Opinion
NO. 3-01-CV-2168-R
March 11, 2002
FINDINGS AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Plaintiff Dr Pepper Bottling Company of Texas, Inc. has filed a motion to stay arbitration or, alternatively, to compel arbitration in Dallas, Texas. By way of separate cross-motions, Defendant Presidential Life Insurance Company ("PLIC") seeks a stay of this litigation pending the outcome of arbitration and Defendants DI Associates ("DIA") and Kevin Panichi ("Panichi") request an order compelling arbitration of all claims against them. For the reasons stated herein, plaintiff's motion should be denied and defendants' motions should be granted.
I.
Plaintiff purchased an excess loss insurance policy from PLIC through its local recording agents, DIA and Panichi. (Plf. First Am. Pet. at 5, ¶ 17). The policy provides reimbursement for medical benefits paid by plaintiff on behalf of ERISA plan participants and their dependants, subject to the terms of the contract. (PLIC App. at 10-33). One such term limits coverage to medical expenses incurred from April 1, 1999 through March 31, 2001 and paid from April 1, 2000 through March 31, 2001. (Id. at 19, 25). Although the policy expired on March 31, 2001, it was subject to renewal at the option of PLIC. (Id. at 10, 14, 32).
In November 2000, Tracy Bagwell, an ERISA plan participant, was seriously injured in an accident and incurred more than $3 million in medical expenses. (Plf. First Am. Pet. at 6, ¶ 18). PLIC and Panichi allegedly instructed plaintiff not to pay these bills pending the results of an audit and investigation. More to the point, Panichi warned that if Bagwell's bills were paid without his express authorization, "he could guarantee Dr Pepper that Presidential Life would not pay the claim." (Id.). The parties continued their discussions through March 28, 2001. During this time, plaintiff repeatedly expressed its concern that the medical bills needed to be paid before the policy expired on March 31, 2001. (Id.).
On March 28, 2001, Tommy Hatfield, plaintiff's insurance broker, and Wayne Adamick, the ERISA plan administrator, called Panichi to discuss the Bagwell claim and renewal of the PLIC policy. During this telephone conversation, Hatfield demanded confirmation that the policy would be renewed and that the claim would be covered by the new policy. Otherwise, Hatfield said that plaintiff would pay Bagwell's medical bills before March 31, 2001. (Id. at 6, ¶ 19). According to plaintiff, "Panichi promised Dr Pepper that the Bagwell claim did not need to be paid before March 31, 2001, that the excess loss coverage was being renewed effective April 1, 2001, and that the time for payment of the Bagwell claim was extended until Presidential Life completed its investigation and audit of the Bagwell claim." (Id. at 7, ¶ 19). Based on these representations, plaintiff did not pay Bagwell' s medical expenses before March 31, 2001. (Id. at 7, ¶ 20).
On April 25, 2001, plaintiff made a premium payment on the renewal policy. Panichi returned the payment and informed plaintiff that the policy would not be renewed. (Id. at 7, ¶ 21). This prompted plaintiff to sue PLIC, DIA, and Panichi in state district court for breach of contract, negligence, negligent misrepresentation, fraud, and fraudulent inducement. PLIC timely removed the case to federal court and filed a demand for arbitration with the American Arbitration Association ("AAA") in New York City. The arbitration demand was based on the following provision in the insurance contract:
PLIC removed this case to federal court on the bases of ERISA preemption and diversity of citizenship. (Not. of Rem. ¶¶ 5 6). Federal diversity jurisdiction is proper because plaintiff and defendants are citizens of different states and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332 (a). Consequently, the court need not determine whether plaintiff's state law claims are completely preempted by ERISA. In any event, plaintiff has not filed a motion to remand the case to state court.
Any controversy or claim arising out of or relating to this Contract shall be settled by Arbitration in accordance with the rules of the American Arbitration Association, with the express stipulation that the arbitrator(s) shall strictly abide by the terms of this Contract and shall strictly apply rules of law applicable thereto.
(PLIC App. at 32, 65-69).
Plaintiff now moves to stay this arbitration proceeding. While acknowledging that the insurance policy contains an arbitration clause, plaintiff contends that: (1) the agreement to arbitrate does not cover the claims made the basis of this suit; (2) the arbitration clause is unconscionable; and (3) legal constraints foreclose arbitration in this case. Alternatively, plaintiff maintains that the arbitration should be held in Dallas, Texas. PLIC, DIA, and Panichi oppose the motion and separately move to stay this litigation and to compel arbitration. The court will address each motion in turn.
Defendants sought this relief as part of their response to plaintiff's motion to stay arbitration. Plaintiff has not filed a response to either motion.
II.
The decision whether to enforce an arbitration clause involves a two-step inquiry. First, the court must determine whether the parties agreed to arbitrate the dispute. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985); R.M. Perez Associates, Inc. v. Welch, 960 F.2d 534, 538 (5th Cir. 1992). The court then must consider whether any statute or policy renders the claims non-arbitrable. Mitsubishi Motors, 105 S.Ct. at 3355; R.M. Perez, 960 F.2d at 538. Plaintiff attacks the arbitration clause contained in the PLIC insurance policy on both grounds.
A.
The first question is whether the parties agreed to arbitrate. The resolution of this issue focuses on two considerations: (1) whether there is a valid agreement to arbitrate; and (2) whether the dispute falls within the scope of that agreement. Webb v. Investacorp., Inc., 89 F.3d 252, 258 (5th Cir. 1996). Plaintiff acknowledges that an arbitration agreement exists, but argues that the claims alleged in this lawsuit do not come within the scope of that agreement.
Arbitration is strongly favored by federal law. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 526 (5th Cir.), cert. denied, 121 S.Ct. 570 (2000), citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Thus, there is a heavy presumption that claims are arbitrable and arbitration should not be denied "unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation that could cover the dispute at issue." Mar-Len of Louisiana, Inc. v. Parsons-Gilbane, 773 F.2d 633, 636 (5th Cir. 1985), quoting Wick v. Atlantic Marine, Inc., 605 F.2d 166, 168 (5th Cir. 1979). If the scope of an arbitration clause is fairly debatable or reasonably in doubt, the claims should be referred to arbitration. Id. at 635.
Plaintiff and PLIC agreed to arbitrate "any controversy or claim arising out of or relating to" their insurance contract. (PLIC App. at 32). In this circuit, an arbitration clause that purports to cover "any dispute" between the parties arising out of a contract is considered "broad." See In re Complaint of Hornbeck Offshore (1984) Corp., 981 F.2d 752, 755 (5th Cir. 1993); Mar-Len, 773 F.2d at 636, citing National Railroad Passenger Corp. v. Chesapeake and Ohio Railway Co., 551 F.2d 136, 140 (7th Cir. 1977). Where such a broad arbitration provision is involved, the arbitrator, not the court, should decide whether a particular dispute falls within the scope of the agreement to arbitrate. Hornbeck, 981 F.2d at 754.
Plaintiff argues that additional language requiring the arbitrators to "strictly abide by the terms of this Contract and strictly apply rules of law applicable thereto" somehow limits the scope of the arbitration clause to claims involving breach of contract. (Plf. Mot. at 6-7). The court cannot agree. At best, this provision is ambiguous. Any such ambiguity militates in favor of arbitration and must be resolved by the arbitrators. See Mar-Len, 773 F.2d at 635.
B.
Plaintiff also maintains that it would be unconscionable to enforce the arbitration agreement in this case. See Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 1656, 134 L.Ed.2d 902 (1996) (unconscionablility may be defense to arbitration). This argument is premised on the misguided belief that the language requiring the arbitrators to "strictly abide by the terms of this Contract and strictly apply rules of law applicable thereto" forecloses all non-contractual claims against PLIC. As discussed above, such is not the case. Consequently, there is nothing unconscionable about this contractual provision.
To the extent that plaintiff maintains that the arbitration clause should not be enforced due to PLIC's alleged fraudulent conduct, this argument also fails. Plaintiff does not accuse PLIC of fraud in connection with procuring the agreement to arbitrate. Rather, all the claims alleged in this lawsuit relate to other provisions of the insurance policy. Consequently, the fraud claims are subject to arbitration. See Prima Paint Corp. v. Flood Conklin Manufacturing Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967) (claims involving fraud in the procurement of an arbitration clause may be resolved by the court, but allegations of fraud in the inducement or performance of the contract generally are subject to arbitration).
C.
Alternatively, plaintiff submits that any arbitration proceeding should be held in Dallas, Texas. Section 4 of the Federal Arbitration Act ("FAA") provides, in relevant part:
A party aggrieved by the alleged failure, neglect or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in the agreement. . . . The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.9 U.S.C. § 4. Since this case is pending in a Dallas federal court, plaintiff contends that arbitration must be held in this district.
Plaintiff's selective reading of this statute is not supported by the caselaw. The remedies afforded by Section 4 of the FAA are available only to a "party aggrieved by the alleged failure, neglect or refusal of another to arbitrate under a written agreement for arbitration." Id. (emphasis added). Here, PLIC has not failed or refused to arbitrate. To the contrary, it has demanded arbitration as provided by the contract. As a result, plaintiff is not a "party aggrieved" within the meaning of the statute. See M I Electric Industries, Inc. v. Rapistan Demag Corp., 814 F. Supp. 545, 547 (E.D. Tex. 1993); Merrill Lynch, Pierce, Fenner Smith, Inc. v. King, 812 F. Supp. 1217, 1218 (M.D.Fla.), aff'd, 3 F.3d 443 (llth Cir. 1993) (Table); Aaacon Auto Transport, Inc. v. Barnes, 603 F. Supp . 1347, 1349 (S.D.N.Y. 1985).
III.
By way of cross-motion, PLIC argues that this entire litigation should be stayed pending the outcome of arbitration. Section 3 of the FAA provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under any agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been held in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3. Having determined that plaintiff's claims against PLIC are subject to arbitration, the Court must stay the litigation as to those parties. Hornbeck, 981 F.2d at 754. The only remaining issue is whether the case should be stayed as to DIA and Panichi, who are not parties to the arbitration agreement.
For their part, DIA and Panichi contend that plaintiff should be required to arbitrate all claims against them. The Fifth Circuit has held that a nonsignatory to a contract with an arbitration clause may compel arbitration under an equitable estoppel theory in two circumstances:
First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. When each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory's claims arise out of and relate directly to the written agreement and arbitration is appropriate. Second, application of equitable estoppel is warranted when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Otherwise, the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.Grigson, 210 F.3d at 527, quoting MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999). Both circumstances are met in this case. In order to prove that DIA and Panichi misrepresented that the Bagwell claim would be paid and that the PLIC policy would be renewed, plaintiff must rely on the terms of the insurance contract. Moreover, plaintiff alleges concerted misconduct on the part of all defendants to deny benefits under the policy. The claims against PLIC on the one hand, and DIA and Panichi on the other hand, thus are "substantially interdependent." Under these circumstances, it would be inequitable and unfair for plaintiff and PLIC to proceed to arbitration without bringing DIA and Panichi to the table.
RECOMMENDATION
Plaintiff's motion to stay arbitration or, alternatively, to compel arbitration in Dallas, Texas should be denied. PLIC's motion to stay this litigation pending the outcome of arbitration and DIA and Panichi's motion to compel arbitration should be granted.
Although a stay is mandatory, the Fifth Circuit has held that the FAA "was not intended to limit dismissal of a case in the proper circumstances." Fedmet Corp. v. M/V Buyalyk, 164 F.3d 674, 678 (5th Cir. 1999), quoting Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992). A district court is not precluded from dismissing an action where all issues are properly subject to arbitration. Id.; Alford, 975 F.2d at 1164. Such appears to be the case here. The parties are directed to confer on this issue and set forth their respective arguments and authorities concerning dismissal in a joint status report. This report, signed by all counsel of record, shall be filed by April 5, 2002. The Court will determine whether to dismiss or stay this action after it reviews the joint status report.