National Union Fire Ins. Co. of Pittsburgh, Pa. v. Belco Petroleum Corp.

• Decision Date: 03 July 1996
• Docket Number: No. 1481,D,1481
• Citation: 88 F.3d 129
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., New Hampshire Insurance Company and American Home Assurance Company, Petitioners-Appellees, v. BELCO PETROLEUM CORPORATION, a wholly-owned subsidiary of Enron Corporation, Enron Corporation (formerly known as InterNorth, Inc.) and IN Holdings, Inc., Respondents-Appellants. ocket 95-9096.
• Court: U.S. Court of Appeals — Second Circuit

Page 129

88 F.3d 129

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,

New Hampshire Insurance Company and American Home

Assurance Company, Petitioners-Appellees, v. BELCO PETROLEUM CORPORATION, a wholly-owned subsidiary of

Enron Corporation, Enron Corporation (formerly

known as InterNorth, Inc.) and IN

Holdings, Inc., Respondents-Appellants.

No. 1481, Docket 95-9096.

United States Court of Appeals,

Second Circuit.

Argued May 3, 1996.

Decided July 3, 1996.

Gregory A. Markel, New York City (Orrick, Herrington & Sutcliffe, Nancy I. Ruskin, of Counsel), for Respondents-Appellants.

George Wailand, New York City (Cahill Gordon & Reindel, of Counsel), for Petitioners-Appellees.

Before: FEINBERG and WINTER, Circuit Judges. ^*

FEINBERG, Circuit Judge:

Respondents Belco Petroleum Corporation, Enron Corporation and IN Holdings, Inc. (collectively referred to as Belco) appeal from an order entered in the United States District Court for the Southern District of New York (Griesa, Ch.J.) granting a petition to compel arbitration of a dispute between Belco and a group of its insurers. The district court held that the preclusive effect of a prior, related arbitration between the parties must be determined by the arbitrator in the current arbitration, rather than by the court. For the reasons stated below, we affirm.

I. Background

This case stems from the settlement of insurance claims following the seizure of Belco's oil exploration and development operations in Peru in December 1985 by the Peruvian government.

Petitioners National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company and American Home Assurance Company (collectively referred to as National Union) were among the underwriters of a confiscation, expropriation and deprivation insurance policy (referred to by the parties as the AIG Policy) issued to Belco in 1983. The AIG Policy was one of a group of interrelated policies that together insured Belco for 90% of any covered loss up to a limit of $200 million. As a result of the seizure, Belco filed with the insurers a joint claim under the entire group of policies for the full $200 million in May 1986.

In response to the claim, all of the insurers including National Union rescinded their policies based on alleged misrepresentations made by Belco at the time the policies were issued. In August 1986, the insurers demanded arbitration of the issue of rescission, and Belco counterclaimed for the full $200 million in coverage. Beginning in October 1987, an arbitration panel of the American Arbitration Association (AAA) conducted extensive proceedings on the issue of rescission as well as on Belco's substantive counterclaim (the AIG Arbitration). In December 1988, the arbitration panel rejected the claim of rescission, found Belco's total loss to be $161 million and awarded Belco $144,900,000--90% of $161 million--plus interest. The New York State Supreme Court confirmed the arbitration award in January 1990.

In addition to the expropriation policies discussed above, Belco was insured under a maritime insurance policy with an expropriation endorsement, issued by Seahawk International Associates, Inc. (the Seahawk Policy). The Seahawk Policy covered certain vessels that were chartered by Belco and had been taken by the Peruvian government. In October 1989, Belco recovered $2,925,000 under the Seahawk Policy for the loss of those vessels. There was apparently some discussion in the AIG Arbitration of the existence of the Seahawk Policy and the possibility of Belco's recovery under it, although the parties dispute the extent and content of that discussion.

Four and one-half years later, in April 1994, National Union served Belco with a demand for arbitration under the AIG Policy seeking, in part, ¹ to recoup a portion of Belco's proceeds under the Seahawk Policy on the ground that the AIG Policy provided that any recoveries for loss from sources outside the policy must be shared between Belco and the insurers.

In this second arbitration, Belco participated in preliminary proceedings before the AAA, but in June 1994 brought an action against National Union in the United States District Court for the Southern District of Texas (the Texas action). In that action, Belco sought a declaratory judgment that National Union's claim to be entitled to a share of Belco's proceeds under the Seahawk policy was barred by res judicata. After filing the Texas action, Belco filed an answer with the AAA to National Union's demand for arbitration, but declined to proceed further with the arbitration.

Four days after Belco commenced the Texas action, National Union filed a petition in New York State Supreme Court to compel arbitration. In July 1994, that action was removed by Belco to the Southern District of New York. In November 1994, on National Union's motion to dismiss or transfer the Texas action, that action was consolidated with National Union's petition to compel arbitration in the Southern District of New York.

Thereafter, in response to National Union's petition, Belco asserted that the issue of National Union's claim to a portion of Belco's proceeds from the Seahawk Policy had already been decided in the AIG Arbitration. Belco also argued that the preclusive effect of the prior arbitration award had to be determined by the court and not by the arbitrator in the pending arbitration.

Chief Judge Griesa of the Southern District then granted National Union's petition to compel arbitration. The judge rejected the contention of both parties that New York law should apply to the question of whether the court or the arbitrator should decide the preclusive effect of the AIG Arbitration. The judge then held that under federal law the arbitrator, not the court, should decide the issue. This appeal followed.

II. Discussion

We review de novo a district court order compelling arbitration. See Collins & Aikman Products Co. v. Building Systems, Inc., 58 F.3d 16, 19 (2d Cir.1995). ²

A petition to compel arbitration under the AIG Policy is subject to the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (FAA or the Act), because the AIG Policy is a contract evidencing a transaction--the insurance of Belco's oil exploration and development assets in Peru--that affected international commerce. See 9 U.S.C. §§ 1 and 2; Allied-Bruce Terminix Companies, Inc. v. Dobson, --- U.S. ----, ---- - ----, 115 S.Ct. 834, 839-43, 130 L.Ed.2d 753 (1995).

Belco makes three primary arguments on appeal. First, the preclusive effect of the AIG Arbitration is not a dispute that falls within the scope of the arbitration clause of the AIG Policy. Second, the district court improperly applied federal rather than New York law to the question of who--the court or the arbitrator--should decide the preclusive effect of the AIG Arbitration. Third, even if federal law applies, the court must decide the preclusion issue.

A. The Arbitration Clause

The arbitration clause of the AIG Policy provides:

All disputes which may arise under or in connection with this policy, including any determination of the amount of the Loss, shall be submitted to the American Arbitration Association under and in accordance with its then prevailing commercial arbitration rules. The arbitration will be held in New York, New York, U.S.A. The award rendered by the arbitrator(s) shall be final and binding upon the parties, subject to the Limit of Liability, and judgment thereon may be entered in any court having jurisdiction thereof.

The AIG Policy also contains the following choice-of-law provision: "The construction, validity and performance of this policy shall be governed by the law of the State of New York, U.S.A."

There are two components of the underlying dispute between the parties here--National Union's right to recovery from Belco and Belco's argument that National Union is precluded from doing so. By granting National Union's petition to compel arbitration, the district court determined that the arbitration provision covered both. Certainly, the language of the arbitration clause, covering "[a]ll disputes which may arise under or in connection with" the AIG Policy, is broad enough to cover both.

There is no doubt that the arbitration clause covers the first component of the underlying dispute. With regard to the second, our decision in Transit Mix Concrete Corp. v. Local Union No. 282, 809 F.2d 963 (2d Cir.1987) is directly on point. That case involved interpretation of a broad arbitration clause in a collective bargaining agreement. The appellant there sought to stay arbitration proceedings on the ground that an earlier arbitration award had resolved the issues raised in the dispute the appellee sought to arbitrate. Id. at 964. In light of the federal policy in favor of "the arbitrability of labor disputes," we held that the preclusive effect of the prior arbitration award had to be decided in the later arbitration. Id. at 968, 970.

Belco argues that Transit Mix should not apply to a commercial dispute because that decision was based on considerations unique to the labor context. We do not agree that the broad federal presumption in favor of arbitration, which Belco concedes applies to labor cases, does not apply as well to arbitration of disputes in non-labor contexts. The FAA expresses a strong federal policy in favor of arbitration in maritime and commercial disputes, and ambiguities as to the scope of an arbitration clause must be resolved in favor of arbitration. See Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765 (1983); see also David L. Threlkeld & Co. v. Metallgesellschaft Ltd. (London), 923 F.2d 245, 248-49 (2d Cir.), cert. dismissed, 501 U.S. 1267, 112 S.Ct. 17, 115 L.Ed.2d 1094 (1991). The policy in favor of arbitration extends even to non-labor arbitrations of claims based on federal statutory rights. See, e.g., Shearson/American Express Inc. v. McMahon, 482...