United States District Court, E.D. Kentucky, Central Division, Frankfort
BEAM PARTNERS, LLC, and TERRY S. SHILLING Plaintiffs,
NANCY G. ATKINS, LIQUIDATOR OF KENTUCKY HEALTH COOPERATIVE, INC., Defendant.
MEMORANDUM OPINION & ORDER
Gregory F. Van Tatenhove, United States District Judge
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.
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.]
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.]
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.
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
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.]
fall, the Liquidator sued Beam Partners and Terry Shilling,
along with Janie Miller, Joseph E. Smith,  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.]
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.
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.
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.]
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.
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.
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.]
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.
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.
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)).
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
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.
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.
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. § 4) (internal
quotation marks omitted). According to the United ...