Security Life Insurance Co. of America, 99-3523

• Decision Date: 13 June 2000
• Docket Number: No. 99-3523,99-3523
• Parties: (8th Cir. 2000) IN THE MATTER OF ARBITRATION BETWEEN, SECURITY LIFE INSURANCE COMPANY OF AMERICA; CONGRESS LIFE INSURANCE COMPANY; APPELLEES, AND DUNCANSON & HOLT, INC.; THE MULTIPLE EMPLOYERS TRUST QUOTA SHARE LINE SLIP; TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY, APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 865

228 F.3d 865 (8th Cir. 2000)

IN THE MATTER OF ARBITRATION BETWEEN, SECURITY LIFE INSURANCE COMPANY OF AMERICA; CONGRESS LIFE INSURANCE COMPANY; APPELLEES AND DUNCANSON & HOLT, INC.; THE MULTIPLE EMPLOYERS TRUST QUOTA SHARE LINE SLIP;

TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY, APPELLANT.

No. 99-3523

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: June 13, 2000

Filed: October 2, 2000

Appeal from the United States District Court for the District of Minnesota. [Copyrighted Material Omitted] Before Hansen and Heaney, Circuit Judges, and Mills ¹ , District Judge.

Heaney, Circuit Judge.

Transamerica Occidental Life Insurance Company (Transamerica) appeals the district court's order concerning the enforcement of a subpoena issued by an arbitration panel pursuant to 7 of the Federal Arbitration Act (FAA), 9 U.S.C. 1-16 (2000). We affirm in part and dismiss in part.

I. BACKGROUND

Security Life Insurance Company (Security) is a small Minnesota insurance company that underwrites health and life insurance in 41 states. In July 1992, Security launched a new group health insurance product. Because it lacked sufficient resources to sell the product without reinsurance, Security entered into a reinsurance contract (or "Treaty") with a group of seven major insurers, among them Transamerica.

The reinsurance contract was managed by Duncanson & Holt (D&H), and provided that the reinsurers would assume 85% of the risk of Security's policies in exchange for 85% of the premiums. The reinsurers also agreed to assume 85% of all loss adjustment expenses, including legal fees incurred in the investigation or defense of all claims. This obligation included "extra-contractual" items such as "punitive, exemplary, compensatory, or consequential damages." (App. at 25-27.) The reinsurers also agreed to assume 85% of liability for "alleged or actual bad faith or negligence" in handling health insurance claims, provided Security counseled with and obtained the concurrence of D&H "with respect to the actions giving rise to the extra contractual obligation." (App. at 27.)

Security later lost a $14 million judgment in a Georgia state court. See Clark v. Security Life Ins. Co. of America, 509 S.E.2d 602, 603 (Ga. 1998). D&H and the reinsurers refused to acknowledge liability for their share of the Clark judgment and related liabilities. They also refused to pay their share of expenses related to four similar cases. According to D&H and the reinsurers, Security failed to honor the "counsel and concur" portion of the reinsurance contract. Security asserts that it abided by this requirement.

The reinsurance contract contained the following provision regarding arbitration of disputes:

[I]f any dispute shall arise between [Security] and [the reinsurers] with reference to the interpretation of this Contract or their rights with respect to any transaction involved, whether such dispute arises before or after termination of this Contract, such dispute, upon written request of either party, shall be submitted to three arbitrators, one to be chosen by each party, and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. If the two arbitrators fail to agree in the selection of a third arbitrator within thirty (30) days of their appointment, each of them shall name two, or whom the other shall decline one and the decision shall be made by drawing lots.

(App. at 29-30.)

Security demanded arbitration on its alleged failure to counsel and concur, and addressed its request to D&H, including its designation of an arbitrator. D&H designated a second arbitrator within the 30-day period. The two arbitrators selected a third. Transamerica took the position that it was not a party to the arbitration, insisting that the counsel-and-concur dispute was not arbitrable, and that in any event it was entitled to arbitrate the dispute in a separate proceeding against it alone.

In April 1999, Security petitioned the arbitration panel for a subpoena duces tecum, which it issued to Transamerica at its offices in Los Angeles. The subpoena required Transamerica to produce documents and to provide the testimony of a certain employee. Security's explanation as to what it hoped to learn from the witness is complex. According to Security, in January 1996, the reinsurers--including a representative from Transamerica--met to discuss the Clark case. The reinsurers instructed D&H to deny coverage. However, in the interim, the Clark plaintiffs amended their complaint to name the reinsurers as unsued co-conspirators. Rather than deny coverage, as the reinsurers instructed, D&H reserved the reinsurers' rights with respect to the case. Security thus sought the subpoenaed information to assist it in proving "at the arbitration hearing that if it had known that the Reinsurers intended to deny coverage, it would have settled with the Clark plaintiffs and cooperated against the Reinsurers. The Reinsurers intentionally deceived Security Life as to their intent to deny coverage in order to keep Security Life litigating as their surrogate, thereby protecting their own interests at the expense of Security Life." (Br. at 29 (citation omitted).)

Transamerica, however, refused to respond to the subpoena, contending that it was not a party to the arbitration, and the arbitration panel thus had no authority under the Federal Arbitration Act (FAA) to issue the subpoena. In May 1999, Security petitioned the district court for the District of Minnesota to compel Transamerica to comply with the subpoena, or alternatively to compel Transamerica to participate in the arbitration proceedings. The district court referred the matter to a magistrate.

The magistrate noted that section 7 of the FAA (9 U.S.C. 7) provides that the district court for the district in which the arbitrator sits may compel attendance or punish for contempt in the same manner provided by law for securing the attendance of witnesses in federal court:

The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case. The fees for such attendance shall be the same as the fees of witnesses before masters of the United States courts. Said summons shall issue in the name of the arbitrator or arbitrators, or a majority of them, and shall be signed by the arbitrators, or a majority of them, and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court; if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.

9 U.S.C. 7. The court noted Transamerica's argument that the court's power to enforce a subpoena under 7 was limited by Federal Rule of Civil Procedure 45(b)(2). Under Rule 45(b)(2), a subpoena "may be served at any place within the district of the court by which it is issued, or at any place without the district that is within 100 miles of the place of the deposition, hearing, trial, production, or inspection specified in the subpoena." Transamerica's Los Angeles office was far outside the 100-mile reach of the federal court in Minnesota, where the arbitration was to take place.

The magistrate resolved the issue by referring to Amgen Inc. v. Kidney Center of Del. County, Ltd., 879 F. Supp. 878 (N.D. Ill. 1995). Faced with a similar conundrum, the Amgen court reasoned that the federal policy in favor of arbitration required that the subpoena power of an arbitrator under the FAA be enforced. Accordingly, the Amgen court concluded that under Rule 45(a)(3)(B), the petitioner's attorney, as an officer of the court, could be directed to issue and sign the subpoena on behalf of the court for the district in which the deposition or production was compelled by the subpoena. Id. at 882-83. The magistrate therefore directed Security's attorney to issue a subpoena to Transamerica. Transamerica appealed to the district court, which found the magistrate's order neither clearly erroneous nor contrary to law. Transamerica appeals to this court.

In the instant appeal, Transamerica argues (1) 7 of the FAA does not authorize prehearing deposition subpoenas; (2) the arbitration panel lacked authority to issue a subpoena to be served in California; (3) the Minnesota court lacked authority to instruct Security's attorney to issue a subpoena of the California court; (4) Security failed to show the materiality of the information it sought from Transamerica, and thus the district court should have refused to compel compliance with the subpoena; (5) the district court's order is an impermissible advisory opinion; and (6) the subpoena issued by the arbitration panel was never properly served because Security failed to tender a witness fee. ²

In response, Security argues (1) Transamerica is a party to the underlying arbitration and can therefore be compelled to provide discovery; (2) the district court properly devised a procedure that allowed it to enforce the subpoena; (3) the district court's order was not an improper advisory opinion; (4) even if Transamerica is not a party to the underlying arbitration it could be compelled to provide discovery...