Opinion
1:22-CV-00934-LY
02-17-2023
JORGE MATTOS, INDIVIDUALLY; AND PATRICIA TOJA, INDIVIDUALLY; Plaintiffs v. NATIONAL WESTERN LIFE INSURANCE COMPANY, A FOREIGN CORPORATION; AND UNIVERSAL INSURANCE BROKER, CORP., A FLORIDA CORPORATION; Defendants
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
DUSTIN M. HOWELL UNITED STATES MAGISTRATE JUDGE
TO: THE HONORABLE LEE YEAKEL UNITED STATES DISTRICT JUDGE
Before the Court is Plaintiffs Jorge Mattos and Patricia Tojas's (“Plaintiffs”) Motion to Remand to State Court, Dkt. 70; Defendants National Western Life Insurance Company (“National Western”) and Universal Insurance Broker's (“UIB”) (collectively “Defendants”) Motion to Further Compel Arbitration and to Stay Pending Arbitration, Dkt. 71; and all related briefing. After reviewing these filings and the relevant case law, the undersigned issues the following report and recommendation recommending that the District Court deny Plaintiffs' Motion to Remand, Dkt. 70, and grant Defendants' Motion to Further Compel Arbitration and to Stay Pending Arbitration, Dkt. 71.
I. BACKGROUND
A. Underlying Dispute
This case concerns a life insurance policy issued by National Western to Helena Mondragon. Dkt. 1-1, at 2. Mattos and Toja were the beneficiaries of Mondragon's policy. Id. at 3. After Mondragon died, National Western declined to pay out proceeds from Mondragon's policy to Mattos and Toja because of missed payments. Id. at 4. Typically, payments under the policy were paid to the insurance broker/agent, UIB, who would then pay National Western. Id. at 5. Mattos and Toja made some of the premium payments on behalf of Mondragon and allege that UIB diverted payments and did not forward them to National Western, resulting in National Western's refusal to pay out the policy proceeds. Id. at 7.
As to National Western, Plaintiffs bring a breach of contract claim for National Western's failure to pay out the proceeds of the policy and for failure to provide Annual Reports which may have alerted Mondragon, Mattos, and Toja to the alleged non-payment of the policy. Id. at 6. Plaintiffs also bring a negligence claim for a failure to properly account for premium payments and a claim for conversion related to the failure to remit a return payment for the premium payments it did receive. Id. at 6-9.
As to the broker/agent, UIB, Plaintiffs bring claims for negligence, breach of fiduciary duty, and negligent supervision for UIB's acceptance and alleged diversion of payments made by Plaintiffs and Mondragon, for UIB's failure to inform Plaintiffs and Mondragon that payments were not being sent to National Western, and for leading Mattos and Toja to believe they would receive proceeds from the policy when Mondragon died. Id. at 8.
B. Transfer to this Court and First Arbitration Attempt
Plaintiffs originally filed their claims in a Florida state court in Miami-Dade County. Id. at 2. Defendants removed Plaintiffs' petition to the Miami Division of the U.S. District Court for the Southern District of Florida pursuant to federal question jurisdiction, pointing to the arbitration provisions contained within the policy application and the policy itself, which state that these agreements were governed by the Inter-American Convention on International Commercial Arbitration. Dkt. 1, at 1, 6; see 9 U.S.C. § 301 (“The Inter-American Convention on International Commercial Arbitration of January 30, 1975, shall be enforced in United States courts in accordance with this chapter.”).
Defendants then filed a motion to compel arbitration which was granted by U.S. District Judge Darrin P. Gayles. Dkts. 6; 16. Plaintiffs submitted a Notice of Arbitration commencing the parties' non-administered arbitration. Dkts. 29, at 5; 41, at 2. National Western appointed Justice David Medina as their arbitrator, while Plaintiffs appointed Judge Juan Ramirez. Dkt. 29, at 5. Arbitrator Medina and Ramirez appointed a third arbitrator, Francisco Gonzalez de Cossio. Dkt. 41, at 3. UIB objected to Plaintiffs' choice of arbitrator and then National Western and UIB, pursuant to the terms of the arbitration agreement, requested that CPR Dispute Resolution Services (“CPR”) “convene an ancillary, limited-purpose panel of arbitrators to determine the alleged conflicts/disqualification issues.” Id. CPR, though, declined to intervene, stating that the underlying arbitrator selection clauses did not comply with CPR's consumer protection standards. Dkt. 29-12, at 2.
After CPR's response, Plaintiffs then moved to vacate Judge Gayles's Order compelling arbitration and moved to remand the case back to state court. Dkt. 28, at 1. Plaintiffs argued that CPR “ousted [the] case from arbitration [because] the agreement [violated] the CPR Arbitration Rules” by failing to meet its due process standards. Id. Plaintiffs further argued that CPR's determination was a final ruling on the arbitrability of the parties' dispute, the policy was nonarbitrable, and that the District Court for the Southern District of Florida now lacked subject matter jurisdiction. Id. at 3. UIB and National Western responded that CPR's determination concerned only Defendants' challenge to Plaintiffs' arbitrator, not to the parties' agreement to arbitrate. Dkt. 29, at 1. Judge Gayles then ordered the parties to seek clarification from CPR. Dkt. 33. CPR responded that it had intervened only to decide a challenge to an arbitrator, that its role in the parties' non-administered arbitration was generally limited, and, thus, it could not advise whether the arbitration proceedings had concluded. Dkt. 38-2, at 2. CPR did confirm, however, that it “declined to provide administrative services in connection with the contract.” Id.
After the parties received CPR's response, Western Life and UIB moved for relief in the form of appointment of an ancillary tribunal to hear the disqualification issue, appointment of a replacement arbitrator, or transfer to this district. Dkt. 41, at 1. Judge Gayles acknowledged that the parties were in an “odd procedural limbo” since CPR rules required that Plaintiffs, as consumers, have the right to nominate any person of their choosing as an arbitrator, while the relevant policy provisions did not allow plaintiffs to appoint an arbitrator unilaterally. Dkt. 49, at 3. Judge Gayles stated “[a]t present, the Arbitration Provisions are clearly ineffective as this matter is in a procedural deadlock due to CPR's refusal to resolve the parties' disagreement over the presiding arbitrators.” Id. at 6. On that basis, Judge Gayles turned to the policy's forum selection clause which gives the courts of Austin, Texas exclusive jurisdiction over the dispute “[i]n the event that [the arbitration clause] is canceled or invalidated or that, for any reason, becomes ineffective.” Dkt. 6-2, at 16. Judge Gayles granted Defendants' transfer motion and transferred the case to the Austin Division of the U.S. District Court for the Western District of Texas. Dkt. 49, at 7.
C. Motions Before this Court
Plaintiffs now move to remand this case back to the Florida state court from which it originated, arguing that this Court has been divested of its federal subject matter jurisdiction because removal to federal court was “solely based on the arbitration statutes” and arbitration has now failed. Dkts. 40, at 1; 70, at 6, 13. Plaintiffs also argue that certain convenience factors, as well as the fact that they are pursuing a case in Florida state court involving the same parties but a different insurance policy, weighs in favor of remand or transfer. Dkt. 70, at 6-10.
Defendants respond that this case and the case pending in Florida state court are materially different, Defendants have not waived their right to arbitration, and arbitration is still proper in this case. Dkt. 72, at 1. On that basis National Western and UIB contend they have invoked this Court's subject matter jurisdiction pursuant to the Federal Arbitration Act (the “FAA”) and moved to compel arbitration and stay proceedings in this Court while the parties attempt to arbitrate their dispute. Dkt. 71, at 1.
II. DISCUSSION
A. Plaintiffs' Motion to Remand
Plaintiffs move to remand this case primarily on the basis that arbitration has failed, and the Court no longer has subject matter jurisdiction under the FAA. Dkt. 70, at 6, 13. Plaintiffs also argue that pursuant to 28 U.S.C. § 1404, there are various factors present weighing in favor of transferring the case. Id. at 6. These factors include the Plaintiffs' choice of forum and the location of witnesses and documents. Id. at 10. Lastly, Plaintiffs argue that this case should be transferred in the interest of judicial economy because they have brought a substantially similar case that is now in discovery in Florida state court. Id.
1. 1404 analysis and Plaintiffs' pending state court action
As a preliminary matter, Judge Gayles has already addressed the Plaintiffs' arguments under 28 U.S.C. § 1404(a) concerning factors that may weigh in favor of transferring the case back to Florida state court. Dkts. 70, at 6-10; 49, at 6-7.
“For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.” 28 U.S.C. § 1404(a). Ordinarily, a § 1404(a) motion requires “the district court [to] weigh the relevant factors and decide whether, on balance, a transfer would serve ‘the convenience of parties and witnesses' and otherwise promote “the interest of justice.'” Atl. Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. of Texas, 571 U.S. 49, 62-65 (2013).
As Judge Gayles noted, the parties' contract has a valid forum selection clause giving the courts of Austin, Texas exclusive jurisdiction over the dispute should arbitration become ineffective. Dkts. 49, at 6; 6-2, at 16. Judge Gayles found that the parties do not dispute the validity of the clause and that it is applicable in this case. Dkt. 49, at 6. The presence of a valid forum selection clause requires courts to adjust their § 1404(a) analysis such that the Plaintiffs' choice of forum bears no weight, and the Court is limited to considering only public interest factors. See Atl. Marine, 571 U.S. at 64. As Judge Gayles explained, “the crux of Plaintiffs' protestations ... relate to private interest factors” and the public interest factor of “trial efficiency” is stated in a conclusory manner. Dkt. 49, at 7. The undersigned is similarly unpersuaded by Plaintiffs' attempts to argue for transfer based on convenience or judicial economy notwithstanding the fact of Plaintiffs' additional suit being currently litigated in Florida state court.
2. Status of arbitration proceedings
The threshold issue at the center of Plaintiffs' remaining argument is whether arbitration has failed. Plaintiffs' argument as to the failure of the parties' arbitration rests on the assertion that CPR determined the case to be nonarbitrable and “ousted” the parties' dispute from arbitration for non-compliance with CPR rules. Dkts. 70, at 6; 28, at 1. Plaintiffs' argument warrants a closer examination of the parties' relationship to CPR, the issue CPR was called upon to resolve, and CPR's actual findings.
a. Relevant policy language
The relevant policy provisions state:
1. In case of disputes, differences, controversies, and claims related to or resulting in connection with this contract, including any matter in reference to its formation, existence, validity, compliance, performance, alteration, or termination, they shall all be resolved by arbitration under the Public Resources Institute Center for Dispute Resolution Rules for Unmanaged Arbitration of International Disputes [CPR] through an arbitration court formed of three arbitrators, each of whom shall be a qualified arbitrator.
2. [National Western] shall assign a qualified arbitrator and all other parties shall assign a qualified arbitrator for them, these two arbitrators shall appoint a third arbitrator, who must be an attorney with full proficiency of the English language to act as the leader of the arbitration court and who may not be a citizen of either of the countries appearing in arbitration, unless otherwise agreed by the parties in arbitration.Dkt. 6-2, at 15-16.
See also Policy Application, Dkt. 6-1, at 4, providing the same.
b. CPR intervention and findings
After Plaintiffs filed their notice commencing arbitration and appointed Judge Juan Ramirez, UIB objected to the appointment on the grounds that the arbitrator selection provision expressly states that “[National Western] will assign a qualified arbitrator and all the other parties, together, must agree and assign a qualified arbitrator to act as a second arbitrator.” Dkt. 29-5, at 4 (emphasis added). UIB argued that Plaintiffs could not unilaterally select the second arbitrator under the terms of the arbitration agreement. Id. Together, UIB and National Western also raised objections to Judge Ramirez's appointment because of perceived impartiality. Dkt. 29-9, at 11.
Defendants then sought adjudication and a declaration from CPR as to Plaintiffs' compliance with the arbitrator selection clause of the agreement and the suitability of Judge Ramirez as an arbitrator of their dispute. Dkt. 29-9, at 13-14. CPR responded to “formally initiate the CPR Challenge Protocol for the challenge of an arbitrator under the 2018 CPR International Non-Administered Arbitration Rules.” Dkt. 29-10, at 7.
As to Defendants' challenge to Arbitrator Ramirez, CPR wrote:
After consultation with the parties, CPR has confirmed that the underlying clauses were contained in an application for life insurance and a life insurance policy purchased by the decedent mother of the Claimants. Decedent and her beneficiaries are accordingly “consumers” within the meaning of CPR's Due Process Protections. CPR has determined that the underlying arbitration clauses do not meet the minimum requirements set out in the Due Process Protections, and the parties have declined to agree on the provision of the Due Process Protections at the time of the dispute. Accordingly, CPR declines to provide the administrative service of deciding the Challenge under the Rules.Dkt. 29-12, at 1.
When CPR was asked to further clarify the status of the proceedings, it responded that the parties' arbitration proceedings “are designed to function without the intervention of an administering organization except in certain limited circumstances such as outlined in Rule 6 and 7 thereof regarding the appointment of an arbitrator when there is a failure of parties' process or challenge to an arbitrator appointed by the parties or the party-appointed arbitrators. Accordingly [CPR] cannot advise whether the ‘arbitration proceeding' has concluded; however, the parties request for CPR intervention in the arbitration is concluded.” Dkt. 38-2, at 2. CPR further specified that “CPR was requested to intervene to decide a challenge under Rule 7 to an arbitrator appointed in your matter.” Id.
While CPR “declined to provide administrative services,” it does not appear that CPR declared that the arbitration had failed, concluded, or that the underlying dispute was nonarbitrable. Id. CPR merely stated that it will not intervene “unless and until [the parties] agree to abide by the [Due Process Protections] and as contemplated in the Rules … each side can (subject to the requirements of independence and impartiality) nominate its own arbitrator or all three are chosen jointly or through a CPR list and rank process.” Id.
The undersigned finds that CPR's determination concerned only Defendants' challenge to Plaintiffs' appointment of Arbitrator Ramirez and does not extend to the overall arbitrability of the parties' dispute, notwithstanding the procedural challenges CPR's determination creates for the parties.
c. This Court's jurisdiction
Because the undersigned finds that the parties' underlying dispute is still arbitrable and that the parties' arbitration provisions still apply, this Court has not been divested of its subject matter jurisdiction. This Court has subject matter jurisdiction to decide the motions before it under the FAA, 9 U.S.C. §§ 203, 302, which codifies the Inter-American Convention on International Commercial Arbitration. Northrop Grumman Ship Sys., Inc. v. Ministry of Def. of Republic of Venezuela, 850 Fed.Appx. 218, 224-25 (5th Cir. 2021). The provision of the Convention Act providing for removal to federal court provides:
Where the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending. The procedure for removal of causes otherwise provided by law shall apply, except that the ground for removal provided in this section need not appear on the face of the complaint but may be shown in the petition for removal. For the purposes of Chapter 1 of this title any action or proceeding removed under this section shall be deemed to have been brought in the district court to which it is removed.9 U.S.C. § 205.
The parties do not dispute that their agreement falls under the Convention because their contract explicitly states:
This contract is specifically drafted and by common agreement to be an international business agreement to be interpreted in accordance with all contract laws of the State of Colorado, United States of America, but excluding its principles of choice of law, and provides that any dispute relating to the agreement of arbitration shall be governed by the international provisions of the United States Arbitration decree, 9 U.S.C. Sec. 201 et. seq.Dkt. 6-2, at 16 (emphasis added).
Section 201 provides for the enforcement of the Convention's terms in U.S. Courts. 9 U.S.C. § 201. The removal provision in 9 U.S.C. § 205 does not explicitly define when an action “relates” to an arbitration agreement falling under the Convention. However, the Fifth Circuit has held that the “expansive” language of the Act evinces Congress's “desire to provide the federal courts with broad jurisdiction over Convention Act cases in order to ensure reciprocal treatment of arbitration agreements by cosignatories of the Convention.” Acosta v. Master Maint. & Const. Inc., 452 F.3d 373, 376-79 (5th Cir. 2006). “Stated as a rule, a clause determining the forum for resolution of specific types of disputes relates to a lawsuit that seeks the resolution of such disputes.” Id.
See Acosta, 452 F.3d at 377 (stating ‘[s]o generous is the removal provision that we have emphasized that the general rule of construing removal statutes strictly against removal cannot apply to Convention Act cases because in these instances, Congress created special removal rights to channel cases into federal court”) (internal citations and quotation marks omitted).
Plaintiffs' suit, concerning their claim to life insurance policy proceeds, is related to an arbitration agreement that provide for arbitration in case of “disputes, differences, controversies, and claims related to or resulting in connection with [the] contract” for life insurance. Dkt. 6-2, at 15; see Acosta, 452 F.3d at 376-79 (finding that “relate” means to have “a connection, relation, or reference” and that “[i]t is unarguable that the subject matter ... of litigation” relates to the parties' arbitration clauses where claims concern policy coverage and the arbitration clauses declare a forum for the resolution of coverage disputes).
Because the underlying dispute is still arbitrable and the parties' relevant arbitration provisions still apply, this Court has not been divested of its subject matter jurisdiction over the underlying dispute, nor Defendants' motion to compel arbitration. Based on the forgoing, the undersigned recommends that the District Court deny Plaintiffs' motion to remand, Dkt. 70.
See Vaden v. Discover Bank, 556 U.S. 49, 62 (2009) (holding that under § 4 of the FAA, a party to an arbitration agreement may petition for an order to compel arbitration in a “‘United States district court which, save for [the arbitration] agreement, would have jurisdiction'” over “‘the controversy between the parties.'” (quoting 9 U.S.C. § 4)).
B. Motion to Compel Arbitration
Defendants National Western and UIB move this Court to further compel arbitration and stay the parties' proceedings while the parties attempt to arbitrate their dispute. Dkt. 71, at 1.
1. Motion to Compel Arbitration analysis
Defendants argue that Plaintiffs' claims fall within the parties' mandatory arbitration agreement and that arbitration has not failed or concluded. Dkts. 71, at 5; 75, at 2. In response, Plaintiffs continue to assert that CPR's determination resulted in the closure of their arbitration proceedings and that this case should return to the Florida state court where it originated. Dkt. 73, at 6, 8-9
When ruling on a motion to compel arbitration, courts use a two-step analysis to determine whether a party may be compelled to arbitrate. Jones v. Halliburton Co., 583 F.3d 228, 233 (5th Cir. 2009); Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996). The Court first inquires whether the party has agreed to arbitrate the dispute at issue. Jones, 583 F.3d at 233-34. This question is subdivided into two factors: “(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement.” Webb, 89 F.3d at 257-58. To determine whether the parties formed a valid agreement to arbitrate, the Court applies ordinary principles of state contract law. Am. Heritage Life Ins. Co. v. Lang, 321 F.3d 533, 537-38 (5th Cir. 2003); Grigson v. Creative Artists Agency, LLC, 210 F.3d 524, 531 (5th Cir. 2000). If the Court finds that there is a valid agreement to arbitrate between the parties and that the dispute in question falls within the scope of the arbitration agreement, the second step is to determine whether any federal statute or policy renders the claims nonarbitrable. Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260, 263 (5th Cir. 2004).
As to the first step of the analysis concerning whether the parties have agreed to arbitrate the dispute at issue, the undersigned finds that a valid agreement to arbitrate exists between the parties, and the parties' dispute falls within the scope of the agreement. Mondragon's National Western policy provides:
In case of disputes, differences, controversies, and claims related to or resulting in connection with this contract, including any matter in reference to its formation, existence, validity, compliance, performance, alteration, or termination, they shall all be resolved by arbitration under the Public Resources Institute Center for Dispute Resolution Rules for Unmanaged Arbitration of International Disputes through an arbitration court formed of three arbitrators, each of whom shall be a qualified arbitrator.
The place of arbitration shall be Austin, Texas, USA.
THIS POLICY IS SUBJECT TO BINDING ARBITRATION.Dkt. 6-2, at 16, 19.
Further, the parties' dispute-based on Plaintiffs' “[demand for] payment under the policy”; National Western's “NON-PAYMENT” or “failure to tender payment” on the “subject Insurance policy”; as well as Defendants' failure to account for premium payments and send annual reports to the insured-concerns performance and termination of the parties' contract. Dkt. 1-1, at 5-10. The parties' dispute, thus, falls within the scope of the arbitration agreement. Additionally, no federal statute or policy renders Plaintiffs' claims nonarbitrable.
As to Plaintiffs' arguments that the District Court should not compel arbitration because arbitration has failed, the undersigned has already found that arbitration has not failed and that CPR's findings concerned the limited issue of the parties' selection of arbitrators. See supra Part II.A.2.b. Thus, Plaintiffs' arguments as to Defendants' motion to compel arbitration are unavailing. Based on the forgoing, the undersigned recommends that the District Court grant Defendant's motion to compel arbitration.
2. District Court intervention in parties' selection of arbitrators While arbitration has not failed and the arbitration proceedings have not closed, the parties are at an impasse because they are not able to convene an arbitral panel to decide their dispute. Judge Gayles acknowledged as much in his Order transferring the case to this Court when he wrote:
CPR's decision places this case in an odd procedural limbo. While the broad language of the Arbitration Provisions delegates questions of arbitrability to the arbitrators, arbitration cannot proceed here because CPR declined to resolve the Challenge to Judge Ramirez. Because of this arbitration deadlock, Defendants filed the instant [transfer] Motion arguing that this case should be transferred to the United States District Court for the Western District of Texas pursuant to the Policy's forum-selection clause. At present, the Arbitration Provisions are clearly ineffective as this matter is in a procedural deadlock due to CPR's refusal to resolve the parties' disagreement over the presiding arbitrators.Dkt. 49, at 7.
CPR's response after the parties sought further clarification as to the organization's determination offered one way forward. The parties' current arbitration agreement affords only National Western the privilege of unilaterally selecting the first of the three arbitrators-it then (oddly) requires UIB and Plaintiffs, who are not aligned, to agree on a second arbitrator. Dkt. 6-2, at 16. These two arbitrators then pick a third arbitrator to round out the arbitral panel. Id. CPR's letter states that it could not intervene in the parties' arbitration proceedings “unless and until [the parties] agree to abide by the [Due Process Protections] and as contemplated in the Rules ... each side can (subject to the requirements of independence and impartiality) nominate its own arbitrator, or all three [arbitrators] are chosen jointly or through a CPR list and rank process.” Dkt. 38-2, at 2. However, CPR's letter indicates that “the parties are not willing to modify [the] provisions” of their arbitration agreement governing selection of an arbitrator to bring the selection process in compliance with CPR rules. Dkt. 38-2, at 2.
Defendants' transfer motion, Dkt. 41, which has been incorporated into Defendants' motion to compel further arbitration offers another way forward. Dkt. 71, at 5. Defendants' transfer motion asked the Court to “assist the parties in furtherance of arbitration by appointment of an ancillary tribunal to determine whether an arbitrator in lieu of the Honorable Juan Ramirez should be appointed . [or] by appointment of an arbitrator in lieu of the Honorable Juan Ramirez . pursuant to 9 U.S.C. §§ 4, 5 of the [FAA].” Dkt. 41, at 1.
While the FAA “expressly favors the selection of arbitrators by parties rather than courts[,] Congress recognized that judicial intervention may be required in certain circumstances to move the parties to an arbitrable dispute out of the court and into arbitration as quickly and easily as possible.” BP Expl. Libya Ltd. v. ExxonMobil Libya Ltd., 689 F.3d 481, 491-93 (5th Cir. 2012) (internal citations and quotation marks omitted). As part of the Court's limited jurisdiction to intervene in the arbitration process before an award, 9 U.S.C. § 5 authorizes a court to intervene “to select an arbitrator upon application of a party, in three instances: (1) if the arbitration agreement does not provide a method for selecting arbitrators; (2) if the arbitration agreement provides a method for selecting arbitrators but any party to the agreement has failed to follow that method; or (3) if there is a lapse in the naming of an arbitrator or arbitrators.” Id. (internal citations and quotation marks omitted).
The facts of this case implicate the third basis for judicial intervention under 9 U.S.C. § 5. The Fifth Circuit has found that there is a lapse in the naming of an arbitrator warranting judicial intervention when there is a “mechanical breakdown” in the selection process such that the parties find themselves in a “deadlock” over the selection process itself. Id. (defining a lapse for the purposes of 9. U.S.C. § 5 to mean “a lapse in time in the naming of the arbitrator or in the filling of a vacancy on a panel of arbitrators, or some other mechanical breakdown in the arbitrator selection process”). In BP Expl. Libya, for example, there was a mechanical breakdown constituting lapse when one of three parties refused to recognize the other two parties' arbitrator appointments and insisted that those parties jointly appoint another arbitrator, which they refused to do. 689 F.3d at 491-93. The parties in that case could not surmount the impasse for several months warranting judicial intervention. Id.
In this case, while the parties' arbitration agreement provides a method for selecting arbitrators, and at least National Western appears to have complied with that method, the method itself is inherently problematic since it does not comport with the CPR rules the parties agreed would govern their arbitration. Dkts. 29-12, at 1; 6-2, at 15-16. As a result, CPR is unable to rule on Defendants' challenge to Plaintiffs' appointment of an arbitrator, and the parties are unable to move forward with their arbitration. Their selection method, therefore, has reached a mechanical breakdown resulting in a lapse. Here, “[a]bsent judicial intervention, the breakdown in the parties' appointment process ‘might indefinitely delay arbitration proceedings,' the exact scenario Congress sought to avoid in enacting § 5 by providing parties recourse to the courts. BP Expl. Libya, 689 F.3d at 492 (citing Stop & Shop Supermarket Co. v. United Food & Commercial Workers Union Local 342, 246 Fed.Appx. 7, 11 (2d Cir. 2007)). The Court is, therefore, within its authority under 9 U.S.C. § 5 to intervene and exercise appointment power.
The undersigned recommends that the District Court intervene to aid the parties in surmounting their impasse by issuing an order directing appointment of the three arbitrators. In light of the parties' intent to arbitrate under the CPR rules and the fact that CPR will only intervene if the parties' proceedings comply with its rules, the District Court's order should outline a process that comports with CPR's rules allowing each side to pick an arbitrator. The undersigned recommends that the District Court's order direct that Plaintiffs be allowed to pick an arbitrator, and UIB and National Western, as co-respondents on the other side of the dispute, appoint a second arbitrator. If Plaintiffs, on one side, and UIB and National Western on the other, cannot appoint arbitrators for their side of the dispute by a date to be determined by the District Court, the Court should appoint one or both of the first two arbitrators, as the case may be. Together, these two arbitrators should follow the parties' agreed procedure for selecting the third member of the arbitral panel- if the first and second arbitrators cannot agree on the third member of the arbitral panel by the date to be determined by the District Court, the Court should appoint the third arbitrator. The parties, of course, are free to reach an agreement amongst themselves to bring their arbitration selection process in compliance with the methods endorsed by CPR, whose rules they agreed would govern their proceedings.
Although § 5 gives the District Court authority to select an arbitrator, the Court cannot impose a condition of arbitration to which none of the parties agreed. BP Expl. Libya, 689 F.3d at 496.Where, as here, the parties' agreement provides for three arbitrators the District Court is limited under § 5 to the appointment of three arbitrators.
3. Stay
Lastly, the undersigned recommends that the District Court grant Defendants' request to stay the proceedings pending arbitration. Section 3 of the FAA provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under the agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3. This provision is mandatory and demands a stay of the proceedings, at the request of a party, if the dispute is arbitrable and referred to arbitration. Tittle v. Enron Corp., 463 F.3d 410, 417 n. 6 (5th Cir.2006).
Based on the forgoing, the undersigned recommends that the District Court grant Defendants' motion to further compel arbitration, Dkt. 71, order selection of the arbitrators in compliance with CPR policies, and stay the proceedings in this Court pending arbitration.
III. RECOMMENDATION
In accordance with the foregoing discussion, the undersigned RECOMMENDS that the District Court DENY Plaintiffs' Motion to Remand, Dkt. 70, and GRANT Defendants' Motion to Further Compel Arbitration, Dkt. 71. Further, the undersigned RECOMMENDS that the District Court order selection of three arbitrators in accordance with the CPR procedures the parties' agreed would govern their arbitration.
IV. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battle v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987). A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).