Opinion
CV-18-00006-PHX-DWL
11-04-2022
Jacob Benson, et al., Plaintiffs, v. Casa De Capri Enterprises LLC, et al., Defendants.
ORDER
DOMINIC W. LANZA, UNITED STATES DISTRICT JUDGE
Now pending before the Court for the second time is Defendant Continuing Care Risk Retention Group, Inc.'s (“CCRRG”) renewed motion to compel arbitration. (Doc. 63.) This order addresses the parties' arguments regarding preemption under the Liability Risk Retention Act of 1986 (“LRRA”). (Docs. 119, 120, 123.) For the following reasons, CCRRG's motion is denied.
RELEVANT BACKGROUND
I. Facts
Jacob Benson is a disabled vulnerable adult who received skilled nursing care at a now-defunct facility called Casa de Capri Enterprises, Inc. (“Capri”). (Doc. 1-1 at 6.) In December 2012, Benson and other family members (together, “Plaintiffs”) brought a negligence action against Capri in Maricopa County Superior Court. (Id. at 5-15.) At the time, Capri had a “Claims Paid & Reported Liability” insurance policy, which was issued by CCRRG. (Doc. 56-1.) Pursuant to this policy, CCRRG assumed Capri's defense of the lawsuit. (Doc. 56 ¶¶ 20-21.)
Capri had purchased a number of successive annual “claims-paid” insurance policies from CCRRG. The policies for the 2012-2013 and 2013-2014 periods contained arbitration provisions. (Doc. 13-1 at 41-42; Doc. 56-1 at 30.) Capri and CCRRG also entered into a Subscription Agreement (Doc. 13-1 at 53-73) in September 2009 containing an arbitration provision (id. at 72), which was incorporated into the policies. (Doc. 13-1 at 6; Doc. 56-1 at 37). These arbitration provisions provided that arbitration would take place in Sonoma County, California. (Doc. 13-1 at 41-42, 72; Doc. 56-1 at 30.)
Capri canceled its policy with CCRRG effective August 1, 2013 (Doc. 13-1 at 49) and then filed for bankruptcy on August 19, 2013 (2:13-bk-14269-EPB). Following Capri's cancellation of the policy, CCRRG withdrew from defending Capri in Plaintiffs' lawsuit. (Doc. 56 ¶ 47.)
On November 29, 2017, Plaintiffs obtained a $1,501,069.90 judgment against Capri. (Doc. 1-2 at 231-32.)
On December 18, 2017, Plaintiffs sought a writ of garnishment against CCRRG in an attempt to recover on the judgment. (Id. at 233-35.)
On January 2, 2018, the garnishment action was removed to this Court. (Doc. 1.)
II. Procedural Background
On January 9, 2018, CCRRG moved to dismiss, or, alternatively, to stay litigation and compel arbitration. (Doc. 13.) CCRRG's motion was premised on three main contentions: (1) the arbitration agreements were valid; (2) Plaintiffs' “claims [were] fully encompassed within the scope of the agreements]”; and (3) Plaintiffs “are claiming rights that [Capri] had under the CCRRG Policy as assignees of [Capri], thus they stand in the shoes of [Capri] and are subject to the arbitration agreements] between CCRRG and [Capri].” (Id. at 9-10.) Plaintiffs responded on January 20, 2018, contending that (1) they were strangers to the arbitration clauses and therefore could not be bound; (2) the clauses were contrary to Capri's reasonable expectations; and (3) the clauses were procedurally and substantively unconscionable. (Doc. 17 at 2.)
On August 17, 2018, Judge Logan issued an order denying CCRRG's motion. (Doc. 27.) The order stated that “no circumstances appear to suggest that any of the contract or agency principles that would provide an exception binding the Plaintiffs to arbitration per the terms of the insurance agreement apply.” (Id. at 4.) It further stated that “Plaintiffs never assumed the insurance contract between the Defendant and [Capri], and the Defendant does not set forth any evidence that the Plaintiffs received any benefit from the agreement between the Co-Defendants.” (Id.)
This case was originally assigned to Judge Logan and was transferred to the undersigned judge on October 31, 2018. (Doc. 35.)
After that order was issued, Plaintiffs moved to amend their complaint to add claims for (1) a declaratory judgment regarding coverage for the underlying judgment and (2) insurance bad faith. (Doc. 40-1 at 8-10.) Plaintiffs also moved for summary judgment on their garnishment claim. (Doc. 55.)
On April 18, 2019, CCRRG filed a renewed motion to compel arbitration. (Doc. 63.) CCRRG argued that, although Plaintiffs asserted in their response to the initial motion to compel arbitration that they weren't seeking to collect from CCRRG as an assignee of Capri's contract, Plaintiffs had since made clear their “intent to pursue claims as assignees” by (1) seeking “broad discovery on issues related to the proposed breach of contract and bad faith claims,” (2) seeking to add breach of contract and bad faith claims in an amended complaint, and (3) “mov[ing] for summary judgment seeking to void certain provisions in the CCRRG Policy.” (Id. at 1-4, 6-9, 11.) In response, Plaintiffs asserted the same main argument they made in response to the initial motion: the garnishment action is not premised on an assignment of Capri's claims under the insurance contract, and therefore Plaintiffs, as non-signatories to the contracts between Capri and CCRRG, could not be compelled to arbitrate the garnishment claim. (Doc. 70 at 6.) In a similar vein, Plaintiffs argued that CCRRG's renewed motion was a “repeat” of its previous motion to compel arbitration that Judge Logan denied and “the law of the case doctrine applies to preclude a rehash of same.” (Id. at 2.)
On May 31, 2019, the Court requested supplemental briefing regarding the applicability of equitable estoppel under Arizona law in the circumstances of this case. (Doc. 79.) After a full briefing (Docs. 81, 82), the Court heard oral argument on July 25, 2019 (Doc. 87). Before oral argument, Plaintiffs withdrew their motion to amend the complaint to add new claims. (Doc. 80.)
On July 30, 2019, the Court granted CCRRG's renewed motion to compel arbitration, concluding that Plaintiffs, as non-signatories to the contract, were bound by its terms under the Arizona doctrine of direct benefits estoppel. (Doc. 88.) Based on this ruling, the Court also denied, as moot, four other motions that were pending at the time, including Plaintiffs' motion for summary judgment on the core disputed issue in this case- whether Plaintiffs' negligence claim against Capri is covered by Capri's CCRRG insurance policy, and by extension whether Plaintiffs may recover from CCRRG via the law of garnishment. (Id. at 18.)
Plaintiffs appealed the order compelling arbitration. (Doc. 93.) The Ninth Circuit, in turn, certified a question of law to the Arizona Supreme Court. In January 2022, the Arizona Supreme Court resolved that question in Plaintiffs' favor, holding that “the doctrine of direct benefits estoppel can[not] be applied in an Arizona garnishment proceeding.” Benson v. Casa de Capri Enters., LLC, 502 P.3d 461, 465 (Ariz. 2022). Based on this ruling, the Ninth Circuit issued an amended memorandum decision in March 2022 concluding that “the district court erred in granting CCRRG's motion to compel arbitration under the doctrine of direct benefits estoppel.” Benson v. Casa de Capri Enters., LLC, 2022 WL 822126, *1 (9th Cir. 2022). In a footnote, the Ninth Circuit added: “CCRRG alternatively argues that the [LRRA] preempts state law governing the operation of risk retention groups, and apparently by extension precludes Arizona from limiting arbitration provisions in insurance policies provided by a risk retention group. The district court did not address this argument and [Plaintiffs] argue that CCRRG did not adequately raise it below. We leave these matters to the district court in the first instance, with the benefit of the Arizona Supreme Court's new guidance.” Id. at *2 n.1.
On June 7, 2022, after reviewing post-remand briefing from the parties (Docs. 112, 113), the Court stated that it intended to rule on the LRRA preemption issue based on the existing briefing. (Doc. 115 at 3-4.) Two days later, the parties filed a joint request to further brief the LRRA preemption issue. (Doc. 117.) The Court granted that motion (Doc. 118), and the issue is now fully briefed (Docs. 119, 120, 123).
CCRRG's request for oral argument is denied because the issues have been fully briefed and oral argument will not aid the decisional process. See LRCiv 7.2(f).
DISCUSSION
I. Legal Standard
A motion to compel arbitration is decided according to a standard similar to that used when resolving summary judgment motions. Scott-Ortiz v. CBRE Inc., 501 F.Supp.3d 717, 721 (D. Ariz. 2020). “The court shall grant summary judgment if [a] movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “A fact is ‘material' only if it might affect the outcome of the case, and a dispute is ‘genuine' only if a reasonable trier of fact could resolve the issue in the non-movant's favor.” Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). The court “must view the evidence in the light most favorable to the nonmoving party and draw all reasonable inference in the nonmoving party's favor.” Rookaird v. BNSF Ry. Co., 908 F.3d 451, 459 (9th Cir. 2018). “Summary judgment is improper where divergent ultimate inferences may reasonably be drawn from the undisputed facts.” Fresno Motors, 771 F.3d at 1125.
A. Preemption
The Supremacy Clause provides that federal law “shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. It follows that “[s]o long as it acts within the scope of its enumerated powers, Congress may preempt inconsistent state law.” Nat'l Warranty Ins. Co. RRG v. Greenfield, 214 F.3d 1073, 1076 (9th Cir. 2000). “In determining whether federal law preempts a state statute, we look to congressional intent. Preemption may be either express or implied, and is compelled whether Congress' command is explicitly stated in the statute's language or implicitly contained in its structure and purpose.” Id. (quoting FMC Corp. v. Holliday, 498 U.S. 52, 56-57 (1990)). “There are two presumptions underlying any preemption analysis. First, the states are independent sovereigns in our federal system, and preemption will not be easily found. In all preemption cases, and particularly in those in which Congress has legislated in a field which the States have traditionally occupied, we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress. Second, the analysis of the scope of the statute's preemption is guided by the oft-repeated comment that the purpose of Congress is the ultimate touchstone in every preemption case.” Id. at 1076-77 (cleaned up).
B. Federal Arbitration Act
The Federal Arbitration Act (“FAA”) applies to contracts “evidencing a transaction involving commerce.” 9 U.S.C. § 2. The FAA provides that written agreements to arbitrate disputes “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Id. The final phrase of that sentence, known as the “savings clause,” “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (quoting Doctor'sAssocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). Thus, absent a valid contractual defense, the FAA “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (emphasis omitted).
In general, a district court's role under the FAA is “limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). These two issues are sometimes referred to as the “gateway” questions of arbitrability. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010). When a party challenges an arbitration agreement as unenforceable, a federal court must “ascertain from all the available data what the state law is and apply it.” Poublon v. C.H. Robinson Co., 846 F.3d 1251, 1266-67 (9th Cir. 2017).
C. Liability Risk Retention Act
“In response to escalating product liability insurance premiums in the late 1970s and early 1980s, manufacturers began to bypass conventional insurance companies and to obtain product liability insurance from insurance cooperatives known as RRGs [risk retention groups].” Nat'l Warranty Ins. Co., 214 F.3d at 1075. Congress ultimately enacted two related statutes to address this development: the Product Liability Risk Retention Act (“PLRRA”) (in 1981) and the LRRA (in 1986). Id. More specifically, Congress first enacted the PLRRA “to encourage the formation and growth of RRGs by reducing state regulation of RRGs, thereby reducing the expenses of RRGs and the cost of insurance to RRG members.” Id. (internal citations omitted). “Under the PLRRA, an RRG is permitted to provide product liability insurance in all states, free of insurance regulation by those states, if it complies with the insurance laws of the state it chooses as its ‘chartering jurisdiction.'” Id. (quoting 15 U.S.C. § 3901(4)(C)(i)). “In the words of the House Report accompanying the PLRRA, the preemption of regulation by non-chartering states enables ‘the efficient operation of risk retention groups by eliminating the need for compliance with numerous non-chartering state statutes that, in the aggregate, would thwart the interstate operation [of] . . . risk retention groups.'” Id. (citation omitted)). Next, “[i]n 1986, Congress enacted the LRRA, amending the PLRRA to allow RRGs, which had previously been limited to product liability insurance, to provide additional kinds of liability insurance.” Id. “Under the LRRA, an RRG is defined as ‘any corporation or other limited liability association . . . whose primary activity consists of assuming, and spreading all, or any portion, of the liability exposure of its group members.'” Id. (quoting 15 U.S.C. § 3901(a)(4)(A)).
Together, “[t]he PLRRA and LRRA create a ‘tripartite' regulatory scheme for risk retention groups.” Allied Pros. Ins. Co. v. Anglesey, 952 F.3d 1131, 1134 (9th Cir. 2020). “First, at the federal level, the statutes preempt state laws regulating the operation of risk retention groups. Second, at the state level, they authorize the chartering state to regulate the groups' formation and operation. Finally, also at the state level, they ‘sharply limit[] the secondary regulatory authority of nondomiciliary states over risk retention groups to specified, if significant, spheres.'” Id. (citation omitted).
Also relevant in this context is the McCarran-Ferguson Act, under which “Congress hereby declare[d] that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of [insurance] by the several States.” 15 U.S.C. § 1011. “The McCarran-Ferguson Act is generally understood to protect state regulation of insurance.” Allied Pros. Ins. Co., 952 F.3d at 1134. However, the Ninth Circuit has “repeatedly held that the LRRA is an exception to the McCarran-Ferguson Act's preference for state regulation of insurance.” Id.
II. LRRA Preemption
A. The Parties' Arguments
CCRRG asks the Court to find that the LRRA “preempt[s] the anti-arbitration provisions of Arizona's garnishment laws as to foreign RRGs operating within the state” for two related reasons: (1) “arbitration is a key component of the claims administration procedures of CCRRG,” so “all Arizona state laws that directly or indirectly regulate or otherwise interfere with CCRRG's operations, including its claim administration procedures, are preempted”; and (2) “the LRRA leaves regulation of RRGs, including their claims administration procedures, to the state where the RRG is chartered, and broadly preempts any nonchartering state law, rule, regulation, or order to the extent that such law, rule, regulation, or order would make unlawful, or regulate, directly or indirectly, the operation of an RRG.” (Doc. 119 at 2, 5-7, 10-14.) CCRRG acknowledges that “there are several exceptions to the LRRA's broad preemption of non-chartering state laws with which a foreign RRG must comply” but argues that “none of these exceptions apply to save the anti-arbitration provisions of Arizona's garnishment laws from preemption” because they only “concern unfair claim settlement laws, false practices laws, taxes, registration requirements, and financial stability regulation.” (Id. at 2, 14-16.) CCRRG also points to various decisions by the Ninth Circuit and other courts as “controlling precedents [that] make clear that Arizona cannot, directly or indirectly, void or otherwise invalidate the arbitration provision of CCRRG's policy.” (Id. at 2, 8-10.)
In response, Plaintiff's first identify various reasons why CCRRG should be deemed to have waived its ability to pursue arbitration in general and arbitration based on LRRA preemption in particular. (Doc. 120 at 2-6.) Next, on the merits, Plaintiffs argue that LRRA preemption is inapplicable here because the “LRRA's exemption only applies to a state insurance law or regulation and not any generally applicable state law.” (Id. at 7-12.) According to Plaintiffs, the “myriad cases cited by CCRRG are inapposite as they deal with laws or regulations specifically applicable to just insurance policies or insurance companies” and “[n]o case cited by CCRRG . . . authorizes preemption of a state law generally applicable to all persons or corporations.” (Id. at 7.) In a related vein, Plaintiffs contend that Arizona's garnishment statute applies “to garnishments based upon any judgment and any debt regardless of whether related to an insurance policy or the insurance business” and that the Arizona Supreme Court's decision was not limited to the insurance context. (Id. at 8-9.) Plaintiffs also contend that Congress' purpose in enacting the LRRA was to free RRGs from state insurance regulation, rather than all state regulation, and that the broad exemption in subsection (a)(4) applies to the entire section by virtue of Congress' use of “subsection” in other places in the statute. (Id. at 8 & n.8.) Plaintiffs also analogize this case to ERISA cases holding that state laws were not preempted because the statutes were generally applicable garnishment provisions. (Id. at 9-11.) Next, Plaintiffs argue that to the extent the factors in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982), which govern whether a practice is part of the “business of insurance,” are relevant, they support Plaintiffs' position given that the focus is on the relationship between insurer and insured, not insurer and judgment creditor. (Id. at 10-11.) Finally, Plaintiffs argue that “[e]ven if there was no waiver and LRRA preemption could apply in some bizarre fashion,” CCRRG's motion would still fail because that FAA only requires parties to arbitrate to the extent they have agreed to arbitrate under state law, but here Plaintiffs are not parties to the relevant insurance policies and never agreed to arbitrate. (Id. at 12-17.)
In reply, CCRRG begins by arguing that Plaintiffs' waiver arguments are precluded by the law of the case and outside the scope of the supplemental briefing authorized by the Court. (Doc. 123 at 1-2.) Next, CCRRG argues that “before [Plaintiffs] can ‘garnish' the Policy's indemnity benefits, they must prove that there are in fact benefits to garnish, i.e., CCRRG is holding property that [Capri] is entitled to under the Policy.” (Id. at 2-5.) Next, CCRRG contends that Plaintiffs are “simply wrong” in their contention that Arizona's garnishment laws are not subject to preemption because they are laws of general applicability and that Plaintiffs' reliance on § 3902(a)(4) is misplaced because that provision is “inapplicable.” (Id. at 5-7.) Alternatively, Plaintiffs argue that “even if § 3904(a)(4) was relevant, Arizona's garnishment statutes serve as [a] vehicle for directly naming insurance carriers to proceedings they would not otherwise be a party to and are thus no different than the numerous direct-action statutes from across the country that had been declared preempted by the LRRA.” (Id. at 7-10.) Finally, CCRRG clarifies that it “only contends that Arizona law banning arbitration in garnishments involving insurance coverage disputes is preempted as applied to foreign RRGs that have arbitration provisions in their policies” and does not argue that the “entirety of Arizona's garnishment law is preempted.” (Id. at 10-11.)
B. Analysis
As an initial matter, the Court notes that the question of whether CCRRG has forfeited its ability to seek to compel arbitration based on LRRA preemption is closer than the Court perceived it to be in earlier orders. Nevertheless, because CCRRG's preemption arguments fail on the merits for the reasons discussed below, there is no need to resolve the question of forfeiture as to that argument.
With that said, CCRRG has forfeited the separate argument, raised in cursory fashion in a footnote in its supplemental brief, that “[t]o the extent Arizona's antiarbitration statutes place an outright ban on arbitration and thus single out arbitration Sirovisions in policies of insurance for suspect status, such statutes violate Section 2 of the FAA].” (Doc. 119 at 4 n.2.) The only question related to arbitrability that the Ninth Circuit authorized this Court to entertain on remand was the question of LRRA preemption. Benson, 2022 WL 822126 at *2 n.1. Otherwise, the Ninth Circuit held that “the district court erred in granting CCRRG's motion to compel arbitration under the doctrine of direct benefits estoppel.” Id. Accordingly, CCRRG cannot ask this Court to affirm its previous (and now reversed) decision compelling arbitration on other grounds. Hall v. City of Los .Angeles, 697 F.3d 1059, 1067 (9th Cir. 2012) (“The rule of mandate is similar to, but broader than, the law of the case doctrine. A district court that has received the mandate of an appellate court cannot vary or examine that mandate for any purpose other than executing it . . . [and] is limited by our remand when the scope of the remand is clear. Violation of the rule of mandate is ajurisdictional error.”) (citations and internal quotation marks omitted). See also United States v. Wright, 716 F.2d 549, 550 (9th Cir. 1983) (“When a party could have raised an issue, in a prior appeal but did not, a court later hearing the same case need not consider the matter.”). Additionally, CCRRG's inclusion of this argument in its supplemental brief violated the Court's June 14, 2022 order, which limited the scope of any supplemental briefing to “the issue of LRRA preemption regarding the arbitration clause.” (Doc. 118.)
The Arizona Supreme Court and Ninth Circuit concluded that Plaintiffs are not bound by the arbitration agreements under the Arizona state-law doctrine of direct benefits estoppel. CCRRG now argues that this conclusion must be reconsidered because the LRRA preempts “Arizona law banning arbitration in garnishments involving insurance coverage.” (Doc. 123 at 10.)
In evaluating this argument, the Court begins with the text of the relevant statutory provision. CSX Transp., Inc. v. Easterwood, 507 U.S. 658, 664 (1993) (“If the statute contains an express pre-emption clause, the task of statutory construction must in the first instance focus on the plain wording of the clause, which necessarily contains the best evidence of Congress' pre-emptive intent.”). The parties agree on the relevant provisions. In 15 U.S.C. § 3902(a), Congress created a broad preemption provision, which appears in subdivision (a)(1), but also identified various “exemptions” to this preemption provision, which appear in subdivisions (a)(1)(A)-(I) and (a)(4):
Except as provided in this section, a risk retention group is exempt from any State law, rule, regulation, or order to the extent that such law, rule, regulation, or order would-
(1) make unlawful, or regulate, directly or indirectly, the operation of a risk retention group except that the jurisdiction in which it
is chartered may regulate the formation and operation of such a group and any State may require such a group to-
(A) comply with the unfair claim settlement practices law of the State;
(B) comply with the unfair claim settlement practices law of the State;
(C) pay, on a nondiscriminatory basis, applicable premium and other taxes which are levied on admitted insurers and surplus lines insurers, brokers, or policyholders under the laws of the State;
(D) participate, on a nondiscriminatory basis, in any mechanism established or authorized under the law of the State for the equitable apportionment among insurers of liability insurance losses and expenses incurred on policies written through such mechanism
....
or
(4) otherwise discriminate against a risk retention group or any of its members, except that nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations.
Additionally, in 15 U.S.C. § 3902(b), Congress provided further guidance concerning the scope of these exemptions:
The exemptions specified in subsection (a) apply to laws governing the insurance business pertaining to-
(1) liability insurance coverage provided by a risk retention group for-
(A) such group; or
(B) any person who is a member of such group;
(2) the sale of liability insurance coverage for a risk retention group; and
(3) the provision of-
(A) insurance related services;
(B) management, operations, and investment activities; or
(C) loss control and claims administration (including loss control and claims administration services for uninsured risks retained by any member of such group);
for a risk retention group or any member of such group with respect to liability for which the group provides insurance.
The Ninth Circuit has provided guidance on how to conduct a preemption analysis under these provisions. “When considering whether the LRRA preempts a state law, we first determine whether the challenged aspect of the state law offends the LRRA's broad preemption language. If so, we consider whether one of the LRRA's exceptions, which are contained in §§ 3902(a)(1) and 3905, applies to save the state law. If no exception applies, the law is preempted.” Att 'ys Liab. Prot. Soc 'y, Inc. v. Ingaldson Fitzgerald, P. C., 838 F.3d 976, 980 (9th Cir. 2016).
1. LRRA's Broad Preemption Language
“The LRRA's preemption provision is broadly worded, and [the Ninth Circuit] has repeatedly held that the LRRA has a broad preemptive effect.” Allied Pros. Ins. Co., 952 F.3d at 1135. “This broad effect requires that the term ‘operation' be read generously.” Id.
Several cases from the Ninth Circuit have remarked on the types of state action that “regulate, directly or indirectly, the operation of a [RRG]” for purposes of the first step of the preemption analysis under § 3902(a)(1). For example, in Alliance of Nonprofits for Insurance Risk Retention Grp. v. Kipper, 712 F.3d 1316 (9th Cir. 2013), Nevada law required vehicle owners to obtain insurance that “compl[ied] with financial responsibility minimums.” Id. at 1319. Compatible policies were called “first dollar” liability policies and, under Nevada's Motor Vehicle Insurance and Financial Responsibility Act, vehicle owners could only obtain first dollar insurance from a provider “authorized to transact business” in Nevada. Id. (citations omitted). Authorized providers had to obtain a certificate of authority. Id. After the Nevada Insurance Commissioner issued an order prohibiting the plaintiff, which was an RRG, “from writing first dollar liability policies in Nevada,” the plaintiff challenged this ruling on the ground that it was preempted by the LRRA. Id. at 1320-21. The district court agreed with the plaintiff and the Ninth Circuit affirmed, holding that “the Commissioner's order makes it unlawful for [the plaintiff], an RRG, to operate in Nevada, to the extent [the plaintiff] sought to write first dollar liability insurance” and thus “plainly fits within the scope of LRRA preemption” under § 3902(a)(1). Id. at 1321. The court added that, “[b]ecause the Order fits within the scope of LRRA preemption, it is invalid unless one of the LRRA's exceptions from preemption applies.” Id.
In Attorneys Liability Protection Society, an Alaska statute prohibited an insurer from recouping funds it spent on independent counsel to defend a non-covered claim pursuant to a reservation of rights. 838 F.3d at 980. The Ninth Circuit concluded that this statute “‘regulates' [the plaintiff RRG's] operations in Alaska” and was therefore subject to preemption under § 3902(a)(1) unless one of the statutory exemptions applied. Id. at 980-81.
And again, in Allied Professionals, a Washington statute was interpreted by state courts as “prohibiting] binding arbitration agreements in insurance contracts in that state.” 952 F.3d at 1132. Nevertheless, an RRG moved to compel arbitration of a claim for breach of an insurance contract, arguing that the statute barring arbitration of such claims was unenforceable because it was preempted under the LRRA. Id. When conducting the first step of the preemption analysis, the Ninth Circuit agreed with the RRG that the challenged statute “regulate[s], directly or indirectly, the operation of a risk retention group” for purposes of § 3902(a)(1) because it “places a restriction on risk retention groups that is not required by the LRRA or by all other states.” Id. at 1135. The court emphasized that the “LRRA was not enacted simply to keep states from discriminating against risk retention groups. Instead, . . . the LRRA was passed by Congress in an effort to support a struggling insurance market. In order to do so, the Act ‘eliminated the need for compliance with numerous non-chartering state statutes that, in the aggregate, would thwart the interstate operation risk retention groups.'” Id. at 1135-36 (cleaned up).
Given this backdrop, the Court assumes that Arizona's determination that direct benefits estoppel does not apply to bind a non-signatory third party to an arbitration agreement in a garnishment action, and instead requires both parties to submit to the power of the court, “indirectly” “regulate[s]” the operation of an RRG for purposes of § 3902(a)(1). Cf. Speece v. Allied Pros. Ins. Co., 853 N.W.2d 169, 179 (Neb. 2014) (holding that an anti-arbitration statute for insurance policies regulated the business of insurance). But this assumption does not end the preemption analysis-it simply means the Court must proceed to the second step, which addresses whether any of the LRRA's exemptions apply.
2. Exemptions
Plaintiffs argue that the Arizona Supreme Court's decision in Benson announces a rule that falls within the exemption set forth at 15 U.S.C. § 3902(a)(4), which provides that states may not “otherwise discriminate against a risk retention group or any of its members, except that nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations.” As explained below, the Court agrees.
The analysis is complicated by the fact that, although many courts have addressed the scope of the explicit exemptions listed in § 3902(a)(1)(A)-(I), which govern various state regulation mechanisms (such as requiring an RRG to submit to examination by the state), few cases address the meaning of the second clause of § 3904(a)(4)-that is, the proviso that “except that nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations.” In National Warranty Insurance Co. RRG, the Ninth Circuit interpreted the first clause of § 3902(a)(4), concluding that the phrase “otherwise discriminates” means “differentiation without an acceptable justification.” 214 F.3d at 1077-81. The court clarified that differentiation not only includes laws that “facially or intentionally” differentiate but also includes “state laws that merely have the effect of differentiating” between “an RRG and an admitted insurance company.” Id. at 1081. Finally, in something of a passing reference, the court characterized the “concluding clause” of § 3902(a)(4) as “specifically allow[ing] regulation by state laws not specifically regulating insurance-that is, by state laws ‘generally applicable to persons and corporations.'” Id. Although this characterization is helpful to Plaintiffs' position, it is not clear that it is dispositive.
Yet even assuming that National Warranty does not control the issue, Plaintiffs have the better of this dispute. In concluding that the doctrine of equitable estoppel cannot be applied to compel arbitration in the garnishment context, the Arizona Supreme Court did not announce a rule that is specific to the insurance industry or to RRGs. Benson, 502 P.3d at 465 (“The Ninth Circuit asks whether the doctrine of direct benefits estoppel can be applied in an Arizona garnishment proceeding as an exception to the general rule that nonparties are not bound by the terms of a contract. We hold it cannot.”). Indeed, in Arizona's statutory scheme, the garnishment procedures apply identically to any judgment debtor or creditor, regardless of the industry. See, e.g., A.R.S. § 12-1570 (defining judgment debtor as “a person or entity against which a money judgment has been awarded or against which an order for support of a person is due” and judgment creditor as “a person or entity that has a money judgment or an order for support of a person that is due”); id. § 12-1570.01 (describing the scope of the garnishment article as applying generally to “[m]onies held by a garnishee on behalf of a judgment debtor” and “[indebtedness owed to a judgment debtor”); id. § 12-1584 (describing the garnishment procedures in general terms of judgment debtors and creditors). Thus, the rule announced in Benson qualifies as a “State law[]generally applicable to persons and corporations” under § 3902(a)(4).
CCRRG's arguments to the contrary are unavailing. CCRRG contends that the second clause of subsection (a)(4) (i.e., “nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations”) does not create an exemption for all laws of general applicability, but only for the subset of such laws specified in the first clause of subsection (a)(4) (i.e., laws that “otherwise, discriminate against a risk retention group or any of its members”). (Doc. 123 at 5-6.) Plaintiffs disagree, arguing that § 3902(a)(4) is a catch-all provision that encompasses the entirety of § 3902(a). (Doc. 120 at 7-10.)
Plaintiffs are correct. “[S]tatutory language must always be read in its proper context.” McCarthy v. Bronson, 500 U.S. 136, 139 (1991). For CCRRG to prevail, the word “section” in the second clause of (a)(4) must refer only to “subsection” (a)(4). But such an interpretation necessarily fails given that § 3902(b)(1) uses the term “subsection” when specifically referring to subsection (a). 15 U.S.C. § 3902(b)(1) (“The exemptions specified in subsection (a) apply to laws governing the insurance business pertaining to . . . .”) (emphasis added). This language choice shows that, had Congress intended for the second clause of § 3902(a)(4) to apply only to the subset of laws covered by the first clause of sub section (a)(4), it would have said so directly. S.E.C. v. McCarthy, 322 F.3d 650, 656 (9th Cir. 2003) (“It is a well-established canon of statutory interpretation that the use of different words or terms within a statute demonstrates that Congress intended to convey a different meaning for those words.”). Instead, it chose the word “section.” This suggests that “section” refers to all of § 3902.
Subsection 3902(b) further supports the conclusion that, under § 3902(a)(4), generally applicable laws are exempt from LRRA preemption. Subsection (b) defines the “Scope” of “[t]he exemptions specified in subdivision (a)” and states that those exemptions may apply to “laws governing the insurance business” pertaining to “liability insurance coverage,” “the sale of liability insurance,” and “the provision of . . . insurance related services; . . . management, operations, and investment activities; or . . . loss control and claims administration “for a risk retention group or any member of such group with respect to liability for which the group provides insurance.” Id. In other words, § 3902(b) clarifies that even some laws that expressly regulate the insurance industry may be exempt from preemption, depending on whether a specific exemption in § 3902(a) applies. See generally National Warranty, 214 F.3d at 1081 (noting that the exemptions set forth at § 3902(a)(1)-(3) share the common characteristic that the permitted and prohibited laws “specifically regulate insurance companies”). The first clause of subsection (a)(4), then, reinforces the insurance-focused readings of (a)(1)-(3) and § 3902(b) by confirming that laws that discriminate against RRGs, in the insurance context, are also prohibited. It is consistent with that statutory scheme for “State laws generally applicable to persons or corporations” to fall outside the LRRA's preemption orbit because they do not purport to regulate insurance at all (even if they “indirectly” have such a regulatory effect for purposes of the first step of the preemption analysis under § 3902(a)(1)). The Second Circuit has affirmed this interpretation, reasoning that “the Act prohibits states from enacting regulations of any kind that discriminate against risk retention groups or their members, but does not exempt risk retention groups from laws that are generally applicable to persons or corporations.” Wadsworth v. Allied Pros. Ins. Co., 748 F.3d 100, 103 (2d Cir. 2014); see also Speece, 853 N.W.2d at 180 (rejecting the use of § 3902(a)(4) as a defense when the statute at issue applied to “insurance contracts” rather “than generally to persons or corporations”).
Although the Ninth Circuit does not appear to have cited, with approval, this specific passage from Wadsworth, it has generally expressed its agreement with Wadsworth. Allied Pros. Ins. Co., 952 F.3d at 1134.
For similar reasons, the Court is unpersuaded by CCRRG's argument that “even if § 3902(a)(4) was relevant, Arizona's garnishment statutes serve as [a] vehicle for directly naming insurance carriers to proceedings they would not otherwise be a party to and are thus no different than the numerous direct-action statutes from across the country that have been declared preempted by the LRRA.” (Doc. 123 at 7.) CCRRG cites Wadsworth in support of this position. (Id. at 6-7). But as discussed above, Wadsworth contains passages suggesting that LRRA preemption does not apply to state laws of general applicability, such as the state-law rule announced in Benson. Additionally, the facts of Wadsworth are distinguishable. Wadsworth focused on a provision of “New York Insurance Law” that allowed an injured party to bring a direct action “against a tortfeasor's insurer.” 748 F.3d at 104. Subsection (a)(4) had no application because New York's law, unlike the rule announced in Benson, was expressly aimed at insurers. CCRRG's other cited cases are distinguishable for the same reason-the statutes at issue in those cases were expressly directed at the insurance industry.
See, e.g., Reis v. OOIDA Risk Retention Grp., Inc., 814 S.E.2d 338, 343 (Ga. 2018) (“The direct action statutes subject insurers of motor carriers to lawsuits as parties, and thus, exposes them directly to liability and any consequent damages.”); Courville v. Allied Pros. Ins. Co., 174 So.3d 659, 666 (La. Ct. App. 2015) (“Louisiana has enacted a statute that effectively prohibits the enforcement of arbitration provisions in the context of insurance disputes.”).
The statutory text is the best indicator of what Congress intended with respect to preemption. CSX Transp., Inc., 507 U.S. at 663. The text here is clear. Congress intended to preempt certain state insurance regulations while leaving intact generally applicable state laws, even when they have the indirect effect of regulating RRGs. Arizona's garnishment scheme is generally applicable to persons and corporations within the meaning of § 3902(a)(4), as is Arizona's doctrine of direct benefits estoppel. Therefore, LRRA preemption does not apply here.
The National Risk Retention Association, which has appeared as amicus curiae in this case, including the following passage in its amicus brief: “Not all state laws affecting an LRRA insurer are tantamount to regulating its operations. Many state laws affect a foreign RRG-everything from laws requiring drivers' licenses to minimum wage statutes-but they do not ‘regulate' the RRG'S business or operations as an insurer. Laws of general applicability are not preempted, while those regulating the ‘business of insurance' are/” (Doc. 116 at 4.) If anything, this logic supports the Court's conclusion that CCRRG is not entitled to compel arbitration based on its LRRA preemption arguments, because the state-law provisions giving rise to the arbitrability dispute are laws of general applicability that do not purport to specifically regulate the business of insurance.
Accordingly, IT IS ORDERED that CCRRG's motion to compel arbitration (Doc. 63) is denied.
The Court will rule on the parties cross-motions for summary judgment (Docs. 55, 125) in due course.