Galilea, LLC v. AGCS Marine Insurance Company et al
OPINION AND ORDER. IT IS HEREBY ORDERED that Galilea, LLC's 6 MOTION to Stay Arbitration Proceedings is DENIED. The Insurers' 21 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM & To Compel Arbitration is GRANTED as to Counts I and II, but DENIED as to the remaining allegations. Galilea, LLC's 25 MOTION to Strike the Insurers' Request for Transfer of this Case to New York Federal Court and 27 MOTION to Strike the Insurers' ; Request for Transfer of this Case to New York Federal Court is DENIED as moot. The Court certifies its decisions regarding the policy's choice-of-law provision and the arbitration clause's enforceability for interlocutory review under 28 U.S.C., section 1292(b). Galilea shall file its appeal within ten days. This action shall be STAYED pending a decision by the Ninth Circuit. This Courts Order 16 staying the arbitration proceedings in AAA Case No. 01-15-0004-4914 shall remain in effect pending a decision by the Ninth Circuit. Signed by Judge Susan P. Watters on 4/4/2016. (EMH, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
APR 0 5 2016
Clerk. u s District court
District Of Montana
OPINION and ORDER
AGCS MARINE INSURANCE
COMPANY, LIBERTY MUTUAL
INSURANCE COMPANY, and
TORUS INSURANCE COMPANY,
This is a continuation of the Court's Opinion and Order issued February 24,
2016. At the Court's request, PlaintiffGalilea, LLC, and Defendants AGCS
Marine Insurance Company, Liberty Mutual Insurance Company, and Torus
Insurance Company (collectively "Insurers") supplied supplemental briefing. For
the reasons discussed below, the Court only refers Counts I and II to arbitration
and certifies its decisions for interlocutory review under 28 U.S.C. § 1292(b).
For the complete background, please see the Court's prior Opinion and
Order (Doc. 37). The Court will only restate facts here to put this Order in context.
Chris and Taunia Kittler formed Galilea, LLC for the sole purpose of owning their
sailing yacht Ga/ilea. The Kittlers are not attorneys or otherwise sophisticated
purchasers of insurance. The Insurers issued Galilea, LLC an insurance policy that
contained the following arbitration and choice-of-law provision:
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
the substantive Jaws 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.)
After the Insurers denied its claim, Galilea, LLC filed this action. In its
Complaint, Galilea, LLC asserts the following causes of action against the
Count I - Declaratory Relief
Count II - Breach of Contract
Count III - Contract Reformation
Count IV - Promissory Estoppel
Count V - Equitable Estoppel
Count VI - Breach of Implied Covenant of Good Faith & Fair Dealing
Count VII - Breach of Fiduciary Duty
Count VIII - Violation of the Montana Unfair Trade Practices Act
Count IX - Negligent Misrepresentation
Count X - Constructive Fraud
Count XI - Tortious Interference with Contract
Count XII - Tortious Interference with Prospective Economic Advantage
(Doc. 1.) The Court applied federal maritime law and determined that the policy's
arbitration clause is enforceable. (Doc. 37 at 14.) The Court requested
supplemental briefing on the arbitration clause's scope, and if some claims fall
outside of the scope, whether litigation should be stayed pending the arbitration.
(Id. at 14-15.)
II. Who Decides Arbitrability
The Insurers argue that this Court should not consider the scope of the
arbitration clause. Instead, the Insurers contend that the arbitrators should decide
the issue. The Insurers point to the arbitration clause's statement that "any and all
disputes arising under this policy shall be resolved exclusively by binding
arbitration ... to be conducted pursuant to the Rules of the American Arbitration
Association." (Doc. 7-6 at 14.) Since the clause incorporates the Rules of the
American Arbitration Association ("AAA"), the Insurers posit this Court should
apply Rule R-7 of the AAA Commercial Arbitration Rules, 1 which provides:
(a) The arbitrator shall have the power to rule on his or her own
jurisdiction, including any objection with respect to the existence,
scope, or validity of the arbitration agreement or to the arbitrability of
any claim or counterclaim.
In previous filings, Galilea, LLC indicated that it disputes the application of the
Commercial Rules, and instead claims that the Consumer Arbitration Rules should
apply. To determine arbitrability, the difference does not matter, as the Consumer
Arbitration Rules also reserve the issue of arbitrability to the arbitrator. See Rule
R-14 of the AAA Consumer Arbitration Rules.
(Doc. 43 at 2.) 2 Galilea, LLC argues that the arbitration clause does not contain an
unmistakable delegation and that this Court should decide arbitrability. The Court
agrees with Galilea, LLC and finds that the arbitration clause does not contain
clear and unmistakable evidence of delegation.
Questions regarding the enforceability and scope of an arbitration clause are
typically "to be decided by the court, not the arbitrator." AT & T Techs., Inc. v.
Commc'ns Workers ofAm., 475 U.S. 643, 649 (1986). However, parties can agree
to arbitrate "gateway questions of arbitrability, such as whether the parties have
agreed to arbitrate or whether their agreement covers a particular controversy."
Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010) (internal quotations
omitted). Delegation of these gateway issues must be supported by "clear and
unmistakable evidence." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
944 (1995) (quoting AT & T Techs., 475 U.S. at 649). The presumption is against
delegation, and any doubt or ambiguities are resolved in favor of judicial
determination. Id. at 944-45.
The Ninth Circuit addressed whether the incorporation of the AAA rules
adequately delegated the determination of arbitrability in Brennan v. Opus Bank,
796 F.3d 1125 (9th Cir. 2015). Similar to the instant case, the arbitration clause in
The AAA Rules can be found on the AAA website, http://www.adr.org (last
accessed April 4, 2016).
Brennan provided that any dispute arising from the contract "shall be settled by
binding arbitration in accordance with the Rules of the American Arbitration
Association." Id. at 1128. In contrast to the instant case, the contract was between
two sophisticated parties - a bank and an experienced attorney and businessman
that the bank hired as its Executive Vice President. Id. at 1127-28, 1131.
The Ninth Circuit held "that incorporation of the AAA rules constitutes clear
and unmistakable evidence that contracting parties agreed to arbitrate
arbitrability." Id. at 1130. By referencing the AAA rules, the parties intended to
be bound by the AAA rule that gives the arbitrator power to rule on his or her own
jurisdiction. Id. However, the Ninth Circuit limited its holding to the facts
presented before it, which involved "an arbitration agreement between
sophisticated parties." Id. at 1131 (internal quotation omitted). It expressly
reserved the question of "the effect if any of incorporating AAA arbitration rules
into consumer contracts or into contracts of any nature between unsophisticated
parties." Id. (internal modifications and quotations omitted).
Facing a situation similar to the instant case, the Northern District of
California addressed the unanswered question from Brennan and ruled that
incorporating the AAA rules into a contract with an unsophisticated party did not
provide "clear and unmistakable evidence of delegation." Meadows v. Dickey's
Barbecue Restaurants Inc.,_ F. Supp. 3d _ , 2015 WL 7015396, at *6 (N.D.
Cal. Nov. 12, 2015). In Meadows, the court noted that a sophisticated party could
reasonably be expected to understand that the incorporation of the AAA rules in a
contract means that an arbitrator would determine the arbitrability. Id. However,
an inexperienced individual untrained in the law would be much less likely to
reach the same conclusion. Id. Accordingly, the court did not extend Brennan's
holding to cases involving an unsophisticated party. Id. at *7. Since one of the
parties was not "sophisticated," incorporation of the AAA rules did not constitute
"clear and unmistakable evidence" of delegation, and the court determined
The Court finds Meadows persuasive and finds that the incorporation of the
AAA rules into the insurance policy is not clear and unmistakable evidence of
delegation. Despite the Insurers' assertion, Galilea, LLC is not a sophisticated
party for these purposes. Galilea, LLC was established for the sole purpose of
owning the Galilea. Chris and Taunia Kittler were the only members ofGalilea,
LLC. Neither of them were attorneys or insurance professionals, and they did not
consult with an attorney or an insurance broker before purchasing the policy from
the Insurers. (Doc. 23-1 at 2-3; Doc. 23-2 at 2-3.) The Insurers point to the
Kittlers' sailing experience. However, a party that is sophisticated for sailing
purposes is not necessarily sophisticated for contract and arbitration law purposes.
Given this lack of experience, the Kittlers would likely not understand that a
reference to the AAA rules would delegate the determination of arbitrability to the
arbitrator. While the Court finds that the arbitration clause is enforceable (see Doc.
37), the Court also finds that the statement that the arbitration would "be conducted
pursuant to the Rules of the American Arbitration Association" is not clear and
unmistakable evidence of delegation when one party is "unsophisticated." An
individual not well-versed in arbitration law is unlikely to be aware that the AAA
rules provide for the arbitrator to determine his own jurisdiction. As any doubts
are resolved against delegation, this Court will determine which claims come
within the scope of the arbitration clause.
III. The Scope of the Arbitration Clause
As mentioned above, the policy provides that "any and all disputes arising
under this policy shall be resolved exclusively by binding arbitration." (Doc. 7-6
at 14.) The Insurers point to the terms "any and all" to argue that all of Galilea,
LLC's claims fall under the scope of the arbitration clause. Alternatively, the
Insurers argue that this Court should enforce the arbitration clause found in the
application for insurance. Galilea, LLC argues that the Ninth Circuit defines the
term "arising under" narrowly and that only its first two claims are referable to
arbitration. The Court agrees with Galilea, LLC.
In the Ninth Circuit, the exact language used in an arbitration clause is
crucial. For example, ifthe clause uses the phrase "arising in connection with," it
is broadly interpreted to reach "every dispute between the parties having a
significant relationship to the contract and all disputes having their origin or
genesis in the contract." Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir.
1999). The term "arising out of or relating to" is similarly interpreted broadly.
Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F .3d 1126, 1131 (9th Cir. 2000).
While those terms are interpreted broadly, the phrase "arising under" is
construed narrowly. Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708
F.2d 1458, 1464 (9th Cir. 1983). When an arbitration agreement covers "disputes
'arising under' the agreement, only those disputes relating to the interpretation and
performance of the contract itself are arbitrable." Cape Flattery Ltd. v. Titan Mar.,
LLC, 647 F.3d 914, 924 (9th Cir. 2011) (quoting Mediterranean, 708 F.2d at
1464). Tort claims alleging wrongful conduct separate from the breach of contract
do not require the interpretation of the contract, and therefore do not "arise under"
the written agreement. Tracer Research Corp. v. Nat'! Envtl. Servs. Co., 42 F.3d
1292, 1295 (9th Cir. 1994). Further, a tort claim is not arbitrable simply because it
would not have arisen "but for" the contract. Cape Flattery, 647 F.3d at 924.
Here, the arbitration clause covers "all disputes arising under" the policy.
Accordingly, its scope is narrow and only applies to claims related to the
interpretation and performance of the policy itself. In reviewing the Complaint,
the Court agrees with Galilea, LLC that only the first two counts "arise under" the
policy. In Count I, Galilea, LLC requests a declaratory judgment that the Insurers
are responsible under the policy to cover the loss of the Galilea. In Count II,
Galilea, LLC alleges a breach of contract claim against the Insurers for failing to
honor the policy's terms. Both of those claims require the interpretation of the
The remaining claims do not relate solely to the interpretation and
performance of the policy. Count III is a close call, as Galilea, LLC requests the
Court to reform the contract to reflect what it claims to be the parties' mutual
intent. Under contract law, "a court may reform a contract to reflect the true intent
of the parties if both parties were mistaken about the content or effect of the
contract." Skinner v. Northrop Grumman Ret. Plan B, 673 F.3d 1162, 1166 (9th
Cir. 2012) (citing Restatement (Second) of Contracts§ 155 (1981)). When
resolving a reformation claim, the Court must look outside the policy to determine
the parties' intentions. Id. Since the Court would be required to look beyond the
its terms, Count III does not "arise under" the policy.
The Court finds that the remaining claims also fall outside the scope of the
arbitration clause. Counts IV-XII involve varying tort theories that allege
independent wrongs separate from breaching the contract. These claims generally
tum on alleged misrepresentations and the alleged misconduct in denying
coverage. They do "not tum on an interpretation of any clause in the contract."
Cape Flattery, 647 F.3d at 924. Since they do not "arise under" the policy, the
Court cannot compel Galilea, LLC to arbitrate Counts III-XII.
The Court is not persuaded by the Insurers' attempt to enforce the arbitration
clause found in Galilea, LLC's application for insurance. The application provided
that "[a]ny dispute arising out of or relating to the relationship between [the
Insurers] and the insured shall be settled by arbitration ... " (Doc. 7-2 at 7.) As
mentioned above, the phrase "arising out of or relating to" is interpreted broadly.
However, the Insurers did not rely upon the application's arbitration clause when
they filed their Demand for Arbitration before the AAA. (Doc. 20-2.) Instead, the
Insurers only cite the arbitration clause found in the policy. (Id.) The arbitration
proceedings that the Insurers are trying to compel Galilea, LLC to participate in are
solely premised on the policy's arbitration clause, not the application's provision.
Accordingly, the Court only construes the policy's arbitration clause.
The Court requested that the parties brief whether a stay would be
appropriate in the event that the Court determined that some claims fall outside the
scope of the arbitration clause. The Insurers argue that this Court should stay this
litigation pending the resolution of the arbitration proceedings. Galilea, LLC
proposes a different course of action. It suggests that this Court should maintain
the stay in the arbitration proceedings and certify this Court's decisions for
interlocutory review under 28 U.S.C. § 1292(b). After careful consideration, the
Court agrees with Galilea, LLC.
Parties typically can only appeal final orders that end litigation. Couch v.
Telescope Inc., 611F.3d629, 632 (9th Cir. 2010). However, a narrow exception is
found in 28 U.S.C. § 1292(b), which provides:
When a district judge, in making in a civil action an order not
otherwise appealable under this section, shall be of the opinion that
such order involves a controlling question of law as to which there is
substantial ground for difference of opinion and that an immediate
appeal from the order may materially advance the ultimate
termination of the litigation, he shall so state in writing in such order.
The Court of Appeals which would have jurisdiction of an appeal of
such action may thereupon, in its discretion, permit an appeal to be
taken from such order, if application is made to it within ten days after
the entry of the order: Provided, however, That application for an
appeal hereunder shall not stay proceedings in the district court unless
the district judge or the Court of Appeals or a judge thereof shall so
Certification for interlocutory review is "to be used only in exceptional situations
in which allowing an interlocutory appeal would avoid protracted and expensive
litigation." In re Cement Antitrust Litig., 673 F.2d 1020, 1026 (9th Cir. 1981). To
certify under§ 1292(b), the district court must find: "(1) that there be a controlling
question of law, (2) that there be substantial grounds for difference of opinion, and
(3) that an immediate appeal may materially advance the ultimate termination of
the litigation." Id.
Given the unique facts and circumstances of this case, the Court finds it
appropriate to certify under § l 292(b ). First, there is a potentially controlling
question of law. For purposes of§ 1292(b), "controlling" means that "resolution
of the issue on appeal could materially affect the outcome of litigation in the
district court." In re Cement Antitrust Litig., 673 F.2d at 1026. In the previous
Opinion and Order, the Court gave effect to the policy's choice-of-law provision
and applied the Federal Arbitration Act ("FAA") to find the arbitration clause
enforceable. If the Court did not uphold the choice-of-law provision and applied
Montana law, as Galilea, LLC urged, then arbitration of the insurance policy could
be prohibited by Mont. Code Ann.§ 27-5-l 14(2)(c).
The Insurers previously argued that Mont. Code Ann.§ 27-5-l 14(2)(c) is
preempted by the FAA. If true, arbitration would be compelled even if Montana
law applied. While Judge Lovell opined in dicta that § 27-5-114(2)( c) is
preempted by the FAA, Bixler v. Next Fin. Grp., Inc., 858 F. Supp. 2d 1136, 114647 (D. Mont. 2012), other courts have held that similar statutes are excepted from
FAA preemption by virtue of the McCarran-Ferguson Act. See McKnight v.
Chicago Title Ins. Co., 358 F.3d 854, 859 (1 lth Cir. 2004); Mut. Reinsurance
Bureau v. Great Plains Mut. Ins. Co., 969 F.2d 931, 935 (10th Cir. 1992); and
Standard Sec. Life Ins. Co. ofNew Yorkv. West, 267 F.3d 821, 824 (8th Cir. 2001).
The Court does not presently express an opinion on whether Mont. Code Ann. §
27-5-l 14(2)(c) is preempted by the FAA. However, ifthe Ninth Circuit
determines that Montana law should apply, that resolution "could materially affect
the outcome of litigation in the district court." In re Cement Antitrust Litig., 673
F .2d at 1026.
Second, the Court finds that there are substantial grounds for difference of
opinion. This prong can be met "where the circuits are in dispute on the question
and the court of appeals of the circuit has not spoken on the point, if complicated
questions arise under foreign law, or if novel and difficult questions of first
impression are presented." Couch, 611 F.3d at 633 (internal quotation omitted). A
disagreement about the interpretation of settled law is insufficient for certification.
Id. Further, "the mere presence of a disputed issue that is a question of first
impression, standing alone, is insufficient to demonstrate a substantial ground for
difference of opinion." Id. at 634 (internal quotation omitted).
This case involved a novel and unique tension between federal maritime law
and the state regulation of insurance. The Court could not locate a case directly on
point where a marine insurance policy contained a provision that is explicitly
prohibited under the forum state's laws. As the Court pointed out in its prior
Opinion and Order, Ninth Circuit precedent provides that courts should only look
to state law in the absence of an applicable federal maritime rule. Certain
Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 650 (9th Cir.
2008) (citing Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 314
(1955)). However, Wilburn Boat also stated that:
Under our present system of diverse state regulations, which is as old
as the Union, the insurance business has become one of the great
enterprises of the Nation. Congress has been exceedingly cautious
about disturbing this system, even as to marine insurance where
congressional power is undoubted. We, like Congress, leave the
regulation of marine insurance where it has been-with the States.
348 U.S. at 320-21.
The Court upheld the application of the choice-of-law provision under
Restatement (Second) of Conflict of Laws§ 187(2). Specifically, the Court
determined that under Restatement§ 187(2)(b), "Montana does not have a
materially greater interest than the federal government." (Doc. 37 at 10.) The
Court still believes it correctly resolved the issue. However, given the tension
between the federal interest in the uniform application of maritime contracts and
the states' interest in regulating insurance, the Court recognizes that are substantial
grounds for difference of opinion as to whether the choice-of-law provision in the
policy should be enforced. The Court does not reach this conclusion simply
because there is uncertainty. Instead, this question presents unique and novel
issues involving federalism and the competing interests in the regulation of
maritime insurance contracts.
Third, the Court finds an immediate appeal may materially advance the
ultimate termination of the litigation. As discussed above, ifthe Court erred and
Montana law applies, then arbitration may be precluded by Mont. Code Ann.§ 275-114(2)(c). The parties would then proceed to litigate the merits ofGalilea,
LLC's claims. However, as things stand now, the parties would arbitrate Counts I
and II in New York. If the Court stays this action, then the parties would resume
litigation on Counts III-XII upon the completion of arbitration. After the litigation
terminates, possibly after a jury trial, Galilea, LLC could then appeal this Court's
Order compelling arbitration.
If the Ninth Circuit determines that this Court erroneously compelled
arbitration, Galilea, LLC would have unnecessarily spent an enormous sum of
money and time arbitrating the dispute. As the Court mentioned in the previous
Opinion and Order, the Insurers contend that the AAA commercial rules apply. If
true, Galilea, LLC would be 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.) Even ifthe arbitration decision is set aside by a court, Galilea, LLC would not
recover the fees it expended. Further, litigation on Counts I and II would be
significantly delayed by forcing the parties to arbitrate the dispute before having
the Ninth Circuit review this Court's decisions. Accordingly, the Ninth Circuit
will materially advance the end of litigation if it allows an immediate appeal. This
is an exceptional situation "in which allowing an interlocutory appeal would avoid
protracted and expensive litigation." In re Cement Antitrust Litig., 673 F.2d at
For the reasons stated above and in the Opinion and Order issued on
February 24, 2016 (Doc. 37), IT IS HEREBY ORDERED:
I. Galilea, LLC's Motion to Stay Arbitration Proceedings (Doc. 6) is
2. The Insurers' Motion to Dismiss and to Compel Arbitration (Doc. 21) is
GRANTED as to Counts I and II, but DENIED as to the remaining
3. Galilea, LLC's Motion to Strike the Insurers' Request for Transfer of this
Case to New York Federal Court (Docs. 25 and 27) is DENIED as moot.
This Court did not consider the Insurers' argument that this Court should
transfer this case to the U.S. District Court for the Southern District of
4. The Court certifies its decisions regarding the policy's choice-of-law
provision and the arbitration clause's enforceability for interlocutory
review under 28 U.S.C. § 1292(b). Galilea, LLC shall file its appeal
within ten days.
5. This action shall be STAYED pending a decision by the Ninth Circuit.
6. This Court's Order (Doc. 16) staying the arbitration proceedings in AAA
Case No. 01-15-0004-4914 shall remain in effect pending a decision by
the Ninth Circuit.
7''1a;;- of April, 2016.
~-c~ t°. i~~
SUSAN P. WATTERS
United States District Judge
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