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Gaffer Insurance Company, Ltd. v. Discover Reinsurance Co.

October 10, 2007


The opinion of the court was delivered by: A. Richard Caputo United States District Judge



Presently before the Court is Defendants' motion to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), or in the alternative to abstain, or in the alternative to compel arbitration. (Doc. 8.) Because Defendant Discover Reinsurance Company ("Discover-Re") and Plaintiff Gaffer Insurance Company, Ltd. ("Gaffer") entered into an agreement to arbitrate, and the claims fall within the scope of the agreement, the Court will compel arbitration between Plaintiff Gaffer and Defendant Discover-Re. Because Plaintiff has failed to state a claim upon which relief can be granted against Defendants United States Fidelity and Guaranty Company ("USF&G") and The St. Paul Travelers Companies, Inc. ("St. Paul Travelers"), all claims against those Defendants will be dismissed pursuant to Rule 12(b)(6). As the Court will dispose of all claims based upon the motion to compel arbitration and the motion to dismiss, the Colorado River abstention doctrine will not be addressed.


The facts as alleged in Plaintiff's Complaint are as follows.

Plaintiff Gaffer is a foreign insurance company, which in this case acted as a re-insurer. (Compl. ¶¶ 6, 10, Doc. 1.) Defendants Discover-Re, USF&G, and St. Paul Travelers are domestic insurance companies that conduct business in Lackawanna County, Pennsylvania. (Id. ¶¶ 2-4.) Discover-Re is a wholly owned subsidiary of USF&G, which is in turn a wholly owned subsidiary of St. Paul Travelers. (Id. ¶¶7, 8.)

On or about May 1997, Gaffer entered into a Captive Reinsurance Agreement ("Agreement") with Discover-Re, where Gaffer agreed to act as a re-insurer for part of the policies insured by Discover-Re. (Id. ¶10.) Reinsurance occurs when insurance companies pass along some of the risks of insuring to other insurance companies. (Id. ¶ 9.) The reinsurance companies then insure part of the original policy, and in turn receive part of the premium. (Id.) In the Agreement, Gaffer ceded certain premiums in exchange for its insurance obligations. (Id. ¶11.) These premiums were then deposited into a "loss payment fund account." (Id.) This account was drawn on by the claims administrator when necessary to pay losses within Gaffer's reinsurance limits pursuant to the Agreement. (Id.) When the funds were insufficient, the Agreement required Gaffer to forward sufficient funds to be placed in the account for payment of losses. (Id.)

The Agreement further required Gaffer to provide Discover-Re with collateral to secure Gaffer's reinsurance obligations. (Id. ¶ 13.) The collateral was in the form of either irrevocable letters of credit or a security trust fund. (Id.) Between 1997 and 2004, Gaffer posted $4,083,100 in letters of credit. (Id. ¶ 16.) During the first three years of the relationship, these funds secured one hundred percent (100%) of the gross written premium, or GAP. (Id. ¶ 17.) During the fourth through ninth years, the letters of credit secured eighty percent (80%) to ninety percent (90%) of the gross written premium. (Id. ¶ 18.)

Plaintiff also had additional requirements pursuant to the Agreement, such as filing a Schedule F document with the insurance department, and posting security for these filings. (Id. ¶ 19). The Agreement further required that on November 14, 1998, and at the end of each year thereafter, the amount of collateral was to be reduced by the difference between the current amount of collateral and the reinsurance obligations. (Id. ¶ 20.) The reinsurance obligations included ultimate net loss and loss adjustment paid by Discover-Re but not recovered from Gaffer, as well as outstanding case reserves for ultimate loss, reserves for ultimate net loss and lost adjustment with respect to IBNR, reserves for loss adjustment expenses and unearned premium reserves. (Id. ¶ 21.)

On or about May 2003, Gaffer terminated its relationship with Discover-Re. (Id. ¶ 28.) At that time, no more insurance was being written, no further premiums were coming in, and there was no more GAP. (Id. ¶ 29.) Following the termination of the relationship, the number of open claims declined, the open claims were paid or an amount was retained for those claims, and the amount of Gaffer's exposure was capped at a certain amount. (Id. ¶ 29.) By May 14, 2004, the maximum amount of exposure by Gaffer was $1,250,000. (Id. ¶ 30.) Gaffer alleges that on that date, $2,833,100 of letters of credit should have been released. (Id. ¶ 31.)

Defendants list the amount of $4,083,100 in letters of credit on their financial statements and on the Schedule F. (Id. ¶ 34.) On May 14, 2004, Brian Murray of Gaffer wrote to Discover-Re requesting that $2,188,100 of the letter of credit be released. (Id. ¶ 32.) The Defendants offered to release only $300,000, but that amount was never released. (Id. ¶ 33.) On October 24, 2004, Murray again requested some letters of credit be released in the amount of $688, 200. (Id. ¶ 37.) On January 3, 2007, Christine Oliver of Gaffer requested that $3,802,100 be released. (Id. ¶40.) Then on February 7, 2005, Oliver requested that $2,588,537 be released. (Id. ¶ 38.) Defendants have not responded to Oliver's requests. (Id. ¶¶39, 41.) Defendants have failed to release any amounts on the letters of credit. (Id. ¶ 35.)

On March 23, 2007, Plaintiff Gaffer filed its Complaint against Defendants Discover-Re, USF&G, and St. Paul Travelers, alleging claims of bad faith pursuant to 42 PA. CONS. STAT. ANN. § 8371, a breach of the covenant of good faith and fair dealing, a breach of fiduciary duty, and negligence. (Doc. 1.) On June 1, 2007, Defendants filed the present motion to dismiss, or in the alternative to abstain, or in the alternative to compel arbitration. (Doc. 7.) This motion is fully briefed and ripe for disposition.


I. Motion to Compel Arbitration

Under Pennsylvania law, parties must submit their claims to arbitration if: (1) the parties entered into an agreement to arbitrate and (2) the dispute falls within the scope of the agreement. Messa v. State Farm Ins. Co., 641 A.2d 1167, 1168 (Pa. Super. 1994). Motions to compel arbitration are governed under the summary judgment standard set forth in FED. R. CIV. P. 56(c). InterDigital Commc'ns Corp. v. Fed. Ins. Co., 392 F. Supp. 2d 707, 711 (E.D. Pa. 2005). Summary judgment is appropriate where the moving party establishes that "there is no genuine issues as to any material fact and that [it is] entitled to judgment as a matter of law." FED. R. CIV. P. 56(c).

In considering a motion to compel arbitration, the Court must consider all of the non-moving party's evidence and construe all reasonable inferences in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Versage v. Twp. of Clinton N.J., 984 F.2d 1359, 1361 (3d Cir. 1993). The Court's function is not to weigh evidence and determine the truth of the matter, but rather to determine whether there is a genuine issue for trial. See Anderson, 477 U.S. at 249.

II. Motion to Dismiss Pursuant to Rule 12(b)(6)

Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for the dismissal of a complaint, in whole or in part, for failure to state a claim upon which relief can be granted. Dismissal is appropriate only if, accepting as true all of the facts alleged in the complaint, Plaintiff has not plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. ----, 127 S.Ct. 1955, 1960, 167 L.Ed.2d 929 (2007) (abrogating "no set of facts" language found in Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). As a result of the Twombly holding, Plaintiff must now nudge its claims "across the line from conceivable to plausible" to avoid dismissal thereof. Id. The Supreme Court noted just two weeks later in Erickson v. Pardus, --- U.S. ----, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (per curiam), that Twombly is not inconsistent with the language of Federal Rule of Civil Procedure 8(a)(2), which requires only "a short and plain statement of the claim showing that the pleader is entitled to relief." Specific facts are not necessary; the statement need only " 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.' " Id. (citing Twombly, 127 S.Ct. at 1959 (quoting Conley, 355 U.S. at 47)).

There has been some recent guidance from the Courts of Appeals about the apparently conflicting signals of Twombly and Erickson. The Second Circuit Court of Appeals reasoned that "the [Supreme] Court is not requiring [in Twombly] a universal standard of heightened fact pleading, but is instead requiring a flexible 'plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) (emphasis in original). Similarly, the Seventh Circuit Court of Appeals stated that "[t]aking Erickson and Twombly together, we understand the Court to be saying only that at some point the factual detail in a complaint may be so sketchy that the complaint does not provide the type of notice of the claim to which the defendant is entitled under Rule 8." Airborne Beepers & Video, Inc. v. AT&T Mobility LLC, - F.3d -, 2007 WL 2406859, at *4 (7th Cir. Aug. 24, 2007).

Until further guidance, this Court will follow the guidance of the Second and Seventh Circuit Courts of Appeals, and apply a flexible "plausibility" standard, on a case-by-case basis, in those contexts in which it is deemed appropriate that the pleader be obliged to amplify a claim with sufficient factual allegations.

In deciding a motion to dismiss, the Court should consider the allegations in the complaint, exhibits attached to the complaint and matters of public record. See Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993), cert. denied, 510 U.S. 1042 (1994). The Court may also consider "undisputedly authentic" documents where the plaintiff's claims are based on the documents and the defendant has attached a copy of the document to the motion to dismiss. Id. The Court need not assume that the plaintiff can prove facts that were not alleged in the complaint, see City of Pittsburgh v. West Penn Power Co., 147 F.3d 256, 263 (3d Cir. 1998), nor credit a complaint's "bald assertions" or "legal conclusions." Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997).

When considering a Rule 12(b)(6) motion, the Court's role is limited to determining whether the plaintiff is entitled to offer evidence in support of the claims. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). The Court does not consider whether the plaintiff will ultimately prevail. See id. In order to survive a motion to dismiss, the plaintiff must set forth information from which each element of a claim may be inferred. See Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). The defendant bears the burden of establishing that the plaintiff's complaint fails to state a claim upon which relief can be granted. See Gould Elecs. v. United States, 220 F.3d 169, 178 (3d Cir. 2000).


I. Motion to Compel Arbitration between Gaffer ...

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