Opinion
Case No. 1:02 CV 00054
February 25, 2002
ORDER
This case is before the Court on Defendant's Motion to Stay Litigation and Refer to Arbitration [Doc. # 8]. For the reasons set out in a contemporaneously filed Memorandum Opinion, Defendant's Motion to Stay is DENIED in part and GRANTED in part and the Motion to Refer to Arbitration is GRANTED.
MEMORANDUM OPINION
Fortress Re has filed Defendant's Motion to Stay Litigation and Refer to Arbitration [Doc. # 8]. For the reasons that follow, Defendant's Motion to Stay is DENIED in part and GRANTED in part and the Motion to Refer to Arbitration is GRANTED.
Nissan Fire Marine insurance Co., Ltd. ("Nissan") entered into a contract with Fortress Re, Inc. ("Fortress") in 1982 in which Fortress agreed to manage Nissan's reinsurance business. The contract was memorialized in a Management Agreement ("Agreement") which included an arbitration clause stating that:
"If any dispute shall arise between the MANAGER [Fortress] and the MEMBER [Nissan], either before or after the termination of this Agreement, with reference to the interpretation of this Agreement or the rights of either party with respect to any transaction under this Agreement, the dispute shall upon the request of one of the parties to said dispute be referred to a panel of two arbitrators and an umpire, one arbitrator to be chosen by each party and the umpire to be chosen by the two arbitrators, all of whom shall be active or retired, disinterested executive officers of insurance or reinsurance companies."
The arbitration agreement only applies to the corporation and does not require the individual defendants to participate in arbitration.
Doc. # 1, Ex. 1, Article X (emphasis added). Fortress managed Nissan's reinsurance affairs until November 2001 when Nissan alleges that it discovered that Fortress was breaching its contractual duties and committing numerous torts. Nissan contends that it consequently terminated Fortress's authority to act on its behalf and continued investigating the matter with the aid of PricewaterhouseCoopers. On January 22, 2002, in accord with the arbitration provision of the Agreement, Nissan sent a demand for arbitration to Fortress on several of its claims, including allegations of improper and deceptive accounting, misleading quarterly reporting, failure to satisfy the Net Acceptance limit, breach of Article IV(A)(8), breach of Article VII, and numerous breaches of Fortress's fiduciary duty and duty of utmost faith. On January 25, 2002, Nissan filed its Complaint in this court against both Fortress and the individual defendants. Nissan's Complaint included a request for declaratory judgments stating that the agency relationship is terminated and that the termination was justifiable, injunctive relief, a claim of breach of fiduciary and agency duties, fraud, constructive fraud, negligence, unfair and deceptive trade practices, conversion, unjust enrichment, accounting, constructive trust, and a request for punitive damages. Nissan also filed a motion for temporary restraining order and preliminary injunction on January 29, 2002. Fortress filed a motion to refer to arbitration pursuant to the Federal Arbitration Act ("FAA") and to stay litigation pending arbitration. At a hearing on February 1, 2002, the parties stipulated to the requests in the temporary restraining order. Nissan and Fortress, however, continued to pursue the other outstanding motions. This memorandum opinion addresses only Fortress's motion for referral to arbitration and a stay pending arbitration.
Nissan has added the individual defendants to many of these claims, as well as others, but because the individual defendants are not subject to the arbitration provision, those claims are not included for the purposes of this opinion.
In the instant case, Fortress has requested that arbitration be compelled. In order to compel arbitration under the FAA, Fortress must demonstrate that: (1) there is a dispute between the parties; (2) that there is a written agreement with an arbitration provision that purports to cover the dispute; (3) that the transaction, as shown in the written agreement, involves interstate or foreign commerce; and (4) that the non-moving party has failed, refused or otherwise neglected to proceed to arbitration. Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1991). Fortress has clearly demonstrated that there is a dispute, that the transaction involves interstate and international commerce, and that Nissan has refused to arbitrate the parts of their dispute it has asserted in federal court. Fortress's contention that the arbitration provision covers the dispute, however, warrants a more detailed discussion.
Federal policy greatly favors arbitration. E.E.O.C. v. Waffle House, Inc., ___ U.S. ___, 122 S.Ct. 754, 762, ___ L.Ed.2d ___ (2002); Smith Barney, Inc. v. Critical Health Sys. of North Carolina, 212 F.3d 858, 861 (4th Cir. 2000). The preference for arbitration is so strong that any doubts about the arbitrability of a dispute should be resolved in favor of arbitration. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); Whiteside, 940 F.2d at 101. Indeed, a dispute should be referred to arbitration "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute."United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 4 L.Ed 2d 1409 (1960).
Although federal policy favors arbitration, it is also true that a party cannot be forced to arbitrate a grievance which it has not agreed to arbitrate. AT T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986); Warrior Gulf Navigation Co., 363 U.S. at 582. The question is therefore whether the parties have agreed to arbitrate the grievances at issue. The arbitration clause itself determines whether the parties have agreed to arbitrate a particular grievance. The decision about whether a grievance is substantively arbitrable is for the court to decide. AT T, 475 U.S. at 649; Rock-Tenn Co. v. United Paperworks Int'l Union AFL-CIO, 184 F.3d 330, 334 (4th Cir. 1999). The question is thus whether the arbitration agreement covers the grievance.
The arbitration provision here is susceptible to an interpretation that the disputes are arbitrable. Nissan contends that the language which allowed arbitration for interpretation of the Agreement or "rights of either party with respect to any transaction under this Agreement" is narrow and does not cover its claims. To support this argument, Nissan relies on Long v. Silver, 248 F.3d 309 (4th Cir. 2000), and American Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88 (4th Cir. 1996). In Long and American Recovery, the Fourth Circuit stated that, in reference to a Ninth Circuit case, arbitration provisions with the phrase "arising under" were more narrow than those including the sweeping language of "arising out of or relating to." The arbitration provision here, however, is not limited only to claims arising under the contract, but instead may be fairly read to include all rights with respect to any transaction arising under the Agreement. This language is thus much more broad than that deemed narrow in Long and American Recovery, and may be read as synonymous with the "arising out of or relating to" language deemed "broad" in Long and American Recovery. The position that the arbitration provision at issue here could be construed as a broad provision is further supported by the strong federal policy in favor of arbitration.
The question is thus whether this arbitration provision, which is susceptible to an interpretation that would characterize it as broad, applies to the claims Nissan asserted in its Complaint. When determining if a claim is subject to an arbitration provision, the "court must determine whether the factual allegations underlying the claim are within the scope of the arbitration clause, regardless of the legal label assigned to the claim." J.J. Ryan Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 319 (4th Cir. 1988) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 622 n. 9, 105 S.Ct 3346, 3351 n. 9, 87 L.Ed.2d 444 (1985)). This pronouncement has given rise to the "significant relationship" test which requires that the claims have a significant relationship to the underlying agreement containing the arbitration clause. American Recovery, 96 F.3d at 93; Long, 248 F.3d at 316-17.
Nissan has alleged thirteen claims against Fortress, all of which involve rights with respect to transactions under the Agreement and bear a significant relationship to the Agreement First, Nissan's request for a declaratory judgment that the agency has been terminated involves the rights relating to transactions under the Agreement because it involves the termination of the Agreement itself. The first request for declaratory judgment is hence intertwined with and significantly related to the Agreement. Second, Nissan's claim for injunctive relief is in essence a claim for a specific remedy prefaced on the other claims and thus significantly related to the contractual claims.
Nissan's pending motion for preliminary injunction, however, is still within the jurisdiction of this court. See Merrill Lynch, Pierce, Fenner Smith, Inc. v. Bradley, 756 F.2d 1048, 1053-54 (4th Cir. 1985).
In Nissan's request for a declaratory judgment that the agency termination was justified, Nissan relies on its ability to terminate Fortress's authority and a list of other facts, designated "a" through "h," which are repeatedly referenced in other claims. The facts in "a" through "h" assert that Fortress engaged in improper reporting as to Nissan's exposure and Fortress's profits, did not comply with the Net Acceptance limits in the contract, used improper accounting practices that masked the true nature of underwriting activities and commissions, refused Nissan access to its own records as allowed under the Agreement, took commissions and distributions that were inconsistent with the Agreement and failed to properly repay those commissions, improperly caused Nissan to pay and rely on reinsurance coverage from Carolina Re, improperly took Nissan's profits or other financial gains, and failed to turn over Nissan's affairs, records, and assets. Each of these grounds involves Fortress's alleged failure to properly fulfill obligations in transactions arising under and significantly related to the Agreement. It is therefore arbitrable.
Nissan's claim for breach of fiduciary and agency duties likewise involves Nissan's rights with respect to a transaction under the Agreement and is significantly related to the Agreement. The alleged breaches arise only because of the agency relationship created by the Agreement. Long at 318. Furthermore, Nissan reasserts its factual claims found in "a" through "h" in the request for declaratory judgment. Those factual assertions, as noted above, also tie the claim for breach of fiduciary and agency duties to the Agreement This claim is therefore arbitrable because it involves rights with respect to a transaction arising under and significantly related to the Agreement.
Nissan's claims for fraud and constructive fraud are also arbitrable. These tort claims relate to how Fortress performed its duties as required under the Agreement and thus involve Nissan's right with respect to a transaction under the Agreement. These claims also invoke the "a" through "h" factual assertions above and are thus also closely tied to the Agreement. The fraud and constructive fraud claims are thus both arbitrable.
Nissan's claim for negligence is arbitrable. In the negligence claim, Nissan asserts that Fortress owed Nissan a duty because of the Agreement. Nissan further stated the "a" through "h" facts which rely on how Fortress made transactions under the Agreement. The negligence claim essentially alleges that Fortress did not appropriately perform the transactions entrusted to it under the Agreement. Nissan's negligence claim thus involves its rights with respect to transactions under the Agreement and is significantly related to the Agreement.
Nissan's claim for unfair and deceptive trade practices is similarly arbitrable. Nissan relies on the facts outlined in "a" through "h," as discussed above, as the sole basis for this claim. These facts involve how Fortress performed transactions under the Agreement, such as accounting, taking commissions, and taking profits. Nissan's dispute thus centers around whether Fortress properly performed these transactions and its rights with respect to these transactions. Thus, the unfair and deceptive trade practices claim does involve rights with respect to a transaction under the Agreement and is intertwined and related to the Agreement.
Nissan's claim for conversion revolves around Fortress's alleged abuse of its duties as agent. This conversion claim involves the extent of Fortress's authority and its position as fiduciary. Thus, the conversion claim also involves rights with respect to a transaction under the Agreement, here, how Fortress allegedly abused the authority bestowed upon it by the Agreement, and is significantly related to the Agreement. The conversion claim is therefore arbitrable.
Nissan's unjust enrichment claim is also arbitrable. In this claim, Nissan specifically states that the unjust enrichment is tied to Fortress's position as a fiduciary based on the Agreement. Nissan bases its unjust enrichment claim on Fortress's alleged breach of fiduciary duty, which has been deemed arbitrable as noted above. The unjust enrichment claim is thus based on Fortress's position as a fiduciary, which was created by the Agreement itself. This claim therefore involves rights with respect to a transaction under the Agreement, notably how Fortress performed its duties, and is significantly related to the Agreement.
Nissan's accounting claim is similarly based on Fortress's position as a fiduciary. This claim asserts that Fortress did not properly perform its duties under the Agreement. This claim is thus based on Nissan's rights with respect to the transactions Fortress took pursuant to its position under the Agreement. This claim falls within the scope of the arbitration provision, is significantly related to the Agreement and is thus arbitrable.
Nissan's claim for a constructive trust is also arbitrable because it is based on facts on Fortress's position under the Agreement. This claim notes that the Agreement created a "position of special trust" in which Fortress owed a fiduciary duty to Nissan. The claim goes on to assert that Fortress has breached that fiduciary duty. This claim thus involves rights with respect to Fortress's transactions as fiduciary under the Agreement and is significantly related to the Agreement. Furthermore, it is important to note that the arbitrators would be allowed to provide equitable relief. For these reasons, the request for a constructive trust is arbitrable.
Finally, Nissan's request for punitive damages is arbitrable. The factual basis for this request deals with how Fortress allegedly inappropriately performed its duties under the Agreement. These duties involved transactions that were performed pursuant to Fortress's authority under the Agreement. This request therefore falls within the scope of the arbitration provision and is arbitrable.
Although the claims against Fortress will be heard in arbitration, there is no need to impose a blanket stay on the proceedings against the individual defendants, as requested by Fortress. There is no requirement to issue stays on claims not referable to arbitration and hence not within the scope of the FAA. Instead, such stays are within the sound discretion of the district court and its ability to control the docket.American Recovery, 96 F.3d at 97; Sierra Rutile Ltd. v. Katz, 937 F.2d 743, 750 (2d. Cir. 1991); Genesco. Inc. v. T. Kakiuchi Co., 815 F.2d 840, 856 (2d. Cir. 1987). Although there are overlapping factual issues between the case against Fortress and the case against the individual defendants, discovery should be allowed to commence immediately in the case involving the individual defendants. Fortress would not be prejudiced by such discovery and may itself even avoid duplicative discovery. Several courts have allowed discovery to continue when arbitration was not yet pending or discovery would be duplicative and not in the interest of judicial economy. See Wright v. SFX Entm't, Inc., No. 00 CIV 5354 SAS, 2001 WL 103433 (S.D.N.Y. Feb. 7, 2001); Marcune v. Coker, 678 F. Supp. 121, 124 (E.D. Pa. 1988). In this case, much of the discovery will be duplicative, the arbitration has not commenced, and it would be in the interest of judicial economy to allow discovery to commence. Although the discovery should not be stayed, the ultimate issues of liability will be stayed because they could be shaped by the arbitration. Thus, although discovery will not be stayed, trial proceedings will be stayed.
Therefore, Defendant's Motion for Referral to Arbitration is GRANTED as to the corporate defendant, and Defendant's Motion to Stay is DENIED as to discovery and GRANTED as to trial proceedings.