Dixie Motels LLC v. Indep. Speciality Ins. Co

Full title: DIXIE MOTELS LLC v. INDEPENDENT SPECIALITY INSURANCE CO

Court: United States District Court, Western District of Louisiana

Date published: May 28, 2024

6:21-CV-03022 (W.D. La. May. 28, 2024)

Opinion

6:21-CV-03022

05-28-2024

DIXIE MOTELS LLC v. INDEPENDENT SPECIALITY INSURANCE CO

CAROL B. WHITEHURST, UNITED STATES MAGISTRATE JUDGE

ROBERT R. SUMMERHAYS, JUDGE

REPORT AND RECOMMENDATION

CAROL B. WHITEHURST, UNITED STATES MAGISTRATE JUDGE

Before the Court is the Motion to Compel Arbitration and to Stay or, Alternatively, Dismiss the Proceedings filed by Defendant, Independent Specialty Insurance Company (“ISIC”). (Rec. Doc. 17). Plaintiff, Dixie Motels, LLC d/b/a Days Inn, opposed the motion (Rec. Doc. 24), and ISIC replied (Rec. Doc. 29). The motion was referred to the undersigned magistrate judge for review, report, and recommendation in accordance with the provisions of 28 U.S.C. §636 and the standing orders of this Court. Considering the evidence, the law, and the arguments of the parties, and for the reasons explained below, the Court recommends that ISIC's motion be granted and that the matter be stayed pending arbitration.

Facts and Procedural History

Dixie Motels filed this suit in August 2021 against its insurer, ISIC, seeking coverage for damage to its property from 2020 Hurricanes Laura and Delta. (Rec. Doc. 1). ISIC issued surplus line coverage to Dixie Hotels. (Rec. Doc. 17-2, p. 2). Due to the number of cases arising from the devastating back-to-back hurricanes, the Court promulgated a hurricane case management order (CMO) establishing disaster protocols for initial disclosures and a streamlined settlement process involving a special master and appointed neutral. (Rec. Doc. 2). Pursuant to the CMO in this case, in January 2024, the special master certified that the parties had complied with the streamlined settlement process, thereby authorizing the case to proceed with litigation. (Rec. Doc. 16). ISIC filed the instant motion the next day, urging the Court to compel the parties to arbitration pursuant to the terms of the policy.

Law and Analysis

The Federal Arbitration Act (FAA) establishes a national policy favoring arbitration. 9 U.S.C. §§ 1-15. Under the FAA, the court must stay legal proceedings on issues referable to arbitration and compel arbitration of arbitrable issues. 9 U.S.C. § 3-4; Hartford Lloyd's Ins. Co. v. Teachworth, 898 F.2d 1058, 1061 (5th Cir. 1990). The determination of whether to compel arbitration under the FAA is a two-step inquiry:

In adjudicating a motion to compel arbitration under the Federal Arbitration Act, courts generally conduct a two-step inquiry. The first step is to determine whether the parties agreed to arbitrate the dispute in question. This determination involves two considerations: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement. When deciding whether the parties agreed to arbitrate the dispute in question, courts generally should apply ordinary

state-law principles that govern the formation of contracts. In applying state law, however, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself must be resolved in favor of arbitration. The second step is to determine whether legal constraints external to the parties' agreement foreclosed the arbitration of those claims.

Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996) (cleaned up).

The FAA notwithstanding, the McCarran-Ferguson Act sets up a reverse preemption scheme favoring state insurance law. The Fifth Circuit explained:

The McCarran-Ferguson Act, passed by Congress in 1945, protects state laws regulating the insurance industry from the preemptive effect of federal law. This Act “declares that the continued regulation ... by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation ... of such business by the several States.” 15 U.S.C. § 1011; see also 15 U.S.C. § 1012(a) (“The business of insurance ... shall be subject to the laws of the several States.”). To shield state regulation from unintended federal interference, the Act provides that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” Id. § 1012(b). In other words, the McCarran-Ferguson Act permits states to reverse-preempt an otherwise applicable “Act of Congress” by enacting their own regulations of the insurance industry.

McDonnel Grp., L.L.C. v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427, 431 (5^th Cir. 2019), as revised (June 6, 2019) (footnote omitted).

The parties do not dispute that the ISIC policy contains an arbitration clause and that the underlying dispute (coverage for damages under the policy) falls within the scope of the arbitration clause:

All matters in dispute between you and us (referred to in this policy as “the parties”) in relation to this insurance, including this policy's formation and validity, and whether arising during or after the period of this insurance, shall be referred to an Arbitration Tribunal in the manner described [in the Arbitration Clause].

(Rec. Doc. 17-2, p. 35).

Initially, ISIC argues that the policy's arbitration clause contains a delegation provision, which requires the arbitration tribunal to determine whether the clause is valid. Although the Court agrees that the arbitration clause encompasses a delegation provision which requires the arbitrator to determine the validity of the clause,¹ the Court must first resolve whether the interplay of Louisiana and Federal law regarding arbitration of insurance dispute permits the Court to disregard the ISIC arbitration clause at the outset.

1 The arbitration clause applies to “[a]ll matters in dispute,” a broad term which the Fifth Circuit has interpreted to constitute a delegation provision mandating that the issue of arbitrability be deferred to the arbitrator. Halliburton Energy Servs., Inc. v. Ironshore Specialty Ins. Co., 921 F.3d 522, 538 (5th Cir. 2019); Richland Equip. Co., Inc. v. Deere & Co., 745 Fed.Appx. 521, 525 (5th Cir. 2018).

Dixie Motels contends that Louisiana Revised Statute 22:868 forecloses arbitration. La. R.S. 22:868(A)(2) states: “No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state regardless of where made or delivered, shall contain any condition, stipulation, or agreement ... [d]epriving the courts of this state of the jurisdiction or venue of action against the insurer.” The statute was amended, effective August 1, 2020, to include “venue,” as emphasized. The 2020 amended legislation also added a new provision, La. R.S. 22:868(D), which states that 22:868(A) “shall not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.” (Emphasis added.) ISIC is a surplus line insurer, which is not subject to the Department of Insurance form and rate approval. La. R.S. 22:446. Thus, under 22:868(D), ISIC is permitted to issue policies which contain a forum and/or venue selection clause. The seminal question is whether the arbitration clause in the ISIC policy mandating arbitration seeks to modify jurisdiction (the ability of the Court to consider a case), in which case 22:868(A) reverse-preempts the FAA and precludes arbitration, or whether the putative arbitration constitutes a forum selection clause, permissible under 22:868(D) for surplus line insurers such as ISIC.

ISIC argues that courts have long classified arbitration agreements as forum or venue selection clauses rather than as jurisdictional constraints, such that 22:868(D) permits ISIC to enforce the arbitration clause. ISIC's position is supported by multiple recent decisions from the Eastern District of Louisiana. See e.g. Crescent City Brewhouse, Inc. v. Indep. Specialty Ins. Co., Inc., No. CV 237366, 2024 WL 640005, at *6 (E.D. La. Feb. 15, 2024), citing multiple Eastern District cases. These cases rely upon jurisprudence from both the Fifth Circuit and the Louisiana Supreme Court equating arbitration clauses to forum or venue selection provisions. See e.g. id citing Hodges v. Reasonover, 2012-0043 (La. 7/2/12), 103 So.3d 1069, 1076, and Ginter ex rel. Ballard v. Belcher, Prendergast & Laporte, 536 F.3d 439 (5th Cir. 2008)). See also Barnett v. DynCorp Int'l, L.L.C., 831 F.3d 296, 302 (5th Cir. 2016) (citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 519, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) for the proposition that arbitration clauses are “in effect, a specialized kind of forum-selection clause.”), and Ruiz v. Donahoe, 784 F.3d 247, 249-50 (5th Cir. 2015) (“[A]greements to arbitrate implicate forum selection and claims-processing rules, not subject matter jurisdiction.”).

Contrarily, Dixie Motels maintains that the arbitration clause operates to deprive the court of jurisdiction, such that 22:868(A) would preclude enforceability of the arbitration clause in this case, notwithstanding that ISIC is a surplus line insurer. In its opposition, filed February 28, 2024, Dixie Motels relies heavily upon Bufkin Enterprises LLC v. Indian Harbor Ins. Co., No. 2:21-CV-04017, 2023 WL 2393700, at *7 (W.D. La. Mar. 7, 2023), in which Judge Cain in the Lake Charles Division of this Court held that 22:868(A) prohibits an arbitration clause in a surplus line policy, despite 22:868(D), because arbitration clauses are jurisdictional (at least as the legislature understood in drafting the 2020 amendments). Just days after Plaintiff filed its opposition in this case, the Fifth Circuit reversed Judge Cain's ruling in Bufkin Enterprises on other grounds not applicable this case. The Fifth Circuit explicitly did not reach the million-dollar question and declined to certify the question to the Louisiana Supreme Court (Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co., 96 F.4^th 726, 733 (5th Cir. Mar. 4, 2024)), possibly because it would reach its own conclusion just two days later in Indian Harbor Ins. Co. v. Belmont Commons, L.L.C., No. 23-30246, 2024 WL 962376, at *3-4 (5th Cir. Mar. 6, 2024).

As indicated, the 2020 amendments unleashed as much havoc as the hurricanes leading to this litigation. Following the Fifth Circuit's reversal in Bufkin, Judge Cain certified the following question to the Louisiana Supreme Court.

Whether the 2020 amendment adding Subsection D (Act No. 307 § 1 of 2020) to La. R.S. 22:868 to allow forum and venue selection clauses in limited circumstances implicitly repealed Subsection A's longstanding prohibition of arbitration clauses in all insurance policies in Louisiana?

Police Jury of Calcasieu Par. v. Indian Harbor Ins. Co., No. 2:24-CV-00342, 2024 WL 1545135, at *2 (W.D. La. Apr. 9, 2024).

The defendant insurer has appealed Judge Cain's order for certification. Even more frustrating for litigators and the district courts alike, the Louisiana Supreme Court has previously denied certification of the issue, with three justices dissenting. Southland Circle, LLC v. Indep. Specialty Ins. Co., 2023-00990 (La. 10/3/23), 370 So.3d 1047. Fortunately, the Fifth Circuit recently made an Erie guess and held that the Louisiana Supreme Court was most likely to agree with the Eastern District's approach:

Since surplus lines insurers are covered by La. R.S. § 22:868(D), the district court reasoned that the prohibition on arbitration clauses contained in La. R.S. § 22:868(A) does not apply to the Policy. We agree with the district court. The determinative issue regarding the scope of the carve-out is whether an arbitration clause is considered a “forum or venue selection clause” under La. R.S. § 22:868(D).

***

The Louisiana Supreme Court, citing its own decision in Hodges v. Reasonover, recently characterized arbitration clauses as “a type of venue selection clause.” Donelon v. Shilling, 340 So.3d 786, 790 n.6 (La. 2020) (citing Hodges v. Reasonover, 103 So.3d 1069, 1076 (La. 2012)). Hodges in turn cited and quoted Ginter ex rel. Ballard v. Belcher, Prendergast & Laporte, in which this Court described an arbitration clause as “a type of forum-selection clause.” Hodges, 103 So.3d at 1076; see also Ginter ex rel. Ballard v. Belcher, Prendergast & Laporte, 536 F.3d 439, 443 (5th Cir. 2008).

Given that the Louisiana Supreme Court has characterized arbitration clauses as a type of venue selection clause, we conclude that the carve-out contained in La. R.S. § 22:868(D) unambiguously includes arbitration clauses. Moreover, including arbitration clauses in the carve-out does not lead to absurd consequences; La. R.S. § 22:868(D) provides a measure of flexibility to surplus lines insurers- who by definition are willing to insure risks and provide coverage for consumers who cannot get coverage in the standard market-by exempting them from the strictures of La. R.S. § 22:868(A). Since the Insurers are all surplus lines insurers and the Policy is a surplus lines policy, all of the Insurers may enforce the Policy's arbitration clause, La. R.S. § 22:868(A) notwithstanding.

Indian Harbor Ins. Co., 2024 WL 962376, at *3-4.

This Court is bound by the foregoing precedent and therefore finds that La. R.S. 22:868 does not prohibit the arbitration clause in ISIC's surplus lines policy.

The Court is mindful that analysis of legislative history and intent may ultimately lead the Louisiana Supreme Court to reach a different conclusion. Compare e.g. Bourgeois v. Indep. Specialty Ins. Co., No. CV 22-1256, 2023 WL 6644171, at *4 (E.D. La. Oct. 12, 2023) and Bufkin Enterprises, 23 WL 2393700, at *7, discussing legislative intent and reaching different conclusions. Nevertheless, the Court is bound by Fifth Circuit precedent as it stands. Accordingly, the Court finds that ISIC's Motion to Compel Arbitration should be granted. The threshold issue of arbitrability as determined by the delegation provision should be referred to the arbitration tribunal, and this matter should be stayed pending outcome of the arbitrator's ruling.

Conclusion

For the reasons discussed herein, the Court recommends that Independent Specialty Insurance Company's Motion to Compel Arbitration and to Stay (Rec. Doc. 17) be GRANTED.

Under the provisions of 28 U.S.C. § 636(b)(1)(C) and Fed.R.Civ.P. 72(b), parties aggrieved by this recommendation have fourteen days from service of this report and recommendation to file specific, written objections with the Clerk of Court. A party may respond to another party's objections within fourteen days after being served with of a copy of any objections or responses to the district judge at the time of filing.

Failure to file written objections to the proposed factual findings and/or the proposed legal conclusions reflected in the report and recommendation within fourteen days following the date of its service, or within the time frame authorized by Fed.R.Civ.P. 6(b), shall bar an aggrieved party from attacking either the factual findings or the legal conclusions accepted by the district court, except upon grounds of plain error. See Douglass v. United Services Automobile Association, 79 F.3d 1415 (5^th Cir. 1996) (en banc), superseded by statute on other grounds, 28 U.S.C. §636(b)(1).