Pacific Reinsurance Management Corporation v. Ohio Reinsurance Corporation

Issue Discussed: Security

Submitted by Michael T. Carolan, Thomas J. Kinney*

Date Promulgated: June 5, 1991

Pacific Reinsurance Management Corporation v. Ohio Reinsurance Corporation, 935 F.2d 1019 (9th Cir. 1991)

Court: U.S. Court of Appeals for the Ninth Circuit

Issue Decided: 1) Whether arbitration panel’s interim order requiring respondent to contribute to escrow account as pre-hearing security was a final order; and 2) Whether arbitration panel’s interim order requiring respondent to contribute to escrow account as pre-hearing security exceeded the arbitration panel’s authority or was otherwise in error.

In Pacific Reinsurance Management Corporation v. Ohio Reinsurance Corporation, the U.S. Court of Appeals for the Ninth Circuit confirmed an arbitration panel’s interim award requiring respondents to contribute to an escrow account pending the final hearing, holding that the interim award was a final order subject to federal court review and confirmation and did not exceed the arbitration panel’s authority.

The Arbitration

Pacific Reinsurance Management Corporation (“PRMC”) managed a reinsurance pool in which Ohio Reinsurance Corporation (“Ohio Re”) and other reinsurers participated.  Pursuant to the Management Agreement, Ohio Re and the other participating reinsurers granted authority to PRMC to develop, underwrite, and manage reinsurance business on their behalf.  Eventually, Ohio Re and the reinsurers sued PRMC for fraud, rescission, and damages.  The dispute was ordered to arbitration.

During the arbitration, the panel set up an escrow account for damages that might be due PRMC under the reinsurance agreements.  In July 1988, the panel issued an interim final order setting up an escrow account with the balances due from the reinsurers to PRMC (in excess of $20 million) if the Management Agreement proved valid after a final hearing.

PRMC sought and received confirmation of the interim award in federal court.  Ohio Re and the other reinsurers petitioned the district court to stay the arbitration and to prohibit the panel from retaining outside counsel to set up the escrow account.  The district court denied the reinsurers’ petition.  The reinsurers appealed.

The Appellate Court Opinion

The U.S. Court of Appeals for the Ninth Circuit reviewed each of the issues addressed at the district court and confirmed the interim award.

First, the Circuit Court denied Ohio Re’s argument that the interim award was a non-final award not subject to review by the District Court.  As the court viewed it: “Temporary equitable relief in arbitration may be essential to preserve assets or enforce performance which, if not preserved or enforced, may render a final award meaningless.  However, if temporary relief is to have any meaning, the relief must be enforceable at the time it is granted, not after an arbitrator’s final decision on the merits.”  Thus, the court held that the interim award had “an element of finality sufficient to be confirmed an enforced” under the Federal Arbitration Act.

Second, the Circuit Court held that the interim award did not exceed the arbitration panel’s powers.  Ohio Re and the other reinsurers argued that the Management Agreement did not confer on PRMC, as manager and agent for them, a right to collect payments owed to third parties.  PRMC disagreed, pointing to a provision in the Management Agreement which stated that PRMC was “empowered to collect balances due from and pay balances to” its clients and that Ohio Re and the other reinsurers “shall pay” any deficit to PRMC “promptly upon receipt of said account.”  On this issue, the court framed the question as “whether the panels’ decision ‘draws its essence’ from the contract” between the parties.  The court further noted that it must “accord considerable deference” to the arbitration panel’s judgment and not vacate an award simply because it may have “interpreted the agreement differently.”  Because the arbitration panel interpreted the clauses cited by PRMC as sufficient to set up the escrow account, the court concluded that it did not exceed its powers.  The court further noted that the arbitration provision in the Management Agreement gave the arbitration panel “wide latitude” to resolve disputes and that establishment of an escrow account pending a final hearing “does not exceed the mandate given the panel.”

Third, the Circuit Court dismissed Ohio Re’s argument that ex parte communications between PRMC, PRMC’s arbitrator, and the umpire concerning balances possibly due PRMC under the reinsurance agreements constituted misbehavior by the arbitration panel.  In the court’s view, the information shared between the two panel members was “common information routinely sent to” Ohio Re on a monthly basis.  Further, the court noted that “all parties were on official notice in September 1987” that PRMC was claiming balances due, leaving Ohio Re “ample opportunity, both before the panel formally considered setting up an escrow account . . . and before [the panel] finally issued” the interim order to dispute the claimed balances.

Finally, the Circuit Court held that the panel’s interim order was not in manifest disregard of the law and facts.  Initially, the court noted the limited nature of judicial review of arbitration awards.  Additionally, the court pointed out that “[t]he panel was not bound by the Federal Rules of Evidence and it was the panel’s job to choose whom to believe.”  The interim order, the court found, reflected “the panel’s sense at that point in the hearings that the balances . . . might well be due PRMC and that an escrow account to provide for that eventuality was advisable.”  Thus, the court concluded that the interim order was not in manifest disregard of law or fact.

*Michael T. Carolan and Thomas J. Kinney are partner and associate, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP.  They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.