Jurisdiction Issues

On September 6, 2017, the Bankruptcy Court for the Southern District of New York issued the latest order in the ongoing coverage battle between MF Global Holdings (“MF Global”) and Allied World Assurance Company regarding the former’s bankruptcy. The decision stemmed from MF Global’s motion to reconsider the court’s August 24, 2017 order compelling arbitration in Bermuda. While the court initially granted the motion to reconsider, it reached the same result and granted Allied World’s motion to compel arbitration.

MF Global’s request for reconsideration was based on the court’s alleged failure to address its argument that the global bankruptcy plan explicitly retained jurisdiction over adversary proceedings, a provision which should have superseded the underlying insurance contract’s arbitration provision which formed the basis of the court’s decision to compel arbitration. The court noted that while its decision mentioned the argument, it did not address the merits of the argument, so the court granted the motion to reconsider.

On reconsideration, the court was unpersuaded by MF Global’s argument that the bankruptcy court retained jurisdiction pursuant to the global bankruptcy plan. In a short opinion, the court distinguished the principal authority upon which MF Global relied: Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304 F.3d 753 (7th Cir. 2002). That case addressed an adversary proceeding that commenced before the bankruptcy plan and a plan provision which retained jurisdiction over pending adversary proceedings. Here, the adversary proceeding was not filed until after the plan was confirmed, and, the court concluded, the plan language retaining jurisdiction of pending adversary proceedings should not be interpreted to supersede the contractual arbitration provision in the pre-petition contract without explicit instruction in the plan as to that interpretation. Furthermore, Allied World had not waived its right to demand arbitration at any point in the proceedings.

Thus, even though the court granted MF Global’s motion to reconsider, it ultimately reached the same conclusion and granted Allied World’s motion to compel arbitration and denied MF Global’s motion to stay the arbitration.

In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Sept. 6, 2017).

This post written by Thaddeus Ewald .

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A municipality sued the company that constructed its water treatment facility, in connection with contaminants found in the water supply. The parties had entered into a series of agreements which contained choice of law and arbitration clauses governing the resolution of any disputes. The company filed a motion to dismiss for lack of jurisdiction based on the contracts’ forum selection and arbitration clauses, and the court construed the motion as falling under Rule 12(b)(1). The court then found that the contracts were inconsistent and ambiguous, and considered extrinsic evidence. The court ultimately granted the motion to dismiss and directed the parties to proceed to arbitration.

On appeal, the Eighth Circuit found that the district court erred by analyzing the motion to dismiss as a 12(b)(1) challenge to its jurisdiction. The court explained that the U.S. Supreme Court has held that “federal venue laws, not forum-selection clauses, govern the propriety of venue under Rule 12(b)(3). The same logic applies where, as here, a party seeks to enforce an arbitration agreement under Rule 12(b)(1). Just as a forum-selection clause has no bearing on the issue of whether venue is ‘wrong’ or ‘improper,’ an arbitration agreement has no relevance to the question of whether a given case satisfies constitutional or statutory definitions of jurisdiction.” The Eighth Circuit found that summary judgment standards should apply on remand because the parties submitted, and the district court considered, matters outside the pleadings. City of Benkelman, Nebraska v. Baseline Engineering Corp., et al., Case No. 16-1949 (8th Cir. Aug. 11, 2017).

This post written by Nora A. Valenza-Frost.

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The Second Circuit has upheld an order granting a petition by Hermès of Paris to compel arbitration after Matthew Swain, a former employee, sued Hermès and a coworker in state court for alleged violations of state non-discrimination laws. The Second Circuit rejected Swain’s argument that there was no subject matter jurisdiction, finding that only parties to the petition to compel arbitration, not the parties in the underlying lawsuit, should be considered when evaluating diversity jurisdiction.

After Swain was fired by Hermès, he sued asserting claims under New Jersey law. Hermès filed a petition in federal court to compel arbitration, and the district court granted that petition. On appeal, Swain argued that the district court lacked subject matter jurisdiction, which the court had based on complete diversity of citizenship, because, even though Hermès and Swain were citizens of different states, Swain and the coworker defendant in the underlying action were both citizens of New Jersey.  Thus, Swain argued that the district court was required to “look through” the arbitration petition to the facts of the underlying state court litigation to determine the jurisdiction issue, citing the Supreme Court’s 2009 ruling in Vaden v. Discover Bank.

The Second Circuit, applying its 1995 decision in Doctor’s Associates v. Distajo, held that the court could only consider the citizenship of the parties to that petition—Hermès and Swain—in evaluating whether diversity jurisdiction existed.  The court further held that Vaden, in which the Supreme Court found that the allegations of the underlying lawsuit were relevant to jurisdiction over the arbitration petition, did not apply because it dealt with federal question jurisdiction, not diversity. Diversity jurisdiction raises different concerns, the Second Circuit found, including the possibility that a plaintiff could try to defeat diversity by adding a party from the same state as a defendant.

The court also rejected Swain’s argument that the coworker, as a third-party beneficiary of the contract containing the arbitration clause, was an indispensable party to the federal litigation. In fact, the court held that whether the coworker was a third party beneficiary did not matter, as the district court could afford full relief to Hermès in the form of an order compelling arbitration without the coworker’s presence in the lawsuit, such that the coworker was not an indispensable party.

Hermès of Paris, Inc. v. Swain, Docket No. 16-3182-cv (2d Cir. Aug. 14, 2017)

This post written by Jason Brost.
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