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Wilmington Savings Fund Society v. Universitas Education, LLC

United States District Court, D. Connecticut

February 17, 2015

WILMINGTON SAVINGS FUND SOCIETY, FSB, as successor-in-interest to Christiana Bank & Trust Company, Plaintiff,
v.
UNIVERSITAS EDUCATION, LLC, and RIDGEWOOD FINANCE II, LLC, as successor-in-interest to Ridgewood Finance, Inc. Defendants.

MEMORANDUM OF DECISION

Vanessa L. Bryant United States District Judge

This action involves the arbitrability of a dispute between a beneficiary and alleged trustee of an insurance policy issued pursuant to a Multiple Employer Welfare Arrangement (''MEWA''). This action also raises three thorny issues of civil procedure. The first procedural issue is whether the action must be remanded to state court because the diverse defendant removed it here on diversity grounds and alleged that the non-diverse defendant was fraudulently joined. The second procedural issue is whether the plaintiff should be allowed to amend its complaint after removal to assert new claims against the non-diverse defendant if the Court rules that the non-diverse defendant was fraudulently joined. The final procedural issue is whether this case should be stayed if the Court rules that the plaintiff and diverse defendant agreed to arbitrate.

The details surrounding the formation of the MEWA are not entirely clear, but the facts are sufficiently clear to permit this Court to resolve all issues presented. The MEWA at issue, Charter Oak Trust (''COT''), held itself out as a vehicle for employers to obtain life insurance coverage for their employees. Plaintiff Wilmington Savings Fund Society, FSB, as successor-in-interest to Christiana Bank & Trust Company (''Wilmington''), served as the insurance trustee for a MEWA named Charter Oak Trust. A participating employer in COT obtained two life insurance policies for its chief executive officer, and that executive designated Defendant Universitas Education, LLC (''Universitas'') as the beneficiary of both policies. At least one of the policies was deposited in a trust account opened by Wilmington, and Wilmington monitored both policies. The executive passed away, and the insurance company paid the death benefits to COT, which rebuffed Universitas‘s demand for payment of the benefits. Universitas later sought arbitration with Wilmington, alleging that it acted improperly as COT‘s insurance trustee.

Soon thereafter, in Connecticut Superior Court, Wilmington sought a declaratory judgment ruling that it was not obligated to arbitrate Universitas‘s claims because Wilmington was not a party to the declaration of trust containing the arbitration agreement referenced in the arbitration demand. Wilmington alleged that it served as the insurance trustee for a different trust, also named Charter Oak Trust but sponsored by a different entity. Wilmington contends that it was not responsible for administering the insurance policies claimed by Universitas and not a proper party to the arbitration proceeding initiated by Universitas. The complaint names Universitas, a diverse defendant, and Defendant Ridgewood Finance II, LLC, as successor-in-interest to Ridgewood Finance, Inc. (''Ridgewood''), a non-diverse party who, according to Universitas‘s arbitration demand, appointed Wilmington to serve as COT‘s insurance trustee. Universitas removed the action to this Court on the basis of diversity jurisdiction, and Wilmington moves to remand the action back to state court on the basis that Ridgewood‘s presence deprives this Court of diversity jurisdiction.

The first issue-whether the action must be remanded to state court- turns on whether there is any possibility, based on the state court pleadings, that Wilmington can state a cause of action against Ridgewood. As explained in greater detail below, no possibility exists because Ridgewood is not a permissive, necessary, or indispensible party to the arbitrability dispute and the allegations in the state court complaint do not suggest a separate, yet related, declaratory judgment against Ridgewood.

Wilmington sought to amend its complaint after Universitas removed the action here, and the proposed amendment also seeks a declaratory judgment declaring Wilmington‘s rights and obligations arising from its appointment agreement with Ridgewood. The second issue-whether Wilmington should be allowed to amend-turns on whether amendment would be fundamentally fair. It would not. The allegations in the amended complaint still do not suggest a separate, yet related, declaratory judgment against Ridgewood because the only legal dispute between the two parties vis- à -vis the appointment agreement concerns indemnification and the amended complaint does not raise that dispute. Notably, that dispute is currently being litigated in a separate state-court action. Even assuming that the amended complaint had properly sought a declaratory judgment against Ridgewood, permitting Wilmington to circumvent fraudulent joinder has no equitable justification.

The final two issues concern Universitas‘s motion to compel arbitration and stay litigation. Whether the dispute is arbitrable turns on whether Wilmington and Universitas agreed to arbitrate the payment of the disputed life insurance benefits. The undisputed evidence demonstrates that, even assuming that there were two trusts named COT, Wilmington agreed to arbitrate any and all disputes relating to the COT holding the insurance policies claimed by Universitas. Whether this action should be stayed pending arbitration turns on whether any or all claims in this action have been referred to arbitration. None have. This action raises only a judicial dispute-that is, arbitrability. In other words, a stay should be denied because the proceeding is ''independent'' rather than ''embedded.''

Factual and Procedural Background

In April 2015, Universitas brought an arbitration demand against Wilmington. ECF No. 1-1. The arbitration demand contains the following allegations. Daniel Carpenter, currently being prosecuted in connection with activities related to this litigation, concocted a financial conspiracy involving a MEWA named COT. Id. at ¶¶ 20, 25, 61. COT held itself out as exclusively designed to provide life insurance benefits to participating employer‘s employees for the benefit of those employees, their dependents, and their beneficiaries. Id. at ¶ 22. COT would own and be named as beneficiary of the life insurance policies, but it would pay death benefits to a beneficiary selected by the insured employee (''insurance beneficiary''). Id. at ¶ 21. The declaration of trust named Nova Group, LLC (''Nova'') as COT‘s sponsor, fiduciary, and corporate trustee. Id. at ¶ 24. The corporate trustee‘s duties consisted of managing COT‘s assets. ECF No. 1-2 at §§ 2.24, 10.02. The declaration of trust vested the power ''[t]o compromise, settle[, ] or adjust any claim or demand by or against the Trust and/or th[e] Plan & Trust with regard to . . . any insurance policy that may be held thereunder'' with the insurance trustee. Id. at § 12.01. The declaration of trust did not identify an insurance trustee and instead gave an interested third-party (subject to the plan sponsor‘s approval) the authority to appoint an insurance trustee. Id. at § 2.13. Ridgewood, a private equity group financing COT with millions, acted as the interested third-party and later appointed Wilmington as the insurance trustee.[1] ECF No. 1-1 at ¶¶ 27-28. Under COT, ''any and all disputes regarding the Trust or the Plan shall be settled by Arbitration.''[2] Id. at ¶ 18 (internal quotation marks and alteration omitted).

The arbitration demand further alleged that Holding Capital Group, Inc., a participating employer in COT, purchased two life insurance policies totaling $30 million for its chief executive officer, Sash A. Spencer. Id. at ¶ 48. Spencer selected Universitas, the research and development arm of a charitable foundation, as his insurance beneficiary. Id. at ¶¶ 9, 48. Spencer died in 2008, and the insurance company tendered his death benefits to COT in 2009. Id. at ¶ 50. COT rebuked Universitas‘s demand for those benefits. Id. at ¶ 51. Instead, Carpenter and his associates transferred the money to shell entities controlled by Carpenter, who thereafter used it for his own purposes, including purchasing a beachfront vacation home. Id. at ¶ 53. Universitas seeks to hold Wilmington liable under the following common law causes of action: breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, aiding and abetting fraud, theft, and aiding and abetting theft. Id. at ¶¶ 66, 71, 76, 82, 87, 94.

In June 2015, Wilmington brought a one-count complaint in Connecticut Superior Court seeking a declaratory judgment ruling that Wilmington is not required to arbitrate its dispute with Universitas. ECF No. 1-2 at ¶¶ 16-24. The complaint, which names Universitas and Ridgewood, contains the following allegations. Id. at ¶¶ 3-4. There are two trusts named COT, one sponsored by Nova and one sponsored by Grist Mill Capital, LLC (''Grist Mill''). Id. at ¶¶ 9, 12. Universitas alleges that it was named the insurance beneficiary of policies held by Nova COT. Id. at ¶ 10. Ridgewood, on the other hand, appointed Wilmington to serve as the insurance trustee for Grist Mill COT pursuant to the purported appointment agreement. Id. at ¶ 12. Wilmington did not serve as insurance trustee to Nova COT and did not otherwise consent to arbitrate any dispute with Universitas. Id. at ¶ 14. The complaint also names Ridgewood, but the complaint seeks no relief from Ridgewood. Ridgewood and Wilmington are separately represented by different law firms.

Universitas removed the action to federal court solely on the basis of diversity jurisdiction, arguing as follows. ECF No. 1 at ¶ 5. The amount in controversy exceeds $75, 000 because the arbitration concerns a multimillion-dollar dispute. Id. at 6. Wilmington, a citizen of Delaware, and Universitas, a citizen of New York, are completely diverse. Id. at ¶¶ 8-9. Ridgewood, a citizen of Delaware and Connecticut, defeats diversity jurisdiction, but it was fraudulently joined. Id. at ¶ 10. The state-court complaint does not state a claim against Ridgewood, and Ridgewood‘s presence is ''entirely unnecessary'' to resolve the question of arbitrability. Id. at ¶ 12.

I. Motion to Remand and First Motion to Dismiss

Wilmington moves to remand the action back to state court. ECF No. 19. Wilmington does not dispute the amount in controversy or that Wilmington and Universitas are completely diverse. ECF No. 20 at 7-8. Wilmington contends that Universitas failed to prove fraudulent joinder. Id. at 9-15. Wilmington argues that Ridgewood is an ''essential party'' to the arbitration dispute because the Court cannot determine arbitrability without first interpreting the appointment agreement and because Ridgewood may be joined under Connecticut‘s Declaratory Judgment Act as an interested party. Id. at 12. Wilmington also argues that it ''stated a claim properly against Ridgewood under the Connecticut [Declaratory Judgment] Act'' because Ridgewood and Wilmington‘s interests are adverse, a legal dispute exists over whether Ridgewood has a contractual obligation to indemnify it and whether Ridgewood appointed Wilmington as the insurance trustee, and the dispute over arbitrability affects Ridgewood. Id. Wilmington also seeks costs and attorney fees. Id. at 15-16.

Universitas opposes the motion, reiterating the arguments from its notice of removal. ECF No. 39. Ridgewood opposes as well, raising the following two arguments. ECF No. 38. First, the state-court complaint fails to state a claim against Ridgewood because Wilmington does not allege a case or controversy involving Ridgewood. Id. at 5-6. Wilmington and Ridgewood have an indemnification dispute, but the state-court complaint does not raise that allegation, which is the subject of a separate action. Id. at 6 n.3. Second, Ridgewood is not essential because Connecticut law does not require that it be joined; Wilmington must only provide notice. Id. at 6-7. Ridgewood also moves to dismiss the purported claims against it, relying on the same reasons as articulated in its memorandum in opposition to remand. ECF Nos. 26, 27.

II. Proposed Amended Complaint and Second Motion to Dismiss

Wilmington has also filed an amended complaint in this Court, reiterating its allegation that Ridgewood appointed it to act as the insurance trustee for a different trust, the Grist Mill COT. ECF No. 34. This time around Wilmington‘s one-count complaint seeks a declaratory judgment with five sub-rulings, including the following three sub-rulings: Ridgewood had the authority to appoint an insurance trustee for the Grist Mill COT; Ridgewood appointed Wilmington as the insurance ...


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