DUKE UNIVERSITY et al v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA

Filing 50

ORDER AND RECOMMENDED RULING - MAGISTRATE JUDGE signed by MAG/JUDGE P. TREVOR SHARP on 2/4/10 re 23 MOTION to Dismiss or Stay Third-Party Complaint filed by UNITED EDUCATORS INSURANCE be granted as set out above. Upon any order adopting this Recommendation, National Union shall initiate arbitration against United Educators within 60 days. Further, IT IS ORDERED that discovery shall now commence between Plaintiffs and Defendant National Union under the exceptional track. LR26.1. The Court incorporates in this Scheduling Order pages 6-8 of the Joint Rule 26(f) Report, Docket No. 46 . (Wilson, JoAnne) Discovery due 11/4/10; Mediation should be conducted before the end of discovery; Parties agree mediator shall be James L. Gale; Dispositive motions due 12/4/10; Parties do not consent to refer case to a Mag/Judge; ETT: 5-6d. Modified on 2/8/2010 to add additional text (Wilson, JoAnne).

DUKE UNIVERSITY et al v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA

Doc. 50

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF NORTH CAROLINA

D U K E UNIVERSITY, and D U K E UNIVERSITY HEALTH S Y S T E M , INC., P l a i n t if fs , v. N A T I O N A L UNION FIRE I N S U R A N C E CO., D e fe n d a n t and T h ird -p a rty Plaintiff, v. U N I T E D EDUCATORS INSURANCE, T h ird -p a rty Defendant.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

1 :0 8 C V 8 5 4

O R D E R AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE T h is matter comes before the Court on the motion to dismiss or to stay the third-party C o m p lain t filed by Third-Party Defendant United Educators Insurance ("United Educators"). (D o c k e t No. 23.) This matter has been fully briefed, and the Court heard argument on the m o tio n on January 25, 2010. For the reasons stated herein, this Court recommends that the th ird -p a rty Complaint claims be stayed to allow Defendant National Union to initiate a r b itr a tio n against United Educators.

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 1 of 9

Dockets.Justia.com

A.

F a c ts , Claims, and Procedural History P la in t if f Duke University and Duke University Health System, Inc., ("Duke") filed

th is action against National Union Fire Insurance Co. ("National Union") claiming that N atio n al Union breached its insurance policies by failing to advance and/or pay all of Duke's d e f e n se costs with respect to certain claims and lawsuits brought against Duke and certain o f its directors, officers, and other insureds by various individuals associated with the Duke U n i v e rs ity 2005-2006 Men's Lacrosse Team (the "underlying claims"). (Docket No. 1, C o m p la in t.) N atio n al Union in turn filed a third-party Complaint against United Educators c la im in g that it was entitled to contribution from United Educators as well as subrogation and f o r declaratory relief. (Docket No. 8, Third-Party Complaint.) T h e primary argument of United Educators is that the third-party Complaint against it should be dismissed or stayed because the coverage issues it raises are subject to arbitration p u rs u a n t to the insurance policy between United Educators and Duke. (Docket No. 24, T h ird -P a rty Def.'s Mem. in Supp. of Motion to Dismiss.) United Educators raises other a rg u m e n ts in support of dismissal or a stay, but the Court finds that the arbitration argument is dispositive and that the other issues need not be addressed. (Id.) T h e insurance policy issued by United Educators to Duke contains an arbitration c la u s e . (Id., Ex. 1 ¶ 18.) It reads as follows:

-2-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 2 of 9

A ll disputes that may arise between the Insureds and us in relation to this P o lic y, or for its breach, shall be finally settled by arbitration held according to the Commercial Arbitration Rules of the American Arbitration Association, b y which the Insureds and we agree to be bound. (D o c k e t No. 24, Ex. 1 ¶ 18.) N a tio n a l Union claims in its third-party Complaint that it is entitled to contribution f ro m United Educators based on this policy between Duke and United Educators which c o n ta in s that arbitration clause. (Docket No. 9, Answer at 39-40.) National Union also c la im s that based on this same policy it is entitled to recover by equitable subrogation from U n ite d Educators according to the liability limits of this policy in an amount to be determined a t trial. (Id. at 40-41.) Finally, National Union seeks a declaratory judgment stating that the p o lic y between Duke and United Educators is applicable with respect to the underlying c la im s and that United Educators is responsible for approximately 83% of the legal fees in c u rr e d by Duke on the underlying claims, subject to the policy limitations. (Id. at 41-42.) N atio n a l Union objects to the motion to dismiss or to stay. (Docket No. 31, Def.'s M e m . of Law in Opp'n to Third-Party Def.'s Motion to Stay or Dismiss.) With respect to U n ite d Educators' arbitration argument, National Union contends that North Carolina law, ra th e r than the Federal Arbitration Act, applies and that under that law it cannot be bound by th e arbitration agreement between Duke and United Educators. (Id.) If federal law applies, N a tio n a l Union argues that it has not received a "direct benefit" under the policy at issue and th e re f o re is not subject to equitable estoppel. (Id. at 13.) Finally, National Union argues that

-3-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 3 of 9

b y its terms the arbitration clause does not encompass claims arising outside of the policy. (Id . at 14.) B. G o v e r n in g Law T h e Federal Arbitration Act provides that: A written provision in any . . . contract evidencing a transaction in v o lv in g commerce to settle by arbitration a controversy thereafter arising out o f such contract or transaction, or the refusal to perform the whole or any part th e re o f , or an agreement in writing to submit to arbitration an existing c o n tro v e rs y arising out of such a contract, transaction, or refusal, shall be v a lid , irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2. In addition, 9 U.S.C. § 3 provides that if suit is brought in federal court "upon any issue referable to arbitration under an agreement in writing for such arbitration," the court u p o n being satisfied that the issue involved in the suit is referable to arbitration under the a g re e m e n t, "shall on application of one of the parties stay the trial of the action until such a rb itra tio n has been had in accordance with the terms of the agreement." 9 U.S.C. § 3. If an action involves both arbitrating and non-arbitrating parties, the decision whether to stay litigation among the non-arbitrating parties pending the outcome of the arbitration is le f t to the court's discretion in controlling its docket. Moses H. Cone Mem'l Hosp. v. M e rc u ry Constr. Corp., 460 U.S. 1, 21 n.22 (1983).

-4-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 4 of 9

C.

A n a ly sis T h e federal law of arbitrability controls the question whether National Union is bound

b y the arbitration clause in the insurance policy between Duke and United Educators. State la w governs such issues as the validity, revocability, or enforceability of contracts generally, b u t the federal substantive law of arbitrability is applicable to "any arbitration agreement w ith in the coverage of" the Federal Arbitration Act (FAA) (9 U.S.C. § 2). Int'l Paper Co. v . Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417 n.4 (4th Cir. 2000). U n d e r the FAA, a written provision in any "contract evidencing a transaction involving c o m m e rc e " to settle a controversy by arbitration "shall be valid, irrevocable, and enforceable, s a v e upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. National Union argues that because the arbitration clause at issue is in an insurance p o lic y, which allegedly does not constitute "commerce," the rules and substantive law of the F A A "have no bearing" upon the motions at issue. (Docket No. 31 at 9.) National Union, h o w e v e r , relies upon cases decided upon a now out-dated view of the expanse of Congress' C o m m e rc e Clause power expressed in the FAA. (Id. at 10 (citing cases decided in the early 1 9 0 0 's for the proposition that insurance policies are not interstate commerce).) T h e Supreme Court now interprets the phrase "involving commerce" as used in the F A A broadly. See Allied-Bruce Terminix Cos., v. Dobson, 513 U.S. 265, 281-82 (1995) ("involvin g commerce" requires only that the transaction in fact involve interstate commerce, -5-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 5 of 9

an d does not require that the parties contemplated an interstate commerce connection). C o u rts now routinely find that insurance policies issued by a foreign corporation to citizens o f particular states "involve commerce" and are subject to the FAA. See Edstrom Indus., Inc. v . Companion Life Ins. Co., 516 F.3d 546, 549 (7th Cir. 2008) ("It is true that the [insurance] c o n tra c t in which the clause is embedded affects interstate commerce, and so the [FAA] is a p p lica b le." ); Wailua Assocs. v. Aetna Cas. and Sur. Co., 904 F. Supp. 1142, 1147 n.2 (D. H aw . 1995) (The "United States Supreme Court has long recognized that the word `c o m m e rc e ' as used in the Commerce Clause includes insurance."); Kong v. Allied Prof'ls In s . Co., No. 8:07-cv-2142-T-17, 2008 WL 2853677 (M.D. Fla. July 22, 2008) (insurance p o lic y purchased through interstate commerce falls under coverage of FAA). National Union a lle g e s in its third-party Complaint that United Educators is a foreign insurance company w ith its principal place of business in Maryland. (Docket No. 9 at 38.) Because Duke is a N o rth Carolina entity, the contract made between them "involved commerce." National U n i o n ' s argument that insurance contracts do not "involve commerce" under the FAA must th e re f o re be rejected. N a tio n a l Union concedes that under the FAA, a non-signatory to an agreement c o n ta in in g an arbitration provision may be equitably estopped from avoiding arbitration of a dispute if he received a direct benefit from the agreement. (Docket No. 31 at 12); Int'l P a p e r Co., 206 F.3d at 418; see R.J. Griffin & Co. v. Beach Club II Homeowners Ass'n, 384 F .3 d 157, 160 (4th Cir. 2004). National Union argues, however, that it is not receiving a -6-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 6 of 9

d ire c t benefit under the contract because it is neither seeking the benefit of coverage on its o w n behalf nor seeking to recover on its own behalf under the policy. (Docket No. 31 at 13.) In International Paper, the Fourth Circuit found that International Paper was estopped f ro m refusing to arbitrate its dispute with Schwabedissen because "[t]he WoodS c h w a b e d is s e n contract provides part of the factual foundation for every claim asserted by In te rn a tio n a l Paper against Schwabedissen." 206 F.3d at 418. The same can be said for N a tio n a l Union's claims against United Educators; each claim in the third-party Complaint is based on the Duke-United Educators' insurance policy which contains the arbitration c la u se . Similar to the approach used in International Paper, the Fourth Circuit in R.J. Griffin lo o k e d to the "basis for the . . . claims" to determine whether a party was seeking a direct b e n e f it from the contract. R.J. Griffin, 384 F.3d at 162. National Union has no contract with U n ited Educators. Its claims rest entirely on the asserted obligations of United Educators to D u k e under the insurance policy containing the arbitration clause. Although National Union m a y not be seeking coverage on its own behalf or to recover on its own behalf, it is claiming a benefit under the contract ­ the alleged obligation of United Educators under the contract to pay a portion of Duke's defense costs. National Union may not "`claim the benefit of the c o n tra c t and simultaneously avoid its burdens.'" Int'l Paper, 206 F.3d at 418 (quoting Avila G ro u p , Inc. v. Norma J. of California, 426 F. Supp. 537, 542 (S.D.N.Y. 1977)). N a tio n a l Union's final argument is that the terms of the arbitration clause cover only th e disputes that may arise between Duke and United Educators, and there are no such -7-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 7 of 9

d is p u te s. (Docket No. 31 at 14.) The contract, of course, only mentions these entities b e c a u se they are the only parties to the contract. National Union does not cite any authority in support of this argument. This argument is subsumed by the theory of equitable estoppel. B e c a u se National Union seeks to hold United Educators to this agreement, it is equitable to h o ld National Union to the arbitration clause in the agreement. See R.J. Griffin, 384 F.3d at 160. A cc o rd in g ly, United Educators' motion to stay all of the claims in National Union's th ird -p a rty Complaint should be granted until arbitration has been had on those claims. See 9 U.S.C. § 3. Because less than all of the claims in this action are to be arbitrated, dismissal is not warranted. See Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1 9 9 2 ) (dismissal appropriate when all issues raised must be submitted to arbitration). Conclusion F o r the foregoing reasons, IT IS RECOMMENDED that the motion to stay the thirdp a rty Complaint filed by Third-Party Defendant United Educators Insurance (Docket No. 23) b e granted as set out above. Upon any order adopting this Recommendation, National Union s h a ll initiate arbitration against United Educators within 60 days.

-8-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 8 of 9

F u rth e r, IT IS ORDERED that discovery shall now commence between Plaintiffs and D e f e n d a n t National Union under the exceptional track. LR26.1. The Court incorporates in th is Scheduling Order pages 6-8 of the Joint Rule 26(f) Report, Docket No. 46.

/s/ P. Trevor Sharp United States Magistrate Judge

D a te : February 4, 2010

-9-

Case 1:08-cv-00854-UA-PTS Document 50

Filed 02/04/10 Page 9 of 9