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Harbourton Mortgage Co. v. Travelers Indemnity Co.

United States District Court, D. Nebraska
Mar 1, 2000
8:99CV94 (D. Neb. Mar. 1, 2000)

Opinion

8:99CV94

March 2000.


ORDER


I. Introduction

This matter is currently before the Court on defendant's appeal (Filing No. 29) of the magistrate's order (Filing No. 28) denying its motion to compel arbitration.

On or about October 7, 1999, the magistrate ordered all discovery stayed in this case pending her ruling on the motion to compel arbitration (Filing No. 27). The magistrate later denied the motion to compel arbitration and dissolved the stay (Fling No. 28). The defendant appealed the magistrate's ruling regarding arbitration (Filing No. 29) and requested that this Court enter a stay until such time as the magistrate's ruling could be reviewed. Following a hearing and subsequent briefing, the Court issued an order staying all proceedings until such time as a ruling was made on the appeal (Fling No. 36). On or about December 27, 1999, I was informed by letter from counsel for the defendant that a recent Nebraska Supreme Court case, Millennium Solutions, Inc. v. Davis, 603 N.W.2d 406 (Neb. 1999), should be considered in this case. I then gave counsel for the plaintiff until January 6, 2000, to respond to defendant's letter.

I have thoroughly reviewed the pleadings, contract, briefs, record and relevant case law. I find that defendant's motion to compel arbitration should be granted for the reasons set forth herein.

II. Facts

On or about January 1, 1996, the plaintiff (hereinafter Harbourton) purchased a mortgage protection insurance policy from the defendant (hereinafter Travelers) covering the time from January 1, 1996, through January 1, 1999. Harbourton was engaged in mortgage banking activities and in particular origination and servicing of mortgages for the Federal Home Administration and the Veterans Administration. The policy contains the following arbitration clause as a general policy condition:

All disputes between any Assured and The Travelers arising out of or related to this insurance (including disputes as to its construction, enforceability or breach) shall be finally resolved by binding arbitration held under the Commercial Arbitration Rules of the American Arbitration Association. The arbitration panel shall consist of three persons, one to be apppointed by [sic] jointly by all Assureds at interest in the dispute, one to be appointed by the Travelers, and the third to be appointed by the two arbitrators so appointed. The arbitration proceeding shall take place at the city and in the state shown in the Assured's mailing address in the Declarations of this policy but the arbitration panel may take evidence elsewhere if necessary for the convenience of the parties. The parties shall have those pre-trial discovery rights as are available under the Federal Rules of Procedure but all interim disputes pending the award of the arbitration panel shall be submitted to the arbitration panel for resolution. The award of the arbitration panel shall be final and shall assign all costs of the arbitration panel may be entered in the Federal District Courts located at the place of the arbitration proceeding [sic]. This arbitration provision shall be governed by the Federal Arbitration Act, but the construction of this insurance, and all disputes arising out of or related to this insurance, shall be governed by the law of the state shown in the Assured's mailing address in the Declarations of this policy [Nebraska].

(Filing No. 1)

III. Discussion A. Federal Arbitration Act and the McCarran-Ferguson Act

The Federal Arbitration Act (FAA), 9 U.S.C. § 1-14, makes written arbitration provisions valid, enforceable, and irrevocable, except upon grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2. In general, the FAA has preemptive effect over state law that tends to preclude parties from submitting matters to arbitration. Perry v. Thomas, 482 U.S. 483 (1987); Southland Corp. v. Keating, 465 U.S. 1 (1984); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Dowd v. First Omaha Securities Corp., 495 N.W.2d 36 (1993).

However, the McCarran-Ferguson Act, 15 U.S.C. § 1012(b) states:

No 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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . . (Emphasis added)

Thus, if a general federal statute conflicts with a state statute passed to regulate the business of insurance, the federal statute could not invalidate or impair or supersede that state's law. Humana, Inc. v. Forsyth, 525 U.S. 299 (1999).

It is clear that the FAA is general in nature and does not specifically deal with insurance. Thus, if there exists a state law that specifically concerns the business of insurance, then the FAA may not preempt, pursuant to the McCarran-Ferguson Act.

B. Nebraska Law

The contract between Harbourton and Travelers was entered into on January 1, 1996, and continued until January 1, 1999. The question before this Court is whether Nebraska had a statute in effect at this time that concerned insurance contracts as they related to arbitration agreements.

The Nebraska legislature passed Neb. Rev. Stat. § 25-2602 (Reissue 1989) which provided in relevant part:

Validity of arbitration agreement. A written agreement to submit any existing controversy to arbitration is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. A provision in a written contract to submit to arbitration any controversy thereafter arising between the parties, other than a claim arising out of a personal injury based on contract or tort, is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract, if the provision (a) is entered into voluntarily and willingly and (b) is not a part of a contract of adhesion, such as a standard installment loan contract, a consumer credit application, a credit card application, or an insurance contract except as provided in section 44-811. The Uniform Arbitration Act also applies to. . . .

(Emphasis added)

This statute was invalidated by State v. Nebraska Ass'n of Public Employees, 477 N.W.2d 577, 580 (Neb. 1991) ("NAPE"), where the Court specifically held that the provisions in the Nebraska Uniform Arbitration Act "authorizing binding arbitration of future disputes" violated Neb. Const. Art. I, § 13 (emphasis added). The magistrate found that the clause regarding exemptions from binding arbitration, i.e., insurance contracts, was not addressed by the court in NAPE and was not in conflict with the Nebraska Constitution. The magistrate relies on Teters v. Scottsbluff Pub. Sch., 592 N.W.2d 155 (Neb. 1999) (factors bearing on severability) to support her contention that the insurance clause exemption was severable from the invalid portions of the statute. I disagree.

(1) Severability

In Teters the Court set forth a five-part test to determine whether sections of a statute could be severed from the rest. The first factor is whether a workable plan remains, absent the invalid portion of the statute. The second factor enunciated in Teters is whether the valid portions are independently enforceable. The third factor is whether the invalid portion was such an inducement to the valid parts that the valid parts would not have passed without the invalid part. The fourth Teters factor is whether the severance will do violence to the intent of the Legislature. Finally, the fifth Teters factor is whether the declaration of separability indicating that the Legislature would have enacted the bill absent the invalid portion is included in the Act.

When part of an Act is held to be unconstitutional, the remaining sections likewise fail, unless the unconstitutional portions are clearly severable from the remaining portions. Bahensky v. State of Nebraska, 486 N.W.2d 883, 884 (Neb. 1992); Jaksha v. State of Nebraska, 486 N.W.2d 858, 873 (Neb. 1992). The unconstitutional part of the statute may be severed if absent the unconstitutional portion, a workable statutory scheme still exists. Robotham v. State of Nebraska, 488 N.W.2d 533, 543 (Neb. 1992). In the case at hand, we are being asked to sever the guts of the statute relating to all "future disputes," but we are being asked to uphold merely the "exemptions" that remain in § 2602. Without the guts of the act, no part of the enactment is workable. See e.g., Bosselman, Inc. v. State of Nebraska, 432 N.W.2d 226, 231 (Neb. 1988); Kwik Shop, Inc. v. City of Lincoln, 498 N.W.2d 102, 108 (Neb. 1993). The valid portions, the exemptions in this case, must "present a complete, workable plan independent of the invalid portions." State of Nebraska v. Sporhase, 329 N.W.2d 855, 856 (Neb. 1983). See also, Duggan v. Beerman, 544 N.W.2d 68, 78 (Neb. 1996) (a case applying the Teeters severability factors to an initiative to impose term limits, where court discusses that there must remain a workable, enforceable plan after the severance of the unconstitutional portions). If the statute is not severable, it "is unconstitutional in its entirety." State of Nebraska v. Moore, 544 N.W.2d 344, 348 (Neb. 1996).

I find that once the Act was declared unconstitutional under NAPE, there existed no workable plan. The purpose of the Act was to regulate and allow arbitration in the State of Nebraska. Once that statute was held to be unconstitutional, the exemptions could not exist without the statutory scheme. Consequently, the entire statute is invalid.

(2) Governing Law after NAPE

Since I have found that the exemptions set forth in the statute could not be severed, I must now determine what law governed during the time in question in this lawsuit. The contract in question was entered into on January 1, 1996. At that time, then, the prevailing law would have been set forth in the Neb. Const. Art. 1, § 13. That provision of the Nebraska constitution invalidated arbitration clauses in the State of Nebraska. The public policy of the State at that time prohibited predispute binding arbitration clauses. However, shortly after the parties entered into their January 1, 1996, contract, the voters of the state of Nebraska amended Article 1, Section 13, to "allow' (not "require") the legislature to pass laws regarding arbitration. The Nebraska Unicameral did in fact pass legislation that allowed for arbitration agreements. This legislation was effective on June 11, 1997. Neb. Rev. Stat. § 25-2602.1.

In a very recent case the Nebraska Supreme Court held that § 25-2602.1 could not be applied retroactively. Millennium Solutions, Inc. v. Davis, 603 N.W.2d 406. The Millennium case makes it very clear that there was no legislation concerning arbitration in effect at the time the contract in question in this case was entered into on January 1, 1996, and that there would be no retroactive application of § 25-2602.1.

I am left with conflicting law. The Nebraska Constitution, during the relevant time in question, would not permit mandatory arbitration. However, as previously stated in this Order, the Federal Arbitration Act preempts, absent a showing of a state interest in insurance pursuant to the McCarran-Ferguson Act, state law regarding arbitration. As I have held that the insurance exemptions cannot survive alone after § 25-2602 has been declared invalid, I find no support for the argument that Nebraska had a scheme that regulated insurance. The Millenium case did not address the issue of preemption or the issue of insurance regulation. However, the contract in question in this case specifically provides that arbitration is governed by the Federal Arbitration Act. The Nebraska Supreme Court has acknowledged that federal arbitration law takes precedence over state public policy regarding arbitration. Kelley v. Benchmark Homes, 550 N.W.2d 640, 643 (Neb. 1996); Dowd v. First Omaha Securities Corp., 495 N.W.2d 36, 38.

Therefore, I find that the Federal Arbitration Act governs this case. The parties shall submit to arbitration pursuant to the contract forthwith.

THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED:

1. Traveler's motion to compel arbitration (Filing No. 21) is granted.
2. The stay issued by this Court on November 12, 1999 (Filing No. 36), is dissolved.

3. The magistrate's order (Filing No. 28) is reversed.


Summaries of

Harbourton Mortgage Co. v. Travelers Indemnity Co.

United States District Court, D. Nebraska
Mar 1, 2000
8:99CV94 (D. Neb. Mar. 1, 2000)
Case details for

Harbourton Mortgage Co. v. Travelers Indemnity Co.

Case Details

Full title:HARBOURTON MORTGAGE CO., L.P. v. THE TRAVELERS INDEMNITY COMPANY OF…

Court:United States District Court, D. Nebraska

Date published: Mar 1, 2000

Citations

8:99CV94 (D. Neb. Mar. 1, 2000)