Houston COA Denies Mandamus Request in Arbitration Dispute between Insurers

Texas’ First District Court of Appeals in Houston has denied a petition for a writ of mandamus related to arbitration proceedings between two insurance companies.  In In Re Irving Drobny, No. 01-15-00435-CV (Tex. App. Houston [ 1^st Dist.], Aug. 30, 2016), Illinois-based National Accident Insurance Group and National Accident Insurance Underwriters (collectively, “NAIU”) entered into an underwriting agreement with Texas-based American National Insurance Corporation (“ANICO”) that authorized NAIU to sell and collect premiums for ANICO insurance policies in exchange for a percentage of the associated profits.  In addition, the underwriting agreement contained an arbitration provision that applied to “all disputes arising from the interpretation or performance of” the contract.

In 2001, NAIU disclosed that one of its executives defrauded the two companies out of more than $40 million by collecting premiums for policies that were not underwritten by either company.  Despite this, ANICO apparently directed that all claims be handled as if the fraudulent policies were issued by ANICO.  After NAIU handled over $13 million in claims, ANICO refused to pay to NAIU the associated claims handling costs.

Following both trial and appellate court rulings on the matter, the two insurance companies selected an umpire and arbitration began.  Soon after, however, ANICO filed a motion to require NAIU to post a security pending the outcome of the arbitral proceedings.  In response, the arbitration panel ordered NAIU to submit a $20 million prehearing security.  Almost three months later, the panel again ordered NAIU to comply with its prehearing security order in response to a motion filed by ANICO.

Approximately six weeks later, NAIU sought a temporary restraining order and temporary injunction from the trial court.  According to NAIU, the arbitration panel exceeded its authority when it required the company to submit a $20 million prehearing security and issued certain discovery orders.  ANICO responded by arguing that NAIU was actually asking the court to vacate the arbitral panel’s order prior to completion of the arbitral proceedings.  After determining that NAIU failed to timely challenge the panel’s prehearing security order, the trial court denied the company’s motion.  NAIU then appealed to Texas’ First District Court of Appeals.

First, the Houston court addressed ANICO’s claim that the court lacked “jurisdiction to decide NAIU’s appeal because the challenged order of the trial court, in which it denied NAIU’s motion to vacate the arbitration panel’s pre-hearing security and discovery orders, is interlocutory, and we are without statutory authorization to consider it.”  The appellate court said:

In sum, the trial court’s order denying NAIU’s motion to vacate is not a final order and does not fall within any of the statutory exceptions that authorize an interlocutory appeal. See TEX. CIV. PRAC. & REM. CODE ANN. § 51.016; see also 9 U.S.C. § 16. Thus, we do not have jurisdiction over NAIU’s appeal. See Perez, 340 S.W.3d at 451. Accordingly, we treat its appeal as a petition for a writ of mandamus. See id. at 452 (“[C]ourt of appeals’ original jurisdiction [invoked] by specifically requesting that its appeal be treated as mandamus petition.”).

Next, the Court of Appeals stated mandamus was “an extraordinary remedy that will issue only to correct a clear abuse of discretion or a violation of a duty imposed by law when there is no adequate remedy by appeal.”  The court then added:

Where, as here, the FAA applies, a trial court does not have the power to review an arbitration panel’s interlocutory decisions. See In re Ihi, 324 S.W.3d 891, 894 (Tex. App.—Houston [14th Dist.] 2010, no pet.) (citing Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 414 (2d Cir. 1980)). Rather, it is only after an arbitration panel has made an “award” that a party may challenge the panel’s determinations in a court by moving to modify, correct, or vacate the award. Id. Until an award has been made, a court is simply without authority to review the validity of an arbitration panel’s interlocutory rulings. Id.

An arbitration award is presumed to be valid and is entitled to great deference. Royce Homes, L.P. v. Bates, 315 S.W.3d 77, 85 (Tex. App.—Houston [1st Dist.] 2010, no pet.). Because judicial review “adds expense and delay, thereby diminishing the benefits of arbitration as an efficient, economical system for resolving disputes,” review of an arbitration award is “extraordinarily narrow.” CVN Grp., Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002); IPCO-G.&C. Joint Venture v. A.B. Chance Co., 65 S.W.3d 252, 256 (Tex. App.—Houston [1st Dist.] 2001, pet. denied). Review is so limited that an arbitration award may not be vacated even if there is a mistake of fact or law. Crossmark, Inc. v. Hazar, 124 S.W.3d 422, 429 (Tex. App.—Dallas 2004, pet. denied). An award has the same effect as a judgment of last resort, and all reasonable presumptions are indulged in favor of the award. Delgado, 95 S.W.3d at 238.

Texas’ First District then stated the trial court did not abuse its discretion when it denied NAIU’s motion to vacate the arbitration panel’s prehearing security order because it lacked the authority to do so.

The appellate court next addressed NAIU’s claim that the trial court committed an abuse of discretion when it held the company’s motion was untimely.  The appellate court stated:

“Procedural matters relating to the confirmation and vacat[ur] of arbitration awards in Texas courts are governed by Texas law even if the FAA supplies the substantive rules of decision.” Roehrs v. FSI Holdings, Inc., 246 S.W.3d 796, 804 (Tex. App.—Dallas 2008, pet. denied). Under the TAA, a “party must make an application [to vacate an award] not later than the 90th day after the date of delivery of a copy of the award to the applicant.” See TEX. CIV. PRAC. & REM. CODE ANN. § 171.088 (Vernon 2011); see also 9 U.S.C. § 12 (2012) (“Notice of a motion to vacate, modify, or correct an award must be served within three months after the award is filed or delivered.”). If a party does not file a motion to vacate the award by the expiration of that time period, the trial court is required to grant an order confirming the award. TEX. CIV. PRAC. & REM. CODE ANN. § 171.088; see also 9 U.S.C. §§ 9, 12.

After that, the Houston Court of Appeals dismissed NAIU’s assertion that the arbitral panel lacked the authority to order the company to pay a prehearing security.  The court said:

Again, the FAA and TAA are not “mutually exclusive,” and the FAA preempts state statutes only to the extent that they are inconsistent with the FAA. In re D. Wilson Constr. Co., 196 S.W.3d at 779. The FAA does not speak to prehearing security. See 9 U.S.C. §§ 1–16 (2012). We note, however, that the TAA provides that a trial court, either during arbitration or after its conclusion, may require security for the satisfaction of a judgment that may later be entered on an arbitration award. TEX. CIV. PRAC. & REM. CODE ANN. § 171.086(b)(4) (Vernon 2015).

Although the TAA does not specify any procedural safeguards that a trial court must undertake to ensure the fairness of any security ordered, appellate courts have held that a trial court “at a minimum, is required to permit the nonmovant [an] opportunity at a hearing to introduce evidence addressing the probable validity of the underlying claims.” See In re Noteboom, 111 S.W.3d 794, 798 (Tex. App.—Fort Worth 2003, no pet.) (emphasis added). Here, the record shows that the trial court held a hearing on NAIU’s motion to vacate the prehearing security order. However, NAIU did not present any evidence at the hearing.

Finally, Texas’ First District Court of Appeals overruled NAIU’s claim that the arbitration panel exceeded its authority with regard to certain discovery orders before ultimately denying the company’s petition for a writ of mandamus.

Photo credit: 401(K) 2013 via Foter.com / CC BY-SA