PB Life and Annuity Co. Ltd. v. Universal Life Insurance Company

Background

PB Life and Annuity Co. Ltd. (PBLA), an insurance company organized under Bermuda law, and Universal Life Insurance Company (ULICO), an insurance company organized under Puerto Rico law, entered into a coinsurance reinsurance agreement. PBLA agreed to reinsure part of ULICO’s obligations under certain policies and annuity contracts. The agreement required PBLA to post collateral that complied with Puerto Rico insurance regulations and contained an arbitration clause.

The companies also entered into a reinsurance trust agreement with The Bank of New York Mellon as trustee. That agreement did not contain an arbitration clause and required certain proceedings concerning the trust agreement to be brought in New York courts or another location selected by the trustee.

ULICO claimed that more than 65% of the assets in the trust account were loan obligations of PBLA’s affiliated entities and therefore violated a 10% limit in Puerto Rico insurance law. ULICO demanded arbitration. PBLA disputed that the matter was arbitrable and filed this action seeking a declaration that the dispute had to be litigated in court. In an earlier ruling, the court compelled arbitration and denied PBLA’s request to stop the arbitration.

The Interim Arbitration Award

The arbitration panel held a hearing on ULICO’s request for interim security. ULICO sought an order requiring PBLA to deposit $524 million in a separate account. PBLA argued that the assets were valuable, safe, and liquid and that ULICO had not shown otherwise.

On June 2, 2020, the panel granted ULICO’s request for preliminary relief. It ordered PBLA to deposit $524,009,051.26 in a separate bank account to secure PBLA’s obligations under the reinsurance agreement and, if necessary, ULICO’s payment of liabilities. The panel required the deposit within 10 business days and stated that interest would accrue at 6% per year after that deadline. The panel said the award was preliminary and that the arbitration would continue toward a decision on the merits.

The panel found that the assets did not comply with Puerto Rico insurance regulations and the reinsurance agreement. It also found that ULICO had shown an immediate need for relief to protect itself and its policyholders. The panel stated that both sides had opportunities to submit evidence and argument.

The Motions Before the Court

ULICO moved to confirm the interim award under the Federal Arbitration Act and the New York Convention. PBLA opposed confirmation and cross-moved to vacate the award.

Under the governing law, a court generally must confirm an arbitration award unless one of the specified grounds for refusing enforcement or vacating the award applies. The court’s review is narrow, and courts generally give substantial deference to arbitration panels.

PBLA’s Due-Process Argument

PBLA argued that the panel denied it a fundamentally fair hearing by refusing to wait for updated expert reports about the value of the trust assets and by denying discovery concerning reports held by ULICO.

The court rejected that argument. It explained that the panel’s decision rested primarily on whether the assets qualified under Puerto Rico law and the reinsurance agreement, not simply on their monetary value. Evidence that the assets were valuable would not necessarily address whether they were qualifying assets. The court also noted that PBLA had submitted extensive exhibits, participated in briefing and a two-hour hearing, and had prior opportunities to develop and present information about the assets.

The court further held that the panel acted within its discretion in deciding the interim-security request without allowing the full discovery and merits process that PBLA wanted. An interim security decision may be made early in an arbitration on a limited record. The court concluded that PBLA had not shown that the denied discovery was central to the panel’s decision or that the process amounted to fundamental unfairness.

Manifest Disregard of the Law

PBLA argued that the panel acted in manifest disregard of the law by finding irreparable harm even though ULICO sought money-related relief. Manifest disregard is an exceptionally narrow basis for vacating an award and requires more than an alleged legal mistake or disagreement with the result.

The court rejected PBLA’s argument. The parties had agreed to use the American Arbitration Association’s Commercial Arbitration Rules, which authorized the panel to issue interim measures, including injunctive relief, and to condition that relief on security. The court held that the panel had authority to order interim relief and that PBLA had not identified a clear law that the panel knowingly ignored or misapplied.

Public-Policy Argument and the North Carolina Restraining Order

PBLA argued that confirming the award would violate public policy because PBLA was subject to a temporary restraining order issued by a North Carolina state court. That order restricted the transfer or disposition of assets without court authorization, although it included procedures for seeking approval of potentially restricted transactions.

The court rejected the argument. PBLA had not raised the restraining order before the arbitration panel, so it could not use that issue as a basis for challenging confirmation. The court also held that the North Carolina order did not necessarily prevent PBLA from complying with the award. PBLA could seek permission from the North Carolina court, and the record did not establish in advance that the two orders would conflict.

The court further concluded that PBLA had identified no controlling public policy preventing one court from confirming an award in favor of a party that was not involved in an earlier proceeding. ULICO was not a party to the North Carolina case and therefore was not bound by that proceeding. The court stated that PBLA could seek relief in North Carolina or use another method to satisfy its obligations, but it could not prevent confirmation of an award to which ULICO was entitled under the governing law and contract.

Arbitrability

PBLA renewed its argument that the trust agreement superseded the arbitration clause in the reinsurance agreement. The court declined to reconsider its earlier ruling that the arbitration clause was not superseded and that the arbitrators could decide arbitrability. The court stated that PBLA had not shown an intervening change in controlling law, new evidence, clear error, or manifest injustice warranting reconsideration.

Disposition

The court held that PBLA had not established any basis to vacate, modify, or correct the interim award. Judge Lewis J. Liman granted ULICO’s motion to confirm the award and denied PBLA’s cross-motion to vacate. The court directed ULICO to file a proposed judgment within seven days and directed the clerk to administratively close the case without prejudice to either party moving to confirm or vacate the arbitration panel’s final award.