Security Ins. Co. of Hartford v. Trustmark Ins.

• Decision Date: 05 August 2003
• Docket Number: No. CIV.3:01CV2198(PCD).,CIV.3:01CV2198(PCD).
• Citation: 283 F.Supp.2d 602
• Court: U.S. District Court — District of Connecticut
• Parties: SECURITY INSURANCE COMPANY OF HARTFORD, Plaintiff, v. TRUSTMARK INSURANCE COMPANY, Defendant.

283 F.Supp.2d 602

SECURITY INSURANCE COMPANY OF HARTFORD, Plaintiff, v. TRUSTMARK INSURANCE COMPANY, Defendant.

No. CIV.3:01CV2198(PCD).

United States District Court, D. Connecticut.

August 5, 2003.

Frank F. Coulom, Jr., Marion B. Manzo, Robinson & Cole, Hartford, Mark B. Holton, Kathryn E. Nealon, David J. Grais, James L. Hallowell, Alia L. Smith, Christine Y. Wong, Gibson, Dunn & Crutcher, Kathryn C. Ellsworth, Robert J. Morrow, Erick M. Sandler, Dewey Ballantine, New York, NY, Jeffrey M. Thomen, McCarter & English, LLP, Hartford, for Security Insurance Co. of Hartford, plaintiff.

Jeffrey R. Hellman, Jeffrey M. Sklarz, Zeisler & Zeisler, P.C., Bridgeport, David Spector, Everett J. Cygal, Ronald S. Safer, William E. Meyer, Jr., Amy M. Rubenstein, Michael Mullins, Dennis G. LaGory, Paula J. Morency, Schiff, Hardin & Waite, Chicago, IL, for Trustmark Ins Co, defendant.

RULING ON PLAINTIFF'S MOTION TO STAY ARBITRATION

DORSEY, District Judge.

Plaintiff moves to stay arbitration proceedings between it and third party defendant TIG Insurance Co. ("TIG") pending the outcome of the present litigation. The motion to stay is granted.

I. BACKGROUND

Familiarity with the prior rulings of this Court is presumed. TIG and plaintiff entered into a Reinsurance Agreement ("Agreement"), effective January 1, 1999, which contains an arbitration clause providing that

As a condition to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement shall be submitted to a board of arbitration composed of two arbitrators and an umpire meeting at a place to be agreed by the board.... The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction.

The Agreement also contains a separate choice of law clause providing that

This Agreement shall be governed by and construed according to the laws of the state of California, except as to rules regarding credit for reinsurance in which case the rules of all applicable states shall pertain thereto. Notwithstanding the foregoing, in the event of a conflict between any provision of this Agreement and the laws of the domiciliary state of any company intended to be reinsured hereunder, that domiciliary state's laws shall prevail.

On May 3, 2002, defendant filed a third-party complaint against TIG alleging fraud and negligent misrepresentation "based upon the material misrepresentations and omissions made by [TIG] in its attempt to transfer to its unsuspecting reinsurers tens of millions of dollars in losses stemming from its under-performing workers' compensation business." Defendant seeks damages equal to "all net losses [defendant] has paid or is required to pay to [plaintiff] on the TIG business retroceded to [defendant] by [plaintiff]."

By letter dated June 27, 2002, TIG notified that it was invoking the arbitration clause and initiating arbitration. TIG moved to stay proceedings in the present case pending resolution of issues through arbitration, which motion was denied.

II. DISCUSSION

Plaintiff argues that arbitration should be stayed (1) pursuant to CAL. CIV. PROC. CODE § 1281.2(c)¹ or (2) under the All Writs Act, 28 U.S.C. § 1651.² TIG responds that this Court has no authority to grant a stay of the arbitration proceedings.

Plaintiff argues that this Court may grant a stay pursuant to § 1281.2(c), notwithstanding the absence of such a provision in the Federal Arbitration Act, 9 U.S.C. § 1 et seq., which undisputedly applies to the present agreement absent an exception to its applicability.

This is not the first time a party has sought to stay arbitration proceedings in deference to ongoing litigation. In Volt Information Sciences v. Board of Trustees, 489 U.S. 468, 470-72, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), a California Court of Appeal construed a choice of law clause providing that "[t]he Contract shall be governed by the law of the place where the Project is located" as incorporating the California procedural law and affirmed the trial court decision granting a stay of arbitration pursuant to § 1281.2(c). The California Supreme Court denied discretionary review, and the United States Supreme Court granted certiorari. Volt Info. Sciences, 489 U.S. at 472, 109 S.Ct. 1248. In resolving the potential conflict between the FAA and California arbitration law, the Court deferred to the state court interpretation of the choice of law provision. Id. at 474, 476, 109 S.Ct. 1248 ("assuming the choice-of-law clause meant what the Court of Appeal found it to mean"), and concluded that

we do not think the Court of Appeal offended the Moses H. Cone principle by interpreting the choice-of-law provision to mean that the parties intended the California rules of arbitration, including the § 1281.2(c) stay provision, to apply to their arbitration agreement. There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable state rules governing the conduct of arbitration-rules which are manifestly designed to encourage resort to the arbitral process-simply does not offend the rule of liberal construction set forth in Moses H. Cone, nor does it offend any other policy embodied in the FAA.

Id. at 476, 109 S.Ct. 1248. The Court further concluded that "Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward." Id. at 479, 109 S.Ct. 1248.

While plaintiff argues that Volt resolves the present question and permits the application of the § 1281.2(c) stay provision, TIG argues that Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995), requires otherwise. Mastrobuono involved a New York law granting courts the authority to award punitive damages by refusing such authority to arbitrators, and a choice of law clause providing that the agreement "shall be governed by the laws of the State of New York." Id. at 53, 115 S.Ct. 1212. The arbitrators awarded compensatory and punitive damages, but a federal district court vacated the punitive damages award concluding that the arbitrators were without authority to issue the award, which decision was affirmed by the court of appeals. Id. at 54-55, 115 S.Ct. 1212. Certiorari was granted "because the Courts of Appeals have expressed differing views on whether a contractual choice-of-law provision may preclude an arbitral award of punitive damages that otherwise would be proper." Id. at 55, 115 S.Ct. 1212.

In reversing the decision of the Court of Appeals, the Court interpreted the two successive sentences in the agreement providing that the "agreement ... shall be governed by the laws of the State of New York" and "any controversy ... shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc. or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange Inc." Id. at 58 n. 2, 115 S.Ct. 1212. The Court concluded that "[a]t most, the choice-of-law clause introduces an ambiguity into an arbitration agreement that would otherwise allow punitive damages awards," id. at 62, 115 S.Ct. 1212. Using as guidelines the principles that "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration," id., "the common-law rule of contract interpretation that a court should construe ambiguous language against the interest of the party that drafted it," id., and that "a document should be read to give effect to all its provisions and to render them consistent with each other," id. at 63, 115 S.Ct. 1212, the Court concluded that the Court of Appeal misinterpreted the agreement and reversed the order vacating the punitive damages award by the arbitrators, id. at 64, 115 S.Ct. 1212.

The import of the Mastrobuono and Volt decisions is a fertile source of debate,³ with state and federal courts arriving at conclusions far too varied to mention here. In an effort to resolve conflicting interpretations, two circuit courts have adopted a presumption "that a generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA's default standards." Roadway Package Sys. v. Kayser, 257 F.3d 287, 296 (3d Cir.2001); Sovak v. Chugai Pharm., 280 F.3d 1266, 1269 (9th Cir.2002) ("the strong default presumption is that the FAA, not state law, supplies the rules for arbitration"). Although this default rule has the benefit of simplicity, it overlooks the interpretative process inherent in carrying out the fundamental policy of the FAA of ensuring "the enforceability, according to their terms, of private agreements to arbitrate." Volt Info. Sciences, 489 U.S. at 476, 109 S.Ct. 1248.

The two Supreme Court decisions further stand for separate propositions. The issue in Volt was not contract interpretation, see Mastrobuono, 514 U.S. at 60 n. 4, 115 S.Ct. 1212 ("we did not interpret the contract de novo ... [but i]nstead ... deferred to the California court's construction of its own State's law"), in concluding that "even if §§ 3 and 4 of the FAA are fully applicable in state-court proceedings, they do not prevent application of CAL. CIV. PROC. CODE ANN. § 1281.2(c) to stay arbitration where, as here, the parties have agreed to arbitrate in accordance with California law," Volt Info. Sciences, 489 U.S. at 477, 109 S.Ct. 1248. Mastrobuono, in comparison, did not simply accept the interpretation...