Jurisdiction Issues

INSURER’S ACTION TO ARBITRATE STAYED IN LIEU OF EARLIER-FILED STATE COURT COVERAGE ACTION

November 23, 2015 by Carlton Fields

An Illinois federal court recently stayed an insurer’s petition to compel arbitration of a dispute with its policyholder, finding that abstention in favor of an earlier-filed suit involving the parties was appropriate under the so-called Colorado River doctrine. A.O. Smith Corporation entered into a settlement/coverage-in-place agreement (the “Agreement”) with Allstate Insurance Company to resolve disputes between them concerning the coverage afforded by various policies for underlying asbestos claims. In exchange for certain payments, the Agreement released Allstate from all claims and liabilities under the subject policies, provided that A.O. would be responsible for a share of defense and indemnity costs, and required A.O. to cooperate in the defense of such claims. The Agreement also contained a provision mandating that A.O. and Allstate resolve disputes by arbitration.

The complex factual history regarding this case can be found here. In short, years after the Agreement was entered into, Continental Casualty Company brought suit in Wisconsin against Allstate, A.O., and other insurers seeking contribution and indemnification for amounts paid by Continental to resolve certain asbestos claims. Allstate moved to stay the action and petitioned an Illinois federal court to compel arbitration under the Agreement on the basis that certain issues involved in the Wisconsin action concerning the Agreement’s scope and A.O.’s duty to cooperate were arbitrable. The Illinois court held that it had subject matter jurisdiction over the action, rejecting A.O.’s motion to dismiss for lack thereof, on the grounds that the Wisconsin suit plainly involved matters that fell within the ambit of the Agreement’s arbitration provision, making it ripe under Section 4 of the Federal Arbitration Act. However, the court granted A.O.’s request to stay the lawsuit pursuant to the Colorado River doctrine, finding that the Wisconsin action would dispose of all the claims presented by Allstate, and that other factors, such as the desire to avoid piecemeal litigation with the other insurer-defendants, that the Wisconsin suit was filed first, the Agreement’s incorporation of Wisconsin law, and the risk of inconsistent rulings weighed in favor of abstention. Allstate Insurance Co. v. A.O. Smith Corp., No. 1:15-cv-06574 (USDC N.D. Ill. Oct. 23, 2015).

This post written by Rob DiUbaldo.

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ACTION TO VACATE ARBITRAL AWARD DISMISSED FOR LACK OF SUBJECT-MATTER JURISDICTION

September 22, 2015 by Carlton Fields

A disappointed claimant in a FINRA arbitration filed suit under section 10 of the Federal Arbitration Act (“FAA”) in United States District Court to vacate the arbitral award. The court dismissed the case for lack of subject-matter jurisdiction. The court noted the well established principle that the FAA is not itself a source of subject-matter jurisdiction. Stating that the parties were not diverse, the court proceeded to evaluate whether it could exercise subject-matter jurisdiction based upon the existence of a federal question. The plaintiff proposed two bases for federal question jurisdiction: (1) the failure of its opponent to produce certain documents, which it argued constituted a violation of FINRA rules, or a disregard by the panel of FINRA rules; and (2) the fact that the claims pursued in the arbitration included claims under federal securities laws and SEC regulations. The court rejected both contentions, finding with respect to the first issue that many courts have held that “manifest disregard” of FINRA or NASD rules do not constitute manifest disregard of federal law for purposes of the FAA. With respect to the second contention, the court followed a Second Circuit opinion which held that a court may not “look through” the petition to the claims in the underlying arbitration for a basis for subject-matter jurisdiction. The court rejected the argument that jurisdiction was supported by Vaden v. Discover Bank, 556 U.S. 49 (2009), which held that, with respect to petitions to compel arbitration under section 4 of the FAA, courts may look through the petition to determine whether it is predicated on an action that “arises under” federal law. Citing textual differences between sections 4 and 10 of the FAA, the court held that Vaden did not provide support for looking through the petition for purposes of evaluating whether the court had subject-matter jurisdiction over an action predicted on section 10 of the FAA. Doscher v. Sea Port Group Securities, LLC, Case No. 15-cv-384 (USDC S.D.N.Y. August 5, 2015).

This post written by Rollie Goss.

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PENNSYLVANIA DISTRICT COURT REJECTS REINSURER’S “FIRST-FILED” COMPLAINT AS IMPROPERLY ANTICIPATORY AND FILED IN BAD FAITH

August 19, 2015 by John Pitblado

A reinsurer filed a complaint in the Eastern District of Pennsylvania seeking declaratory relief regarding its obligations under a reinsurance contract on May 7, 2015. The defendants filed an action concerning the same parties, facts, and issues in the District of Connecticut on May 12, 2015. Despite the fact that the Pennsylvania action was filed first, the court declined to exercise jurisdiction under the Declaratory Judgment Act.

On May 1, 2015, the defendants requested payment by May 15th from the reinsurer under the parties’ reinsurance contract and indicated that they would file suit in the District of Connecticut if payment was not timely received. Instead of either paying or responding, the reinsurer filed its complaint for declaratory judgment, preemptively, in the Eastern District of Pennsylvania. The defendants moved to dismiss. Noting that the timing of these events suggested an improper first filing, the Pennsylvania court dismissed the reinsurer’s complaint. Fatal to the reinsurer’s action were the court’s finding that the Pennsylvania filing “was filed in bad faith, as it was improperly anticipatory and solely for declaratory relief.” Additionally, the court found that the reinsurer’s first filed action was merely an “attempt to secure better procedural law by rushing to the [Pennsylvania] courthouse ahead of [the defendants].” Finally, because the defendants were able to establish a nexus between Connecticut and the dispute, and because the plaintiff had improperly “fired the first shot” while the defendants’ pre-litigation demand was pending, the court held that the reinsurer was not entitled to the benefits of the equitable “first-filed” rule. Excalibur Reinsurance Corp v. Select Ins. Co., et al., Case No. 15-2522 (USDC E.D. Pa. July 7, 2015)

This post written by John A. Camp.

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COURT DISMISSES CHALLENGE OF FINRA ARBITRATION AWARD FOR LACK OF JURISDICTION

June 22, 2015 by Carlton Fields

In a case involving a FINRA arbitration between investors and their financial advisor, Judge Anita S. Brody of the United States District Court for the Eastern District of Pennsylvania found that she did not have the jurisdiction to hear a challenge of the arbitration award. Though FINRA rules may be subject to heavy federal regulation and approval by the SEC, the court found that this was not enough to create a federal question to give the court jurisdiction over the challenge. Instead, the court found that under § 10 of the Federal Arbitration Act, review of an arbitration award with underlying federal questions does not in itself implicate a federal question sufficient for jurisdictional purposes. This is because where there is no merits review, “the substance of the underlying arbitration is generally irrelevant to a district court’s consideration of a motion to vacate.” Instead, the motion to vacate must raise a federal question on its face. The court further held that an argument of manifest disregard of federal law in such an instance was still heard as a claim under § 10 of the Federal Arbitration Act, which is “something of an anomaly in that it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Accordingly, the court dismissed the case for lack of subject-matter jurisdiction. Goldman v. Citigroup Global Markets Inc., No. 2:12-cv-04469-AB (USDC E.D. Pa. May 19, 2015).

This post written by Zach Ludens.

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ADMINISTRATIVE CLOSING OF EMPLOYMENT DISCRIMINATION CASE SUBJECT TO ARBITRATION AGREEMENT BARS APPELLATE REVIEW

June 18, 2015 by John Pitblado

In Walker v. TA Operating, LLC et. al., Case No. 14-41046 (5th Cir. May 22, 2015), the Fifth Circuit Court of Appeals dismissed an appeal of an employment discrimination case subject to an arbitration agreement due to lack of jurisdiction. In the underlying case, the district court granted the defendant’s motion to compel arbitration and administratively closed the case because the district court determined that the parties were subject to a valid and applicable arbitration agreement. The district court’s decision was dictated by the Federal Arbitration Act (the “FAA”), which grants district courts two powers: 1) the authority to issue an order directing that arbitration proceed in the manner provided for in such agreement; and 2) the authority to stay an arbitrable proceeding pending the outcome of the contractually-required arbitration. On appeal, the Fifth Circuit dismissed the cased due to lack of jurisdiction because an order by the district court administratively closing a case is tantamount to a stay, and bars appellate review. The Fifth Circuit explained that a district court has jurisdiction over final decisions of the district court and that Congress explicitly provided that appellate courts lack jurisdiction over a district court order granting a stay of any action under section 3 of the FAA or directing arbitration to proceed under section 4 of the FAA.

This post written by Kelly A. Cruz-Brown.

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