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Citizens of Humanity v. Applied Underwriters, Inc.

California Court of Appeals, Second District, Second Division

November 22, 2017

CITIZENS OF HUMANITY et al., Plaintiffs and Respondents,
APPLIED UNDERWRITERS, INC., et al., Defendants and Appellants.

         APPEAL from an order of the Superior Court of Los Angeles County No. BC571913. Allan Goodman, Judge. Affirmed.

          Hinshaw & Culbertson, Spencer Y. Kook, Misty A. Murray, and James C. Castle for Defendants and Appellants.

          Browne George Ross, Eric M. George, Peter W. Ross, and Corbin K. Barthold for Plaintiffs and Respondents.

         Defendants and appellants Applied Underwriters, Inc. (Applied Underwriters), California Insurance Company (CIC), Continental Indemnity Company (CNI), Applied Risk Services, Inc., Joan Sheppard, Westin Fredrick Penfield, and Michael Scott Wichman (collectively, defendants) appeal from an order denying their petition to compel arbitration of a dispute with plaintiffs and respondents Citizens of Humanity, LLC and CM Laundry, LLC (collectively, plaintiffs). We affirm the trial court's order.


         The RPA

         In 2012, plaintiffs purchased from defendants a workers' compensation insurance package known as the EquityComp program. As part of that program, plaintiffs entered into a Reinsurance Participation Agreement (RPA) with Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA), a company affiliated with defendants. The RPA contains an arbitration provision that provides in relevant part:

         “13. Nothing in this section shall be deemed to amend or alter the due date of any obligation under this Agreement. Rather, this section is only intended to provide a mechanism for resolving accounting disputes in good faith.”

         “(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 operation of the Company, 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 all of 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.”

         None of the other agreements between the parties contains an arbitration provision.

         The RPA also contains a choice of law provision that states:

         “16. 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.”

         The instant action

         In February 2015, plaintiffs filed a complaint against defendants and AUCRA alleging causes of action against AUCRA for fraudulent inducement in entering into the arbitration agreement, breach of contract, and breach of the covenant of good faith and fair dealing; and against all of the defendants for fraud, false advertising, breach of fiduciary duty, professional negligence, and declaratory relief.

         The parties filed competing motions to compel and to stay arbitration of their dispute. In their motion to stay the arbitration, plaintiffs argued that Nebraska law applied pursuant to the choice of law provision in the RPA and that the arbitration provision of the RPA was void under section 25-2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA), which prohibits arbitration of “any agreement concerning or relating to an insurance policy.” Plaintiffs further argued that the Federal Arbitration Act (9 U.S.C. §§ 1-16) (FAA) did not preempt the NUAA because another federal statute, the McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015) mandates that state laws “regulating the business of insurance” preempt any federal statute not specifically related to the business of insurance and that impairs state insurance laws. Defendants argued that the FAA governs and preempts the NUAA, and that under the RPA's broad delegation clause, any issue concerning arbitrability should be resolved by the arbitrator.

         Before the hearing on defendants' motion to compel arbitration, plaintiffs dismissed AUCRA as a defendant. Plaintiffs then argued that the motion to compel arbitration should be denied because the only defendant that had signed the RPA had been dismissed. At the hearing on defendants' motion, the trial court requested supplemental briefing from the parties on a number of issues, including whether California or Nebraska law should be applied to determine whether defendants have the right to enforce the RPA's arbitration provision, whether Nebraska law bars arbitration of the parties' dispute, and whether the FAA or the McCarran-Ferguson Act applies.

         In their supplemental brief, plaintiffs argued, among other things, that the McCarran-Ferguson Act displaced the FAA, that both California and Nebraska law applied to bar arbitration, and that the court, not the arbitrator, should determine the consequences of applying the McCarran-Ferguson Act. Defendants argued that the RPA's delegation clause required all questions concerning construction and enforceability of that agreement, including applicability of the NUAA, to be decided by the arbitrator, and that the FAA governed the arbitration provision, which was not displaced by the general choice of law provision.

         Following a July 8, 2016 hearing, the trial court denied the motion to compel arbitration. In its written order denying the motion, the trial court first addressed the threshold question of who should decide -- the court or the arbitrator -- the arbitrability of the parties' dispute. The court noted that defendants' sole basis for arguing that the arbitrator rather than the court should decide this issue was the FAA and cases decided thereunder. The trial court then noted that a potential conflict existed between the FAA and the McCarran-Ferguson Act, which allows state laws enacted for the purpose of regulating the business of insurance to reverse preempt the FAA. After analyzing applicable federal case law on the reverse preemption issue, the trial court concluded that reverse preemption applied under the McCarran-Ferguson Act and that Nebraska law applied to invalidate the arbitration clause in the RPA. The trial court denied the motion to compel arbitration and this appeal followed.


         I. Standard of review

         We ordinarily review an order denying a petition to compel arbitration for abuse of discretion. However, where, as is the case here, the trial court's denial of a petition to compel arbitration presents a pure question of law, we review the ...

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