Nandorf, Inc. v. Applied Underwriters Captive Risk Assurance Co.

Decision Date23 September 2019
Docket NumberCase No. 18-cv-05285
Citation410 F.Supp.3d 882
Parties NANDORF, INC., d/b/a Unique Thrift Store, et al., Plaintiffs, v. APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., Defendant.
CourtU.S. District Court — Northern District of Illinois

Carl Michael Johnson, Richard George Douglass, Novack and Macey LLP, Chicago, IL, for Plaintiffs.

Joseph Anton Roselius, Joseph Michael Carey, DLA Piper LLP, Chicago, IL, Shand S. Stephens, Pro Hac Vice, DLA Piper LLP, New York, NY, for Defendant.


John Robert Blakey, United States District Judge

This case presents the question: Who decides whether a dispute is arbitrable in the first instance? Plaintiffs Nandorf, Inc., d/b/a Unique Thrift Store, and Southwest Management Company (collectively, Nandorf) purchased a workers' compensation insurance package from Defendant Applied Underwriters Captive Assurance Company, Inc. (AUCRA). As part of the package, Nandorf entered into a Reinsurance Participation Agreement (RPA) with AUCRA. AUCRA claims that Nandorf refuses to pay amounts due and owing under the RPA; thus, AUCRA filed a demand for arbitration before the American Arbitration Association (AAA) in May 2015. Nandorf refuses to proceed before the AAA and filed this action seeking to enjoin AUCRA from proceeding with that arbitration. [1-1].

AUCRA moves to compel arbitration, or in the alternative, to transfer venue to the District of Nebraska. [16]. For the reasons explained below, this Court converts AUCRA's motion into a motion to dismiss for improper venue under Rule 12(b)(3), grants that motion, and dismisses this case without prejudice.

I. Background

AUCRA is a captive reinsurance company, which from 2010 to 2014 offered a workers' compensation program known as EquityComp. [1-1] at 3, 4. Among other things, the EquityComp program comprised a retrospective rating plan, embodied in the RPA. Id. at 4. In October 2010, Nandorf purchased a worker's compensation policy from AUCRA's affiliate and executed the RPA. Id. at 5. The RPA, which provided Nandorf three years of workers' compensation insurance coverage, was effective from October 4, 2010 to October 3, 2013. Id. at 14, 15.

Paragraph 13 of the RPA contains an arbitration provision, stating:

(A) It is the express intention of the parties to resolve any disputes arising under this Agreement without resort to litigation in order to protect the confidentiality of their relationship and their respective businesses and affairs. Any dispute or controversy that is not resolved informally pursuant to sub-paragraph (B) of Paragraph 13 arising out of or related to this Agreement shall be fully determined in the British Virgin Islands under the provisions of the American Arbitration Association.
(B) All disputes between the parties relating in any way to (1) the execution and delivery, construction or enforceability of this Agreement, (2) the management or operations of the Company [AUCRA], or (3) any other breach or claimed breach of this Agreement or the transactions contemplated herein shall be settled amicably by good faith discussion among the parties hereto, and failing such amicable settlement, finally determined exclusively by binding arbitration in accordance with the procedures provided herein. The reference to this arbitration clause in any specific provision of this Agreement is for emphasis only, and is not intended to limit the scope, extent or intent of this arbitration clause, or to mean that any other provision of this Agreement shall not be fully subject to the terms of this arbitration clause. All disputes arising with respect to any provision of this Agreement shall be fully subject to the terms of this arbitration clause.

Id. at 16–17.

The RPA further states: "All arbitration proceedings shall be conducted ... in accordance with the rules of the American Arbitration Association and shall take place in Tortola, British Virgin Islands or at some other location agreed to by the parties." Id. at 17.

The RPA also contains a general choice-of-law clause:

This Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska and any matter concerning this Agreement that is not subject to the dispute resolution provisions of Paragraph 13 hereof shall be resolved exclusively by the courts of Nebraska without reference to its conflict of laws.

Id. at 18.

In August 2014, AUCRA sent a letter to Nandorf, stating that Nandorf had incurred amounts due under the RPA and threatening to file a demand for arbitration. [17-5] at 2. AUCRA filed a demand for arbitration with AAA on May 8, 2015. [1-1] at 169–70. The demand named "Kenneth Alterman d/b/a Unique Thrift Store" as the respondent. Id. Nandorf claims that it repeatedly advised AUCRA that their dispute should not go through arbitration. Id. at 7.

On July 3, 2018, Nandorf filed an action in the Circuit Court of Cook County, Illinois, seeking to stay the arbitration proceedings instituted by AUCRA. Id. at 2. The complaint seeks relief to: (1) declare that Alterman, the former president of Nandorf's parent company, is not a proper party to the arbitration;1 (2) declare the RPA's arbitration provision invalid; and (3) enjoin the arbitration. Id. at 8–11; see also [17-3] at 2. Defendant AUCRA removed the case to this Court in August 2018, [1-1], and subsequently moved to compel arbitration, [16].

II. Legal Standard

Congress enacted the Federal Arbitration Act (FAA) in 1925 to counter generalized judicial hostility to arbitration as an alternative to litigation and to allow agreements to arbitrate to be enforced. AT & T Mobility LLC v. Concepcion , 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). Arbitration remains "a matter of contract." First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). The FAA provides that arbitration agreements in contracts involving interstate commerce are "valid, irrevocable, and enforceable." 9 U.S.C. § 2. State law cannot bar enforcement of the FAA, even in the context of state-law claims. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006).

Under the FAA, arbitration may be required if three elements are present: (1) an enforceable written agreement to arbitrate; (2) a dispute within the scope of the arbitration agreement; and (3) a refusal to arbitrate. Scheurer v. Fromm Family Foods LLC , 863 F.3d 748, 752 (7th Cir. 2017) (citing Zurich Am. Ins. Co. v. Watts Indus. , 417 F.3d 682, 687 (7th Cir. 2005) ). The party opposing arbitration bears the burden of demonstrating the arbitration agreement is unenforceable and the claims are unsuitable for arbitration. Green Tree Fin. Corp.-Alabama v. Randolph , 531 U.S. 79, 91–92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). Courts resolve any doubts concerning arbitrability in favor of arbitration. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

III. Analysis
A. This Court Cannot Compel Arbitration Outside of This District

As an initial matter, this Court addresses one threshold issue. Invoking the FAA, AUCRA moves to compel arbitration, asking this Court to enforce the arbitration clause contained in the RPA. [16] [17]. The Federal Arbitration Act (FAA) provides:

The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.

9 U.S.C. § 4 (emphasis added).

Under Section 4, "where an arbitration agreement contains a forum selection clause, only the district court in that forum can issue a § 4 order compelling arbitration." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer , 49 F.3d 323, 327 (7th Cir. 1995). Accordingly, "a district court cannot compel arbitration outside the confines of its district." Faulkenberg v. CB Tax Franchise Sys., LP , 637 F.3d 801, 808 (7th Cir. 2011) ; see also Jackson v. Payday Fin., LLC , 764 F.3d 765, 773 (7th Cir. 2014). Where a court faces a motion to compel arbitration in a forum outside of its district, it should dismiss the complaint under Rule 12(b)(3) if the parties' claims are subject to arbitration. Bahoor v. Varonis Sys., Inc. , 152 F. Supp. 3d 1091, 1096 (N.D. Ill. 2015) (citing Haber v. Biomet, Inc. , 578 F.3d 553, 558 (7th Cir. 2009) ).

Here, the RPA contains forum selection provisions designating Tortola, British Virgin Islands as the location for arbitration. See [1-1] at 16–17 ("Any dispute or controversy ... arising out of or related to this Agreement shall be fully determined in the British Virgin Islands under the provisions of the American Arbitration Association."); id. at 17 ("All arbitration proceedings ... shall take place in Tortola, British Virgin Islands or at some other location agreed to by the parties."). Because the forum selection provisions in the RPA designate a location outside this district as the place of arbitration, this Court lacks authority to compel arbitration. Faulkenberg , 637 F.3d at 808.

Nonetheless, the central question presented in AUCRA's motion remains the same whether this Court proceeds under the FAA or Rule 12(b)(3): Did the parties agree to arbitrate their claims? Under these circumstances, this Court can convert AUCRA's motion to a motion to dismiss under Rule 12(b)(3) and proceed "as if it is deciding a motion to compel arbitration." Bahoor , 152 F. Supp. 3d at 1096, 1102 (converting motion to compel arbitration into motion to dismiss under Rule 12(b)(3) where the parties' agreement designated New York as the forum for arbitration, and dismissing the plaintiff's claims because they were subject to arbitration); Ferenc v. Brenner , 927...

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