JOHN M. GERRARD, District Judge.
The plaintiff, Prospect Funding Holdings (NY), LLC, seeks confirmation of two arbitration awards pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Filing 1. The defendants, Ronald J. Palagi, P.C., L.L.C. ("RJP")
Stubblefield is being represented by RJP in a lawsuit against General Parts and other defendants in Douglas County District Court that is, so far as the Court is aware, still ongoing. Filing 22 at 15. On January 27, 2016, Stubblefield and Prospect Funding entered into a "Sale and Repurchase Agreement" pursuant to which Prospect Funding agreed to purchase a share of Stubblefield's claims in the General Parts case. Filing 2-2.
The Agreement provided for an initial payment to Stubblefield of $5,000, in exchange for which Prospect Funding received a share of Stubblefield's claim in the amount of $23,120. Filing 2-2 at 1. The Agreement also provided for up to seven monthly "additional purchases" in which Stubblefield would receive another $3,000 each month in exchange for an additional $12,036 share of Stubblefield's claims. Filing 2-2 at 1. The Agreement provided that the "maximum amount of Additional Prospect Ownership Amount will be $84,252 with a total purchase price of $24,780." Filing 2-2 at 1 (emphasis omitted). Accordingly, if all the additional purchases had been made, Stubblefield would have received $26,000 in exchange for a $107,372 interest in his claims. Filing 2-2 at 13.
The Agreement provided that if Stubblefield received nothing on his claims in the General Parts case, then he would owe Prospect Funding nothing. Filing 2-2 at 1. If he recovered on his claims, he would receive nothing until Prospect Funding had received its ownership amount, but his obligation to pay Prospect Funding was limited to amounts he recovered. Filing 2-2 at 1, 4. The Agreement provided, however, that if Stubblefield did not comply with the Agreement or attempted to avoid paying Prospect Funding, he would be liable for liquidated damages of twice the amount of Prospect Funding's ownership amount in his claims, regardless of the outcome of the underlying case. Filing 2-2 at 1, 5.
And the Agreement contained an arbitration clause. Filing 2-2 at 1, 6-7. Specifically, the Agreement provided in relevant part that "the Federal Arbitration Act ('FAA') applies to this agreement and arbitration provision" and that the parties agreed that "the FAA's provisions—not state law— govern all questions of whether a dispute is subject to arbitration." Filing 2-2 at 7 (emphasis omitted). The parties further agreed that
Filing 2-2 at 7 (emphasis omitted). The arbitrator's decision would be "final and binding in all respects" and "non-appealable[,]" and any person could "have a court of competent jurisdiction confirm the arbitration award as a judgment of such court and enter into its record the findings of such arbitrators for all purposes, including for the enforcement of the award." Filing 2-2 at 7 (emphasis omitted).
Stubblefield also signed a "Irrevocable Letter of Direction," addressed to Palagi, directing Palagi to pay Prospect Funding from any settlement proceeds. Filing 2-2 at 9. Palagi signed the "Attorney Acknowledgement" at the end of the letter, acknowledging the arbitration clause and agreeing to honor the letter. Filing 2-2 at 10.
Prospect Funding asserts that Stubblefield received a settlement in the General Parts litigation and refused to pay Prospect Funding.
Filing 2-5. A similar award as to Stubblefield was entered on August 8. Filing 2-7. Notice of the arbitration awards appears to have been provided to Palagi and Stubblefield, respectively, by email from ARS soon after each award was entered. Filing 2-6; filing 2-7.
Prospect Funding filed the present petition to confirm the arbitration awards on January 1, 2018. Filing 1. The defendants, both represented by Palagi and RJP, answered on February 20. The answer contained a cross-petition to vacate the arbitration awards, but did not articulate an excuse for not moving to vacate the awards within three months after they were filed or delivered. Filing 11 at 3-4; see 9 U.S.C. § 12. The Court entered an order (filing 13) establishing a schedule for submission of briefing and evidence and directing the defendants to file "[a]ny request to vacate the arbitration award pursuant to 9 U.S.C. § 10 . . . as a separate motion[.]" Filing 13 at 2.
After a short deadline extension (filing 15), the defendants filed their brief opposing confirmation of the awards. Filing 22. They did not file a motion to vacate the awards before the deadline established for such a motion. See filing 15. At the same time, the defendants moved to delay ruling on confirmation of the awards until the defendants could conduct discovery. Filing 21. Prospect Funding filed a brief (filing 25) opposing that motion and a reply brief (filing 26) supporting confirmation of the awards. Then, with no explanation, the defendants filed an unauthorized surreply brief opposing confirmation of the awards. Filing 30. And they filed a separate motion to dismiss asserting a purported jurisdictional defect. Filing 29.
A motion pursuant to Federal Rule of Civil Procedure 12(b)(1) challenges whether the court has subject matter jurisdiction.
Before addressing the parties' arguments, the Court will digress on a matter of procedure. As described above, instead of filing a reply brief in support of their motion to delay ruling, the defendants filed what is clearly an unauthorized surreply brief in opposition to the arbitration awards. Filing 30. That brief, filed without leave, was not authorized by the Court's order on briefing, this Court's local rules, or the Federal Rules of Civil Procedure. See filing 13; NECivR 7.1(c). Accordingly, filing 30 is stricken.
The defendants question the Court's subject matter jurisdiction because, they say, the amount in controversy required for diversity jurisdiction is not satisfied. See filing 29-1. That argument is without merit. It is true that the FAA itself confers no federal jurisdiction, but instead requires a separate jurisdictional basis. Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 581-82 (2008); CMH Homes, Inc. v. Goodner, 729 F.3d 832, 835 (8th Cir. 2013). And diversity jurisdiction, pursuant to § 1332, is such a basis. CMH Homes, 729 F.3d at 835.
In assessing the amount in controversy in the context of a petition to confirm an arbitration award, the Court "looks through" the arbitration petition to determine whether the case meets the threshold for federal diversity jurisdiction. Id. at 837-38. The defendants argue, based on Nebraska law, that Prospect Funding is owed less than $30,000. Filing 29-1 at 2. But that conflates the merits of Prospect Funding's claim with the amount it is claiming.
The amount-in-controversy allegation of a plaintiff invoking federal-court jurisdiction is accepted if made in good faith. Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S.Ct. 547, 553 (2014). The complaint will be dismissed if it appears to a legal certainty that the claim is really for less than the jurisdictional amount. Peterson v. The Travelers Indem. Co., 867 F.3d 992, 995 (8th Cir. 2017). But the legal certainty standard is met only where the legal impossibility of recovery is so certain as virtually to negate the plaintiff's good faith in asserting the claim. Id.
Here, Prospect Funding appears with two arbitration awards in hand, each of which is for substantially more than the jurisdictional amount. It is hardly a legal impossibility that it can recover at least that amount. See id. Accordingly, the Court has jurisdiction over this case, and will deny the defendants' motion to dismiss.
The defendants also seek to delay confirmation of the arbitration awards to permit discovery. The Court will grant that motion, but explaining why—and explaining the scope of discovery that will be permitted—requires examining the defendants' substantive arguments in more detail.
The defendants advance several arguments that, they say, preclude enforcement of the awards. But the Court's scope of review is narrow. The FAA establishes a liberal federal policy favoring arbitration agreements. Epic Sys. Corp. v. Lewis, No. 16-285, slip op. at 5 (U.S. May 21, 2018). So, the Court is required to rigorously enforce arbitration agreements according to their terms. Id. The Court must accord an extraordinary level of deference to the underlying awards. SBC Advanced Sols., Inc. v. Commc'n Workers of Am., Dist. 6, 794 F.3d 1020, 1027 (8th Cir. 2015).
The defendants' primary argument is that the underlying Agreement is unconscionable. Filing 22 at 7-10. And, they contend, the factual basis for the arbitration awards is wrong: they say the General Parts suit wasn't settled before the arbitration. Filing 11-1 at 2; filing 22 at 2. But while those arguments could have been presented to the arbitrator, they aren't a basis for refusing to enforce the awards. Courts have no authority to reconsider the merits of an arbitration award, even when the parties allege that the award rests on factual errors or a misinterpretation of the underlying contract. Med. Shoppe Int'l, Inc. v. Turner Invs., Inc., 614 F.3d 485, 488 (8th Cir. 2010). The Court must confirm the arbitrator's award even if it is convinced that the arbitrator committed serious error, so long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his or her authority. See id.; see also SBC Advanced Sols., 794 F.3d at 1027. An award may not be set aside because the Court might have interpreted the agreement differently or because the arbitrator erred in interpreting the law or determining the facts. SBC Advanced Sols., 794 F.3d at 1027.
It is true that the savings clause of the FAA, § 2, permits arbitration agreements to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability. Epic Sys., slip op. at 7. But that refers to the alleged unconscionability of the arbitration clause specifically, not to the agreement as a whole. See id.; Cicle v. Chase Bank USA, 583 F.3d 549, 553-54 (8th Cir. 2009). As a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract, Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006). So, "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance." Id. at 445-46. Because the defendants "challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court." Id. at 446.
But some of the defendants' other arguments carry more weight—or, at least, enough weight to warrant some discovery. To begin with, the defendants contend that they didn't get notice of the arbitration proceedings. Filing 11-1 at 1; filing 22 at 3. And Prospect Funding has presented neither evidence nor argument to contradict them. As a general matter, "[w]ithout question due notice should be given to the parties, of the time and place for hearing the cause, and if the award was made without such notice, it ought, upon the plainest principles of justice, to be set aside." Lutz v. Linthicum, 33 U.S. 165, 178-79 (1834). All parties in an arbitration proceeding are entitled to notice and an opportunity to be heard. 21st Fin. Servs., LLC v. Manchester Fin. Bank, 747 F.3d 331, 337 (5th Cir. 2014).
But the procedural vehicle for presenting that contention to the Court is less clear. It could be that the arbitrator committed misconduct, if the arbitrator was required to provide notice to the parties and failed to do so. Cf. Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 332-33 (7th Cir. 1995). Alternatively, an arbitration award may be overturned where it is completely irrational—that is, where it fails to draw its essence from the agreement, see SBC Advanced Sols., 794 F.3d at 1027,
And that presents a different question that the Court cannot answer on the present record: What notice rules were applicable to these arbitration proceedings? There are several options. The arbitration clause itself provides for arbitration "in New York and under the laws of the state of New York" and pursuant to the chosen arbitration association's "single arbitrator, expedited rules." Filing 2-2 at 7 (emphasis omitted). So, ARS's own rules might have applied, see Gingiss Int'l, 58 F.3d at 332-33, but they aren't before the Court. If New York's arbitration rules were applicable, they required the arbitrator to provide written notice to the parties, personally or by registered or certified mail. See N.Y. C.P.L.R. 7506(b). And the Agreement itself provides that "[a]ll notices and communications given or made pursuant to" the Agreement "shall be in writing" to be "delivered personally or sent by registered or certified mail (postage prepaid, return receipt requested) or delivered by reputable overnight courier[.]" Filing 2-2 at 6. That allencompassing language might control notice of arbitration as well. See Choice Hotels, 519 F.3d at 200; but see Gingiss Int'l, 58 F.3d at 333.
So, the Court will permit the defendants to conduct discovery focused on whether effective notice of the arbitration proceeding was provided.
The defendants also allege that the Agreement violates public policy. Filing 11 at 2-3. An arbitration award can be trumped by a "well defined and dominant public policy arising from laws and legal precedents." Entergy Operations, Inc. v. United Gov't Sec. Officers of Am. Int'l Union, 856 F.3d 561, 564 (8th Cir. 2017) (quotations omitted). And the defendants' public policy argument may have some force, because Nebraska public policy is clearly expressed by the Nonrecourse Civil Litigation Act, Neb. Rev. Stat. § 25-3301 et seq., which might be applicable. RJP also contends that it is not subject to an arbitration award because it was not a party to the Agreement. Filing 22 at 10-12. That has some force as well: arbitration is contractual by nature, and a party cannot be required to submit to arbitration any dispute he has not agreed to submit—so, while federal policy favors arbitration agreements, those agreements cannot be construed to encompass claims and parties not intended by the original contract. Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995); see Simmons Foods, Inc. v. H. Mahmood J. Al-Bunnia & Sons Co., 634 F.3d 466, 468-69 (8th Cir. 2011).
But that all implicates another problem—under the FAA, "[n]otice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered." § 12. A party who fails to comply with the statutory precondition of timely service of notice forfeits the right to judicial review of the award. Piccolo v. Dain, Kalman & Quail, Inc., 641 F.2d 598, 600 (8th Cir. 1981). The Court, in fact, lacks jurisdiction to modify or vacate the award in that situation. See id.; see also RGA Reinsurance Co. v. Ulico Cas. Co., 355 F.3d 1136, 1139 (8th Cir. 2004). And failure to file a timely motion to vacate waives any defenses to confirmation that might have been asserted in the motion. Val-U Constr. Co. of S.D. v. Rosebud Sioux Tribe, 146 F.3d 573, 579 (8th Cir. 1998); Sanders-Midwest, Inc. v. Midwest Pipe Fabricators, Inc., 857 F.2d 1235, 1237-38 (8th Cir. 1988).
Here, even if the "Cross-Petition to Vacate Arbitration Award" contained in the defendants' answer is construed as satisfying § 12,
There is a separate question whether all of the arguments the defendants advance are subject to waiver under § 12. There is at least some authority suggesting that an argument questioning the enforceability of the award, as opposed to the validity of the award—for example, an argument that the award is unenforceable as against public policy—is not raised under § 10 and is, therefore, not subject to § 12. See Int'l Union, United Mine Workers of Am. v. Monongalia Cty. Coal Co., 240 F.Supp.3d 466, 472-73 (N.D. W. Va. 2017); cf. Seacoast Motors v. Salisbury, Inc. v. DaimlerChrysler Motors Corp., 271 F.3d 6, 8-9 (1st Cir. 2001); but see Inversiones Procesadora Tropical INPROTSA, S.A. v. Del Monte Int'l GMBH, No. 16-24275-Civ, 2017 WL 1737648, at *7 (S.D. Fla. May 2, 2017); Demartini v. Johns, No. 12-cv-3929, 2015 WL 12781178, at *11 (N.D. Cal. January 22, 2015); Abbott v. Mulligan, No. 2:06-cv-593, 2010 WL 2375944, at *2 (D. Utah June 7, 2010); White v. Local 46 Metallic Lathers Union & Reinforcing Iron Workers of New York City, No. 01-Civ-8277, 2003 WL 470337, at *4 (S.D.N.Y. Feb 24, 2003).
Additionally, RJP has a colorable argument it was not a party to the agreement—and, therefore, to the arbitration clause. It has been held that
MCI Telecomms. Corp. v. Exalon Indus., Inc., 138 F.3d 426, 430-31 (1st Cir. 1998); accord Haberer Foods Int'l, Inc. v. Goya de Puerto Rico, Inc., Civ. No. 17-80, 2017 WL 4041147, at *4 (D. Minn. Sept. 13, 2017).
Of course, there are circumstances under which a signatory to an arbitration agreement may bind a non-signatory to the agreement—but, the signatory must establish at least one of these five theories: incorporation by reference, assumption, agency, veil-piercing/alter ego, or estoppel. Reid v. Doe Run Res. Corp., 701 F.3d 840, 846 (8th Cir. 2012) (citing Thomson-CSF, 64 F.3d at 776); see Simmons Foods, 634 F.3d at 469. But neither party has presented the Court with evidence relevant to those theories.
Finally, the defendants also point out that Prospect Funding is, they say, not registered to do business in Nebraska.
But it is an open question whether Prospect Funding is "transacting business in this state": that term, as relevant, does not include "maintaining, defending, or settling an action or proceeding;" "creating or acquiring indebtedness, mortgages, or security interests in real or personal property;" "conducting an isolated transaction that is completed within thirty days and is not in the course of similar transactions;" or "transacting business in interstate commerce." § 21-157(a). From the record, the Court cannot determine whether Prospect Funding must obtain a certificate of authority to transact business in this state in order to maintain this action.
In sum, the Court agrees that there are issues presented in this case that require discovery, but that discovery will be limited to evidence relevant to those issues: (a) whether the defendants were given proper notice of the arbitration proceedings, (b) whether the defendants were given proper notice of the arbitration awards, (c) whether the Agreement can be enforced against RJP, and (d) whether Prospect Funding is "transacting business in this state" within the meaning of the Nebraska Uniform Limited Liability Company Act. Any good-faith disputes about whether requested discovery is properly relevant to those issues can be presented to the Magistrate Judge, pursuant to the Federal Rules of Civil Procedure, this Court's local rules, and Judge Nelson's civil case management practices.
Finally, the Court notes that RJP and Palagi continue to represent both RJP and Stubblefield, and there are some uncertainties about that arrangement that it is prudent to point out to the parties. Most obviously, it is hard to imagine how discovery in this case can proceed without Palagi himself becoming a witness in some capacity. In fact, he's already a witness to some extent—he has filed two affidavits in which he avers to the adjudicative facts of this case. Filing 11-1; filing 22 at 14-17. And Palagi's testimony will only become more necessary on issues of notice and contract formation. That will certainly present practical problems, and could potentially present ethical ones as well. See Neb. Ct. R. of Prof. Cond. § 3-503.7(a); see also Beller v. Crow, 742 N.W.2d 230, 234-36 (Neb. 2007); see generally Turner v. AIG Domestic Claims, Inc., 823 F.Supp.2d 899, 905-10 (D. Neb. 2011).
There may also be a lurking conflict of interest: because RJP has defenses that Stubblefield does not, there is a potential for RJP's interests and Stubblefield's to diverge.
The Court is not acting on these concerns right now, but will be mindful of them. At this point, the Court only asks that counsel remain mindful of them as well, and asks Palagi to carefully consider at every juncture whether representing both defendants is practical and appropriate.
IT IS ORDERED:
