Burlington Insurance v. Trygg-Hansa Insurance

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
THE BURLINGTON INSURANCE 
COMPANY; FIRST FINANCIAL
INSURANCE COMPANY; BURLINGTON
INSURANCE GROUP, INCORPORATED,
Plaintiffs-Appellees,
 No. 00-1373
v.
TRYGG-HANSA INSURANCE COMPANY
AB,
Defendant-Appellant.

Appeal from the United States District Court
for the Middle District of North Carolina, at Durham.
William L. Osteen, District Judge.
(CA-99-334-1)
Argued: January 23, 2001
Decided: May 23, 2001
Before WILKINSON, Chief Judge, and WILKINS and
KING, Circuit Judges.
Vacated and remanded by unpublished per curiam opinion.
COUNSEL
ARGUED: Andrew S. Amer, SIMPSON, THACHER & BART-
LETT, New York, New York, for Appellant. Louis M. Solomon,
SOLOMON, ZAUDERER, ELLENHORN, FRISCHER & SHARP,
2 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
New York, New York, for Appellees. ON BRIEF: Sasha A. Smith,
SIMPSON, THACHER & BARTLETT, New York, New York;
Josiah S. Murray, III, John R. Long, NEWSOM, GRAHAM, HED-
RICK & KENNON, P.A., Durham, North Carolina, for Appellant.
Margaret A. Dale, SOLOMON, ZAUDERER, ELLENHORN, FRIS-
CHER & SHARP, New York, New York; Catharine B. Arrowood,
Brian D. Darer, PARKER, POE, ADAMS & BERNSTEIN, L.L.P.,
Raleigh, North Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
This appeal, from the Middle District of North Carolina, arises
from a lawsuit filed by Burlington Insurance Company ("Burlington
Insurance"), First Financial Insurance Company ("First Financial"),
and Burlington Insurance Group, Inc. ("Burlington Group") (collec-
tively, "Plaintiffs"), against Trygg-Hansa Insurance Company AB
("Trygg"). The Complaint alleges several claims for, inter alia, breach
of contract and deceptive trade practices, stemming from reinsurance
contracts entered into by Trygg and the Plaintiffs.
Trygg moved to stay the litigation proceedings in the district court
pending arbitration. The district court granted Trygg’s motion in part,
but it refused to stay two claims for relief made in the Complaint.
Trygg has appealed the district court’s ruling pursuant to 9 U.S.C.
§ 16(a)(1)(A) (authorizing interlocutory appeals to review denials of
motions to stay proceedings pending arbitration). For the reasons
explained below, we find arbitration warranted with respect to all
claims made in the Complaint. Accordingly, we vacate the district
court’s order and remand for entry of an appropriate stay.
BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE 3
I.
A.
Trygg is a Swedish insurance company that approximately ten
years ago decided to enter the United States reinsurance market. To
accomplish this end, it signed a January 14, 1991 Memorandum of
Agreement ("MOA") with Burlington Group. Pursuant to the terms of
the MOA, Trygg advanced $6 million to Burlington Group in
exchange for a non-negotiable promissory note of that same sum.
Burlington Group is not itself an insurance company, but is a parent
company indirectly holding controlling equity in both Burlington
Insurance and First Financial.
In October of 1991, Trygg entered into two reinsurance agree-
ments, one with Burlington Insurance and one with First Financial,
each effective January 1, 1991 ("the Reinsurance Agreements"). The
Reinsurance Agreements contain identical arbitration provisions:
As a condition precedent to any right of action hereunder,
any dispute arising out of this Agreement shall be submitted
to the decision of a board of arbitration . . . .
J.A. 56, 83.
For reasons in dispute but immaterial to the resolution of this
appeal, Trygg decided in 1993 to withdraw from the reinsurance mar-
ket in the United States. Pursuant to the terms of the Reinsurance
Agreements, Trygg gave written notice, effective January 1, 1994, of
their termination. Trygg, for reasons also in dispute, consented, on
December 29, 1993, to terminate the MOA and forgive one-half of
the $6 million loan it had made to Burlington Group. Then, on April
8, 1994, Trygg signed a Reconfirmation of Agreement ("ROA") with
Burlington Group, First Financial, and Burlington Insurance. The
ROA memorializes the December 29, 1993 understanding and
releases Trygg from liability for all insurance policies issued after
December 31, 1994, but reiterates that all other provisions of the
Reinsurance Agreements remain in effect.
4 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
Under disputed circumstances, Trygg ceased paying its share of
losses due under the Reinsurance Agreements. To cover the insurance
claims, Burlington Insurance and First Financial drew on the letters
of credit posted by Trygg under the Reinsurance Agreements. Both
insurers then asked Trygg to increase its letters of credit to secure
future losses, but Trygg declined to meet those demands, alleging that
it had been misled into forgiving one-half of the loan due under the
MOA.1
B.
Burlington Insurance and First Financial, on April 8, 1999 (exactly
five years after the ROA was signed), formally demanded arbitration
under the Reinsurance Agreements, demanding money damages for
unpaid claims and asking Trygg to increase its letters of credit. On the
same day, Burlington Insurance, First Financial, and Burlington
Group filed a civil action in the Superior Court of North Carolina,
seeking recompense from Trygg for: (1) breach of contract and conse-
quential damages; (2) consequential damages for the violation of the
duties of good faith and fair dealing; (3) treble damages, attorneys’
fees, and costs under North Carolina’s deceptive trade practices law;
(4) punitive damages in excess of $10 million; (5) pre-answer security
of $2,659,291 pursuant to North Carolina’s insurance code; and (6)
a declaration that the ROA is valid and enforceable.
1
The parties vigorously dispute each other’s version of events, but a
determination of the factual disputes is unnecessary to our resolution of
this appeal. Put succinctly, Trygg asserts that it agreed to forgive one-
half of the loan because the reinsurance business had apparently been
profitable. Trygg further contends, however, that in reality Burlington
Insurance and First Financial were concealing mounting claims under the
insurance contracts that Trygg was obligated to reinsure. Thus, according
to Trygg, Burlington Insurance and First Financial fraudulently lulled
Trygg into thinking it had achieved satisfactory profits, convincing
Trygg to forgive one-half of the loan. Burlington Insurance and First
Financial dispute both the allegation that they fraudulently concealed
claims and the allegation that the forgiveness of the $3 million was con-
ditioned solely on Trygg’s understanding of the profits it had achieved
during its relationship with the Plaintiffs.
BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE 5
On April 23, 1999, Trygg removed the civil action to the Middle
District of North Carolina, on the basis of diversity of citizenship.
Then, on May 17, 1999, Trygg filed a Motion for Stay Pending Arbi-
tration, pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 ("FAA"),
maintaining that the entire civil action was subject to arbitration, pur-
suant to the Reinsurance Agreements. The district court, by its Memo-
randum Opinion of March 17, 2000 ("Memorandum Opinion"),
granted Trygg’s motion in part, and ordered a stay of the litigation
except to the extent that the plaintiffs were seeking (1) a declaration
that the ROA was valid; and (2) extra-contractual damages, i.e., dam-
ages under the theory that Trygg’s breaches "limited Plaintiffs’ ability
to underwrite new business and caused Plaintiffs to accrue financial
penalties or that Trygg-Hansa engaged in a continuing course of
wrongful conduct[.]" Memorandum Opinion, at 8. The district court
then stayed the trial of all claims, but directed the parties to proceed
with discovery on the claims and issues unaffected by the stay. Trygg
filed a timely notice of appeal, repeating its contention that both dis-
covery and trial must be stayed for all claims until arbitration is com-
pleted.2
II.
Under the FAA, a court must stay "any suit or proceeding" pending
arbitration of "any issue referable to arbitration under an agreement
in writing for such arbitration." 9 U.S.C. § 3. Because ascertaining the
scope of an arbitration agreement is a task of contract interpretation,
we review de novo a district court’s determination of the arbitrability
of a dispute. See United States v. Bankers Ins. Co., 245 F.3d 315, 319
(4th Cir. 2001). At the same time, we give due regard to the federal
policy favoring arbitration and resolve "any doubts concerning the
scope of arbitrable issues . . . in favor of arbitration[.]" Moses H.
Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983).
2
On May 23, 2000, the district court denied Trygg’s motion for a stay
pending appeal. Trygg then filed a stay request with this Court, on June
2, 2000, which we denied on June 27, 2000.
6 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
III.
A.
At the outset, we note that the Plaintiffs have belabored the point
that the district court did not "compel" arbitration under 9 U.S.C. § 4,
but instead merely "stayed" the proceedings under 9 U.S.C. § 3. Plain-
tiffs claim — in contravention of 9 U.S.C. § 16 (authorizing interlocu-
tory appeals of a district court’s denial to stay "any action under
section 3") — that there is no appellate jurisdiction in this case, since
Burlington Group is not a party to any ongoing arbitration and has not
signed an agreement containing an arbitration clause. Plaintiffs, how-
ever, appear to misapprehend the purposes of the FAA, 9 U.S.C. § 16,
and the district court’s "stay." A stay simply means that the litigation
in the district court — of which Burlington Group is a party — must
be stayed until the disputes in the case undergo arbitration. Whether
Burlington Group is also a party to ongoing arbitration that is con-
ducted simultaneous with the pending litigation is irrelevant. Simi-
larly, Burlington Group’s assertion that it is not subject to any
arbitration clause entered into by the other parties is irrelevant for the
purposes of determining our jurisdiction. Burlington Group is a party-
plaintiff in the litigation as filed in the state court and as removed to
the district court. That litigation is the subject of this appeal, not the
contemporaneous arbitration among First Financial, Burlington Insur-
ance and Trygg.3
We see Plaintiffs’ attempt to insert a red herring into these pro-
ceedings — questioning our abundantly clear jurisdiction, as well as
the significance of a stay under § 3 versus compelled arbitration under
§ 4 — as based on conclusory4 and flawed reasoning.5 See also Shan-
3
The issue of whether Burlington Group is bound by the arbitration
clauses is appropriately raised in determining the merits of the motion for
stay pending arbitration, and we address Plaintiffs’ assertions on this
issue supra, at Part III.B.2.b.
4
Plaintiffs’ argument is conclusory because it is based on the erroneous
assumption that Burlington Group is not bound by any arbitration clause.
Even if this were true (and we have determined otherwise, see supra Part
III.B.2.b.), such a finding would not affect our jurisdiction to decide
BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE 7
feroke Coal & Supply Co. v. Westchester Serv. Corp., 293 U.S. 449,
453 (1935) ("[T]here is no reason to imply that the power to grant a
stay is conditioned upon the existence of power to compel arbitration
in accordance with section 4 of the act.").
B.
We now turn to the core issues in this case. In that connection,
Plaintiffs stress that the district court correctly determined that the
arbitration clauses in question were "narrow,"6 and do not encompass
the claims the district court declined to stay. Furthermore, Plaintiffs
assert that the arbitration clauses only cover the Reinsurance Agree-
ments (since only those agreements contain such clauses) and the dis-
putes arising therefrom, and in no event pertain to any lawsuit
maintained by Burlington Group, since it was not a party to the Rein-
surance Agreements.
On the other hand, Trygg contends that all disputes in this case
emanate from the Reinsurance Agreements, and that the arbitration
clauses set forth therein were reaffirmed by the ROA. Furthermore,
it challenges Plaintiffs’ assertion that Burlington Group’s claims are
whether a stay under § 3 should be granted. See note 3 and accompany-
ing text.
5
Trygg, having filed no claims of its own, has little use for § 4. How-
ever, once the lawsuit was filed against Trygg, it enforced its right to
have the dispute settled by arbitration. "[S]ection 4, by its very terms,
refers only to situations in which a party aggrieved by another’s failure
to honor an arbitration agreement initiates an independent proceeding to
compel arbitration . . . . When . . . a party seeks a stay pending arbitration
in the context of an ongoing lawsuit, that party is seeking relief pursuant
to section 3." McDonnell Douglas Fin. Corp. v. Penn. Power & Light
Co., 849 F.2d 761, 763 n.1 (2d Cir. 1988).
6
There are two types of arbitration clauses — broad and narrow. See,
e.g., American Recovery Corp. v. Computerized Thermal Imaging, Inc.,
96 F.3d 88, 92-93 (4th Cir. 1996) (explaining the significance of broad
versus narrow arbitration clauses). We later discuss the scope of the arbi-
tration clauses in the instant case, as well as the significance of that
determination. See supra Part III.B.1.
8 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
not subject to an arbitration agreement. Trygg insists that Burlington
Group’s status as the parent company of Burlington Insurance and
First Financial, along with its decision to pursue related and insepara-
ble claims to Burlington Insurance and First Financial, makes it sub-
ject to the arbitration clauses found in the Reinsurance Agreements.
1.
The arbitration clauses in question each provide that "any dispute
arising out of this Agreement shall be submitted to [arbitration.]" The
district court, in construing this language, concluded that the agree-
ment to arbitrate "claims arising out of the agreement" was "an exam-
ple of a narrow arbitration clause." Memorandum Opinion, at 6. The
Plaintiffs urge that the district court’s approach was correct, relying
on the language "arising out of this Agreement" as evidence that the
arbitration clauses only cover disputes based explicitly on the con-
tract, not "all and any disputes" between the parties. Appellees’ Br.,
at 20 (citations omitted).
Coincidentally, just three days prior to the district court’s decision,
we decided certain arbitration issues in Int’l Paper Co. v. Schwa-
bedissen Maschinen & Anlagen GMBH, 206 F.3d 411 (4th Cir. 2000).
In that case, the arbitration provision was nearly identical to those
involved here, providing that "[a]ny dispute arising out of the Con-
tract" was to be submitted to arbitration. Int’l Paper Co., 206 F.3d at416 n.3. In our decision, we specifically noted that the arbitration
clause involved there was "a broad one[.]" Id. In any event, a conclu-
sion that the arbitration clauses in this case are "broad" is not a neces-
sary component of our decision that the arbitration clauses cover all
counts of the Complaint. The claim for extra-contractual damages, as
to which the district court specifically refused a stay, clearly "arises"
from the contract.
Indeed, the alternate contention — that the Plaintiffs’ extra-
contractual claims do not "arise" from the Reinsurance Agreements,
and are thus not subject to the arbitration clauses — is without merit.
The district court, however, found that the claim that "Trygg’s-
Hansa’s failure to meet its contractual obligations damaged plaintiffs
in ways beyond the scope of the contract . . . do[es] not concern
BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE 9
Trygg-Hansa’s performance of contractual obligations." Memoran-
dum Opinion, at 8.
We find ourselves in disagreement with the district court on this
point. Any claim dependent on a "failure to meet [ ] contractual obli-
gations" must necessarily concern and depend on what those contrac-
tual obligations are, and to what extent they have been performed by
the party alleged to have breached them. It is clear that Trygg owed
no duty (relevant for the resolution of this litigation) to the Plaintiffs
except those arising from the existence of the Reinsurance Agree-
ments and the related contracts. Although the damages claimed by
Plaintiffs go beyond ordinary contractual damages, they clearly arise
from the original contract itself, inasmuch as they are premised on
Trygg’s alleged failure to comply with its contractual duties. Thus,
the claims for extra-contractual damages must be submitted to arbitra-
tion as required in the Reinsurance Agreements.
2.
Having concluded that the arbitration clauses at issue encompass
all claims for damages that resulted from Trygg’s alleged breaches,
two questions remain. First, we must determine whether the Plain-
tiffs’ claim for declaratory relief — that the ROA is valid and
enforceable — must be submitted to arbitration, notwithstanding the
fact that the ROA itself does not contain an arbitration clause. Sec-
ond, we must ascertain the significance, if any, of Burlington Group
not being a party to the Reinsurance Agreements, and of the fact that
Burlington Group "never signed an arbitration agreement with
Trygg[.]" Appellees’ Br., at 13.
a.
In evaluating whether the ROA contains a commitment to arbitrate
disputes arising from it, we look first at its plain language. See, e.g.,
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56-57
(1995). While the ROA does not specifically contain an arbitration
provision, it explicitly provides that "all other provisions of such rein-
surance agreements remain in full force and effect[.]" Indeed, the
ROA is a reconfirmation of the MOA and the Reinsurance Agree-
ments, not a substitution thereof. By its terms, the ROA includes all
10 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
provisions of the Reinsurance Agreements, including the arbitration
clauses, that are not changed by the ROA. Thus, it is clear that the
ROA includes and is subject to the arbitration clauses included in the
Reinsurance Agreements.
b.
Lastly, we turn to the significance of Burlington Group’s failure to
specifically and directly enter into an arbitration agreement with Trygg.7
We first note that Burlington Group is only included as a plaintiff in
the Complaint’s sixth claim for relief, which seeks a declaration that
the ROA is valid and enforceable. The ROA essentially contains three
parts. Part one (Paragraphs 1 and 2) addresses the termination of the
MOA and the corresponding loan between Burlington Group and
Trygg. Part two (Paragraph 3) addresses the Reinsurance Agreements.
In consideration for cancellation of the MOA and loan thereunder
(Paragraphs 1 and 2), and various changes (and non-changes) to the
Reinsurance Agreements (Paragraph 3), Burlington Group executed a
new $3 million note to Trygg (Paragraph 4). Of importance, all of the
allegations in the Complaint pertaining to Trygg’s failure to comply
with its contractual duties mention only the duties originally created
by the Reinsurance Agreements, duties as such Trygg owed to Bur-
lington Insurance and First Financial.8
In short, although Burlington Group is a party to the ROA, the sole
allegation of a breach of duty to Burlington Group is that Trygg failed
to honor the Reinsurance Agreements, to which Burlington Group
was not a party, and that Trygg’s recommitment to honor the Reinsur-
ance Agreements was part of the consideration for Burlington
Group’s execution of the new $3 million note in the ROA.9 Thus, the
7
Although Burlington Group was a party to the ROA, which contains
an arbitration clause, see supra Part III.B.2.a., that clause only applies to
the Reinsurance Agreements, to which Burlington Group was not a party.
8
Indeed, in the part of the Complaint where the factual predicate of the
litigation and Trygg’s breaches are alleged, J.A. 127-33, Burlington
Group is not mentioned.
9
Of course, Burlington Group received a one-half reduction in the
amount it owed to Trygg, since the ROA cancelled the $6 million note
BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE 11
success of Burlington Group’s lawsuit is entirely dependent on and
inseparable from the claim of Burlington Insurance and First Finan-
cial that Trygg breached its duty under the ROA and Reinsurance
Agreements.
Under our precedents, there are two compelling reasons why Bur-
lington Group must be bound to the arbitration clauses, even though
it was not a party to the Reinsurance Agreements. First, "[w]hen the
charges against a parent company and its subsidiary are based on the
same facts and are inherently inseparable, a court may refer claims
against the parent to arbitration even though the parent is not formally
a party to the arbitration agreement." J.J. Ryan & Sons, Inc. v. Rhone
Poulenc Textile, S.A., 863 F.2d 315, 320-21 (4th Cir. 1988). The sce-
nario discussed in J.J. Ryan & Sons is sufficiently analogous to the
situation that exists in this case and, because the exact issues to be
determined here were pre-committed to arbitration, it would violate
the intent of the parties and the purpose of the FAA to not hold Bur-
lington Group to the arbitration clauses.
and substituted a $3 million note. Furthermore, although not discussed by
the parties, we point out that Trygg’s agreement to reconfirm its duties
under the Reinsurance Agreements could not properly be consideration
(and therefore could not be the basis for a breach of contract suit) for
Burlington Group’s execution of a new $3 million note. See, e.g., Con-
tempo Design, Inc. v. Chicago & Northeast Illinois Dist. Council of Car-
penters, 226 F.3d 535, 549 (7th Cir. 2000) ("[P]romising to perform a
duty that already is owed under an existing contract is not consider-
ation[.]"); Masonite Corp. v. Norfolk & W. Ry. Co., 601 F.2d 724, 727-
28 (4th Cir. 1979) (restating the well-established rule that performing a
pre-existing contractual duty cannot be consideration for a new agree-
ment with the same party); Alaska Packers’ Ass’n v. Domenico, 117 F.
99, 104 (9th Cir. 1902) ("A promise by a party to do what he is bound
in law to do is . . . the same as no consideration at all[.]") (citing Cobb
v. Cowdery, 40 Vt. 25 (1867)). The fact that both parties also offered
new and additional consideration sufficient to bind the ROA is irrelevant
to whether Trygg’s promise to perform under the Reinsurance Agree-
ments was an independent component of Trygg’s consideration for the
ROA, since Trygg was never free to breach the Reinsurance Agreements.
See, e.g., 1 E. Allan Farnsworth, Farnsworth on Contracts § 4.21, at 501
(2d ed. 1998).
12 BURLINGTON INSURANCE v. TRYGG-HANSA INSURANCE
Another solid reason binding Burlington Group to the arbitration
clauses is that the clauses are a part of the contracts that Burlington
Group seeks to enforce, i.e., the Reinsurance Agreements. Although
the claim for declaratory relief centers around the ROA, it is the
duties under the Reinsurance Agreements which are at issue in this
case, and which the ROA merely reaffirms. Since the arbitration
clauses in the Reinsurance Agreements remained in full force after the
ROA, see supra Part III.B.2.a., Burlington Group cannot sue to
enforce the ROA while at the same time seeking to avoid the arbitra-
tion clauses. Indeed, this Court has repeatedly explained that "no
party suing on a contract should be able to enforce certain contract
provisions while simultaneously attempting to avoid the terms of an
arbitration provision contained therein." Bankers Ins. Co., 245 F.3d
at 323. See also Long v. Silver, No. 00-1612, 2001 WL 432483, at *8
(4th Cir. Apr. 27, 2001); Int’l Paper Co., 206 F.3d at 418. Burlington
Group, however, seeks to do exactly what we have proscribed in the
above cases. The principle that a party may not pick and choose the
contract provisions that it seeks to enforce is an important one that is
founded on equity, see Int’l Paper Co., 206 F.3d at 418, and we have
no reason to ignore that principle in this case. When, as here, a party
sues on a contract, "any arbitration provision contained therein
remains in force." Bankers Ins. Co., 245 F.3d at 323.
IV.
For these reasons, we must vacate the district court’s decision to
deny a stay of arbitration on the Plaintiffs’ claims for extra-
contractual damages and declaratory judgment on the ROA. We
remand this case to the district court with directions that a stay be
entered, pending arbitration on all counts of the Complaint.10
VACATED AND REMANDED WITH DIRECTIONS
10
On April 26, 2001, we were notified by counsel for the Plaintiffs that
the related arbitration among Burlington Insurance, First Financial, and
Trygg has been completed. No party, however, has filed a motion to dis-
miss this appeal as moot. In any event, the effect of our decision today
— with particular respect to those claims yet outstanding — is a matter
for the district court in the first instance.