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Alternative Dispute Resolution | MONDAY, MARCH 31, 2014 | S11

Preemption
boundaries of McCarran- Ferguson’s “reverse therefore, constitutes an “Act of Congress” The Fourth Circuit reached a similar result

preemption” power over the FAA occurs when or a legislative act that would be subject to in The ESAB Group v. Zurich Ins., 685 F.3d
the insurance company involved is a foreign the provisions of McCarran-Ferguson. See 376 (4th Cir. 2012). In ESAB Group, a policy-
« Continued from page S9
company. The Convention on the Recognition Stephens v. American International Ins., 66 holder sought to avoid an arbitration clause
Cir. 1992) (holding that Kansas statute pro- and Enforcement of Foreign Arbitral Awards, F.3d 41 (2d Cir. 1995). Thus, the court in contained in an insurance policy sold by a
viding that written agreement to arbitrate also known as the New York Convention, Stephens held that a treaty is only “[t]o be foreign insurance company on the basis of
is invalid if contained in contract of insur- requires courts of contracting countries to regarded in the courts of justice as equivalent a South Carolina law that makes insurance
ance was enacted for purpose of regulating give effect to an agreement to arbitrate in a to an act of legislature, whenever it operates policy provisions requiring the arbitration of
business of insurance and thus McCarran- matter covered by an arbitration agreement of itself, without the aid of any legislative insurance disputes unenforceable. See S.C.
Ferguson Act precluded application of FAA), and also to recognize and enforce awards provision.” See id. at 45 (internal citations Code Ann. §15-48-10(a). The Fourth Circuit

cert. denied, 506 U.S. 1001, 113 S. Ct. 604, 121 made in other countries, subject to specific omitted). Accordingly, the Second Circuit held that the McCarran-Ferguson Act did not
L.Ed. 2d 540 (1992); Friday v. Trinity Universal limited exceptions. The Convention has been held that because an adoption act was nec- “reverse preempt” the New York Convention
of Kansas, 262 Kan. 347, 939 P.2d 869, 872-73 made part of the FAA. See 9 U.S.C. §201.
essary, the Convention is not self-executing provisions of the FAA because McCarran-
(1997) (holding that McCarran-Ferguson Act The Supreme Court noted: and a Kentucky state-law provision barring Ferguson was limited to the regulation of
prevented FAA from preempting Kansas stat- The goal of the Convention, and the arbitration, owing to McCarran-Ferguson, domestic legislation, not legislation such as
ute invalidating arbitration clauses in insur- principle purpose underlying Ameri- was held to trump the Federal Arbitration the New York Convention that concerned
ance contracts; homeowners could not be can adoption and implementation of it, Act notwithstanding the New York Conven- international commerce. ESAB Group, 685
compelled to arbitrate dispute with insurer).
tion and the involvement of a foreign based F.3d at 390.
Nat’l Union Fire Ins. v. Personnel Plus, was to encourage the recognition and
In enforcement of commercial arbitration insurance company.
Ins., 2013 U.S. Dist. LEXIS 102278, 14-15 agreements in international contracts Recent case law, however, has been critical The Future of Restrictions on Arbitration
(S.D.N.Y. July 22, 2013), however, the court and the unify the standards by which of the Second Circuit’s holding in Stephens
reached a different result. In considering a agreements to arbitrate are observed and and courts have found that when a foreign- Although recent legislative activity has not
challenge to an arbitration clause under a arbitral awards are enforced in signatory based insurance company is involved, the resulted in the passage of federal legislation
California statute requiring submission of countries.
New York Convention trumps McCarran- aimed at reforming mandatory pre-dispute
insurance policies to a state agency before Ferguson’s “reverse preemption” of the FAA.
arbitration clauses, consumer groups and
they may be enforced, the court found that Scherk, 417 U.S. at 519 n.15. In the insur- In Safety National Cas. v. Certain Under- state legislatures continue to push for such
because the state statute did not specifically ance context, however, the issue is whether writers at Lloyd’s, London, 587 F.3d 714 (5th legislation. While the FAA in many cases

address arbitration clauses contained in the McCarran-Ferguson can “reverse preempt” Cir. 2009), in response to the policyholder’s supersedes any state legislation that seeks
policies that had not been filed, there was the FAA in cases involving insurance arbitra- argument that a Louisiana anti-insurance to restrict arbitration in the interests of
no conflict with the FAA and therefore no tion clauses issued by foreign-based insur- arbitration statute “reverse preempted” the protecting consumers, consumers may be
McCarran-Ferguson “reverse preemption.”
ance companies from countries that are signa- FAA pursuant to McCarran-Ferguson, the Fifth able to avoid arbitration in some cases by
As evidenced by Personnel Plus, the extent tories to the Convention as it would in cases Circuit rejected the Second Circuit’s reasoning using the typical contract defenses, such as
to which McCarran-Ferguson can be used to in which the FAA would otherwise supersede in Stephens and held that because the insur- fairness and unconscionability. In addition,
invalidate arbitration clauses in the insurance a state statute regulating the arbitration of ance company was foreign, and the New York McCarran-Ferguson’s “reverse preemption”
context is dependent on the state statute at insurance disputes.
Convention was not an “Act of Congress,” in the insurance context could present a blue-
issue and will likely continue to be a hotly In Stephens v. American International the FAA provisions regarding the New York print for limited legislative reform in areas

contested area as litigants continue to test Ins., the Second Circuit reasoned that the Convention were not preempted by McCarran- such as elder law or health care, which many
the boundaries of the doctrine.
act adopting the Convention prevents the Ferguson and the state anti-arbitration statute groups contend require additional protections
An additional wrinkle in the debate over the
Convention from being self-executing and,
was therefore invalidated by the FAA.
against the uniform use of arbitration clauses.

Mediating
No. 08-10975 (RDD) (Bankr. S.D.N.Y.) (Docket No. 421); In case and diligence that an ordinarily prudent person un- 886 F.2d 921, 927 (7th Cir. 1989); see also Martin v. Kane
re Bernard L. Madoff, Adversary Case No. 08-01789 (BRL) der similar circumstances would exercise.” David P. Pri- (A & C Properties), 784 F.2d 1377, 1380 (9th Cir. 1986),
(Bankr. S.D.N.Y.) (Docket No. 3141).
mack, Note: “Confusion and Solution: Chapter 11 Bank- cert. den. sub nom, Martin v. Robinson, 479 U.S. 854
« 9. See also Greenberg, supra note 4. Mediation has also proven to be a significant tool in the Detroit bank- ruptcy Trustee’s Standard of Care for Personal Liability,” 43 Wm. & Mary L. Rev. 1297, 1309 (2002) (citing Hall v. (1986). The seminal case in this area is Drexel v. Loomis, which highlighted the paramount interests of the credi-
Continued from page S4
ruptcy case. In fact, it has been recognized that, absent Perry (In re Cochise College Park), 703 F.2d 1339, 1357 tors and a proper deference to their reasonable views.
diation as part of the case management of bankruptcy cases since 1986 when the Southern District of California the use of mediation, in this case the funds and re- (9th Cir. 1983)). For a lengthy discussion on the standard Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929). It is
established the first mediation program”).
sources were simply not there to efficiently resolve the of care to be applied to actions of trustees, see id. (“The well established that compromises are favored in bank-
5. See 28 U.S.C. §§651-658, 651(b) (2014) (identifying issues. “What has transpired is a delicate balancing act first and only Supreme Court case to address the issue of ruptcy. See 9 Collier on Bankruptcy ¶ 9019.03 (15th ed.
current statutory citation).
in bankruptcy court, where the public’s right to know the standard of case for a reorganization trustee is Moss- 2008). As the Supreme Court noted in TMT Trailer, “[i]n
6. Prior to the implementation of formal local rules, how public money is being handled is being weighed against the rights of creditors and debtors to resolved er v. Darrow.”). In Mosser v. Darrow, the Supreme Court recognized that it needed to be proactive in protecting administering reorganization proceedings in an econom- ical and practical manner, it will often be wise to arrange
many bankruptcy judges relied on §105 of the Bankrupt- cy Code to facilitate the mediation process.
their disputes in private.” See Tresa Baldas, Matt Helms bankruptcy trustees so they were not hindered in mak- the settlement of claims to which there are substantial
7. See Hon. Cecelia G. Morris & Cheryl J. Lee, “From & Alisa Priddle, “How Mediation has Put Detroit Bank- ing business judgments by others that these decisions and reasonable doubts.” Protective Comm. for Indep.
Behind the Bench: Toward an Efficient Mediation ruptcy on the Road to Resolution,” Detroit Free Press, could later be “open to serious criticism by obstreper- Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S.
Model—Evaluative Mediation in Bankruptcy,” 4 Norton Feb. 20, 2014, http://www.freep.com/article/20140202/ ous creditors aided by hindsight.” Mosser v. Darrow, 341 414, 424 (1967).
Bankr. L. Advisor 2, 6 (2007).
NEWS01/302020063/Orr-Snyder-Rosen-Detroi-bankrupt- cy. As lead mediator, Chief Judge Gerald E. Rosen over- U.S. 267, 273-74 (1951).
12. See In re Diplomat Const., 481 B.R. 215, 220-21 14. See, e.g., In re Bohack, 607 F.2d 258, 262 n.4 (2d Cir. 1979) (confirming that a “committee owes a fiduciary
8. So too, have many other bankruptcy cases utilized this, entering orders providing for Proposed Procedures saw several contentious restructuring talks between the (Bankr. N.D. Ga. 2012); see also Comm. of Equity Security duty to the creditors, and must guide its actions so as
in cases where a debtor, creditors’ committee or trustee city and its creditors, brokered the rescue fund to boost Holders v. Lionel (In re Lionel), 722 F.2d 1063, 1070 (2d to safeguard as much as possible the rights of minor-
anticipates filing a large number of avoidance actions. pensions and shielded artwork from being sold. Id.
Cir. 1983); In re Thomson McKinnon Secs., 120 B.R. 301, ity as well as majority creditors” (citing Woods v. City
See, e.g., In re Oldco M. (f/k/a Metaldyne), Case No. 10. Greenberg, supra note 4, at 547.
307 (Bankr. S.D.N.Y. 1990).
Nat’l Bank & Trust, 312 U.S. 262, 268-69 (1941))); In re
09-13412 (MG) (Bankr. S.D.N.Y.) (Docket No. 1726); In 11. “[A] bankruptcy or reorganization trustee is a fi- 13. “The benchmark for determining the propriety of Caldor, 193 B.R. 165, 181 (Bankr. S.D.N.Y. 1996); In re Iono-
re Lehman Brothers, Case No. 08-01420 (JMP) (Bankr. S.D.N.Y.) (Docket No. 2894); In re Creative Group, Case
duciary of each creditor ... . As such, he has a duty to treat all creditors fairly and to exercise that measure of
a bankruptcy settlement is whether the settlement is in the best interests of the estate.” In re Energy Coop.,
sphere Clubs, 101 B.R. 844, 855 (Bankr. S.D.N.Y. 1989); In re McLean Indus., 70 B.R. 852, 862 (Bankr. S.D.N.Y. 1987).

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