APPEAL FROM JEFFERSON CIRCUIT COURT HONORABLE IRV MAZE, JUDGE ACTION NO. 10-CI-004121
BRIEFS AND ORAL ARGUMENT FOR APPELLANT: Todd C. Myers Lexington, Kentucky
BRIEF FOR APPELLEE: Eric L. Ison Margaret E. Keane Benjamin J. Lewis Louisville, Kentucky ORAL ARGUMENT FOR APPELLEE: Benjamin J. Lewis Louisville, Kentucky
BEFORE: KELLER,  STUMBO, AND THOMPSON, JUDGES.
Hugh Scott (Scott) appeals from the circuit court's orders denying his motion to compel arbitration. On appeal, Scott argues that an arbitration provision contained in an agreement entered into by Louisville Bedding Company (Bedding), United Re Trust, and United Re AG is enforceable and that he is entitled to enforce it. Bedding argues that the arbitration provision is not enforceable and, even if it is, Scott is not entitled to enforce it. Having reviewed the record and the arguments of the parties, we agree with the circuit court that Scott is not entitled to enforce the arbitration provision and affirm.
The parties had not conducted any significant discovery before Scott filed this appeal. Therefore, we take our recitation of the facts from the parties' pleadings.
Bedding provides health insurance to its employees, which it self-insures. In 2008, Bedding approached American Administrators for advice and guidance with regard to administering its health insurance plan and obtaining excess or "stop-loss" insurance. Based on advice from American Administrators, or based on its own investigation,  Bedding applied to participate in the United Re Trust, which is administered by United Re AG (hereinafter collectively the United Re Entities), and Bedding and the United Re Entities entered into a "Trust Agreement" (the Agreement). The Agreement was signed by Scott, as President of United Re AG, and contains the following pertinent provision:
THIS AGREEMENT AND THE TRUST IT CREATES SHALL BE INTERPRETED ACCORDING TO THE LAWS OF THE STATE OF TEXAS. IN THE EVENT THERE IS A DISPUTE BETWEEN THE BENEFICIARY AND TRUSTEE AS TO ANY ASPECT OF THE TRUST, INCLUDING DISPUTES OVER DISTRIBUTION OF FUNDS, BENEFICIARY AND TRUSTEE HAVE AGREED TO BINDING ARBITRATION WITH THE AMERICAN ARBITRATION ASSOCIATION AS OUTLINED IN SCHEDULE B.
Schedule B to the Agreement, which is entitled "Participation Guide United Re Trust", contains the following pertinent provision:
LEGAL ACTION - NO LEGAL ACTION CAN BE BROUGHT AGAINST THE TRUSTEE OR THE TRUST. ANY CONFLICTS OR DISPUTES RELATING TO THE CREATION OR ADMINISTRATION OF THE TRUST SHALL BE RESOLVED THROUGH BINDING ARBITRATION ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION IN THE STATE IN WHICH THE EMPLOYER IS HEADQUARTERED.
Bedding believed that, pursuant to the Agreement, the United Re Entities would purchase stop-loss insurance to cover any medical expenses Bedding incurred in excess of $200, 000 per individual employee or $1, 878, 341 in the aggregate. Scott argues that the United Re Entities were not offering any type of insurance and that they were not obligated to purchase stop-loss insurance coverage for Bedding. During the year the Agreement was in place, Bedding incurred medical expenses that exceeded the $1, 878, 341 provided for in the Agreement by $925, 846.97. Pursuant to its understanding of the Agreement, Bedding submitted a claim to the United Re Entities seeking payment in that amount. Bedding's claim was denied, and Bedding filed a complaint against the United Re Entities, Scott, American Administrators, and a number of other individuals. In its complaint, Bedding alleged that: Scott exercised complete control over United Re Trust; the United Re Entities were simply Scott's "alter egos"; United Re Trust is an unincorporated organization; United Re Trust unlawfully sold insurance; United Re Trust was a "scheme" to avoid insurance regulations; the United Re Entities were the defendants in a number of lawsuits that threatened their financial stability; neither Scott nor any of the other defendants advised Bedding of the financial instability of the United Re Entities; and the actions of Scott and/or United Re Trust amounted to fraud, misrepresentation, negligent misrepresentation, deceit, breach of contract, and/or unjust enrichment. We note that United Re AG was not named as a party in the complaint that was filed of record on June 14, 2010. However, based on other documents in the record, it appears that Bedding filed an amended complaint and named United Re AG as a party defendant at some point early in the litigation.
The defendants, with the exception of the United Re Entities, filed answers. In his answer, Scott, in pertinent part, denied that he is the alter-ego for the United Re Entities and asserted that the court lacked jurisdiction because the Agreement was subject to arbitration.
Because the United Re Entities did not file an answer to Bedding's complaint and/or amended complaint, the court entered a default judgment against them. Neither the United Re Entities, nor anyone on their behalf, challenged that judgment, and it is now final.
On February 2, 2011, approximately eight months after Bedding filed its complaint, Scott filed a motion to dismiss or, in the alternative, to compel arbitration. We note that several of the other defendants had filed similar motions at or near that same time. However, because those defendants are not parties to this appeal, we do not further address their motions.
On June 7, 2011, the court entered an order compelling arbitration. In doing so, the court determined that the Agreement was valid and enforceable and that the arbitration provisions were also valid and enforceable.
Bedding filed a motion to alter, amend, or vacate, arguing that the arbitration provisions in the Agreement are not enforceable under the Kentucky Uniform Arbitration Act (KUAA) because the Agreement is an insurance contract, and it does not specify Kentucky as the site for any arbitration proceedings. Furthermore, Bedding argued that by responding to discovery requests and filing a motion to dismiss, Scott had waived any right to compel arbitration. Scott argued to the contrary.
On September 30, 2011, the court entered an amended opinion and order. In that order, the court held that it lacked jurisdiction under the KUAA to enforce the arbitration provisions because the Agreement did not specify that any arbitration would take place in Kentucky. However, the court noted that, as applied to this case, the Federal Arbitration Act (FAA) preempted the KUAA, thus giving the court jurisdiction. The court then determined that because Scott signed the Agreement in his capacity as "President" of United Re AG, he was not a party to the Agreement; therefore, he could not enforce the arbitration provisions. The court did not address whether Scott's conduct during litigation acted as a waiver of the arbitration provisions. Furthermore, the court stated that it did not need to determine whether the Agreement was an insurance contract and was not doing so.
Scott then filed a motion to alter, amend, or vacate and, in the alternative, renewed his motion to dismiss. On January 9, 2012, the court entered its final order addressing the arbitration issue. In that order, the court found that the Agreement is an insurance contract and thus unenforceable under the KUAA. Furthermore, the court found that the FAA did not preempt the KUAA's exemption of insurance contracts from arbitration. Finally, the court held that since the arbitration provisions were unenforceable, Scott could not use those provisions to compel arbitration. It is from the court's two orders denying his motions to compel arbitration that Scott now appeals.
On appeal, Scott argues that the arbitration provision of the Agreement is enforceable under both the FAA and KUAA; the provision inures to his benefit personally; he has not waived his right to enforce the provision because of his conduct during litigation in circuit court; the Agreement is not an insurance contract; if the Agreement is an insurance contract, it is enforceable because the KUAA exemption for insurance contracts is preempted by the FAA; and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) requires enforcement. Bedding argues to the contrary.
STANDARD OF REVIEW
When reviewing a trial court's ruling on the enforceability of an arbitration agreement, "we defer to the trial court's factual findings, upsetting them only if clearly erroneous or if unsupported by substantial evidence, but we review without deference the trial court's identification and application of legal ...