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Erickson v. Thrivent Insurance Agency Inc.

United States District Court, D. South Dakota, Southern Division

February 1, 2017




         This case involves an insurance contract between Plaintiff Raymond Erickson and a fraternal benefit society. Insurance contracts issued by a fraternal benefit society generally include the society's bylaws, as well as any subsequent amendments to the bylaws, provided that the amendments do not reduce the benefits promised in the original contract. This Court must decide whether Erickson is bound by an arbitration clause that was not in his original insurance contract but was later added to the fraternal benefit society's bylaws. Because the arbitration clause does not reduce Erickson's benefits under the contract, this Court finds that the clause applies to him and requires him to arbitrate his claims.

         I. Facts

         Erickson is a South Dakota resident. Doc. 1 at ¶ 1. In 1994, Erickson and his wife purchased a long-term care insurance policy from Lutheran Brotherhood, a Minnesota fraternal benefit society. Doc. 1 at ¶ 7; Doc. 16 at ¶ 3. Erickson's entire insurance contract consists of the insurance certificate, including any riders or amendments; the application; and Lutheran Brotherhood's Articles of Incorporation and Bylaws. Doc. 19-1 at 11. Unlike a typical insurance policy that has fixed terms, some portions of Erickson's contract are subject to change. Specifically, Section 8.1 of the insurance certificate states that the contract includes the "Articles of Incorporation and Bylaws of the Society and all amendments made to them after the Date of Issue, " provided that the amendments do not reduce the benefits promised in the contract. Doc. 19-1 at 11. The contract did not contain an arbitration provision when Lutheran Brotherhood issued it to Erickson.

         In early 2002, Lutheran Brotherhood merged into a Wisconsin fraternal benefit society called Aid Association for Lutherans (AAL), with AAL continuing on as the surviving entity. Doc. 16 at ¶ 3. AAL changed its name to Thrivent following the merger but retained its Articles of Incorporation and Bylaws. Doc. 16 at ¶¶ 3, 6. These Bylaws include a Dispute Resolution Bylaw that AAL's board of directors adopted in 1999. Doc. 16 at ¶¶ 6, 7. Initially adopted as Section 12 of the bylaws, the Dispute Resolution Bylaw requires mediation and, if that fails, binding arbitration. Doc. 16 at ¶¶ 6, 7; Doc. 16-1 at 4-5; Doc. 16-2 at 6-7. The purpose of the Bylaw is to provide the "sole means" to resolve disputes between Thrivent and its members and insureds. Doc. 16-1 at 4-5; Doc. 16-2 at 6-7. It applies "to all claims, actions, disputes and grievances of any kind or nature whatsoever." Doc. 16-1 at 4; Doc. 16-2 at 6. AAL filed the Dispute Resolution Bylaw with the Wisconsin Office of the Commissioner of Insurance. Doc. 16 at ¶ 11. In December 2008, Thrivent amended its Bylaws by, among other things, renumbering the Dispute Resolution Bylaw as Section 11. Doc. 16 at ¶ 7; Doc. 16-1 at 4-5. Thrivent filed the December 2008 amendments with the Wisconsin Office of the Commissioner of Insurance and gave notice of the amendments to all state insurance departments, including the South Dakota Division of Insurance. Doc. 16 at ¶¶ 9, 12; Docs. 16-3, 16-4. Thrivent notified its members of the amendments through the Winter 2009 edition of its official publication.[1] Doc. 16 at ¶10.

         Erickson made a claim for benefits under the contract, in December 2014 after he moved into a long-term care facility. Doc. 1 at ¶ 13. Thrivent paid Erickson benefits for some time, but terminated them in November 2015. Doc. 1 at ¶¶ 16, 18. Erickson then sued Thrivent in this Court, asserting claims for breach of contract, bad faith, breach of fiduciary duty, punitive damages, and attorney's fees. Doc. 1. The parties mediated before Magistrate Judge Veronica Duffy, but were unable to resolve their dispute. Doc. 11. Thereafter, Thrivent filed a Motion to Compel Arbitration and argued that the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-14, and the Dispute Resolution Bylaw require this Court to stay the case and compel arbitration. Docs. 14, 15, 21. Erickson opposed the motion, contending that the Dispute Resolution Bylaw is unenforceable for several reasons.

         II. Analysis

         Congress enacted the FAA to counter judicial aversion to arbitration and ensure that courts treat arbitration agreements just like any other contract. Volt Info. Scis., Inc. v. Bd. of Leland Stanford Junior Univ.. 489 U.S. 468, 478 (1989). The key language of the FAA states that a written agreement to arbitrate in a contract involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The FAA provides two mechanisms for enforcing an arbitration agreement: a stay of proceedings under § 3 when an issue in the case is "referable to arbitration" and an order compelling arbitration under § 4 when a party has refused to adhere to an arbitration agreement. 9 U.S.C. §§ 3, 4.

         If a contract is subject to the FAA, courts ordinarily engage in a two-part inquiry to determine whether to stay the case and compel arbitration. See Faber v. Menard, Inc., 367 F.3d 1048, 1052 (8th Cir. 2004); Daisy Mfg. Co. v. NCR Corp.. 29 F.3d 389, 392 (8th Cir. 1994). First, the court determines whether a valid arbitration agreement exists between the parties. Faber, 367 F.3d at 1052. Second, the court must determine whether the dispute falls within the scope of the arbitration agreement. Id. These two issues, sometimes referred to together as the "question of arbitr•ability, " are for the court to decide "[u]nless the parties clearly and unmistakably provide otherwise." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-84 (2002) (alteration in original) (quoting AT&T Techs.. Inc. v. Commc'ns Workers. 475 U.S. 643, 649 (1986)). '"If there is an issue of fact as to the making of the agreement for arbitration, then a trial is necessary' on the issue of arbitrability." Dakota Foundry, Inc. v. Tromley Indus-Holdings. 891 F.Supp.2d 1088, 1095 (D.S.D. 2012) (quoting Bensadoun v. Jobe-Riat. 316 F.3d 171, 175 (2d Cir. 2003)). When the parties agreed to arbitrate and the particular dispute falls within the agreement, the FAA allows courts to stay the case and compel arbitration.

         The FAA applies here because the contract, including the Dispute Resolution Bylaw, is in writing and because Erickson's purchase of insurance from an out-of-state company that does business nationwide meets the FAA's interstate commerce requirement. See Clayton v. Woodmen of The World Life Ins. Soc'v. 981 F.Supp. 1447, 1450 (M.D. Ala. 1997) ("[A]n insurance agreement between a fraternal benefit society and its member[s] . . . evidences a transaction in commerce."); In re 2000 Sugar Beet Crop Ins. Litig., 228 F.Supp.2d 992, 995 (D. Minn. 2002) (stating that "insurance policies are contracts 'involving commerce'" and are therefore subject to the FAA); see also Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-74 (1995) (adopting a broad reading of the phrase "involving commerce" in 9 U.S.C. § 2). The parties agree that this Court should decide the question of arbitrability and nothing in the contract clearly and unmistakably provides otherwise. Thus, this Court turns to the first question, whether a valid arbitration agreement exists between Erickson and Thrivent.

         A. Validity of Arbitration Agreement

         State contract law governs whether a valid arbitration agreement exists between Erickson and Thrivent. First Options of Chi.. Inc. v. Kaplan. 514 U.S. 938, 944 (1995). This Court is sitting in diversity jurisdiction, so it applies South Dakota's choice-of-law rules to determine which state's laws govern whether a valid arbitration agreement exists. Dakota Foundry, 891 F.Supp.2d at 1095. The parties disagree on which state's law should apply, with Thrivent arguing for Wisconsin law and Erickson arguing for South Dakota law.

         Thrivent argues that Wisconsin law governs because Thrivent is a fraternal benefit society domiciled in Wisconsin and organized under Wisconsin law. Chapter 614 of Wisconsin's statutes generally requires that fraternal benefit societies have a lodge system, a representative form of government, and provide insurance and other benefits to their members. Wis.Stat. § 614.01. Consistent with Wisconsin law, Thrivent is a nonprofit organization governed by a member-elected board of directors. Id. §§ 614.01, 614.42; Doc. 16 at ¶ 4. Each Thrivent benefit member is entitled to one vote in the board of directors' election, and every member of the board of directors must also be a benefit member of Thrivent. Doc. 16 at ¶ 4; Doc. 16-1 at 2. Thrivent is organized under the lodge system, with nearly seven hundred local lodges across the United States. Doc. 16 at ¶ 5. Thrivent provides insurance and several other benefits to its members. Doc. 16 at ¶ 5.

         As Thrivent notes, the Supreme Court of the United States has held that me Constitution's Full Faith and Credit Clause requires courts to apply the law of a fraternal benefit society's domicile when considering the validity of the society's bylaws. Order of United Commercial Travelers v. Wolfe,331 U.S. 586, 624-25 (1947); Sovereign Camp. W.O.W. v. - Bolin, 305 U.S. 66, 75 (1938); Modern Woodmen of Am. v. Mixer. 267 U.S. 544, 551 (1925). Several state courts have relied on Wolfe. Bolin. and Mixer to hold that the validity of a fraternal benefit society's arbitration bylaw must be determined under the law of the society's domicile. Russell v. Lutheran Bhd.. No. 03 CV 6810, 2004 WL 316383, at *l-2 (Colo. Dist. Ct. Feb. 2, 2004) (holding that the Full Faith and Credit clause required the court to apply Wisconsin law in suit against Thrivent brought by a plaintiff who had purchased insurance from Lutheran Brotherhood); Crosby v. Aid Ass'n for Lutherans. No. MC 00-11088, 2004 WL 2584847, at *1 (Minn. Dist. Ct. Oct. 21, 2004) ("The United States Supreme Court's Full Faith and Credit Clause jurisprudence relating to fraternal benefit societies requires the court to apply Wisconsin law to this matter because AAL is incorporated ...

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