Flintlock Construction Services, LLC v. Arch Specialty Insurance Company

Background

Flintlock Construction Services, LLC, a general contractor, was insured under a Subcontractor Default Insurance Policy issued by Arch Specialty Insurance Company and Catlin Special Insurance Company. After a dispute concerning coverage and payment for losses connected to BMNY Contracting Corp.’s alleged default and defective concrete work, Flintlock and the insurers entered into a $9.2 million settlement agreement.

The settlement agreement required Flintlock to continue pursuing claims against parties allegedly responsible for the loss. It also contained a “waterfall provision” requiring recoveries or damages from that effort to be divided among Flintlock and the insurers. The first $2 million was to be divided among them under specified percentages, the next $500,000 was to go entirely to Flintlock, and any remaining amount was to be divided equally between Flintlock and the insurers.

The parties agreed that a separate arbitration involving concrete suppliers would serve as the recovery effort for purposes of the settlement agreement. That arbitration produced a liability award in favor of Flintlock and BMNY against the concrete suppliers, but before damages were determined, Flintlock, BMNY, and the suppliers reached an $8.7 million global settlement. After accounting for amounts allocated to an unrelated matter and a payment by Flintlock to BMNY, Flintlock calculated that it recovered $8,125,500 related to the construction project.

Flintlock initially paid the insurers $1,582,827.40 under the waterfall provision. In making that payment, Flintlock excluded $4,684,845.20 that had been allocated to BMNY in the global settlement. The insurers disagreed and sought a larger share based on the $8,125,500 that Flintlock ultimately netted. The disputed amount was placed in escrow.

Arbitration and Motions

Under the settlement agreement’s arbitration clause, Flintlock and the insurers submitted the dispute to a three-member American Arbitration Association panel. The panel concluded that the plain and unambiguous meaning of the settlement agreement subjected the entire amount credited to Flintlock to the waterfall provision. The panel issued an award requiring Flintlock to pay the insurers $2,229,923.60.

Flintlock filed an amended petition to vacate, or cancel, the award. The insurers cross-moved to confirm, or make enforceable, the award and sought attorney’s fees. The parties disagreed about whether New York arbitration law or the Federal Arbitration Act supplied the governing standard, but the court found it unnecessary to decide that issue because Flintlock’s petition failed under either standard.

Court’s Analysis

Judicial review of arbitration awards is limited and deferential under both the Federal Arbitration Act and New York law. An award may be vacated on specified grounds, including arbitrator partiality, corruption or fraud, misconduct, or exceeding the arbitrator’s authority. The party seeking vacatur bears a heavy burden.

The court rejected Flintlock’s argument that the panel exceeded its authority by vacating or rewriting the earlier liability award or the global settlement. The panel had been asked to determine how the settlement agreement allocated recovery proceeds, and that was what it did. Interpreting whether funds allocated among the concrete suppliers, Flintlock, and BMNY were included within the agreement’s phrase “recoveries or damages” did not alter the earlier liability award or rewrite either settlement agreement.

The court also rejected Flintlock’s arguments based on public policy, irrationality, and the rule preventing previously decided matters from being relitigated. The earlier arbitration had addressed liability, not the damages or financial obligations at issue in the later award. The later award interpreted which portions of the settlements were subject to the waterfall provision; it did not nullify, contradict, or amend the earlier award.

Finally, the court denied the insurers’ request for attorney’s fees. Although Flintlock’s arguments failed, the record did not establish that Flintlock acted in bad faith, vexatiously, wantonly, or for oppressive reasons.

Disposition

Flintlock’s motion to vacate the arbitration award was DENIED. The insurers’ cross-motion to confirm the award was GRANTED. The insurers’ request for attorney’s fees was DENIED. The Clerk was directed to close the motion and terminate the case.