Hawkins v. Aid Ass'n for Lutherans

• Decision Date: 05 August 2003
• Docket Number: No. 01-4124.,No. 01-4147.,No. 01-4148.,01-4124.,01-4147.,01-4148.
• Citation: 338 F.3d 801
• Parties: Glenn A. HAWKINS and Nedra J. Hawkins, Plaintiffs-Appellants, v. AID ASSOCIATION FOR LUTHERANS, Defendant-Appellee. Aid Association for Lutherans, Plaintiff-Appellee, v. Martin F. Radmer, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

338 F.3d 801

Glenn A. HAWKINS and Nedra J. Hawkins, Plaintiffs-Appellants, v. AID ASSOCIATION FOR LUTHERANS, Defendant-Appellee.

Aid Association for Lutherans, Plaintiff-Appellee, v. Martin F. Radmer, et al., Defendants-Appellants.

No. 01-4124.

No. 01-4147.

No. 01-4148.

United States Court of Appeals, Seventh Circuit.

Argued May 30, 2002.

Decided August 5, 2003.

COPYRIGHT MATERIAL OMITTED

John A. Yanchunis, James, Hoyer, Newcomer & Smiljanich, Tampa, FL, Richard A. Lockridge (argued), Lockridge Grindal Nauren, Minneapolis, MN, for Glenn A. Hawkins and Nedra J. Hawkins.

Thomas D. Yannucci, Christopher Landau (argued), James P. Gillespie, Andrew B. Kay, Kirkland & Ellis, LLP, Washington, DC, Thomas L. Shriner, Jr., Foley & Lardner, Milwaukee, WI, for Aid Ass'n for Lutherans.

Diane A. Nygaard, Nygaard Law Firm, Kansas City, MO, Richard A. Lockridge (argued), Nygaard Law Firm, Minneapolis, MN, Richard Schiffrin, Schiffrin & Barroway, Bala Cynwyd, PA, for Martin F. Radmer, Gerald W. Bredenberg, Joanne Just, Christopher E. Schroeder and Charles Sattler.

Before FLAUM, Chief Judge, and HARLINGTON WOOD, Jr., and MANION, Circuit Judges.

FLAUM, Chief Judge.

Three groups of plaintiffs filed putative class actions against Aid Association for Lutherans ("AAL"), a fraternal benefit society that provides them with life insurance, alleging that AAL engaged in fraudulent sales practices. These policyholders want their claims resolved in a judicial forum, but a federal district court ordered them to arbitration. We affirm.

I. BACKGROUND

Located in Appleton, Wisconsin, AAL is a fraternal benefit society, i.e., a nonprofit, nonstock, membership organization with a representative governing system, see Wis. Stat. § 614.01, that provides life insurance and other benefits to its members. Like other fraternal benefit societies, AAL is not regulated by the same laws as commercial insurance companies. Instead, every state, including Wisconsin, has a regulatory scheme that governs these organizations based on a Model Fraternal Code. See id. §§ 614 et seq., 632 et seq. While commercial insurers utilize "closed" contracts, i.e., self-contained agreements with set terms, fraternal benefit societies employ "open" contracts. Open contracts are memorialized by the member's application, the insurance certificate, and the society's articles of incorporation and bylaws. Central to this dispute, open contracts also explicitly recognize that the articles of incorporation and bylaws are subject to change, and that any subsequent amendment to them is incorporated into the preexisting open contract as long as it does not destroy or diminish the benefits promised in the original contract. See id. § 632.93(1)(2). As required by Wisconsin law, AAL's life insurance contracts specify that AAL's articles of incorporation and bylaws are part of the agreement and state explicitly that any subsequent amendments to the bylaws are binding on the policyholder.

When the plaintiffs purchased their policies, AAL's bylaws did not prescribe a means for resolving disputes. In March 1999, however, AAL's Board of Directors amended the organization's bylaws to include a mandatory arbitration provision. Under the amended bylaws, binding arbitration is the sole means to resolve any dispute with AAL. The arbitration program has three steps. If the first two steps ("appeal" and "mediation") fail, the parties proceed to binding arbitration in accordance with American Arbitration Association ("AAA") rules. AAL pays the costs of arbitration, but does not pay for the member's attorney's fees.

In April 1999 AAL filed its amended bylaws with the Wisconsin Commissioner of Insurance pursuant to Wis. Stat. § 614.12(4). It also filed certified copies of the amended bylaws with the requisite government department in each of the plaintiffs' home states. In May 1999 AAL published a brief synopsis of the new mediation program in Correspondent, its official publication.

In August 1999 Martin Radmer and three other policyholders (the "Radmer plaintiffs") filed a class action against AAL in Missouri state court, alleging that AAL had engaged in illegal churning by encouraging them to borrow against their current policies to purchase new ones to their detriment. See IDS Life Ins. Co. v. Royal Alliance Assocs., Inc., 266 F.3d 645, 652 (7th Cir.2001). AAL removed the case on diversity grounds, 28 U.S.C. § 1332, but a federal district court in Missouri remanded the case to state court because not every plaintiff satisfied the amount-in-controversy requirement. In October 1999 AAL filed a petition in a federal district court in Wisconsin to compel the Radmer plaintiffs to arbitrate their claims pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. ("FAA"). The Radmer plaintiffs filed a motion to dismiss for lack of jurisdiction, which the court denied.

In November 1999 another policyholder, Charles Sattler, filed his own class action (the "Sattler plaintiffs") in Illinois state court, asserting similar allegations against AAL. AAL removed the case to a federal district court in Illinois, and then amended its petition in the Eastern District of Wisconsin, which sought to compel the Radmer plaintiffs to arbitrate, to include the Sattler plaintiffs. The federal district court in Illinois then transferred the Sattler plaintiffs' action to the federal district court in Wisconsin under 28 U.S.C. § 1404(a).

In July 2000 AAL was sued again, this time by policyholders Glenn and Nedra Hawkins (the "Hawkins plaintiffs"), who filed a class action in Indiana state court that was similar to the suits filed by the Radmer and Sattler plaintiffs in Missouri and Illinois. AAL removed the case to federal district court in Indiana. The Hawkins plaintiffs challenged removal, but the district court denied their motion and transferred the case under § 1404(a) to the Eastern District of Wisconsin. AAL then moved to compel the Hawkins plaintiffs to arbitrate.

The district court in Wisconsin ultimately granted AAL's petitions to compel arbitration of the Radmer, Sattler, and Hawkins plaintiffs' claims. The court also dismissed without prejudice the underlying complaints filed by the Sattler and Hawkins plaintiffs, ordering the parties to take no further action in any court until the completion of arbitration. In response, the Missouri state court then stayed the underlying Radmer case. This court consolidated the appeals of all plaintiffs.

II. DISCUSSION

A. Jurisdiction

Appellants first challenge the federal court's subject matter jurisdiction. The Hawkins plaintiffs assert that the district court did not have jurisdiction under 28 U.S.C. § 1332(a)(1) because their claims did not exceed $75,000. The court believed that the amount-in-controversy threshold had been met because the value of the Hawkins plaintiffs' policies surpassed $75,000, but the Hawkins plaintiffs insist this was error because they are not seeking the full cash value of the policies. We agree with the district court. The Hawkins plaintiffs are not only seeking money damages, but are also attacking the validity of their policies by seeking to nullify the arbitration provisions and to enjoin AAL from cancelling policies of class members who fail to pay premiums. And as AAL correctly points out, when the validity of a policy (as opposed to the insurer's obligation to pay) is in dispute, the face value of that policy is a proper measure of the amount-in-controversy. Keck v. Fid. & Cas. Co. of N.Y., 359 F.2d 840, 841 (7th Cir.1966). See also Budget Rent-A-Car, Inc. v. Higashiguchi, 109 F.3d 1471, 1473 (9th Cir.1997); Guardian Life Ins. Co. of Am. v. Muniz, 101 F.3d 93, 94 (11th Cir. 1996); Mass. Cas. Ins. Co. v. Harmon, 88 F.3d 415, 416 (6th Cir.1996). Accordingly, we find that the court had subject matter jurisdiction to compel the Hawkins plaintiffs to arbitration.

Next, the Radmer plaintiffs assert that the district court did not have subject matter jurisdiction over their claims because it was required to give preclusive effect to the Missouri district court's prior remand. The Missouri district court returned the case to state court because not every plaintiff satisfied § 1332(a)'s amount-in-controversy threshold. This remand, however, was not entitled to preclusive effect because it was unappealable under 28 U.S.C. § 1447(d). See Benson v. SI Handling Sys., 188 F.3d 780, 783 (7th Cir.1999). Moreover, the ruling was contrary to this circuit's precedent, which holds that when one named plaintiff meets the minimum amount-in-controversy threshold, a district court may exercise supplemental jurisdiction under 28 U.S.C. § 1367(a) over the remaining plaintiffs' claims, even if their individual claims do not exceed that amount. See In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599, 607 (7th Cir. 1997).

B. Arbitrability

We now turn to the central controversy of this case — whether the district court erred by ordering Appellants to submit their claims to arbitration. We review de novo the court's decision to compel arbitration based on its finding that the parties entered into an enforceable agreement. Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126, 1130 (7th Cir. 1997). Federal policy strongly favors arbitration, as embodied in the FAA. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657, 662 (7th Cir.2002). Arbitration is a matter of contract-no party can be required to arbitrate a claim if they have not agreed to do so. Harter v. Iowa Grain Co., 220 F.3d 544, 553 (7th Cir.2000). Whether the parties agreed to arbitrate is a matter of state contract law. Tinder v. Pinkerton Sec., 305 F.3d 728, 733 (7th Cir.2002). Here, we look to Wisconsin law because the district court applied it below, a decision unchallenged by the parties on appeal. See Kritikos v. Palmer Johnson, Inc., 821 F.2d 418, 421...