MOUNTAIN VALLEY PROPERTY INC v. APPLIED RISK SERVICES INC et al

Filing 50

ORDER AFFIRMING RECOMMENDED DECISION OF THE MAGISTRATE JUDGE - adopting Report and Recommended Decision re 44 Report and Recommendations for 32 Motion to Dismiss. By JUDGE D. BROCK HORNBY. (mnw)

UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
MOUNTAIN VALLEY PROPERTY,
INC.,
PLAINTIFF
V.

APPLIED RISK SERVICES, INC.,
AL.,

ET

DEFENDANTS

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CIVIL NO. 1:15-CV-187-DBH

ORDER AFFIRMING RECOMMENDED DECISION
OF THE MAGISTRATE JUDGE
On December 22, 2015, the United States Magistrate Judge filed with the
court, with copies to counsel, his Recommended Decision on the defendants’
motion to dismiss this case and send the dispute to arbitration. The plaintiff
filed an objection to the Recommended Decision on January 8, 2016, raising two
issues, and I held oral argument on February 23, 2016.
The central disputed issue is whether the underlying conflict between two
of the parties must go to arbitration and, in that respect, whether this court or
the arbitrator should first decide whether the conflict is arbitrable. Because the
contract has a Nebraska law clause, and because Nebraska has a statute and
Supreme Court decision making arbitration clauses in insurance contracts
invalid,1 the plaintiff argues that I should first determine whether the mandatory

NEB. REV. STAT. ANN. § 25-2602.01(f)(4) (West 2015); Speece v. Allied Prof’ls Ins. Co., 853 N.W.2d
169, 174 (Neb. 2014); Kremer v. Rural Cmty. Ins. Co., 788 N.W.2d 538, 553 (Neb. 2010).
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clause in the contract is valid.2 On that topic, I agree with the Magistrate Judge
that the following language in the arbitration clause is key:
All disputes between the parties relating in any way to (1) the
execution and delivery, construction or enforceability of this
Agreement, (2) the management or operations of the
Company, or (3) any other breach or claimed breach of this
Agreement or the transactions contemplated herein shall
be . . . finally
determined
exclusively
by
binding
arbitration . . . .

Pl.’s First Am. Compl., Ex. B at ¶ 13(B) (ECF No. 31-2). I also agree with the
Magistrate Judge that “[b]y including the ‘enforceability’ of the agreement within
the scope of arbitration, the parties clearly and unmistakably agreed to arbitrate
the issue of arbitrability.”

Recommended Decision at 8 (ECF No. 44).

In a

decision directly on point, the United States Court of Appeals for the Sixth Circuit
reached the same conclusion. Milan Express Co., Inc. v. Applied Underwriters
Captive Risk Assurance Co., 590 F. App’x 482 (6th Cir. 2014). I find its reasoning
persuasive.3
The plaintiff cites a number of cases that refer to the “validity” of an
arbitration clause as a question for the court, not the arbitrator. The cases

There are a number of subsidiary issues for the decision-maker: for example, is the document
in question an “agreement concerning or relating to an insurance policy other than a contract
between insurance companies including a reinsurance contract,” NEB. REV. STAT. ANN.
§ 25-2602.01(f)(4); is the contract’s Nebraska law clause a choice-of-law for all purposes,
including validity or enforceability; is the Nebraska arbitration prohibition preempted by the
Federal Arbitration Act (“FAA”), or is the FAA “reverse preempted” by reason of the
McCarran-Ferguson Act for regulations dealing solely with insurance?
3 Similarly persuasive is the language from the Supreme Court in Southland Corporation v.
Keating, 465 U.S. 1, 10-11 (1984):
We discern only two limitations on the enforceability of arbitration provisions
governed by the Federal Arbitration Act: they must be part of a written maritime
contract or a contract “evidencing a transaction involving commerce” and such
clauses may be revoked upon “grounds as exist at law or in equity for the
revocation of any contract.” We see nothing in the Act indicating that the broad
principle of enforceability is subject to any additional limitations under State law.
(Quoting 9 U.S.C.A. § 2.)
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generally make that assertion, however, in the context of section 2 of the Federal
Arbitration Act (“FAA”), which states that a written arbitration provision “shall
be valid, irrevocable, and enforceable, save upon such grounds as exist at law or
in equity for the revocation of any contract.” 9 U.S.C.A. § 2 (2009 & Supp. 2015)
(emphasis added). I agree with the Sixth Circuit’s holding in Milan Express that
the asserted invalidity of an arbitration clause under Nebraska insurance law
does not fit under “such grounds as exist at law or in equity for the revocation of
any contract.” 590 F. App’x at 485-86 (quoting 9 U.S.C.A. § 2).4 Instead, “the
proper framework for deciding when disputes are arbitrable under [Supreme
Court] precedents . . . [is that] a court may order arbitration of a particular
dispute only where the court is satisfied that the parties agreed to arbitrate that
dispute.” Granite Rock Co. v. Int’l Bhd. Of Teamsters, 561 U.S. 287, 297 (2010).
Likewise:
“The FAA reflects the fundamental principle that arbitration
is a matter of contract.” Therefore, the first principle that
underscores all of the Supreme Court’s arbitration decisions
is that “[a]rbitration is strictly a matter of consent, and thus
is a way to resolve those disputes—but only those disputes—
that the parties have agreed to submit to arbitration.”

Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 638 F.3d 367, 375-76 (1st Cir.
2011) (citation omitted) (quoting Rent-A-Center, West, Inc. v. Jackson, 561 U.S.

According to the Sixth Circuit:
Milan has not asserted such a challenge to the validity of the arbitrability
agreement, specifically (or the Agreement as a whole), on grounds that would
warrant revocation. Rather, Milan’s challenge to the arbitration clause as a whole,
is limited to the argument that it is unenforceable under Nebraska law. Milan
may be right about this, but enforceability is a question the parties expressly
agreed to submit to arbitration, an agreement Milan has not challenged on fraud
or unconscionability grounds.
Milan Express, 590 F. App’x at 486. That is exactly the case here.

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63, 67, 77 (2010)). Here, given the contractual language I quoted earlier, there
can be no dispute that the parties agreed to submit their dispute, including the
enforceability of any portion of the contract, to the arbitrator.5
The second issue is whether the Magistrate Judge properly held arbitrable
the plaintiff’s dispute with two parties who did not sign the contract containing
the arbitration clause in question. The parties agree that in the defendants’ reply
memorandum on their motion to dismiss and at oral argument before the

I do not mean to imply that the matter is entirely free from doubt, given the language that the
Supreme Court and appellate courts sometimes use. For example, Granite Rock states:
Applying this principle [i.e., that consent is key], our precedents hold that courts
should order arbitration of a dispute only where the court is satisfied that neither
the formation of the parties’ arbitration agreement nor (absent a valid provision
specifically committing such disputes to an arbitrator) its enforceability or
applicability to the dispute is in issue. Where a party contests either or both
matters, “the court” must resolve the disagreement.
561 U.S. at 299-300 (citation omitted). The arbitration clause here does specifically commit
enforceability and applicability to the arbitrator, but the plaintiff argues that the provision is not
“valid,” and thus that the court must resolve the disagreement. The Supreme Court stated in
Rent-A-Center that “[i]f a party challenges the validity under § 2 of the precise agreement to
arbitrate at issue, the federal court must consider the challenge before ordering compliance with
that agreement . . . .” 561 U.S. at 71. But it then illustrates that principle by referring to “fraud
in the inducement of the arbitration clause itself,” id. (quoting Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967), which, of course, fits directly within the language
of section 2 concerning “such grounds as exist at law or in equity for the revocation of any
contract,” 9 U.S.C.A. § 2. The First Circuit also states broadly that “if a party challenges the
validity of the arbitration clause itself, a court must determine the challenge, for one must enter
into the system somewhere,” Farnsworth v. Towboat Nantucket Sound, Inc., 790 F.3d 90, 96
(1st Cir. 2015) (quotation marks omitted), but the case did not turn on that statement. See id.
at 96-98 (detailing how Farnsworth had failed to challenge the validity of the arbitration clause
itself). At oral argument, the plaintiff argued that Supreme Court references in Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) and Southland Corporation demonstrate that
the court must determine the validity issue here. The Buckeye reference appears in the Supreme
Court’s efforts to categorize challenges. 546 U.S. at 444. In referring to challenges to the validity
of the arbitration clause itself (the nature of the challenge in this case), Buckeye then cited
Southland Corporation as an example of that category of challenge. Id. Southland Corporation
was a case where the California Supreme Court refused to send to arbitration a controversy on
account of a state statute, 645 P.2d 1192, 1203-04 (Cal. 1982), and the Supreme Court of the
United States reversed the California decision, holding that the Federal Arbitration Act
preempted California law. 465 U.S. at 16. Unlike the plaintiff, I do not draw any conclusive
inference from those two cases for this controversy.
At the rebuttal stage of oral argument, the plaintiff seemed to raise a scope issue. Under
the broad language of the arbitration clause, however, the arbitrator makes the first judgment
on such an argument. See Dialysis Access Ctr., LLC, 638 F.3d at 376.
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Magistrate Judge, the defendants said they were seeking a declaration of
arbitrability only as to the dispute between the plaintiff and the defendant
Applied Underwriters Captive Risk Assurance Co., Inc., (“AUCRA”)—the entity
that did sign the contract whose arbitration clause is in dispute. As for the other
two defendants (who were not signatories), they were seeking only a stay of this
lawsuit pending the outcome of the arbitration between the plaintiff and AUCRA.
I will therefore modify the Magistrate Judge’s Recommended Decision to reflect
the defendants’ stay request.
Accordingly, I conclude that the dispute between the plaintiff and the
defendant AUCRA should be referred to arbitration.

Dismissal is not

appropriate, but I ORDER that a stay be entered of this lawsuit against AUCRA
to permit the plaintiff’s dispute with AUCRA to proceed to arbitration. I also
ORDER a stay of the lawsuit as against the other two defendants, for reasons of
judicial economy, pending the outcome of the arbitration between the plaintiff
and AUCRA. Finally, I ORDER the parties to report every six months on the status
of the arbitration proceeding.
SO ORDERED.
DATED THIS 25TH DAY OF FEBRUARY, 2016
/S/D. BROCK HORNBY
D. BROCK HORNBY
UNITED STATES DISTRICT JUDGE

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