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Jurisdiction Issues

FEDERAL COURT LOOKS TO PETITION TO COMPEL ARBITRATION, NOT THE FACTS OF THE UNDERLYING LITIGATION, TO DETERMINE WHETHER IT HAS DIVERSITY JURISDICTION OVER DISPUTE

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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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PENNSYLVANIA FEDERAL COURT GRANTS MOTION TO DISMISS BASED ON LACK OF SUBJECT MATTER JURISDICTION

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Plaintiff RAD Manufacturing, LLC (“RAD”), a Delaware corporation with its principal place of business in Pennsylvania, and its insurer and reinsurer (as subrogees) brought an action in federal court in Pennsylvania against Advanced Fabrication Services, Inc. (“AFS”), a Pennsylvania corporation with its principal place of business in Pennsylvania. The underlying dispute involves allegations that RAD had hired and contracted with AFS to design, install and service a boiler control system on its premises, and the boiler dry-fired and caused damage to RAD’s property. RAD filed a motion to dismiss primarily based on lack of subject matter jurisdiction.

The Pennsylvania federal court noted that RAD’s presence in the action destroyed complete diversity and that RAD, the insured, is a necessary party and thus an indispensable party, and thus cannot be dismissed from the action to cure the jurisdictional defect. In particular, the court noted that there is another state court action pending involving the same parties. Thus, the court was particularly concerned with RAD’s ability to protect its interest in the state court if the federal action proceeded without RAD and was resolved first, and thus would likely have a res judicata effect on that state court action.

Thus, the Pennsylvania federal court held that RAD, the insured/subrogor, is an indispensable party and that the action cannot proceed without RAD, and as such, the complaint was dismissed for lack of subject matter jurisdiction.

RAD Manufacturing LLC, et al. v. Advanced Fabrication Services, No. 3:16-2138 (M.D. Pa. June 20, 2107).

This post written by Jeanne Kohler.

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MF GLOBAL HOLDINGS REINSURER’S $15 MILLION BOND STRUCK BY BANKRUPTCY COURT AND LEAVE TO APPEAL REJECTED BY NEW YORK FEDERAL COURT

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Two courts in New York recently issued decisions concerning Allied World’s ongoing coverage dispute with MF Global Holdings Ltd. over the former’s bankruptcy. As previously reported on this blog, the Bankruptcy Court for the Southern District of New York, in a series of opinions, has found that Allied World and other re/insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions, granted a preliminary injunction prohibiting the insurers from enforcing those injunctions, and ordered Allied World to post a $15 million bond as an unauthorized foreign insurer. Late last month, the Southern District of New York—with appellate jurisdiction over Bankruptcy Court decisions—denied Allied World’s motions seeking leave to appeal the court’s order granting a preliminary injunction, the contempt order for violating a prior temporary restraining order, and the Barton violation order. In another ruling last week, the Bankruptcy Court struck a $15 million bond posted in response to that court’s earlier order.

In part, the Southern District rejected Allied World’s argument it was entitled to an appeal as of right regarding the Barton order because, as an automatic stay, it was akin to a permanent injunction which qualifies as a final order subject to interlocutory review. The court found the Barton order was not an appealable final order. Although in certain circumstances a Barton violation order could constitute a final order, the court held that as a “practical matter” it was not final because the Bankruptcy Court intended to reconsider the propriety of the order imminently. Indeed, the parties had submitted additional briefing on the issue and an opinion on the matter was pending in the Bankruptcy Court at the time. Additionally, the court rejected Allied World’s alternative ground for appeal under the collateral order doctrine because it failed the doctrine’s third prong that the order at issue be effectively unreviewable.

Next, the court addressed Allied World’s motions for leave to appeal the preliminary injunction, contempt order, and Barton order. In regards to Allied World’s argument that the Bankruptcy Court lacked personal jurisdiction for the preliminary injunction and Barton order based upon insufficient service, the court found the record was incomplete on the service and thus interlocutory review was inappropriate. In regards to Allied World’s argument that the Bankruptcy Court applied the Barton doctrine in novel ways by extending the types of defendants covered and by applying it extraterritorially, the court noted the Barton order was hardly a “controlling issue of law” for the overarching litigation because proceedings in the matter would continue even if it were reversed. Additionally, the court concluded Allied World did not demonstrate any substantial ground for differences of opinion aside from mere conjecture on either supposedly novel application. In regards to Allied World’s argument for pendent jurisdiction over the contempt order, the court denied that motion because it had denied leave to appeal either of the other two orders.

The Bankruptcy Court also struck Allied World’s bond filed in response to the court’s June 12 order. After Allied World posted the bond, MF Global moved to strike the bond on the grounds that it inappropriately conditioned performance upon the exhaustion of any appeal filed by Allied World from a final judgment of the Bankruptcy Court. The court found that the statute requiring the bond imposed no such requirement for exhaustion of appeals and the statute’s trigger—a “final judgment”—includes final judgment of trial courts notwithstanding ongoing appeals. Further, the court found Allied World’s proposed modifications to the bond were likewise unacceptable, noting the only way Allied World could avoid or delay payment would be a stay of enforcement pending appeal and subsequent posting of a supersedeas bond. Allied World must now post a compliant $15 million bond by July 21, 2017.

This post written by Thaddeus Ewald .

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COURT FINDS CALIFORNIA INSURANCE CODE SECTION 11658.5 REVERSE-PREEMPTS SECTION 4 OF THE FAA

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National Union Fire Insurance Company of Pittsburgh, PA provided Seneca Family of Agencies with workers’ compensation and employers’ liability insurance for Seneca’s operations in California from 2004 to 2013. The parties entered into a payment agreement that governed the parties’ financing and credit obligations with respect to the insurance policies. The agreement’s arbitration provision provided that, among other things, “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.” In 2013, the parties amended the arbitration provision to include: “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.”

Years later, a dispute over the amount of collateral to be paid under the payment agreement arose and National Union moved to compel arbitration. At issue before the court was Seneca’s objection based on the application of Cal. Ins. Code § 11658.5, which requires arbitration provisions in workers’ compensation policies to be disclosed to potential insureds. The court approached this issue in two parts— first, addressing claims related to policies issued on or after July 1, 2012, the effective date of § 11658.5, (the “Post-July 2012 policies”) and second, addressing claims related to policies issued prior to July 1, 2012 (the “Pre-July 2012 policies”).

With regard to claims related to the Post-July 2012 policies, the Court denied National Union’s motion to compel arbitration. The Court analyzed an issue not previously addressed in the case of Monarch Consulting (see blog post dated March 15, 2016)— that is, whether the McCarran-Ferguson Act reverse-preempts the FAA with respect to § 11658.5. Applying the three-prong test to determine if a state statute reverse-preempts a federal statute, the Court found all prongs to be met: (1) the FAA did not specifically relate to insurance; (2) § 11658.5 was enacted to regulate the business of insurance; and (3) the FAA would invalidate, impair, or supersede § 11658.5 because § 4 of the FAA directly conflicted with § 11658.5 in this case.

With regard to the Pre-July 2012 policies, the Court found that any claims related to those policies must be arbitrated, primarily because § 11658.5 did not apply to those policies, and any claims related to Pre-July 2012 policies plainly fell within the scope of the payment agreement’s arbitration provision. As such, the Court granted National Union’s motion to compel arbitration of claims related to the Pre-July 2012 policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Seneca Family of Agencies, Case No: 17-cv-01061 (USDC S.D.N.Y. June 12, 2017).

This post written by Gail Jankowski.

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FEDERAL COURT RETAINS JURISDICTION OVER ACTION STAYED FOR ARBITRATION, PRE-EMPTING STATE COURT

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Following Davis’s filing of a federal lawsuit alleging state malpractice and breach of contract claims, as well as federal Fair Housing Act and Civil Rights Act claims, the Court ordered the action be stayed pending arbitration, and the suit was “administratively dismissed without prejudice subject to full reinstatement upon the completion of the required arbitration” of the disputes arising from Fenton’s representation of Davis.

Davis was awarded damages for malpractice, but the arbitration panel denied her other claims. Fenton then sued Davis in state court, seeking to have the arbitration award vacated or at least reduced. Davis moved to reinstate her federal suit, and Fenton failed to attend the hearing, resulting in default and confirmation of the award. Fenton sought to vacate the default judgment and remand the case to state court “on the ground that the district court lacked jurisdiction because he (Fenton) had filed his state lawsuit challenging the arbitration award prior to Davis’s having moved the district court to re-open the case.”

The District Court refused, reminding the parties that “I was the one that enforced the defendants’ request for arbitration and I sent the case for arbitration. So it would seem to me, because I retained jurisdiction, that any request to vacate the arbitration award that the plaintiff won should have come to this Court and not to some [state court] judge.” Fenton appealed the ruling to the Seventh Circuit, which agreed with the trial court: “the judge had jurisdiction over the case at the time it was filed, as it raised questions of federal law, and the judge’s order staying the case (or equivalently, administratively dismissing it subject to reinstatement at the conclusion of arbitration) retained jurisdiction to confirm or vacate an arbitral award.”  Davis v. Fenton, et al., Nos. 16-2121, 16-2165 (USCA 7th Cir. May 26, 2017).

This post written by Nora A. Valenza-Frost.
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