JOHN R. TUNHEIM Chief Judge United States District Court

MEMORANDUM OPINION AND ORDER

Anna Tobin, Lawrence M. Shapiro, Mark L. Johnson, and X. Kevin Zhao, GREENE ESPEL PLLP, 222 South Ninth Street, Suite 2200, Minneapolis, MN 55402 for plaintiff. Anne M. Lockner, ROBINS KAPLAN LLP, 800 LaSalle Avenue, Suite 2800, Minneapolis, MN 55402, Christopher Stephen Carver and Jason Samuel Oletsky, AKERMAN LLP, 350 East Las Olas Boulevard, Suite 1900, Fort Lauderdale, FL 33301, for defendants SUNZ Insurance Company, SUNZ Insurance Solutions, LLC, and United Wisconsin Insurance Company. Mitchel Krouse, THE KROUSE LAW FIRM, 9040 Town Center Parkway, Lakewood Ranch, FL 34202, Jessica C. Richardson, Kelly P. Magnus, and Rolf E. Sonnesyn, TOMSCHE, SONNESYN & TOMSCHE, PA, 8401 Golden Valley Road, Suite 250, Minneapolis, MN 55427, for defendants Butler America Holdings, Inc., Century Employer Organization, LLC, and Payday, Inc.

Plaintiff Benchmark Insurance Company filed an Interpleader Action arising out of a dispute between Benchmark and Defendants SUNZ Insurance Company ("SUNZ"), SUNZ Insurance Solutions, LLC ("SIS"), and various insureds over the dispensation of excess collateral held by Benchmark. The Interpleader Action named 35 defendants, some insurance companies, and some insured parties ("Defendant-Insureds"), who may possibly claim some interest in the interpleaded funds.

Two of those Defendant-Insureds—Century Employer Organization, LLC and Payday, Inc.—filed crossclaims against SUNZ, and a third—Butler America Holdings, Inc.—filed crossclaims against United Wisconsin Insurance Company ("UWIC"), a SUNZ affiliate. SUNZ and UWIC filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration of the Crossclaims. Butler then voluntarily dismissed its crossclaims against UWIC, leaving only Payday's and Century's crossclaims against SUNZ. The Court will accordingly dismiss the claims against UWIC without prejudice and dismiss UWIC from this action.

Because the Court finds that Century's and Payday's crossclaims derive from the same case or controversy as the original action, the Court will deny SUNZ's Motion to Dismiss the crossclaims. Because SUNZ has not met its burden of demonstrating that the parties have an agreement to arbitrate and that the crossclaims fall within the scope of that agreement, the Court will also deny SUNZ's Motion to Compel Arbitration of the crossclaims.

By stipulation of the parties, SUNZ also filed counterclaims against Benchmark; Benchmark in turn filed counterclaims-in-reply against SUNZ and SIS. SUNZ and SIS have filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration of Benchmark's counterclaims-in-reply.

The Court finds that Benchmark's counterclaims-in-reply are compulsory replies to SUNZ's permissive counterclaims and will deny SUNZ and SIS's Motion to Dismiss. The Court further finds that SUNZ has failed to demonstrate that these claims are within the scope of an agreement to arbitrate between the parties and will deny the request to compel arbitration of Benchmark's counterclaims-in-reply. SIS filed a separate Motion to Dismiss, or in the Alternative, to Compel Arbitration of Benchmark's crossclaims for indemnification; Benchmark subsequently voluntarily dismissed its crossclaims. The Court will deny SIS's Motion as moot.

BACKGROUND

I. FACTUAL BACKGROUND

A. The Parties

This action arises out of a dispute between insurance companies. In 2015, Plaintiff Benchmark Insurance Company ("Benchmark") and Defendant SUNZ Insurance Company ("SUNZ") established a partnership to administer an insurance program for large-deductible workers' compensation policies (the "Benchmark/SUNZ Program"). (Civ. No. 20-907, Compl. ¶¶ 10-11, Apr. 9, 2020, Docket No. 1.) Benchmark appointed SUNZ Insurance Solutions ("SIS") as its agent to issue workers' compensation policies and administer the policies on Benchmark's behalf. (Civ. No. 20-908, Compl. ("Compl.") ¶¶ 1-2, Apr. 9, 2020, Docket No. 1.) The large-deductible workers' compensation insurance policies were sold to professional employer organizations in various states. (Civ. No. 20-907, Compl. ¶ 1.) The insured organizations that are parties to this action ("Defendant-Insureds") were issued policies from the Benchmark/SUNZ Program and have posted more collateral than is presently required to secure their obligations. (Compl. ¶ 9.) The Benchmark/SIS relationship ended in 2018 and no new policies have been issued or renewed since that time, but insureds may still make claims that arose during the coverage period. (Compl. ¶ 16.)

B. Contracts and Collateral

The Benchmark/SUNZ Program is governed by multiple contracts and agreements between Benchmark, SUNZ, SIS, other SUNZ-affiliates, and the Defendant-Insureds. Six types of agreements are at the root of the claims addressed in the pending Motions:

(1) Program Manager Agreement ("PMA"): between Benchmark and SIS, under which SIS issued large-deductible policies on Benchmark's behalf and in Benchmark's name, (Civ. No. 20-907, Decl. J. Compl. ¶ 12-13);

(2) Quota Share Reinsurance Contract ("Reinsurance Contract"): between Benchmark and SUNZ, which required SUNZ to accept 100 percent of Benchmark's "Gross Liability" for policies SIS issued on Benchmark's behalf and required SUNZ to post collateral to secure its obligations to Benchmark, (id. ¶ 14);

(3) Reinsurance Treaty Trust Agreement ("Trust Agreement"): between Benchmark and SUNZ, which required SUNZ to deposit securities into a trust account at Fifth Third Bank and governed the terms of the trust account's management, (id. ¶ 15);

(4) Large Deductible General Agent Agreement ("LDGAA"): between Benchmark and SIS, which required SIS to collect Deductible Collateral from insureds under policies issued by SIS on Benchmark's behalf and to obtain Program Agreements from each insured, (id. ¶ 19);

(5) Program Agreements ("Program Agreements" or "LD Agreements"): between Benchmark and the insureds, collected by SIS and addressing Deductible Collateral requirements, claims administration, and other topics, (id. ¶ 19); and

(6) Policies and Endorsements (also referred to as "LD Endorsements"): large-deductible workers' compensation insurance policies and endorsements underwritten by SIS on behalf of Benchmark and purchased by insureds, (id. ¶¶ 12-13).

These agreements also establish different forms of collateral to insure the parties' obligations to each other. (Civ. No. 20-907, Compl. ¶¶ 2, 13, 14, 28.) SUNZ has alleged that Benchmark is "overfunded and over-collateralized," and that Benchmark holds $50.5 million of excess collateral. (Civ. No. 20-907, Compl. ¶ 28.) Of particular significance to this action is Deductible Collateral, which the insureds posted to offset their obligations to reimburse Benchmark for deductible claims that Benchmark paid, but for which the insureds are contractually liable. (Civ. No. 20-907, Compl. ¶ 13.) Benchmark has determined that it is currently holding $20,533,594 in Excess Deductible Collateral posted by insureds under their various Policies and Program Agreements. (Compl. ¶¶ 2-3.)

II. PROCEDURAL HISTORY

In early 2019, SUNZ initiated a series of negotiations with Benchmark regarding various types of excess collateral that Benchmark held related to the Benchmark/SUNZ Program. (Civ. No. 20-907, Compl. ¶¶ 21-24.) On January 27, 2020, SUNZ served an arbitration demand on Benchmark, seeking broad relief related to Benchmark's collateral holdings and the release of $50.5 million in excess collateral to SUNZ. (Id. ¶¶ 25-27.) On April 9, 2020, Benchmark filed the Interpleader Action to manage adverse claims to $20,533,594 in excess Deductible collateral. (Compl. ¶ 4.)

Through the Interpleader Action, Benchmark identified thirty-five entities, the Defendant-Insureds, that purchased insurance policies through the Benchmark/SUNZ Program and may claim an interest to some portion of the $20.5 million excess Deductible Collateral. Thirty-two of the Defendant-Insureds have disclaimed interest in the excess collateral and have been dismissed from the Interpleader Action; the only remaining Defendant-Insureds are Century, Payday, and Butler.

A. Defendant-Insureds' Crossclaims

On June 4, 2020, Defendant-Insureds Century and Payday filed counterclaims for breach of contract against Benchmark and crossclaims for breach of contract against SUNZ. (Payday Crosscl., June 4, 2020, Docket No. 163; Century Crosscl., June 22, 2020, Docket No. 227.) On July 9, 2020, SUNZ filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration of the crossclaims. (Mot. Dismiss Crosscl., July 9, 2020, Docket No. 295.)

Payday and Century (collectively "Crossclaimants") allege that they individually engaged SIS to provide large deductible workers compensation insurance policies, and that SIS presented Crossclaimants with Program Agreements that presented a quote for the proposed terms of the insurance coverage that SIS would seek to obtain from SUNZ. (See e.g. Payday Crosscl. ¶ 1-2.) Crossclaimants each subsequently signed insurance policies with SUNZ. (See e.g. id. ¶ 5.) Crossclaimants allege that the policies superseded and excluded the Program Agreements from application, but that SUNZ sought to improperly modify the terms of the policies by applying the Program Agreement terms. (See e.g. id. ¶¶ 10-14.)

In particular, Crossclaimants allege that SUNZ improperly increased the amount of collateral required under the policies, imposed excessive fees that wrongfully depleted the Crossclaimants' respective collateral funds, and that SUNZ misapplied and misappropriated payments made by Crossclaimants by improperly comingling collateral funds with other funds, and failed to properly account for Crossclaimants' collateral payments. (See e.g. id. ¶¶ 14-15, 19.) Crossclaimants further allege that SUNZ engaged in negligent claims management practices that resulted in excessive cost containment fees and that SUNZ otherwise depleted their collateral accounts. (See e.g. id. ¶¶ 16, 20.) Century separately alleges that SUNZ wrongfully cancelled and terminated Century's policy and that SUNZ improperly drew down a $100,000.00 Letter of Credit that Century provided. (Century Crosscl. ¶¶ 21-22.)

On July 9, 2020, SUNZ filed a Motion to Dismiss, or in the alternative, to Compel Arbitration of, the crossclaims. (Mot. Dismiss or, in the Alternative, to Compel Arbitration of Crosscls. ("Mot. Dismiss Crosscl."), July 9, 2020, Docket No. 295.)

B. Benchmark's Counterclaims-in-Reply

On May 20, 2020, SUNZ filed a counterclaim for breach of contract against Benchmark, pursuant to a joint stipulation by the parties. (Countercl. Stip., May 19, 2020, Docket No. 83; SUNZ Countercl., May 20, 2020, Docket No. 88.) SUNZ's counterclaim alleges Benchmark used funds from the trust account established at Fifth Third Bank to satisfy this Interpleader Action, in violation of the Trust Agreement's limitations on the use of trust funds. (SUNZ Countercl. ¶¶ 1-19.) On July 1, 2020, Benchmark filed an answer to SUNZ's counterclaim and made counterclaims-in-reply. (Am. Ans. & Countercl.-in-Reply ("Countercl. Reply"), July 1, 2020, Docket No. 286.)

Benchmark's counterclaims-in-reply allege five counts: (1) Breach of the LDGAA by SIS, (Countercl. Reply ¶¶ 43-46); (2) Breach of the PMA by SIS, (id. ¶¶ 47-50); (3) Tortious Interference with the LDGAA and PMA by SUNZ, (id. ¶¶ 51-53); (4) Breach of Fiduciary Duty by SIS, (id. ¶¶ 54-57); (5) Aiding and Abetting Breach of Fiduciary Duty by SUNZ, (id. ¶¶ 58-61).

SUNZ and SIS filed a Motion to Dismiss, or in the Alternative, to Compel Arbitration. (Mot. to Dismiss or, in the Alternative, to Compel Arbitration, July 30, 2020, Docket No. 337.)

DISCUSSION

I. STANDARD OF REVIEW

A. Motion to Dismiss

"A motion to dismiss pursuant to Rule 12(b)(1) challenges the Court's subject matter jurisdiction and requires the Court to examine whether it has authority to decide the claims." Damon v. Groteboer, 937 F. Supp. 2d 1048, 163 (D. Minn. 2013). In addressing this facial Rule 12(b)(1) attack, the Court "restricts itself to the face of the pleadings, and the non-moving party receives the same protections as it would defending against a motion brought under Rule 12(b)(6)." Osborn v. United States, 918 F.2d 724, 729 n.6 (8^th Cir. 1990) (citations omitted).

B. Motion to Compel Arbitration

The Federal Arbitration Act ("FAA") permits a party who believes that a dispute is subject to arbitration to move for an order compelling arbitration and staying the proceedings. 9 U.S.C. § 3. On a motion to compel arbitration under the FAA, the Court "does not determine the merits of the substantive issues," but simply "whether the parties have agreed to submit a particular grievance to arbitration[.]" Express Scripts, Inc. v. Aegon Direct Mktg. Servs., Inc., 516 F.3d 695, 699 (8^th Cir. 2008). When considering such a motion, the Court is therefore limited to determining: (1) whether a valid agreement to arbitrate exists between the parties and, if so, (2) whether the specific dispute is within the scope of that agreement. Pro Tech Indus., Inc. v. URS Corp., 377 F.3d 868, 871 (8^th Cir. 2004). "The party seeking to compel arbitration 'must demonstrate that a valid agreement to arbitrate exists.'" Pederson v. Donald J. Trump for President, Inc., 465 F. Supp. 3d 929, 936 (D. Minn. 2020) (quoting Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 638 F.3d 367, 375 (1^st Cir. 2011)).

ANALYSIS

I. SUNZ'S MOTION TO DISMISS, OR IN THE ALTERNATIVE, TO COMPEL ARBITRATION OF CENTURY'S AND PAYDAY'S CROSSCLAIMS

A. Motion to Dismiss for Lack of Subject Matter Jurisdiction

SUNZ argues that the Court lacks subject matter jurisdiction over Century's and Payday's crossclaims because these crossclaims are not part of the same case or controversy that is at the root of Benchmark's interpleader action, but rather focus on alleged breaches of contracts between non-Minnesota corporations that are governed by Florida law.

Under Rule 13(g), a crossclaim against a coparty must:

arise[] out of the transaction or occurrence that is the subject matter of the original action or of a counterclaim, or . . . relate[] to any property that is the subject matter of the

original litigation. The crossclaim may include a claim that the coparty is or may be liable to the crossclaimant for all or part of a claim asserted in the action against the crossclaimant.

Century and Payday each make claims to a portion of the excess collateral interpleaded in the original action; their crossclaims against SUNZ for breach of contract lay out the reasons for their alleged entitlement to those interpleaded collateral funds, and also allege that SUNZ engaged in improper inflation, management, and distribution of that collateral, thereby creating additional harms. In other words, the crossclaims create a basis for Century's and Payday's adverse claims to the interpleaded funds. Both the original claim and crossclaims are related to distribution of the Deductible Collateral, and because Crossclaimants make almost identical counterclaims against Benchmark related to improper collection and maintenance of that collateral, Crossclaimants present claims that would be expected to be tried in one judicial proceeding. OnePoint Sols., 486 F.3d at 350.

SUNZ relies on State Farm Fire & Casualty Co. v. Tashire, in which the Supreme Court found that "interpleader was never intended . . . to be an all-purpose 'bill of peace.'" 386 U.S. 523, 535 (1967). SUNZ argues that the Crossclaims expand the litigation beyond the interpleader and are thus barred by Tashire. This is far too expansive a reading of Tashire, which dealt with claims related to a mass tort multiparty bus crash. See id. at 534-36. While Tashire does seek to limit the scope of interpleader actions to efficiently dispense adverse claims to a fund, "[a]t most, the Tashire language might be read as preventing crossclaims seeking to establish liability in the context of a mass tort rather than as an across-the-board proscription against crossclaims in interpleader actions." 7 Wright, Miller & Kane, Fed. Prac. & Proc. Civ. § 1715 (3d ed.) Accordingly, the Court finds that Tashire does not serve as a bar to Century's and Payday's crossclaims.

B. Motion to Compel Arbitration

In reviewing SUNZ's Motion to Compel Arbitration, the Court considers only whether a valid agreement to arbitrate exists between the parties and whether the specific dispute is within the scope of that agreement. Pro Tech Indus., 377 F.3d at 871. SUNZ contends that Payday's and Century's crossclaims are subject to the dispute resolution and forum selection clauses established in the Program Agreements, which require mediation, followed by arbitration if mediation is unsuccessful. Crossclaimants argue that their policies and endorsements superseded the Program Agreements and that the mediation and arbitration clauses are therefore not binding. Because the dispute between the parties focuses in part on the validity of the Program Agreements themselves, which is at issue in this case, the Court finds that SUNZ has not met its burden at this time of demonstrating that the parties have agreed to submit this dispute to arbitration. Express Scripts, 516 F.3d at 699. Accordingly, the Court will deny SUNZ's Motion to compel arbitration. II. SUNZ & SIS'S MOTION TO DISMISS, OR IN THE ALTERNATIVE, TO COMPEL ARBITRATION OF BENCHMARK'S COUNTERCLAIMS-IN-REPLY

A. Motion to Dismiss

SUNZ asserts that Benchmark's counterclaims-in-reply are procedurally improper under Rule 7. A counterclaim-in-reply is generally only permitted "when it is a compulsory reply to a permissive counterclaim." Feed Mgmt. Sys., Inc. v. Brill, 518 F. Supp. 2d 1094, 1096 (D. Minn. 2007). SUNZ characterizes its own counterclaims as compulsory and Benchmark's as permissive and thus improper. However, SUNZ's counterclaim was brought pursuant to Rules 13(e) and 15(d), two rules that recognize the Court's discretion to permit a party to file supplemental pleadings. See Fed R. Civ. P. 13(e), 15(d). Counterclaims that matured or were acquired by the pleader after service of their pleadings "are, by the terms of Rule 13(e), permissive." Am. Home Assur. Co. v. Pope, 487 F.3d 590, 604 n.6 (8^th Cir. 2007) (citation omitted). Having found SUNZ's counterclaims permissive, the Court must determine whether Benchmark's claims are permissive or compulsory.

Rule 13(a) defines a compulsory counterclaim as one that "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim" and "does not require adding another party over whom the court cannot acquire jurisdiction." Fed. R. Civ. P. 13(a)(1). The Eighth Circuit has adopted four "varying tests for determining whether the claim in question arose out of the same transaction or occurrence, within the meaning of Rule 13(a)[.]" Cochrane v. Iowa Beef Processors, Inc., 596 F.2d 254, 264 (8^th Cir. 1979), cert. denied sub nom., 442 U.S. 921 (1979). These tests include: (i) whether the issues of fact and law raised by the claim and counterclaim are largely the same; (ii) whether res judicata would bar a subsequent suit on the defendant's claim; (iii) whether the evidence to support or refute the counterclaims would be substantially the same as the plaintiff's claim; and (iv) whether there is a logical relation between the claim and counterclaim. Id.

The Eighth Circuit has often used the flexible "logical relation" test to efficiently join related claims into one proceeding. Tullos v. Parks, 915 F.2d 1192, 1195 (8^th Cir. 1990). There is a logical relation between SUNZ's claim that Benchmark violated the Trust Agreement and Benchmark's counterclaim that SUNZ's and SIS's breaches of the other governing contracts establish defenses for Benchmark's conduct related to the Trust Agreement. On that test alone, the Court could find Benchmark's counterclaims compulsory.

However, the facts of this case are sufficiently complex that the logical relation test alone risks inflating the interpleader action beyond its procedural function. See Protective Life Ins. Co. v. Kridner, No. 12-582, 2013 WL 1249205, at *2 (D. Minn. Mar. 27, 2013) (quoting Wittry v. Nw. Mut. Life Ins. Co., 727 F. Supp. 487, 499-500 (D. Minn. 1989) ("Interpleader is a procedural device that allows a party holding money or property, concededly belonging to another, to join in a single suit two or more parties asserting mutually exclusive claims to the fund.")).

Allowing both SUNZ's counterclaims and Benchmark's counterclaims-in-reply to proceed does risk excessive expansion of the interpleader proceedings and jeopardizing efficient dispensation of the interpleaded funds. The Court is persuaded, however, that if it were to bar Benchmark's counterclaims-in-reply while SUNZ's counterclaims proceeded, it would improperly constrain Benchmark's defenses and could create a res judicata problem for Benchmark going forward. SUNZ's counterclaim introduced facts and questions of law related to the Trust Agreement into the Interpleader Action. Developing a record sufficient to adjudicate the dispute over those obligations will include facts related to the other contracts that govern the relationships between Benchmark, SUNZ, SIS, and the Defendant-Insureds. The Court will thus find that Benchmark's counterclaims-in-reply are compulsory and may proceed.

B. Motion to Compel Arbitration

As with the crossclaims, Benchmark and SUNZ dispute which contracts are operative for the purposes of resolving this dispute. The parties have agreed to arbitrate claims arising out of the PMA and the Reinsurance Contract, but the LDGAA requires that claims be brought in Minnesota state or federal court, and the Trust Agreement does not contain an arbitration clause. While it is possible that Benchmark's counterclaims-in-reply related to the PMA will ultimately be subject to the PMA's arbitration clause, the Court is not convinced that the present dispute falls within the scope of that agreement. Accordingly, the Court finds that SUNZ has not met its burden of demonstrating that Benchmark agreed to submit its dispute about the collection, management, and dispensation of Deductible Collateral to arbitration.

CONCLUSION

The Court will deny the pending Motions to Dismiss and Motions to Compel Arbitration. However, question arises concerning whether the current alignment of lawsuits and parties is conducive to prompt resolution of these claims. The focus should be on expeditiously resolving distribution of the interpleader funds in the amounts that were originally allocated to each remaining Defendant. To address this issue, the Court will order the parties to confer with the Magistrate Judge to determine whether realignment of the claims would better serve the efficient resolution of the Interpleader Action as well as the parties' other claims.

ORDER

Based on the foregoing, and all the files, records, and proceedings herein, IT IS HEREBY ORDERED that:

1. Pursuant to the Joint Stipulation voluntarily dismissing Butler America Holdings, Inc.'s Crossclaim against United Wisconsin Insurance Company without prejudice and without costs and disbursements [Docket No. 435], United Wisconsin Insurance Company is DISMISSED;

2. United Wisconsin Insurance Company is DISMISSED FROM THIS ACTION and may have and recover nothing of the interpleaded funds;

3. SUNZ's Insurance Company's Motion to Dismiss, or in the Alternative, Compel Arbitration of Crossclaims [Docket No. 295] is DENIED as to Century Employer Organization, LLC's and Payday, Inc.'s Crossclaims;

4. SUNZ Insurance Company and SUNZ Insurance Solutions, LLC's Motion to Dismiss, or in the Alternative, Compel Arbitration of Benchmark's Counterclaims-in-Reply [Docket No. 337] is DENIED; and

5. SUNZ Insurance Solutions, LLC's Motion to Dismiss, or in the Alternative, Compel Arbitration of Crossclaims for Indemnification [Docket No. 343] is DENIED as moot.

/s/_________

JOHN R. TUNHEIM

Chief Judge

United States District Court