Pershing, L.L.C. v. Kiebach

• Decision Date: 06 April 2016
• Docket Number: No. 15–30396.,15–30396.
• Parties: PERSHING, L.L.C., Plaintiff–Appellee v. Thomas KIEBACH; Marcel Dumestre; Margaret Dumestre; Mamie Helen Baumann, Through power of attorney Mamie C. Sanchez; Joseph Becker; et al., Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

819 F.3d 179

PERSHING, L.L.C., Plaintiff–Appellee

v.Thomas KIEBACH; Marcel Dumestre; Margaret Dumestre; Mamie Helen Baumann, Through power of attorney Mamie C. Sanchez; Joseph Becker; et al., Defendants–Appellants.

No. 15–30396.

United States Court of Appeals, Fifth Circuit.

April 6, 2016.

Thomas Miles Farrell, Attorney (argued), McGuireWoods, L.L.P., Houston, TX, Jeffrey J. Chapman, McGuireWoods, L.L.P., New York, NY, Lana Davis Crump, Kean Miller, L.L.P., Baton Rouge, LA, William Grayson Lambert, Esq., McGuireWoods, L.L.P., Charlotte, NC, Amanda Howard Lowe, Kean Miller, L.L.P., New Orleans, LA, for Plaintiff–Appellee.

Phillip W. Preis, Esq. (argued), Charles Malcolm Gordon, Jr., Esq., Preis Gordon, A.P.L.C., Baton Rouge, LA, for Defendants–Appellants.

Before JOLLY and JONES, Circuit Judges, and MILLS^* , District Judge.

EDITH H. JONES

, Circuit Judge:

This is an interlocutory appeal of the district court's order denying Appellants' Fed. R. Civ. Pro. 12(b)(1)

motion to dismiss, for lack of subject matter jurisdiction, Appellee's motion to confirm an arbitration award. Adopting the better reasoned approach to the amount in controversy under these circumstances, we AFFIRM the district court's order and hold that the monetary amount sought in the underlying arbitration is the amount in controversy for purposes of diversity jurisdiction.

I.

Appellants are investors who suffered financial losses as a result of R. Allen Stanford's Ponzi scheme. In their arbitration complaint, seeking $80 million in damages, Appellants alleged that Appellee ("Pershing"), a clearing broker for Stanford Group Company, failed to disclose adverse financial information. After a two week hearing, a Financial Industry Regulatory Authority ("FINRA") panel rejected Appellants' claims, but it awarded them $10,000 in compensation for certain arbitration-related expenses. On November 7, 2014, Pershing filed, pursuant to Section 9 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq.,

a motion to confirm the arbitration award.

Because the arbitration award fell below the amount in controversy for federal jurisdiction, 28 U.S.C. § 1332(a)

, Appellants sought dismissal.¹ On April 22, 2015, the district court denied Appellants' motion, holding that the $75,000 amount in controversy requirement was met. Pershing LLC v. Kiebach, 101 F.Supp.3d 568 (E.D.La.2015). The district court noted, however, that federal courts have disagreed about the proper standard for determining the amount in controversy in the context of confirming an arbitration award below $75,000, and proceeded to certify the issue for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). This court granted leave to file an interlocutory appeal, and Appellants timely appealed.

II.

This court applies a de novo standard of review and uses the same standard as the district court when reviewing a 12(b)(1) motion to dismiss. LeClerc v. Webb, 419 F.3d 405, 413 (5th Cir.2005)

. Issues of subject matter jurisdiction are questions of law reviewed de novo. Am. Rice, Inc. v. Producers Rice Mill, Inc., 518 F.3d 321, 327 (5th Cir.2008). "It is to be presumed that a cause lies outside [a federal court's] limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994) (internal citations omitted).

III.

This court granted an interlocutory appeal to decide whether the amount in controversy for establishing diversity jurisdiction over a petition to confirm an arbitration award is the amount awarded by the arbitration panel or the amount previously sought in the arbitration proceeding.²

Courts that have confronted this issue generally follow one of two approaches—the award approach or the demand approach. Karsner v. Lothian, 532 F.3d 876, 882 (D.C.Cir.2008)

. "[U]nder the award approach, the amount in controversy is determined by the amount of the underlying arbitration award regardless of the amount sought." Id.; Baltin v. Alaron Trading Corp., 128 F.3d 1466, 1472 (11th Cir.1997) ; Ford v. Hamilton Invs., Inc., 29 F.3d 255, 260 (6th Cir.1994). In contrast, "[under] the demand approach, the amount in controversy is the amount sought in the underlying arbitration rather than the amount awarded."³

Id.; Bull HN Info Sys., Inc. v. Hutson, 229 F.3d 321, 329 (1st Cir.2000) ; Am. Guar. Co. v. Caldwell, 72 F.2d 209, 211 (9th Cir.1934).

In its order denying Appellants' motion to dismiss, the district court concluded that the demand approach was the correct one: "[e]ach approach has strengths and weaknesses, and the issue is one that will be resolved by the Fifth Circuit. However, having considered ... [the cited authority] the Court finds that the demand approach is more appropriate." Pershing, 101 F.Supp.3d at 573

.

We agree. Based on Appellants' arbitration demand of $80 million, the district court correctly concluded that the $75,000 amount in controversy requirement was met. First, the demand approach recognizes the true scope of the controversy between the parties. The only logical assumption about Appellants' efforts to prevent confirmation of this arbitration award is that they want a second chance to pursue their claims. The $10,000 award "is but the last stage of litigation" that began with an $80 million controversy. Pershing, 101 F.Supp.3d at 573

. Therefore, the amount at stake is the $80 million that Appellants initially sought in arbitration, not the minimal award for arbitration-related costs.⁴

Second, the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy. The federal district court has diversity jurisdiction over a motion to compel arbitration based on the amount demanded in the petition. Webb v. Investacorp, Inc., 89 F.3d 252, 256 (5th Cir.1996)

. Under the award approach, however, the federal court would lack jurisdiction over a later petition to confirm or vacate the arbitration award in the same case if the award falls below the jurisdictional threshold. See Karsner, at 883–84. "The award approach would promote needless litigation and gamesmanship" because "litigants may file potentially frivolous, or unnecessary motions to compel arbitration in order to preserve their right to a federal forum for review of the eventual award." Pershing, 101 F.Supp.3d at 574

. This they could do by filing a motion to compel arbitration and, once it is granted, by seeking a stay of further court proceedings pending motions to confirm or vacate the final award. Conversely, under the demand approach, purely tactical and meritless litigation will likely be avoided. In these ways, the demand approach effectively acknowledges "the close connection between arbitration and subsequent enforcement proceedings" and helps "to carry out the federal policies in favor of arbitration." Bull HN Info. Sys., 229 F.3d at 329 ; see also Smith v. Tele–Town Hall, LLC, 798 F.Supp.2d 748, 755 (E.D.Va.2011) (recognizing "Congress's careful tailoring of the relationship between district courts and arbitration panels.").

Third, the demand approach allows "the district court to exercise jurisdiction coextensive with the diversity jurisdiction that would have otherwise been present if the case had been litigated rather than arbitrated." Id. at 884 (internal quotation marks and citation omitted); see also Luong v. Circuit City Stores, Inc., 356 F.3d 1188, 1197–98 (9th Cir.2004)

(Kozinski, J., dissenting), opinion withdrawn, 368 F.3d 1113 (9th Cir.2004).⁵ In essence, the amount in controversy is measured the same way in federal court for litigation and for matters submitted on petitions to compel arbitration: the plaintiff's pleading, not the ultimate result in the case, governs jurisdiction.

For these reasons, we conclude that "the award approach has the least appeal," while "the demand approach is soundest because it avoids anomalous and unwarranted inconsistencies in a federal court's jurisdiction." Karsner, 532 F.3d at 883

; Tele–Town Hall, LLC, 798 F.Supp.2d at 753. Accordingly, we AFFIRM the district court's order.⁶

MICHAEL P. MILLS

, District Judge, concurring in result only:

I agree with the majority that the district court correctly concluded, based on the facts of this case, that the amount in controversy should be decided based on the $20 million demand in arbitration. I write separately because I believe that the parties to this appeal have framed the issues in an overbroad manner which has led the majority to make a holding which is broader than is necessary in this case. I also write to make clear my view that many of the legal assumptions underlying this interlocutory appeal are erroneous, based largely upon inaccurate descriptions of the state of federal precedent set forth in the D.C. Circuit's opinion in Karsner v. Lothian, 532 F.3d 876, 882 (D.C.Cir.2008)

.

I understand the majority's inclination to simply answer the question as certified; indeed, that was also my initial inclination. However, in cases where an interlocutory appeal is based upon a suspect legal assumption, I feel it is incumbent upon us to correct it. This court granted interlocutory appeal to resolve the controlling issue of law as to "the proper method of determining the amount in controversy for the purpose of establishing diversity jurisdiction over a petition to confirm an arbitration award." The parties to this litigation clearly anticipated that, in deciding this issue, this court would choose between two alleged "approaches" in this context, namely the "demand approach" and the "award approach." The parties seem to agree that a third alleged "approach," namely the "remand approach," is inapplicable here.

Certainly, providing clarification to district courts is a laudable goal, and, if either the "award approach" or the "demand approach" provided what I felt to be reliable standards for assessing amount in controversy issues in motions to confirm arbitration awards,...