The Federal Arbitration Act (FAA) has been challenged numerous times since its inception, but the Supreme Court continuously upholds arbitration clauses because arbitration helps keep the court system moving and can keep costs down by avoiding costly litigation. Arbitration presents a powerful tool when used correctly. However, arbitration is a double-edged sword that can potentially cut the other way.
The Original Agreement
In Bankers Conseco Life Insurance Company et al. v. Feuer et al., Plaintiffs, as insurance companies, brought suit against Defendants, as individuals and a private investment firm, for fraudulently misrepresenting the financial situation and corporate structure of the private investment firm, Beechwood Re. Plaintiffs supplied Defendants with $550 million in trust assets for investment and management as part of Defendant’s reinsurance business. Plaintiffs then allege that Defendants misappropriated the trust assets for their own gain.
The issue in this case hinged on arbitration language contained within the Reinsurance Agreements because although the arbitration language refers to all parties related to the Reinsurance Agreement, Defendants were never signatories to the Reinsurance Agreements. The Defendants asked the court to send the case to arbitration, pursuant to the Reinsurance Agreements. The court explained that “when the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed,” the non-signatories could invoke equitable estoppel to compel arbitration against signatories.
In order to invoke equitable estoppel, the court explained that there is a two-part “intertwined-ness” test. The two prongs of the test “examine (1) whether the signatory’s claims arise under the same subject matter of the agreement and (2) whether the non-signatory has a ‘close relationship’ to a signatory of the agreement.”
The court held that both prongs of the test are met as (1) “the Reinsurance Agreements are significantly intertwined with the allegations in the First Amended Complaint,” and (2) “Defendants…possess the essential close relationship….” Thus, the court granted Defendant’s motion to compel arbitration.