Hamilton Life Ins. Co. of NY v. Republic Nat. Life Ins. Co., 349

• Citation: 408 F.2d 606
• Decision Date: 12 March 1969
• Docket Number: No. 349,Docket 32937.,349
• Parties: HAMILTON LIFE INSURANCE COMPANY OF NEW YORK, Petitioner-Appellee, v. REPUBLIC NATIONAL LIFE INSURANCE COMPANY, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

408 F.2d 606 (1969)

HAMILTON LIFE INSURANCE COMPANY OF NEW YORK, Petitioner-Appellee, v. REPUBLIC NATIONAL LIFE INSURANCE COMPANY, Respondent-Appellant.

No. 349, Docket 32937.

United States Court of Appeals Second Circuit.

Argued January 23, 1969.

Decided March 12, 1969.

Anthony L. Tersigni, New York City (Herbert A. Einhorn, and Aranow, Brodsky, Bohlinger, Einhorn & Dann, New York City, on the brief), for petitioner-appellee.

Robert W. Holland, Phoenix, Ariz. (Thomas G. Nash, Jr., Dallas, Tex., Carson, Messinger, Elliott, Laughlin & Ragan, Phoenix, Ariz., and Simpson, Thacher & Bartlett, New York City, on the brief), for respondent-appellant.

Before MEDINA, SMITH and HAYS, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge:

This is an appeal from a judgment of the United States District Court for the Southern District of New York, William B. Herlands, Judge, 291 F.Supp. 225 (S.D.N.Y.1968), granting motion of appellee Hamilton Life Insurance Company of New York to compel arbitration pursuant to 9 U.S.C. § 4.¹ We find no error and affirm the judgment.

Republic contends that it was entitled to a trial by jury on the issue of the existence of a written contract to arbitrate, that the terms of the agreement giving broad powers to the arbitrators denied it due process of law, that the agreement is invalid under the McCarran Act, and that there was no jurisdiction over it obtained in the action. Judge Herlands, in a characteristically careful and well reasoned opinion, rejected these contentions, and we agree.

On September 21, 1965 Hamilton and Republic entered into a written agreement of reinsurance, which provided that Republic would reinsure a certain percentage of the risks on group life insurance policies written by Hamilton covering civil service employees in the New York City area. The reinsurance agreement contains the following broad arbitration clause:

1. All disputes and differences between the two contracting parties upon which an amicable understanding cannot be reached are to be decided by arbitration and the arbitrators shall place a liberal construction upon this agreement free from legal technicalities, for the purpose of carrying out its evident intent.

2. The court of arbitrators, which is to be held in the city where the home office of CEDING COMPANY Hamilton is domiciled, shall consist of three arbitrators. * * *

Disputes having arisen between the parties, on July 27, 1967 Hamilton served on Republic a Demand for Arbitration which recited that by virtue of the reinsurance agreement Republic was obligated to pay Hamilton the sum of $278,023.41, representing claims paid by Hamilton and reinsured by Republic. Republic refused to proceed to arbitration, and instead instituted a number of court proceedings in the Northern District of Texas and the District of Arizona to obtain judicial relief. Hamilton was at the time in financial difficulty and is under supervision by the New York State Insurance Department.

On December 11, 1967, Hamilton commenced the present action in the District Court to compel arbitration.

I.

Republic claims that the District Court erred in not requiring a jury trial in order to determine, as a preliminary fact, whether a written contract was made providing for arbitration of the disputes which Hamilton seeks to arbitrate. Specifically, Republic maintains that the contract is really a three-party parol contract, with Financial Security Life Insurance Company the third party, and that as such the contract must have a three-party arbitration clause to permit arbitration of disputes involving the ultimate liability of the three parties.

Section 2, 9 U.S.C. provides as follows:

A written provision in any * * * contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

Although a frivolous or patently baseless claim should not be ordered to arbitration, a court's function in an action to compel arbitration is limited to ascertaining whether the party seeking arbitration is making a claim which on its face is governed by the contract. Procter & Gamble Independent Union of Port Ivory, N. Y. v. Procter & Gamble Mfg. Co., 195 F.Supp. 64 (E.D.N.Y. 1961), aff'd 298 F.2d 647 (2 Cir. 1962).

The District Court correctly concluded that to allow Republic to prove that there was an oral agreement modifying the reinsurance agreement would violate the parol evidence rule, Fogelson v. Rackfay Construction Co., 300 N.Y. 334, 90 N.E.2d 881 (1950); N.Y.General Obligations Law, McKinney's Consol.Laws, c. 24-A, § 15-301; 1A Moore's Federal Practice ¶ 0.313, and would be contrary to the express terms of the agreement, which provides:

ARTICLE XIV. AMENDMENT

This instrument contains the sole agreement between the parties hereto on the subject of group reinsurance, and it may be amended only by an instrument in writing which expresses such an intention and is signed with the same formalities as this instrument.

The District Court also correctly noted that there is no impediment to enforcing an agreement to arbitrate as between two parties in a dispute involving a multi-party agreement. Wilko v. Swan, 201 F.2d 439, 445 (2 Cir.), rev'd on other grounds, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); Lumbermens Mutual Casualty Co. v. Borden, 268 F.Supp. 303 (S.D.N.Y.1967). Even assuming arguendo that a portion of the business ceded to Republic was to be retroceded to a third party, Financial Security, pursuant to an oral agreement, this would not affect the enforceability of the agreement between Hamilton and Republic to arbitrate, as between themselves, all disputes arising in connection with the business ceded by Hamilton under the reinsurance agreement, within the scope of 9 U.S.C. § 2 and § 4.

The court was correct in concluding that there was no bona fide issue concerning the making of the agreement for arbitration or the failure to comply therewith. Moreover, there was no right to jury trial had these issues existed, since Republic did not make a request for jury trial as required by the statute, 9 U.S.C. § 4, on or before the return day of the notice of application.

The court was therefore justified in concluding that under the facts the contract required submission to arbitration. Engineers Association v. Sperry Gyroscope Co., 251 F.2d 133 (2 Cir. 1957). See Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 412 (2 Cir. 1959), cert. dismissed 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960).

II.

Republic also maintains that the order of the District Court denies it due process of law in that Republic's legal defenses to arbitration are left to be decided by arbitrators who are specifically absolved of any responsibility to uphold the rule of law. Republic contends that the parties did not and could not have intended to include such legal issues as fraud and illegality, which are themselves defenses to an attempted enforcement of an agreement to arbitrate, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2 Cir. 1968); and Robert Lawrence Co., supra.

Republic's reliance upon the above cases is misplaced. Republic has not alleged that the arbitration agreement itself was induced by illegality or fraud, but rather makes these allegations with respect to the reinsurance agreement. Republic's answer states:

The agreement set forth in paragraph "10" of the petition was fraudulently induced by the petitioner, which represented that the insurance covered by said agreement was valid and of full force and effect although petitioner knew or should have known at the inception of such agreement that such insurance business was illegal under the laws of the State of New York.

The Arbitration Act contemplates a distinction between the entire contract between the parties and the arbitration clause. While it is true that fraud or illegality in the inducement of the arbitration clause itself is a defense to enforcement of arbitration, the illegality, fraudulent inducement, or repudiation of the principal contract does not operate to nullify an agreement to arbitrate. Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra, 271 F.2d at 409-411. As the Supreme Court stated in Prima Paint, supra, 388 U.S. at 406, 87 S.Ct. at 1807:

In the present case, no claim has been advanced by Prima Paint that F & C fraudulently induced it to enter into the agreement to arbitrate "any controversy or claim arising out of or relating to this Agreement, or the breach thereof." This contractual language is easily broad enough to encompass Prima Paint\'s claim that both execution and acceleration of the consulting agreement itself were procured by fraud. Indeed, no claim is made that Prima Paint ever intended that "legal" issues relating to the contract be excluded from arbitration, or that it was not entirely free so to contract.

The other cases relied upon by appellant are inapposite. In American Safety Equipment, supra, the court held that as a matter of accommodating the policies of the Sherman Antitrust and Arbitration Statutes, the remedy provided by the antitrust laws is of a character inappropriate for enforcement by arbitration. No such considerations are present before us here.

Nor did the District Court deny appellants a forum for determining if a written agreement exists for arbitrating the above "jurisdictional" questions. Instead the court explicitly found that the "jurisdictional" requisites were present, i. e. that the parties had made a binding agreement to arbitrate, and that the arbitration clause was broad enough to cover the defenses raised. Robert Lawrence Co., supra, 271 F.2d...