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The extent to which a Liquidator or Receiver of a defunct insurer can be compelled to comply with an arbitration requirement has been the subject of a good deal of discussion in the industry and disagreement in the courts. Now, after a complicated series of cases involving years of procedural wrangling, the claims between Allstate and Chuck Quackenbush, the Receiver of Mission Insurance Company were finally settled. According to the terms of the settlement, Allstate must pay the Receiver $7.5 million. Prior to settlement, however, a series of rulings in the case upheld the use of arbitration for the resolution of a Liquidator's claims where there were broad arbitration clauses in the reinsurance agreements.

History

Before Mission's insolvency, Mission and Allstate had entered into several reinsurance contracts with each other. In some of the agreements Mission acted as the reinsurer, and on other contracts Allstate acted as the reinsurer. All of the reinsurance contracts contained broad arbitration agreements.

In 1987, because of Mission's insolvency and pursuant to the California Insurance Code's insolvency procedure, Allstate filed proofs of claim with Mission's court-appointed Liquidator, Chuck Quackenbush (the California Insurance Commissioner). Some of the proofs of claim concerned the amounts owed by Mission to Allstate under reinsurance agreements, and others stated the amount of set-offs that Mission might try to claim by virtue of Allstate's reinsurance obligations to Mission.

Then, in 1990, Quackenbush sued Allstate in California Superior Court for contract and tort damages based on Allstate's alleged breach of its reinsurance contracts. Allstate removed the case to federal court on diversity grounds. Allstate then moved the federal court to stay the action and compel arbitration of the dispute under the Federal Arbitration Act (the "FAA") in accordance with the arbitration agreements between the parties. In response, Quackenbush moved the federal court to refrain from hearing the case on the basis of the doctrine of Burford abstention and remand the case to the state court. In addition, Quackenbush argued that the issue of whether Allstate could set off its claims against his claims was a matter of state law that was already pending in the state court liquidation proceeding.

The federal district court granted Quackenbush's motion, concluding that it should abstain because its decision of the substantive legal issues involved, such as Allstate's right to offset its obligations to Mission by Mission's obligations to it, would interfere with California's comprehensive scheme for regulating the insurance industry. (The basis for withholding jurisdiction pursuant to the doctrine of Burford abstention is to prohibit interference with a comprehensive state regulatory scheme).

The Ninth Circuit, however, vacated the district court's order and ordered the case sent to arbitration. The court held that Burford abstention is only applicable where the relief sought is equitable, not legal, in nature. Thus, because Quackenbush was seeking damages, Burford abstention was incorrectly invoked.

Subsequently the Supreme Court of the United States, in a unanimous decision, affirmed the Ninth Circuit's opinion, although it narrowed the Ninth Circuit's language somewhat. Quackenbush v. Allstate Ins. Co., --- U.S. ---, 116 S.Ct. 1712 (1996). The Supreme Court held that Burford abstention only supports the remand or dismissal of a case where the relief sought is discretionary. Since Quackenbush had not sought any type of discretionary relief, the district court should not have remanded the case to the state court on the basis of Burford abstention.

The case was thus remanded to the district court, Quackenbush moved for an order staying the federal proceeding, and Allstate moved to enjoin Quackenbush from litigating its set-off defenses in the state proceeding and to compel arbitration. In two separate orders, the court denied Quackenbush's motion to stay the federal proceedings and denied Allstate's motion for an injunction. The effect of these orders was to allow both the state liquidation proceeding and the federal action to proceed simultaneously. Both parties appealed the district court's orders to the Ninth Circuit.

The Ninth Circuit Decision

In Quackenbush v. Allstate Ins. Co., 121 F.3d 1372 (1997), the Ninth Circuit held that the state liquidation proceedings were the appropriate forum for the resolution of Allstate's claims against Mission. The court also held that the liquidator's claims against Allstate were correctly submitted to arbitration.

While the court recognized that the suits between the parties appeared to be "two sides of the same coin," it stressed that the proceedings were in fact distinct from one another as the set-off issue, which was the primary source of dispute, was only relevant in the federal proceeding where Allstate was the defendant. Id. at 1382. Therefore, the court reasoned, allowing both cases to proceed independently was the correct outcome, even though the resolution of the state court issues in the liquidation proceeding might have a preclusive effect on Allstate's set-off defenses in the federal court proceeding.

[It is important to note, however, that in an unpublished opinion a California appellate panel held that once the district court had compelled arbitration of Quackenbush's claims against Allstate, the Superior Court handling Mission's insolvency should have stayed its proceedings pending the resolution of the arbitration. In re Mission Ins. Co., No. B107839, Cal. App., 2d Dist. (Aug. 22, 1997).]

As to the arbitration issue, the Ninth Circuit held that the district court had reached the right result. The Ninth Circuit held that the FAA required the district court to order Quackenbush's claims against Allstate to be resolved through arbitration. The Ninth Circuit, using strong language, said that because of the existence of the broad arbitration clauses in the reinsurance agreements, the district court had no discretion under the FAA to order anything except that the parties proceed to arbitration.

The court rejected all of Quackenbush's arguments as to why the dispute should not be resolved through arbitration. First, the Ninth Circuit categorically rejected Quackenbush's argument that the parties had, in some way, intended to exempt insolvency claims from the broad scope of issues covered by the arbitration agreements, since there was no evidence of such an intention. Second, the court found Quackenbush's suggestion that the state-law issues implicated in the case were statutory, and therefore not arbitrable, without merit. Finally, the court addressed Quackenbush's contention that the McCarran-Ferguson Act, which prohibits the preemption of state laws regulating the insurance business by federal law, prevents these claims from being resolved through arbitration. While the court acknowledged that the McCarran-Ferguson Act would prevent the arbitration of Allstate's claims against Mission by preempting California's statutory insolvency scheme, it noted that, in this case, where Mission's trustee was asserting claims against Allstate, the act had no relevance because the statutory insolvency scheme was not implicated.

Conclusion

It remains to be seen how much influence this decision will have. It may serve to weaken generally obstacles to arbitration raised under McCarran-Ferguson in insolvency situations, or it may be limited to situations where the Liquidator is also a claimant; in other words, it may simply be a matter of not allowing the Liquidator to eat his cake and have it too.