Galilea, LLC v. AGCS Marine Insurance Company et al
Filing
37
OPINION AND ORDER that the Parties shall simultaneously file briefs on which claims this Court should compel the parties to arbitrate and whether a stay would be appropriate by 3/9/2016. The Parties shall file responses briefs by 3/23/2016. Signed by Judge Susan P. Watters on 2/24/2016. (EMH, )
FILED
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
BILLINGS DIVISION
FEB 2 4 2016
Clerk, U.S. District Court
D1stnct O.f Montana
Billings
GALILEA, LLC,
CV 15-84-BLG-SPW
Plaintiff,
OPINION and ORDER
vs.
AGCS MARINE INSURANCE
COMPANY, LIBERTY MUTUAL
INSURANCE COMPANY, and
TORUS INSURANCE COMPANY,
Defendants.
Before the Court are the Motion to Stay Arbitration Proceedings filed by
Plaintiff Galilea, LLC and the Motion to Dismiss and to Compel Arbitration filed
by Defendants AGCS Marine Insurance Company, Liberty Mutual Insurance
Company, and Torus Insurance Company (collectively "Insurers"). The motions
present the same question: Whether the parties are required to arbitrate this
insurance dispute. Before answering that question, the Court is required to decide
whether federal maritime, New York or Montana law governs the interpretation of
the policy. For the following reasons, the Court decides that federal maritime law
applies. The Court further concludes that the arbitration clause is enforceable. The
Court invites further briefing on the scope of the arbitration clause and which of
Galilea, LLC's claims are required to be arbitrated.
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I.
Background
Galilea, LLC is a limited liability company organized under Nevada law.
Chris and Taunia Kittler formed Galilea, LLC for the sole purpose of owning their
sailing yacht Gali/ea. The Kittlers are Montana citizens and are the only members
of Gali lea, LLC.
In May 2015, the Kittlers were sailing aboard the Gali/ea in the Caribbean
Sea. The Kittlers planned on eventually passing through the Panama Canal before
reaching the Galilea's home port of San Diego, California. After evaluating
potential new insurers for the Ga/ilea, Chris Kittler submitted a questionnaire to
Pantaenius American Yacht Insurance ("Pantaenius"). Pantauenius has addresses
in New York, Rhode Island, and Maryland, as well as several international
locations. (See Doc. 7-2.) On May 7, 2015, Pantaenius provided the Kittlers with
a premium quote for insurance coverage. The quote listed a Montana address for
Galilea, LLC. The Kittlers communicated several times via phone and email with
a Pantaenius representative named Andrea Giacomazza. Giacomazza's office is in
Harrison, New York, as indicated on her email signature block. (Doc. 7-4 at 2-3.)
The parties dispute whether Giacomazza knew that the Kittlers were in the
Caribbean Sea. Both Chris and Taunia Kittler claim that they specifically told
Giacomazza that they were in the Caribbean. (Doc. 7-3 at 2-3.) In contrast,
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Giacomazza claims that the Kittlers never mentioned sailing in the Caribbean.
(Doc. 20-7 at 1-2.)
On May 12, 2015, the Kittlers emailed an application for insurance to
Pantaenius. The application listed Galilea, LLC as the insured and the port of
registry as Las Vegas, Nevada, and indicated that the Ga/ilea would spend
hurricane season in San Diego. (Doc. 7-2 at 3-4.) Although the application was
drafted by Pantaenius, the application listed the issuing insurance companies as the
Insurers named in this action. (Id. at 5.) None of the Insurers are incorporated in
New York or have their principal place of business in New York. They are
registered to do business in Montana. (Doc. 1 at 2-3.) Galilea, LLC claims that
Pantaenius acted as the Insurers' agent, (Doc. 7 at 11 ), while the Insurers represent
that Pantaenius was their "third party administrator," (Doc. 20 at 9).
On May 13, 2015, Pantaenius emailed the Kittlers an insurance binder that
bound the Insurers to coverage. Pantaenius also emailed the Kittlers a sample
policy. The next day, Pantaenius emailed the Kittlers an invoice and the policy.
The policy contained the following arbitration and choice of law provision on its
fifth page:
All: JURISDICTION AND CHOICE OF LAW
This insurance policy shall be governed by and construed in
accordance with well established and entrenched principles and
precedents of substantive United States Federal Maritime Law, but
where no such established and entrenched principles and precedents
exist, the policy shall be governed and construed in accordance with
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the substantive laws of the State of New York, without giving effect
to its conflict of law principles, and the parties hereto agree that any
and all disputes arising under this policy shall be resolved exclusively
by binding arbitration to take place within New York County, in the
State of New York, and to be conducted pursuant to the Rules of the
American Arbitration Association.
(Doc. 7-6 at 14.) The Kittlers paid the premium on May 19, 2015.
On June 24, 2015, the Galilea was grounded in an accident off the coast of
Panama and deemed a total loss. The Kittlers submitted a claim to Pantaenius the
same day. The Insurers quickly denied coverage on the basis that the accident
occurred outside of the geographical area identified in the policy.
After the Kittlers asked the Insurers to reconsider their denial of coverage,
the Insurers initiated arbitration proceedings in New York. Galilea, LLC initiated
this action against the Insurers and asserts 12 causes of action. This Court stayed
the arbitration proceedings temporarily until this Court resolved Galilea, LLC's
Motion to Stay Arbitration Proceedings.
II.
Pending Motions
Galilea, LLC has filed a Motion to Stay Arbitration Proceedings. In the
motion, Galilea, LLC argues that despite the choice-of-law provision designating
New York law or "well established and entrenched principles and precedents" of
Federal maritime law as the governing law, Montana law should apply to the
interpretation of the policy. Galilea, LLC continues that Montana law forbids
arbitration clauses in insurance policies. Galilea, LLC also contends that it never
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agreed to arbitrate any disputes, and in any event, the arbitration provision is
unconscionable. Accordingly, Galilea, LLC asks this Court to permanently stay
the arbitration proceedings.
The Insurers oppose Galilea, LLC's motion and have filed a competing
Motion to Dismiss and to Compel Arbitration. The Insurers argue that pursuant to
federal maritime law, the choice-of-law provision is valid. The Insurers contend
that under both New York and federal maritime law, arbitration clauses are
permissible in insurance policies. The Insurers further argue that the Federal
Arbitration Act compels this Court to honor the policy's arbitration clause.
Accordingly, this Court must first determine what law - either federal
maritime, New York, or Montana law- governs the interpretation of the policy.
The second step is applying that law to the policy's arbitration clause and
determining whether it is enforceable.
III.
Choice of Law
To determine the applicable law, the Court must first determine whether its
subject matter jurisdiction derives from diversity of citizenship or from the
maritime nature of the policy. Aqua-Marine Constructors, Inc. v. Banks, 110 F.3d
663, 670 (9th Cir. 1997). "This is so because a federal court sitting in diversity
applies the choice-of-law rules of the forum state, whereas a federal court sitting in
admiralty must apply federal maritime choice-of-law rules." Id. (internal citation
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omitted). Diversity jurisdiction exists ifthere is complete diversity among the
parties and the amount in controversy is at least $75,000. 28 U.S.C. § 1332(a).
Federal courts also have exclusive jurisdiction over any "civil case of admiralty or
maritime jurisdiction, saving to suitors in all cases all other remedies to which they
are otherwise entitled." 28 U.S.C. § 1333(1). In the Complaint, Galilea, LLC
asserts diversity jurisdiction and does not reference admiralty jurisdiction.
Diversity jurisdiction and admiralty jurisdiction are not mutually exclusive
and can exist concurrently. Ghotra by Ghotra v. Bandila Shipping, Inc., 113 F.3d
1050, 1055 (9th Cir. 1997). Accordingly, a plaintiff with in personam maritime
claims has three choices: (1) File suit in federal court under the court's admiralty
jurisdiction; (2) File suit in federal court under diversity jurisdiction if the
requirements are met; or (3) File suit in state court. Id. at 1054. A party wishing to
proceed under admiralty jurisdiction may designate its claims as such under Fed.
R. Civ. P. 9(h)(l ). Several procedural differences exist between diversity and
admiralty jurisdiction. Coronel v. AK Victory, 1 F. Supp. 3d 1175, 1183 (W.D.
Wash. 2014 ). Likely the greatest difference is the lack of a right to a jury trial
under admiralty law, while claims brought under diversity jurisdiction preserve
that right. Ghotra by Ghotra, 113 F.3d at 1054.
However, despite the procedural differences between proceeding under
diversity or admiralty jurisdiction, the "same substantive law pertains to the claim
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regardless of the forum ... to ensure the uniform application of admiralty law." Id.
at J 055. If the suit justifies the exercise of admiralty jurisdiction, "the choice of
substantive law to be applied in this case is governed by federal maritime choiceof-law rules." F. WF., Inc. v. Detroit Diesel Corp., 494 F. Supp. 2d 1342, 1353
(S.D. Fla. 2007); see also Buccina v. Grimsby, 96 F. Supp. 3d 706, 709 (N.D. Ohio
2015) ("Substantive federal maritime law governs a plaintiffs maritime-based
claim regardless of whether she has elected to proceed in admiralty or invoke this
Court's diversity jurisdiction").
Generally, "admiralty law applies to all maritime contracts." Aqua-Marine
Constructors, 110 F.3d at 670. While there is "no clear test for whether the subject
matter of a contract is maritime," the Ninth Circuit has "recognized repeatedly that
marine insurance policies are maritime contracts for purposes of admiralty
jurisdiction." La Reunion Francaise SA v. Barnes, 247 F.3d 1022, 1024-25 (9th
Cir. 2001). The contract's nature and subject matter, not the place of execution or
place of performance, determines the existence of federal maritime jurisdiction.
Aqua-Marine Constructors, 110 F.3d at 671. "If the subject of the contract relates
to the ship and its uses as such, or to commerce or navigation on navigable waters,
or to transportation by sea, the contract is maritime." Id.
Here, the Court finds that the insurance policy between the Insurers and
Galilea, LLC is a marine insurance policy, therefore it is a maritime contract
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subject to federal maritime jurisdiction. The policy's subject matter was the
Galilea. The policy insured against risks that may have happened either to or
onboard the Galilea. Since the policy's subject is the Ga/ilea and its transportation
by sea, the policy's place of performance or place of execution is irrelevant to
determining jurisdiction. "The policy is a quintessential example of a maritime
insurance policy covering a vessel for maritime risks." Those Certain
Underwriters at Lloyd's ofLondon v. Eugene Horton, LLC, 2012 WL 1642208
(W.D. Wash. May 10, 2012). Since it is a maritime contract, the policy is to be
interpreted by substantive federal maritime law.
The next question is whether the choice-of-law provision is enforceable
under federal maritime law. As mentioned above, the policy states that it will be
interpreted by federal maritime law, or ifthat particular area of federal maritime
law is not "established and entrenched," New York law will apply. (Doc. 7-6 at
14).
When a contract specifies which law applies, "admiralty courts will
generally give effect to that choice." Chan v. Soc); Expeditions, Inc., 123 F.3d
1287, 1296-97 (9th Cir. 1997); see also Great Lakes Reinsurance (UK) PLC v.
Durham Auctions, Inc., 585 F.3d 236, 242 (5th Cir. 2009) ("Under federal
maritime choice of law rules, contractual choice of law provisions are generally
recognized as valid and enforceable"). To determine the validity of a choice-of-
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law provision in a maritime contract, the Ninth Circuit looks to the Restatement
(Second) of Conflict of Laws § 187(2) ("Restatement"). Flores v. Am. Seafoods
Co., 335 F.3d 904, 916-17 (9th Cir. 2003). Restatement§ 187(2) provides:
(2) The law of the state chosen by the parties to govern their
contractual rights and duties will be applied, even if the particular
issue is one which the parties could not have resolved by an explicit
provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties
or the transaction and there is no other reasonable basis for the
parties' choice, or
(b) application of the law of the chosen state would be contrary
to a fundamental policy of a state which has a materially greater
interest than the chosen state in the determination of the
particular issue and which, under the rule of§ 188, would be
the state of the applicable law in the absence of an effective
choice of law by the parties.
Although it refers to the law of a "state," Restatement § 187(2) allows the
consideration of the federal government and its interest in enforcing federal law.
Flores, 335 F.3d at 917-18.
In Flores, the Ninth Circuit concluded that the federal government had a
substantial relationship to maritime employment contracts due in part to more than
two centuries of federal regulation. 335 F.3d at 917. Similarly, admiralty
jurisdiction and marine insurance policies enjoy a long history together. New
England Mut. Marine Ins. Co. v. Dunham, 78 U.S. 1 (1870). Additionally, Flores
considered that federal law had statutes directly applicable to maritime
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employment. Flores, 335 F.3d at 917. Here, courts should first look to federal
admiralty law when interpreting a marine insurance policy. Certain Underwriters
at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 649-50 (9th Cir. 2008).
Courts should only look to state law in the absence of an applicable federal
admiralty rule. Id.; see also Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348
U.S. 310, 323 (1955) (Frankfurter, J., concurring) ("Judicial enforcement of
nationwide rules regarding marine insurance is ... deeply rooted in history" and
uniform application of established maritime rules is necessary to avoid "the crazyquilt regulation of the different States"). This strong federal interest in marine
insurance gives it a substantial relationship to the transaction under Restatement §
187(2)(a). Flores, 335 F.3d at 918.
Under Restatement § 187(2)(b), even assuming that Montana law would
apply in the absence of an effective choice-of-law provision, the Court finds that
Montana does not have a materially greater interest than the federal government.
As discussed above, the United States has a significant interest in the enforcement
of maritime contracts. Galilea, LLC contracted with the Insurers while out at sea.
Montana's only connection to the transaction is that Galilea, LLC's only members
- the Kittlers - are Montana citizens. Montana's interest is not greater than the
federal interest in interpreting this particular marine policy.
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Finally, Restatement§ 187 cmt. b states that courts should not apply choiceof-law provisions in contracts of adhesion if it "would result in substantial injustice
to the adherent." Under federal maritime law, there is substantial injustice ifthe
contract's drafter overreached or took undue advantage of the adherent. Flores,
335 F.3d at 918. Here, the Court does not find that the Insurers overreached or
took undue advantage of Galilea, LLC when they contracted for the insurance
policy. Under Restatement§ 187(2), the policy's choice-of-law provision is
enforceable.
In conclusion, the Court finds it must apply federal maritime law when
interpreting the insurance policy. In applying federal maritime law, the Court finds
that the choice-of-law provision is enforceable.
IV.
The Arbitration Clause
The next step is to determine whether the policy's arbitration clause is
enforceable under the governing law. As discussed above, the policy provides:
[A]ny and all disputes arising under this policy shall be resolved
exclusively by binding arbitration to take place within New York
County, in the State of New York, and to be conducted pursuant to the
Rules of the American Arbitration Association.
(Doc. 7-6 at 14.)
Under the Federal Arbitration Act ("FAA"), a "written provision in any
maritime transaction" requiring the arbitration of a controversy arising out of the
transaction "shall be valid, irrevocable, and enforceable, save upon such grounds
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as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. If a
party seeks to compel arbitration under a valid arbitration provision, "the court
shall make an order directing the parties to proceed to arbitration in accordance
with the terms of the agreement." 9 U.S.C. § 4. District courts have no discretion
and "shall direct the parties to proceed to arbitration on issues as to which an
arbitration agreement has been signed." Kilgore v. KeyBank, Nat. Ass'n, 718 F.3d
1052, 1058 (9th Cir. 2013) (emphasis in original) (quoting Dean Witter Reynolds,
Inc. v. Byrd, 470 U.S. 213, 218 (1985)). For better or worse, federal law has
adopted a "liberal federal policy favoring arbitration." AT&T Mobility LLC v.
Concepcion, 563 U.S. 333, 339 (2011).
Here, the marine insurance policy issued by the Insurers to Galilea, LLC
contains a written provision requiring the arbitration of"any and all disputes"
arising under the policy. Under the FAA, this Court has no discretion and is
required to enforce the provision and compel the parties to arbitrate the dispute.
Galilea, LLC advances several contract defenses recognized under Montana
law against the arbitration provision. Specifically, Galilea, LLC argues that the
arbitration provision is unconscionable and that Galilea, LLC did not agree to
arbitration. Under the FAA, an arbitration clause can be deemed unenforceable
under any grounds that "exist at law or in equity for the revocation of any
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contract." 9 U.S.C. § 2. However, since Montana law does not apply, any
Montana grounds cannot serve to revoke the contract.
Even applying any equivalent of unconscionability under federal maritime or
New York law, Galilea, LLC has not shown that it can revoke the contract.
Galilea, LLC argues that the arbitration provision is unconscionable because it
unreasonably favors the insurers and it works to deprive Galilea, LLC of the
protections of Montana law.
Galilea, LLC also points to the exorbitant costs of
arbitration proceedings. 1 However, a court cannot invalidate an arbitration
provision as unconscionable based solely on the features of arbitration.
Concepcion, 563 U.S. at 341; see also Mortensen v. Bresnan Commc'ns, LLC, 722
F.3d 1151, 1159 (9th Cir. 2013) (A party cannot use "unconscionability to end-run
FAA preemption"). Nor can an arbitration clause be invalidated because the cost
of arbitrating a claim would be higher than the potential recovery. American Exp.
Co. v. Italian Colors Rest.,_ U.S._, 133 S. Ct. 2304, 2311-12 (2013).
Galilea, LLC also argues that it never agreed to arbitrate any dispute. Of
course, "the FAA does not require parties to arbitrate when they have not agreed to
do so." Volt Irifo. Sciences, Inc. v. Bd. of Trustees ofLeland Stariford Junior Univ.,
1
The Insurers' position in the arbitration proceeding is that Galilea, LLC is
required to pay administrative fees of$14,700 in addition to the hourly fees of
three New York commercial arbitrators. (Doc. 7-7 at 2). This is nearly double the
$7,779.30 premium paid by Galilea, LLC, (Doc. 7-3 at 4), and significantly more
than the $400 filing fee required to open a civil case in the District of Montana.
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489 U.S. 468, 478 (1989). However, Galilea, LLC accepted the terms of the
insurance policy. Pantaenius emailed the policy to the Kittlers on May 14, 2015.
(Doc. 7-6.) The Kittlers performed their end of the contract by paying the
insurance premium on May 19, 2015. (Doc. 7-3 at 4.) Galilea, LLC agreed to the
arbitration provision in the policy when it paid the premium, just as it agreed to
every other provision and exclusion found in the policy.
Finally, Galilea, LLC contends that even if it is forced to arbitrate, the
arbitration proceeding must occur in Montana. Galilea, LLC relies upon Mont.
Code Ann. § 27-5-323. However, as discussed above, Montana law does not
govern the interpretation of the contract. In addition, since Montana law does not
apply, the Court declines to consider Galilea, LLC's argument that Mont. Code
Ann. § 27-5-l 14(2)(c) precludes the enforcement of arbitration clauses in
insurance policies.
The arbitration provision is valid and enforceable under the FAA. The Court
does not find any legal grounds to revoke the contract.
V.
Conclusion
Similar to Mortensen, this was "not an easy case." 722 F.3d at 1162. Under
the unique facts presented, the Court concludes that the policy's arbitration clause
is enforceable. However, the enforceability of the arbitration clause is a separate
question from the scope of the arbitration clause. See Cape Flattery Ltd. v. Titan
14
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Mar., LLC, 647 F.3d 914 (9th Cir. 2011 ). Both parties briefly touch upon which of
Galilea, LLC's allegations are referable to arbitration. In a footnote, Galilea, LLC
posits that most of its claims are outside the arbitration clause's scope. (Doc. 7 at
15.) The Insurers state that all the claims "fall squarely within the scope of the
arbitration clause." (Doc. 22 at 20.) Possibly due to word limit constraints, the
parties do not cite legal authority or further flesh out their arguments regarding the
scope of the arbitration clause. The Court would appreciate further briefing on
which of Galilea, LLC's claims fall within the scope of the arbitration clause. The
parties should also address whether this Court should stay litigation pending the
conclusion of arbitration if this Court only compels the arbitration of some of the
claims.
Accordingly, IT IS HEREBY ORDERED that the parties shall
simultaneously file briefs on which claims this Court should compel the parties to
arbitrate and whether a stay would be appropriate by March 9, 2016. The parties
shall file response briefs by March 23, 2016.
DA TED tM<
&
~
day ofFebruary, 2016')
~~-cJ~
SUSANP. WATTERS
United States District Judge
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