United States District Court, S.D. New York
April 12, 2004.
NEW HAMPSHIRE INSURANCE CO., Plaintiff(s) -v- CANALI REINSURANCE CO., LTD. FELD CHEVROLET CO., and ANDREW S. WOLFSON, Defendant(s)
The opinion of the court was delivered by: LAURA TAYLOR SWAIN, District Judge
MEMORANDUM OPINION AND ORDER
Petitioner New Hampshire Insurance Company ("NHIC") filed a Notice of
Petition to Compel Arbitration on October 21, 2003, in the Supreme Court
of the State of New York, in connection with a dispute over money
allegedly owed to Petitioner pursuant to a reinsurance contract covering
a vehicle service contract program. Shortly thereafter, the matter was
removed to this Court. Respondent Canali Reinsurance Company ("Canali")
now moves pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss
the Petition for failure to state a claim; Respondents Feld Chevrolet
("Feld") and Andrew S. Wolfson ("Wolfson") move to dismiss pursuant to
Rule 12(b)(2) based on lack of personal jurisdiction. For the following
reasons, Canali's motion to dismiss is granted.
The following relevant facts are alleged in the Petition to Compel
Arbitration. Petitioner NHIC has an agreement with a company known as
Warrantech Automotive, Inc. ("Warrantech"), under which NHIC reimburses
Warrantech for expenses incurred through claims on certain vehicle
service contracts ("VSCs") that Warrantee!! sells to car dealership
customers. (Petition to Compel Arbitration ¶ 19.) A VSC provides a
new or used car buyer with coverage in case of mechanical failure that
extends beyond the car's factory warranty. (Id. ¶ 18.)
Insurers profit on VSCs to the extent that the premium paid for VSCs
exceeds the amounts paid out in claims under the VSCs. (Id.
¶ 21.) Because claims for repairs are paid out over the life of the
contract, which is up to seven years, and because claims occur more
frequently toward the end of the seven-year contract, insurers of VSCs,
such as NHIC here, receive an influx of cash during the beginning of the
contract and are able to earn interest on that cash flow. (Id.)
In order to capitalize on that cash flow, certain car dealerships have created
reinsurance companies that reinsure NHIC's obligations to Warranted!.
(Id. ¶ 22.)
Canali and NHIC entered into such an agreement in April 1997 (effective
as of October 1996) (the "Reinsurance Agreement"). (Id. ¶
24.) The agreement contained an arbitration clause that provides in
All disputes or differences arising out of the
interpretation of this Agreement shall be
submitted to the decision of two arbitrators, one
to be chosen by each party, and in the event of
the arbitrators failing to agree, to the decision
of an umpire to be chosen by the arbitrators.
(Id. ¶ 13.)
NHIC and Canali also entered into a Trust Agreement under which NHIC
made deposits to a trust account of money due to Canali under the
Reinsurance Agreement in order to ensure that there would be sufficient
money available to cover the relevant VSC claims and premiums at all
times. (Id. ¶¶ 25, 30.) As NHIC made these "cession"
payments into the trust account, it issued quarterly cession statements
to Canali that, according to NHIC, should have notified Respondents of
the total amounts that they should have deposited into the trust account
to satisfy obligations under the Reinsurance Agreement and Trust
Agreement. (Id. ¶ 31.) Petitioner asserts the Respondents
underfunded the trust account and therefore materially breached the
Reinsurance Agreement. (Id. ¶¶ 14, 33-40.)
Petitioner submitted a written demand to Respondents for arbitration
pursuant to the Reinsurance Agreement on March 4, 2003. (Id.
¶ 56.) Respondents have not complied with the demand, contending that
the question of whether the Reinsurance Agreement has been breached is
one that is outside the scope of the arbitration clause of the
Reinsurance Agreement. (Resp. Mem. of Law in Support of Mot. to Dismiss,
at 8.) Respondent Canali now moves on this same basis, pursuant to Rule 12(b)(6), to dismiss the Petition to
Compel Arbitration for failure to state a claim.
In deciding a motion to dismiss for failure to state a claim upon which
relief may be granted, a court must accept as true the material facts
alleged by the plaintiff and draw all reasonable inferences in
plaintiff's favor. Grandon v. Merrill Lynch, 147 F.3d 184, 188
(2d Cir. 1998). The court must not dismiss the action unless "`it appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief.'" Cohen v.
Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley
v. Gibson, 355 U.S. 41, 45-46 (1957)): Sims v. Artuz,
230 F.3d 14, 20 (2d Cir. 2000).
The Second Circuit has established a two-part test to determine the
arbitrability of claims not derived from federal statutes: "(1) whether
the parties agreed to arbitrate disputes at all; and (2) whether the
dispute at issue comes within the scope of the arbitration agreement."
Ace Capital Re Overseas Ltd, v. Central United Life Ins. Co.,
307 F.3d 24, 28 (2d Cir. 2002). Because Article XIV of the Reinsurance
Agreement contains an arbitration clause, there is no dispute as to the
first part of the test, at least as to Respondent Canali, which is the
only Respondent that executed the Reinsurance Agreement. The Court
therefore turns to the question of whether the dispute, as framed by
Petitioner, falls within the scope of the arbitration clause.
The Supreme Court has instructed that where, as here, a contract
contains an arbitration clause, there is a presumption of arbitrability
"unless it may be said with positive assurance that the arbitration
clause is not susceptible of an interpretation that covers the
asserted dispute." AT&T Tech., Inc. v. Communications
Workers of Am., 475 U.S. 643, 650 (1986) (emphasis added). The arbitration clause of the Reinsurance
Agreement between NHIC and Canali focuses on disputes or differences
arising out of the interpretation of the Agreement. The dispute here
concerns Respondents' alleged failure to deposit funds to the trust
account pursuant to the terms of the Reinsurance Agreement and the Trust
Agreement. Because there is no indication that there is any dispute over
the calculation of the amounts due, there is nothing in the Petition that
even remotely implicates a need for interpretation of the Reinsurance
Narrow arbitration clauses such as the one upon which the Petition
relies cannot authorize compulsion of the arbitration disputes beyond
their scope. See Gerling Global Reinsurance Corp. v. Home Ins.
Co., 302 A.D.2d 118, 123-24 (N.Y. App. Div., 1 Dept. 2002)
(dispute regarding a party's obligation to refund money pursuant to an
insurance contract was not within the purview of the arbitration clause
specifying arbitration only in the event of a dispute as to contract
interpretation); see also Louis Dreyfus Negoce S.A. v. Blystad
Shipping & Trading, Inc., 252 F.3d 218, 225 (2d Cir. 2001)
("When parties use expansive language in drafting an arbitration clause,
presumably they intend all issues that `touch matters' within the main
agreement to be arbitrated . . . while the intended scope of a narrow
arbitration clause is obviously more limited.").
Petitioner's contention that the arbitration clause is a broad one
rests on a reading of the provision that is plainly inconsistent with its
terms. Petitioner represents that the relevant clause mandates
arbitration of "[a]ll disputes or differences arising out of . . . this
Agreement." That is true, but only if the reader ignores the middle of
the clause, which in its entirety provides for arbitration of "[a]ll
disputes or differences arising out of the interpretation of
this Agreement." (Reinsurance Agreement, Art. XIV) (emphasis added).
Petitioner's reading of the clause renders the interpretation language as
mere surplusage and defies the plain meaning of the clause. As the Second
Circuit has explained, ". . . it is axiomatic that, when interpreting a
contract, the court generally must consider the contract as a whole so
that it may give significance to each term." T.G.I. Friday's Inc. v.
Nat'l Restaurants Mgmt., Inc., 59 F.3d 368, 373 (2d Cir. 1995).
Read properly and as a whole, the arbitration clause, which is integral
to the Petition, clearly covers only a specific category of disputes
ones arising out of the interpretation of the Reinsurance
Agreement. Also confirming a narrow reading of the arbitration clause is
the fact that the parties included a separate Service of Suit clause in
Article XVI of the Reinsurance Agreement providing that in the event that
there is a dispute regarding amounts due pursuant to the Agreement, the
parties will submit to the jurisdiction of a United States court with the
specific provision that
[n]othing in this clause constitutes or should be
understood to constitute a waiver of Reinsurers'
rights to commence an action in any Court of
competent jurisdiction in the United States, to
remove an action to a United States District
Court, or to seek a transfer of a case to another
Court as permitted by the laws of the United
States or of any state in the United States.
(See Reinsurance Agreement, Art. XVI.) Such provisions
clearly show that the parties contemplated disputes that would not fall
within the scope of the arbitration clause.
Even when the Petition is read in the light most favorable to the
Petitioner, it can nonetheless be said with positive assurance in this
matter that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute. Accordingly, the
Petition fails to state a claim upon which relief may be granted and must be
Because neither the factual allegations of the Petition nor the
language of the clause pursuant to which Petitioner seeks to compel
arbitration of the reinsurance liability dispute would entitle Petitioner
to the relief it seeks (i.e., an order compelling arbitration
of the underlying dispute), Canali's motion to dismiss is granted, and
the Petition is dismissed as against all Respondents for failure to state
a claim upon which relief may be granted.
Petitioner has requested leave to amend its allegations to demonstrate
that this is a dispute within the scope of the arbitration clause, that
is, one requiring interpretation of the Reinsurance Agreement.
Petitioner's application is granted. NHIC shall serve and file an amended
Petition to Compel Arbitration no later than Friday, April 23, 2004. If
Petitioner files an amended Petition, the Court will hold an Initial
Pre-trial Conference on Wednesday, June 30, 2004, at 11:00 a.m. If
Petitioner fails to file and serve its amended Petition by April 23,
2004, this action will be dismissed with prejudice without further notice
to the parties.
The motion to dismiss the Petition as against Respondents Wolfson and
Feld for lack of personal jurisdiction, pursuant to Rule 12(b)(2), is denied
without prejudice as moot in light of the Court's determination as to the
viability of the current pleading.