A decision of the Eighth Circuit Court of Appeals, Northport Health Services of Arkansas, LLC v. Rutherford, No. 09-2433 (8th Cir. 2010), recently held that diversity of citizenship jurisdiction in the context of a motion to compel arbitration under § 4 of the Federal Arbitration Act (“FAA”) can be determined by looking at the citizenship of the parties named in the proceedings before the district court, plus any indispensible parties who must be joined.

The representatives of the estates of two people admitted to nursing facilities in Arkansas filed actions asserting tort claims in state court against Northport Health Services of Arkansas, LLC (“Northport”), plus the administrators of the two nursing homes. Northport filed suit in federal court to compel arbitration under § 4 of the FAA, alleging federal jurisdiction based upon diversity between the Northport entities (Alabama citizens) and the state court plaintiffs (Arkansas citizens). The representatives did not contest the citizenship allegations, and the district court granted the petition to compel arbitration.

However, after the Supreme Court held that a federal court entertaining a petition to compel arbitration “should determine its jurisdiction by ‘looking through’ a § 4 petition to the parties’ underlying substantive controversy” (see Vaden v. Discover Bank, 129 S. Ct. 1262, 1273 (2009)), the representatives moved to vacate the order compelling arbitration. The district court granted the motions to vacate because the underlying controversy in each case involved a non-diverse party, the nursing home administrators. Northport appealed the rulings.

The Court of Appeals held that although some of the reasoning in Vaden supported the district court’s decision, the Supreme Court’s ruling addressed only federal question jurisdiction, and was thus distinguishable. Specifically, the court noted that Vaden approved the “look through” approach only to the extent that a federal court may “look through” a § 4 petition to determine whether it is predicated on an action that arises under federal law (thus invoking federal question jurisdiction). Thus, the orders of the district court dismissing the cases for lack of subject matter jurisdiction were reversed, and the cases were remanded with directions to re-enter the prior orders compelling arbitration.

Click here to review a copy of the court’s decision.