Jurisdiction Issues

The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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The U.S. Court of Appeals for the Fifth Circuit held that an order compelling arbitration and staying a related action was not an appealable “final decision with respect to arbitration” under the Federal Arbitration Act (“FAA”).

Anthony Charles filed an action asserting substantive claims regarding construction of a home in Mississippi (“Charles I”). While it was pending, the defendants filed a separate action against Charles (“Charles II”), seeking to compel him to arbitrate the claims in Charles I. The court in Charles II granted the motion to compel, and ordered that the unresolved claims in Charles I be stayed pending arbitration. Charles appealed.

The Fifth Circuit held that it did not have jurisdiction over the appeal. The court noted that the FAA only allows courts to consider an appeal from a “final decision with respect to arbitration,” meaning one that “ends the litigation on the merits.” In ruling, the court found that furthering the strong interest in favor of arbitration required considering Charles II together with Charles I. Because the claims in Charles I were merely stayed by virtue of Charles II – not dismissed – the court held that the decision in Charles II could not be considered a “final appealable order” under the FAA.

Green Tree Servicing, LLC, et al. v. Anthony Charles, No. 17-60165 (5th Cir. Sept. 29, 2017)

This post written by Alex Silverman.

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