Jurisdiction Issues

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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ELEVENTH CIRCUIT RESOLVES JURISDICTIONAL ISSUES REGARDING THE CONFIRMATION OF AN ARBITRATION AWARD

January 16, 2017 by Rob DiUbaldo

The Eleventh Circuit recently held that a district court retained jurisdiction over a motion to confirm an arbitral award, even though the plaintiff had voluntarily dismissed its claims while the motion to confirm was pending.

After PTA-FLA and affiliated entities (“ClearTalk plaintiffs”) filed a series of lawsuits across multiple jurisdictions against ZTE USA, ZTE moved to compel arbitration and the disputes were addressed in a consolidated arbitration proceeding. The arbitration resulted in a zero dollar award for both sides meant to bind ZTE and the ClearTalk plaintiffs.

While ZTE’s motion to confirm the arbitral award was pending, PTA-FLA voluntarily dismissed its claims, but the district court confirmed the arbitral award based upon its supplemental jurisdiction to do so. The Eleventh Circuit affirmed, finding that the lower court’s diversity jurisdiction granted it power both to compel the arbitration and confirm the resulting award. It held that the zero dollar award did not destroy diversity jurisdiction because the amount in controversy was satisfied at the time the case was filed. Likewise, it decided that the voluntarily dismissal did not destroy diversity jurisdiction because the confirmation of an arbitral award is a collateral claim over which the district court had independent jurisdiction.

Furthermore, the Eleventh Circuit confirmed that the lower court had supplemental jurisdiction to confirm the award against those ClearTalk plaintiffs that were joined for the consolidated arbitration. In doing so, it confirmed that the exception to supplemental jurisdiction excluding claims by plaintiffs against parties added under certain Federal Rules applied only to the “original” plaintiffs, and not third-party, counter, or cross plaintiffs.

PTA-FLA, Inc. v. ZTE USA, Inc., No. 15-15159 (11th Cir. Dec. 15, 2016)

This post written by Thaddeus Ewald .

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ARBITRATION CLAUSE IN BODY OF REINSURANCE AGREEMENT GOVERNS OVER PROVISION IN ENDORSEMENT

December 5, 2016 by Rob DiUbaldo

In a dispute between First Mutual, a ceding company, and its reinsurer, Infrassure, over which of two competing arbitration clauses in a reinsurance contract governed, the Second Circuit affirmed a lower court decision in favor of the reinsurer and found the arbitration provision contained in the body of the operative agreement controlling over a second provision located in an endorsement.

First Mutual, the insurance arm of New York’s Metropolitan Transit Authority, sought to resolve its claims against Infrassure arising from damage caused by Superstorm Sandy in a London arbitration. The endorsement relied upon by First Mutual contained the second arbitration clause, which was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).” Infrassure argued the endorsement was inapplicable because it was not a UK or Bermuda insurer. Another provision in the agreement, the so-called ‘Titles Clause,’ provided that titles in the agreement existed for convenience and were not deemed to limit or affect the provisions they titled. First Mutual argued that the endorsement’s title limiting the provision to UK and Bermuda Insurers could not limit the substance of that provision.

The Second Circuit ruled that the reinsurance agreement was unambiguous in this respect, and that the arbitration clause contained in its body controlled, because the second clause was contained in a section expressly limiting its effect to UK and Bermuda insurers. Furthermore, the court noted that First Mutual’s construction of the Titles Clause would render several critical clauses within the reinsurance agreement meaningless because the titles provided critical context regarding what the language therein governed.

Infrassure, Ltd. v. First Mut. Transp. Assurance Co., No. 16-306 (2nd Cir. Nov. 16, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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COURT GRANTS DEFAULT JUDGMENT CONFIRMING ARBITRATION AWARD, WITH A LESSON ON JURISDICTION

November 30, 2016 by Michael Wolgin

Choice Hotels filed an application to confirm an arbitration award of over $247,000 for the alleged breach of a franchise agreement by two defendants, which failed to timely commence construction of a hotel. The defendants had not participated in or submitted any written materials for arbitration. However, the court denied Choice Hotels’ first motion for a default judgment because it failed to adequately establish subject matter jurisdiction and jurisdiction under the FAA. The Court explained that the FAA is not an independent source of jurisdiction, and further held that Choice Hotels’ failed to plead the requirements of diversity jurisdiction. Additionally, because there was no record in the application or the arbitration award itself that the arbitration occurred in Maryland, which was required by the arbitration agreement, the court could not determine that jurisdiction existed under the FAA. Choice Hotels filed a second motion for default judgment, which successfully alleged diversity jurisdiction and established that the case was within the scope of the FAA. The Court then granted the motion for default judgment and confirmed the award. Choice Hotels Int’l, Inc. v. HSL Inv., Inc., Case No. TDC-15-2386 (USDC D. Md. Oct. 20, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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