TAYLOR, SUPT., APPELLEE, v. ERNST & YOUNG, L.L.P., APPELLANT.
No. 2010-1324
Supreme Court of Ohio
Submitted May 25, 2011—Decided October 18, 2011.
130 Ohio St.3d 411, 2011-Ohio-5262
{¶ 1} This appeal involves the question of whether the superintendent of insurance, in her capacity as the liquidator of an insolvent insurer, is bound by an agreement to arbitrate that was entered into by an insolvent insurer in cases in which the liquidator does not disavow the contract that contains the arbitration clause. For the reasons explained below, we hold that the liquidator is not bound by the insolvent insurer‘s agreement when the liquidator‘s claims do not arise from the contract that contains the arbitration provision. Accordingly, we affirm the judgment of the court of appeals but in part for different reasons, as explained below.
{¶ 2} For purposes of this appeal, the facts are as stated in the complaint and the motion to dismiss. Ernst & Young (“E & Y“), an independent accounting firm, provided auditing services to American Chambers Life Insurance Company (“ACLIC“) for the year ending December 31, 1998. The audit was undertaken pursuant to an engagement letter signed by E & Y and ACLIC1 that contained an arbitration clause. On February 25, 1999, E & Y submitted a report to the Ohio Department of Insurance (“ODI“) that certified that it had conducted the audit in accordance with generally accepted auditing standards and that ACLIC‘S financial statements presented fairly, in all material respects, ACLIC‘s financial position.
{¶ 3} On March 13, 2000, the superintendent filed an action in the Franklin County Common Pleas Court that sought, at first, to place ACLIC in rehabilitation. On May 8, 2000, the court issued a final liquidation order based on ACLIC‘s insolvency. During the liquidation proceedings, the liquidator entered into a tolling agreement with E & Y whereby each side agreed to toll the time for filing causes of action and claims against the other side until one year from May 2, 2002.
{¶ 4} On April 30, 2003, the liquidator filed this action in the Franklin County Common Pleas Court against E & Y.2 The liquidator alleged two claims against E & Y. In one claim, she alleged that E & Y had “negligently failed to perform its duties as the independent certified public accountant retained to conduct the audit of ACLIC‘s December 31, 1998, Annual Statement, thus breaching the duties owed.” Specifically, the liquidator alleged that E & Y had failed to conduct its audit according to generally accepted auditing standards and had failed to discover or disclose material misstatements in ACLIC‘s financial statements, such as understatement of loss reserves, overstatement of receivables, unrecorded liabilities, and investments that exceeded the allowable amounts. That breach, she alleged, allowed ACLIC‘s financial condition to go undetected and, consequently, allowed it to continue transacting business, causing harm to ACLIC, its policyholders and creditors, and the public.
{¶ 5} In another claim, the liquidator alleged that E & Y had received preferential or fraudulent payments of more than $25,000. Specifically, she
{¶ 6} On July 15, 2003, E & Y moved to dismiss the complaint or to stay the proceedings and compel arbitration based on the arbitration clause contained in the engagement letter. The trial court denied the motion, and E & Y appealed. The Tenth District Court of Appeals affirmed. Hudson v. Ernst & Young, L.L.P., 189 Ohio App.3d 60, 2010-Ohio-2731, 937 N.E.2d 585, at ¶ 39.3 That court held that because the liquidator had not signed the arbitration agreement, there was a presumption against arbitration. Id. at ¶ 16. It then held that the presumption could never be overcome because the General Assembly did not contemplate liquidation proceedings being turned over to private arbitrators. Id. at ¶ 18. In other words, the Tenth District held that there is an irreconcilable conflict between the Ohio Liquidation Act and the Ohio Arbitration Act and that the Liquidation Act prevails. Id.
{¶ 7} This court accepted E & Y‘s discretionary appeal, which sets forth two propositions of law: (1) “An insurance liquidator that does not disavow a contract entered into by an insurer is bound by an arbitration provision in that contract, which must be enforced pursuant to Ohio‘s statutory code and strong policy favoring arbitration,” and (2) “A tolling agreement that preserves ‘all defenses’ as of its effective date preserves an arbitration defense that existed on the effective date.” We address each proposition in turn.
{¶ 8} Although the liquidator did not agree to arbitrate any claims and is not a signatory to the engagement letter that contains the arbitration provision, E & Y nonetheless argues that the liquidator is bound by the arbitration clause for three reasons. First, E & Y asserts that the liquidator stands in the shoes of the insolvent insurer. In the alternative, E & Y contends that because the liquidator is asserting claims that are based on and arise out of the contract that contains the arbitration clause, she is bound by the arbitration provisions. Finally, E & Y argues that the Liquidation Act does not permit the liquidator to disavow the arbitration clause while enforcing the balance of the contract.
{¶ 9} The liquidator rebuts each assertion. First, she denies that she stands in the shoes of the insolvent insurer. Rather, she stands in a unique public-protection role. Second, she argues that she is not asserting claims that are based on or arise out of the contract but, rather, that she is bringing claims that arise from both her statutory powers and certain financial statements and audit
II. ANALYSIS
A. The Ohio Liquidation Act
{¶ 10} The Insurers Supervision, Rehabilitation, and Liquidation Act (the “Liquidation Act“), codified in
{¶ 11} The Liquidation Act grants the superintendent three levels of oversight of the insurance industry apart from her usual regulatory powers. First,
{¶ 13} In contrast to the liquidator‘s broad powers, creditors have limited rights to file claims against the insurer‘s estate.
{¶ 14} Subject to judicial review, the liquidator investigates, values, and approves or denies claims filed against the estate. See, e.g., Covington v. Am. Chambers Life Ins. Co., 150 Ohio App.3d 119, 2002-Ohio-6165, 779 N.E.2d 833, ¶ 26. She then sorts the payable claims according to nine statutory classes.
{¶ 15} The General Assembly designed the Liquidation Act to be centralized in order to enhance efficiency.
{¶ 16} The liquidator‘s power of forum selection stands in sharp contrast to the creditors’ limited right to file suits in the liquidation court only.
{¶ 17} Here, E & Y seeks to remove the entire action filed by the liquidator in the liquidation court to arbitration. We turn our discussion to the arbitration law, which E & Y relies upon in support of its position.
B. The Ohio Arbitration Act
{¶ 18} The Ohio Arbitration Act (“OAA“) provides: “A provision in any written contract * * * to settle by arbitration a controversy that subsequently arises out of the contract * * * shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.”
{¶ 19} The FAA was enacted in 1925 “to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts.” Equal Emp. Opportunity Comm. v. Waffle House (2002), 534 U.S. 279, 289, 122 S.Ct. 754, 151 L.Ed.2d 755, quoting Gilmer v. Interstate/Johnson Lane Corp. (1991), 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26. The purpose was “to make arbitration agreements as enforceable as other contracts, but not more so.” Id. at 294, quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967), 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270, fn. 12. Therefore, the FAA ” ‘does not require parties to arbitrate when they have not agreed to do so.’ ” Id. at 293, quoting Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ. (1989), 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488; see also id. at 294 (holding that the FAA is, at its core, a policy of enforcing contractual arrangements).
{¶ 20} Consistently, this court has held: ” ‘[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.’ * * * This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed to submit such grievances to arbitration.” Council of Smaller Ents. v. Gates, McDonald & Co. (1998), 80 Ohio St.3d 661, 665, 687 N.E.2d 1352, quoting AT & T Technologies, Inc. v. Communications Workers of Am. (1986), 475 U.S. 643, 648-649, 106 S.Ct. 1415, 89 L.Ed.2d 648, quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co. (1960), 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409. Accordingly, when deciding motions to compel arbitration, the proper focus is whether the parties actually agreed to arbitrate the issue, i.e., the scope of the arbitration clause, not the general policies of the arbitration statutes. Waffle House, 534 U.S. at 294. It follows that although any ambiguities in the language of a contract containing an arbitration provision should be resolved in favor of arbitration, the courts must not “override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.” Id.
{¶ 21} For these reasons, Ohio courts recognize a presumption in favor of arbitration when a claim falls within the scope of an arbitration provision. Williams v. Aetna Fin. Co. (1998), 83 Ohio St.3d 464, 471, 700 N.E.2d 859. But significantly, there is a counterweighing presumption against arbitration when a party seeks to invoke an arbitration provision against a nonsignatory. Council of Smaller Ents., 80 Ohio St.3d at 667, citing First Options of Chicago, Inc. v. Kaplan (1995), 514 U.S. 938, 945, 115 S.Ct. 1920, 131 L.Ed.2d 985. In the latter instance, “there is serious doubt that the party resisting arbitration has empowered the arbitrator to decide anything * * *” Id.
C. The Liquidator Is Not Bound by the Arbitration Clause
1. The liquidator does not stand in the shoes of an insolvent insurer, but in a public-protection role
{¶ 22} We first address E & Y‘s argument that the liquidator is bound by the arbitration agreement, like a signatory, because she stands in the shoes of a signatory, ACLIC. We hold that the liquidator does not stand in the shoes as a mere successor in interest of the insolvent insurer. Consequently, she is not
{¶ 23} Our holding is in accord with the United States Supreme Court‘s jurisprudence on arbitration. See, e.g., Waffle House, 534 U.S. at 294 (holding that the Equal Employment Opportunity Commission is not bound by an arbitration agreement between an employer and employee). In Waffle House, the Equal Employment Opportunity Commission (“EEOC“) filed an enforcement action against Waffle House based on alleged unlawful employment practices relating to the discharge of an employee who had health problems. Id. at 283. When the employee applied for the job, he signed a standard Waffle House application that contained an agreement to arbitrate any disputes or claims that might develop regarding his potential future employment. Id. at 282-283. He was hired and fired and filed a timely charge of discrimination with the EEOC—but did not seek arbitration.
{¶ 24} In its suit, the EEOC sought injunctive relief to ” ‘eradicate the effects of [the employer‘s] past and present unlawful employment practices’ ” and also sought victim-specific relief for the employee, including back pay, reinstatement, compensatory damages, and punitive damages. Id. at 283-284. Waffle House moved to compel arbitration based on the arbitration agreement between it and the employee.
{¶ 25} The court initially noted that the federal circuits that had dealt with the issue had come to conflicting conclusions. The Sixth Circuit was among the circuits that had addressed the issue and decided that an employee‘s agreement to arbitrate does not affect the EEOC‘s independent statutory authority to pursue an enforcement action, even for victim-specific relief. Id. at 285, citing EEOC v. Frank‘s Nursery & Crafts, Inc. (C.A.6, 1999), 177 F.3d 448. The court agreed with the Sixth Circuit and held that the arbitration agreement between the employee and the employer did not bind the EEOC for the simple reason that the EEOC was not a party to the agreement. Id. at 294. In so holding, it rejected the argument that the EEOC stands in the shoes of aggrieved employees, reasoning that “the statute specifically grants the EEOC exclusive authority over the choice of forum and the prayer for relief once a charge has been filed.” Id. at 297-298. The court further explained that it had previously recognized several situations in which the EEOC does not stand in the employee‘s shoes when it held that the EEOC does not have to comply with statutes of limitations or certain civil rules. Finally, the court explained that although the employee‘s actions are relevant in the application of the principles of res judicata, mootness,
{¶ 26} Similarly, the characteristics of the liquidator‘s public-protection role confirm that she does not stand in the shoes of the insolvent insurer. The liquidator, like the EEOC, has the exclusive choice of forum (when there is a choice).
{¶ 27} In doing so, we also reject E & Y‘s argument that Shearson/Am. Express, Inc. v. McMahon (1987), 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185, justifies the opposite result. In Shearson, two private parties entered into an arbitration agreement. One signatory sued the other for alleged violations of the federal Securities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act. The Security Exchange Act provided for exclusive jurisdiction in the federal district courts over claims brought under it.
{¶ 28} In contrast to Waffle House, as well as this case, Shearson involved signatories of an arbitration agreement. A material fact in Waffle House was that the EEOC was not a signatory to the arbitration agreement. Waffle House, 534 U.S. at 294 (“It goes without saying that a contract cannot bind a nonparty. Accordingly, the proarbitration policy goals of the FAA do not require the agency to relinquish its statutory authority if it has not agreed to do so“). Therefore, Shearson is inapposite.
{¶ 29} E & Y also relies on Benjamin v. Ernst & Young, 167 Ohio App.3d 350, 2006-Ohio-2739, 855 N.E.2d 128. The dispute in Benjamin was part of this ongoing litigation between E & Y and the liquidator. Id. at ¶ 1. The Tenth District Court of Appeals decided Benjamin while E & Y‘s motion to compel arbitration (at issue in this case) was pending before the Franklin County Common Pleas Court. It is of limited persuasive value here, given its posture. Moreover, Benjamin undermines, rather than supports, E & Y‘s arguments. Benjamin is the result of a motion filed by a law firm, Foley & Lardner, and one of its attorneys, Michael J. Woolever (collectively, “Foley“), that sought to remove
{¶ 30} In affirming, the Tenth District explained that the “superintendent as liquidator is a separate entity from the superintendent as regulator.” Id. at ¶ 19. In attempting to make the distinction, that court stated that the superintendent as liquidator “stands in the shoes of the insolvent insurer.” Id. at ¶ 18. Nonetheless, it more fully explained: “Any benefits received from a judgment or settlement in an action initiated by the liquidator accrue to the sole benefit of the members, shareholders, policyholders, and creditors of the insured, not to the state of Ohio.” Id.
{¶ 31} E & Y‘s argument in this case is fatally flawed for the same reason that Foley‘s failed in Benjamin—that is, its argument that the liquidator is, in essence, ACLIC, is inconsistent with the nature of the liquidator‘s claims. Any assertion that the liquidator is a mere successor in interest who is bringing breach-of-contract claims on behalf of ACLIC ignores the fact that the superintendent did not bring this suit on behalf of ACLIC and its shareholders but, rather, in her capacity as liquidator of ACLIC for the protection of “the rights of insureds, policyholders, creditors, and the public generally.” Fabe v. Prompt Fin., Inc., 69 Ohio St.3d at 275, 631 N.E.2d 614.
{¶ 32} Notwithstanding E & Y‘s claim to the contrary, this case presents a garden-variety attempt to enforce an arbitration clause against a nonsignatory. Therefore, there is a presumption against arbitration in this case. See Council of Smaller Ents., 80 Ohio St.3d at 667, 687 N.E.2d 1352. Because that presumption applies here, we must respect it, absent a showing to the contrary.
{¶ 33} E & Y‘s asserts that the arbitration agreement is enforceable against the liquidator because her claims “relate to” the subject matter of the engagement letter. This is not the applicable test.5 The test is whether the liquidator, a nonsignatory, has asserted claims that arise from the contract containing the arbitration clause. See, e.g., Gerig v. Kahn, 95 Ohio St.3d 478, 2002-Ohio-2581, 769 N.E.2d 381, ¶ 19. Consistent with our precedent, we conclude that the presumption against arbitration is not overcome, because neither of the liquidator‘s claims arises from the engagement letter that contained the arbitration provision. See id. at ¶ 19; see also Henderson v. Lawyers Title Ins. Corp., 108 Ohio St.3d 265, 2006-Ohio-906, 843 N.E.2d 152, ¶ 42; Peters v. Columbus Steel Castings Co., 115 Ohio St.3d 134, 2007-Ohio-4787, 873 N.E.2d 1258, at ¶ 6. Because the liquidator‘s claims differ in nature, we address each in turn.
a. The malpractice claim
{¶ 34} The liquidator‘s first claim alleged that E & Y failed to conduct its audit of ACLIC in accordance with generally accepted auditing standards as required and, consequently, material misstatements in ACLIC‘s financial statements went undisclosed or undetected. This malpractice claim does not arise from the engagement letter for two related reasons. First, the malpractice claim plainly does not seek a declaration of a signatory‘s rights and obligations under the engagement letter. See Gerig at ¶ 19. Second, the malpractice claim arises independently of the engagement letter because it arises from the powers given to the liquidator by the General Assembly together with the allegedly false or misleading audit report E & Y filed with ODI. See Henderson at ¶ 42.
{¶ 35} In Gerig, this court addressed whether an issue of insurance coverage was subject to arbitration in accordance with an agreement between a physician and a hospital. While under the care of a physician, Dawn Gerig gave birth to twins at St. Vincent Mercy Medical Center. At the time of the deliveries, the physician was working at the hospital under an affiliation agreement that required the hospital to insure him against medical-malpractice claims. The Gerigs filed suit against the physician and alleged that he caused birth defects to one of the twins by malpractice during the delivery. At the time the suit was filed, the hospital provided malpractice insurance to the physician through an
{¶ 36} Thereafter, the insurance company became insolvent and was forced into liquidation. The Ohio Insurance Guaranty Association (“OIGA“) became involved in the case to pay any covered claims brought by consumers against the insolvent insurance company, pursuant to
{¶ 37} Because the statutory limit for OIGA claims was $300,000 and because OIGA pays claims only after a claimant has exhausted her rights under all other insurance policies, the Gerigs, the physician, and OIGA sought judicial clarification on the issue of insurance coverage, in light of the insurance company‘s insolvency. Id. at ¶ 3-6. The Gerigs and the physician sought a declaration that by virtue of the affiliation agreement, the hospital was responsible for any judgment up to $4 million. The OIGA sought a declaration that by virtue of the affiliation agreement, the hospital was required to pay any judgment to the Gerigs under its self-insurance fund and that consequently, OIGA was not obligated to pay any damages unless the Gerigs exhausted that fund. The hospital moved the trial court to stay the proceedings and to compel arbitration in the medical-malpractice case and “also sought an order compelling arbitration of the dispute regarding whether St. Vincent [was] legally required, pursuant to the agreement, to insure [the physician] through its self-insurance plan.” Id. at ¶ 7. The physician, who was the only other signatory to the affiliation agreement, did not oppose the hospital‘s motion.
{¶ 38} In deciding the issue, we first noted that the Gerigs and OIGA sought a declaration of the hospital‘s rights and obligations to the physician under the affiliation agreement. Id. at ¶ 12. By the same token, they did not have a direct dispute with the hospital. We then held that it would be inequitable to allow them to avoid arbitration while simultaneously seeking a substantive benefit of the contract that contained the arbitration clause. Accordingly, based on the principle of equitable estoppel, we found the arbitration agreement to be enforceable against the interested nonsignatories. Id. at ¶ 19.
{¶ 39} In this case, the liquidator is not seeking a declaration of E & Y‘s obligations to ACLIC. Notably, the liquidator‘s claim did not request or require the court to interpret the engagement letter to determine E & Y‘s obligations to ACLIC. The complaint alleges the following:
{¶ 40} (1) Pursuant to
{¶ 41} (2) Pursuant to
{¶ 43} (4) Pursuant to
{¶ 44} Additionally, the liquidator alleges that E & Y represented in its certification that was filed with ODI that it conducted the audit in accordance with generally accepted auditing standards but that E & Y did not, in fact, conduct its audit in accordance with those standards and, therefore, failed to discover or disclose material misstatements in the financial statements. As a result, the liquidator alleges, even though ACLIC was already insolvent, the superintendent, ACLIC‘s creditors, and the public did not know it. This claim plainly arises from statutory duties and certifications filed in public record by ACLIC and E & Y. In no form does the liquidator seek judicial interpretation of the engagement letter.
{¶ 45} Further, unlike the nonsignatories in Gerig, the liquidator has a direct dispute with E & Y—that is, she claims that ACLIC‘s policyholders, creditors, and the public, as well as ODI itself, relied on and were misled by the audit report that E & Y prepared and filed with ODI. Consequently, she alleges, the superintendent was hindered in exercising a greater level of oversight sooner, and E & Y thereby caused harm to policyholders, creditors, and the public by aiding ACLIC in continuing to transact business. By its nature, this is a dispute between E & Y and the liquidator on behalf of the estate‘s creditors. Therefore, Gerig is materially different from this case and does not compel the result sought by E & Y.
{¶ 46} This matter is guided by our ruling in Henderson, 108 Ohio St.3d 265, 2006-Ohio-906, 843 N.E.2d 152. In Henderson, customers of a title-insurance company, Lawyers Title, filed a class-action complaint against it for its alleged failure to give them (and other policyholders) a 40 percent reissue credit that they were entitled to receive under the applicable rate schedule filed by Lawyers Title with ODI. The named plaintiffs, the Hendersons, bought certain property in May 1999 and sold other property to the Johnsons in August 1999. At each transaction, the buyers and sellers split the cost of title insurance; Lawyers Title provided the insurance for both deals. Although the Hendersons and the Johnsons split the cost of the second insurance policy, it insured record title in the purchaser of the property, the Johnsons.
{¶ 47} Lawyers Title sought to compel the Hendersons to arbitrate based on an arbitration clause contained in the insurance policy that it issued to the Johnsons. Id. at ¶ 5. We upheld the lower courts’ denial of Lawyers Title‘s motion on two bases, stating, “The holding in Gerig applies when a nonparty is
{¶ 48} It is difficult to imagine a fact pattern that fits more neatly into the Henderson rule than the one presented here. The liquidator‘s claims arise from the harm that she alleges was caused by E & Y‘s filing of its certification of ACLIC‘s financial statement. Once the liquidator discovered that ACLIC was already insolvent when it filed financial statements that represented that it was solvent, the liquidator could trace the alleged harm to E & Y via the public filings and certifications, without reference to the engagement letter. Therefore, the claims do not arise from the engagement letter wherein E & Y agreed to provide the accounting services in conformance with the standards that the codes independently required it to observe.
{¶ 49} For all of these reasons, the malpractice claim does not arise from the engagement letter that contains the arbitration provision, and therefore, the liquidator is not bound by it.
b. The preference claim
{¶ 50} The liquidator‘s second claim alleged that ACLIC transferred money to E & Y after it became insolvent and did so either to improperly favor E & Y or to defraud other creditors. Because preference and fraudulent-transfer claims arise only by virtue of statute and arise only in favor of the liquidator, they cannot as a matter of law arise from a contract entered into by an insolvent insurer. Therefore, E & Y may not enforce the arbitration clause against the liquidator‘s preference claims, because ACLIC did not have authority to bind the liquidator to arbitrate those claims. See Peters v. Columbus Steel Castings Co., 115 Ohio St.3d 134, 2007-Ohio-4787, 873 N.E.2d 1258, at ¶ 6.
{¶ 51} In Peters, an employee entered into a contract with his employer that required him to arbitrate any legal claims “regarding [his] employment.” Id. at ¶ 2. By its express terms, the arbitration provision purported to apply to the employee‘s “heirs, beneficiaries, successors, and assigns.” Id. The employee was fatally injured at work. Thereafter, his estate brought a survival action, as well as a wrongful-death action. Based on the arbitration provision of the employment agreement, the employer sought to compel arbitration of both claims. In response, the estate dismissed the survival claim and proceeded solely on the wrongful-death claim. The court of appeals affirmed the trial court‘s denial of the motion to dismiss for arbitration, and we upheld that decision. Id. at ¶ 6.
{¶ 53} Likewise, an insurance company does not have the authority to bind the liquidator to arbitrate preference or fraudulent-transfer claims, which are purely statutory claims that spring to life after the issuance of a liquidation order.
c. Conclusion
{¶ 54} The liquidator‘s malpractice and preference claims are not subject to arbitration based on the agreement entered into by E & Y and ACLIC. Therefore, E & Y‘s third argument that the liquidator cannot disavow part of a contract is moot. Likewise, we do not reach the liquidator‘s argument that an irreconcilable conflict exists between the Ohio Liquidation Act and the Ohio Arbitration Act. The Tenth District did not analyze whether the liquidator‘s claims arise from the engagement letter. Instead, it relied on another case in which it concluded that “‘compelling arbitration against the will of the liquidator will always interfere with the liquidator‘s powers and will always adversely affect the insolvent insurer‘s assets.’ (Emphasis sic.)” Hudson v. Ernst & Young, 189
D. The Tolling Agreement Did Not Preserve the Right to Compel Arbitration
{¶ 55} E & Y‘s second proposition can be disposed of in short order. E & Y contends that the tolling agreement preserved its right to compel arbitration under now-overruled Tenth District case law. In the tolling agreement, E & Y agreed that for a period of one year from the effective date, May 2, 2002, the liquidator “may forbear and postpone the filing, commencement and prosecution of any and all claims or causes of action it may have against E & Y: (a) arising out of accounting or auditing services provided by E & Y to ACLIC; or (b) arising out of transfers of monies or other property from ACLIC to E & Y during the period from March 13, 1999 to March 13, 2000.” The liquidator also agreed that E & Y could likewise “forbear and postpone the filing, commencement and prosecution of any and all claims, causes of action or counterclaims it may have against ACLIC: (a) arising out of accounting or auditing services provided by E & Y to ACLIC; or (b) arising out of transfers of monies or other property from ACLIC to E & Y during the period from March 13, 1999 to March 13, 2000.” The parties agreed that any lawsuit brought within the tolling period would not be deemed time-barred if the lawsuit or claim would not be deemed time-barred on the effective date. The parties further agreed that the liquidator “may otherwise assert, as defenses to any lawsuit or claim E & Y may file against ACLIC, all defenses that ACLIC has as of the Effective Date, including but not limited to the statute of limitations,” and that E & Y “may otherwise assert, as defenses to any lawsuit or claim the liquidator may file against E & Y, all defenses that E & Y has as of the Effective Date, including but not limited to the statute of limitations.”
{¶ 56} “The general rule is that a decision of a court of supreme jurisdiction overruling a former decision is retrospective in its operation, and the effect is not that the former was bad law, but that it never was the law.” Peerless Elec. Co. v. Bowers (1955), 164 Ohio St. 209, 210, 57 O.O. 411, 129 N.E.2d 467. The tolling agreement simply gave each side additional time to file claims against the other and preserved each side‘s right to defend against those claims.
{¶ 57} For all of these reasons, the judgment of the court of appeals is affirmed, and this cause is remanded to the common pleas court.
Judgment affirmed and cause remanded.
PFEIFER, LUNDBERG STRATTON, LANZINGER, and MCGEE BROWN, JJ., concur.
O‘DONNELL and CUPP, JJ., concur in part and dissent in part.
O‘DONNELL, J., concurring in part and dissenting in part.
{¶ 58} The majority has determined that the liquidator is not bound by the arbitration clause contained in the engagement letter between Ernst & Young (“E & Y“) and American Chambers Life Insurance Company (“ACLIC“), because the liquidator does not stand in the shoes of the insolvent insurer and the claims asserted by the liquidator do not arise from the engagement letter.
{¶ 59} I concur in the majority‘s opinion to the extent that the liquidator cannot be compelled to arbitrate the preference claim, but because I find that the liquidator stands in the shoes of the insolvent insurer and that the claim alleging that E & Y breached its duties arises from the engagement letter, I respectfully dissent as to that portion of the opinion.
Facts and Procedural History
{¶ 60} In November 1998, E & Y and ACLIC entered into an agreement for E & Y to provide auditing services to ACLIC in exchange for an estimated $46,000. The engagement letter, which memorialized the agreement, stated that E & Y would “audit and report on the consolidated financial statements” of ACLIC and provide an “opinion on the fairness, in all material respects, of the presentation of the financial statements in conformity with generally accepted accounting principles or those prescribed or permitted by the Ohio Insurance Department, respectively.” It also contained a provision that required the arbitration of “[a]ny controversy or claim arising out of or relating to the services covered by this letter.”
{¶ 61} According to the complaint, the superintendent of insurance filed an action in the Franklin County Court of Common Pleas in March 2000, seeking to place ACLIC in rehabilitation pursuant to
{¶ 62} On April 30, 2003, the superintendent of insurance, as liquidator of ACLIC, filed suit against E & Y, alleging that it had “failed to properly audit
{¶ 63} E & Y moved to dismiss or stay the proceedings and compel arbitration based on the arbitration provision in the engagement letter. The liquidator opposed E & Y‘s motion, asserting that because the claims arose from E & Y‘s breach of its duties pursuant to Ohio law and not the engagement letter, arbitration could not be compelled. The trial court denied E & Y‘s motion, and the court of appeals affirmed.
Law and Analysis
{¶ 64} In Hudson v. Petrosurance, 127 Ohio St.3d 54, 2010-Ohio-4505, 936 N.E.2d 481, ¶ 16, this court recognized, “The Liquidation Act sets forth a comprehensive framework governing the liquidation of insurance companies operating in Ohio. The purpose of the act is to protect the interests of insureds, claimants, creditors, and the public generally, and the provisions of the act are to be liberally construed to effectuate this purpose. See
{¶ 65} If the superintendent of insurance determines that an insurer has become insolvent,
{¶ 66} The statutory powers of the liquidator are enumerated in
{¶ 67} By taking possession of and title to the assets and contracts of the insolvent insurer, the liquidator succeeds to the insurer‘s property and interests and is, therefore, in privity with the insolvent insurer. Cf. Morris v. Jones (1947), 329 U.S. 545, 550, 67 S.Ct. 451, 91 L.Ed. 488 (“Nor is there any lack of privity between Chicago Lloyds and the Illinois liquidator. There is no difference in the cause of action, whether Chicago Lloyds or the liquidator is sued” [citations omitted]); Whitehead v. Gen. Tel. Co. (1969), 20 Ohio St.2d 108, 49 O.O.2d 435, 254 N.E.2d 10, paragraph four of the syllabus, overruled on other grounds, Grava v. Parkman Twp. (1995), 73 Ohio St.3d 379, 653 N.E.2d 226 (“Generally, a person is in privity with another if he succeeds to an estate or an interest formerly held by another“).
{¶ 68} When a liquidator prosecutes or commences an action on behalf of the insolvent insurer or its creditors, members, policyholders, or shareholders, seeking to recover their assets or protect or enforce their rights, the liquidator stands in the shoes of the insolvent insurer. E.g., Hudson v. Petrosurance, 10th Dist. No. 08AP-1030, 2009-Ohio-4307, 2009 WL 2596962, ¶ 39, and cases cited therein; Bennett v. Liberty Natl. Fire Ins. Co. (C.A.9 1992), 968 F.2d 969, 972; Costle v. Fremont Indemn. Co. (D.Vt.1993), 839 F.Supp. 265, 272; Foster v. Monsour Med. Found. (Pa.Commw.1995), 667 A.2d 18, 20; Reider v. Arthur Andersen, L.L.P. (Conn.Super.2001), 47 Conn.Supp. 202, 205, 784 A.2d 464.
The first claim against E & Y
{¶ 69} The liquidator‘s first claim alleges that E & Y negligently rendered auditing services, breaching the duties it owed to ACLIC. The engagement letter contractually obligated E & Y to render auditing services to ACLIC and set forth E & Y‘s responsibilities and duties. The arbitration provision contained in the engagement letter required the parties to arbitrate “[a]ny controversy or claim arising out of or relating to the services covered by this letter.” The liquidator, however, asserts that this claim does not arise out of the engagement letter but, rather, that it arises out of E & Y‘s failure to perform its obligations as required by Ohio law.
{¶ 70} In Academy of Medicine of Cincinnati v. Aetna Health, Inc., 108 Ohio St.3d 185, 2006-Ohio-657, 842 N.E.2d 488, ¶ 18, this court held that a provision that mandates the arbitration of claims or controversies “arising out of or relating to” the contract is considered a broad clause, encompassing any dispute arising out of the business relationship. We further explained, “Arbitration is not limited to claims alleging a breach of contract, and creative pleading of claims as
{¶ 71} Here, the liquidator is a successor in interest to, and in privity with, ACLIC and is therefore bound by ACLIC‘s agreement with E & Y. This is the type of claim that ACLIC could directly pursue if it were not in liquidation. By prosecuting such a claim, the liquidator stands in ACLIC‘s shoes and is bound by its agreement to arbitrate. Cf. Reider, 47 Conn.Supp. at 205, 784 A.2d 464 (liquidator stands in the shoes of the insolvent insurer when prosecuting a claim the insurer could have pursued were it not in liquidation). The arbitration provision contained in the engagement letter is a broad clause, and this claim involves an issue that falls within its scope. Accordingly, the liquidator is bound by ACLIC‘s agreement to arbitrate.
{¶ 72} E & Y rendered auditing services to ACLIC only by virtue of its agreement with ACLIC, and the liquidator‘s claim alleging that E & Y negligently performed its duties necessarily implicates the engagement letter. The liquidator attempts to create distance from the engagement letter by asserting that this claim arose from E & Y‘s breach of its duties pursuant to Ohio law. The duties imposed by Ohio law, however, are the same duties set forth in the engagement letter. And, as asserted, the claim merely alleges that E & Y breached its duties; it does not identify the predicate source of those duties, let alone rule out the engagement letter as being that source.
{¶ 73} The plain language of
{¶ 74} Because this is a case in which the liquidator brought suit on behalf of an insolvent insurer and its creditors, shareholders, and policyholders against a third party for its alleged failure to perform auditing services rendered pursuant
{¶ 75} The majority determines that the liquidator does not stand in the shoes of the insolvent insurer as a successor in interest and is not bound by the arbitration provision, relying primarily on Equal Emp. Opportunity Comm. v. Waffle House (2002), 534 U.S. 279, 122 S.Ct. 754, 151 L.Ed.2d 755, to support its determination. The question in Waffle House involved “whether an agreement between an employer and an employee to arbitrate employment-related disputes bars the Equal Employment Opportunity Commission (EEOC) from pursuing victim-specific judicial relief, such as backpay, reinstatement, and damages, in an enforcement action alleging that the employer has violated Title I of the Americans with Disabilities Act of 1990(ADA), 104 Stat. 328, 42 U.S.C. § 12101 et seq. (1994 ed. and Supp. V).” Id. at 282. The court held that the employee‘s agreement to arbitrate did not bind the EEOC from exercising the enforcement authority granted it by Congress, and the “provisions of Title VII defining the EEOC‘s authority” served as the predicate for its decision. Id. at 285-286. The court explained that “[t]o hold otherwise would undermine the detailed enforcement scheme created by Congress [for the EEOC] * * *.” Id. at 296.
{¶ 76} The majority‘s reliance on Waffle House is misplaced because that case is readily distinguishable. While on its face the case involves the same issues, i.e., whether a nonsignatory to an arbitration agreement can be compelled to arbitrate, the decision in Waffle House turned on the complex federal statutory framework of the EEOC, which is not analogous to the statutory scheme and purpose of
{¶ 77} Moreover, in rejecting Waffle House‘s argument that the EEOC stood in the shoes of the employee, the court noted that the EEOC did not sue in a wholly derivative capacity. Unlike the EEOC, however, the liquidator, as established by the allegations in the complaint, brought suit against E & Y in a derivative capacity; the first paragraph of the complaint provides, “As the Liquidator of ACLIC, the Superintendent is empowered, pursuant to Sections
{¶ 78} Even if the liquidator did not stand in ACLIC‘s shoes, the liquidator is still bound to arbitrate this claim. The majority determines that this claim does not arise from the engagement letter because it does not seek a declaration of ACLIC‘s rights and obligations under the engagement letter, and it arises from the liquidator‘s statutory duties, which exist independently of the engagement letter. As previously explained, however, the duties imposed by Ohio law that E & Y allegedly failed to perform are the same as those set forth in the engagement letter, and whether cast in tort or contract, the issue is one that falls within the broad scope of the arbitration provision. It also bears repeating that the claim alleges that ACLIC “retained” E & Y to conduct its audit and that retention occurred only because of the engagement letter. Moreover, although the liquidator may be empowered by statute to assert this claim, the basis for the claim is E & Y‘s alleged negligence, which arose from the services it rendered pursuant to the engagement letter. In fact, the complaint alleges the foregoing to establish venue and jurisdiction. Thus, because this claim arises from the engagement letter, the arbitration provision is enforceable against the liquidator.
{¶ 79} Accordingly, I would hold that the liquidator is bound by the engagement letter to arbitrate this claim because the liquidator, as a successor in interest to ACLIC, stands in its shoes, the claim is one that ACLIC could itself prosecute were it not in liquidation, and the claim arises from the engagement letter. Additionally, equitable-estoppel considerations also operate to compel arbitration of this claim.
The second claim against E & Y
{¶ 80} This claim seeks to recover the fee paid by ACLIC to E & Y for the auditing services rendered. And unlike the first claim asserted by the liquidator against E & Y, this claim is expressly premised upon
Conclusion
{¶ 81} Based on the foregoing, it is my position that the liquidator is bound by the arbitration provision to arbitrate the claim alleging that E & Y breached its duties but cannot be compelled to arbitrate the preference claim. Accordingly, I would affirm in part and reverse in part the judgment of the court of appeals and remand the matter, ordering the case stayed pending arbitration of the liquidator‘s first claim against E & Y.
CUPP, J., concurs in the foregoing opinion.
Michael DeWine, Attorney General, Alexandra T. Schimmer, Chief Deputy Solicitor General, Stephen P. Carney, Deputy Solicitor, and Thaddeus H. Driscoll, Assistant Solicitor; and Kegler, Brown, Hill & Ritter Co., L.P.A., and Melvin D. Weinstein, for appellee.
Squire, Sanders & Dempsey, L.L.P., John R. Gall, and Aneca E. Lasley; and Mayer Brown, L.L.P., Stanley J. Parzen, and James C. Schroeder, for appellant.