In an action by a lender and its affiliate to recover insurance proceeds for defense costs of a federal qui tam action and indemnification for the resulting settlement, the New York Court of Appeals recently held that an arbitration panel can reconsider an initial determination, or "partial final award," so long as the determination or award does not resolve all of the issues submitted for arbitration.
A copy of the opinion is available at: Link to Opinion
Two Insureds, a non-depository lender and its affiliate (Insureds), sought payment of their defense costs of a federal qui tam action and indemnification for the resulting settlement under two insurance policies issued by Insurer. After Insurer denied coverage, the Insureds demanded arbitration pursuant to the arbitration clauses seeking damages for Insurer's alleged breach of the insurance policies by refusing to defend the Insureds in the federal action and indemnify them for the $10.1 million settlement.
All parties moved for summary disposition of the arbitration proceeding. At oral argument one of the arbitrators inquired whether "a partial summary disposition is in the cards," and the Insureds' counsel replied that such a procedure would "make the most sense." However, Insurer's counsel never directly commented on whether Insurer would agree to a partial summary disposition, and the arbitration panel never stated on the record that it would issue such a partial determination. Moreover, there was no discussion regarding whether any such "partial summary disposition" would be a "final" award deciding some, but not all, of the issues submitted to the panel.
The arbitration panel issued what it denominated a "Partial Final Award," determining that only one insurance policy was applicable, under which only the lender's affiliate was an insured, and that the federal settlement did not constitute a covered loss under this insurance policy. Consequently, the panel concluded that the lender's affiliate was not entitled to indemnification but was entitled to defense costs and, because there was a factual dispute regarding the amount of legal expenses incurred during the federal action, the question of damages would be resolved after a separate evidentiary hearing before the panel.
Before an evidentiary hearing was held, Insureds sought reconsideration of the Partial Final Award, arguing that the panel had erred by concluding that the settlement did not constitute a covered loss. Insurer opposed the reconsideration application both on procedural grounds —-namely, that the arbitrators were without authority to reconsider the Partial Final Award under the doctrine of "functus officio" —- and on the merits, arguing that the arbitrators correctly decided the indemnification issue.
As you may recall, "functus officio" is Latin for "having performed [one's] office" (Black's Law Dictionary [11th ed 2019]), and has operated historically as a restriction on the authority of arbitrators, precluding them from taking additional actions after issuing a final award.
The arbitration panel changed course and concluded in a "Corrected Partial Final Award" that, upon reconsideration, the settlement did constitute a covered loss under the applicable insurance policy. A majority of the panel rejected Insured's argument that the functus officio doctrine precluded reconsideration.
Thereafter, the arbitration panel conducted an evidentiary hearing to determine the amount of the lender's affiliate's covered defense costs, and ultimately issued a "Final Award," granting the lender's affiliate recovery against Insurer for damages consisting of both the settlement and defense costs, less offsets for insurance proceeds paid to the lender under insurance policies not otherwise at issue in the arbitration.
Insurer appealed to New York's intermediate appellate court.
The Appellate Division reversed, granting Insurer's petition, vacating the Corrected Partial Final Award and Final Award, and confirming the Partial Final Award concluding that, "during the arbitration proceedings, the parties agreed to an immediate determination solely as to liability, which they expected would be final," and "nothing in the record . . . suggest[ed] that the parties or the panel believed that the [Partial Final Award] would be anything less than a final determination." Therefore, the appellate court held that, "under the functus officio doctrine, it [was] improper and in excess of the panel's authority" to reconsider the Partial Final Award.
The Insureds appealed to New York's highest court.
The New York Court of Appeals -- New York's highest court -- begin its analysis by recognizing "New York's long and strong public policy favoring arbitration" and New York Civil Practice Law & Rules Article 75 which codifies a limited role for the judiciary in arbitration. In that regard, an application to vacate an arbitration award may be granted in narrow circumstances, including where "an arbitrator . . . exceeded his [or her] power" (CPLR 7511 [b]  [iii]).
The Court next noted that, in Mobil Oil Indonesia v Asamera Oil (Indonesia), New York Court of Appeals explained that judicial review of arbitration awards is typically limited to "final determination[s] upon the matters submitted" to the arbitrators, with specifically enumerated exceptions in CPLR article 75 that are not relevant here (43 NY2d at 281, citing Jones, 71 NY at 212; see CPLR 7503 [b]). Thus, a final arbitration award is generally one that is coextensive with the issues submitted to the arbitrators by the parties (see Jones v Welwood, 71 NY 208, 212 ), and that resolves the entire arbitration.
The New York Court of Appeals held that functus officio would apply only to final awards and, despite its name, the Partial Final Award was not in fact final.
Insurer argued that the parties here agreed to bifurcate the arbitration, as well as to the issuance of a partial and final award. Federal courts have consistently recognized that partial determinations may be treated as final awards where the parties expressly agree both that certain issues submitted to the arbitrators should be decided in separate partial awards and that such awards will be considered to be final.
Most notably, in Trade & Transport Inc. v Natural Petroleum Charterers Inc., the Second Circuit held that -- where both parties expressly asked the arbitration panel to issue a partial award regarding liability for one aspect of the dispute in order to obtain "a decision that was expressly intended to have immediate collateral effects in a judicial proceeding," and neither party objected when the arbitrators informed them that they would render a partial final award as a result of the bifurcation —- the arbitrators were without authority to reconsider the resulting partial final award (931 F2d at 192-193, 195).
The New York Court of Appeals found in the present matter, neither the parties nor the arbitrators ever discussed or otherwise demonstrated any mutual understanding regarding whether the proposed severance of the calculation of defense costs would result in a final partial award. This case is therefore distinguishable from Trade & Transport, in which the parties specifically agreed to bifurcate the arbitration for the very purpose of obtaining a "decision that was expressly intended to have immediate collateral effects in a judicial proceeding." Absent an express, mutual agreement between the parties to the issuance of a partial and final award, the functus officio doctrine would have no application in this case.
Accordingly, the New York Court of Appeals reject Insurer's argument that the arbitration panel exceeded its authority by reconsidering the Partial Final Award, reversing the order of the Appellate Division, with costs, and affirming so much of the order and judgment of trial court as (1) denied the motion to vacate the August 2016 Corrected Partial Final Award and the April 2017 Final Award and (2) confirmed the April 2017 Final Award reinstated.
Ralph T. Wutscher
Maurice Wutscher LLP
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