Beam Partners, LLC v. Nancy G. Atkins, Liquidator of Ky. Health Coop., Inc.

• Decision Date: 11 September 2018
• Docket Number: Civil No. 3:17-cv-004-GFVT
• Parties: BEAM PARTNERS, LLC, and Terry S. Shilling, Plaintiffs, v. Nancy G. ATKINS, Liquidator of Kentucky Health Cooperative, Inc., Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

340 F.Supp.3d 627

BEAM PARTNERS, LLC, and Terry S. Shilling, Plaintiffs,

v.Nancy G. ATKINS, Liquidator of Kentucky Health Cooperative, Inc., Defendant.

Civil No. 3:17-cv-004-GFVT

United States District Court, E.D. Kentucky, Central Division. Frankfort.

Signed September 11, 2018

Philip W. Collier, Timothy D. Thompson, Stites & Harbison, PLLC, Louisville, KY, for Plaintiffs.

Connor B. Egan, Perry M. Bentley, Stoll Keenon Ogden, PLLC, Lexington, KY, Paul Christopher Harnice, Sarah Jackson Bishop, Stoll Keenon Ogden, Frankfort, KY, for Defendant.

MEMORANDUM OPINION & ORDER

Gregory F. Van Tatenhove, United States District Judge

Federal judges often find themselves at the intersection of state law and federal law and faced with the dilemma of which direction to turn. Occasionally, an area of state law can circumvent the Founding Fathers' dictate that federal law reign supreme, but only in rare situations. After several hearings and many hundreds of pages of briefing, the Court finds that this situation does not arise here. Kentucky's prohibition of arbitration between insolvent insurance companies and third-party contractors does not trump the mandate of the Federal Arbitration Act that valid arbitration agreements must be upheld. For the following reasons, the Liquidator's motions to dismiss are DENIED and the Plaintiffs' motions to compel arbitration are GRANTED .

I

The Kentucky Health Cooperative (KYHC) sought approval from the Center for Medicare and Medicaid Services (CMS) to offer health plans to Kentucky citizens in 2011 and 2012. [R. 4-1 at 2.] During this time, KYHC contracted with Beam Partners, LLC, whereby Beam Partners would provide management and support services to KYHC. [R. 4-2.] Terry S. Shilling is the sole member of Beam Partners. [R. 1 at ¶ 2.] Through this Management and Development Agreement (MDA), Beam Partners agreed to train and orient members of the KYHC board of directors, apply for and obtain licensure for KYHC through the Kentucky Department of Insurance, apply for KYHC's tax-exempt status, provide consulting services to KYHC regarding internal systems and processes, identify and screen candidates for KYHC's support services, and provide interim management assistance until KYHC installed permanent officers. [R. 4-1 at 3.] The MDA included a section where parties agreed to arbitrate claims and disputes arising under or relating to the MDA. [R. 4-2 at 10–11.]

Similarly, KYHC contracted with Milliman, Inc., for Milliman to perform actuary and consulting services to KYHC [Milliman, Inc., v. Roof , 3:18-cv-00012-GFVT, R. 1-2], and CGI Technologies and Solutions, Inc., agreed to perform administrative services for KYHC [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 9-2]. Significantly, each of these agreements also contained arbitration clauses. [Milliman, Inc., v. Roof , 3:18-cv-00012-GFVT, R. 1-2 at ¶ 5; Milliman, Inc., v. Roof , 3:18-cv-00012-GFVT, R. 1-3 at ¶ 4; Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 9-2 at 26–27.]

By the end of 2015, KYHC was insolvent and placed into rehabilitation by Franklin Circuit Court in Franklin County, Kentucky. [R. 4-3 at 3.] Pursuant to KRS § 304.33-010, et seq. , Franklin Circuit Court placed KYHC into liquidation on January 15, 2016, and appointed H. Brian Maynard, Commissioner of the Kentucky Department of Insurance, as the Liquidator. Id. at 4. Jeff Gaither and David Hurt were appointed as Special Deputy Liquidators. Id.

Pursuant to the Liquidation Order,

The Liquidator and the Special Deputy Liquidators are hereby authorized to deal with the property, business, and affairs of KYHC and KYHC's estate, and in any necessary forum, to sue or defend for KYHC, or for the benefit of KYHC's policyholders, creditors, or shareholders in the courts and tribunal, agencies or arbitration panels of this states and other states, or in any applicable federal court in the Liquidator's name as Commissioner of the Kentucky Department of Insurance, in his capacity as Liquidator, or a Special deputy in his capacity as Special Deputy Liquidator, or in the name of KYHC.

Id. at 8. Since that time, Nancy G. Atkins has replaced H. Brian Maynard as Commissioner of the Kentucky Department of Insurance, and thus also as the Liquidator. See KRS § 304.33-200. Donald Roof was also appointed as a Deputy Litigator for KYHC on August 14, 2017. [Milliman, Inc., v. Roof , 3:18-cv-00012-GFVT, R. 1 at 2.]

On May 13, 2016, the Liquidator sued CGI in Franklin Circuit Court for breach of contract and tort claims. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 71-1 at 2.] The Liquidator refused to honor the arbitration clause, so CGI removed that claim to this Court and filed a Petition to Compel Arbitration. Id. Those actions were consolidated. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 8.]

That fall, the Liquidator sued Beam Partners and Terry Shilling, along with Janie Miller,¹ Joseph E. Smith,² the Officers and Board of Directors of KYHC, and CGI for similar breach of contract and tort claims. [R. 4-4.] The Liquidator again refused to arbitrate, and CGI removed that action to this Court on December 1, 2016. [Jeff Gaither, Deputy Liquidator of Kentucky Health Cooperative, Inc. v. Beam Partners, LLC, et al. , 3:16-cv-00094-GFVT, R. 1.] Beam Partners and Terry Shilling (collectively, "Beam Partners") then filed this present action, a Petition to Compel Arbitration, on January 6, 2017. [R. 1.]

Meanwhile, in Atkins v. CGI , the Liquidator sought remand back to Franklin Circuit Court. KYHC is a Kentucky non-profit corporation with a principal place of business in Kentucky, while CGI is a business incorporated in Delaware with a principal place of business in Virginia. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 1 at 1.] The amount in controversy exceeds $75,000. Id. Accordingly, under a traditional analysis of diversity jurisdiction, this Court has requisite authority and subject-matter jurisdiction. 28 U.S.C. § 1332(b). However, the Liquidator sought remand on the basis of reverse preemption. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 49 at 3–4.] On January 3, 2017, this Court determined that its federal diversity jurisdiction was not reverse preempted by application of the Kentucky Insurers Rehabilitation and Liquidation Law (IRLL) through the McCarran–Ferguson Act. Id. at 16. Accordingly, the Liquidator's Motion to Remand was denied. Id.

Similarly, the Liquidator sought remand in the contract and tort action, Gaither v. Beam. In Gaither , however, there was not complete diversity, as both plaintiffs and several defendants were residents of Kentucky. [Jeff Gaither, Deputy Liquidator of Kentucky Health Cooperative, Inc. v. Beam Partners, LLC, et al. , 3:16-cv-00094-GFVT, R. 44 at 6.] On March 31, 2017, this Court declined to sever the claims against the nondiverse parties and remanded for lack of jurisdiction. Id. at 30.

After these developments, this Court denied CGI's Motion to Compel Arbitration without prejudice and directed the parties to re-brief the issue based on the significantly altered procedural posture. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 63.] Instead, CGI appealed the Court's Order to the Sixth Circuit Court of Appeals. [Atkins v. CGI Techs. & Sols., Inc. , 3:16-cv-00037-GFVT, R. 67.] Pending a decision in that case, the Court stayed this action. [R. 14.]

Early in 2018, the Sixth Circuit vacated this Court's Order denying CGI's Motion to Compel Arbitration and remanded for further proceedings. Atkins v. CGI Techs. & Sols., Inc. , 724 F. App'x 383 (6th Cir. 2018). The Court of Appeals reviewed only this Court's denial of the Motion to Compel Arbitration and did not review any decision involving abstention. Id. at 388. Accordingly, the Circuit Court determined that denial of the Motion to Compel Arbitration was premature insofar as it was based on reverse preemption under Kentucky's IRLL. Id. at 390–93. Because the case had been removed from state court and this Court had denied remand, the purposes served by the exclusive jurisdiction provision of the IRLL did not apply, and state interests could not trump federal interests in the disposition of the case. Id.

However, while removing the issue of IRLL reverse preemption from Atkins v. CGI , the Sixth Circuit did not resolve all issues, nor did the Sixth Circuit resolve the issue of reverse preemption in either this case or Milliman v. Roof . The Liquidator has filed a Supplemental Motion to Dismiss [R. 19] to revisit this issue, and the parties appeared before this Court for oral argument [R. 30].³

II

In the initial Motion to Compel Arbitration, Beam Partners argued that the parties entered into a valid agreement to arbitrate and that this dispute fell within the scope of that agreement, therefore, the Federal Arbitration Act mandates arbitration. [R. 4-1 at 5.] The Liquidator disagreed, stating that the agreement was invalid under Kentucky law, and thus the Court could not compel arbitration. [R. 9-1 at 1–2.] Specifically, the Liquidator argued that Kentucky law reverse preempted federal diversity jurisdiction in this case. Id. In the alternative, the Liquidator requested this Court abstain from exercising jurisdiction. Id. Following the Sixth Circuit decision in Atkins v. CGI , the Liquidator supplemented the original motion to dismiss, arguing that the prior exclusive jurisdiction doctrine precludes this Court from exercising subject-matter jurisdiction and that Beam Partners' petition for arbitration was not ripe for review. [R. 19 at 5.]

A

The Liquidator first claims that the McCarran–Ferguson Act reverse preempts this Court's diversity jurisdiction. [R. 9-1 at 9–10.] Because the IRLL vests exclusive jurisdiction in the Franklin Circuit Court for matters relating to an insurance company's liquidation, the Liquidator argues that this Court does not have subject-matter jurisdiction. The Court has already rejected this argument...