Continental Cas. Co. v. American Nat. Ins. Co.

• Decision Date: 05 August 2005
• Docket Number: No. 04-1615.,04-1615.
• Citation: 417 F.3d 727
• Parties: CONTINENTAL CASUALTY COMPANY, an Illinois insurance company, Plaintiff-Appellant, v. AMERICAN NATIONAL INSURANCE COMPANY, a Texas insurance company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

417 F.3d 727

CONTINENTAL CASUALTY COMPANY, an Illinois insurance company, Plaintiff-Appellant, v. AMERICAN NATIONAL INSURANCE COMPANY, a Texas insurance company, Defendant-Appellee.

No. 04-1615.

United States Court of Appeals, Seventh Circuit.

Argued November 4, 2004.

Decided August 5, 2005.

Constantine L. Trela, Jr. (argued), Sidley Austin Brown & Wood, Chicago, IL, for Plaintiff-Appellant.

Michael F. Braun (argued), Schuyler, Roche & Zwirner, Chicago, IL, for Defendant-Appellee.

Before BAUER, RIPPLE and KANNE, Circuit Judges.

RIPPLE, Circuit Judge.

Continental Casualty Co. ("Continental") filed suit against American National Insurance Co. ("ANICO"), a co-participant in the Associated Accident and Health Reinsurance Underwriters ("AAHRU") reinsurance pool managed by IOA Re, Inc. ("IOA Re"). Continental attempted to leave the reinsurance arrangement in 2000. It sought a declaratory judgment that it owed no duty to indemnify ANICO pursuant to a Quota Share Personal Accident Retrocession Contract ("Quota Share Contract") executed in 2001 by ANICO and IOA Re. Continental maintained that IOA Re lacked the authority to enter into the contract on Continental's behalf. In response, ANICO moved for dismissal on the grounds, among others, that arbitration clauses in the Quota Share Contract between IOA Re and ANICO, and in the AAHRU Participation Agreement between IOA Re and Continental, required the parties to arbitrate.

The district court agreed with ANICO, holding that IOA Re had apparent authority as a matter of law to bind Continental to the Quota Share Contract and that the Participation Agreement's arbitration clause also compelled arbitration. Because the arbitration venue was not the Northern District of Illinois, the district court dismissed the action and Continental appeals. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

Continental and ANICO were major participants in the reinsurance pool, AAHRU.¹ As part of the participation agreements covering each member's participation in the pool, the fund manager, IOA Re, was granted the authority to enter into reinsurance contracts on behalf of the members. On July 5, 2000, Continental notified IOA Re of its intent to terminate its participation in AAHRU at the end of 2000. It followed this communication with two more notices on July 21 and November 29. On August 22, 2000, Continental also revoked certain aspects of IOA Re's agency authority, including the authority to enter into multiple-year contracts on Continental's behalf and to back-date reinsurance policies. Continental did not notify any of the other three AAHRU members of its withdrawal. It notified only the pool manager IOA Re.

ANICO claims that in 2000 it sought to cede certain reinsurance business to AAHRU. This cession was reduced to writing in a Quota Share Contract. For reasons that are unexplained by ANICO and are not clear from the record, the formal Contract was not executed until April 20, 2001—after Continental's withdrawal from the pool. However, the Contract was back-dated and given an effective date of January 1, 2000. The ceded block of policies included risks covering the World Trade Center that were implicated by the terrorist attacks of September 11, 2001. Continental asserts that it learned of the Quota Share Contract when, in the wake of the attacks, ANICO asked for partial indemnification under the agreement.

Continental's participation is important to ANICO because, in 2000, Continental represented almost 50% of the total AAHRU participation. Without Continental, ANICO's indemnification from other insurers would be reduced significantly. ANICO claims that it would not have entered into the reinsurance contract with IOA Re if it had known that Continental would not be a participant in the reinsurance pool.

B. District Court Proceedings

Continental filed this action against ANICO, seeking a declaratory judgment that it was not bound by, and owed ANICO no duty under, the Quota Share Contract. ANICO then filed a motion to dismiss, contending that (1) the Quota Share Contract contained an arbitration clause, and arbitration was required under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq.; (2) the venue was improper, see Fed. R.Civ.P. 12(b)(3); and (3) Continental had failed to join IOA Re, an indispensable party, see id. 12(b)(7).

ANICO grounded its arbitration argument in the arbitration clauses of two different agreements: the Quota Share Contract entered into by IOA Re and ANICO and the Participation Agreement between IOA Re and Continental establishing Continental's membership in AAHRU. The district court first determined, as a matter of law, that IOA Re had the apparent authority to bind Continental to the Quota Share Contract that IOA Re had signed with ANICO. Therefore, held the court, Continental was bound to arbitrate any disputes under the Quota Share Contract.

In the alternative, the court determined that the dispute over Continental's liability under the Quota Share Contract arose under the Participation Agreement. The court reasoned that, although ANICO was not a signatory to the Continental/IOA Re agreement, ANICO was a third-party beneficiary to the Participation Agreement and thus was entitled to invoke the Agreement's arbitration clause. As the district court viewed the matter, then, the dispute before it was subject to two arbitration clauses: the Quota Share Contract required arbitration and Continental's Participation Agreement's arbitration clause also covered "any dispute" arising from the arrangement. Accordingly, the district court held that "under either the Quota Share Contract or the Participation Agreement, a valid arbitration agreement exists; however, in either case, the forum for arbitration is not in the Northern District of Illinois." R.18 at 8. The court accordingly dismissed the action. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 328 (7th Cir.1995); Snyder v. Smith, 736 F.2d 409, 420 (7th Cir.1984), overruled on other grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir.1998).

Continental then brought this appeal, seeking review of the two alternative holdings of the district court.

II DISCUSSION

Before embarking on our analysis, we pause to set forth some basic governing principles. "Although the Federal Arbitration Act favors resolution of disputes through arbitration, its provisions are not to be construed so broadly as to include claims that were never intended for arbitration." American United Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 929 (7th Cir.2003). Whether the parties have agreed to arbitrate is a question normally answered by the court rather than by an arbitrator. The issue is governed by state law principles governing contract formation. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); Reliance Ins. Co. v. Raybestos Prods. Co., 382 F.3d 676, 678-79 (7th Cir.2004). Nevertheless, we must be mindful that the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements" and "that questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). "[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . ." Id. at 24-25, 103 S.Ct. 927.

A.

We begin our analysis by dealing with a threshold issue on which the parties have spent a great deal of time and energy in the course of this appeal. In this court the parties dispute the procedural posture in which this case comes to us. ANICO takes the view that the district court acted under Federal Rule of Civil Procedure 12(b)(1) and dismissed the case for want of jurisdiction. Continental contends, however, that the district court dismissed the case under Rule 12(b)(6) for failure to state a claim. The parties believe that this disagreement is important for two reasons. First, Continental submits that, if the motion was decided under Rule 12(b)(6), the district court erred by considering matters outside of the pleadings, specifically the Participation Agreement, without affording Continental Rule 56 procedural protections. See Fed.R.Civ.P. 12(b).² Continental points out that the only Rule 12(b) ground with an evidentiary limitation is 12(b)(6); thus, Continental argues, the district court's taking the time to explain why it considered the Participation Agreement to be part of the pleadings indicates that it was proceeding under Rule 12(b)(6).³

Second, the parties believe that the procedural characterization of the district court's action is important because it affects our standard of review or, more particularly, our presumptions in exercising that review. If ANICO is correct, and the district court dismissed the action under Rule 12(b)(1), we review the district court's legal conclusions de novo and its findings of fact, in particular, the court's finding that ANICO had apparent authority, for clear error. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir.2003) (en banc). If, as Continental urges, the motion to dismiss came under Rule 12(b)(6) or was an improperly converted Rule 56 motion, then we must review the district court's ruling de novo but draw all reasonable inferences in favor of the plaintiff. See Anderer v. Jones, 385 F.3d 1043, 1064 (7th Cir.2004); Jet, Inc. v. Shell Oil Co., 381 F.3d 627, 629 (7th Cir. 2004).

There is some authority to support the view of each party. Some courts have taken the view that, if a district court determines that parties have agreed to arbitrate a dispute, the district court, at least temporarily, no longer has the authority to resolve arbitrable claims. See 9 U.S.C. § 3.⁴ Those courts...