Jurisdiction Issues

SUPREME COURT “LOOKS THROUGH” FAA § 4 PETITION TO UNDERLYING DISPUTE TO DETERMINE JURISDICTION

March 17, 2009 by Carlton Fields

Last week, in a decision authored by Justice Ginsburg, the Supreme Court announced that a federal court may “look through” a Federal Arbitration Act § 4 petition to determine whether it is predicated on a controversy that arises under federal law. Under the well-pleaded complaint rule, a suit “arises under” federal law when the plaintiff’s statement of the cause of action shows that it is based on federal law. The Court held that the language of § 4 (“save for the arbitration agreement…”) directs federal courts to “look through” the petition itself to determine proper jurisdiction. Justice Ginsburg stated that federal courts should assume the absence of the arbitration agreement and determine jurisdiction based on the parties’ underlying dispute.

With this in mind, the Court held that the underlying controversy between Vaden and Discover Bank did not support federal jurisdiction. The controversy arose from Vaden’s alleged debt and not any federal law or other basis for federal jurisdiction. The Court thus declined federal jurisdiction. Chief Justice Roberts filed an opinion concurring in part and dissenting in part. Vaden v. Discover Bank, No. 07-773, (U.S. Mar. 9, 2009).

This post written by John Black.

ACTION TO CONFIRM ARBITRATION AWARD DISMISSED FOR LACK OF SUBJECT MATTER JURISDICTION

February 26, 2009 by Carlton Fields

On December 2, 2008, we reported on an order by the U.S. District Court for the Eastern District of Michigan granting the Respondent’s motion to seal in part, permitting the Respondent to “temporarily file” its motion to dismiss and the award under seal, pending a determination of the motion to dismiss for lack of subject matter jurisdiction in the Petitioners’ action to confirm the arbitration award. After the order, the Respondent filed its motion to dismiss and the Petitioners moved for sanctions. The district court noted that the arbitration award included declaratory provisions but no monetary award. Petitioners argued that the court retained jurisdiction from an earlier action to appoint an umpire and that the amount sought in the arbitration, rather than the award, provided diversity jurisdiction. In granting the motion to dismiss, the district court first stated that jurisdiction was not retained because the earlier action was dismissed without the court issuing an order to compel arbitration, which would have retained jurisdiction on a subsequent motion to confirm. The district court next stated that the amount in controversy is the amount of the arbitration award sought to be confirmed. Since no monetary damages were awarded and the Petitioners did not show that the declaratory provisions had any real value, the court concluded the amount in controversy did not meet the threshold required to exercise diversity jurisdiction, which will force the Petitioners to file a similar motion to confirm in state court. Petitioners sought sanctions against Respondent’s local counsel for costs incurred to defend against the motion to dismiss and to address the motion to seal and related motion papers. The court ultimately denied the motion for sanctions because the Respondent’s position in the motion to dismiss was correct and the arbitration premised on the parties’ own agreement necessitated the motion to seal. American Bankers Insurance Co. of Florida v. National Casualty Co., Case No. 08- 13522 (USDC E.D. Mich. Feb. 3, 2009).

This post written by Dan Crisp.

NO INDEPENDENT SUBJECT MATTER JURISDICTION UNDER FEDERAL ARBITRATION ACT

January 22, 2009 by Carlton Fields

Defendant, Sandra R. Sanchez, filed a Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction against the plaintiff, Newton & Associates, LLC. Sanchez asserted that, because the Federal Arbitration Act (“FAA”) did not confer federal-court jurisdiction, the case should be dismissed because the parties are not diverse and there was no other basis for federal jurisdiction. The Eastern District of Louisiana granted Sanchez’s motion to dismiss, holding that while the FAA created a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, it did not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise. The District Court noted in particular that section 10 of the FAA allowed federal district courts to vacate arbitration awards but did not confer upon federal courts subject matter jurisdiction. The court did, however, opine that under limited circumstances, the non-statutory ground for vacatur of an arbitration award (if made in manifest disregard of the law) may provide subject matter jurisdiction for the federal courts. As this was not the case here, the court dismissed the action. The case has been remanded to state court. Newton & Assoc., LLC v. Sanchez, Case No. 08-4558 (USDC E.D. La. Dec. 22, 2008).

This post written by John Black.

RELEASE OF CLAIMS HELD TO CONFER EXCLUSIVE JURISDICTION ON ENGLISH COURTS TO DECIDE ACTIONS OF “FRAUD”

January 20, 2009 by Carlton Fields

This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.

COURT REFUSES SUBJCT MATTER JURISDICTION TO REVIEW ARBITRATION AWARD, SINCE THE VALUE OF THE AWARD WAS LESS THAN THE COURT’S JURISDICTIONAL AMOUNT

January 5, 2009 by Carlton Fields

A dispute arose between Hansen Beverage Company and DSD Distributors over a distribution agreement. The agreement included an arbitration clause providing that all disputes were to be arbitrated in California. The parties submitted to arbitration in San Diego where the arbitrator found that defendant had not breached the contract and Hansen did not constructively terminate the contract. Thus, no monetary damages or attorneys’ fees were awarded to either party.

On the day the arbitration award was handed down, DSD filed a motion in Wisconsin state court (the company’s state of domicile) to vacate or modify the award. That court declined jurisdiction holding that the arbitration should be finalized in California Federal Court. On the same day, Hansen filed a motion in the Southern Dist. of California to confirm the arbitration award, while DSD moved to stay or dismiss the award.

DSD contends that the action must be dismissed for lack of subject matter jurisdiction because the arbitration award fell below the $75,000 minimum for diversity jurisdiction. The court, noting a circuit split on this issue, held that where a petition seeks confirmation or vacatur of an award, without seeking remand for further arbitration proceedings, the amount in controversy is the value of the arbitration award itself. The court additionally stated that although the arbitrator’s judgment was essentially equivalent to a declaratory judgment, that aspect of the arbitration award was merely a collateral consequence of the arbitrator’s decision. Thus, the Motion to Dismiss or Stay was granted. The court did note specifically, however, that its decision may have been different if DSD was seeking to reopen arbitration in the California court rather than Wisconsin. Hansen Beverage Co. v. DSD Distributors, Inc., Case No. 08-0619 (USDC S.D. Cal. Dec. 12, 2008).

This post written by John Black.