Jurisdiction Issues

SIXTH CIRCUIT FINDS IT HAS NO JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION AND ENJOINING STATE COURT PROCEEDINGS

March 21, 2017 by Rob DiUbaldo

The Sixth Circuit has dismissed the appeal of an order granting a motion to compel arbitration and to enjoin certain state court proceedings, finding the order was not appealable because the district court stayed the matter pending arbitration rather than dismissing it.

The case began in state court where the administratrix of an estate brought various claims against a nursing home where the decedent had resided. The nursing home moved in federal court to compel arbitration and enjoin the administratrix from pursuing her claims in state court, which the district court granted.

The Sixth Circuit’s opinion hinged on the district court’s decision to stay the case pursuant to 9 U.S.C. § 3 rather than to dismiss it. The Sixth Circuit noted that, under 9 U.S.C. § 16(b)(1), such an order is not appealable except as provided for in 28 U.S.C. § 1292(b), which allows interlocutory orders to be appealed only if the district court states in writing that the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” As the district court made no such finding, the order was not appealable. Similarly, the Sixth Circuit found that it had no jurisdiction to review the district court’s order enjoining the state court proceeding, which was entered pursuant to the court’s power to direct arbitration provided by 9 U.S.C. § 4, as 9 U.S.C. § 16(b)(2) specifically prohibits appeals of such an interlocutory order.

Brandenburg Health Facilities v. Mattingly, Case No. 16-6161 (6th Cir. Feb. 24, 2017)

This post written by Jason Brost.

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KENTUCKY FEDERAL COURT ORDERS FURTHER BRIEFING ON WHETHER THE FEDERAL ARBITRATION ACT OR KENTUCKY LAW APPLIES IN DISPUTE INVOLVING AN INSOLVENT INSURER

March 8, 2017 by John Pitblado

The background of this case is as follows. State Insurance Commissioner Brian Maynard, acting as liquidator of the failed Kentucky Health Cooperative (“KYHC”), filed suit in Kentucky state court against CGI Technologies and Solutions, Inc. (“CGI”), KYHC’s administrator pursuant to an Administrative Services Agreement (the “Agreement”), which contained an arbitration clause. The suit alleged that CGI was “grossly negligent” in processing and paying claims and thus breached the Agreement. The state court action was removed to federal court. CGI commenced a separate federal action to compel arbitration, which was consolidated with the first action. The Liquidator made a motion to remand, challenging the Kentucky federal court’s power to decide the case.

In seeking to remand, the Liquidator claimed that Kentucky’s Insurers Rehabilitation and Liquidation Law (“IRLL”) vests exclusive jurisdiction in Kentucky state court, thus “reverse preempting” federal diversity jurisdiction, and in the alternative, argued that the federal court should abstain from exercising jurisdiction. The Kentucky federal court first found that the application of the IRLL’s exclusive jurisdiction directly conflicts with federal law, and thus that the IRLL’s jurisdiction provision was preempted by the federal removal and diversity subject matter jurisdiction statutes and the court had the subject matter jurisdiction required to decide the case. Next, the court found that because the case is really a contract action for damages and the court has subject matter jurisdiction, it should exercise the authority granted to it and refuse to exercise the discretion to abstain.

Finally, turning to the merits, the Kentucky federal court noted that the threshold issue was not whether there was a breach of the Agreement or whether the liquidation of KYHC was due to CGI’s actions or inactions, but rather what substantive law applies. CGI argued that the Agreement contains a “Dispute Resolution” clause which provided for all disputes to be resolved by mediation or arbitration, and that the Federal Arbitration Act (“FAA”) compels the court to enforce the binding arbitration clause. The Liquidator, on the other hand, argued that the IRLL provides for exclusive jurisdiction in state court, and thus under McCarran Ferguson, “reverse preempts” the FAA. The Liquidator also noted that the Agreement contained a “Governing Law” clause which provides that the Agreement is governed by Kentucky law. The Kentucky federal court denied the Liquidator’s motion to remand, but held that it required further briefing on which law shall apply. Thus, the court ordered the parties to submit briefing on the limited issues of : 1) Whether the IRLL allows enforcement of the Agreement’s “Dispute Resolution” clause; 2) Whether the FAA can apply in light of the parties “Governing Law” clause in the Agreement; and 3) Any other relevant argument which addresses choice of law.

Maynard v. CGI Technologies and Solutions, Inc., 16-cv-0037 (USDC E.D. KY Jan. 3, 2017).

This post written by Jeanne Kohler.

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BANKRUPTCY COURT HOLDS BERMUDA INSURERS VIOLATED BARTON DOCTRINE BY SEEKING ANTI-SUIT INJUNCTIONS IN BERMUDA COURTS

March 7, 2017 by Rob DiUbaldo

Two separate courts in the Southern District of New York have recently issued opinions relating to a complicated bankruptcy proceeding following the collapse of MF Global Holdings Ltd. in 2011. The underlying dispute involves MF Global Holdings and MF Global Assigned Assets’ (“Plaintiffs”) attempts to recover insurance proceeds from the defendants (“Bermuda Insurers”) under certain excess errors & omissions policies following a global settlement of MDL litigation in SDNY. In August 2016, the Bankruptcy Court for the Southern District approved the global settlement.

On November 8 2016, the Bermuda Insurers filed an adversary proceeding in the Supreme Court of Bermuda (“the Bermuda action”), obtaining ex parte anti-suit injunctions prohibiting Plaintiffs from prosecuting their insurance claims in the Bankruptcy Court and requiring them to arbitrate such disputes in Bermuda. On November 22—the same day the Bankruptcy Court entered an order to show cause why the Bermuda Insurers should not be held in contempt for filing the Bermuda action—they filed a motion to compel arbitration in the Bankruptcy Court, to which the Plaintiffs were unable to respond because of the Bermuda action’s anti-suit injunctions.

On December 21, 2016, the Bankruptcy Court entered a temporary restraining order barring the Bermuda Insurers from enforcing the Bermuda action’s anti-suit injunctions. On January 12, 2017, the court granted a preliminary injunction extending the TRO’s relief. The Southern District issued an opinion on February 10, 2017 denying the Bermuda Insurers’ motion for leave to appeal the TRO, which it filed shortly after the TRO was initially granted. The district court denied the motion seeking interlocutory appeal of the Bankruptcy Court’s TRO decision, because the subsequent issuance of the preliminary injunction rendered the appeal moot and because of the lack of a fully developed record.

On January 31, 2017, the Bankruptcy Court issued an opinion finding that the Bermuda Insurers violated the Barton Doctrine by initiating the Bermuda action and ordering them to dismiss that proceeding. The Barton Doctrine provides that suits may not be brought against receivers without leave of the receiver’s appointing court. The Bankruptcy Court surveyed case law extending this doctrine to other contexts including, most significantly, bankruptcy proceedings. It held that Plaintiffs were entitled to the protections of the Barton Doctrine by virtue of MF Global Holdings’ role as Plan Administrator, and MF Global Assigned Assets’ role as a company created to retain assets assigned in satisfaction of debtor claims. The court found the Bermuda action was effectively an attempt by the Bermuda Insurers to delay Plaintiffs’ administration of the bankruptcy estate, and as such, ran afoul of the Barton Doctrine. Following the Bankruptcy Court’s order on January 23, the Bermuda Insurers dismissed the Bermuda action.

This post written by Thaddeus Ewald .
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FIRST CIRCUIT AFFIRMS DISTRICT COURT’S CONFIRMATION OF ARBITRATION AWARD UNDER THE “LOOK-THROUGH” TEST

February 14, 2017 by John Pitblado

The background of this matter could be found here. In sum, Plaintiffs Dr. Luis Ortiz-Espinosa and his wife Maritza Soto-Garcia, the conjugal partnership they formed, Espinosa-Soto, and Luis Ortiz-Espinosa, as trustee of Centro Dermatologico San Pablo PSC Retirement Plan (“Plaintiffs”) had two sets of brokerage investment accounts with defendant BBVA Securities of Puerto Rico, Inc. Plaintiffs’ accounts were opened in 2006 with over $2.6 million, and by 2009, the accounts had suffered losses of over $2.049 million. Believing that BBVA and the securities broker employed by BBVA who managed their accounts were responsible for the losses, Plaintiffs commenced arbitration before the Federal Industry Regulatory Authority (“FINRA”) against BBVA and the securities broker, asserting several claims under both federal and Puerto Rico law.

A FINRA arbitration panel conducted seventeen hearing sessions in Puerto Rico, and then issued an award, denying Plaintiffs’ claims. Plaintiffs then filed a complaint in Puerto Rico court, requesting that the court vacate or modify the arbitration award under the Puerto Rico Arbitration Act. Defendants removed the case to Puerto Rico federal court, arguing that the district court had federal question jurisdiction and also had supplemental jurisdiction over the state law claims. Plaintiffs moved to remand the case to Puerto Rico court for lack of jurisdiction. The federal district court denied the motion to remand after applying the look-through approach, a test which the Supreme Court had previously determined applies under the FAA with respect to motions to compel arbitration. Under this approach, a court may “look through” the motion to compel to determine if it is predicated on an action that “arises under federal law.” Thus, the district court “looked through” the motions to confirm and vacate and determined that the underlying statement of claim in the arbitration alleged claims based on federal securities laws. The district court subsequently denied Plaintiffs’ petition to vacate or modify the arbitration award and granted the petition to confirm the award, noting that disturbing the arbitration award was “not warranted” under either under the Federal Arbitration Act (“FAA”) or Puerto Rico law. Plaintiffs appealed to the First Circuit.

The First Circuit first found that the FAA applied to this case.as it involves an arbitration agreement in a transaction involving commerce. It then held that the look-through approach is the correct test in arbitration award enforcement proceedings, noting that federal courts have an important role in enforcing arbitration agreements post awards, and thus, it would not make sense to exclude federal question jurisdiction over those cases. The First Circuit also noted that the look-through approach is the only possible approach that would provide such federal jurisdiction. The First Circuit also determined that federal jurisdiction existed as there was no question that Plaintiffs’ claims in the arbitration involved federal securities laws arising under federal laws. Finally, the First Circuit found that the district court did not err in refusing to vacate the award and in confirming it. Thus, the First Circuit affirmed the Puerto Rico federal district court’s confirmation of the arbitration award.

Ortiz-Espinosa v. BBVA Securities of Puerto Rico, Inc., No. 16-1122 (1st Cir. 2017).

This post written by Jeanne Kohler.

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PETITION TO VACATE ARBITRATION AWARD SERVED BY EMAIL DID NOT CONSTITUTE SERVICE UNDER FED. R. CIV. P. 5

February 13, 2017 by John Pitblado

The Second Circuit has affirmed a decision finding email insufficient for service, absent consent to such method. In the underlying district court, the Petitioner emailed a copy of his petition to one of Respondent, Deutsche Bank’s attorneys asking whether counsel would accept service on Deutsche Bank’s behalf. Counsel agreed to accept service if Petitioner would give Deutsche Bank 90 days to respond. Petitioner did not respond, and instead personally served Deutsche Bank after the three-month period to vacate the award had expired. The Second Circuit affirmed the SDNY’s decision dismissing the petition for failure to serve notice as required by 9 U.S.C. § 12 and Fed. R. Civ. P. 5. Martin v. Deutsche Bank Securities Inc., No. 16-456 (2d Cir. Jan. 19, 2017)

This post written by Nora A. Valenza-Frost.

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