HAMILTON LIFE INS. CO. OF N. Y. v. REPUBLIC NAT. LIFE INS. CO.

J. JOSEPH SMITH, Circuit Judge:

This is an appeal from a judgment of the United States District Court for the Southern District of New York, William B. Herlands, Judge, 291 F.Supp. 225 (S.D.N.Y.1968), granting motion of appellee Hamilton Life Insurance Company of New York to compel arbitration pursuant to 9 U.S.C. § 4.1 We find no error and affirm the judgment.

Republic contends that it was entitled to a trial by jury on the issue of the existence of a written contract to arbitrate, that the terms of the agreement giving broad powers to the arbitrators denied it due process of law, that the agreement is invalid under the McCarran Act, and that there was no jurisdiction over it obtained in the action. Judge Herlands, in a characteristically careful and well reasoned opinion, rejected these contentions, and we agree.

On September 21, 1965 Hamilton and Republic entered into a written agreement of reinsurance, which provided that Republic would reinsure a certain percentage of the risks on group life insurance policies written by Hamilton covering civil service employees in the New York City area. The reinsurance agreement contains the following broad arbitration clause:

Disputes having arisen between the parties, on July 27, 1967 Hamilton served on Republic a Demand for Arbitration which recited that by virtue of the reinsurance agreement Republic was obligated to pay Hamilton the sum of $278,023.41, representing claims paid by Hamilton and reinsured by Republic. Republic refused to proceed to arbitration, and instead instituted a number of court proceedings in the Northern District of Texas and the District of Arizona to obtain judicial relief. Hamilton was at the time in financial difficulty and is under supervision by the New York State Insurance Department.

On December 11, 1967, Hamilton commenced the present action in the District Court to compel arbitration.

I.

Republic claims that the District Court erred in not requiring a jury trial in order to determine, as a preliminary fact, whether a written contract was made providing for arbitration of the disputes which Hamilton seeks to arbitrate. Specifically, Republic maintains that the contract is really a three-party parol contract, with Financial Security Life Insurance Company the third party, and that as such the contract must have a three-party arbitration clause to permit arbitration of disputes involving the ultimate liability of the three parties.

Section 2, 9 U.S.C. provides as follows:

Although a frivolous or patently baseless claim should not be ordered to arbitration, a court's function in an action to compel arbitration is limited to ascertaining whether the party seeking arbitration is making a claim which on its face is governed by the contract. Procter & Gamble Independent Union of Port Ivory, N. Y. v. Procter & Gamble Mfg. Co., 195 F.Supp. 64 (E.D.N.Y. 1961), aff'd 298 F.2d 647 (2 Cir. 1962).

The District Court correctly concluded that to allow Republic to prove that there was an oral agreement modifying the reinsurance agreement would violate the parol evidence rule, Fogelson v. Rackfay Construction Co., 300 N.Y. 334, 90 N.E.2d 881 (1950); N.Y.General Obligations Law, McKinney's Consol.Laws, c. 24-A, § 15-301; 1A Moore's Federal Practice ¶ 0.313, and would be contrary to the express terms of the agreement, which provides:

The District Court also correctly noted that there is no impediment to enforcing an agreement to arbitrate as between two parties in a dispute involving a multi-party agreement. Wilko v. Swan, 201 F.2d 439, 445 (2 Cir.), rev'd on other grounds, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); Lumbermens Mutual Casualty Co. v. Borden, 268 F.Supp. 303 (S.D.N.Y.1967). Even assuming arguendo that a portion of the business ceded to Republic was to be retroceded to a third party, Financial Security, pursuant to an oral agreement, this would not affect the enforceability of the agreement between Hamilton and Republic to arbitrate, as between themselves, all disputes arising in connection with the business ceded by Hamilton under the reinsurance agreement, within the scope of 9 U.S.C. § 2 and § 4.

The court was correct in concluding that there was no bona fide issue concerning the making of the agreement for arbitration or the failure to comply therewith. Moreover, there was no right to jury trial had these issues existed, since Republic did not make a request for jury trial as required by the statute, 9 U.S.C. § 4, on or before the return day of the notice of application.

The court was therefore justified in concluding that under the facts the contract required submission to arbitration. Engineers Association v. Sperry Gyroscope Co., 251 F.2d 133 (2 Cir. 1957). See Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 412 (2 Cir. 1959), cert. dismissed 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960).

II.

Republic also maintains that the order of the District Court denies it due process of law in that Republic's legal defenses to arbitration are left to be decided by arbitrators who are specifically absolved of any responsibility to uphold the rule of law. Republic contends that the parties did not and could not have intended to include such legal issues as fraud and illegality, which are themselves defenses to an attempted enforcement of an agreement to arbitrate, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2 Cir. 1968); and Robert Lawrence Co., supra.

Republic's reliance upon the above cases is misplaced. Republic has not alleged that the arbitration agreement itself was induced by illegality or fraud, but rather makes these allegations with respect to the reinsurance agreement. Republic's answer states:

The Arbitration Act contemplates a distinction between the entire contract between the parties and the arbitration clause. While it is true that fraud or illegality in the inducement of the arbitration clause itself is a defense to enforcement of arbitration, the illegality, fraudulent inducement, or repudiation of the principal contract does not operate to nullify an agreement to arbitrate. Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra, 271 F.2d at 409-411. As the Supreme Court stated in Prima Paint, supra, 388 U.S. at 406, 87 S.Ct. at 1807:

The other cases relied upon by appellant are inapposite. In American Safety Equipment, supra, the court held that as a matter of accommodating the policies of the Sherman Antitrust and Arbitration Statutes, the remedy provided by the antitrust laws is of a character inappropriate for enforcement by arbitration. No such considerations are present before us here.

Nor did the District Court deny appellants a forum for determining if a written agreement exists for arbitrating the above "jurisdictional" questions. Instead the court explicitly found that the "jurisdictional" requisites were present, i. e. that the parties had made a binding agreement to arbitrate, and that the arbitration clause was broad enough to cover the defenses raised. Robert Lawrence Co., supra, 271 F.2d at 409.

Republic's attack on the arbitration clause as enabling a party with superior economic power to close the door of the courts to a weaker party is a little hard to digest, coming as it does from the party which was the author of the clause in the contract in question, a party moreover which has sought to delay arbitration so long against a failing insurance company whose condition would be vastly helped by arbitration proceedings and an award.

III.

Appellant further contends that application of the Arbitration Act is precluded by the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq.2

The McCarran Act does not recreate a "broad field for state regulation of the insurance industry free from federal intervention," as appellant argues. Instead it was a reaction to United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944) (which reversed the pre-existing rule that the business of insurance was not commerce), and attempted to return primary responsibility for insurance regulation to the states. Monarch Life Ins. Co. v. Loyal Protective Life Ins. Co., 326 F.2d 841 (2 Cir.), cert. denied 376 U.S. 952, 84 S.Ct. 968, 11 L.Ed.2d 971 (1963). Under the terms of the Act, only when a state has not acted, would federal legislation become effective.

The McCarran Act does not, as appellant submits, exempt the business of insurance from the coverage of all federal statutes which do not specifically state that their provisions are applicable to insurance. As the District Court correctly noted:

To avail itself of the McCarran Act, then, appellant must show that the application of the Federal Arbitration Act would "invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance." 15 U.S.C. § 1012(b).

It is quite plain that arbitration statutes, including those of Texas and New York, are not statutes regulating the business of insurance, but statutes regulating the method of handling contract disputes generally. As the Supreme Court has recently said, in rejecting the claim that the McCarran Act precluded application of federal securities regulation to merger of Arizona insurance companies, "Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the `business of insurance' does the statute apply * * * [W]hatever the exact scope of the statutory term [business of insurance], it is clear where the focus was — it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the `business of insurance.'" S. E. C. v. National Securities, Inc., et al., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (Jan. 27, 1969).

Neither the Texas Arbitration Act nor the New York Arbitration Act is a law regulating the business of insurance within the meaning of the McCarran Act.3

IV.

Appellant's final contention is that the District Court never obtained jurisdiction in personam over it since service of process in Texas was insufficient.

In Farr & Co. v. Cia Intercontinental de Navegacion, 243 F.2d 342 (2 Cir. 1957), this court held that the 1954 amendment to the Federal Arbitration Act provided that service of petitions to compel arbitration was governed by the Federal Rules of Civil Procedure4 and that under Rule 4(d) (7) Congress made available the manner of service of the state in which the petition was brought.5

The District Court held that personal service upon appellant in Texas was "unquestionably valid" under New York law which holds that "consent to jurisdiction includes consent to service by any method consistent with due process." Petrol Shipping Corp. v. Kingdom of Greece, 360 F.2d 103, 107 (2 Cir.), cert. denied 385 U.S. 931, 87 S.Ct. 291, 17 L.Ed.2d 213 (1966).

Appellant argues, however, that the submission in Petrol Shipping was based upon the express provision that arbitration takes place in New York, with the statement, "for the purpose of enforcing any award, this agreement may be made a rule of the Court." Similarly in Farr & Co., supra, the arbitration agreement directed the arbitration to take place in New York, adding that "this submission may be made a rule of Court by either party."

These distinctions do not, however, require a different result here. The arbitration clause states that arbitration is to be "held in the city where the home office of CEDING COMPANY [Hamilton] is domiciled," which was and is New York City. Under New York law, the making of an agreement providing for arbitration in New York confers in personam jurisdiction on the courts to enforce the agreement and enter judgment on an award. As the court said in Samincorp So. Amer. M. & M. Corp. v. Tikvah Min. Co., 43 Misc.2d 27, 250 N.Y.S.2d 151 (Sup.Ct.N.Y.Co.1964), at 153:

See also S. M. Wolff Co. v. Tulkoff, 9 N.Y.2d 356, 214 N.Y.S.2d 374 (1961); Gilbert v. Burnstine, 255 N.Y. 348, 174 N.E. 706, 73 A.L.R. 1453 (1930).

Since consent to arbitration in New York provides a basis for the court's exercise of power, the court obtained jurisdiction over appellant by personal service on it in Texas. Petrol Shipping, supra.

Judgment affirmed.