PaineWebber Inc. v. Cohen

• Decision Date: 25 October 2001
• Docket Number: No. 01-3228,PLAINTIFF-APPELLANT,DEFENDANT-APPELLEE,01-3228
• Citation: 276 F.3d 197
• Parties: (6th Cir. 2001) PAINEWEBBER, INC.,, v. ALFRED M. COHEN, EXECUTOR OF THE ESTATE OF SAMUEL GINSBURG, Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 197

276 F.3d 197 (6th Cir. 2001)

PAINEWEBBER, INC., PLAINTIFF-APPELLANT, v. ALFRED M. COHEN, EXECUTOR OF THE ESTATE OF SAMUEL GINSBURG, DEFENDANT-APPELLEE.

No. 01-3228

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: October 25, 2001

Decided and Filed December 27, 2001

Appeal from the United States District Court for the Southern District of Ohio at Cincinnati. No. 00-00611--Herman J. Weber, District Judge.

Jeffrey J. Jones (argued and briefed), Douglas Marr Mansfield (briefed), Jones Day, Reavis & Pogue, Columbus, Ohio, for Plaintiff-Appellant.

Stanley M. Chesley (argued and briefed), Waite, Schneider, Bayless & Chesley, Michael R. Barrett, Barrett, & Weber, Cincinnati, Ohio, for Defendant-Appellee.

Before: Boggs, Gilman, and Bright, Circuit Judges.^*

OPINION

Gilman, Circuit Judge

PaineWebber, Inc. filed a petition to compel arbitration and stay the state court action brought by Alfred Cohen, as executor of the Estate of Samuel J. Ginsburg, against PaineWebber and Richard Wilhelm, one of PaineWebber's branch managers. Following the district court's determination that Wilhelm, an Ohio resident whose presence would defeat complete diversity of citizenship, was a necessary and indispensable party to the federal proceeding, the court dismissed PaineWebber's petition for lack of subject matter jurisdiction. For the reasons set forth below, we REVERSE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.

I. BACKGROUND

A. Factual background

Ginsburg entered into a "Client's Agreement" with PaineWebber on August 11, 1992. This agreement contains a detailed arbitration clause providing "that any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration." Several days later, Ginsburg and PaineWebber executed a "Master Account Agreement" that contains an arbitration clause nearly identical to the one found in the Client's Agreement. One significant difference between the two documents, however, is that the Master Account Agreement's arbitration clause not only references disagreements between PaineWebber and Ginsburg, but also specifies that it governs disputes between Ginsburg and "[PaineWebber's] employees or agents." Both agreements include provisions that make their terms binding on Ginsburg's heirs, executors, administrators, successors, and assigns.

After Ginsburg died on October 9, 1999, Cohen, an Ohio resident, was appointed the executor of Ginsburg's estate. Acting in his capacity as executor, Cohen filed a lawsuit against PaineWebber and Wilhelm in the Hamilton County Court of Common Pleas on July 26, 2000, asserting claims of conversion and fraudulent concealment that relate to Ginsburg's brokerage account with PaineWebber.

B. Procedural background

PaineWebber filed a petition in the United States District Court for the Southern District of Ohio two days later, seeking to compel arbitration, enforce the arbitration agreements, and stay Cohen's state court action. It filed an amended petition seeking the same relief on August 10, 2000. Wilhelm was not named as a party in either PaineWebber's original or amended petition. The sole basis for federal jurisdiction over PaineWebber's petition was diversity of citizenship under 28 U.S.C. § 1332.

PaineWebber also filed a motion in state court to stay the action there pending a ruling by the district court on PaineWebber's petition. The state court did not rule on this motion because the parties submitted an agreement not to proceed with the state court action while the federal petition was pending. Aside from the state court's issuance of a temporary restraining order to preserve evidence, no further proceedings occurred in the state court until after the district court ruled on PaineWebber's petition.

On January 31, 2001, the district court granted Cohen's motion to dismiss PaineWebber's petition for lack of subject matter jurisdiction. The district court determined, pursuant to Rule 19 of the Federal Rules of Civil Procedure, that Wilhelm was a necessary and indispensable party to PaineWebber's petition to compel arbitration. Because Ginsburg was and Wilhelm is a resident of Ohio, and Cohen is deemed to be a citizen of the same state as Ginsburg pursuant to 28 U.S.C. § 1332(c), Wilhelm's presence would defeat complete diversity of citizenship. The district court therefore dismissed the petition.

II. ANALYSIS

A. Standards of review

A district court's finding that a party is necessary to an action, so that the party should be joined pursuant to Rule 19(a) of the Federal Rules of Civil Procedure if feasible, will not be set aside unless we find an abuse of discretion. Keweenaw Bay Indian Cmty. v. Michigan, 11 F.3d 1341, 1346 (6th Cir. 1993). In contrast, a district court's application of Rule 19(b)'s factors to determine whether a necessary party is also indispensable to an action is a legal conclusion to be reviewed de novo. Id. Similarly, we review a district court's decision regarding the existence of subject matter jurisdiction de novo. Caudill v. N. Am. Media Corp., 200 F.3d 914, 916 (6th Cir. 2000).

B. Rule 19 and subject matter jurisdiction

Rule 19 of the Federal Rules of Civil Procedure establishes a three-step analysis for determining whether a case should proceed in the absence of a particular party. Keweenaw Bay Indian Cmty., 11 F.3d at 1345. A court must first determine "whether a person is necessary to the action and should be joined if possible." Soberay Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 763-64 (6th Cir. 1999); Fed. R. Civ. P. 19(a). If the party is deemed necessary for the reasons enumerated in Rule 19(a), the court must next consider whether the party is subject to personal jurisdiction and can be joined without eliminating the basis for subject matter jurisdiction. Keweenaw Bay Indian Cmty., 11 F.3d at 1345-46 (describing the second step of the Rule 19 analysis as an inquiry into whether the court has personal jurisdiction over the necessary party); Fed. R. Civ. P. 19(a) (requiring the court to join a necessary party "who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action").

The third step "involves an analysis under Rule 19(b) to 'determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent party [being] thus regarded as indispensable.'" Soberay Mach. & Equip. Co., 181 F.3d at 764 (quoting Fed. R. Civ. P. 19(b)). Dismissal should occur only if an indispensable party is not subject to personal jurisdiction or cannot be joined without eliminating the basis for subject matter jurisdiction. Id. at 770 (concluding that the district court erred in failing to consider the defendant's motion to dismiss the case under Rule 19, because joining the indispensable party would have eliminated complete diversity). If a necessary party is not deemed indispensable pursuant to Rule 19(b), that potential party need not be joined and the action can proceed with the original litigants.

1. Whether Wilhelm is a necessary party to the federal proceeding between PaineWebber and Cohen

The district court based its determination that Wilhelm is a necessary party to the federal proceeding between PaineWebber and Cohen on its finding that Ginsburg's contracts with PaineWebber apply not only to PaineWebber, but also to its employees. In performing its analysis, the district court focused on Rule 19(a)(2)(ii), which provides that a party is necessary if

the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may . . . leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.

Because the contracts cover both PaineWebber and Wilhelm, the court concluded that Wilhelm is necessary to any proceeding interpreting the arbitration clause in the contracts. The district court believed that this result avoided the possibility of a federal court and a state court reaching opposite conclusions regarding the question of whether the contracts require Cohen to process his claims through arbitration.

Applying an abuse-of-discretion standard, we must affirm the district court's Rule 19(a) analysis unless we are "left with a definite and firm conviction that the trial court committed a clear error of judgment." Cincinnati Ins. Co. v. Byers, 151 F.3d 574, 578 (6th Cir. 1998) (internal quotation marks and citation omitted). The language of the contract between Ginsburg and PaineWebber permits a finding that the contract also covers PaineWebber's employees, which would include Wilhelm. Although the contract's terms seem designed primarily to protect the interests of Ginsburg and PaineWebber, they arguably benefit employees like Wilhelm by enabling them to arbitrate complaints that PaineWebber's customers might have against them.

Wilhelm could therefore claim an interest in the contract between Ginsburg and PaineWebber. If a federal court and a state court reached different conclusions regarding whether the arbitration clauses apply to Cohen's claims against PaineWebber and Wilhelm, Cohen would be faced with inconsistent procedural remedies against the alleged joint tortfeasors. We thus conclude that the district court did not abuse its discretion in determining that Wilhelm is a necessary party to this action.

2. Whether Wilhelm's presence would deprive the court of subject matter jurisdiction

The sole basis for subject matter jurisdiction in this action is diversity of citizenship under 28 U.S.C. § 1332. Section 1332 confers federal jurisdiction only if complete diversity of citizenship...