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BANK OF AMERICA N.A. v. DIAMOND STATE INSURANCE COMPANY

United States District Court, Southern District of New York


August 29, 2003

BANK OF AMERICA, N.A., ET AL., PLAINTIFFS,
v.
DIAMOND STATE INSURANCE COMPANY LIMITED, DEFENDANT. DIAMOND STATE INSURANCE COMPANY LIMITED, PLAINTIFF, V. WORLDWIDE WEATHER TRADING CO., LLC, ET AL., DEFENDANTS

The opinion of the court was delivered by: Gabriel Gorenstein, Magistrate Judge

OPINION AND ORDER

Defendant Diamond State Insurance Company Limited ("Diamond State") moves pursuant to Fed.R.Civ.P. 39(a) to strike the jury demand by plaintiffs Bank of America, N.A. ("Bank of America") and Platinum Indemnity Limited ("Platinum"). For the following reasons, the motion is denied.

Background and Procedural History

Plaintiffs filed their complaint with a jury demand on January 26, 2001. In brief, plaintiffs assert claims relating to reinsurance contracts issued in the name of Diamond State to [ Page 2]

Platinum through Customized Worldwide Weather Insurance Agency, Inc. ("Worldwide") and its proprietor, Harold Mollin. The reinsurance contracts each contain a provision requiring dispute resolution by arbitration. Diamond State has consistently maintained that the contracts are void because neither Worldwide nor Mollin had authority to issue the contracts. The plaintiffs assert that the contracts are binding. In the instant suit, they are attempting to collect the payments that would be due under the contracts.

Notwithstanding its contention that the contracts containing the arbitration clauses are void, Diamond State early on in this litigation sought to compel arbitration, arguing before the district court and the United States Court of Appeals for the Second Circuit that plaintiffs should be bound by the arbitration clauses. The Court of Appeals — as well as the district court — rejected this argument, concluding that the question of whether the contracts "existed" was an issue of fact that had to be decided by the district court before it decided whether arbitration should be compelled. See Bank of America, N.A. v. Diamond State Ins. Co., 2002 WL 1378683, at *2 (2d Cir. June 26, 2002), aff'g, 2001 WL 1029410 (S.D.N.Y. Sept. 7, 2001). Thereafter, in December 2002, Diamond State made the instant motion to strike plaintiffs' jury demand.

Discussion

Whether the right to trial by jury exists in this case — and the determination of who may exercise that right — depends on the interpretation and application of section 4 of the Federal Arbitration Act ("FAA"). That statute governs the procedure to be followed when the parties dispute whether they have entered into an agreement to arbitrate. The statute provides in relevant part: [ Page 3]

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement. . . . 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 . . . If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof. If no jury trial be demanded by the party alleged to be in default . . . the court shall hear and determine such issue. Where such an issue is raised, the party alleged to be in default may . . . demand a jury trial of such issue. . . .
9 U.S.C. § 4.

For purposes of determining who may demand a trial by jury, the statute identifies two parties: a "party aggrieved" and a "party in default." Where the "making of the arbitration agreement" is raised, the statute permits only a "party in default" to demand a jury trial of that issue. Thus, the question here turns on which party — the plaintiffs or Diamond State — is the "party in default." Diamond State argues that it is the "party in default" because it has consistently challenged the existence and enforceability of the insurance contracts containing the agreement to arbitrate. See Memorandum of Law in Support of Defendant's Motion to Strike Plaintiffs' Jury Demand, filed December 26, 2002 ("Def. Mem."), at 5-7; see also Reply Memorandum of Law in Further Support of Defendant's Motion to Strike Plaintiffs' Jury Demand, filed January 22, 2003 ("Def. Reply Mem."), at 2-8. The plaintiffs argue that they are the "party in default" because they have resisted any effort to arbitrate.

An examination of the plain language of section 4 finds no support for Diamond State's argument. Section 4 contemplates that the "party aggrieved" is the party who is seeking to force a recalcitrant party to arbitrate. Obviously, Diamond State is the only party seeking to have [ Page 4]

another party arbitrate. Consequently, Diamond State qualifies as the "party aggrieved." Section 4 also contemplates that the party opposing arbitration is the "party in default." Given the structure of the statute, only the plaintiffs qualify as the party in default. Section 4 unequivocally grants a party in default the right to demand a jury trial.

Diamond State's only argument to avoid this result is that, in the typical case, the party seeking to compel arbitration is the party that is arguing for the validity or existence of the contract containing the arbitration clause. See, e.g., Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, 983 (2d Cir. 1996); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391, 398 n. 12 (5th Cir. 1981); Hamilton Life Ins. Co. of New York v. Republic Nat'l Life Ins. Co., 408 F.2d 606, 609 (2d Cir. 1969); Vaccaro v. Insurance Co. of North America, 1996 WL 762234, at *3 (D. Conn. Dec. 23, 1996). From this line of cases Diamond State deduces the principle that where a party is arguing for the validity or existence of the contract, such party must necessarily be the "party aggrieved" and that the party challenging the contract must necessarily be the "party in default."

This argument, however, rests on a non sequitur. While it is true that in the typical case the party challenging the enforceability of the agreement to arbitrate is the party in default within the meaning of section 4, it does not follow that in all cases the challenging party is the party in default. Diamond State is interpreting the statute as if it defined "party in default" by reference to whether that party is challenging the existence or validity of the arbitration agreement. In fact, the statute does not so define the "party in default." Instead, it defines the "party in default" as the party seeking to avoid arbitration. Under the statute, the party who is seeking to avoid arbitration is entitled to a jury trial on the issue of the making of the contract. Because the statute [ Page 5]

is clear on its face, there is no basis for examining the statute's legislative history to construe its meaning, as Diamond State proposes. See, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001).

Diamond State cites Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51 (3d Cir. 1980) in support of its position because Par-Knit Mills contains the broad language that "the party who is contesting the making of the agreement has the right to have the issue presented to a jury." 636 F.2d at 54. The choice of this language is not surprising, however, since Par-Knit Mills involved the typical situation where the party contesting the making of the arbitration agreement also happened to be the "party in default." It did not purport to rule on the "anomalous" case where — as here — the party challenging the enforceability of the contract is also seeking to compel arbitration. See, e.g., Sandvik AB v. Advent Int'l Corp., 220 F.3d 99 (3d Cir. 2000); Becker v. DPC Acquisition Corp., 2002 WL 1144066 (S.D.N.Y. May 30, 2002). The quoted language in Par-Knit Mills is thus dictum and cannot control the instant case.

Conclusion

In sum, section 4 of the FAA grants to plaintiffs the right to demand a jury trial on the issue of whether the parties entered into an agreement to arbitrate. Diamond State's motion to strike plaintiff's jury demand is denied. [ Page 1]

20030829

© 1992-2003 VersusLaw Inc.



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