McDonnel Group, L.L.C. v. Certain Underwriters at ( 2019 )

Case: 18-30817 Document: 00514986059 Page: 1 Date Filed: 06/06/2019
REVISED JUNE 6, 2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 18-30817 United States Court of Appeals
Fifth Circuit
FILED
May 13, 2019
MCDONNEL GROUP, L.L.C.,
Lyle W. Cayce
Clerk
Plaintiff - Appellant
v.
GREAT LAKES INSURANCE SE, UK BRANCH, Improperly named as
Certain Underwriters at Lloyd’s, London; LLOYD’S SYNDICATES, CNP
4444 and CNP 958, Improperly named as Certain Underwriters at Lloyd’s,
London; INTER HANNOVER, Improperly named as Certain Underwriters at
Lloyd’s, London,
Defendants - Appellees
Appeal from the United States District Court
for the Eastern District of Louisiana
Before JOLLY, JONES, and DENNIS, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
In this appeal, relating to arbitration under the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, 1 we address
1June 10, 1958, 21 U.S.T. 2517. Congress implemented the Convention by enacting
Chapter 2 of the Federal Arbitration Act (FAA), 9 U.S.C. § 201 et seq.
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whether a “conformity to statute” provision 2 amends the insurance contract so
as to conform with a conflicting, but preempted, state statute forbidding
arbitration in insurance contracts.
McDonnel Group, L.L.C. purchased an insurance policy from the
defendants that included a written agreement to arbitrate disputes. After the
Insurers denied McDonnel’s claim, McDonnel initiated this declaratory and
breach of contract action in federal district court. The Insurers moved to
dismiss based on the policy’s arbitration provision. McDonnel responded that
the arbitration provision was “amended out” of the contract through the
contract’s conformity to statute provision because arbitration conflicted with a
Louisiana statute. The district court held, however, that the allegedly
conflicting Louisiana statute was preempted by the Convention, and therefore
dismissed the case in favor of arbitration. We must decide whether the policy’s
conformity provision negates the agreement to arbitrate. We hold that it does
not and thus AFFIRM the district court.
I.
In fall 2015, McDonnel Group, L.L.C. obtained a builder’s risk insurance
policy from a group of insurers 3 for a construction project on a property located
in New Orleans, Louisiana. Two years later, according to McDonnel, the
property suffered significant water damage. McDonnel submitted a claim that
the Insurers refused to pay.
2 The conformity provision in this case provides: “In the event any terms of this Policy
are in conflict with the statutes of the jurisdiction where the Insured Property is located, such
terms are amended to conform to such statutes.”
3 The insurers consist of Great Lakes, Insurance SE, UK Branch; International
Insurance Company of Hannover SE; and Lloyd’s syndicates CNP 4444 and CNP 958. For
the sake of brevity, we will refer to them collectively as “the Insurers.”
2
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McDonnel then filed the instant action seeking declaratory relief and
damages for breach of contract and breach of the duty of good faith and fair
dealing. The Insurers responded by filing a motion to dismiss for lack of
subject-matter jurisdiction and improper venue. 4 Fed. R. Civ. P. 12(b)(1), (3).
As to both defenses, the Insurers invoked the contract’s arbitration provision,
which provides:
Any dispute, controversy or claim arising out of, relating to, or in
connection with this Policy, shall be finally settled by arbitration.
The arbitration shall be conducted in accordance with the
International Arbitration Rules of the American Arbitration
Association in effect at the time of the arbitration. The seat of the
arbitration shall be New York, New York, in the United States of
America.
The Insurers argued that the arbitration provision should be enforced, and the
case dismissed in favor of arbitration pursuant to the Convention.
The policy, however, also contained a “conformity to statute” provision,
stating: “In the event any terms of this Policy are in conflict with the statutes
of the jurisdiction where the Insured Property is located, such terms are
amended to conform to such statutes.” Invoking that provision, McDonnel
responded that any obligation to arbitrate under the Convention did not apply
to the instant dispute because the policy’s arbitration agreement was, as a
matter of law, invalid. The arbitration provision was contrary to La. Rev. Stat.
Ann. § 22:868(A)(2), which prohibits arbitration agreements in insurance
contracts covering property located in the state. Thus, the conformity
provision, McDonnel argued, “amended” the arbitration provision out of the
contract in order to “conform” with Louisiana law. Consequently, the dispute
between McDonnel and the Insurers was not subject to the Convention.
4 The Insurers also asserted other alternative grounds for dismissal that are not
relevant to this appeal.
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The district court disagreed. Relying on the decision of our en banc court
in Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s, the court held
that the Convention superseded La. Rev. Stat. Ann. § 22:868. 587 F.3d 714
(5th Cir. 2009). Because the state statute was preempted by federal law, the
court determined that no conflict existed between the policy and state law so
as to trigger the conformity provision of the policy. Thus, the arbitration
agreement remained valid. The district court, therefore, dismissed the action
in favor of arbitration. The parties, accordingly, present a precise issue in this
appeal: does the contractual agreement to conform to state statutes apply when
the conflicting state statute has been held as a matter of law to have been
preempted by the Convention.
II.
The standard of review for a dismissal pursuant to both Federal Rules of
Civil Procedure 12(b)(1) and 12(b)(3) is de novo. 5 See Ambraco, Inc. v. Bossclip
B.V., 570 F.3d 233, 237–38 (5th Cir. 2009). The well-pleaded factual
allegations in the complaint are taken “as true and [we] view them in the light
most favorable to the plaintiff.” See Lane v. Halliburton, 529 F.3d 548, 557
(5th Cir. 2008) (citing In re Katrina Canal Breaches Litig., 495 F.3d 199, 205
(5th Cir. 2007)).
5 Our court has not decided whether Rule 12(b)(1) or 12(b)(3) is the proper vehicle for
a motion to dismiss based on an arbitration provision. See Noble Drilling Servs., Inc. v. Certex
USA, Inc., 620 F.3d 469, 472 n.3 (5th Cir. 2010). We have, however, accepted Rule 12(b)(3)
as a proper method for seeking dismissal in favor of arbitration. See Lim v. Offshore Specialty
Fabricators, Inc., 404 F.3d 898, 902 (5th Cir. 2005). The parties have not raised whether
dismissal under Rule 12(b)(1) would also be proper and therefore we will not address this
issue.
4
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III.
A.
Although quite elemental to say, it is relevant here to point out that
under our constitutional system, federal law, including the treaties of the
United States, are the “supreme Law of the Land . . . any Thing in the
Constitution or Laws of any State to the Contrary notwithstanding.” U.S.
Const. art. VI, cl. 2. From the Supremacy Clause stems our preemption
doctrine: when federal and state law conflict, the state law is nullified. See
Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152–53 (1982). This
case presents such a conflict. We thus begin our discussion with a review of
the state and federal laws at issue.
First the state law: Louisiana’s insurance code. See La. Rev. Stat. Ann.
§ 22:1 et seq. Specifically, § 22:868(A)(2) provides that “[n]o insurance contract
delivered or issued for delivery in [Louisiana] and covering subjects located . .
. in [Louisiana] . . . shall contain any condition, stipulation, or agreement . . . .
[d]epriving the courts of [Louisiana] of the jurisdiction of action against the
insurer.” Louisiana’s state courts have interpreted § 22:868 as rendering void
arbitration provisions in insurance contracts. See, e.g., Doucet v. Dental Health
Plans Mgmt. Corp., 412 So. 2d 1383, 1384 (La. 1982) (“Classification of the
contract at issue as an insurance contract renders the arbitration provisions of
that contract unenforceable under [§ 22:868].”).
Next the federal law. In 1970, the United States acceded to the
Convention, an international commercial treaty, to “encourage the recognition
. . . of commercial arbitration agreements in international contracts and to
unify the standards by which agreements to arbitrate are observed.” Scherk v.
Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974). The Convention requires
signatory states to “recognize an agreement in writing under which the parties
undertake to submit to arbitration all or any differences which have arisen or
5
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which may arise between them in respect of a defined legal relationship,
whether contractual or not, concerning a subject matter capable of settlement
by arbitration.” Convention art. II(1). When the Convention is applicable,
courts of signatory states must “at the request of one of the parties, refer the
parties to arbitration, unless it finds that the . . . agreement is null and void,
inoperative or incapable of being performed.” Id. at art. II(3). This court has
succinctly described the Convention’s trigger as consisting of four elements; a
district court must dismiss a case in favor of arbitration “if (1) there is an
agreement in writing to arbitrate the dispute, (2) the agreement provides for
arbitration in the territory of a Convention signatory, (3) the agreement arises
out of a commercial legal relationship, and (4) a party to the agreement is not
an American citizen.” Francisco v. STOLT ACHIEVEMENT MT, 293 F.3d 270,
273 (5th Cir. 2002). Like all treaties, the Convention ordinarily preempts
conflicting state laws. See, e.g., Lim, 404 F.3d at 904.
But the appeal today presents a twist. The McCarran–Ferguson Act,
passed by Congress in 1945, protects state laws regulating the insurance
industry from the preemptive effect of federal law. This Act “declares that the
continued regulation . . . by the several States of the business of insurance is
in the public interest, and that silence on the part of the Congress shall not be
construed to impose any barrier to the regulation . . . of such business by the
several States.” 15 U.S.C. § 1011; see also 15 U.S.C. § 1012(a) (“The business
of insurance . . . shall be subject to the laws of the several States.”). To shield
state regulation from unintended federal interference, the Act provides that
“[n]o Act of Congress shall be construed to invalidate, impair, or supersede any
law enacted by any State for the purpose of regulating the business of
6
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insurance.” 6 Id. § 1012(b). In other words, the McCarran–Ferguson Act
permits states to reverse-preempt an otherwise applicable “Act of Congress” by
enacting their own regulations of the insurance industry.
Against this background, in Safety National, our en banc court addressed
whether, under the McCarran–Ferguson Act, La. Stat. Rev. § 22:868 reverse-
preempted the Convention or its implementing legislation. 587 F.3d at 717.
We found that it did not. An “Act of Congress,” as referred to in the McCarran–
Ferguson Act, does not include a treaty, such as the Convention, which
“remains an international agreement or contract negotiated by the Executive
Branch and ratified by the Senate, not by Congress.” Id. at 723 (footnotes
omitted). This governing principle is true whether the treaty is self-executing
or requires implementing legislation. Id. at 723–24. And, importantly, the
FAA itself points towards the Convention, stating that “[i]t is the Convention
[not the congressional legislation] under which legal agreements ‘fall.’” Id. at
724 (quoting 9 U.S.C. § 202). It is therefore the Convention itself, i.e., the
treaty, not the FAA, i.e., the federal statute that codified the treaty, that
supersedes Louisiana law. Id. at 724–25. Thus, the en banc court held that,
because “the Convention, an implemented treaty . . . supersedes state law, the
McCarran–Ferguson Act’s provision that no ‘Act of Congress’ shall be
construed to supersede state law regulating the business of insurance is
inapplicable.” Id. at 725. To the point: the McCarran–Ferguson Act does not
permit state laws to reverse-preempt the Convention. Id. at 732. This appeal
is not yet resolved, however.
6 The Act does contain an exception if the “Act [of Congress] specifically relates to the
business of insurance.” 15 U.S.C. § 1012(b). The Convention does not relate to the business
of insurance, so this exception does not apply. See Safety Nat’l, 587 F.3d at 720.
7
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B.
We now turn to the analysis of the precise issue before us, which we
break down as follows: whether (1) an agreement to arbitrate (2) provided in
an insurance policy (3) is voided by the policy’s conformity provision (4) when
the conflicting state law prohibiting arbitration (5) has been preempted by the
Convention. 7 McDonnel argues that the arbitration provision was amended by
deletion from the contract ab initio because it conflicts with La. Rev. Stat. Ann.
§ 22:868. The Insurers respond that there is no conflict between the contract
and § 22:868 because the Convention preempts this state law.
This issue, which is only a question of contract interpretation, is of first
impression. Although Safety National has already decided the more difficult
questions regarding preemption and reverse preemption, the insurance
contract in that case did not contain a conformity provision. So, what does the
contract between McDonnel and the Insurers provide? We focus on two
provisions. First, it contains a conformity provision, which amends the terms
of the contract to conform to state statutes. But that provision only applies
“[i]n the event any terms of [the] Policy are in conflict with the statutes of the
jurisdiction where the Insured Property is located.” Second, the policy contains
an arbitration provision. It is the arbitration provision of the insurance policy
that is said not to conform with La. Rev. Stat. Ann. § 22:868, a statute
prohibiting arbitration agreements. This state statute, however, as we held in
Safety National, is preempted by the Convention. 8 Because the state statute,
7 A reminder that we have already held that the Convention preempts this Louisiana
statute. See Safety Nat’l, 587 F.3d at 732.
8 The Convention’s requirements are clearly met in this case. The provision is a
written agreement to arbitrate the dispute; it provides for arbitration in a signatory country,
the United States; it arises from a commercial legal relationship, an insurance contract; and
the Insurers are not American citizens. See Francisco, 293 F.3d at 273.
8
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i.e., La. Rev. Stat. Ann. § 22:868, is preempted by the Convention, the statute
does not and cannot apply to McDonnel’s policy. And because the statute does
not apply to the policy, there is no conflict between the policy and the state
statute. With that premise established, the conformity provision is not
triggered; its inapplicability leads only to the conclusion that the arbitration
provision survives, undiminished by state law. 9 The district court judgment in
favor of the Insurers will be and is
AFFIRMED.
9 Our holding is consistent with our precedent that conformity provisions in insurance
contracts are not triggered when the conflicting state law is preempted by the Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. See La. Health
Serv. & Indem. Co. v. Rapides Healthcare Sys., 461 F.3d 529, 533 (5th Cir. 2006) (“Neither
[conformity] provision displaces the preemption analysis in this case. ERISA plans must
always conform to state law, but only state law that is valid and not preempted by ERISA.”);
Light v. Blue Cross & Blue Shield of Ala., Inc., 790 F.2d 1247, 1248 (5th Cir. 1986) (holding
that because “ERISA pre-empts state law, there is no applicable state law to which the
administrator must conform”).
9