The background of this case is as follows. State Insurance Commissioner Brian Maynard, acting as liquidator of the failed Kentucky Health Cooperative (“KYHC”), filed suit in Kentucky state court against CGI Technologies and Solutions, Inc. (“CGI”), KYHC’s administrator pursuant to an Administrative Services Agreement (the “Agreement”), which contained an arbitration clause. The suit alleged that CGI was “grossly negligent” in processing and paying claims and thus breached the Agreement. The state court action was removed to federal court. CGI commenced a separate federal action to compel arbitration, which was consolidated with the first action. The Liquidator made a motion to remand, challenging the Kentucky federal court’s power to decide the case.
In seeking to remand, the Liquidator claimed that Kentucky’s Insurers Rehabilitation and Liquidation Law (“IRLL”) vests exclusive jurisdiction in Kentucky state court, thus “reverse preempting” federal diversity jurisdiction, and in the alternative, argued that the federal court should abstain from exercising jurisdiction. The Kentucky federal court first found that the application of the IRLL’s exclusive jurisdiction directly conflicts with federal law, and thus that the IRLL’s jurisdiction provision was preempted by the federal removal and diversity subject matter jurisdiction statutes and the court had the subject matter jurisdiction required to decide the case. Next, the court found that because the case is really a contract action for damages and the court has subject matter jurisdiction, it should exercise the authority granted to it and refuse to exercise the discretion to abstain.
Finally, turning to the merits, the Kentucky federal court noted that the threshold issue was not whether there was a breach of the Agreement or whether the liquidation of KYHC was due to CGI’s actions or inactions, but rather what substantive law applies. CGI argued that the Agreement contains a “Dispute Resolution” clause which provided for all disputes to be resolved by mediation or arbitration, and that the Federal Arbitration Act (“FAA”) compels the court to enforce the binding arbitration clause. The Liquidator, on the other hand, argued that the IRLL provides for exclusive jurisdiction in state court, and thus under McCarran Ferguson, “reverse preempts” the FAA. The Liquidator also noted that the Agreement contained a “Governing Law” clause which provides that the Agreement is governed by Kentucky law. The Kentucky federal court denied the Liquidator’s motion to remand, but held that it required further briefing on which law shall apply. Thus, the court ordered the parties to submit briefing on the limited issues of : 1) Whether the IRLL allows enforcement of the Agreement’s “Dispute Resolution” clause; 2) Whether the FAA can apply in light of the parties “Governing Law” clause in the Agreement; and 3) Any other relevant argument which addresses choice of law.