Opinion
Civil No. 01-1106-HA
August 10, 2001
ORDER
Presently before the court is Associates' Petition (#1) for Order Compelling Arbitration.
BACKGROUND
David and Susan Young (the plaintiffs) filed a complaint in state court in December, 1999. The plaintiffs, who live in Portland, Oregon, alleged that Associates (a California Corporation), Redman Homes (a Delaware Corporation), Bonanza Homes (an Oregon corporation), and Evan M. Whitaker (president of Bonanza, whose mailing address is in Milwaukee, Oregon) violated the Truth in Lending Act, 15 U.S.C. § 1638, the Magnuson Moss Warranty Act, 15 U.S.C. § 2310d, and Oregon statutory and common law.
The Youngs are the plaintiffs in an underlying state court case giving rise to this dispute. Associates is a defendant in that case. For the sake of clarity, as both this petition and the underlying case are discussed herein, the Youngs are referred to as the "plaintiffs" and Associates is referred to as the "defendant."
The plaintiffs purchased a manufactured home from Bonanza, which in turn assigned the retail installment contract to Associates. The contract contained a "Pre-Dispute Arbitration Agreement" that required arbitration of various disputes likely to be brought by the buyer, but excluded from arbitration all actions likely to be brought by the seller. The Arbitration Agreement waived the right to a jury trial on any action, allowed only the recovery of actual damages and specifically excluded an award of punitive damages. Further, the Arbitration Agreement provided that each party must pay its own attorney fees and costs of arbitration. The Arbitration Agreement, which is "governed by the Federal Arbitration Act ("FAA"), Title 9, United States Code," is triggered when the amount in controversy is $20,000 or more.
The plaintiffs originally pleaded actual damages "not to exceed $15,000." The exact amount of actual damages pleaded in the second amended complaint was $14,633.36. However, plaintiffs were also seeking an order directing the defendants to accept return of the home, with costs and expenses paid by defendants, and to rescind the outstanding loan obligation. Plaintiffs have submitted evidence that the monetary value of these additional remedies would have exceeded $90,000 at the time the complaint was filed. As will be explained below, the $90,000 loan obligation is not relevant to the issue before this court. However, it is worth noting that any claim Associates may have had for the collection of the debt was an "excluded action" under the Arbitration Agreement, whereas any claim by the Youngs to rescind that obligation was subject to arbitration.
In its answer, dated May 5, 2000, Associates admitted that Bonanza was an Oregon corporation, but denied it was a California corporation, asserting that it was in fact a Delaware limited liability company.
It is inexplicable why Associates would deny California citizenship in state court and yet designate itself a California corporation in its petition to this court. However, whether it is a California or Delaware corporation does not affect the outcome here.
It appears that on or about January 19, 2001, Associates filed its first motion for summary judgment. The affidavit attached to the motion stated that Associates took possession of the Youngs' manufactured home on June 30, 2000. At that time, the plaintiff's outstanding loan was $91,997. The affidavit further stated that as of January 19, 2001, "Associates has now written off the indebtedness of the Youngs, has taken no action to collect the amounts owed to it, and will not make any attempt to collect any amounts related to the loan."
On February 21, 2001, the state court judge ordered the parties in this and approximately 25 related cases to meet for a global settlement conference. That conference occurred on or about July 10, 2001. The cases did not settle.
On or about March 19, 2001, plaintiffs filed a second amended complaint in which they asserted a claim for $5 million in punitive damages. Apparently the only purpose of the second amended complaint was to assert the claim for punitive damages which, under Oregon law, cannot be pleaded in the original complaint. ORS 18.535(1). Punitive damages in Oregon must be supported by "clear and convincing" proof that the defendant acted with "malice or has shown a reckless and outrageous indifference to a highly unreasonable risk of harm and has acted with a conscious indifference to the health, safety and welfare of others." ORS 18.537(1). In order to receive leave from the court to amend their complaint to include the claim for punitive damages, the plaintiffs were required to come forward with "admissible evidence adequate to avoid the granting of a motion for a directed verdict . . . on the issue of punitive damages in a trial on the matter." ORS 18.535(3).
On June 15, 2001, almost three months after the amended complaint was filed, the defendant's attorney sent a letter to plaintiff's counsel which stated:
Pursuant to 9 U.S.C. § 4, this letter serves as five days' written notice that if plaintiffs do not comply with the Pre-Dispute Arbitration Agreement in the above-mentioned cases, we will file a petition with U.S. District Court to order arbitration.
The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., provides that a
party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Five days' notice in writing of such application shall be served upon the party in default.9 U.S.C. § 4.
Plaintiffs' counsel replied on June 22, 2001, questioning whether a federal court could exercise subject matter jurisdiction over defendant's proposed petition, and asking the defendant to refrain from filing the petition until after the settlement conference. Although defendant could have filed its petition prior to receiving plaintiffs' letter, it did not do so. However, it did file a second summary judgment motion prior to the settlement conference, and then filed its petition in this case on July 19, 2001.
DISCUSSION
Federal courts are courts of limited jurisdiction, and their power is limited by the Constitution and by statute. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. at 378 (1994). "It is to be presumed that a cause lies outside this limited jurisdiction, (internal citation omitted), and the burden of establishing the contrary rests upon the party asserting jurisdiction." Id. at 377. Federal court jurisdiction is defined by Article III of the Constitution of the United States, and by Title 28 of the United States Code. Basically, federal court jurisdiction is limited to cases involving questions of federal law, cases where the parties are citizens of different states, cases originally filed in state court that would otherwise meet the criteria for jurisdiction under Title 28, admiralty and bankruptcy cases, and a few other limited circumstances.
The FAA does not limit its jurisdictional inquiry to Article III, but rather to all of Title 28.
"It is well-settled that the FAA does not, on its own, provide an independent basis for federal question jurisdiction." Blue Cross of California v. Anesthesia Care Associates Medical Group, 187 F.3d 1045, 1050 (9th Cir. 1999); see Southland Corp. v. Keating, 465 U.S. 1, 15, n. 9 (1984). 9 U.S.C. § 4 authorizes a federal court to order arbitration:
only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before an order can issue.
Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25 n. 32 (1983). Therefore, Associates bears the burden of proving federal jurisdiction of this case under Title 28. Associates first argued for jurisdiction under 28 U.S.C. § 1331 because plaintiffs' underlying complaint alleged violations of federal law. It abandoned that position at oral argument, and now contends only that this court has diversity jurisdiction because the additional claim for punitive damages has created jurisdiction where none existed before.
Plaintiffs argue that defendant cannot rely on either basis for jurisdiction because it did not remove the case to federal court within 30 days of being served with the original complaint, that the parties in the underlying lawsuit do not have diverse citizenship, that even newly-created diversity jurisdiction cannot be invoked more than one year after the original state court complaint was filed, and that the state court has already ruled on the validity of an identical arbitration clause in one of the related cases, and relied heavily on Graham Oil Co. v. Arco Products Co., 43 F.3d 1244 (9th Cir. 1994) in that ruling. However, plaintiffs acknowledge that the state court also found that the amount in controversy set out in the arbitration clause was not met.
In Graham Oil, an arbitration clause in which one party forfeited important statutory rights was ruled unenforceable. The Graham Oil clause was similar to the one in this case in that it denied recovery of attorney fees and exemplary damages. Plaintiffs also contend that, independent of the state court ruling, this court should find the arbitration clause unenforceable under Graham Oil, that the clause here contravenes public policy by rendering the consumer protection statutes meaningless, and that the clause is unenforceable because it is an adhesion contract with unconscionable terms.
1. Diversity Jurisdiction Under 28 U.S.C. § 1332
"The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between (1) citizens of different states." 28 U.S.C. § 1332(a).
The petition in this case names only the Youngs, who are citizens of Oregon, and Associates, which names itself a citizen of California. Associates has not named the other state court defendants in its petition. Associates contends that the amount in controversy is satisfied by the $5 million punitive damages claim.
Diversity jurisdiction can be created after a lawsuit is filed, as with an amended complaint that increases the amount in controversy or by dismissal of the non-diverse party. Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826 (1989). In response to plaintiffs' argument that the time requirements of the removal statute, 28 U.S.C. § 1446, bar this action, Associates is careful to point out that it does not seek to remove the underlying action, but only to compel arbitration.
Associates is correct that the court must look only to the action before it to determine the citizenship of the parties. In the petition to compel arbitration, diversity of citizenship is present. First Franklin Financial Corp. v. McCollum, 144 F.3d 1362 (11th Cir. 1998); We Care Hair Development, Inc. v. Engen, 180 F.3d 838, 842 (7th Cir. 1999); Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157 (2nd Cir. 1998). However, under this same line of cases, the amount in controversy is lacking.
In We Care, sixty four franchisees filed a class action alleging only state law claims in state court against the common franchisor. The disputed franchise agreement contained an arbitration clause that invoked the FAA. The franchisor, We Care, filed a petition to compel arbitration in federal court, asserting diversity jurisdiction and naming only fifty three respondents. It excluded the eleven franchisees that would otherwise have destroyed diversity. The Seventh Circuit found that the petition did satisfy the jurisdictional condition that the parties were citizens of different states. However, in analyzing whether We Care had shown the necessary amount in controversy, the court stated that "since the present suit is not a removal suit but rather an independent federal suit, it is the stakes of the arbitration and not the possible state court award that control". We Care, 180 F.3d at 841; Doctor's Associates, 150 F.3d at 160; see also Webb v. Investacorp, Inc., 89 F.3d 252 (5th Cir. 1996).
In the present case, the Arbitration Agreement provides that the "arbitrator shall not be empowered to award damages in excess of compensatory damages. EACH PARTY IRREVOCABLY WAIVES ANY RIGHT TO RECOVER DAMAGES IN EXCESS OF COMPENSATORY DAMAGES." (Pre-Dispute Arbitration Agreement, page 1). Assuming, arguendo, that the arbitration clause is otherwise enforceable, it appears from the record that the actual stakes of any arbitration between Associates and the Youngs could not approach $75,000. Therefore, this court lacks subject matter jurisdiction over Associates' petition.
CONCLUSION
Associates' Petition (#1) for Order Compelling Arbitration is denied for lack of subject matter jurisdiction. This action is dismissed with prejudice.