Choice Hotels Intern., Inc. v. Felizardo, CIV.A.DKC 2002-3613.

• Decision Date: 12 August 2003
• Docket Number: No. CIV.A.DKC 2002-3613.,CIV.A.DKC 2002-3613.
• Citation: 278 F.Supp.2d 590
• Parties: CHOICE HOTELS INTERNATIONAL, INC. v. Francisco FELIZARDO, et al.
• Court: U.S. District Court — District of Maryland

278 F.Supp.2d 590

CHOICE HOTELS INTERNATIONAL, INC. v. Francisco FELIZARDO, et al.

No. CIV.A.DKC 2002-3613.

United States District Court, D. Maryland.

August 12, 2003.

James G. Healy, Choice Hotels International Inc., Silver Spring, MD, for Plaintiff.

Daniel S. Willard, Law Offices of Daniel S. Willard PC, Rockville, MD, for Defendant.

MEMORANDUM OPINION

CHASANOW, District Judge.

Presently pending and ready for resolution is the motion of Choice Hotels International Inc. (Choice) to vacate arbitration award. The issues have been fully briefed and the court now rules, no hearing being deemed necessary. Local Rule 105.6. For the following reasons, the motion to vacate will be denied.

I. Background

This case arises out of a franchise agreement between Choice as franchisor and Francisco Felizardo and Erlinda Felizardo (Defendants) as franchisees. Defendants operated a hotel in Santa Clara, California under the Econo Lodge marks owned by Choice in exchange for the payment of certain fees and royalties pursuant to the franchise agreement with Choice. The parties' agreement was effective on July 15, 1997 and Choice terminated the agreement by letter dated April 4, 2000, following the failure of Defendants to comply with their obligations under the contract, including failure to pay timely royalty fees and other charges due under the franchise agreement, which prompted Choice to send Defendants several formal notices of default.

Following termination of the franchise agreement, Choice filed an arbitration proceeding with the American Arbitration Association (AAA) against Defendants in which it sought to recover franchise fees that had accrued during the time the contract was in effect, along with damages due to the premature termination of the contract. Defendants filed a counterclaim seeking, inter alia, rescission of the franchise agreement and the return of franchise fees paid on the ground that Choice had failed to provide a required disclosure statement and secure a receipt therefor. The arbitration hearing took place on July 9, 2002. In an award dated September 4, 2002, the arbitrator entered an award for Defendants in the amount of $33,970.66 and $2,000.00 for costs. On November 5, 2002, Choice filed the instant action in this court seeking to vacate the arbitration award and remand the case to the AAA for scheduling of a new hearing before a different arbitrator.

II. Jurisdiction

There are three possible bases for a federal district court's exercise of jurisdiction over a given case: (1) jurisdiction under a specific statutory grant; (2) federal question jurisdiction pursuant to 28 U.S.C. § 1331; or (3) diversity jurisdiction pursuant to 28 U.S.C. § 1332(a). See Baltin v. Alaron Trading Corp., 128 F.3d 1466, 1469 (11th Cir.1997). Federal courts and state courts have concurrent jurisdiction to enforce the FAA, Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), however, the FAA does not create an independent basis for federal question jurisdiction. Id., at 26 n. 32, 103 S.Ct. 927. Courts have held that § 10 of the FAA, 9 U.S.C. § 10, is not a statutory grant of federal subject matter jurisdiction. See, e.g., Baltin, 128 F.3d at 1470. Furthermore, the instant matter involves a breach of contract to which Maryland law applies.¹ Choice's motion to vacate is premised on the alleged misconduct of the arbitrator and does not depend on the "resolution of a substantial question of federal law." See Franchise Tax Bd. of State of California v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 28, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983); Baltin, 128 F.3d at 1472. Federal question jurisdiction is therefore also not present.

At issue is whether diversity jurisdiction exists in this case. Diversity jurisdiction exists pursuant to 28 U.S.C. § 1332(a) in all civil actions where the matter in controversy exceeds $75,000 and is between citizens of different states. Id. Defendants do not contest that they and Choice are citizens of different states; instead, Defendants argue that the amount in controversy between the parties does not exceed $75,000. The state court claim that Choice initially filed against Defendants in November 2000 in the Circuit Court for Montgomery County sought $6,313.21 in unpaid franchise fees and $39,600 in liquidated damages. Paper 4, Ex. 1, at 4. In the demand for arbitration that Choice made against Defendants in April 2001, Choice sought relief in the amount of $46,266.41. Id., Ex. 5, at 1. In the closing brief Choice submitted in the arbitration, it requested that it be awarded the sum of $56,711.23.² Id., Ex. 11, at 14. Defendants note that at no time have Choice's demands against them exceeded the $75,000 amount required for diversity jurisdiction.

Courts are not uniform in their approach to determining the amount in controversy in an action challenging an arbitration award. Some look solely to the amount of the award. See Goodman v. CIBC Oppenheimer & Co., 131 F.Supp.2d 1180, 1184 (C.D.Cal.2001) (holding that "[t]he amount in controversy is equal to the arbitration award regardless of the amount sought in the underlying arbitration."); see also Mannesmann Dematic Corp. v. Phillips, Getschow Co., No. Civ. A. 3:00-CV-2324-G, 2001 WL 282796 at * 2 (N.D.Tex. March 16, 2001) (adopting the "sound approach" taken by the Sixth and Eleventh Circuits to depend solely on the amount of the award in an action to vacate). Other courts have noted that, where a remand is sought in addition to the vacating of the award, it might be proper to look at the underlying amount sought. See Sirotzky v. New York Stock Exchange, No. 02 C 0970, 2002 WL 1052029 at * 3 (N.D.Ill. May 20, 2002) (noting that under Hough v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 757 F.Supp. 283 (S.D.N.Y.1991), the amount in controversy may consist of the amount sought in the underlying arbitration where a plaintiff petitions for a remand for rehearing in addition to vacation of an earlier arbitration award); see also Baltin, 128 F.3d at n. 16 (observing that had the plaintiffs requested an award modification that would provide them with money in addition to reducing or eliminating the arbitration award against them, the amount in controversy might include more than just the amount of the arbitration award).

It is the burden of the party asserting jurisdiction to demonstrate that jurisdiction exists. Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir.1999). While the amount of the arbitration award is only $33,970.66 plus $2000 in costs, Choice did request a remand to the AAA for a rehearing of the matter when it filed its motion to vacate. Paper 1, at 16. From Choice's perspective, at the time it filed its motion, it not only sought to avoid the $35,970.66 award to Defendants but also sought to obtain the original arbitration claim against Defendants. Paper 6, at 1. Thus, from the perspective of the party filing suit, the amount in controversy was a swing from minus $36,000 to a plus of about $60,000, a total of approximately $96,000. The amounts sought by each party are mutually exclusive and would not be set offs against each other. Although it is not entirely free from doubt, the court concludes that, looking at both the amount of the award sought to be avoided and the additional amount sought to be obtained by the moving party on remand, the amount in controversy in this case exceeds $75,000 and that diversity jurisdiction exists.

III. Standard of Review

Review of an arbitrator's award is severely circumscribed. Indeed, the scope of review of an arbitrator's valuation decision is among the narrowest known at law because to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all-the quick resolution of disputes and the avoidance of the expense and delay associated with litigation.

Apex Plumbing Supply v. U.S. Supply Co., Inc., 142 F.3d 188, 193 (4th Cir.1998). If there is a valid contract between the parties providing for arbitration, and if the dispute resolved in the arbitration was within the scope of the arbitration clause, then substantive review is limited to those grounds set out in § 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 10(a). That section allows vacating of an award (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or misconduct on the part of the arbitrator; or (3) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a). In addition, a court may overturn a legal interpretation of an arbitration panel if "it is in manifest disregard for the law." See, e.g. Apex Plumbing, 142 F.3d at 193 ("Federal courts may vacate an arbitration award only upon a showing of one of the grounds listed in the [FAA], or if the arbitrator acted in manifest disregard of the law"); Upshur Coals Corp. v. United Mine Workers of America, 933 F.2d 225, 229 (4th Cir.1991). Mere misinterpretation of a contract or an error of law does not suffice to overturn an award. See Upshur, 933 F.2d at 229. The burden is on the party challenging an award to prove the existence of one of the grounds for vacating the award.

IV. Analysis

Choice argues that the arbitration award must be vacated because the arbitrator exceeded the authority granted to him by the parties or, in the alternative, because the award was made in manifest disregard of the law. Defendants challenge the motion to vacate, asserting that Choice has failed to meet the very high standard for vacating an arbitration award.

A. Authority Granted to Arbitrator by the Parties

Choice argues that the arbitration award must be vacated pursuant to § 10 of the FAA because the arbitrator exceeded the authority granted to him by the parties by ignoring the plain language of the...