

The underlying arbitration concerned a longstanding dispute about amounts allegedly owed under insurance contracts. In 2003, National Union and Vaca Valley Roofing, Inc. entered into a Payment Agreement requiring insurance-related payments and collateral. The agreement allowed National Union to review its collateral requirements and stated that arbitrators could order the other party to provide collateral as required by the agreement. It also required arbitration of unresolved disputes and permitted expense-shifting when a party failed to perform its contractual duties.

In 2009, Petersen-Dean entered into an Assumption Agreement with National Union. The opinion states that Petersen-Dean assumed Vaca Valley’s rights and obligations under the Payment Agreement, but notes that Petersen-Dean disputed the scope of those obligations. The court did not decide the full scope of the Assumption Agreement for purposes of this ruling.

The Arbitration Award

National Union served Petersen-Dean with an arbitration demand alleging that Petersen-Dean had failed to make required payments. National Union requested $27,521,996 in prehearing security, citing Petersen-Dean’s financial difficulties and concern that a later award might be uncollectible. Petersen-Dean opposed the request, arguing that it could not obtain the requested amount and that paying it would destroy the business.

After oral argument, the panel ordered Petersen-Dean to provide $2 million in prehearing security. The panel said the award was intended to secure National Union’s costs of pursuing the arbitration in light of Petersen-Dean’s stated financial difficulties. The panel later denied Petersen-Dean’s request to vacate its own award.

Court’s Analysis

The court applied the highly deferential standard governing review of arbitration awards. Under Section 10(a)(4) of the Federal Arbitration Act, a court may vacate an award when arbitrators exceed their powers. The court explained that this ground is read narrowly and that an award must be confirmed if the arbitrators were at least arguably interpreting and applying the parties’ agreement and had a barely colorable justification for their result.

The court concluded that the Payment Agreement gave the panel broad authority. The agreement contained an “honorable engagement” provision allowing the arbitrators to act without strict judicial formalities and to carry out the agreement’s general purpose. It also required Petersen-Dean to provide collateral, allowed National Union to review its collateral requirements, and authorized arbitrators to order collateral.

The court further determined that the $2 million award was consistent with the agreement’s purpose. The amount was substantially less than National Union’s request and was intended to reduce the risk of Petersen-Dean’s bankruptcy while protecting National Union from spending substantial resources on an arbitration that might produce an uncollectible award. The court held that the panel did not violate an express contractual restriction and did not improperly rewrite the agreement.

The court rejected Petersen-Dean’s argument that collateral could not cover arbitration costs and fees because those items were not expressly listed in the definition of “Payment Obligation.” The definition stated that the listed obligations were included but not exclusive, and the court held that the panel’s interpretation was at least arguably supported by the agreement. The court also stated that the panel could use the $2 million amount as a reasonable way to enforce the agreement’s general purpose even assuming that attorney fees and costs were not themselves part of the “Payment Obligation.”

Disposition

The court denied Petersen-Dean’s petition to vacate the prehearing arbitral award and granted National Union’s cross-petition to confirm the award. The court directed Petersen-Dean to file unredacted versions of specified documents within one week because the order relied on material that had been redacted. It directed the Clerk to terminate the open motions and close the case without prejudice to either party moving by letter to reopen it within 30 days after the arbitration proceedings concluded.