United States Fire Insurance Company v. Waterfront Associates, Inc.

Filing 48

REPORT AND RECOMMENDATIONS re 41 Third-Party Defendant C&B Marine LLC's MOTION to Stay the Proceedings and Compel Arbitration. IT IS RECOMMENDED THAT C&B's motion to compel arbitration and to dismiss this case 41 be DENIED. Objections to R&R due by 11/25/2016. Signed by Magistrate Judge Stephanie K. Bowman on 11/8/2016. (km)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

UNITED STATES FIRE INSURANCE CO.,
Plaintiff/Crossclaim Plaintiff

Case No. 1:15-cv-46
Beckwith, J.
Bowman, M.J.

v.

WATERFRONT ASSOCIATES, INC.,
Defendant/Third-Party Plaintiff,
v.
C&B MARINE, LLC,
Third-Party Defendant/Crossclaim Defendant

REPORT AND RECOMMENDATION
Third-Party Defendant C&B Marine, LLC (“C&B”) has filed a motion to compel
arbitration and to stay all other proceedings in this declaratory judgment action.

Both

Plaintiff United States Fire Insurance Co. (“U.S. Fire”) and Defendant Waterfront
Associates, Inc. (“Waterfront”) have filed responses in opposition to C&B’s motion, and
C&B has filed a reply. The motion has been referred to the undersigned for initial
review. I now recommend that the motion be DENIED.
I. Background
A barge that once operated on the Ohio River as a well-known floating restaurant
called the Waterfront (hereinafter “Barge”) sunk in August 2015, and was declared a
total loss. Several calamities befell the ill-fated Barge prior to its last day afloat. Which

of these events proved to be fatal, and who was responsible for the sinking, forms the
basis for this litigation.
All parties agree that the first misadventure occurred on March 11, 2011.
Unfortunately for the restaurant patrons inside at the time, the Barge broke away from
its moorings in Covington, Kentucky. Immediately following that calamity, the restaurant
closed.
In September 2011, Waterfront sought and obtained insurance on the Barge from
U.S. Fire. The insurance policy (“Policy”) was renewed in 2013, with an effective date
through October 1, 2014. (Doc. 1 at ¶12; Doc. 9 at ¶12).
On or about February 6, 2014, a second misfortune occurred when the Barge
again broke away from its moorings. After that, Waterfront hired C&B to move the
Barge from Covington, Kentucky to Hebron, Kentucky to C&B’s facility. (Doc. 35 at ¶1012).

Waterfront alleges in its third-party complaint that while still under the care,

custody and control of C&B, on June 26, 2014, a third calamity occurred when the
Barge was struck by another barge, identified as Barge AEP 2015 (“Allision”). (Doc. 1
at ¶27; Doc. 9 at ¶17; Doc. 35 at ¶17).
Waterfront alleges that on or about August 4, 2014, C&B repositioned the Barge,
which resulted in the Barge being moved to shallower water. (Doc. 35 at ¶¶21-22).
Waterfront alleges that during that move, the Barge suffered one last misfortune, when
it struck a submerged hazard that damaged its hull. (Id. at ¶24). Just prior to the
repositioning by C&B, Waterfront alleges that C&B disconnected the power to the
Barge’s pumps and did not reconnect that power supply. (Id. at ¶23).

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Waterfront reported to its insurer, U.S. Fire, that on August 5, 2014, the Barge
sank while at its normal mooring in expectable conditions. (Doc. 9 at ¶29; Doc. 35 at
¶29). Waterfront now alleges that C&B is liable for the loss. Waterfront alleges that the
sinking of the Barge was caused by C&B disconnecting power to the pumps on board,
and/or because the Barge struck a submerged hazard. (Doc. 35 at ¶¶28-32).
Soon after the Barge sank, on October 9, 2014, Waterfront entered into a new
contract with C&B to remove the wrecked Barge (the “Wreck Removal Contract”). The
Wreck Removal Contract required Waterfront to pay C&B the sum of $500,000.00 to
remove and dispose of the sunken vessel.
Waterfront sought to recover under the U.S. Fire Policy for the cost of raising the
Barge and for the total loss of or damage to the hull of the Barge. Waterfront requested
that its insurer make an advance payment to C&B for its services to raise the Barge.
U.S. Fire agreed, advancing “Waterfront’s contract payment to C&B,” and paying C&B
$500,000.00 on Waterfront’s behalf. However, U.S. Fire made the payment subject to a
reservation of its rights concerning questions of coverage under the Policy. (Doc. 1 at
¶¶33-38; Doc. 9, ¶¶33-38).
In January 2015, U.S. Fire initiated this lawsuit against Waterfront, alleging that
when it purchased the Policy, Waterfront failed to disclose or misrepresented “the full
condition” of the vessel - namely, that “it was in a state of advanced deterioration and
wastage and was not in a serviceable or …seaworthy condition.” (Doc. 1 at ¶¶16-17).
U.S. Fire further alleges that Waterfront misrepresented its intentions to reopen the
Barge as an operating restaurant. (Doc. 1 at ¶¶`19-20). Presenting fourteen claims,
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U.S. Fire’s complaint seeks a declaratory judgment to declare the Policy to be void ab
initio, or alternatively, to declare that there is no coverage for the Barge under the
Policy, and ordering Waterfront to repay to U.S. Fire the sum previously advanced
under the Policy ($500,000.00) plus interest, costs, and attorney’s fees.

(Doc. 1,

PageID 13).
Waterfront filed an Answer and Counterclaim. The Counterclaim alleges that
U.S. Fire breached its contract of insurance to pay the full value of the Barge, plus preand post-judgment interest. Waterfront further alleges bad faith by U.S. Fire in “its delay
and ultimate refusal to pay its obligations and in attempting to void the policies.” (Doc. 9
at ¶20). Waterfront seeks a judgment against U.S. Fire “in the amount of Waterfront’s
actual losses and attorney’s fees and expenses and punitive damages in the amount of
$3,400,000.” (Id., PageID 75).
The Court issued a Scheduling Order on April 24, 2015 and an Amended
Calendar Order on November 1, 2015, that required the parties to disclose fact
witnesses by November 16, 2015 and expert witnesses by February 1, 2016, with a final
discovery deadline of April 15, 2016. (Docs. 20, 22).
Near the close of discovery, on March 18, 2016, Waterfront filed its third party
complaint against C&B, alleging that C&B’s negligence caused the sinking of the Barge.
(Doc. 35). On May 6, 2016, U.S. Fire filed a cross-claim against C&B, contingent upon
U.S. Fire being subrogated to Waterfront for the claimed loss of the Barge. U.S. Fire
argues that if C&B is responsible for the sinking of the Barge, then C&B should be held

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liable to U.S. Fire for the $500,000 in Policy proceeds that U.S. Fire previously
advanced to C&B. (Doc. 39).
In response, C&B has filed a motion to stay proceedings and to compel
arbitration pursuant to an arbitration clause in the October 2014 Wreck Removal
Contract between Waterfront and C&B.
II. Defendant’s Motion to Compel Arbitration/ Dismiss
The Federal Arbitration Act reflects a strong federal policy in favor of arbitration,
and explicitly provides that:
A written provision in any…contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of
such contract or transaction…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. §2.
Despite the strong federal policy reflected in the statute, this Court retains
jurisdiction to determine the validity of the contractual arbitration clause that C&B
invokes in this case. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
404-05 (1967) (holding that courts have jurisdiction under the FAA to determine the
contractual enforceability of an arbitration clause). When considering whether to grant a
motion to compel arbitration, district courts are called upon to make several threshold
determinations, including whether the parties agreed to arbitrate and whether the scope
of the arbitration agreement encompasses the parties’ dispute.
Byrider, 228 F.3d 709, 714 (6th Cir. 2000).

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See Stout v. J.D.

“In examining a motion to compel arbitration, ‘courts treat the facts as they would
in ruling on a summary judgment motion, construing all facts and reasonable inferences
that can be drawn therefrom in a light most favorable to the non-moving party.’”
Ackison Surveying, LLC v. Focus Fiber Solutions, LLC, Case NO. 2:15-cv-2044, 2016
WL 4208145 (S.D. Ohio Aug. 10, 2016) (holding that disputed fact as to whether
contract existed to arbitrate required denial of motion to compel arbitration) (additional
internal citations omitted).
A. The Existence of an Arbitration Agreement
Under the October 9, 2014 Wreck Removal Contract executed between
Waterfront and C&B, Waterfront agreed to pay the sum of $500,000.00 to C&B to
“[r]emove and dispose of barge and restaurant,” (Doc. 41-1, PageID 197). The Wreck
Removal Contract includes an arbitration clause, which C&B argues mandates
arbitration in this litigation.
Waterfront and U.S. Fire readily deny the existence of any applicable arbitration
agreement. None of the parties suggest that the underlying Policy between Waterfront
and U.S. Fire, or any other contractual agreement in force between C&B and Waterfront
prior to the execution of the Wreck Removal Contract contained an arbitration
agreement.
The parties also do not dispute that Paragraph 18.2 of the Wreck Removal
Contract provides, in relevant part: “Any dispute arising out of this Agreement shall be
referred to Arbitration….” (Doc. 41-1, PageID 200, emphasis added). A Rider on the

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back of the Wreck Removal Contract contains five paragraphs alphabetically designated
as A-E, of which only Paragraphs A and C are relevant to the pending dispute.
Paragraph A specifies that any arbitration is to take place in New York, and
provides details of how the panel of arbitrators is to be selected and the law to be
applied. Paragraph C of the Rider to the Wreck Removal Contract states:
C) This Agreement shall not affect the parties’ respective rights to other
claims each might have against the other, including, but not limited to,
claims associated with the sinking of the vessel and nothing herein shall
be construed as a waiver of such rights.
(Doc. 41-1, PageID 201). The remaining three paragraphs of the Rider, designated as
Paragraphs B, D, and E, do not appear relevant to the arbitration clause or to the
underlying dispute presented in this case. 1
B. The Scope of the Arbitration Agreement
Having confirmed the existence of an arbitration agreement in the Wreck
Removal Contract between C&B and Waterfront, the Court is next called to determine
whether it applies to the claims at issue. As described above, the parties’ underlying
dispute concerns the liability for the sinking of the Barge, and whether or not the Policy
should be enforced. Depending upon the cause of the sinking (including whether
Waterfront misrepresented the condition of the Barge), Waterfront may be responsible
for repaying the $500,000.00 previously advanced by U.S. Fire under the Policy.
Alternatively, U.S. Fire may be held responsible to pay out additional insurance
1

Of the three remaining paragraphs in the Rider, Paragraph B and E require C&B to accept the transfer of
title and ownership of the Barge, and to include Waterfront in C&B’s insurance coverage relating to the
Barge removal. Paragraph D arguably is the most important, at least to the extent that it is bolded and
capitalized to set it apart. Paragraph D contains C&B’s agreement to permit Waterfront and U.S. Fire “A
REASONABLE OPPORTUNITY …TO INSPECT THE HULL MINUS ITS SUPERSTRUCTURE PRIOR
TO THE HULL’S REMOVAL AND DEMOLITION.” (Doc. 41-1, PageID 201).

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proceeds under the Policy. All of the events on which the parties’ respective claims are
based, relating to representations made about the Barge and the causal events that led
to its sinking, occurred between March 11, 2011 and August 5, 2014, long before C&B
and Waterfront entered into the Wreck Removal Contract.
The undersigned finds persuasive the arguments by Waterfront and U.S. Fire
that the Wreck Removal Contract, including but not limited to the arbitration clause,
cannot be applied retroactively to reach back and require arbitration of claims that arose
prior to the formation of that Agreement. In addition to the timing of the events and the
explicit language of the Wreck Removal Contract limiting its terms to disputes “arising
out of this Agreement,” the non-waiver clause set forth in Paragraph C of the Rider
further confirms the parties’ clear intent to exclude pre-existing claims “associated with
the sinking of the vessel” from all provisions of the Wreck Removal Contract. 2
To support its expansive reading of the contract containing the arbitration clause,
C&B cites the strong presumption under federal law of resolving any doubts concerning
the scope of arbitrable issues in favor of arbitration. In so doing, C&B ignores basic
principles of contract law. “[A]rbitration is a matter of contract between the parties, and
one cannot be required to submit to arbitration a dispute which it has not agreed to
submit to arbitration.” Simon v. Pfizer Inc., 398 F.3d 765, 775 (6th Cir. 2005) (internal
additional quotation marks and citation omitted); see also NCR Corp. v. Korala
Associates Ltd., 512 F.3d 807, 813 (6th Cir. 2008) (holding that lower court erred in
applying a broad standard that clause requiring arbitration for “any controversy or claim

2

C&B admits that “Waterfront’s suspicions [about C&B’s liability for the sinking] explain the purpose of
Section C of [the] Rider.” (Doc. 47, PageID 224).

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arising out of or relating to this contract” applied to encompass all claims that merely
“touch[ed] upon matters” covered by the contract).
The clear and unambiguous language of the October 9, 2014 Wreck Removal
Contract provides for arbitration only for issues “arising out of” the Wreck Removal
Contract, which itself is limited in scope to the “remov[al] and dispos[al]” of the Barge.
Paragraph C of the Rider underscores the same point by restating that the Agreement
does not pertain to any issues that relate to the sinking of the Barge or claims that preexisted the Wreck Removal Contract.
The case of Granite Rock Co. v. Int’l Brotherhood of Teamsters, 130 S. Ct. 2847
(2010) illustrates the point that a pre-existing claim cannot “arise under” a laterexecuted contract containing an arbitration clause. There, an arbitration clause was
included in a Collective Bargaining Agreement (“CBA”). The CBA also contained a “nostrike” provision. The unions had begun striking in July 2004, and the parties disputed
whether the CBA (with its arbitration clause) applied. A threshold issue concerned
when the CBA was ratified. Reiterating the bedrock principle that “[a]rbitration is strictly
‘a matter of consent,’” the Supreme Court held that “courts should order arbitration of a
dispute only where the court is satisfied that neither the formation of the parties’
arbitration agreement nor…its enforceability or applicability to the dispute is in issue.”
Id. at 2857-2858.

The Court explained that if “as [the Union] asserts, the CBA

containing the parties’ arbitration clause was not ratified, and thus not formed, until
August 22, there was no CBA for the July no-strike dispute to “arise under,” and thus no

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valid basis for the Court of Appeals’ conclusion that Granite Rock’s July 9 claims arose
under the CBA and were thus arbitrable….” Id. at 2861.
So too in the case presented, the critical facts that form the basis of this dispute
occurred well before the formation of the Wreck Removal Contract. The arbitration
clause applies only to issues “arising under” that Contract, which was limited to the
removal and disposal of the submerged vessel. Because the Wreck Removal Contract
containing the arbitration clause did not exist until October 9, 2014, it is impossible for
the underlying disputes over the sinking of the Barge or applicability of the U.S. Fire
Policy to have “arisen under” that Agreement.
C&B makes two countervailing arguments, neither of which is persuasive. First,
C&B argues that the underlying dispute cannot be resolved without “reference to” the
Wreck Removal Contract, because U.S. Fire alleges in its original complaint, and
Waterfront admits in its answer, that U.S. Fire “agreed to advance Waterfront’s contract
payment to C&B” in the amount of $500,000.00, as an advance under the Policy to pay
for the removal of the Barge. (Doc. 1 at ¶ 36; Doc. 9 at ¶ 36). Several courts, including
the Sixth Circuit, have offered the following short-hand method of determining the scope
of an arbitration clause contained in a contract: “A proper method of analysis here is to
ask if an action could be maintained without reference to the contract…at issue. If it
could, it is likely outside the scope of the arbitration agreement.” Fazio v. Lehman
Bros., Inc., 340 F.3d 386, 395 (6th Cir. 2003) (additional citation omitted). Assuming the
converse as an immutable truth – that if the pleadings reference the contract, it is within

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the scope of the arbitration agreement - C&B argues that the reference to the Wreck
Removal Contract brings the underlying action within that Contract.
In the same vein, C&B argues that the damages sought from C&B, repayment of
the $500,000.00 paid to C&B on Waterfront’s behalf, even more directly arise from the
Wreck Removal Contract. Because Waterfront and/or U.S. Fire both seek to recover
the same sum, C&B contends that the dispute “arises under” the Wreck Removal
Contract.
Waterfront does not dispute that if it can prove that C&B negligently caused the
Barge to sink, then Waterfront “would be entitled to recover that $500,000 from C&B
Marine as damages for the sinking….” (Doc. 45, PageID 212, emphasis added). U.S.
Fire also concedes that its contingent cross-claims seek recovery of the Policy
advancement of $500,000 paid for removal of the Barge. However, neither Waterfront
nor U.S. Fire agree that the fact that the damages sought from C&B align with the
amount paid under the Wreck Removal Contract converts the underlying insurance
coverage dispute over the sinking of the Barge, or the related negligence claim against
C&B, into a dispute arising under that Contract. The undersigned agrees.
If C&B had sued Waterfront for failure to timely pay C&B for removing and
disposing of the Barge under the Wreck Removal Contract, or conversely, if Waterfront
had filed suit against C&B for failure to remove and dispose of the Barge, such claims
naturally would “arise under” the Contract and be arbitrable. But a claim that damages
are owed based upon C&B’s alleged negligence prior to the formation of the Wreck
Removal Contract is entirely different. As U.S. Fire points out, the costs of removal and
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disposal of the Barge are simply part of the damages Waterfront claims to have incurred
as a result of the sinking of the Barge, and are specifically imposed on a vessel owner
under the federal Wreck Removal Statute. See 33 U.S.C. § 409. The Supreme Court
has made clear that an arbitration clause should be liberally interpreted only after first
determining that the contract that contains that clause applies to the underlying dispute.
When a contract limits itself to disputes “arising under this Agreement” and was formed
long after the underlying dispute, the contract has no applicability to the unrelated and
pre-existing dispute. See Granite Rock Co. v. Int’l Brotherhood of Teamsters, supra.
C&B’s reliance on the short-hand “reference to the contract” method of analysis
cited with approval in Fazio assumes too much.

Following Fazio, the Sixth Circuit

clarified that a brief reference to a contract containing an arbitration clause does not
necessarily mean that the underlying dispute must be arbitrated.
[A] claim that is truly outside of an arbitration agreement…cannot be
forced into arbitration, even though there may be factual allegations in
common. In particular, the determination that a claim ‘require[s] reference’
to an arbitrable issue of factual dispute is not determinative.
Simon, 398 F.3d at 776 (citing Bratt Enters., Inc. v. Noble Int’l Ltd., 338 F.3d 609, 613
(6th Cir. 2003)). Thus, the fact that U.S. Fire and Waterfront’s claims share “factual
underpinnings” to the wholly different type of claims that would require arbitration under
the Wreck Removal Contract does not mean that the litigated claims must themselves
be arbitrated. Id. at 776 (“The question of whether or not Simon’s ERISA claims share
facts with the arbitrable claims is not necessarily determinative of arbitrability of the
ERISA claims”).

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In Alticor, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 411 F.3d 669
(6th Cir. 2005), the Sixth Circuit upheld the denial of a motion to compel arbitration,
where the arbitration clause was not included in the insurance policy that was the basis
for the underlying dispute, but instead was contained in an ancillary Premium Payment
Agreement that compelled arbitration only for disputes “arising out of or relating to” that
separate contract. The insurer had argued that because Alticor was refusing to pay its
alleged deductible under National’s interpretation of the underlying policy, that Alticor
simultaneously was violating the Premium Payment Agreement, such that the dispute
fell within the arbitration clause.

However, the Sixth Circuit held that “Alticor’s

requirement under the Premium Payment Agreement to make payments to National
Union does not convert the determination of the amount of such reimbursement – an
issue arising under the insurance policy – into a dispute relating to or arising under the
Premium Payment Agreement.” Id. at 672. The appellate court’s explanation resonates
here: “Although this arbitration provision may appear broad because of its coverage of
‘all’ disputes ‘relating to’ the Premium Payment Agreement, it also is narrow because of
its limitation to that Agreement and its failure even to refer to the insurance policy.” Id.
“[T]he arbitration provision is limited to ‘disputes or differences arising out of or relating
to’ the Premium Payment Agreement, and the dispute between the parties relates not to
that agreement, but to the insurance policy.” Id. at 673.
Having determined that the Wreck Removal Contract has no application at all to
the claims herein, it is unnecessary to reach C&B’s additional argument concerning the
meaning of Paragraph C. However, to the extent considered, the undersigned rejects
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C&B’s strained interpretation that Paragraph C of the Wreck Removal Contract does not
preserve the parties’ rights to file suit for any claims “in court,” but rather, merely
“preserve[s] the right to bring certain claims against C&B, but not exclude them from
arbitration.” (Doc. 47, PageID 224, emphasis original).
Under C&B’s interpretation, there would be no basis to include Paragraph C,
whether or not related to claims over the sinking of the Barge. Yet even C&B admits
that Paragraph C was added to confirm the limited scope of the Wreck Removal
Agreement, not to expand it, based upon Waterfront’s belief at the time that C&B might
bear some responsibility for the sinking of the Barge. (See Doc. 47, PageID 223, citing
evidentiary exhibits). “The Clause [Paragraph C] exists solely because Waterfront hired
C&B to scrap the Barge, even though Waterfront wrongfully suspected that C&B could
have been responsible for the Barge’s sinking.” (Doc. 47, PageID 226).
III. Conclusion and Recommendation
Having concluded that all of the claims that Plaintiff seeks to litigate are outside
the scope of the arbitration clause contained in the Wreck Removal Contract, the
undersigned finds no basis either to compel arbitration, or to stay any of the claims at
issue in this litigation. Accordingly, IT IS RECOMMENDED THAT C&B’s motion to
compel arbitration and to dismiss this case (Doc. 41) be DENIED.

s/ Stephanie K. Bowman
Stephanie K. Bowman
United States Magistrate Judge

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

UNITED STATES FIRE INSURANCE CO.,

Case No. 1:15-cv-46

Plaintiff/Crossclaim Plaintiff

Beckwith, J.
Bowman, M.J.

v.

WATERFRONT ASSOCIATES, INC.,
Defendant/Third-Party Plaintiff,
v.
C&B MARINE, LLC,
Third-Party Defendant/Crossclaim Defendant

NOTICE
Pursuant to Fed. R. Civ. P. 72(b), any party may serve and file specific, written
objections to this Report & Recommendation (“R&R”) within FOURTEEN (14) DAYS of
the filing date of this R&R. That period may be extended further by the Court on timely
motion by either side for an extension of time. All objections shall specify the portion(s)
of the R&R objected to, and shall be accompanied by a memorandum of law in support
of the objections. A party shall respond to an opponent’s objections within FOURTEEN
(14) DAYS after being served with a copy of those objections.

Failure to make

objections in accordance with this procedure may forfeit rights on appeal. See Thomas
v. Arn, 474 U.S. 140 (1985); United States v. Walters, 638 F.2d 947 (6th Cir. 1981).

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