WILLIAM G. CAMBRIDGE, United States District Judge.
This matter came before the Court for hearing on Plaintiff's motion for preliminary injunction (filing 4). After careful consideration of the briefs, evidence, and case law, the Court finds that the motion should be denied.
BACKGROUND
Both litigants are part of the Farm Credit System, which is a federally-formed network of borrower-owned lending institutions specializing in providing credit to production agriculture under the Farm Credit Act,
12 U.S.C. § 2001-2279cc. The Farm Credit System is composed of Farm Credit Banks ("FCBs"), federal land bank associations, production credit associations ("PCAs"), and the banks for cooperatives. The plaintiff, Farm Credit Services of America, PCA ("FCS"), is associated with or a subsidiary of AgAmerica, FCB. AgAmerica was headquartered in Spokane, Washington, when the parties entered into the contract at issue.
AgAmerica, on behalf of its affiliated institutions, joined with other Farm Credit System member banks to form and fund The Farm Credit System Association Captive Insurance Company ("Insurer"). Under the Farm Credit Act, Farm Credit System institutions can share losses to "protect against capital impairment or for any other purpose."
12 U.S.C. § 2013(23). Thus, AgAmerica and other principal subscribers entered into an agreement (the "Subscribers Agreement") which established the Insurance Company to provide certain lines of insurance coverage for subscribing organizations within the Farm Credit System. The Insurer is a Colorado association licensed and regulated by the Colorado Division of Insurance. It is located in Denver.
One of the types of insurance policies available was a Bankers Blanket Bond which covers loss caused by employee dishonesty. The Insurer issued such a Blanket Bond to AgAmerica and its scheduled associations and subsidiaries. FCS submitted a claim in 1998 for loan losses suffered when a borrower defaulted. FCS asserts that the losses resulted directly from the dishonest or fraudulent acts of certain FCS employees who compromised their duty of loyalty and fidelity to their employer, and therefore should be covered under the Blanket Bond. The Insurer denied the claim, prompting FCS to file this lawsuit on May 25, 1999. The Insurer initiated arbitration proceedings under the terms of the Blanket Bond on May 26, 1999. FCS then filed this motion for preliminary injunction to prevent the Insurer from pursuing arbitration while this action is pending.
The question before the Court is essentially one of contract interpretation. FCS argues that the arbitration provision in the Blanket Bond is unenforceable as against the public policy of Nebraska. The Insurer, however, maintains that the choice-of-law provision in the Subscriber Agreement is part of the contract, and that Colorado law permits arbitration of insurance disputes, so the arbitration should be allowed to proceed. As explained below, the Court agrees with the Insurer's position on this issue.
STANDARD OF REVIEW
The motion for preliminary injunction is brought pursuant to Federal Rule of Civil Procedure 65. The burden of establishing the need for a preliminary injunction is on the movant.
Gelco Corp. v. Coniston Partners,
811 F.2d 414, 418 (8th Cir. 1987). In deciding a preliminary injunction motion, the district court weighs (1) the threat of irreparable harm to the moving party; (2) the balance between the harm to the movant if the injunction is denied and the harm to other parties if the injunction is granted; (3) the movant's likelihood of success on the merits; and (4) the public interest.
See Dataphase Sys., Inc. v. C L Sys., Inc.,
640 F.2d 109, 113 (8th Cir. 1981) (en banc). "No single factor in itself is dispositive; rather, each factor must be considered to determine whether the balance of equities weighs toward granting the injunction."
United Indus. Corp. v. Clorox Co.,
140 F.3d 1175, 1179 (8th Cir. 1998). "At base, the question is whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined."
Dataphase,
640 F.2d at 113 (footnote omitted).
A The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies."
Beacon Theatres, Inc. v. Westover,
359 U.S. 500, 506-07 (1959). Thus, to warrant a preliminary injunction, the moving party must demonstrate a sufficient threat of irreparable harm.
See Adam-Mellang v. Apartment Search, Inc.,
96 F.3d 297, 299 (8th Cir. 1996).
If the chance of irreparable injury to the movant should relief be denied is outweighed by the likely injury to other parties litigant should the injunction be granted, the moving party faces a heavy burden of demonstrating that he is likely to prevail on the merits. Conversely, where the movant has raised a substantial question and the equities are otherwise strongly in his favor, the showing of success on the merits can be less.
Dataphase,
640 F.2d at 113.
The court must exercise caution in its deliberation, and "the essential inquiry in weighing the propriety of issuing a preliminary injunction is whether the balance of other factors tips decidedly toward the movant and the movant has also raised questions so serious and difficult as to call for more deliberate investigation."
United Indus. Corp.,
140 F.3d at 1179 (quoting
General Mills, Inc. v. Kellogg Co.,
824 F.2d 622, 624-25 (8th Cir. 1987)).
DISCUSSION
To reach the issue of whether FCS is entitled to the relief it seeks in its motion, I must first resolve the fundamental issues of whether the arbitration clause and choice-of-law clause are part of the parties' contract, as well as which state's law governs this dispute. The subject matter of this case also provides the opportunity to explore the germaneness of the Federal Arbitration Act (
9 U.S.C. § 1-16) and the McCarran-Ferguson Act (
15 U.S.C. § 1011-1015) to such contract provisions which may conflict with a state's public policy. All of this has a direct bearing on the merits of whether an injunction is warranted.
The Parties' Contract
There are two documents executed by the parties which form the contract at issue. One is the Subscribers Agreement, which contains "articles of association" and appoints an attorney-in-fact to act on behalf of the various lenders and affiliated institutions which have agreed to contribute to and purchase insurance through the Captive Association. The other is the Bankers' Blanket Bond, which is the insurance policy.
Of the numerous provisions of the Subscribers Agreement, two are particularly relevant to the present dispute. Article VII of the Subscribers Agreement is the arbitration provision. The parties agreed that "[a]ny dispute arising under this Agreement" between an insured and the insurer would be settled by arbitration. Pl.'s Evid. in Supp. of Mot. for Prelim. Inj., Ex. C at 9, 1 (filing 5). The subscribers agreed to submit disputes to arbitration and acknowledged that lawsuits could not be filed "concerning any dispute that may arise which is covered by the arbitration agreement, unless it involves a question of constitutional or civil rights."
Id. at 2.
The second pertinent provision is the choice-of-law clause. Paragraph 11 of the general provisions of Article IX of the Subscribers Agreement notes "This Agreement shall be interpreted under and governed by the laws of the State of Colorado."
Id. at 17. The Insurer is a Colorado corporation and has its principal place of business in Denver.
The Blanket Bond itself does not contain a choice-of-law clause. It does, however, specifically provide that "[n]o suit, action or legal proceedings shall be brought hereunder. Any dispute arising under the Bond shall be settled by arbitration as provided in the Subscribers Agreement." Def.'s Evid. in Opp. to Mot. for Prelim. Inj., Ex. 1 to Ex. A, § 5(f) at 13-14 (filing 8).
FCS takes the position that the Subscribers Agreement and Blanket Bond are two separate and independent documents. It argues that because the Blanket Bond is silent as to choice of law when the parties could have added such a provision if they so chose, there was no intent that it be governed by Colorado law. Instead, the plaintiff argues, the Court should follow the approach of § 188 of the Restatement (Second) of Conflict of Laws and apply Nebraska law to this dispute.
Choice of Law
This case is brought by a citizen of one state against a citizen of another, and more than $75,000 is at issue. The Court therefore has diversity jurisdiction over the case.
28 U.S.C. § 1332. It is axiomatic that a federal district court, sitting in diversity, applies the choice of law rules of the state in which it sits.
See Klaxon Co. v. Stentor Elec. Mfg. Co.,
313 U.S. 487, 496 (1941). As a result, I must apply Nebraska's choice of law provisions.
Whirlpool Corp. v. Ritter,
929 F.2d 1318, 1320 (8th Cir. 1991) (federal district courts must apply choice of law rules of the state in which they sit when their jurisdiction is based on diversity of citizenship). Under Nebraska law, persons residing in different states may select the law of either state to govern their contract; when by the terms of the contract they have fixed and determined the place for performance, the law of that place will govern.
Vanice v. Oehm,
526 N.W.2d 648, 651 (Neb. 1995) (citing
Farm Mortgage Loan Co. v. Beale,
202 N.W. 877 (Neb. 1925)).
If the parties have not included a choice of law provision in their contract, then Restatement (Second) of Conflict of Laws § 188 applies.
Powell v. American Charter Fed. Sav. Loan Ass'n,
514 N.W.2d 326, 331-32 (Neb. 1994). Section 188 utilizes the "most significant relationship" approach, evaluating a number of factors to determine which state has the most significant relationship to the transaction:
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the [choice of law principles] to determine the law applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
Restatement (Second) of Conflict of Laws 2d § 188 (1971).
The Federal Arbitration Act and the McCarran-Ferguson Act
The Federal Arbitration Act is invoked here because it demonstrates Congress's approval of and encouragement of the use of arbitration agreements.
See
9 U.S.C. § 2:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The United States Supreme Court approves of the contractual freedom this allows parties as they formulate the scope of such agreements:
Arbitration under the [Federal Arbitration] Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted.
Mastrobuono v. Shearson Lehman Hutton, Inc.,
514 U.S. 52, 57 (1995) (quoting
Volt Info. Sciences, Inc. v. Board of Trustees,
489 U.S. 468, 479 (1989) (internal citation omitted)).
This federal promotion of arbitration does have some constraints, however. Congress also recognized the need to let certain types of business be regulated by the states. One of those areas is insurance. The McCarran-Ferguson Act ensures that federal law does not preempt state law in this area.
See
15 U.S.C. § 1012:
(a) State regulation
The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.
(b) Federal regulation
No 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 insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .
A In other words, the McCarran-Ferguson Act bars the application of a federal statute if the federal statute does not relate specifically to the business of insurance, a state statute has been enacted to regulate the business of insurance, and the federal statute would invalidate, impair, or supersede the state statute."
LaBarre v. Credit Acceptance Corp.,
175 F.3d 640, 643 (8th Cir. 1999).
Nebraska Law and Public Policy
Nebraska has long taken the position that agreements to arbitrate future disputes deprive citizens of their right of access to the courts and are therefore void and unenforceable as against public policy.
Babb v. United Food Commercial Workers Dist. Union, Local 271,
448 N.W.2d 168, 172 (Neb. 1989). However, in 1997, in response to voters' approval of an amendment to the Nebraska constitution, the Unicameral adopted a modified form of the Uniform Arbitration Act. Neb. Rev. Stat. Ann. §§ 25-2601 to 25-2622 (Michie 1995 Supp. 1998). That act, however, specifically excludes insurance policies from the class of agreements in which arbitration clauses are permitted:
(b) A provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable, and irrevocable, except upon such grounds as exist at law or in equity for the revocation of any contract, if the provision is entered into voluntarily and willingly.
* * *
(f) Subsection (b) of this section does not apply to:
(1) A claim arising out of personal injury based on tort;
(2) A claim under the Nebraska Fair Employment Practice Act;
(3) Any agreement between parties covered by sections 60-1401.01 to 60-1440 [motor vehicle industry licensing]; and
(4) Except as provided in section 44-811 [arbitration by assessment associations], any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.
Neb. Rev. Stat. Ann. § 25-2602.01 (Michie Supp. 1998).
Is an injunction warranted?
With this background in mind, it is now time to determine the parameters of the parties' contract and whether FCS is entitled to enjoin the arbitration proceedings.
First, despite FCS's arguments to the contrary, it is clear from reading the Blanket Bond that it adopts the Subscribers Agreementin toto. Any other interpretation would require the Court to engage in unnecessary hair-splitting. See Blanket Bond § 14:
Section 14. The Insurer is composed of Subscribers, each of which is a party to a "Subscribers Agreement and Power of Attorney" (the "Subscribers Agreement"),
which is made a part hereof, that vests in the Attorney-in-Fact the power to underwrite and issue policies of insurance or bonds of the character authorized by, and subject to all limitations contained in, the Subscribers Agreement, and the liability of each Subscriber, including the Subscriber hereunder, is to be measured and determined by the terms of the Subscribers Agreement with the same force and effect as if the Subscribers Agreement was set forth in full herein as part of this Bond.
Def.'s Evid. in Opp. to Mot. for Prelim. Inj., Ex. 1 to Ex. A, § 14 at 18 (filing 8) (emphasis added).
This conclusion means that the Colorado choice of law clause in the Subscribers Agreement governs interpretation of the Blanket Bond as well. In general, Colorado jurisprudence favors the use of arbitration in resolving disputes. "Arbitration has long been recognized in Colorado as "a convenient, speedy and efficient alternative to settling disputes by litigation,' and Colorado has joined thirty-four other states in adopting the Uniform Arbitration Act." City County of Denver v. District Court, 939 P.2d 1353, 1362 (Colo. 1997) (en banc) (internal citations omitted).
In Colorado, arbitration is a favored method of dispute resolution. . . . Our constitution, our statutes and our case law all support agreements to arbitrate disputes. See Colo. Const. art. XVIII, § 3; §§ 13-22-201 to -223, 5 C.R.S. (1997); Judd Constr. Co. v. Evans Joint Venture, 642 P.2d 922, 924 (Colo. 1982) (noting that "it has long been the policy of this state to foster and encourage the use of arbitration as a method of dispute resolution"). Thus, absent a conflicting and overriding public policy to the contrary in a particular situation, valid agreements to arbitrate should be enforced as written.
Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 493 (Colo. 1998) (en banc).
Nowhere in the statutes or case law does Colorado indicate an exception to arbitration for agreements relating to insurance policies. See Colo. Rev. Stat. §§ 13-22-201 to -223.
§ 13-22-203. Validity of arbitration agreement
A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. . . .
Therefore, because (1) the parties here agreed that Colorado law would govern their agreement, (2) that provision was adopted in the insurance policy itself, (3) the parties agreed to submit their disputes under the contract to arbitration, and (4) Colorado law favors arbitration as a dispute resolution tool, FCS is unable to show that it is entitled to a preliminary injunction. FCS has not demonstrated the threat of irreparable harm if the injunction is not granted or the likelihood of success on the merits, and the Court is not inclined to step in and alter what the parties have agreed to. For these reasons, FCS's motion for preliminary injunction will be denied.
IT IS ORDERED Plaintiff's motion for preliminary injunction (filing 4) is denied.