Napleton v. General Motors Corp.

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation138 F.3d 1209
PartiesKatherine R. NAPLETON, not individually, but as Trustee under the Katherine R. Napleton Revocable Self-Declaration of Trust dated
Decision Date01 October 1992

William R. Quinlan (argued), John F. Kennedy, James A. Niewiara, Quinlan & Crisham, Chicago, IL, for Plaintiff-Appellant.

James H. Schink, Robert B. Ellis (argued), Kirkland & Ellis, Chicago, IL, for Defendant-Appellee.

Before CUDAHY, KANNE, and DIANE P. WOOD, Circuit Judges.

CUDAHY, Circuit Judge.

Katherine Napleton appeals from a district court order dismissing her action without prejudice to allow for arbitration. She asserts that the district court misconstrued the scope of the arbitration clause and referred a non-arbitrable issue to arbitration. But because the district court issued its order favoring arbitration in the course of an "embedded" proceeding, we lack jurisdiction to reach these issues.

I. Background

In 1955, General Motors Corporation leased property in Hinsdale, Illinois, from New England Life Insurance Company. The lease provided for an initial twenty-year rental term that ended on December 31, 1975. General Motors then had the option to renew the lease, first for a ten-year term ending on December 31, 1985, and then for a series of five-year terms, with the final one ending on December 31, 2005. General Motors had incentive to renew, because the lease specified fixed rental rates that decreased over time. 1 Not surprisingly, General Motors thrice renewed with New England, extending the lease through December 31, 1995.

New England transferred its fee interest in the Hinsdale property to Edward Napleton in December 1992. The day after Edward received the property, he conveyed it to his wife, Katherine Napleton. 2 Katherine also acquired from New England six properties outside of Illinois. New England had leased these other properties to General Motors as well.

In June 1993, New England notified General Motors that it had assigned the Hinsdale lease to Edward and the non-Illinois leases to Katherine. New England's letter provided that General Motors should contact Edward whenever the Hinsdale lease required "payment, notice, demand or other communication" and Katherine when the non-Illinois leases so required. New England supplied the same address for both Edward and Katherine.

Although General Motors did not receive written notice that Edward had conveyed the Hinsdale property to Katherine, it nonetheless acted as though it knew Katherine was the owner. In September 1993, and February and December 1994, General Motors mailed Katherine statements of insurance for the Hinsdale property, as required by the lease. These statements listed Katherine as an additional insured. And in 1993, General Motors began to pay rent for the Hinsdale and non-Illinois properties with a single check made payable to Katherine.

The Hinsdale lease provided that to renew for a third five-year term that would extend until December 31, 2000, General Motors must notify the lessor by December 31, 1994. But on October 24, 1994, General Motors sent a written renewal notice to Edward--not Katherine--at the address previously provided by New England. When Edward failed to respond, General Motors, on January 17, 1995, sent him a copy of the October 24 renewal. On February 2, Edward informed General Motors that Katherine owned the Hinsdale property and that all notices should be sent to her. Finally, on February 16, General Motors mailed Katherine a copy of the October 24 renewal notice.

Katherine did not respond immediately. Instead, in June 1995, she informed the company that she did not consider it to have renewed the lease and that it should vacate the property on December 31, 1995, the end of its current term. General Motors replied that it would not surrender the property; as far as it was concerned, the lease had not expired.

On December 15, 1995, Katherine filed for declaratory and injunctive relief in the Circuit Court of Cook County, Illinois. General Motors removed the action to federal district court. General Motors then argued that an arbitration clause in the lease governed its dispute with Katherine and it presented to the district judge a motion to dismiss or stay the action pending arbitration. The district judge agreed that the arbitration clause applied. Accordingly, he issued an order "grant[ing] the motion to dismiss without prejudice to allow for arbitration." Order of 7/29/96. After the district court denied Katherine's motion for reconsideration, she filed this appeal.

Katherine challenges the dismissal on the grounds that: (1) no issue falls within the scope of the arbitration clause and; (2) the district court has referred to an arbitrator the question whether an enforceable contract exists, which is an issue only a court may determine. Katherine also suggests that the record would allow us to decide as a matter of law that she is entitled to relief. We do not reach these arguments because we lack jurisdiction over Katherine's appeal.

II. Discussion

Katherine asserts that we have jurisdiction pursuant to 28 U.S.C. § 1291, which allows appeals from the final decisions of district courts. But we cannot take jurisdiction under § 1291 without first considering the Federal Arbitration Act, which controls the appealability of arbitration decisions by district courts. See 9 U.S.C. § 16. In general, the Act favors arbitration by assuring that appellate courts quickly review orders denying arbitration so that the parties may proceed promptly to an arbitrator if the district court has erred. See Perera v. Siegel Trading, 951 F.2d 780, 783 (7th Cir.1992). As for orders compelling arbitration, final decisions are appealable and interlocutory decisions are not. 3 See id. Because § 16 does not define "final decision," we have announced that it is a "legal term of art" animated by prior judicial opinions. Id.; see Amgen, Inc. v. Kidney Ctr. of Del. County, Ltd., 95 F.3d 562, 565 (7th Cir.1996). Thus, to grapple with the implications of Katherine's dismissal without prejudice, we must look to our own precedents as well as to those of other circuits.

According to Katherine, the alpha and omega of the jurisdictional issue is that the district court dismissed her case, thereby divesting itself of jurisdiction and terminating all proceedings before it. But this alone cannot be dispositive, because we traditionally have distinguished between "independent" and "embedded" proceedings. In an independent proceeding, the request to compel arbitration is the sole issue before the district court. In an embedded proceeding, the motion for arbitration is made in the course of a larger, substantive suit. See Perera, 951 F.2d at 784-85. Here General Motors requested arbitration in the context of Katherine's action for declaratory and injunctive relief. Hence Katherine has appealed from an embedded proceeding.

To date the distinction between independent and embedded proceedings has had a talismanic significance in our jurisprudence. We consistently have found jurisdiction over appeals from arbitration orders in independent proceedings and have declined to find jurisdiction over appeals from arbitration orders in embedded proceedings. Compare S+L+H S.p.A. v. Miller-St. Nazianz, Inc., 988 F.2d 1518, 1523 (7th Cir.1993) (finding jurisdiction over an appeal from an independent proceeding), with Wilson Wear, Inc. v. United Merchants & Mfrs., Inc., 713 F.2d 324, 326 (7th Cir.1983) (holding that an order granting a stay and compelling arbitration in an embedded proceeding is not final within the meaning of 28 U.S.C. § 1291), and Whyte v. THinc Consulting Group Int'l, 659 F.2d 817, 818 (7th Cir.1981) (same). In some cases, our refusal to extend jurisdiction over appeals from arbitration orders in embedded proceedings is unremarkable; the order to arbitrate is akin to a "case management order" that does not touch on the merits of the claim and thus much work remains for the district court. See In the Matter of Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 784 F.2d 831, 833 (7th Cir.1986). However, we have even declined to find jurisdiction over an appeal from an embedded proceeding when the practical result of the order to arbitrate was to refer all claims to the arbitrator and terminate proceedings before the district court. See Perera, 951 F.2d at 785; see also Humphrey v. Prudential Sec. Inc., 4 F.3d 313, 317-18 (4th Cir.1993). Katherine's appeal, however, adds an unfamiliar ingredient to the garden variety embedded proceeding. In most embedded proceedings, the district court stays the action pending arbitration; here the judge substituted a dismissal without prejudice for the usual stay. Thus we must decide whether, in the context of an embedded proceeding, a dismissal without prejudice "to allow for arbitration" constitutes an appealable--i.e. final--decision.

Other circuits have addressed similar questions, though there is no unanimity in their answers. Both the Tenth and Third Circuits have held that a dismissal in favor of arbitration is an appealable decision, even in an embedded proceeding. See Armijo v. Prudential Ins. Co. of America, 72 F.3d 793, 797 (10th Cir.1995); Nationwide Ins. Co. of Columbus, Ohio v. Patterson, 953 F.2d 44, 46 (3d Cir.1991); see also Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir.1990) (finding jurisdiction when the district court ordered arbitration, dismissed the proceedings and entered a Rule 54(b) judgment). In contrast, the Ninth Circuit has found that it lacks jurisdiction over an appeal from a dismissal in an embedded proceeding when the dismissal effectively requires the parties to arbitrate. See McCarthy v. Providential Corp., 122 F.3d 1242, 1244 (9th Cir.1...

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