FILED: NEW YORK COUNTY CLERK 12/06/2016 01:51 PM INDEX NO. 656341/2016 NYSCEF DOC. NO. 4 RECEIVED NYSCEF: 12/06/2016 ALLIED CAPITAL CORPORATION and CIENA CAPITAL LLC (f/k/a BUSINESS LOAN EXPRESS LLC), Claimants, - against AMERICAN INTERNATIONAL SPECIALTY JAMS Case Number 1425007648 LINES INSURANCE COMPANY, Respondent. PARTIAL FINAL AWARD (CORRECTED) On or about March 8, 2016, the Tribunal issued a Partial Final Award ("PFA"), one arbitrator dissenting. The PFA granted the insurer's ("AISLIC's") motion for summary disposition seeking a declaration of no coverage for a loss allegedly suffered by its insured, Allied Capital Corporation ("Allied"). The panel also denied the insured's reciprocal motion for summary disposition. The PFA further determined that, while Allied was not entitled to be indemnified for the $10.1 million payment that the government ultimately received, it was entitled to its defense costs. In that regard, however, the panel determined that an evidentiary hearing was required to fix the amount. Thus, the panel denied that part of the insurer's motion that sought to deny Allied its defense costs, and granted that part of Allied's motion that sought defense costs, but reserved on the amount. 1
By letter dated April 1, 2016 ("Allied's Appl."), Allied requested the Tribunal to reconsider the PFA on the basis, among others, that the majority of the Tribunal erred in finding that Allied did not suffer a "Loss" as that term was used in the applicable insurance policy. AISLIC opposes Allied's motion for reconsideration on both procedural and substantive grounds. AISLIC first argues that the Tribunal, having issued a PFA denying coverage, has no power to reconsider that award other than for computational, typographical or similar errors, and then only upon Allied's timely application in compliance with JAMS Comprehensive Rule 24(j).1 AISLIC then argues that the PFA's conclusions were in any event correct and that the finding of no coverage must be confirmed even if the Tribunal reaches the merits of Allied's Application. Further, even assuming arguendo that the Tribunal erred on the merits, the arbitrators are powerless to rectify the mistake once a final award on the issue of coverage has been made. On the other hand, Allied argues that the Tribunal is not prohibited by the doctrine of functus officio or otherwise from reconsidering the PFA, and that any reference to the JAMS Comprehensive Rules is misplaced because those rules do not govern the conduct of the arbitration. Allied, of course, also argues that the panel erred in finding that Allied did not suffer JAMS Rule 24(j) provides in pertinent part: "Within seven (7) calendar days after service of a Partial Final Award or Final Award by JAMS, any Party may serve upon the other Parties and on JAMS a request that the Arbitrator correct any computational, typographical or other similar error in an Award... or the Arbitrator may sua sponte propose to correct such error in an Award.... The Arbitrator may extend the time within which to make corrections upon good cause..." 2
an insurable "Loss" as that term is defined in the 2008 Policy, and that "the interests of justice require that the Tribunal reconsider its Partial Final Award." (Allied's Appl. At 2). The parties briefed the issues at the request of the Tribunal, and a hearing was conducted on June 7, 2016 at which counsel argued their respective positions. A. Do the JAMS Comprehensive Rules apply, and, if so, is Allied barred by the JAMS Rules from pursuing its motion for reconsideration? AISLIC argues that JAMS Rule 24(j) is the exclusive means to challenge a partial final award, and that Allied cannot rely on Rule 24(j) because: (i) it does not permit a merits reconsideration, and (ii) Allied's motion for reconsideration was in any event untimely under the rule. Allied counters that the arbitration was not conducted under the JAMS Rules, and AISLIC's reliance on Rule 24(j) to avoid reconsideration of the PFA is therefore misplaced. After due consideration, the Tribunal agrees with Allied that the JAMS Comprehensive Rules do not govern the procedure in this arbitration. This arbitration was originally brought under the 2008 Policy with AISLIC arguing that the circumstances that gave rise to the loss first arose in 2006 and that by reason of the so-called "prior claims exclusion" in the 2008 Policy the Tribunal should look to the 2006 Policy to determine coverage. The arbitration agreement in the 2008 Policy does not reference the JAMS Rules. Instead, Clause 17 of 2008 Policy simply provides that "all disputes or differences which may arise with regard to the construction or interpretation of the provisions of this policy, whether arising before or after termination of this policy shall be submitted to the alternative dispute resolution ("ADR") process set forth in this Clause." The remainder of Clause 17 describes the possibility of a mediation prior to an arbitration. If an arbitration is required, Clause 17 then describes how a panel is to be formed 3
(each side to select an arbitrator and then the two so chosen to select a chair). The Clause then addresses choice of law and excludes punitive or consequential damages. It nowhere mentions the rules of a particular provider organization. The parties' arbitration agreement in Clause 17 of the 2006 Policy also does not refer to the JAMS Comprehensive Rules, but to -arbitration submitted to the American Arbitration Association under or in accordance with its then-prevailing Commercial Arbitration Rules." On February 11, 2013, a preliminary conference was conducted with the parties by telephone to discuss the procedures to govern the arbitration. The results of that conference were set forth in writing in Procedural Order No. 1. Prior to the conference, the panel sent a list of questions to counsel with instructions to meet and confer and to agree on as many procedural aspects as possible. One of the specific questions on which counsel were asked to confer was "3. Please advise what procedural rules and what substantive law you believe will govern the arbitration?" While the parties reached agreement on many of the procedural questions that the panel asked in its email, they did not reach an agreement on the application of any institutional rules. Instead, after the conference took place, Procedural Order No. 1, which memorialized the agreements reached at the conference, simply recited in paragraph 6 that "This is an insurance coverage dispute essentially involving two insurance policies... The law of the State of New York... governs the 2008 Policy. The law of the State of Delaware... will apply to the 2006 Policy." It says nothing about any particular institutional rules that may govern the arbitration. The fact that the case is being administered by JAMS and bears a JAMS case number does not equate to an agreement by the parties to use the JAMS Comprehensive Rules. The 2008 Policy contains a New York choice of law clause in Clause 17 ("The dispute or differences considered by the mediator or arbitrators shall be governed by the internal laws of the 4
State of New York [except for certain enumerated exceptions not here relevant]"). The 2006 Policy is governed by Delaware law. The arbitration was conducted in New York City thus implying the applicability of New York procedural law to the arbitration. At most, the choice of law clauses and the venue of the arbitration speak to the applicability of state procedural law (such as that contained in Article 75 of the CPLR) as an overlay to the Federal Arbitration Act ("FAA"). Neither New York nor Delaware law mandate the use of any particular institutional rules.2 The FAA is similarly silent leaving it up to the parties to choose the procedure to govern their arbitration. Volt Information Sciences v. Stanford Junior University, 489 U.S. 468 (1989). AISLIC points out that the parties, in various pieces of correspondence, referenced the JAMS Comprehensive Rules. Most of such correspondence, however, was sent or received prior to the parties' entry into Procedural Order No. 1 on February 11, 2013.3 There are three references to the JAMS Comprehensive Rules after February 11, 2013. In one of them dated March 19, 2015 the arbitrators asked specifically (in the context of AISLIC's application citing JAMS Comprehensive Rule 15(i)-- to remove Mr. Joyce as Allied's party-appointed arbitrator): "Section 17 of the 2008 Policy, Alternative Dispute Resolution Process, does not require the arbitration to be conducted under JAMS Rules. Do the parties want the JAMS Rules and specifically Rule 15(i) to apply to this arbitration?" (Tab 12 of AISLIC's bound submission 2 The 2008 Policy's arbitration agreement describes what is known as an ad hoc arbitration with no named administrative authority or institutional rules. One piece of correspondence dated December 22, 2010 came from the intake case manager at JAMS. She confirmed that JAMS had received a Demand for Arbitration and her letter included the statement "It is my understanding that this arbitration shall be conducted in accordance with JAMS Comprehensive Arbitration Rules and Procedures Rules (sic)." No party confirmed that statement, and, again, a statement by an administrative person cannot equate to an agreement by the parties to be governed by the JAMS Comprehensive Rules. 5
served at the June 7, 2016 hearing). Counsel for Allied responded: "We consider the conflict issue to be a procedural matter which, as previously agreed with respect to such matters, is to be decided by the Chairperson." Id. That response, which does not constitute an agreement to use the JAMS Rules, is consistent with Procedural Order No. 1. In sum, any references to the JAMS Rules are no substitute for an explicit party agreement, and the Tribunal declines to infer such an agreement especially when the parties were asked, prior to the finalization of Procedural Order No. 1, to specify the arbitral procedure and declined to do so4 and when the parties were invited to specify the JAMS Rules in March 2015 and again declined to do so. As the JAMS Rules do not apply to the arbitration, Allied's failure to comply with JAMS Rule 24(j) is not a bar to its Application for reconsideration. B. Is Allied's Application barred by the doctrine of functus officio? The parties have not brought any New York or Delaware law to the attention of the Tribunal that would bar a motion for reconsideration after the issuance of a partial final award. The FAA is silent on the issue. Allied contends that the basis for such a bar, however, may be found in the common law doctrine of functus officio.5 According to Judge Posner, the doctrine has its roots "In the bad old days when judges were hostile to arbitration and ingenious in We recognize that this may have been an oversight as opposed to a deliberate decision, but whatever the reason the record is nonetheless devoid of any agreement on the application of institutional rules to the arbitration. As Judge Baer explained in Employers' Surplus Lines Ins. Co. v. Global Reinsurance Corp., 2008 WL 337317 at *4 (S.D.N.Y. Feb. 6, 2008) ("Global Re'), "[T]he common law doctrine of functus officio presumes that an arbitrator's final decision on an issue strips him of authority to consider that issue further" citing Trade & Transport, Inc. v. Natural Petroleum Charterers, 931 F.2d 191, 195 (2d Cir. 1991), 6
hamstringing it." Glass, Molders, Pottery, Plastics & Allied Workers Intl Union v. Excelsior Foundry Co., 56 F.3d 844, 846 (7th Cir. 1995), quoted at fn. 6. in Global Re cited above. As Judge Baer further explained in Global Re at *9: "the rationale underlying [functus officio] is to prevent re-examination of any issue by a nonjudicial officer potentially subject to outside communication and unilateral influence- citing New York Hotel & Motel Trades Council v. Hotel St. George, 988 F.Supp. 770, 781 (S.D.N.Y. 1997). Several cases have examined the doctrine in the context of a litigant's attempt either to avoid or enforce the finality of an arbitration award. In Trade & Transport, supra, the Second Circuit affirmed the district court's confirmation of an arbitration award. There, the parties asked for a bifurcated proceeding, and a panel of three arbitrators issued an award as to liability only. One of the arbitrators then died before the damages hearing could be conducted. The district court appointed a replacement arbitrator, and the losing party then moved for reconsideration of the liability award. The newly constituted panel refused, held a hearing on damages, and issued a final award. In affirming confirmation of the award, the Court of Appeals held that the panel's failure to reconsider the liability award did not constitute -misconduct" under 9 U.S.C. Section 10(c). The Court explained, "Thus, if the parties have asked the arbitrators to make a final partial award as to a particular issue and the arbitrators have done so, the arbitrators have no further authority, absent agreement by the parties, to redetermine that issue." Trade & Transport, supra, 931 F.2d at 195. It was clearly important in that case that the parties "asked the panel to decide the issue of liability immediately, a decision that was expressly intended to have immediate collateral effects in the judicial proceeding. The panel understood that this was to be a final decision as to liability." Id. 7
Since the Second Circuit decided Trade & Transport in 1991, several other courts have wrestled with the application of the doctrine offunctus officio. The Global Re decision, supra, refused to apply the doctrine. There, the arbitrator issued a Partial Final Award in which he made two separate liability findings based on his interpretation of an insurance certificate. Id. at *2. One of the parties moved in the district court to confirm the first liability finding (as to coverage) but to vacate the second liability finding (relating to the payment of defense costs). The insured opposed the insurer's petition as premature and argued that the partial final award was not "final" pursuant to the FAA because the issue of the entitlement to counsel fees was still pending. Id. The district court declined to rule on either party's petition and instead referred the parties to the Arbitrator for further proceedings. The Arbitrator ultimately issued a Final Award retaining the Partial Final Award's first liability finding, but expanding upon, and thereby changing, the second liability finding. Id. at *3. In confirming the Final Award (which reconsidered and changed in certain respects one of the liability findings in the Partial Final Award), the district court determined that the doctrine offunctus officio did not preclude the Arbitrator's reconsideration of the Partial Final Award because the Partial Final Award as originally rendered did not completely determine the parties' claims. Id. at *5. As the district court explained, "Generally, in order for a claim to be completely determined, the arbitrators must have decided not only the issue of liability of a party on the claim, but also the issue of damages." [citing, Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 412 at 413-14 (2d Cir. 1980)]... [H]ere, as the Partial Final Award left open the question of damages on the second liability finding, it would have been error for me to review it and thus my only option was to remand the parties' dispute to the Arbitrator." Id. 8
The district court distinguished Trade & Transport by explaining that "in that case, the parties expressly requested the arbitration panel to make an immediate determination as to liability, leaving for a later time the calculation of damages... The Second Circuit held that the arbitrators were functus officio once they decided liability but based its conclusion on the parties' express intent to bifurcate the arbitration proceedings between liability and damages." As the district court in Global Re concluded, "I agree with [the insurer] that Trade & Transport is distinguishable from the case at bar. Because the parties in Trade & Transport had explicitly modified their original arbitration submission to bifurcate the liability and damages issues, and the partial final award 'conclusively decide[d] every point required by and included in the first part of the parties modified submission,' the partial final award in that case was final. 931 F.2d at 195. Such is not the case here." Global Re, supra, at *5. In the present case, the parties did not bifurcate the proceedings, but they did make reciprocal motions for summary disposition on the issue of coverage. Included in those motions, however, were requests for a determination of all issues, including those relating to defense costs.' The PFA in the instant case determined the coverage issue and further determined that the insured was entitled to its defense costs but left open the proceedings for a hearing on the amount, if anything, of such defense costs. It is significant that the Policy's definition of "Loss" includes defense costs. Thus, the PFA did not determine in any fashion the total amount of the insured's Loss regarding defense costs. Further, the insurer did not move in the district court to confirm the PFA. It is uncertain under these circumstances whether such a motion to confirm would have been entertained. If not, this is a factor that militates for the non-application of the 6 Allied first demanded its defense costs in its Demand for Arbitration. See, Demand for Arbitration dated October 21, 2010 at page 9. 9
functus officio doctrine. As the district court explained in Global Re ("[C]ommon sense requires that if a district court confirms a partial final award, the arbitrator is functus officio, i.e., without power to modify it. Applying logic, the contrapositive is also true: if an arbitrator is not, functus officio as to an interim award, then the interim award is not subject to judicial review. It seems likely, as well, that if a partial final award lacks ripeness for judicial review, the arbitrator is not,functus officio and may reconsider it.") Id. at *4. In Rocket Jewelry Box v. Noble Gift Packaging, 157 F.3d 174 (2d Cir. 1998), the Second Circuit discussed when an arbitration award is "final" for purposes of confirmation. There, the Court analyzed the tests articulated in both Trade & Transport and Conn Tech Dev. Co. v. University of Conn., 102 F.3d 677 (2d Cir. 1996). The Rocket Jewelry Box court concluded that the tests used in those cases were "two ways of saying the same thing: that an arbitration award, to be final, must resolve all the issues submitted to arbitration, and that it must resolve them definitively enough so that the rights and obligations of the two parties, with respect to the issues submitted, do not stand in need of further adjudication. 157 F.3d at 176. (Emphasis in original) In Rocket Jewelry Box, the losing party opposed confirmation on the grounds that the dispute was not fully decided. However, the allegedly "undecided" dispute in that case was never submitted to the arbitrators. Taking these cases as a whole, the Tribunal concludes that in the context of this ad hoc arbitration-- the doctrine of functus officio does not preclude the panel's reconsideration of the Partial Final Award. The PFA did not resolve all issues submitted to the arbitrators in the parties' competing motions for summary disposition. Indeed, the insured recognized that, if its motion for defense costs was granted, further proceedings would most likely be needed. Under these circumstances, it is unlikely that a district court would have entertained a motion to confirm the 10
PFA, and the PFA would not have been considered "final" for purposes of the functus officio doctrine. It is also the case that reconsideration in this case would not run afoul of the policy rationale underlying the doctrine, i.e, "to prevent re-examination of any issue by a nonjudicial officer potentially subject to outside communication and unilateral influence" (Global Re at *9) because the arbitration did not terminate with the PFA and the rule against ex parte contact with the arbitrators was, and has been, continuously in force. Moreover, if a mistake was made, it ought to be rectified. When in doubt, the. functus officio doctrine should not prevent an arbitral tribunal from arriving at a correct decision, especially given the deferential review accorded to arbitration awards. The Tribunal therefore reaches the merits of Allied's Application. C. Did the Tribunal Err in Determining that Allied did not suffer a "Loss" under the 2008 Policy? In its letter Application for reconsideration dated April 1, 2016, Allied points to several errors that it claims were made in the PFA. The Tribunal finds merit in several of these claims, the main one being that the PFA erroneously determined that Allied did not suffer a "Loss" under the 2008 Policy when Allied fulfilled its obligations under the FCA Settlement Agreement. As set forth in the PFA at paragraphs 30-34, Allied undertook an obligation under the FCA Settlement Agreement to "release a sufficient amount of the liens and security interests collateralizing the Secured Credit Facility to fund all distributions required to be funded under the Plan [of Reorganization in the Ciena bankruptcy]." PFA, para. 33. The PFA, however, concluded that the mere release of a portion of Allied's lien did not result in a Loss because Allied, as a secured creditor in an amount far in excess of the debtor's net realizable assets, 11
was after the release of a portion of Allied's lien - - still entitled to 100% of Ciena's equity.7 The PFA recognized that Ciena's value dropped because of its payment to the government (see, PFA paragraph 61), but determined that "A Loss, however, [under the Policy] does not include a diminution in the NRV [net realizable value] of a subsidiary, even if the accounting treatment reflected that reduction in value as a reduction in net income. AISLIC did not insure that risk." Id. The Tribunal determines that the error was made in this statement and in the further conclusions set forth in PFA paragraphs 54-65 that no Loss occurred. AISLIC did not insure the risk of a diminution in the value of an insured's subsidiary, but it did insure a "Loss" arising out of a "Wrongful Act." As stated at page 4 of Allied's Application, "With the execution of the FCA Settlement Agreement, liability was imposed on both Allied and Ciena." Allied accepted and agreed to recognize its own liability in that settlement, not just the liability of its subsidiary. That acceptance of liability was not gratuitous. The government sued Allied as Ciena's alter ego. A viable cause of action thus existed directly against Allied. (See PFA, paragraph 88). Therefore, the "reduction in value [of the subsidiary] was the result of the FCA Settlement Agreement" (Id) and, as such, constitutes an insurable Loss. The subsequent post-petition loan was irrelevant to this conclusion. The Loss had already occurred. The money that Ciena paid to the government could have hypothetically come from anywhere, e.g., from a loan from an unrelated third party. Offsets to the Loss Here, the distinction between a lien and the assets secured by the lien becomes important. A lien may be in any amount, but its value is limited by the amount of the security secured by the lien. See, e.g., PFA paragraph 55. 12
As explained at PFA paragraphs 96 and 97, AISLIC contends that if coverage is found under either the 2008 Policy or the 2006 Policy, it "shall apply only as excess over any other valid and collectible insurance," such as the XL Specialty and Indian Harbor policies insuring Ciena that were the subject of pending litigation in the Supreme Court of New York. That litigation has recently settled and some money has presumably changed hands as a result. The Tribunal must determine whether AISLIC is entitled to a credit for any recoveries under either of the above insurance policies. Conclusion Thus, upon reconsideration, the PFA is corrected to grant summary disposition on the issue of liability to Allied, and to deny summary disposition to AISLIC.8 The remainder of the PFA, including AISLIC's liability for defense costs, is affirmed. A telephone conference with counsel will be scheduled to determine the date for a final hearing on the issues of: (i) whether AISLIC is entitled to a credit for any Allied recoveries under the XL Specialty or Indian Harbor policies; and (ii) the appropriate amount, if any, due Allied for the defense costs incurred. Dated: August, 2016 Robert B. Davidson, Chairman Edward M. Joyce, Arbitrator Any statements in the PFA inconsistent with the conclusion above are deemed amended and corrected as well. 13
As explained at PFA paragraphs 96 and 97, A ISLIC contends that it'coveraae is tbund under either the 2008 Policy or the 2006 Policy. it "shall apply only as excess over any other valid and collectible insurance," such as the XL Specialty and Indian Harbor policies insuring Ciena that were the subject of pending litigation in the Supreme Court of New York. That litigation has recently settled and some money has presumably changed hands as a result. The Tribunal must determine whether A IS LIC is entitled to a credit for any recoveries under either of the above insurance policies. Conclusion Thus, upon reconsideration, the PFA is corrected to grant summary disposition on the issue of liability to Allied, and to deny summary disposition to AISLIC.s The remainder of the PFA, including liability for defense costs, is affirmed. A telephone conference with counsel will be scheduled to determine the date for a final hearing on the issues of': (i) whether AISLIC is entitled to a credit for any Allied recoveries under the XL Specialty or Indian Harbor policies; and (ii) the appropriate amount, if any, due Allied for the defense costs incurred. Dated: August ig, 2016.(3 Robert B. Davidson. Chairman Edward M. Joyce, Arbitrator 8 Any statements in the PFA inconsistent with the conclusion above are deemed amended and corrected as well. 13
Thomas R. Newman, Arbitrator (dissenting) 14
Thomas R. Newman (dissenting) For the reasons stated below, [1] Allied's motion for reconsideration should be denied because the Tribunal is barred by the doctrine of functus officio from reconsidering and altering its Partial Final Award ("PFA"), and [2] the Tribunal's conclusion in 1199 of the PFA that "Claimant's motion for Summary Disposition seeking to recover the monies paid to the Government in connection with the FCA Settlement is DENIED and AISLIC's reciprocal Motion for Summary Disposition is GRANTED" is correct and should be adhered to. I. In its PFA (Corrected), the Tribunal quotes from Trade & Transport, Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191, 195 (2d Cir. 1991), where the Second Circuit held if the parties have asked the arbitrators to make a final partial award as to a particular issue and the arbitrators have done so, the arbitrators have no further authority, absent agreement by the parties, to redetermine that issue. And in Employers' Surplus Lines Ins. Co. v. Global Re. Corp. U.S. Branch, 2008 U.S. Dist. LEXIS 8253 at *18-*19 (SDNY 2008), relied on by the Tribunal, the District Court stated: a partial award is final (and thus ripe for a petition to confirm) if it finally disposes of a separate, independent claim. This holds true even where the parties have not asked the arbitrator to decide a claim separately. "Disposition of an issue that is severable from other issues still before the arbitrator may be deemed final and subject to confirmation."... Sperry Int'l Trade, Inc. v. Gov't of Israel, 532 F. Supp. 901, 906 (S.D.N.Y. 1982), affd, 689 F.2d 301 (2d Cir. 1982) (emphasis added); see also Kerr Mc- Gee Ref. Corp. v. M/T Triumph, 924 F.2d 467, 471 (2d Cir. 1991) ("An award that finally and conclusively disposes of a 'separate independent claim' may be confirmed even if it does not dispose of all the claims that were submitted to arbitration.")(emphasis added).. After both parties moved for summary disposition Allied seeking to recover in full its alleged "Loss" and AISLIC seeking dismissal of the claim in its entirety Allied's counsel, by words and actions, implicitly if not explicitly, agreed to bifurcation of [1] the issue of coverage DM 1 \7137603.1
for Allied's claim to be indemnified for its alleged $10.1 million "Loss" stemming from Ciena 's payment to the Government in settlement of the Brickman Action, and [2] whether it was entitled to recover its defense costs in the Brickman Action and, if so, the amount of such recovery. Allied's brief in opposition to AISLIC's motion stated (at p. 43) that "the quantum of attorneys' fees need not be decided on this motion, but could be subject to a separate evidentiary process in the event coverage is found." Then, at the hearing on August 25, 2015, Allied's counsel agreed that the amount awarded as defense costs "would be the topic for a separate proceeding... like an inquest to prove up what was done and how much was done." (Tr. 8/25/15, 140:6-22). The Chairman then said, "So a partial summary disposition is in the cards," and Allied's counsel replied, "I think that makes the most sense." (Tr. 141:2-5). AISLIC's counsel did not disagree. A further indication of Allied's agreement to bifurcation is that Allied offered no proof of the amount of its defense costs sought to be recovered. Thus, the quantum of defense costs was not an issue submitted to the Tribunal for summary disposition. The Tribunal disposed of the two separate, independent claims submitted to it for summary disposition: 1. Is Allied entitled to recover the $10.1 million paid to the Government by Ciena? No. 2. Is Allied entitled to recover its defense costs in the Brickman action? Yes, and a hearing is required to determine the amount of those defense costs. Allied's separate and independent claim to be indemnified for its alleged $10.1 million "Loss" is final for purposes of the functus officio rule which -presumes that an arbitrator's final decision on an issue strips him of authority to consider that issue further." Employers' Surplus Lines Ins. Co., supra, 2008 U.S. Dist. LEXIS 8253 at *4. DM 1'7137603.1 2
The Tribunal states that "if a mistake was made, it ought to be rectified. When in doubt, the functus officio doctrine should not prevent an arbitral tribunal from arriving at a correct decision, especially given the deferential review accorded to arbitration awards." (p. 11). This is much too broad an interpretation of the exception for mistakes that permits an arbitrator to correct only clerical or other obvious errors such as mathematical calculations. The law is clear that the exceptions to the.functus officio doctrine allow an arbitrator to "correct a mistake which is apparent on the face of his award, complete an arbitration if the award is not complete, and clarify an ambiguity in the award." International Bhd. of Teamsters, Chauffers, Warehouse-men and Helpers of Am., AFL-CIO, Local 631 v. Silver State Disp. Serv., Inc., 109 F.3d 1409, 1412 (9th Cir. 1997) But, the "spirit and basic effect of the award" may not be modified, as the Tribunal has done here. In Clarendon Nat'l Ins. Co. v. TIG Reinsurance Co., 183 F.R.D. 112, 116-117 (SDNY 1998), the court stated: Arbitrators should simply be permitted to correct errors -- but only errors - - upon remand even if the particular issue was not remanded. This holding in no way gives arbitrators carte blanche to alter any decision previously rendered. Given the unusual circumstance -- namely, that the arbitrators acknowledged a mathematical error, one that neither party disputes -- equitable factors in this case weigh in favor of Clarendon, and the motion to confirm will be granted. Finally, the Tribunal says "it is unlikely that a district court would have entertained a motion to confirm the PFA, and the PFA would not have been considered 'final' for purposes of functus officio doctrine." (p. 10). It "unlikely" that either party would have made a motion to confirm the PFA insofar as it required further proceedings to determine the quantum of an award for defense costs, as that, clearly, is non-final. If a district court follows the law set out above, it is likely to find that the Tribunal erred in granting Allied's motion for reconsideration. DM 1 \ 7 1 37603. I 3
In any event, the original PFA should be adhered to as correct. The PFA stated (1160), An insured cannot collect insurance without demonstrating some damage or pecuniary loss arising from an insured risk." Allied never made such a demonstration. After stating that "ASLIC did not insure the risk of a diminution in the value of an insured's subsidiary, but it did insure a 'Loss' arising out of a 'Wrongful Act,. the Tribunal incorrectly concludes that "the 'reduction in value [of the subsidiary] was the result of the FCA Settlement Agreement'... and, as such, constitutes an insurable Loss." (p. 12) Allied could easily have paid the $10.1 million settlement on behalf of Ciena and itself from its own funds. Yet it structured the settlement so that the payment was made by Ciena out of the proceeds of a loan from a new $20 million revolving credit facility that Allied created for Ciena. Since Allied elected to take advantage of the corporate formalities to make it appear that Allied was not paying any part of the settlement, the Tribunal should not disregard them. I also disagree with the Tribunal's statement that the "subsequent post-petition loan was irrelevant" to its conclusion that the "reduction in value [of the subsidiary] was the result of the FCA Settlement Agreement'... [because] "The Loss had already occurred." (p. 12). That is wrong. The "Loss" did not occur before Ciena made its payment to the Government. And Ciena could not make such a payment until after it drew down $14 million from Allied's post-petition revolving credit facility. Instead of being irrelevant, that loan was critical for Ciena's payment that the Tribunal now finds constitutes a "Loss" to Allied. DM 17137603.1 4
The PFA correctly found ( 64) that "Allied's release of its security interests did not result in any payment or transfer of the collateral to the Government, since the parties restructured the transaction into a loan to Ciena. Allied did not suffer a 'Loss" under the 2008 Policy." Moreover, it is highly relevant that Allied is carrying that loan as a performing asset on its books, not as a "Loss." DM 1,7137603.1 5