Court Opinion

ID: 162178
Source: CourtListenerOpinion
Date Created: 2010-08-14 07:28:07+00
Date Added: 2024-06-11T17:17:09.836086
License: Public Domain

F I L E D
                                                                  United States Court of Appeals
                                                                          Tenth Circuit
                     UNITED STATES COURT OF APPEALS
                                                                           APR 5 2002
                                   TENTH CIRCUIT
                                                                       PATRICK FISHER
                                                                              Clerk

 DOUGLAS L. WILSON,

               Plaintiff - Appellee,                     No. 00-1528
          v.                                        (D. C. No. 00-M-534)
 AMERICAN INVESTMENT                                    (D.Colorado)
 SERVICES, INC., an Illinois
 corporation,

               Defendant - Appellant.

                             ORDER AND JUDGMENT         *

Before TACHA , Chief Circuit Judge, and    ANDERSON and MURPHY , Circuit
Judges.

      Appellant American Investment Services, Inc. (“AIS”) brings this

interlocutory appeal challenging the district court’s order denying its motion to

compel the arbitration of Appellee Douglas Wilson’s (“Wilson”) claim for bad

      *
       This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
faith breach of an insurance contract. We exercise jurisdiction pursuant to 9

U.S.C. § 16(1)(C) and affirm.

                                      FACTS

A.    General Background

      At all relevant times, Wilson worked for AIS as a stock broker. Pursuant to

his employment with AIS, Wilson paid premiums for errors and omissions

liability insurance coverage. Wilson paid these premiums directly to AIS, who

then obtained insurance coverage for Wilson and other similarly situated brokers

from a third-party insurer. On or about May 21, 1997, AIS notified Wilson and

other similarly situated brokers that AIS was terminating the outside errors and

omissions coverage. AIS informed its brokers, however, that it would continue to

collect the same amount of money from them, and that it would use the monies

collected to establish its own “litigation reserve account.”

B.    Arbitration Proceedings

      In May 1998 one of Wilson’s customers, Kendra M. MacAlpine

(“MacAlpine”), brought a number of claims against Wilson, AIS and others.       1

      1
       MacAlpine alleged that Wilson engaged in unauthorized trading and
converted funds from her account. Award at 2, App. to Appellant’s Br (“App.”)
                                                                  (continued...)

                                         -2-
These claims were submitted to arbitration before the National Association of

Securities Dealers, Inc. (“NASD”), pursuant to the NASD’s Code of Arbitration

Procedure. At this time, Wilson asked AIS to cover his litigation expenses and

indemnify him for any liability he incurred to MacAlpine as a result of the

arbitration. Wilson’s position was that AIS contractually agreed to provide him

with errors and omissions liability coverage through the litigation reserve

account, on the same terms as that originally provided by third-party insurers

prior to May 1997.

      When AIS denied Wilson’s request for coverage, Wilson filed a cross-claim

against AIS in the arbitration, entitled “Insurance,” asserting that AIS breached a

contract of insurance with Wilson, illegally acting to deny him the errors and

omissions coverage he had paid for.   2
                                          Resp’t Wilson’s Resp. to Claimant’s

Statement of Claim, Countercl. and Cross-cl. at 16, ¶ 1, App. at 48. During the

course of the arbitration proceedings, Wilson also attempted to introduce evidence

      1
        (...continued)
at 54. She brought claims against Wilson for securities fraud, common law fraud,
breach of fiduciary duty, conversion, and violations of Colorado and federal
securities regulations. Id. Her claims against AIS and others were based on
theories of respondeat superior. Id.
      2
       Wilson brought two other cross-claims against AIS, one entitled “Dealings
with MacAlpine,” the other entitled “The Electronic Trail.” Wilson prevailed on
the former; the latter was dismissed with prejudice by the arbitration panel during
the arbitration hearing. Award at 4, App. at 56. Wilson also asserted counter-
claims against MacAlpine. However, none of these other arbitration claims are
relevant on appeal.

                                            -3-
establishing that AIS breached the contract of insurance in bad faith and acted to

inflict mental anguish on him and/or his wife. At oral argument on appeal, AIS

stated that it objected to the admission of such evidence during the arbitration

hearing on the grounds that Wilson did not plead a claim for bad faith breach

and/or that Wilson failed to provide required discovery on that claim.      3
                                                                                In

response to AIS’ procedural objection(s), the arbitrators reviewed Wilson’s

pleadings and, after determining that Wilson had not pled the claim, dismissed

Wilson’s claim for bad faith breach without prejudice.      4
                                                                At the conclusion of the

proceedings, the arbitration panel ruled in favor of Wilson on his remaining cross-

       The transcript from the arbitration proceeding is unclear as to AIS’ exact
       3

objection. At oral argument AIS could not recall whether it objected on the
grounds of inadequate pleading, inadequate discovery, or both.
       4
           Specifically, the arbitration panel stated as follows:

       Okay. Now the panel has reviewed the pleadings again and Mr.
       Zarlingo, we do not believe that either [inaudible] or mental anguish
       was pleaded originally. And I think that – it is the panel’s feeling
       that it would be – it would prejudice, really at ths point, both
       sides. . . . This is a procedural decision, based on the fact that we do
       not see that bad faith and mental anguish or physical condition were
       plead in the original pleadings. So it has nothing to do with what
       may be reality . . . , but we just think procedurally, we are not going
       to entertain it at this time.

Tr. of Arb. Hr’g Starting Monday 1/25/99 at 9-10, App. at 103-04 (emphasis
added).

                                             -4-
claims, including his claim that AIS breached the parties’ contract of insurance,

awarding him $14,000.   5

C.    Federal Lawsuit

      On or about March 10, 2001, Wilson filed this lawsuit in the United States

District Court for the District of Colorado. In his Complaint, Wilson asserted

claims against AIS for “Willful and Wanton Breach of Contract” and “Bad Faith

Breach of Insurance Contract.” Compl. at 3, App. at 7. Both of these claims

were based on AIS’ refusal to provide errors and omissions coverage to Wilson

during the MacAlpine arbitration. Compl. at ¶¶ 16 and 21, App. at 7-8.

      AIS originally responded to Wilson’s claims with a motion to dismiss under

the doctrines of “ res judicata claim preclusion and   res judicata fact preclusion.”

Order on Def’s Mot. for Summ. J. at 1, App. at 120. The district court converted

this motion to one for summary judgment, granting it with respect to Wilson’s

claim for willful and wanton breach of contract, but denying it with respect to

Wilson’s claim for bad faith breach. Regarding the bad faith breach claim, the

      5
        The $14,000 was awarded to Wilson on both his “Insurance” cross-claim
and his “Dealings with MacAlpine” cross-claim, and was awarded jointly and
severally against AIS and one of its associates, A. Philip Chang. The award does
not articulate what portion of the $14,000 award was attributable to the
“Insurance” claim versus the “Dealings with MacAlpine” claim. See Award at 4,
App. at 56.

                                          -5-
court noted that “Colorado law makes a distinction between a breach of contract

that is characterized as willful and wanton conduct and the tort of bad faith

breach of insurance contract.”     Id. at 2, App. at 121. Based on the arbitrators’

treatment of Wilson’s bad faith claim,     see supra note 4, the district court

concluded that Wilson’s “tort [claim] was not litigated in the arbitration

proceeding,” and that Wilson did not have “a fair opportunity to present it.”     Id. 6

       Having lost its motion to dismiss, AIS moved to compel arbitration of the

bad faith breach claim, asserting that Wilson was contractually required to

arbitrate his tort claim pursuant to the Uniform Application for Securities

Registration or Transfer form (“U-4 Form”) he filed with the Securities and

Exchange Commission (“SEC”) prior to his employment with AIS, as well as the

Uniform Submission Agreement (“USA”) he filed in the arbitration proceeding.

In relevant part, the U-4 Form states as follows:

       I agree to arbitrate any dispute, claim or controversy that may arise
       between me and my firm, or a customer, or any other person, that is
       required to be arbitrated under the rules, constitutions or by-laws of
       the organization[] . . . and that any arbitration award rendered against
       me may be entered as a judgment in any court of competent
       jurisdiction.

U-4 Form at 4, ¶ 5, App. at 145. The relevant portion of the USA states:

       The undersigned party [Wilson] hereby submits the present matter in
       controversy, as set forth in the Statement of Claim, Answers, Cross

       6
           AIS does not and cannot appeal the validity of this ruling at this time.

                                            -6-
      Claims and all related Counterclaims and/or Third Party Claims
      which may be asserted, to arbitration in accordance with the
      Constitution, By-Laws, Rules, Regulations and/or Code of
      Arbitration Procedure of the sponsoring organization.

USA at 1, ¶ 1, App. at 160.

      Wilson does not dispute the fact that he was bound by the provisions in the

U-4 Form and/or the USA, nor does he challenge the general validity of these

provisions. He simply argues that these agreements expressly incorporate all

provisions of the NASD’s Code of Arbitration Procedures, and that Rule 10101 of

this Code expressly exempts his bad faith breach claim from compulsory

arbitration. In relevant part, Rule 10101 states as follows:

      This Code of Arbitration Procedures is prescribed and adopted
      pursuant to Article VII, Section 1(a)(iv) of the By-Laws of the
      Association for the arbitration of any dispute, claim, or controversy
      arising out of or in connection with the business of any member of
      the Association, or arising out of the employment or termination of
      employment of any associated person(s) with any member,      with the
      exception of disputes involving the insurance business of any
      member which is also an insurance company.

NASD Code of Arbitration Procedures § 10101 (emphasis added). Wilson argues

that AIS acted as an “insurance company” under Rule 10101 by agreeing to

provide liability insurance in exchange for the premiums collected from Wilson

and other similarly situated brokers, and that his bad faith coverage dispute is

thereby exempt from compulsory arbitration because it involves AIS’ insurance

business.

                                         -7-
      The district court agreed with Wilson, denying AIS’ motion to compel on

the basis that Wilson’s claim for bad faith breach was exempt from compulsory

arbitration under Rule 10101. The district court specifically found that “the only

claim to be litigated in this case is [Wilson’s] tort claim for bad faith breach of

insurance contract and that on this claim the relationship between [Wilson] and

[AIS] was that of an insured and an insurance company.” Order Denying Mot. to

Compel Arb. at 1, App. at 163. It is this order from which AIS appeals.

                                     DISCUSSION

                                            I.

      As indicated above, this is an interlocutory appeal involving only one

question: Did the district court err in denying AIS’ motion to compel the

arbitration of Wilson’s claim for bad faith breach of an insurance contract? “We

review a district court’s grant or denial of a motion to compel arbitration de novo,

applying the same legal standard employed by the district court.”      Armijo v.

Prudential Ins. Co. of Am.   , 72 F.3d 793, 796 (10th Cir. 1995);   see also Williams

v. Imhoff , 203 F.3d 758, 762 (10th Cir. 2000).

      In general, any inquiry into the scope of an arbitration clause must begin

with the presumption that arbitration is required, and “an order to arbitrate the

particular grievance should not be denied unless it may be said with positive

                                           -8-
assurance that the arbitration clause is not susceptible of an interpretation that

covers the asserted dispute.”    AT&T Tech. v. Communications Workers of Am.            ,

475 U.S. 643, 650 (1986) (internal quotation omitted). “[A]ny doubts concerning

the scope of arbitrable issues should be resolved in favor of arbitration,”

Williams , 203 F.3d at 764 (internal quotation omitted), and any ambiguities in the

arbitration agreement must be resolved in favor of arbitrability.       Armijo , 72 F.3d

at 797. Applying these principles, the question to be resolved is whether the

contract provisions set forth above compel the conclusion that Wilson’s bad faith

claim must be submitted to compulsory arbitration, or whether the “insurance

business” exception of Rule 10101 applies.

       As a threshold matter, AIS asserts that the NASD arbitrators, rather than

the courts, should determine whether Wilson’s claim is arbitrable under the

NASD Rules. AIS relies entirely on an October 1996 NASD filing with the SEC,

stating that “eligibility determinations under the NASD Arbitration Rules were

deemed subject to determination by the arbitrators, as opposed to the Director of

Arbitration as had been the NASD’s previous policy.” Appellant’s Br. at 21

(citing D. Robbins, Securities Arbitration Procedure Manual         , § 5-10, at 198 (3rd

Ed. 1998)). We are unpersuaded.

       In Dean Witter Reynolds, Inc. v. Howsam       , 261 F.3d 956 (10th Cir. 2001),

we held that courts should decide the arbitrability issue “‘unless there is “clea[r]

                                             -9-
and unmistakabl[e]” evidence’” that the parties agreed to arbitrate the issue.         Id.

at 964 (quoting First Options of Chicago, Inc. v. Kaplan         , 514 U.S. 938, 944

(1995)) (further citations omitted). Although the U-4 Form and the USA

expressly incorporate all of the NASD rules and procedures, the NASD ruling

relied upon by AIS does not constitute “clear and unmistakable” evidence of the

parties’ intent to have arbitrability questions resolved by the arbitrators. The

NASD ruling apparently clarifies only who should make arbitrability decisions

within the NASD, as between the arbitrators assigned to a given case and the

NASD’s Director of Arbitration. It does not appear to speak about who should

make arbitrability decisions as between the NASD arbitrators and the courts.

Accordingly, it does not provide “clear and unmistakable evidence” that AIS and

Wilson agreed to arbitrate the question of arbitrability.

       We turn now to the question of whether Wilson’s bad faith claim is subject

to compulsory arbitration. As set forth above, Rule 10101 exempts from

compulsory arbitration all “disputes involving the insurance business of any

member which is also an insurance company.” The purpose of this rule is “to

keep arbitrators away from issues that are peculiar to insurance, such as reserves,

reinsurance, actuarial calculations, rates,    coverage , and mandatory terms, and to

prevent arbitrators from being swamped with insurance claims, which are apt to

be more numerous than securities claims.”            IDS Life Ins. Co. v. Royal Alliance

                                              -10-
Assocs., Inc. , 266 F.3d 645, 652 (7th Cir. 2001) (emphasis added). Under this

provision, we must determine (i) whether the bad faith coverage dispute between

AIS and Wilson is one involving the insurance business of AIS, and (ii) whether

AIS qualifies as an “insurance company” for purposes of the exception. We

answer both of these questions in the affirmative.

       First, we conclude that Wilson’s claim involves the insurance business of

AIS because the relationship of the parties is that of an insurer and insured and

Wilson’s claim implicates primarily issues of insurance law.          See In re Prudential

Ins. Co. of Am. Sales Practice Litig.    , 133 F.3d 225, 232 (3rd Cir. 1998) (“The

intent to be inferred from this phrase is that where the dispute is      ‘insurance-only’

or even ‘intrinsically insurance’    it falls beyond the scope of arbitration.”)

(emphasis added); Cular v. Metropolitan Life Ins. Co        ., 961 F. Supp. 550, 558

(S.D.N.Y. 1997) (holding that employee/plaintiffs’ claims against the employer

for “fraudulent inducement to enter into a life insurance contract” fell within the

insurance business exception because they were brought “by the plaintiffs in their

capacity as insurance policyholders”).     7
                                               Regarding the relationship of the parties,

       Cf. Armijo, 72 F.3d at 800 (compelling arbitration of the plaintiffs’
       7

employment discrimination claims because “the dispute as framed by plaintiffs is
predicated on the civil rights laws, not the insurance laws, and they are predicated
on Prudential’s role as an employee rather than as an insurer.”); IDS Life Ins. Co.,
266 F.3d at 653 (rejecting application of the insurance business exception because
“[n]o technical issue of insurance law or of the economics, regulation, or business
                                                                       (continued...)

                                               -11-
it is noteworthy that by ruling in Wilson’s favor on his “Insurance” cross-claim,

the arbitration panel necessarily concluded that AIS entered into and breached a

contract of insurance with Wilson. Implicit in this finding is a determination that

the monies AIS collected from Wilson and other similarly situated brokers

constituted premium payments collected in exchange for a promise to provide

insurance coverage, and that AIS’ relationship with Wilson was therefore that of

insurer and insured.

       The substance of the actions by AIS confirms that inference. As the facts

set out above show, when AIS discontinued its brokers’ outside insurance

coverage in May 1997, AIS voluntarily stepped into the shoes of the third party

insurers, establishing a “litigation reserve account” and “requir[ing] Wilson and

its other registered representatives” to “pay a certain sum” into the reserve, in

“the same amount as had previously been paid to obtain insurance from [the] third

party” insurers. Appellant’s Br. at 8-9. Thus, although the district court provided

no reasoning for its decision, we agree with its conclusion that the relationship of

the parties was that of an insurer and insured.    See Order Denying Mot. to Compel

Arb. at 1, App. at 163.

       7
        (...continued)
customs of insurance was thrust upon the arbitrators”); Mouton v. Metropolitan
Life Ins. Co., 147 F.3d 453, 457 (5th Cir. 1998) (refusing application of the
exception because the plaintiff’s discrimination claim involved the “employer’s
statutory obligations as an employer” rather than its obligations as an insurer).

                                            -12-
       Regarding the nature of the claim, Wilson’s claim is nothing more than a

coverage claim arising in tort. Specifically, Wilson asks the district court to

determine whether AIS acted tortiously in denying Wilson’s request for insurance

coverage related to the MacAlpine arbitration. His claim raises no issues of

securities or employment law which would ordinarily be subjected to arbitration

under Rule 10101.

       AIS also qualifies as an “insurance company” for purposes of Rule 10101.

It is undisputed that AIS registered itself with the Illinois Department of

Insurance.   8
                 Moreover, as explained above, AIS actively and voluntarily engaged

in the business of selling an insurance product to Wilson and similarly situated

brokers for a fee, rendering itself a   de facto insurance company for purposes of

Rule 10101.      9

       AIS did not refute Wilson’s contention on appeal that AIS is “registered
       8

with the Illinois Department of Insurance” as a business that “provides variable
annuity insurance products.” Appellee’s Br. at 20.

       We reach this determination based solely on the purpose of Rule 10101,
       9

discussed above, to exempt from compulsory arbitration all issues related to the
provision of insurance coverage. IDS Life Ins. Co., 266 F.3d at 652. We do not
rely on Colorado law, as Wilson urged us to do in his brief. See Appellee’s Br. at
15-16. Although application of the Colorado state insurance code provisions
cited by Wilson would likely lead us to the same result, we believe that what the
Colorado legislature intended by the term “insurance company” is irrelevant in
determining what the drafters of the NASD intended by that same term. See In re
Prudential Ins. Co. of Am. Sales Practice Litig., 133 F.3d at 232 n. 10 (“What
Congress intended by ‘insurance’ for purposes of the McCarran-Furguson Act is
simply irrelevant to how the parties before us define insurance and the scope of
disputes subject to arbitration.”).

                                           -13-
      In response, AIS contends that Rule 10101 cannot apply because it is a

securities firm that does not engage primarily in the business of selling insurance

to the public for a profit. Appellant’s Br. at 22, 25. We are not persuaded. For

purposes of Rule 10101, AIS’ status as a securities firm does not exclude other

business activities. It is sufficient that AIS held itself out as an insurance

company to at least one state agency and in its dealings with Wilson, selling him

an insurance product for a fee. Indeed, in substance there is no discernible

difference where Wilson was concerned between the insurance arrangements

before and after the outside insurance company was involved. Accordingly, on

the unique facts of this case, we hold that Rule 10101 unambiguously exempts

Wilson’s claim for bad faith breach from the compulsory arbitration procedures of

the U-4 Form and the USA.

                                          II.

      AIS also asserts that the district court erred in denying its motion to compel

without providing it an evidentiary hearing on the application of Rule 10101’s

insurance exception. We review this claim under an abuse of discretion standard,

Riddle v. Mondragon , 83 F.3d 1197, 1208 (10th Cir. 1996), and find no such

abuse in this case. As discussed above, there is more than enough in the record to

support the district court’s application of Rule 10101, without the need for any

further factual inquiry. AIS was afforded the opportunity to submit briefs and

                                          -14-
articulate its argument fully before the district court. Any documents or affidavits

that AIS wished to have before the district court could have been and should have

been submitted as exhibits to its filings in support of its motion to compel.   10

                                     CONCLUSION

       Based on the foregoing, the judgment of the district court denying AIS’

motion to compel arbitration is AFFIRMED.

                                                   ENTERED FOR THE COURT

                                                   Stephen H. Anderson
                                                   Circuit Judge

       10
         At oral argument there was discussion about whether, by submitting or
attempting to submit his insurance claims to arbitration, Wilson waived his right
to challenge the arbitrability of his bad faith claim. After reviewing the record,
we conclude that such a claim is not properly before us because AIS failed to
adequately develop it in the district court, as well as in its opening brief on
appeal. See Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th Cir. 1992)
(holding that we will not consider arguments raised for the first time on appeal);
State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 984 n.7 (10th Cir. 1994)
(noting that issues not addressed in the appellant’s opening brief are deemed
waived); Gross v. Burggraf Constr. Co., 53 F.3d 1531, 1547 (10th Cir. 1995)
(holding that parties cannot raise arguments for the first time at oral argument).
Even assuming arguendo that AIS’ waiver claim was properly before us, we
would nevertheless reject it. The record discloses that although Wilson may have
been ready and willing to waive his Rule 10101 arguments and proceed on his bad
faith claim in the arbitration proceeding, it was AIS who prevented arbitration of
the claim by raising procedural objections that caused the arbitrators to dismiss
Wilson’s bad faith claim without prejudice.

                                            -15-