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A dispute over $49 million in taxes arising from ACE Ltd.’s acquisition of CIGNA Corp.’s property and casualty business falls within an arbitration clause of the acquisition agreement, a New York federal judge held July 9 (ACE Limited v. CIGNA Corp. and CIGNA Holdings Inc., Case No. 00 Civ. 9423, S.D.N.Y.). ACQUISITION Bermuda-based ACE, which sells insurance and reinsurance in the U.S. and about 50 other countries, sued insurance and financial services company CIGNA Corp. and CIGNA Holdings Inc. for breach of contract over ACE’s $3.45 billion acquisition of CIGNA’s property and casualty business. Under the 1999 acquisition agreement, Philadelphia-based CIGNA agreed to operate the property and casualty business in the normal course and not change any accounting procedures between the January 1999 signing of the agreement and the July 1999 closing. TAX-SHARING AGREEMENT CIGNA and its subsidiaries also agreed to abide by the terms of a tax-sharing agreement. The agreement requires the subsidiaries to make quarterly payments to or receive refunds from CIGNA based on their estimated federal income taxes due during a given tax period. After their tax returns are filed, the subsidiaries reconcile their tax accounts with CIGNA. However, according to the complaint, CIGNA has breached these obligations by refusing to pay $49 million in tax refunds owed to the property and casualty business under the tax-sharing agreement. ACE maintains that it is entitled to the $49 million because it now owns the property and casualty business. ACE also asserts that CIGNA misrepresented the value of the property and casualty business. ARBITRATION The parties do not dispute that ACE was entitled to a $49 million tax refund. CIGNA asserts that ACE already had a $49 million net credit in its tax accounts and CIGNA offset that amount against any payments owed to ACE. ACE refutes the existence of a net credit. CIGNA moved to compel arbitration pursuant to a clause in the acquisition agreement that calls for disputes concerning tax issues to be resolved through arbitration. The clause requires the selection of an arbitrator “to determine … all points of disagreement concerning Tax matters with respect to this Agreement.” ACE contends that the dispute cannot be characterized as a “Tax matter” and that the arbitration clause is narrow and does not encompass this dispute. CIGNA’s failure to refund the $49 million is simply a breach of contract, ACE said. SUBJECT TO CLAUSE Granting the motion to compel and staying the proceedings relating to the dispute, Senior U.S. Judge Whitman Knapp of the Southern District of New York found that the arbitration clause, though narrow, does encompass this dispute. The dispute is one over “tax matters,” he said. In rejecting ACE’s argument that the dispute over the $49 million does not concern taxes, he said it would be illogical to exclude the numerous debits and credits between CIGNA and its subsidiaries from the scope of the word “taxes.” “The Tax Sharing Agreement was the subsidiaries’ only procedure for dealing with United States tax liabilities. Thus, the ‘amount of Taxes for which [CIGNA or ACE] … may be liable’ encompasses liabilities or credits existing between CIGNA and its subsidiaries as a result of executing the Tax Sharing Agreement,” he noted. ACE relied on the decision in McDonnell Douglas Financial Corp. v. Pennsylvania Power & Light Co., (858 F.2d 825 (2d Cir. 1988), in which a motion to compel arbitration of good faith issues was denied because the parties agreed to select a tax counsel as arbitrator. ACE argued that because the parties here likewise agreed to select tax counsel as arbitrator, this breach of contract dispute cannot be subject to arbitration. The judge disagreed, noting that in light of the tax-sharing agreement, the dispute constituted a tax matter subject to the arbitration clause. The complaint was filed on behalf of ACE by H. Lee Godfrey, Vineet Bhatia and Harry P. Susman of Susman Godfrey in Houston. Jay B. Kasner of Skadden, Arps, Slate, Meagher & Flom in New York represents CIGNA. (c) Copyright 2001 Mealey Publications, Inc.

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