Applied Underwriters v. Milan Express Co.

Citation: Not availableDocket: A-18-570

Court: Nebraska Court of Appeals; March 17, 2020; Nebraska; State Appellate Court

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Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA) and Milan Express Co. Inc. have been engaged in a prolonged dispute concerning amounts AUCRA claims are owed under their Reinsurance Participation Agreement (RPA). Both the RPA and a related Request to Bind Coverages (Binder) were executed in September 2008, with the RPA containing an arbitration clause mandating that disputes be resolved in the British Virgin Islands and enforceable in Nebraska courts, governed by Nebraska law. The Binder also included an arbitration provision for resolving disputes under the Federal Arbitration Act and required arbitration to occur in Omaha, Nebraska, in accordance with JAMS.

After unsuccessful attempts to resolve the matter, Milan initiated legal action against AUCRA in a Tennessee federal court in February 2013. AUCRA's motion to compel arbitration was denied, but the Sixth Circuit Court of Appeals later reversed this decision, directing that the issue of arbitrability be determined by an arbitrator. An AAA arbitration panel subsequently ruled that the RPA’s arbitration clause was unenforceable under Nebraska law due to its relation to an insurance policy. Following this, the Tennessee case was dismissed in February 2016 at AUCRA's request.

In March 2016, AUCRA filed a new action against Milan in Douglas County, Nebraska, seeking amounts owed under the RPA. This time, AUCRA sought to compel arbitration based on the Binder's arbitration clause, rather than the one in the RPA, as a response to the prior ruling that rendered the RPA's clause unenforceable.

Milan successfully filed a motion to halt arbitration, arguing that the AAA arbitration panel’s Final Award had already resolved the claims in question. The district court ruled that issue and claim preclusion prevented AUCRA from initiating a second arbitration, thus granting Milan's motion and denying AUCRA's request to stay pending arbitration. AUCRA subsequently appealed the decision, but the appellate court affirmed the district court's ruling. 

Milan, a Tennessee corporation providing transportation services, entered into a Binder and a related Reinsurance Participation Agreement (RPA) with AUCRA, a British Virgin Islands corporation. The Binder specified that AUCRA would provide workers' compensation insurance contingent on Milan executing the RPA, which included an arbitration clause mandating that disputes be resolved through binding arbitration in accordance with the Federal Arbitration Act and Nebraska law. 

AUCRA filed for arbitration in 2012, while Milan had previously sought similar relief in a federal court case in Tennessee in 2013, where a magistrate judge deemed the arbitration clause invalid under Nebraska law. Milan made monthly payments for workers' compensation insurance from November 2008 until May 2011, after which litigation commenced.

The federal district court upheld a decision regarding arbitrability, determining that it, not an arbitrator, was responsible for this issue, referencing Milan Exp. Co. v. AUCRA, 993 F. Supp. 2d 846 (W.D. Tenn. 2014). AUCRA's appeal to the Sixth Circuit resulted in a ruling that the parties intended for an arbitrator to decide arbitrability, leading the court to vacate the order halting arbitration and remand for further proceedings (Milan Exp. Co. Inc. v. Applied Underwriters Captive Risk Assur. Co. Inc., 590 Fed. Appx. 482 (6th Cir. 2014)). The AAA’s Final Award from July 2015 indicated the arbitration focused solely on the enforceability of the RPA's arbitration clause, which was found to be unenforceable under Nebraska law due to its relation to an insurance policy. Following this, AUCRA sought to vacate the award and dismiss the case for forum non conveniens, which the district court granted, stating the matter should have been brought in Nebraska state court, without addressing the arbitration award's validity.

Subsequently, AUCRA filed a complaint against Milan in Douglas County District Court on March 7, 2016, claiming $2,953,722.20 owed under the RPA. AUCRA requested a stay of litigation pending arbitration resolution under the FAA, asserting that the Binder executed by Milan required arbitration for claims. Milan countered with claims of fraudulent misrepresentation and sought to stop arbitration based on the AAA panel's previous finding. AUCRA filed multiple requests for a stay, incorporating the Binder in its latest filing. In May 2016, the district court granted AUCRA’s motion for a stay due to the pending Sixth Circuit appeal, ordering the parties to notify the court of any developments from the appeal before further proceedings.

In December 2016, the Sixth Circuit dismissed AUCRA’s appeal regarding the federal district court's inaction on AUCRA's motion to vacate an AAA arbitration award, interpreting the silence as an indication that the parties should pursue remedies in Nebraska, as per their contractual agreement. The court declined to assert jurisdiction over the arbitration award's validity.

Subsequently, in November 2017, the Douglas County District Court held a hearing concerning AUCRA's motion to stay arbitration and Milan's motion to halt it. The court had previously partially ruled on AUCRA's motion. In February 2018, the district court denied AUCRA's motion to stay arbitration and granted Milan's motion based on issue and claim preclusion, highlighting Milan's arguments against the enforcement of the arbitration clause under Nebraska law and AUCRA's counterarguments based on federal law and Tennessee state law.

AUCRA contested the ruling, asserting that the arbitration clause in the Binder was distinct from that in the RPA and not subject to Nebraska law. AUCRA requested a stay on its motion pending a Nebraska Supreme Court interpretation of relevant law. Following a May 2018 hearing, the district court denied AUCRA's motion without new reasoning, prompting AUCRA to appeal.

AUCRA claims the district court erred in applying issue and claim preclusion to bar enforcement of the Binder's arbitration agreement. The appellate court confirmed that arbitrability and the appropriateness of a stay are legal questions, and it maintains jurisdiction over AUCRA's appeal. For jurisdiction to exist, a final order must be issued by the lower court, which affects a substantial right as defined under Nebraska law.

Denial of a motion to compel arbitration under the Federal Arbitration Act (FAA) constitutes a final, appealable order under Nebraska law if it affects a substantial right during a special proceeding. Not all orders denying arbitration affect substantial rights; only those that deprive the moving party of legal rights available prior to the order, such as the benefits of an arbitration agreement, qualify. For instance, an order denying arbitration was not deemed final when the moving party failed to demonstrate the existence of an arbitration agreement. In this case, the district court denied AUCRA’s motion to stay litigation pending arbitration and granted Milan’s motion to halt arbitration, citing preclusion doctrines without addressing the enforceability of the arbitration clause in the Binder. The court's denial affected AUCRA’s substantial rights related to the contractual right to arbitration outlined in the Binder, thus rendering the order final and appealable.

Additionally, after an AAA arbitration panel ruled the RPA's arbitration provision unenforceable, AUCRA sought arbitration through JAMS under the Binder's clause. The district court ruled against AUCRA's second attempt at arbitration based on issue and claim preclusion, leading to a dispute over the Binder's relevance, as neither AUCRA's complaint nor Milan's counterclaim alleged breach of the Binder. The Binder, signed solely by Milan, served to request workers' compensation insurance policies contingent upon executing the RPA and finance agreement, which AUCRA identified as the main agreement in their business relationship.

Milan contended that all claims from both parties were directly related to the RPA and not to the Binder, which it characterized as a temporary agreement facilitating an insurance arrangement prior to the RPA. Milan asserted that AUCRA was improperly attempting to invoke an arbitration clause from the Binder while not contesting the Binder itself. AUCRA maintained that the RPA was the sole contract governing the dispute but argued that the arbitration clause in the Binder should apply nonetheless. 

The district court determined that the enforceability of the arbitration clause in the Binder had been effectively settled by an arbitration panel, which ruled that, under Nebraska law (§ 25-2602.01(f)(4)), arbitration clauses related to insurance policies are unenforceable and are not preempted by the FAA. Thus, the court found the question of the Binder's arbitration clause enforceability barred by issue and claim preclusion.

Issue preclusion prevents re-litigation of an issue that has been conclusively decided in a prior case involving the same parties. The court outlined the requirements for issue preclusion: (1) an identical issue was decided in a prior action, (2) there was a final judgment on the merits, (3) the party against whom it is applied was involved in the prior action, and (4) there was an opportunity to fully litigate the issue previously. AUCRA argued that the district court incorrectly applied issue preclusion, claiming that the first and fourth elements were not satisfied, as no prior arbitrator or court had specifically evaluated the enforceability of the Binder's arbitration clause. AUCRA highlighted distinctions between the RPA and the Binder, including differing choice-of-law provisions and the applicability of Nebraska versus Tennessee law regarding enforceability.

AUCRA argues that the current issue before the district court differs from those previously decided by the arbitration panel or a Tennessee court. The district court highlighted that the arbitration panel ruled arbitration clauses in contracts related to insurance policies are unenforceable under § 25-2602.01(f)(4) and that this statute is not preempted by the FAA. The panel also established that the arbitration clause in the Binder pertains to an insurance policy. Although AUCRA claimed there was no choice-of-law provision in the Binder, unlike the RPA, the district court noted the Binder is subject to both FAA and Nebraska’s arbitration laws.

The arbitration panel had already addressed the enforceability of arbitration agreements related to insurance policies under both legal frameworks, rendering its prior decision final and on the merits. The court affirmed that the Binder is indeed an insurance-related contract governed by Nebraska law, and the dispute primarily arises from the RPA, which the arbitration panel has already adjudicated regarding the enforceability of its arbitration agreement.

AUCRA also contended it lacked the opportunity to litigate the enforceability of the Binder’s arbitration clause due to its focus on the RPA. However, the district court found that AUCRA participated in the previous litigation and had a fair opportunity to contest these issues, fulfilling the criteria for issue preclusion. Lastly, AUCRA's argument regarding the inequity of applying issue preclusion due to differing arbitration rules between AAA and JAMS was dismissed by Milan, who characterized it as irrelevant, asserting that it does not prevent issue preclusion from being applicable in this case.

Milan recognizes that the arbitration provisions in the RPA and Binder utilize different arbitration rules but asserts that AUCRA did not demonstrate how the arbitration processes in AAA and JAMS differ concerning the enforceability of the arbitration provision. The core issue is whether a final decision regarding the enforceability of the Binder's arbitration clause has already been made. The district court concluded that issue preclusion prevented AUCRA from pursuing arbitration through the Binder.

Claim preclusion under Nebraska law prohibits relitigating any matter that was directly addressed or necessarily included in a previous adjudication if certain conditions are met: the prior judgment must be final, rendered by a competent court, on the merits, and involve the same parties or their privies. The district court determined that an arbitrator had previously ruled that Nebraska law disallows the enforcement of arbitration clauses like the one in the RPA, noting that both arbitration requests stem from the same alleged breach and involve similar factual considerations.

The court found that because the earlier arbitration decision was final and on the merits, and the parties were the same, all criteria for claim preclusion were satisfied. It ruled that AUCRA could not compel a new arbitration under the Binder since the claim was either included in or could have been raised in the prior proceedings.

AUCRA contends that the enforceability of the Binder’s arbitration agreement was not necessarily addressed in the AAA arbitration panel’s decision, arguing that the panel could not have adjudicated this without exceeding its jurisdiction since the prior arbitration focused solely on the RPA. AUCRA claims that it did not request, nor could have requested, a determination regarding the Binder because the AAA panel lacked subject matter jurisdiction over it. However, Milan argues that AUCRA has not cited any authority or AAA rule restricting the Arbitration Panel's jurisdiction to assess the validity of the arbitration provision under the RPA.

In Hicks v. O’Meara, the plaintiffs, a husband and wife, filed a wrongful termination claim against their former employer in a South Dakota small claims court after their one-year employment contract was terminated after five months. The court ruled in favor of the employer. Subsequently, the plaintiffs pursued a federal district court action for unpaid minimum wage and overtime, alleging violations of the Fair Labor Standards Act and state law, without contesting the wrongful termination dismissal. The federal court granted summary judgment for the employer based on res judicata, but the Eighth Circuit reversed this decision, stating that the two claims were based on different facts and involved different wrongs, and that the small claims court lacked jurisdiction over the amount claimed, which exceeded $13,000.

In a separate matter, AUCRA attempted to bring a breach of contract claim against Milan, which was the same claim previously raised. The court found that both claims were related to an insurance policy and noted that an arbitration panel had ruled arbitration clauses in such cases unenforceable under the FAA and Nebraska law. AUCRA's argument that it could not raise issues regarding the Binder due to lack of jurisdiction was deemed unsupported. The district court's decision to bar AUCRA’s second arbitration attempt based on claim preclusion was upheld. Furthermore, the district court's ruling that agreements to arbitrate future disputes in insurance policies are invalid under Nebraska law was acknowledged, but not necessary for the decision. The district court's order denying AUCRA's motion to stay arbitration and granting Milan's motion to stop arbitration was affirmed.