                                                  United States Court of Appeals
                                                           Fifth Circuit
                                                        F I L E D
                 REVISED OCTOBER 2, 2006
                                                       September 1, 2006
          IN THE UNITED STATES COURT OF APPEALS
                  FOR THE FIFTH CIRCUIT             Charles R. Fulbruge III
                                                            Clerk


                      No. 05-20380



PAMELA M TITTLE, etc; ET AL

                Plaintiffs

TITTLE PLAINTIFFS

                Plaintiff-Appellee

ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES LTD; FEDERAL
INSURANCE CO

                Interpleader Plaintiffs-Appellees

     v.

ENRON CORPORATION; ET AL

                Defendants

MARY K JOYCE; ROBERT A BELFER; NORMAN P BLAKE, JR; RONNIE C
CHAN; JOHN H DUNCAN; WENDY L GRAMM; ROBERT K JAEDICKE;
CHARLES A LEMAISTRE; MIKIE RATH; SHEILA KNUDSEN; JAMES G
BARNHART; KEITH CRANE; WILLIAM GULYASSY; RODERICK HAYSLETT;
PAUL RIEKER; CINDY OLSON; TOD A LINDHOLM; DAVID SHIELDS

                Defendants-Appellees

     v.

LINDA LAY, as executrix of the Estate of Kenneth L Lay,
substituted in place and stead of Kenneth L Lay, deceased;
JEFFREY K SKILLING

                Defendants-Appellants


SEVERED ENRON EMPLOYEES COALITION (SEEC); ET AL

                Plaintiffs
           v.

     THE NORTHERN TRUST COMPANY; ET AL

                       Defendants

     LINDA LAY, as executrix of the Estate of Kenneth L Lay,
     substituted in place and stead of Kenneth L Lay, deceased;
     JEFFREY K SKILLING

                       Defendants-Appellants

           v.

     PHILLIP J BAZELIDES; JOE H FOY; JAMES S PRENTICE

                       Defendants-Appellees


           Appeal from the United States District Court
            for the Southern District of Texas, Houston
                          No. 4:04-CV-3913


Before KING, STEWART, and DENNIS, Circuit Judges.

KING, Circuit Judge:

     In this interpleader insurance action, defendant-appellants

Kenneth Lay and Jeffrey Skilling appeal the district court’s

denial of their motion to compel arbitration and to stay the

interpleader action pending arbitration pursuant to 9 U.S.C.

§§ 3, 4.   For the reasons stated below, we AFFIRM.

                I.   FACTUAL AND PROCEDURAL BACKGROUND

A.   The Fiduciary Liability Policies

     This dispute centers around the interpretation of two

fiduciary liability insurance policies issued by Associated

Electric & Gas Insurance Services, Ltd. (“AEGIS”), and Federal

                                    -2-
Insurance Co. (“Federal”) (collectively, “the Insurers”) to Enron

Corporation (“Enron”).   For the sake of clarity, a brief overview

of the policies and the specific provisions at issue is necessary

before reviewing the procedural history of the lawsuit and

settlement that underlie this appeal.

     1.    The Primary Policy

     AEGIS issued to Enron its primary liability insurance

policy, a Fiduciary and Employee Benefit Liability Insurance

Policy with an aggregate limit of $35 million, for the period of

May 15, 1999, to May 15, 2002 (the “Primary Policy”).    In

addition to the $35 million limit, the Primary Policy also

includes a Defense Costs Coverage Endorsement to be paid out

before the $35 million liability limit to cover the defense costs

of the insureds up to $10 million.    The Primary Policy defines

the following as “INSURED”: Enron, the Employee Benefit Programs,

and “any past, present or future trustee, officer, director or

employee” of Enron or the Employee Benefit Program or any

fiduciaries or administrators of the benefit program.    See 3 R.

at 474.   All parties acknowledge that, as a former director of

Enron and Enron’s former Chief Executive Officer, defendant-

appellant Kenneth Lay (“Lay”)1 qualifies as an insured under the

     1
        Kenneth Lay died on July 5, 2006, and his widow, Linda
Lay, has been appointed as his personal representative. In re
Estate of Kenneth L. Lay, Deceased, Case No. 365,446, Probate
Court No. 1, Harris County, Texas (filed July 20, 2006). On
August 23, 2006, this court granted the Tittle Plaintiffs’ motion
pursuant to FED. R. APP. P. 43(a) to substitute Linda Lay, in her

                                -3-
policy; likewise, they acknowledge that defendant-appellant

Jeffrey Skilling (“Skilling”) qualifies as an insured, having

been a former director of Enron and Enron’s former Chief

Financial Officer and Chief Executive Officer.

       2.    The Excess Policy

       For the same period, Federal issued to Enron an Excess

Fiduciary Policy (the “Excess Policy”) with an aggregate limit of

$50 million in excess of the Primary Policy’s $35 million limit.

The Excess Policy includes an endorsement that generally

incorporates the terms and conditions set forth in the Primary

Policy, including the dispute resolution provisions.     See 3 R. at

512.

       3.    The Arbitration Clause

       Section IV(T) of the Primary Policy, titled “Dispute

Resolution and Service of Suit,” provides both non-binding and

binding procedures for settling policy disputes.     See 3 R. at

485-86.     Sections IV(T)(1) and IV(T)(2), titled “Negotiation” and

“Mediation” respectively, provide for non-binding dispute

resolution procedures that must occur before binding arbitration.

See id.     Once the negotiation and mediation processes are

exhausted and binding arbitration is invoked, the parties




capacity as the executrix of Kenneth Lay’s estate, as a
defendant-appellant in Kenneth Lay’s stead. For the sake of
consistency, we will continue to refer to both Kenneth Lay and
the Estate of Kenneth Lay as “Lay” throughout this opinion.

                                  -4-
involved in the dispute must follow the specific binding

arbitration procedures set forth in section IV(T)(3) (the

“Arbitration Clause”).   See 3 R. at 486.   The preamble to the

Arbitration Clause states:

      Any controversy or dispute arising out of or relating to
      this POLICY, or the breach, termination or validity
      thereof, which has not been resolved by non-binding means
      as provided herein within ninety (90) days of the
      initiation of such procedure, shall be settled by binding
      arbitration in accordance with the CPR Institute Rules
      for Non-Administered Arbitration of Business Disputes
      (the “CPR Rules”) by three (3) independent and impartial
      arbitrators.

Id.

      Directly following this language, the remainder of the

clause sets out specific procedures that “the SPONSOR

ORGANIZATION” and “the COMPANY” must follow in the event that

binding arbitration becomes necessary.    Under section II(E) and

(P) of the Primary Policy, “the SPONSOR ORGANIZATION” is defined

as Enron, and “the COMPANY” is defined as AEGIS.2    See 3 R. at

478-79.   The Arbitration Clause specifies that, once binding

arbitration has been invoked pursuant to the procedures set forth

in section IV(T),

      [t]he SPONSOR ORGANIZATION and the COMPANY each shall
      appoint one arbitrator; the third arbitrator, who shall
      serve as the chair of the arbitration panel, shall be
      appointed in accordance with the CPR Rules. If either
      the SPONSOR ORGANIZATION or the COMPANY has requested the
      other to participate in a non-binding procedure and the

      2
        Via the Excess Policy’s incorporation provision, however,
the procedures set forth in the Primary Policy with regard to
AEGIS apply equally to both Insurers. See 3 R. at 512.

                                -5-
     other has failed to participate, the requesting party may
     initiate arbitration before expiration of the above
     period. The arbitration shall be governed by the United
     States Arbitration Act, 9 U.S.C. §§ 1 et seg. [sic], and
     judgment upon the award rendered by the arbitrators may
     be entered by any court having jurisdiction thereof. The
     terms of this POLICY are to be construed in an evenhanded
     fashion as between the SPONSOR ORGANIZATION and the
     COMPANY in accordance with the laws of the jurisdiction
     in which the situation forming the basis for the
     controversy arose. Where the language of this POLICY is
     deemed to be ambiguous or otherwise unclear, the issue
     shall be resolved in a manner most consistent with the
     relevant terms of this POLICY without regard to
     authorship of the language and without any presumption or
     arbitrary interpretation or construction in favor of
     either the SPONSOR ORGANIZATION or the COMPANY. . . .
     In the event of a judgment being entered against the
     COMPANY on an arbitration award, the COMPANY at the
     request of the SPONSOR ORGANIZATION, shall submit to the
     jurisdiction of any court of competent jurisdiction
     within the United States of America, and shall comply
     with all requirements necessary to give such court
     jurisdiction and all matters relating to such judgment
     and its enforcement shall be determined in accordance
     with the law and practice of such court.

3 R. at 486.

B.   Procedural History

     The lawsuit underlying this appeal is a class action breach

of fiduciary duty suit, Tittle v. Enron Corp., No. H-01-CV-3913

(S.D. Tex.), brought in 2001 against Enron and its board of

directors by various former employees of Enron (the “Tittle

Plaintiffs”), alleging breach of fiduciary duties associated with

Enron’s collapse in violation of the Employee Retirement Income

Security Act (“ERISA”), 29 U.S.C. §§ 1001, et seq.   The Secretary

of Labor subsequently filed a similar action, Chao v. Enron

Corp., No. 03-2257, which was consolidated into the Tittle class


                               -6-
action.   Many of the defendants to this class action, including

Lay and Skilling, submitted claims for coverage of their defense

costs under the Primary Policy.    The Insurers began paying these

claims to the defendants to the class action, including Lay and

Skilling, out of the $10 million Defense Costs Coverage

Endorsement as provided by the Primary Policy.

     On April 15, 2004, a subset of defendants to the Tittle

class action (the “Settling Defendants”) reached a proposed

settlement agreement with the Tittle Plaintiffs and the

Department of Labor (the “Partial Settlement”), requiring that

the Insurers pay the entire combined $85 million policy liability

limits to the Tittle Plaintiffs.        See 3 R. at 404-55.   The

Settling Defendants did not include Lay, Skilling, or Enron.        The

Partial Settlement did not affect the $10 million Defense Costs

Coverage Endorsement, which at the time was still available to

the non-settling defendants, including Lay and Skilling.

     On May 12, 2004, in response to the growing prospect of

litigation over competing claims to the policy proceeds that was

likely to arise as a result of the Partial Settlement, and

because the Partial Settlement would exhaust the combined policy

limits if consummated, the Insurers moved to intervene in the

Tittle action and filed a Complaint in the Nature of Interpleader

(“Interpleader Complaint”) pursuant to FED. R. CIV. P. 22 to

determine the proper distribution of the $85 million in policy



                                  -7-
proceeds.3    See 3 R. at 456-73.    The Interpleader Complaint named

as interpleader defendants many of the parties who had submitted

or could potentially submit claims against the policies,

including the Settling Defendants, Enron,4 and Lay and Skilling.

See 3 R. at 462-66.    Over opposition from Lay and Skilling, the

district court granted the Insurers’ motion to intervene and

subsequently granted the Insurers permission to tender the entire

$85 million in policy proceeds to the district court.      See 9 R.

at 1488.     The Insurers deposited the funds with the court,

reserving in the Interpleader Complaint their right to recover

proceeds to the extent that the funds “are not ultimately

required to resolve covered claims.”5      3 R. at 469.

     3
        The $10 million Defense Costs Coverage Endorsement, out
of which the Insurers had been paying the defense costs of
various insureds prior to filing the Interpleader Complaint, is
not part of the interpleader action. See 8 R. at 1331. At oral
argument, the parties noted that this fund had not yet been
exhausted at the time that the Interpleader Complaint was filed,
but has since been exhausted.
     4
        Although Enron is an insured and was not included in the
Partial Settlement, it did not object to the Partial Settlement
and made no claims to the interpleaded policy proceeds in its
answer to the Insurers’ subsequent Interpleader Complaint. See 2
R. 387, 9 R. 1437-43.
     5
         Specifically, the Interpleader Complaint states:

     As a result of the multiple and conflicting claims,
     plaintiffs [i.e., the Insurers] are unable to determine
     as between conflicting claims which defendants are
     entitled [to] what portions of the policy limits
     available because the demands exhaust the limits of
     liability of the policies without providing releases to
     all Insureds. Plaintiffs concede that, at present, the
     $85 million in combined coverage must be paid to resolve

                                    -8-
     On September 20, 2004, various of the interpleader

defendants filed answers to the Interpleader Complaint, asserting

their claims to the policy proceeds.   See generally 8-9 R.

Specifically, Lay and Skilling each filed an answer asserting his

right to the payment of all attorneys’ fees and legal costs

incurred in their defense of claims asserted against them in the

Tittle litigation.   See 8 R. at 1348-52, 1395-97.    Additionally,

they demanded that an equitable share of the policies’ proceeds

be held in reserve to provide them coverage against a possible

judgment or settlement in that litigation.   Id.     On the same day,

along with his answer, Skilling filed a Motion to Compel

Arbitration and Stay the Interpleader Action (“Arbitration

Motion”) pursuant to sections 3 and 4 of the Federal Arbitration



     claims against Insureds. However, there are a number of
     future contingencies that could affect the amounts
     ultimately required to resolve covered claims against
     Insureds and the timing of any such payments.     These
     contingencies include, inter alia:

               •     Court approval of any settlement of the
                     class action claims against Insureds;
               •     Satisfaction or waiver of each of the
                     conditions precedent to the closing of
                     any settlement agreement; and
               •     Any necessary Bankruptcy Court approval.

     While plaintiffs stand neutral as to the appropriate use
     of the policy limits to resolve covered claims against
     the Insureds, and seek discharge from all obligations
     under or relating to the policies, they reserve the right
     to seek the return of any funds that are not ultimately
     required to resolve covered claims.

3 R. at 469.

                                -9-
Act (“FAA”), 9 U.S.C. §§ 3, 4, asserting that resolution of the

interpleader defendants’ competing claims to the policy proceeds

is governed by the Primary Policy’s Arbitration Clause, which

requires that any controversy or dispute “arising out of or

relating to” the policies be resolved by binding arbitration.

See 8 R. at 1356.   Also on September 20, 2004, Lay filed a motion

to join Skilling’s Arbitration Motion.   See 8 R. at 1372.    Lay

and Skilling were the only interpleader defendants to request

arbitration.

C.   The District Court Memorandum and Order

     The district court granted Lay’s motion to join Skilling’s

Arbitration Motion but denied the Arbitration Motion itself in a

memorandum and order dated March 15, 2005.     In re Enron Corp.

Secs., Derivative & “ERISA” Litigation, No. H-01-3913 (S.D. Tex.

March 15, 2005) [hereinafter “Dist. Ct. Order”].    Based on its

review of the policy language, the district court held that the

dispute at issue--which it characterized as a disagreement among

the various insureds over the allocation of the $85 million in

policy proceeds that the Insurers agreed to pay out--was not an

arbitrable dispute because the parties to the policy did not

agree to arbitrate a dispute in the nature of the one in

question.   As an initial matter, the district court found that

the Arbitration Clause applies only to “any controversy or

dispute arising out of or relating to” the policy, and a



                               -10-
settlement within the policy limits between the Insurer and the

insureds means that there is no controversy or dispute.      Dist.

Ct. Order at 17.    Further, the district court found that there

can be no arbitrable controversy or dispute within the scope of

the Arbitration Clause in this case because a reading of both

policies in their entirety reveals that the Arbitration Clause

was meant to apply only to disputes over coverage between the

insureds and the Insurers.    Because the Insurers agreed to pay

out the entire $85 million policy limit, tendered the proceeds to

the district court, and proclaimed their neutrality as to the

allocation of the proceeds, they “no longer [have] an interest in

the $85 million”; therefore, there is not a dispute between the

insureds and the Insurers, only a dispute among the various

insureds.    Dist. Ct. Order at 17.    Finally, the district court

noted that Texas law governing insurance settlements supports its

conclusion that no arbitrable dispute exists:

     Under Texas law, an insurer’s Stowers duty to settle a
     claim against its insured is triggered by a settlement
     demand if the claim against the insured is within the
     policy’s scope of coverage, if the demand is within the
     limits of the policy, and if the terms of the demand are
     such that an ordinarily prudent insurer would accept it
     considering the likelihood and extent of the insured’s
     potential exposure to an excess judgment. State Farm
     Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 41 (Tex.
     1998). Moreover, an insurer does not have to provide
     funds for all its insureds before exhausting policy
     limits.   See, e.g., Travelers Indemnity Co. v. Citgo
     Petroleum Corp., 166 F.3d 761 (5th Cir. 1999) . . . .

Id. at 18.

     On April 12, 2005, Lay and Skilling filed their timely

                                -11-
notice of appeal from the denial of their Arbitration Motion with

this court.

                            II. DISCUSSION

A.   Jurisdiction

     The district court had subject-matter jurisdiction over the

underlying ERISA action in this case under 29 U.S.C. § 1132(e)

and 28 U.S.C. § 1331.     It accordingly asserted supplemental

jurisdiction over the Insurers’ related FED. R. CIV. P. 22

interpleader action pursuant to 28 U.S.C. § 1367(a).

     Because the district court denied Lay and Skilling’s

Arbitration Motion, which asked the court to stay the proceeding

and compel arbitration under 9 U.S.C. §§ 3, 4, this court has

jurisdiction over this appeal pursuant to 9 U.S.C. § 16(a)(1)(A),

(B), which provides that “[a]n appeal may be taken from an order

refusing a stay of any action under section 3 of this title,” or

an order “denying a petition under section 4 of this title to

order arbitration to proceed . . . .”

B.   Standard of Review

     This court reviews de novo a district court’s denial of a

motion to compel arbitration under 9 U.S.C. § 4.     See Primerica

Life Ins. Co. v. Brown, 304 F.3d 469, 471 (5th Cir. 2002); Webb

v. Investacorp., Inc., 89 F.3d 252, 257 (5th Cir. 1996).     We also

review de novo a denial of a motion to stay a proceeding pending

arbitration.   See Harvey v. Joyce, 199 F.3d 790, 793 (5th Cir.


                                 -12-
2000).6

     The Supreme Court has enunciated four general principles

applicable to determining arbitrability that guide our

consideration of the Arbitration Clause at issue in this case.

First, “‘arbitration is a matter of contract and a party cannot

be required to submit to arbitration any dispute which he has not

agreed to submit.’”   AT&T Techs., Inc. v. Commc’ns Workers of

Am., 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior &

Gulf Nav. Co., 363 U.S. 574, 582 (1960)).   Second, given that

arbitrators derive their authority from an agreement between the

parties to arbitrate, “‘the question of arbitrability . . . is

undeniably an issue for judicial determination.    Unless the

parties clearly and unmistakably provide otherwise, the question

of whether the parties agreed to arbitrate is to be decided by

the court, not the arbitrator.’”   AT&T Techs., 475 U.S. at 649

(quoting Warrior & Gulf, 363 U.S. at 582-83).     Third, “in

deciding whether the parties have agreed to submit a particular

     6
        We reject the Settling Defendants’ argument that, if this
court holds that Lay and Skilling have an arbitrable claim, the
appropriate action is to remand to the district court to
determine whether a discretionary stay is appropriate. Under 9
U.S.C. § 3, a stay is mandatory at the request of a party if the
dispute is arbitrable under 9 U.S.C. § 4 and it is referred to
arbitration; therefore, the appropriateness of the district
court’s denial of the stay essentially depends upon our de novo
review of the order denying Lay and Skilling’s motion to compel
arbitration. See Harvey, 199 F.3d at 793 (noting that “[w]e
review a district court order refusing to stay an action pending
arbitration under the de novo standard of review” and proceeding
to examine whether the dispute at issue was arbitrable under 9
U.S.C. § 4).

                               -13-
grievance to arbitration, a court is not to rule on the potential

merits of the underlying claims.”       AT&T Techs., 475 U.S. at 649;

see also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 404 (1967); Primerica, 304 F.3d at 471-72.      And finally,

“where the contract contains an arbitration clause, there is a

presumption of arbitrability.”     AT&T Techs., 475 U.S. at 650; see

also Primerica, 304 F.3d at 471 (citing Southland Corp. v.

Keating, 465 U.S. 1, 10 (1984)).    Such a presumption means that,

“[i]n determining whether the dispute falls within the scope of

the arbitration agreement, ‘ambiguities . . . [are] resolved in

favor of arbitration.’”   Fleetwood Enters., Inc. v. Gaskamp, 280

F.3d 1069, 1073 (5th Cir. 2002) (quoting Volt Info. Sciences,

Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S.

468, 475 (1989)).

C.   Analysis

     When considering a motion to compel arbitration under the

FAA,7 a court employs a two-step analysis.      First, a court must

“determine whether the parties agreed to arbitrate the dispute in


     7
        No party disputes the applicability of the FAA to the
Arbitration Clause at issue in this case, which, as reflected in
the Interpleader Complaint, was part of a “contract evidencing a
transaction involving commerce”; i.e., an insurance policy
providing liability insurance to insureds in a number of
different states. See 9 U.S.C. § 2 (specifying that the FAA
applies to any arbitration clause in “a contract evidencing a
transaction involving commerce”); see also 8 R. at 1327-28
(reflecting that the Primary and Excess Policies provided
coverage to insureds residing in at least five states, the
District of Columbia, and three foreign nations).

                                 -14-
question.”   Webb, 89 F.3d at 258; see also Mitsubishi Motors

Corp. v. Soler Chysler-Plymouth, 473 U.S. 614, 626 (1985).

Second, a court must determine “whether legal constraints

external to the parties’ agreement foreclosed the arbitration of

those claims.”   Mitsubishi Motors, 473 U.S. at 628.    Because no

party has argued that external legal constraints have foreclosed

the arbitration of the claims at issue in this case, we need only

conduct the first step of the analysis to resolve the

arbitrability question.

     The first step of the analysis--whether the parties agreed

to arbitrate the dispute in question--consists of two separate

determinations: “(1) whether there is a valid agreement to

arbitrate between the parties; and (2) whether the dispute in

question falls within the scope of that arbitration agreement.”

Webb, 89 F.3d at 258 (citing Daisy Mfg. Co. v. NCR Corp., 29 F.3d

389, 392 (8th Cir. 1994)); see also Pennzoil Exploration & Prod.

Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1065 (5th Cir. 1998).

Because no party challenges the validity of the policies (or of

the Arbitration Clause), the only issue in this case is whether

the dispute falls within the scope of the Arbitration Clause.

This question, in turn, will require this court to consider the

two major areas of contention in this appeal--the scope of the

Arbitration Clause itself and the nature of the dispute at issue.

     1.   Scope of the Arbitration Clause



                               -15-
     Lay and Skilling argue that the language of the Arbitration

Clause should be construed broadly to include disputes between

the Insurers and insureds as well as disputes among the insureds

themselves.   They assert that the Arbitration Clause applies to

“[a]ny controversy or dispute arising out of or relating to this

POLICY,” without explicitly limiting its application to disputes

between certain parties.

     In contrast, the Settling Defendants and the Insurers argue

that the Arbitration Clause applies only to disputes between the

Insurer and the parties defined as insureds under the policies.

They note that Lay and Skilling quote only the preamble to the

Arbitration Clause in their brief, focusing on the “arising out

of or relating to” language to the exclusion of the remainder of

the Arbitration Clause and the rest of the language in section

IV(T) of the Primary Policy.   The Settling Defendants argue that

reading the “arising out of or relating to” language in the

context of these provisions, which refer only to “the SPONSOR

ORGANIZATION” (i.e., Enron) and “the COMPANY” (i.e., the

Insurers), necessarily means that the Arbitration Clause applies

only to disputes between Enron (or the other insureds for whom

Enron serves as the “sponsor organization”) and the Insurers, not

to disputes among the insureds themselves under circumstances

where there is no dispute with an Insurer.

     To determine the scope of the Arbitration Clause at issue in

this case, this court must apply Texas rules of contract

                               -16-
interpretation.   See Washington Mut. Fin. Group v. Bailey, 364

F.3d 260, 264 (5th Cir. 2004) (“[I]n determining whether the

parties agreed to arbitrate a certain matter, courts apply the

contract law of the particular state that governs the

agreement.”); Harvey, 199 F.3d at 793 (applying state-law

contract principles); Webb, 89 F.3d at 258 (“‘[C]ourts generally

. . . should apply ordinary state-law principles that govern the

formation of contracts.’”) (quoting First Options of Chicago,

Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).    Under Texas law,8 a

court construing a contract must read that contract in a manner

that confers meaning to all of its terms, rendering the

contract’s terms consistent with one another.     See FDIC v. Conn.

Nat’l Bank, 916 F.2d 997, 1001 (5th Cir. 1990); Coker v. Coker,

650 S.W.2d 391, 393 (Tex. 1983); see also SAS Inst., Inc. v.

Breitenfeld, 167 S.W.3d 840, 841 (Tex. 2005); Nat’l Union Fire

Ins. Co. of Pittsburgh v. CBI Indus., Inc., 907 S.W.2d 517, 520

(Tex. 1995).   In doing so, “courts should examine and consider

the entire writing in an effort to harmonize and give effect to

all the provisions of the contract so that none will be rendered

meaningless. . . . No single provision taken alone will be given

controlling effect; rather, all the provisions must be considered

with reference to the whole instrument.”     Coker, 650 S.W.2d at

393.

       8
        All parties acknowledge that Texas state law governs the
insurance policies at issue here.

                               -17-
     Applying these principles to the insurance policies at hand,

we agree with the Settling Defendants and the district court that

the scope of the Arbitration Clause is limited only to disputes,

arising out of or related to the policies, that include an

Insurer and one or more insureds.     The Arbitration Clause itself,

located in section IV(T)(3) of the Primary Policy, must be read

in context with the other provisions of the contract, in

particular the entirety of section IV(T), which governs “Dispute

Resolution and Service of Suit.”    The subsections directly

preceding the Arbitration Clause set out a number of non-binding

dispute resolution procedures that must be invoked by either

Enron or the Insurers before binding arbitration can occur.      The

language of these provisions, which references only Enron and the

Insurers, indicates that these procedures apply only to

situations where there is a dispute with an Insurer.     For

instance, section IV(T)(1), a provision addressing “Negotiation,”

provides that

     [t]he SPONSOR ORGANIZATION and the COMPANY shall attempt
     in good faith to resolve any controversy or dispute
     arising out of or relating to this POLICY promptly by
     negotiations between executives who have authority to
     settle the controversy. . . . Within thirty (30) days
     after delivery of the disputing party’s notice, the
     executives of both parties shall meet at a mutually
     acceptable time and place, and thereafter as often as
     they reasonably deem necessary, to attempt to resolve the
     dispute.

4 R. at 485-86 (emphasis added).

     Moreover, while the preamble to the Arbitration Clause


                               -18-
itself uses the phrase “arising out of or related to,” language

which the Supreme Court has acknowledged can sweep broadly in

scope, see Prima Paint, 388 U.S. at 406, the breadth of that

scope is limited by the language in the remainder of the

provision.   Indeed, the very procedures that the Arbitration

Clause requires Enron and the Insurers to follow once binding

arbitration has been invoked would be logical only in the case of

a dispute where an Insurer is adverse to one or more of the

insureds.    For example, directly following the “arising out of or

related to” language, the Arbitration Clause instructs that, upon

the initiation of binding arbitration,

     [t]he SPONSOR ORGANIZATION and the COMPANY each shall
     appoint one arbitrator; the third arbitrator, who shall
     serve as the chair of the arbitration panel, shall be
     appointed in accordance with the CPR Rules. If either
     the SPONSOR ORGANIZATION or the COMPANY has requested the
     other to participate in a non-binding procedure and the
     other has failed to participate, the requesting party may
     initiate arbitration before expiration of the above
     period.

     . . .

     The terms of this POLICY are to be construed in an
     evenhanded fashion as between the SPONSOR ORGANIZATION
     and the COMPANY in accordance with the laws of the
     jurisdiction in which the situation forming the basis for
     the controversy arose.

     . . .

     In the event of a judgment being entered against the
     COMPANY on an arbitration award, the COMPANY at the
     request of the SPONSOR ORGANIZATION, shall submit to the
     jurisdiction of any court of competent jurisdiction
     within the United States of America . . . .

3 R. at 486.

                                -19-
     Interpreting the Arbitration Clause to encompass disputes

that do not include an Insurer would render many of these agreed-

to procedures set forth in section VI(T) inconsistent and largely

meaningless, particularly as those procedures apply to the

Insurers.   If the Arbitration Clause encompassed such disputes,

neither Insurer would have an interest in participating in the

required non-binding dispute resolution procedures prior to

arbitration or in selecting an arbitrator in cases where an

Insurer is not involved in the dispute.   Nonetheless, these

procedures must be invoked in every case prior to commencing

binding arbitration, and the Arbitration Clause does not provide

alternative procedures to follow should disputes involving only

insureds arise.   This omission indicates that the parties to the

policies intended the dispute resolution procedures to apply only

to the disputes for which procedures are provided--i.e., only to

situations where there is a dispute with an Insurer.   See Coker,

650 S.W.2d at 393 (“In construing a written contract, the primary

concern of the court is to ascertain the true intentions of the

parties as expressed in the instrument.”).   Furthermore, the

Arbitration Clause itself would be internally inconsistent if it

were read to encompass disputes that do not include an Insurer

because it provides neither an agreement by the insureds to

arbitrate disputes only among themselves, nor a mechanism by

which each side of a dispute consisting of only insureds may

appoint arbitrators.   Had the parties contemplated arbitration of

                               -20-
disputes among competing insureds in circumstances where there is

no dispute with an Insurer, they could have provided a mechanism

to represent the adverse interests of the insureds when

appointing arbitrators.   They did not.

     Therefore, given the plain language of section IV(T), our

reading of the Arbitration Clause--i.e., that it applies only to

disputes, arising out of or related to the policy, that include

an Insurer and one or more insureds--is the most natural and, in

the context of the entire policy, best harmonizes and gives

effect to all of the provisions contained therein.   See MCI

Telecomms. Corp. v. Tex. Util. Elec. Co., 995 S.W.2d 647, 652

(Tex. 1999) (“When interpreting a contract, we examine the entire

agreement in an effort to harmonize and give effect to all

provisions of the contract so that none will be meaningless.”)

(citing City of Midland v. Waller, 430 S.W.2d 473, 478 (Tex.

1968); Universal C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154,

158 (1951)); Coker, 650 S.W.2d at 393.

     2.   Nature of the Instant Dispute

     “[A] party cannot be required to submit to arbitration any

dispute which he has not agreed to submit.”   Warrior & Gulf, 363

U.S. at 582.   Therefore, having determined that the scope of the

Arbitration Clause extends only to disputes arising out of or

related to the policies that include an Insurer and one or more

insureds, we now must decide whether the dispute in the instant



                               -21-
case falls within this scope.   That is, we must determine whether

the interpleader action (1) arises out of or relates to the

Primary and Excess Policies, and (2) constitutes a dispute that

includes an Insurer and one or more insureds.

     Lay and Skilling argue that the disputes over the

distribution of policy proceeds “‘arise out of’ and ‘relate to’

the Primary and Excess Policies in the strictest sense--were it

not for those policies, there would be neither funds to

interplead nor any legal basis for the insureds’ competing

claims.”   Defendants-Appellants’ Br. at 29.   They further assert

that the nature of the dispute as an interpleader action does not

mean that the dispute falls outside of the scope of the

Arbitration Clause.   Lay and Skilling contend that, rather than

avoiding disputes with the insureds when they filed their

interpleader complaint, the Insurers in effect created a dispute

with every insured by not agreeing to any of their demands.

Finally, Lay and Skilling argue that the Insurers admitted the

existence of a dispute when they filed their interpleader

complaint because Article III of the United States Constitution

prevents courts from adjudicating matters that are not actual

“cases or controversies”; if there were no dispute, the district

court should have dismissed the interpleader action.

     On the other hand, the Settling Defendants and the Insurers

argue that the dispute is outside the scope of the Arbitration

Clause because it does not arise out of or relate to the

                                -22-
policies.    Moreover, they assert that, even if the dispute did

arise out of or relate to the policies, Lay and Skilling do not

have a dispute with the Insurers; rather, their dispute is with

the Settling Defendants over the proper allocation of the $85

million in policy proceeds.    Because the Insurers have agreed to

pay out the entire $85 million policy limit, tendered the funds

to the district court, and “stand neutral” as to the proper

distribution of the funds, the Settling Defendants and the

Insurers maintain that there is nothing for the Insurers to

arbitrate with the insureds and therefore no dispute within the

meaning of the Arbitration Clause.

            a.   “Arising Out of or Related To”

     A dispute “arises out of or relates to” a contract if the

legal claim underlying the dispute could not be maintained

without reference to the contract.     Ford v. NYLCare Health Plans

of the Gulf Coast, Inc., 141 F.3d 243, 250 (5th Cir. 1998)

(noting that a claim does not “arise out of or relate to” a

contract if the claim “is completely independent of the contract

and could be maintained without reference to a contract”).    Under

this definition, the instant dispute arises out of and is related

to the Primary and Excess Policies because those policies are not

only the source of the interpleaded fund, but they are also the

source of any insured’s legal right to the proceeds of that fund.

In other words, Lay and Skilling could not assert a claim to any



                                -23-
of the policy proceeds without reference to their contractual

right to those proceeds under the policies.9    However, as we

explained above, the Arbitration Clause contains further language

limiting its scope to such disputes that include an Insurer and

one or more insureds, notwithstanding the broad construction that

some courts have given to “arising out of or related to” language

in arbitration clauses in cases where the applicability of the

clauses to specific parties was not an issue.    See Prima Paint,

388 U.S. at 406 (interpreting the “arising out of or related to”

phrase broadly to encompass a fraud in the inducement claim

without having to address whether the arbitration clause applied

to the specific parties before the Court); cf. Mayflower Ins. Co.

v. Pellegrino, 261 Cal. Rptr. 224, 227-28 (Cal. Ct. App. 1989)

(refusing to compel arbitration of a dispute between insureds

because the policy’s arbitration provision contemplated only the

arbitration of disputes between the insurer and the insureds).


     9
        The Settling Defendants’ reliance on Ford for the
proposition that the insureds’ claims to the policy proceeds do
not arise out of or relate to the policies is misplaced. The
court in Ford addressed a situation where the plaintiff brought a
false advertising claim in tort against the defendants, with whom
he had a contractual relationship. The defendants attempted to
compel arbitration under the FAA based on the arbitration clause
in their contract with the plaintiff, but the court held that the
false advertising claim did not “arise out of or relate to” the
contract as required by the arbitration clause because the
plaintiff could maintain his action in tort without reference to
the contract. In contrast, but for the existence of the
insurance policies in the instant case, Lay and Skilling could
not maintain their claims for the policy proceeds in tort or
under any other legal theory independent of the policies.

                              -24-
Therefore, in this case, because the policy language limits the

Arbitration Clause’s applicability to disputes that include an

Insurer, the mere fact that this dispute “aris[es] out of or

relate[s] to” the policies does not end our analysis as Lay and

Skilling urge.   We still must determine whether this dispute

includes an Insurer or is more appropriately characterized as a

dispute only among various insureds.

          b.     The Interpleader Action

     Under the circumstances of this case, we conclude that the

only existing dispute is one only among various insureds.      By

filing their Interpleader Complaint and tendering the entire $85

million in policy proceeds to the district court, the Insurers

have effectively removed themselves from any dispute by conceding

coverage up to the policy limits and remaining neutral as to the

proper distribution of the funds.      See 3 R. at 469.   All that now

remains is a dispute among the insureds (i.e., Lay, Skilling, and

the Settling Defendants) over the appropriate allocation of the

policy proceeds; therefore, this dispute falls outside the scope

of the Arbitration Clause.

     This conclusion is consistent with the purpose of

interpleader as a procedural device: to shield a stakeholder (in

this case, the Insurers) from liability when faced with the

threat of multiple inconsistent claims to a single fund by

allowing the stakeholder to tender that fund to the court in lieu



                                -25-
of defending against multiple possible lawsuits.          See Rhoades v.

Casey, 196 F.3d 592, 600 n.8 (5th Cir. 1999) (“The legislative

purpose of an interpleader action is to remedy the problems posed

by multiple claimants to a single fund, and to protect a

stakeholder from the possibility of multiple claims on a single

fund.”); Wausau Ins. Cos. v. Gifford, 954 F.2d 1098, 1100 (5th

Cir. 1992).     The procedural device of interpleader, then, allows

a stakeholder effectively to avoid a dispute with the claimants

while the court determines the proper allocation of the disputed

fund:

       [t]he principle of interpleader is that, where two
       persons are engaged in a dispute, and that which is to be
       the fruit of the dispute is in the hands of a third
       party, who is willing to give it up according to the
       result of the dispute, then, . . . that third person
       . . . is not to be obliged to be at the expense and risk
       of defending an action; but, on giving up the thing
       . . ., he is to be relieved, and the Court directs that
       the persons between whom the dispute really exists shall
       fight it out at their own expense. The mere statement of
       the principle shows its justice.

7 CHARLES ALAN WRIGHT, ARTHUR R. MILLER, & MARY KAY KANE, FEDERAL PRACTICE

AND   PROCEDURE § 1702 (3d. ed. 2001) [hereinafter WRIGHT & MILLER]

(quoting Evans v. Wright, C.P. 1865, 13 Weekly Reporter 468, 12

Law Times 77 (per Willes, J.) (Eng.) (emphasis added)).            In other

words,

       [i]nterpleader was originally designed to protect the
       stakeholder. . . . The protection afforded by
       interpleader takes several forms. Most significantly, it
       prevents the stakeholder from being obliged to determine
       at his peril which claimant has the better claim, and,
       when the stakeholder has no interest in the fund, forces
       the claimants to contest what essentially is a

                                   -26-
     controversy   between them   without  embroiling the
     stakeholder in the litigation over the merits of the
     respective claims.

7 WRIGHT & MILLER § 1702.   Likewise, in Treinies v. Sunshine Mining

Co., 308 U.S. 66, 72 (1939), the Supreme Court relied on this

concept when it held that a stakeholder’s citizenship in a

statutory interpleader action based on diversity jurisdiction

need not be diverse from the citizenship of the claimants because

     there is a real controversy between the adverse
     claimants.   They are brought into the court by the
     complainant stakeholder who simultaneously deposits the
     money or property, due and involved in the dispute into
     the registry of the court. This was done in this case.
     The [interpleader statute] provides that the ‘court shall
     hear and determine the cause and shall discharge the
     complainant from further liability.’ Such deposit and
     discharge effectually demonstrates the applicant’s
     disinterestedness as between the claimants and as to the
     property in dispute, an essential in interpleaders.

Id. (emphases added); see also Haynes v. Felder, 239 F.3d 868,

871 (5th Cir. 1957) (citing Treinies and holding that only the

claimants to the interpleaded fund need be diverse to the

diversity-of-citizenship requirement in an interpleader

action).10   For this reason, Lay and Skilling’s contention that

     10
        Given this precedent acknowledging that the real dispute
in an interpleader action is between the adverse claimants--and
that even the mere “threat of multiple vexation by future
litigation provides sufficient basis for interpleader,” Corrigan
Dispatch, 696 F.2d at 364--we find no merit in Lay and Skilling’s
argument that no Article III case or controversy can exist if we
hold that the Insurers do not have a dispute with the insureds.
Lay and Skilling fail to point us to any cases where a court has
dismissed an interpleader action on such a ground, and we have
found none. There is certainly a dispute in this case sufficient
to constitute an Article III case or controversy; the dispute
simply does not fall within the scope of the Arbitration Clause.

                                 -27-
the Insurers created a dispute with each insured when it filed

the Interpleader Complaint is without merit.    Characterizing an

interpleader action in that manner would undermine a

stakeholder’s primary reason for filing an interpleader complaint

in the first place, which is to avoid a dispute with competing

claimants to the interpleaded fund.    See Corrigan Dispatch Co. v,

Casa Guzman, S.A., 696 F.2d 359, 364 (5th Cir. 1983)

(“Interpleader is a device which allows a party in possession of

money or property belonging to another to join two or more

parties asserting mutually exclusive claims to the property or

fund in a single suit, thereby freeing the stakeholder from

multiple liability or multiple lawsuits.”).    Therefore, faced

with the threat of multiple vexation resulting from potential

lawsuits with various insureds asserting claims to the policy

proceeds, the Insurers availed themselves of the procedural

protections of interpleader described above.    In so doing, they

avoided disputes with each of the insureds by tendering the

entire $85 million policy limit to the district court and

remaining neutral as to its allocation.    See Rhoades, 196 F.3d at

600 n.8; 7 WRIGHT & MILLER § 1702.

     Nonetheless, Lay and Skilling contend that, because the

Insurers filed a complaint in the nature of interpleader rather

than a strict bill of interpleader, the Insurers have not avoided




                                -28-
a dispute with the insureds.11    But such a distinction makes

little difference in our analysis, at least as it applies to the

dispute as it currently stands.    Lay and Skilling argue that the

Insurers’ contingent interest in the fund, as well as the

Insurers’ continued ability to assert coverage defenses against

Lay and Skilling at any time, create an ongoing dispute with the

Insurers within the meaning of the Arbitration Clause.    However,

these reservations of rights merely create the possibility of a

hypothetical future dispute; they do not create a present

dispute.   Since a prerequisite to any interpleader action is the

existence of multiple, mutually exclusive claims to a single

fund, the interpleader would no longer be viable if the policy

limits were not exhausted because the competing claims would no

     11
        A party who files a strict bill of interpleader
relinquishes all interest in the interpleaded funds, while a
party who files a bill in the nature of interpleader reserves at
least some right to those funds. See Texas v. Florida, 306 U.S.
398, 406-07 (1939) (“The essential of the bill in the nature of
interpleader is that it calls upon the court to exercise its
jurisdiction to guard against the risks of loss from the
prosecution in independent suits of rival claims where the
plaintiff himself claims an interest in the property or fund
which is subjected to the risk.”); see also FED. R. CIV. P. 22(1)
(allowing for both strict interpleader complaints and complaints
in the nature of interpleader). Here, the Insurers filed a
complaint in the nature of interpleader, conceding coverage up to
the $85 million policy limit, tendering the entire amount to the
district court, and asking to be discharged from any further
liability once the $85 million in proceeds have been paid in
full. 3 R. at 470. Consistent with a bill in the nature of
interpleader, however, the Insurers also have reserved a
contingent interest in the fund to the extent that the full
amount is “not ultimately required to resolve covered claims” and
have not waived any coverage defenses available to them. 3 R. at
469.

                                 -29-
longer be mutually exclusive.   See White v. F.D.I.C., 19 F.3d

249, 251 (5th Cir. 1994) (“Interpleader is a procedural device

which entitles a person holding money or property, concededly

belonging at least in part to another, to join in a single suit

two or more persons asserting mutually exclusive claims to the

fund.”).   If that were to happen, a dispute within the meaning of

the Arbitration Clause could potentially arise because any

potential future decision by the Insurers to deny coverage for

Lay or Skilling would have to be litigated or arbitrated in a

later action.   Likewise, if, in the future, the Insurers decide

to assert one or more coverage defenses against Lay or Skilling,

such an action might create a dispute within the meaning of the

Arbitration Clause.   However, because the Insurers have not taken

such an action, no arbitrable dispute exists at this time.   We

therefore hold that, because the only present dispute is one

among the insureds over the proper allocation of the interpleaded

funds, and because the scope of the Arbitration Clause does not

encompass such a dispute, the district court properly denied Lay

and Skilling’s Arbitration Motion.12

     12
        Lay and Skilling also argue that the district court
erred by delving into the merits of the interpleader action when
it denied their Arbitration Motion. We agree that this aspect of
the district court’s order is problematic, specifically its
reliance on substantive Texas state law to conclude that, because
the settlement terms are reasonable under Texas case law, the
Insurers can fully fund the Partial Settlement out of the
interpleaded funds to the exclusion of the other insureds. See
Dist. Ct. Order at 17-22 (explaining that Texas law allows an
insurer to enter into a reasonable settlement with a subset of

                                -30-
                          III. CONCLUSION

     For the foregoing reasons, we AFFIRM the district court’s

denial of Lay and Skilling’s Arbitration Motion.




insureds, even if the settlement would exhaust the policy limits
and prevent other insureds from collecting). It is well
established that such a merits-based determination has no place
in an arbitrability analysis. See AT&T Techs., 475 U.S. at 649
(“[I]n deciding whether the parties have agreed to submit a
particular grievance to arbitration, a court is not to rule on
the potential merits of the underlying claims.”); Primerica, 304
F.3d at 471-72 (“When conducting this two-pronged [arbitrability]
analysis, courts must not consider the merits of the underlying
action.”) (citing Snap-On Tools Corp. v. Mason, 18 F.3d 1261,
1267 (5th Cir. 1994)); see also 1 JAY E. GRENIG, ALTERNATIVE DISPUTE
RESOLUTION § 6:46 (3d ed. 2005) (“It is not the function of the
court to determine whether the claim with respect to which
arbitration is sought is valid or otherwise to rule on the merits
of the dispute.”).
      However, we decline Lay and Skilling’s invitation to reverse
the district court on this ground because, as explained above, we
conclude pursuant to our de novo review that the scope of the
Arbitration Clause does not encompass the dispute at issue. To
reach this conclusion, we do not--and need not--consider the
merits of the underlying interpleader action or opine on which
principles will govern the eventual distribution of the
interpleaded funds. Given that the dispute falls outside the
scope of the Arbitration Clause, the district court’s ultimate
determination that arbitration cannot be compelled under the FAA
in this instance was correct. See Warrior & Gulf, 363 U.S. at
582 (“[A]rbitration is a matter of contract and a party cannot be
required to submit to arbitration any dispute which he has not
agreed to submit.”).

                               -31-
