Earlier this month, the United States District Court for the Eastern District of Kentucky entered an order compelling arbitration and enjoining the pursuit of an underlying state court action. This case reflects a procedural history that is becoming more commonplace and about which we have written previously. A party to an arbitration agreement filed suit in state court against a skilled nursing facility in violation of an arbitration agreement, and in response, the skilled nursing facility filed its own federal court action to enforce the arbitration agreement and put an end to the state court litigation. Employing a similar analysis to that reported in our previous article, the federal court determined that it had jurisdiction to determine the enforceability of the arbitration agreement; it declined to abstain from exercising its jurisdiction; and it enjoined the federal court defendant from pursuing his state court litigation. The case is Brookdale Senior Living, Inc. v. Caudill, 5:14-098-DCR (E.D. Ky. July 10, 2014).
Subject Matter Jurisdiction
It is well-established that the FAA does not itself confer federal question jurisdiction. Therefore, the federal court plaintiff must demonstrate that the federal court has jurisdiction to hear its petition to compel arbitration. In this case the federal court plaintiff relied on diversity jurisdiction, which requires complete diversity between the parties to the federal court action and an amount in controversy exceeding $75,000.
The court noted that “diversity exists on the face of the federal Complaint” because the federal defendant was a citizen of Kentucky and no named federal plaintiff was a citizen of Kentucky. Caudill, at 5. The district court applied a “limited look through” approach to “determine whether the value at stake in the arbitration being sought in the federal action could exceed $75,000, regardless of whether the claim(s) to be arbitrated were part of a broader parallel state court action in which the total amount in controversy might be greater.” Id. at 5-6 (quoting Northport Health Servs. of Arkansas, LLC v. Rutherford, 605 F.3d 483, 486-87 (8th Cir. 2010)). The court found that the claims seeking actual and punitive damages relating to alleged substandard medical care exceeded $75,000, exclusive of interest and costs.
The federal defendant acknowledged that diversity jurisdiction existed on the face of the Complaint, but asserted that the court should consider the citizenship of individuals who were not parties to the federal action but were parties in the underlying state court action (nursing home administrators who were residents of Kentucky).Caudill, at 6.
The federal defendant asserted that the “look through” approach of Vaden v. Discover Bank, 556 U.S. 49 (2009), required the district court to consider whether the entire underlying state court action would give rise to subject matter jurisdiction. However, the district court noted that Vaden addresses only federal-question jurisdiction and that “[c]ourts confronting the issue have consistently rejected the ‘look through’ analysis when considering whether the parties to a controversy are completely diverse.” Caudill, at 7 (citing Northport Health Servs., 605 F. 3d at 490-91); see also Brookdale Senior Living v. Teresa Stacy, No. 5:13-290-KKC, 2014 U.S. Dist. Lexis 84460 (E.D. Ky. June 20, 2014); Credit Acceptance Corp. v. Davisson, 644 F. Supp. 2d 948, 953 (N.D. Ohio 2009).
The district court also rejected the federal defendant’s assertion that the state court defendants who were not named as plaintiffs in the federal action (the non-diverse nursing home administrators) were indispensable parties. The district court assumed that the non-diverse nursing home administrators were necessary parties because they had “been sued in the underlying state-court action” and therefore had “an interest in the controversy and their absence in this matter results in claims left undecided.” Caudill at 9. However, the court determined that the nursing home administrators were not indispensable based on a weighing of factors relevant to the decision. The court noted that any risk of having to proceed simultaneously in both courts or any risk of those courts reaching conflicting conclusions was the result of the federal defendant’s decision to file suit rather than demand arbitration under the arbitration agreement. Id. at 9-11.
The court further determined that it should not abstain from exercising its jurisdiction by weighing the factors involved in abstention analysis. It determined that the most important factor—“whether there is a clear federal policy evincing the avoidance of piecemeal adjudication found within the statutory scheme at issue”—had already been answered in the negative by the Sixth Circuit. Caudill, at 12-13 (quoting Answers in Genesis of Ky., Inc. v. Creation Ministries Int’l, Ltd., 556 F.3d 459, 467 (6th Cir. 2009) (“In the case of the [FAA], there most clearly is not such a policy.”). The court noted that this factor counseled in favor of exercising jurisdiction and that other factors did not demand abstention. Id.
The district court noted that “[a]lthough they are always ‘a delicate matter,’ injunctions are sometimes appropriate to protect the final judgment of the Court on an issue.” Caudill, at 19. The court further noted that “[a]lthough it is doubtful that a state court would proceed where another court of proper jurisdiction has ruled on the validity of an arbitration agreement, the plaintiffs here seek, and are entitled to, this assurance.” Caudill, at 19 (citations and quotations omitted).
This case reflects a trend of federal courts exercising jurisdiction to determine the enforceability of arbitration agreements covering claims brought in state court.
For a copy of Brookdale Senior Living, Inc. v. Caudill, 5:14-098-DCR (E.D. Ky. July 10, 2014), please click here.