A dispute between professional services firm Organizational Strategies Inc and captive manager Capstone Associated Services has been dismissed from district court because of a lack of subject matter.
US District Court for the District of Delaware Judge Richard Andrews dismissed the case on 12 February, as agreements to independently arbitrate disputes were already in place.
Feldman Law Firm LLP set up three captives for OSI—Integration Casualty, Systems Casualty and Optimal Casualty—and its management business, Capstone, was charged with managing them.
The captives have benefited from 831(b) of the Internal Revenue Code, which allows entities earning $1.2 million or less in premium income per year to only be taxed on investment income.
But audits of the captives in 2011 revealed that premiums paid to the captives were too high, and an independent consultant warned that they would not stand up to the scrutiny of the IRS.
Fearing that its captives would lose their status as bone fide insurance companies and the tax advantages it brings, OSI asked Capstone to adjust the premiums, but it reportedly refused, leading it to file its complaint in the Delaware district court.
OSI argued that the arbitration agreements are void, because of conflicts between wordings and alleged ethical violations.
Capstone countered that the district court lacked subject matter jurisdiction because an arbitration had already taken place.
The captive manager said that OSI’s arguments “put the cart before the horse”, adding that “if there was no agreement to arbitrate in the first place, then what happened in the arbitration is irrelevant,” according to court documents.
Judge Andrews sided with Capstone, finding that the arbitration agreements were clear and that the alleged ethical violations were up to an arbiter to decide on. He dismissed the case due to a lack of subject matter.
Capstone is yet to respond to a request for comment.
