Parties required to arbitrate the dispute

Federal District Court Opinions

KOKEN v. COLOGNE REINSURANCE (BARBADOS) LTD., (M.D.Pa.
12-5-2006) M. DIANE KOKEN, Insurance Commissioner of the
Commonwealth of Pennsylvania, as Liquidator of AMERICAN
INTEGRITY INSURANCE CO., Plaintiff v. COLOGNE REINSURANCE
(BARBADOS) LTD., Defendant. CIVIL ACTION NO. 1:CV-98-0678.
United States District Court, M.D. Pennsylvania. December
5, 2006

MEMORANDUM

WILLIAM CALDWELL, Senior District Judge

I. Introduction.

Plaintiff, M. Diane Koken, the Pennsylvania Insurance
Commissioner, in her capacity as the Liquidator of American
Integrity Insurance Company, filed this lawsuit against
defendant, Cologne Reinsurance (Barbados), Ltd., to recover
on a reinsurance agreement American Integrity had with
Cologne. We required the parties to arbitrate the dispute.
See Koken v. Cologne Reinsurance (Barbados), Ltd., 34 F.
Supp. 2d 240 (M.D. Pa. 1999). After the arbitrators issued
their final award, we vacated the award in part on August
23, 2006. See 2006 U.S. Dist. LEXIS 59540.

We are considering the timely motion of defendant Cologne
to alter or amend that order. Familiarity with our two
previous memorandums is assumed. The motion requests the
following: (1) a remand to the original panel so that it
can determine the effect of the termination of the Stop
Loss Agreement Page 2 (part of our August 23 order) on
Cologne’s right of setoff; and (2) a stay of paragraph 5 of
the final arbitral order of March 17, 2006, so that the
Trust Account remains subject to the jurisdiction of the
Pennsylvania Commonwealth Court.

In response, Koken agrees with the second request to allow
the commonwealth court to control the disposition of the
Trust Account but opposes remand, arguing that the court
should resolve matters that now must be addressed in light
of our decision that the Stop Loss Agreement terminated on
July 25, 1993.[fn1] In the alternative, Koken contends that
if we decide that the case must be sent back to
arbitration, we order that the remand be handled by a
different arbitration panel. Koken also argues that
arbitration now would be untimely under American
Integrity’s agreement with Cologne.

We do not think the court should adjudicate the remaining
issues. As Cologne points out, the dispute is subject to
arbitration, an issue we decided in our first memorandum.
Nor would remanding the case for further arbitral
proceedings violate any deadline. Koken concedes there is
no such deadline, basing the argument instead on thirty-day
deadlines for the parties to select their arbitrators, to
select an umpire and to submit their Page 3 cases. (Doc.
106, Pl.’s Br. at p. 4). Koken infers from these deadlines
that any award had to be made “with some promptness,” yet
the parties submitted their cases well over two years ago,
with the July 22, 2005, interim arbitral order issued about
thirteen months after the hearing. (Id., p. 4). Nonetheless,
in the absence of a contractual deadline, we will not read
one into the agreement to preclude further arbitration of
the parties’ dispute.

The only issue left is whether we should remand to the
original panel or require the parties to choose a new one.
Defendant argues that remand to the original panel is
proper for the following reasons, among others. First, when
the parties were before the arbitration panel, they agreed
that the arbitration would take place in two phases, with
the issues that have to be resolved now as a result of our
August 23 order to be handled in Phase II. Thus, the
parties have already agreed to arbitrate the issues before
the original panel. Second, our order made the final
arbitral order of March 17, 2006, ambiguous or incomplete,
and in these circumstances courts remand to the original
panel for a clarification by those who rendered the
decision.

In opposition, Koken argues as follows that remand to the
original panel is not proper. First, the doctrine of
functus officio prohibits it. Second, the original panel
has already shown that it has a manifest disregard for the
law by the ruling we vacated, specifically the panel’s
conclusion that Page 4 40 P.S. § 221.21 did not
terminate the Stop Loss Agreement on July 25, 1993, thirty
days after the liquidation order was entered.[fn2] Koken
characterizes the panel as an “industry panel” that has
shown it would rule against her as a liquidator, “an
involuntary, non-industry litigant.” (Doc. 106, Pl.’s Br.
at p. 8). Koken maintains that a court should not remand a
case to a panel that has shown manifest disregard for the
law.

We conclude that this case should be remanded to a new
panel, but reject Koken’s reliance on the doctrine of
functus officio. That common-law doctrine bars arbitrators
“from revisiting the merits of an award once it has
issued.” Office & Prof’l Employees Int’l Union v.
Brownsville Gen. Hosp., 186 F.3d 326, 331 (3d Cir. 1999).
They are viewed as having “exhaust[ed] their power when
they have made a final determination on the matters
submitted to them.” Id. (quoted case omitted). One of the
reasons for the rule is to protect against the pressure
that might be applied to arbitrators, who do not have the
institutional protection of judges, to change their ruling.
Id. (quoted case omitted). In this case, however, functus
officio does not apply because the panel will not be
revising its decision, either on its own or because we have
ordered it to do so. It will instead be taking up issues
that must be resolved in light of our August 23, 2006,
order partially vacating their decision. When we vacate an
Page 5 arbitral decision, we have the authority to remand
for another hearing. See 9 U.S.C. § 10(b).

However, Koken’s argument that a case should not be
remanded to a panel that has shown manifest disregard for
the law has merit. We have discretion to remand to the
original panel or to a new one. In re the Arbitration
Between Tempo Shain Corp. v. Bertek, Inc., 1997 WL 580775,
at *2 (S.D.N.Y.). Generally, the remand should be to the
original panel because of the efficiency and cost
effectiveness involved. Id. If the panel has acted “in a
manner from which one might infer bias against one of the
parties, corruption, fraud, or other misconduct” the remand
should be to a new panel. In re A.H. Robins Co., 230 B.R.
82, 86 (E.D. Va. 1999). As cited by Koken, however, another
reason for remanding to a new panel would be if the
original panel had manifestly disregarded the law. See
Montes v. Shearson Lehman Bros. Inc., 128 F.3d 1456, 1461
(11th Cir. 1997). While the facts of Montes are an
egregious example of manifest disregard for the law, we
conclude here that remand to another panel is
appropriate.[fn3] Page 6

In reaching this conclusion, we reject Cologne’s
contention that the parties agreed to arbitrate before the
same panel. That agreement contemplated a Phase I and a
Phase II that would both occur before the panel issued a
final arbitral order. As it turned out, after Phase I the
parties were able to reach agreement, and a final order was
entered without having to reach Phase II. There was no
agreement on what would happen if intervening judicial
review of the final order required further arbitral
proceedings.

We will issue an appropriate order.

ORDER

AND NOW, this 5th day of December, 2006, upon consideration
of defendant Cologne’s motion (doc. 101) to alter or amend
the order of August 23, 2006, and the response thereto, it
is ordered that:

1. Pursuant to 9 U.S.C. § 10(b), this matter is
remanded for a hearing before a new arbitration panel to
address and resolve the issues raised and re-opened by the
August 23, 2006, order.

2. The operation of paragraph 4 of the August 23, 2006,
order is stayed, as respects the Trust Account identified
in paragraph 5 of the final arbitral award of March 17,
2006, pending further order of the Pennsylvania
Commonwealth Court.

[fn1] Koken represents that termination of the Stop Loss
Agreement has stopped balances being generated for Cologne
so that “[w]hat remains . . . is to compute the post-July
25, 1993 balances under the Coinsurance Agreement and to
render judgment in that amount (plus interest)” for
Plaintiff. (Doc. 106, Pl.’s Br. at p. 3) (footnote
omitted).

[fn2] In our memorandum accompanying the August 23, 2006,
order, we decided this was a manifest error of law.

[fn3] The Eleventh Circuit later noted the following facts
in Montes: “`the party who obtained the favorable award had
conceded to the arbitration panel that its position was not
supported by the law, which required a different result,
and had urged the panel not to follow the law; 2) that
blatant appeal to disregard the law was explicitly noted in
the arbitration panel’s award; 3) neither in the award
itself nor anywhere else in the record is there any
indication that the panel disapproved or rejected the
suggestion that it rule contrary to law; and 4) the
evidence to support the award is at best marginal.'” B.L.
Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905, 911
(11th Cir. 2006) (quoting Montes, 128 F.3d at 1464 (Carnes,
J., concurring)).