Webb v. Investacorp, Inc.

Decision Date26 July 1996
Docket NumberNo. 95-21052,95-21052
Citation89 F.3d 252
Parties30 UCC Rep.Serv.2d 756 Earl WEBB; Barbara Webb, Plaintiffs-Appellants, v. INVESTACORP, INC., Defendant-Appellee. Summary Calendar.
CourtU.S. Court of Appeals — Fifth Circuit

James R. Snell, Houston, TX, for plaintiffs-appellants.

David M. Rappaport, Miami Lakes, FL, for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before KING, DAVIS and BENAVIDES, Circuit Judges.

PER CURIAM:

Earl and Barbara Webb appeal the district court's order denying their motion to remand this action to state court and granting Investacorp's motion to compel arbitration. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Investacorp, Inc., a Florida corporation, is a securities broker-dealer. On September 10, 1991, Earl Webb, then a citizen of Texas, executed a "Manager's Agreement" with Investacorp whereby he became a contract representative for Investacorp in Houston, Texas. This agreement was later superseded by a "Principal Agreement," which Earl Webb executed on October 28, 1992. Barbara Webb became a contract representative for Investacorp by executing a similar "Principal Agreement" with Investacorp on October 1, 1993.

Each of the Principal Agreements contained an indemnification clause that required the contractor to indemnify Investacorp for any debit in an account of his clients. Each agreement also contained a "Governing Law and Venue" clause, which stated:

In all respects this Agreement shall be governed by and construed in accordance with the laws of the State of Florida. It is hereby agreed by the parties that all proceedings will be subject to arbitration before the NASD and will be instituted and take place in the county in which Company maintains its executive offices or as close thereof as is possible. Further, Contractor shall be responsible to Company for the costs of collection, including attorney's fees, forum fees and other costs arising out of the enforcement and/or defense of this Agreement.

In December 1994, a dispute arose between the Webbs and Investacorp regarding an account of one of the Webbs' customers. As a result of this dispute, the Webbs resigned from Investacorp. Later, the customer failed to meet a margin call, resulting in a debit balance of approximately $75,000 in the customer's account. Investacorp then filed a claim with the National Association of Securities Dealer's, Inc. ("NASD"), seeking arbitration of its claim that the Webbs are contractually obligated to indemnify it for the loss on the customer's account.

The Webbs filed the present action in state district court in Harris County, Texas. Specifically, the Webbs sought a declaratory judgment that the contracts between themselves and Investacorp did not require them to arbitrate disputes with Investacorp and an injunction prohibiting Investacorp from pursuing claims in arbitration proceedings. Investacorp removed this case to federal district court based on diversity of citizenship.

The Webbs filed a motion to remand the case to state court, asserting that the amount in controversy did not exceed $50,000, as required by 28 U.S.C. § 1332(a), because a declaratory judgment would not result in any direct pecuniary gain or loss to Investacorp. In addition, Investacorp filed a motion to dismiss for lack of subject matter jurisdiction, or in the alternative, to stay the proceedings and compel arbitration. Specifically, Investacorp argued that NASD had exclusive jurisdiction of its dispute with the Webbs. Investacorp alternatively claimed that § 4 of the Federal Arbitration Act, 9 U.S.C. § 4, required the district court to stay the instant case and to enter an order compelling arbitration.

The district court denied the Webbs' motion to remand, looking to Investacorp's $75,000 claim in the underlying arbitration to determine the amount in controversy. The court also denied Investacorp's motion to dismiss and to stay proceedings, but granted Investacorp's motion to compel arbitration. The court reasoned that the "Governing Law and Venue" clauses in the agreements between Investacorp and the Webbs were valid and enforceable, and therefore entered an order compelling arbitration of Investacorp's claim. The court noted that the order compelling arbitration "effectively disposes of the case." The Webbs timely appealed.

II. DISCUSSION

On appeal, the Webbs argue that the district court erred in denying their motion to remand, asserting that Investacorp failed to establish that the amount in controversy in this action meets the requirement for diversity jurisdiction. The Webbs also contend that the court erred in determining that the agreements between themselves and Investacorp require them to arbitrate Investacorp's claim. We address each of these arguments in turn.

A. Amount in Controversy

Because removal is an issue of statutory construction, we review a district court's determination of the propriety of removal de novo. Garrett v. Commonwealth Mortgage Corp. of Am., 938 F.2d 591, 593 (5th Cir.1991).

The Webbs argue that the district court erred in looking to the amount of Investacorp's claim in arbitration to determine the amount in controversy in this case. First, they assert that the amount in controversy in a declaratory judgment action is the value of the right that the plaintiffs seek to protect, and that a court must determine this value from the plaintiffs' perspective. They then contend that the right at issue in this case is their right to have their dispute with Investacorp adjudicated in a court rather than an arbitration proceeding--a right that they claim cannot be valued in monetary terms. By contrast, they argue that Investacorp's right to indemnity is not an issue in this case. Finally, they attempt to distinguish the cases relied upon by the district court on the ground that, in those cases, the plaintiffs sought to compel arbitration under the Federal Arbitration Act or to control the conduct of a pending arbitration, whereas they are only requesting a declaration under state law of their obligation to arbitrate prior to arbitrating or while arbitrating under protest.

"[T]he amount in controversy, in an action for declaratory or injunctive relief, is the value of the right to be protected or the extent of the injury to be prevented." Leininger v. Leininger, 705 F.2d 727 (5th Cir.1983). This court has not addressed the issue of the value of the right not to submit a dispute to arbitration; however, as the district court noted, the Second and Third Circuits have addressed an analogous issue. In Davenport v. Procter & Gamble Mfg. Co., 241 F.2d 511 (2d Cir.1957), the plaintiff brought a state court action to compel arbitration according to the terms of a collective bargaining agreement. The defendant removed the case to federal court based on diversity jurisdiction, whereupon the plaintiff moved for remand on the ground that the jurisdictional amount was not satisfied because a demand to compel arbitration "has no ascertainable money value." Id. at 512-13. The court denied the motion and the plaintiff appealed. Id. at 512. On appeal, the Second Circuit held that:

In considering the jurisdictional amount requirement the court should look through to the possible award resulting from the desired arbitration, since the petition to compel arbitration is only the initial step in a litigation which seeks as its goal a judgment affirming the award.

Id. at 514. Because the petition for removal indicated that the amount of the arbitration award sought exceeded the statutory requirement for diversity jurisdiction, the court affirmed the denial of the motion to remand. Id. The Third Circuit has subsequently followed Davenport in determining the amount in controversy in actions to compel arbitration. Jumara v. State Farm Ins. Co., 55 F.3d 873, 877 (3d Cir.1995); Manze v. State Farm Ins. Co., 817 F.2d 1062, 1068 (3d Cir.1987).

At least one court has found that the logic of Davenport and its progeny applies to a suit seeking to enjoin an arbitration provision. Hambell v. Alphagraphics Franchising Inc., 779 F.Supp. 910, 912 (E.D.Mich.1991). In Hambell, a dispute arose between a franchisor and two of its franchisees, prompting the franchisor to file a demand for arbitration in Arizona, as required by the franchise agreement. Id. at 911. The franchisees responded by filing a suit in Michigan state court in which they sought to enjoin enforcement of the arbitration location provision in the franchise agreement. Id. The franchisor removed the case to federal district court and the franchisees moved for remand on the ground that "the purely equitable nature of the relief sought by their state court complaint renders the action inherently incapable of meeting the amount in controversy requirement." Id. at 911-12. The district court disagreed, reasoning that an action to enjoin an arbitration provision was analogous to a motion to compel arbitration, and therefore, Davenport and its progeny suggested that the court should look to the amount of the claim in the underlying arbitration to determine the amount in controversy. Id. at 912. Because the amount of the underlying claim exceeded $50,000, the court denied the motion to remand. Id.

We are persuaded that Davenport and its progeny state the correct rule in holding that the amount in controversy in a motion to compel arbitration is the amount of the potential award in the underlying arbitration proceeding. Moreover, we find that the Hambell court's extension of this rule by analogy is well-reasoned and instructive. Similar to the plaintiffs in Hambell, the Webbs sought to "enjoin[ ] pending or future arbitration" in their original state court petition. The Webbs also sought a judgment "declaring that the written documents in question do not require the Webbs to submit to arbitration." These claims are sufficiently analogous to a motion to...

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