United States v. Clark

Brief in Support of Defendants' Motion to Dismiss Complaint and Petition to Compel Arbitration

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION

BRIEF IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS COMPLAINT AND PETITION TO COMPEL ARBITRATION

I. Pertinent Facts

The filed a complaint in the Mobile County Circuit Court on November 12, against and 's agents, and .

The alleged claims of fraud and conspiracy against the defendants based on the sale and servicing of adjustable life insurance policies (and the surrendering of their older policies) in 1984.

The assert in their complaint that they met with at their home in October of 1984 to discuss their insurance coverage with .

The already had policies with with built-up cash value, that suggested they surrender and put into two new policies.

told the that Mr. could purchase a 150,000 policy for $102.00 per month and could purchase a policy for approximately $20-$30 per month.

The had told that they only wanted permanent type of coverage where the insurance was guaranteed for life for the premium paid.

The did not want term or term-like insurance where the policy runs out at a certain age. told them that she had just the policy for them.

She stated that as long as the premiums quoted were paid, the insurance coverage would exist. She further told the that these policies had a savings fund where money would continue to build up for the .

The were told that the savings and the insurance were separate parts of the same product, except that they could use the savings fund to pay premiums on the policies if they ever needed or wanted to do that.

showed the illustrations with the current rates only (no guarantees), which reflected that Mr. could have $58,114 he could withdraw at age 65, and Mrs. would have around $10,000 she could withdraw.

told the that taking these amounts out would not affect the insurance coverage.

told the that was paying 8%-10% interest on the money in the savings fund because of the money was saving on not advertising this policy to the public.

convinced the to exchange their older policies for these new policies.

Consequently, close to $6,000 dollars was taken from Mr. 's policy ($5,922.73) and put into his new policy, and $447.05 was taken from Mrs. 's older policy and put into her new policy.

did not inform the that these new policies were actually a type of term insurance where the cost of insurance goes up each year, and that the premium for each policy would not carry the policies to maturity or even through the .

The policies will lapse within a few years, leaving the without insurance coverage they thought they had purchased or the retirement money guaranteed.

Upon the Rainwaters discovering in 1998 through counsel the actual type of policy sold to them, and the problems with those policies, they filed their Complaint. Upon being served, filed a Removal to this Court. did so without the Alabama resident being served.

The promptly filed a Motion for Remand, with which , after being served at her home in Baldwin County, Alabama, agreed.

The case was then remanded to the Circuit Court of Mobile County on .

thereafter filed this Complaint and Petition under 9 U.S.C. §§ 3 and 4 with this Court.

The Arbitration provision that seeks to force the to follow instead of their suit in the Mobile County Circuit Court was not a part of the applications they signed to purchase the policies in 1984 (or the earlier ones), and was not a part of the policies.

Indeed, no reference is made to arbitration in any of the documents given to the by , except of course document sent subsequently to the amendment.

claims that simply because it is allowed to amend its Constitution and Laws at any time if certain requirements are met, and that the amendments are supposed to be binding on its policyholders (as a Fraternal Benefit Society), retroactively, that it can make any amendment it wants, even where as here, the amendment violates established federal and state law and constitutional rights of the .

This interpretation by of the statutes relating to Fraternal Benefit Societies issuing insurance policies is erroneous.

The ' 1984 policies in Part Two(2), starting on page six (6), define that the contracts between them and consist of the policy with all applications, endorsements, etc., the written application attached to the policy, the Articles of Incorporation of , and the Constitution and Laws of .

fails to include within the definition any amendment to the Constitution, Laws, or Articles of Incorporation.

Page seven (7) of each of the policies provides that the terms of the policy are governed by the laws of the state where it is delivered. (See the ' policies attached to 's Complaint as Exhibit B).

In this case, the state is Alabama.

It was not until approximately twelve (12) years after the purchased the policies that decided to amend its Constitution to include an alternative dispute resolution procedure for all claims brought by insureds against .

This amendment was made in December of 1996. The final step of the procedure is arbitration. unilaterally, without the knowledge or vote of its policyholders, held a quick telephonic meeting of the Board of Directors of and voted to amend its constitution to take away its insureds' rights to trials by juries.

II. Analysis of Law

A. The McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. §§ 1011-1012 (1945), in conjunction with the Alabama (Insurance) Code § 27-14-22, and Alabama's Anti-Arbitration Statute, Ala. Code § 8-1-41(3), prohibit enforcement of arbitration clauses in insurance policies purchased in Alabama.

has asserted that it should be allowed to force the to arbitrate their disputes pursuant to the FAA, and the alternative resolution/arbitration provisions amended into its Constitution and laws recently in December of 1996.

The ' policies and applications to purchase the policies contain no clause relating to arbitration or make any reference to arbitration whatsoever.

The did not agree to arbitration of any of their claims against , and further and most importantly, arbitration agreements in insurance contracts are prohibited in Alabama by the McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. §§ 1011-1012 (1945) and Ala. Code § 8-1-41(3).

Section 2 of the FAA relied upon by provides in pertinent part:

A written provision in any ... contract evidencing a transaction involving interstate commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable.... 9 U.S.C. § 2.

Historically, the United States Supreme Court has held that the business of insurance is not "commerce" within the meaning of the United States Constitution's Commerce Clause.

Thus, insurance was beyond the scope of federal control via statutes such as the FAA or otherwise.

Then, the United States Supreme Court's 1944 decision in United States v. Southeastern Underwriters Assoc., 322 U.S. 533 (1944), declared that the "business of insurance" was interstate commerce subject to the Sherman Antitrust Act.

Congress responded quickly to this case by enacting the McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. §§ 1011-1012 (1945).

This Act reserved to the states the sole right to regulate the business of insurance.

Indeed, Congress enacted this statute for the specific purpose of giving each State broad and primary responsibility for regulating the insurance industry.

In relevant part, the Act provides:

Regulation by state law, federal law relating specifically to insurance; applicability of certain federal law after June 30th, 1948.

(a) the business of insurance, and every person engaged therein, shall be subject to laws of several states which relate to the regulation or taxation of such business.

(b) no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance; PROVIDED, that after June 30th, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by state law.

15 U.S.C. § 1012(a) and (b). Ordinarily, federal law preempts conflicting state law due to the Supremacy Clause in the United States Constitution, Art. VI, Cl. 2.

The McCarran-Ferguson Act, however, reverses that rule in situations involving state regulation of the insurance industry.

While the Act specifically reserves the application of certain federal provisions to the regulation of insurance companies, the FAA is not one of them.

The McCarran-Ferguson Act allows a state law to reverse preempt a federal statute where: (1) the federal statute does not specifically relate to the business of insurance; (2) the state law was enacted for the purpose of regulating the business of insurance, and (3) the federal statute operates to invalidate, impair, or supersede the state law.

The recent United States Supreme Court case of Humana, Inc., et al. v Forsyth, et al., 119 S.Ct. 719 (January 20, 1999) directly addresses the issue of whether or not the McCarran-Ferguson Act preempts and precludes federal law in certain situations.

The Humana case held that The McCarran-Ferguson Act precludes the application of a federal law, where state and federal laws directly conflict and the application of the federal law would frustrate state policy.

The FAA is unquestionably not an Act of Congress that specifically relates to the business of insurance.

The legislative history of the FAA clarifies that it was never intended to apply to or regulate the business of insurance.

In December 1922, the United States Senate and House of Representatives submitted simultaneous Bills in regard to the passage of what we now know as the FAA.

Bills S. 4214 and H.R. 13522 were introduced and debated by the members of Congress in regard to establishing the FAA.

In 1922, the Senate Judiciary Committee held a hearing on S. 4212 and focused much of their attention on the arbitration provision's effect on consumers and a citizen's constitutional right to a trial by jury.

Senator Walsh and Mr. W. H. H. Piatt were two proponents who argued in favor of passage of S. 4212.

The following is an excerpt from their discussion of the FAA in the Senate Judiciary Sub-Committee:

Senator Walsh of Montana. The trouble about this matter is that a great many of these contracts that are entered into are really not voluntarily things at all. Take an insurance policy, there is a blank in it. You can take that or you can leave it. The agent has no power at all to decide it. Either you can make the contract or you cannot make any contract. It is the same with a good many contracts of employment. A man says "these are our terms. All right, take it or leave it." Well, there is nothing for the man to do except to sign it; and then he surrenders their right to have their case tried by the Court, and has to have it tried before a tribunal in which he has no confidence at all.

Mr. Piatt. That would be the case in that kind of case I think; but it is not the intention of this Bill to cover insurance cases.

Sales and Contracts to Sale in Interstate and Foreign Commerce, and Federal Commercial Arbitration, hearing on S. 4212 and 4214 before a subcommittee of the Committee on the Judiciary, 67th Cong., 4th Sess. 9-10 (1923) (emphasis added).

The original legislative intent of the FAA was not to govern insurance contracts.

There can be no other meaning derived from the language of the senator who sponsored passage of the FAA other than the FAA does not govern insurance contracts.

There is no need for the FAA to govern an insurance contract because the McCarran-Ferguson Act explicitly reserves that right to the several states.

As to Ala. Code § 8-1-41 being a state statute relating to the business of insurance, at least one Federal Circuit has interpreted a similar statute to be relating to insurance.

Alabama's anti-arbitration statute is stronger than the Kansas statute in that it is a blanket prohibition to pre-dispute arbitration clause.

Ala. Code § 8-1-41(3) regulates business in general, including the business of insurance.

This Code Section in pertinent part, is as follows:

§ 8-1-41. Obligations which cannot be specifically enforced.

The following obligations cannot be specifically enforced:

(3) An agreement to submit a controversy to arbitration;

This statute is part of Title 8 of the Code entitled "Commercial Law and Consumer Protection."

It is the public policy of this State, for protection of consumers such as purchasers of life insurance, that pre-dispute arbitration agreements are not enforceable.

As stated by the United States Supreme Court, the category of law enacted "for the purpose of regulating the business of insurance" is broad and consists of those laws that possess to end, intention, or aim, of adjusting, managing, or controlling the business of insurance.

In determining what constitutes the "business of insurance" The McCarran-Ferguson Act contemplated the focus being on the relationship between the insurance company and the policyholder.

Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws governing the "business of insurance."

It is not necessary that the state statute be in the form itself of an insurance code or an act relating only to insurance.

Ala. Code § 27-14-22, an "insurance" statute, specifically incorporates Alabama's anti-arbitration statute § 8-1-41 by providing that Alabama contract law must apply to any and all insurance agreements made in the State of Alabama.

The Act states:

All contracts of insurance, the application for which is taken within this state, shall be deemed to have been made within this state and subject to the laws thereof.

Ala. Code § 27-14-22. Alabama law consequently specifically references Alabama's anti-arbitration statute as being applicable to insurance contracts.

Lastly, the FAA, in providing for the enforcement of arbitration agreements, thus directly invalidates and impairs Ala. Code § 27-14-22 and § 8-1-41(3) governing arbitration as to insurance contracts in Alabama.

Because of this direct conflict, and the frustrating effect the FAA would have on Alabama statutory law, the McCarran-Ferguson Act combined with §§ 8-1-41 and 27-14-22 prevents application of the FAA.

Based on the authority cited herein, it is clear that Alabama's Anti-Arbitration Statute found at § 8-1-41(3) and incorporated in the Alabama Insurance Code via § 27-14-22, reverse preempts the FAA under the McCarran-Ferguson Act, and prohibits the enforceability of an arbitration clause in an insurance contract in Alabama.

2. The Federal Arbitration Act, 9 U.S.C. § 1 et. seq., is not applicable in the present case and can not be used to force arbitration on the where there is no evidence of a signed voluntary agreement to arbitrate by the

Assuming arguendo, this Court finds that an arbitration clause is allowable in Alabama contracts of insurance, the prerequisites to enforcing an arbitration clause have not been met in this case because the did not voluntarily enter into or sign a written agreement calling for arbitration.

simply unilaterally amended its Constitution to include arbitration more than twelve (12) years after the Rainwaters' policies were purchased.

Under Alabama law, pre-dispute arbitration agreements in contracts are prohibited and nonenforceable on the basis that it violates public policy.

The only instance in which an arbitration clause is enforceable in Alabama is if the FAA preempts Alabama law in a given fact situation.

And, the FAA would only preempt Alabama law and apply to render an arbitration clause enforceable if the arbitration clause is (1) an agreement voluntarily entered into by all parties and signed by the plaintiff, and (2) the arbitration agreement is contained in a contract that involves interstate commerce.

The FAA does not make all arbitration clauses enforceable; rather, it makes arbitration agreements enforceable.

The determination of whether the parties agreed to arbitrate is judged by state law principles governing the formation of contracts.

In the present case, it is clear that the did not voluntarily enter into or sign a written arbitration agreement with .

Hence, one of the requirements of the FAA is not met and Alabama law controls, prohibiting pre-dispute arbitration clauses/agreements.

Under Alabama contract law, the language of the contract is to be given its clear meaning and determines whether a dispute is to be submitted to arbitration.

The duty to arbitrate is a contractual obligation and a plaintiff cannot be required to submit to arbitration any dispute that he did not agree to arbitrate.

The purpose of a signature from plaintiff is to show mutuality and assent which are required for a contract to be binding.

The absence of a signature of the plaintiff under an arbitration clause shows a lack of mutuality and assent.

Further, the addition of an arbitration clause after an agreement between the parties that establishes the fundamental bargain, constitutes a material alteration of the contract.

In Coastal Industries, Inc., supra, the issue was whether an arbitration clause was part of the contract of sale of four commercial pressing machines from the defendant to the plaintiff Alabama corporation.

In finding that the plaintiff did not voluntarily and expressly accept the arbitration clause, the court stated that the addition of the clause unilaterally by the defendant in this case constituted a material alteration, which is defined as an addition or change to the contract which would result in surprise or hardship if incorporated without express awareness by the other party.

By requiring evidence of an express agreement permitting the inclusion of an arbitration provision into a contract, the court protects the plaintiff who will be unwillingly deprived of a judicial forum in which to air their grievance.

The addition of the arbitration clause after an agreement had already been reached by the parties as in Coastal Industries, Inc., supra, has been specifically reaffirmed by the Alabama Supreme Court to be a material alteration.

In the recent case of Ex parte Hopper, [Ms. 1970259] ____ So.2d ____ (Ala. 1/15/99), this Court specifically held under facts similar to those in this case, that Woodmen could not force arbitration upon the Hoppers because the Hoppers did not assent to the arbitration procedure adopted by Woodmen.

The Court cited Allstar Homes, Inc. v. Waters, 711 So.2d 924 (Ala. 1997) for this holding.

As the Alabama Supreme Court so aptly stated:

When the Hoppers signed their original contract for insurance, none of the documents mention in that original contract contained an arbitration provision. Although the Hoppers' certificate of insurance did incorporate future amendments to the governing laws of the Society, a provision of this kind is not enough to put the Hoppers on notice that by signing their application for insurance they were agreeing to mandatory, binding arbitration. The Hoppers' agreement to allow the Society to make certain unilateral changes to their insurance agreement does not provide the clear and unmistakable evidence required to show that the Hoppers voluntarily waived their constitutional rights to a judicial resolution.

When a court is addressing the scope of an arbitration provision, it resolves every question in favor of arbitration, but the opposite is true when a court is addressing the threshold issue whether a party has voluntarily waived the right to a judicial resolution by entering into an agreement to arbitrate.

It is a central tenet of constitutional law that courts indulge every reasonable presumption against waiver.

Aetna Insurance Co. v. Kennedy, 301 U.S. 389, 393 (1936). A waiver of constitutional rights in any context must, at the very least, be clear.

This Court has consistently recognized the requirement that, in order to be required to arbitrate, the parties must have expressed an intent to arbitrate.

In the recent case of Ex parte Beasley, 712 So.2d 338, 341 (Ala. 1998), this Court stated that absent the plaintiff's signature on a document containing a valid arbitration clause, we cannot hold that the plaintiff agreed to arbitrate her claims against the defendant.

This case presents a similar situation.

The Hoppers were never asked to sign a document containing or referencing an arbitration agreement.

In addition, the Hoppers received no notice when the Society adopted the amendment 11 years later.

In short, the Hoppers were never given the option of considering whether or not to agree to arbitration.

Without this option, we cannot find a valid agreement to arbitrate.

In the present case, as already stated previously, the ' contracts of insurance purchased in 1964 and in 1987, did not contain any arbitration clauses, and certainly not any agreements.

The policies themselves define the entire contracts as including the certificate, any endorsements, applications, and amendments, the written application, the Articles of Incorporation and Constitution and Laws of Woodmen.

The written applications were the only documents mentioned above which were signed by the .

The policies themselves were not signed.

Further, this section includes as part of the contract, the Articles of Incorporation and Constitution and Laws of as they existed at the time the contracts were entered into by the .

At all material times mentioned, the Articles of Incorporation, the Constitution, and Laws of Woodmen, did not contain an arbitration clause or provision.

The arbitration clause at issue in this case was not born into the Constitution until December, 1996.

At that time, the Constitution was amended to include an arbitration clause and was not put to a vote by policyholders, nor was it required to be voluntarily agreed to by the insureds.

Indeed, the Board of Directors meeting was only briefly held telephonically for the purpose of quickly adopting the dispute resolution/arbitration procedure.

No signature of any policyholder was required when accomplishing this amendment.

The insureds did not learn of the amendment until sent brochures to insureds subsequent to the amendment being made.

Clearly, there is no voluntarily, signed, written agreement by the as to an arbitration clause, and same is thus not binding upon the .

Because the prerequisites of the FAA are not met in this fact situation, the FAA does not apply to preempt Alabama's state law.

Under controlling Alabama law, this arbitration clause, unilaterally drafted by Woodmen, is not enforceable.

3. The arbitration provision purported by to be a part of the ' policies violates their right to trial by jury under Amendment VII of the United States Constitution and Ala. Const. Art. I, §§ 10, 11 and 13.

's attempted forcing of the to pursue their claims through arbitration violates the ' right to trial by jury provided in Amendment VII of the United States Constitution and in Ala. Const. Art. I §§ 10, 11 and 13 (1901 amended 1943).

Petitioner's right to trial by jury under United States and the Alabama Constitutions is "inviolate".

The United States Constitution, Amendment VII provides:

Trial by Jury in Civil Cases.
In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.

As stated in the Alabama Constitution:

Sec. 10. Right to Prosecute Civil Case.
That no person shall be barred from prosecuting or defending before any tribunal in this state, by himself or counsel, any civil cause to which he is a party.

Sec. 11. Right to Trial by Jury.
That the right of trial by jury shall remain inviolate.

Sec. 13. Courts to be Open; Remedies for all Injuries; Impartiality of Justice.
That all courts shall be open; and that every person, for any injury done him, and their lands, goods, person, or reputation shall have a remedy by due process of law; and right and justice shall be administered without sale, denial, or delay.

Ala. Const. Art. I §§ 10, 11 and 13 (1901 amended 1943).

The arbitration provision before this Court strips away the ' right to trial by jury by unilaterally forcing arbitration upon the without an agreement, without signatures, and without any type of authorization from the as the policyholder.

Ala. Code § 8-1-41(3) as applicable to insurance contracts through Ala. Code § 27-14-22, was an attempt by the Alabama Legislature to insure preservation of every Alabama citizen's right to trial by jury.

The framers of § 8-1-41(3) did not want Petitioner's right to trial by jury to be terminated by arbitration clauses.

's attempt to unilaterally insert an unbargained for arbitration provision into the ' policies is a violation of the ' right to trial by jury.

This kind of act is prohibited by the United States federal law, by Alabama state law, and the McCarran-Ferguson Act.

As can be seen, every Alabama citizen who enters into an insurance contract in the State of Alabama, has the inherent right and benefit to a trial by jury should they seek such redress.

To hold otherwise would absolutely violate the policyholders' constitutional rights under both the United States Constitution and the Constitution of the State of Alabama.

Justice Kennedy, writing for the Supreme Court of Alabama, recently stated in Ex parte Bentford, supra:

It would be fundamentally unjust for this Court to articulate a standard whereby the citizens of this state, when entering contracts, would be required to leap from document to document searching for provisions that, in amongst the fine print and voluminous documentation, might operate to deprive them of their fundamental rights without their acknowledged consent.

Ex parte Bentford, 719 So.2d 781.

Thus, seeks to have this Court violate the ' right to trial by jury through application of 's unilateral adoption of an arbitration provision in its Constitution.

III. Conclusion

The foregoing arguments and legal authority clearly reflect that arbitration clauses in contracts of insurance are prohibited in Alabama; even if, for arguments sake, the FAA is applicable to contracts of insurance, the requirement of a voluntary, signed arbitration agreement is not present.

's Complaint and Petition to Compel Arbitration is due to be dismissed.

CERTIFICATE OF SERVICE

I do hereby certify that I have on this day of , served a copy of the foregoing pleading by mailing same by United States mail, properly addressed and first class postage prepaid, to the following:

____________________________________

Plaintiff's attorney