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Beam Partners, LLC v. Atkins

United States District Court, E.D. Kentucky, Central Division, Frankfort

September 11, 2018



          Gregory F. Van Tatenhove, United States District Judge

         Federal judges often find themselves at the intersection of state law and federal law and faced with the dilemma of which direction to turn. Occasionally, an area of state law can circumvent the Founding Fathers' dictate that federal law reign supreme, but only in rare situations. After several hearings and many hundreds of pages of briefing, the Court finds that this situation does not arise here. Kentucky's prohibition of arbitration between insolvent insurance companies and third-party contractors does not trump the mandate of the Federal Arbitration Act that valid arbitration agreements must be upheld. For the following reasons, the Liquidator's motions to dismiss are DENIED and the Plaintiffs' motions to compel arbitration are GRANTED.


         The Kentucky Health Cooperative (KYHC) sought approval from the Center for Medicare and Medicaid Services (CMS) to offer health plans to Kentucky citizens in 2011 and 2012. [R. 4-1 at 2.] During this time, KYHC contracted with Beam Partners, LLC, whereby Beam Partners would provide management and support services to KYHC. [R. 4-2.] Terry S. Shilling is the sole member of Beam Partners. [R. 1 at ¶ 2.] Through this Management and Development Agreement (MDA), Beam Partners agreed to train and orient members of the KYHC board of directors, apply for and obtain licensure for KYHC through the Kentucky Department of Insurance, apply for KYHC's tax-exempt status, provide consulting services to KYHC regarding internal systems and processes, identify and screen candidates for KYHC's support services, and provide interim management assistance until KYHC installed permanent officers. [R. 4-1 at 3.] The MDA included a section where parties agreed to arbitrate claims and disputes arising under or relating to the MDA. [R. 4-2 at 10-11.]

         Similarly, KYHC contracted with Milliman, Inc., for Milliman to perform actuary and consulting services to KYHC [Milliman, Inc., v. Roof, 3:18-cv-00012-GFVT, R. 1-2], and CGI Technologies and Solutions, Inc., agreed to perform administrative services for KYHC [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 9-2]. Significantly, each of these agreements also contained arbitration clauses. [Milliman, Inc., v. Roof, 3:18-cv-00012-GFVT, R. 1-2 at ¶ 5; Milliman, Inc., v. Roof, 3:18-cv-00012-GFVT, R. 1-3 at ¶ 4; Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 9-2 at 26-27.]

         By the end of 2015, KYHC was insolvent and placed into rehabilitation by Franklin Circuit Court in Franklin County, Kentucky. [R. 4-3 at 3.] Pursuant to KRS § 304.33-010, et seq., Franklin Circuit Court placed KYHC into liquidation on January 15, 2016, and appointed H. Brian Maynard, Commissioner of the Kentucky Department of Insurance, as the Liquidator. Id. at 4. Jeff Gaither and David Hurt were appointed as Special Deputy Liquidators. Id.

         Pursuant to the Liquidation Order,

The Liquidator and the Special Deputy Liquidators are hereby authorized to deal with the property, business, and affairs of KYHC and KYHC's estate, and in any necessary forum, to sue or defend for KYHC, or for the benefit of KYHC's policyholders, creditors, or shareholders in the courts and tribunal, agencies or arbitration panels of this states and other states, or in any applicable federal court in the Liquidator's name as Commissioner of the Kentucky Department of Insurance, in his capacity as Liquidator, or a Special deputy in his capacity as Special Deputy Liquidator, or in the name of KYHC.

Id. at 8. Since that time, Nancy G. Atkins has replaced H. Brian Maynard as Commissioner of the Kentucky Department of Insurance, and thus also as the Liquidator. See KRS § 304.33-200. Donald Roof was also appointed as a Deputy Litigator for KYHC on August 14, 2017. [Milliman, Inc., v. Roof, 3:18-cv-00012-GFVT, R. 1 at 2.]

         On May 13, 2016, the Liquidator sued CGI in Franklin Circuit Court for breach of contract and tort claims. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 71-1 at 2.] The Liquidator refused to honor the arbitration clause, so CGI removed that claim to this Court and filed a Petition to Compel Arbitration. Id. Those actions were consolidated. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 8.]

         That fall, the Liquidator sued Beam Partners and Terry Shilling, along with Janie Miller, [1]Joseph E. Smith, [2] the Officers and Board of Directors of KYHC, and CGI for similar breach of contract and tort claims. [R. 4-4.] The Liquidator again refused to arbitrate, and CGI removed that action to this Court on December 1, 2016. [Jeff Gaither, Deputy Liquidator of Kentucky Health Cooperative, Inc. v. Beam Partners, LLC, et al., 3:16-cv-00094-GFVT, R. 1.] Beam Partners and Terry Shilling (collectively, “Beam Partners”) then filed this present action, a Petition to Compel Arbitration, on January 6, 2017. [R. 1.]

         Meanwhile, in Atkins v. CGI, the Liquidator sought remand back to Franklin Circuit Court. KYHC is a Kentucky non-profit corporation with a principal place of business in Kentucky, while CGI is a business incorporated in Delaware with a principal place of business in Virginia. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 1 at 1.] The amount in controversy exceeds $75, 000. Id. Accordingly, under a traditional analysis of diversity jurisdiction, this Court has requisite authority and subject-matter jurisdiction. 28 U.S.C. § 1332(b). However, the Liquidator sought remand on the basis of reverse preemption. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 49 at 3-4.] On January 3, 2017, this Court determined that its federal diversity jurisdiction was not reverse preempted by application of the Kentucky Insurers Rehabilitation and Liquidation Law (IRLL) through the McCarran-Ferguson Act. Id. at 16. Accordingly, the Liquidator's Motion to Remand was denied. Id.

         Similarly, the Liquidator sought remand in the contract and tort action, Gaither v. Beam. In Gaither, however, there was not complete diversity, as both plaintiffs and several defendants were residents of Kentucky. [Jeff Gaither, Deputy Liquidator of Kentucky Health Cooperative, Inc. v. Beam Partners, LLC, et al., 3:16-cv-00094-GFVT, R. 44 at 6.] On March 31, 2017, this Court declined to sever the claims against the nondiverse parties and remanded for lack of jurisdiction. Id. at 30.

         After these developments, this Court denied CGI's Motion to Compel Arbitration without prejudice and directed the parties to re-brief the issue based on the significantly altered procedural posture. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 63.] Instead, CGI appealed the Court's Order to the Sixth Circuit Court of Appeals. [Atkins v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, R. 67.] Pending a decision in that case, the Court stayed this action. [R. 14.]

         Early in 2018, the Sixth Circuit vacated this Court's Order denying CGI's Motion to Compel Arbitration and remanded for further proceedings. Atkins v. CGI Techs. & Sols., Inc., 724 Fed.Appx. 383 (6th Cir. 2018). The Court of Appeals reviewed only this Court's denial of the Motion to Compel Arbitration and did not review any decision involving abstention. Id. at 388. Accordingly, the Circuit Court determined that denial of the Motion to Compel Arbitration was premature insofar as it was based on reverse preemption under Kentucky's IRLL. Id. at 390-93. Because the case had been removed from state court and this Court had denied remand, the purposes served by the exclusive jurisdiction provision of the IRLL did not apply, and state interests could not trump federal interests in the disposition of the case. Id.

         However, while removing the issue of IRLL reverse preemption from Atkins v. CGI, the Sixth Circuit did not resolve all issues, nor did the Sixth Circuit resolve the issue of reverse preemption in either this case or Milliman v. Roof. The Liquidator has filed a Supplemental Motion to Dismiss [R. 19] to revisit this issue, and the parties appeared before this Court for oral argument [R. 30].[3]


         In the initial Motion to Compel Arbitration, Beam Partners argued that the parties entered into a valid agreement to arbitrate and that this dispute fell within the scope of that agreement, therefore, the Federal Arbitration Act mandates arbitration. [R. 4-1 at 5.] The Liquidator disagreed, stating that the agreement was invalid under Kentucky law, and thus the Court could not compel arbitration. [R. 9-1 at 1-2.] Specifically, the Liquidator argued that Kentucky law reverse preempted federal diversity jurisdiction in this case. Id. In the alternative, the Liquidator requested this Court abstain from exercising jurisdiction. Id. Following the Sixth Circuit decision in Atkins v. CGI, the Liquidator supplemented the original motion to dismiss, arguing that the prior exclusive jurisdiction doctrine precludes this Court from exercising subject-matter jurisdiction and that Beam Partners' petition for arbitration was not ripe for review. [R. 19 at 5.]


         The Liquidator first claims that the McCarran-Ferguson Act reverse preempts this Court's diversity jurisdiction. [R. 9-1 at 9-10.] Because the IRLL vests exclusive jurisdiction in the Franklin Circuit Court for matters relating to an insurance company's liquidation, the Liquidator argues that this Court does not have subject-matter jurisdiction. The Court has already rejected this argument in H. Nancy G. Atkins, Liquidator of Kentucky Health Cooperative, Inc. v. CGI Techs. & Sols., Inc., 3:16-cv-00037-GFVT, and the teaching of the Sixth Circuit agrees: “the district court's jurisdictional ruling, rejecting the Liquidator's argument that Kentucky's IRLL reverse-preempted the federal diversity jurisdiction statute, is consonant with Sixth Circuit law and the majority view among the circuits.” Atkins v. CGI Techs. & Sols., Inc., 724 Fed. App'x 383, 388 (6th Cir. 2018). Nevertheless, the Court reiterates that ruling here.

         Parties agree that the “fundamental tenets of diversity jurisdiction” are present. As required by 28 U.S.C. § 1332(a)(1), there is complete diversity amongst the parties. Beam Partners, LLC is a business incorporated in Georgia, and its only member, Terry S. Shilling, is also a citizen of Georgia. [R. 1 at 1.] Brian Maynard is the court-appointed liquidator of KYHC, which is a non-profit corporation that has its principal place of business in Kentucky. Id. at 2. The amount in controversy exceeds $75, 000. 28 U.S.C. § 1332(b). Therefore, under a traditional analysis of diversity jurisdiction, this Court has the requisite authority and subject-matter jurisdiction to adjudicate this dispute.

         Nonetheless, the question presented is whether federal law has opened the door for state law to reverse preempt the diversity jurisdiction statute. The Liquidator seeks to expand the existing McCarran-Ferguson reverse preemption framework to prevent Beam Partners from seeking relief in federal court. [R. 9-1 at 11.] However, the Constitution prevents this Court from ruling so expansively. See, e.g., Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 880 (1985) (“Although the McCarran-Ferguson Act exempts the insurance industry from Commerce Clause restrictions, it does not purport to limit in any way the applicability of the Equal Protection Clause”); AmSouth Bank v. Dale, 386 F.3d 763, 783 (6th Cir. 2004) (“courts tend to look unfavorably on claims of McCarran-Ferguson preemption of . . . the removal statutes so as to insulate that action from the federal courts”). Most Circuit Courts of Appeals that have addressed this question have either rejected the argument or expressed skepticism in applying McCarran-Ferguson to the federal diversity jurisdiction statute. See, e.g., AmSouth Bank, 386 F.3d at 783; Dykhouse v. Corp. Risk Mgmt. Corp., No. 91-1646, 1992 WL 97952 *2 n.9 (6th Cir. May 8, 1992) (unpublished per curiam decision); Hawthorne Savs. F.S.B. v. Reliance Ins. Co. of Ill., 421 F.3d 835, 843 (9th Cir. 2005), Gross v. Weingarten, 217 F.3d 208, 222 (4th Cir. 2000); Munich Am. Reins. Co. v. Crawford, 141 F.3d 585, 595-96 (5th Cir. 1998); Murff v. Prof'l Med. Ins. Co., 97 F.3d 289, 293 (8th Cir. 1996)).

         After further research, the Court found one example of McCarran-Ferguson reverse preempting federal diversity jurisdiction. See W. Ins. Co. v. A & H Ins., Inc., 784 F.3d 725 (10th Cir. 2010). Western Insurance Company became insolvent and was liquidated pursuant to the Utah Insurer Receivership Act. Id. at 726. The district court in this matter appeared to intertwine analysis of McCarran-Ferguson with discussions of abstention. Id. at 728-29 (“the court proceeded to mix the two doctrines by referring to abstention under the McCarran- Ferguson Act”) (internal quotation marks omitted). The appellate court in this case determined that the district court had abstained due to McCarran-Ferguson reverse preemption and that the “order was ‘based to a fair degree' upon lack of subject matter jurisdiction.” Id. at 729. Accordingly, the Court of Appeals was unable to rule on the merits of the district court's analysis as they lacked appellate jurisdiction to review the district court. Id. Even in light of W. Ins. Co., this Court has been unable to find a Court of Appeals decision that permits federal diversity jurisdiction to be reverse preempted by the McCarran-Ferguson Act.

         There are important Constitutional reasons why this is the case. Federal diversity jurisdiction, 28 U.S.C. § 1332, and the removal mechanism available in 28 U.S.C. § 1441, were enacted by Congress through its authority under Article 1, Section 8, Clause 9 (“To constitute Tribunals inferior to the Supreme Court”) and Article III of the United States Constitution. Accordingly, the framework established by McCarran-Ferguson does not apply when it comes to federal diversity jurisdiction.

         Moreover, consistent with the Supremacy Clause, U.S. Const. art. VI, cl. 2, federal jurisdiction prevails over conflicting state forum provisions. See also Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 152-53 (1982). The Supremacy Clause states that, “the Laws of the United States which shall be made in Pursuance” of the Constitution “shall be the supreme Law of the Land.” U.S. Const. art. VI, cl. 2. “Conflict preemption occurs where compliance with both federal and state regulations is a physical impossibility, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” State Farm Bank v. Reardon, 539 F.3d 336, 342 (quoting Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 98 (1992)) (internal quotations omitted). In the case at hand, application of the Kentucky IRLL's exclusive jurisdiction provision would directly conflict with federal law, therefore, the IRLL jurisdiction provision must be preempted by the federal removal and diversity subject matter jurisdiction statutes resulting in this Court being appropriately vested with the subject-matter jurisdiction needed to adjudicate this dispute.



         The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., “manifests a liberal federal policy favoring arbitration agreements.” Masco Corp. v. Zurich Am. Ins. Co., 382 F.3d 624, 626 (6th Cir. 2004) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)) (internal quotation marks omitted). Section 2 of the FAA states that arbitration clauses in commercial contracts “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2; see also Javitch v. First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir. 2003). Under § 4, when a party is “aggrieved by the failure of another party to arbitrate under a written agreement for arbitration, ” that party “may petition a federal court for an order directing that such arbitration proceed in the manner provided for” by the contract. Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 68 (2010) (quoting 9 U.S.C. ยง 4) (internal quotation marks omitted). According to the United ...

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