Opinion
01 Civ. 4465 (JSM)
July 19, 2001
Russell A. Smith, Montauk, N.Y. 11954, Smith Doran Shea PC, FOR Petitioners.
Ernest E. Badway, Saiber Schlesinger Satz Goldstein LLC Newark, N.J. 07102, For Respondent.
OPINION and ORDER
Wanderlust Pictures, Inc., Box Marley Productions, Inc., Dana Offenbach, and Christopher S. Cherot ( "Wanderlust" or "Petitioners") bring this motion for an order compelling arbitration of their contractual grievance with Empire Entertainment Group, L.L.C. ("Empire" or "Respondent"), see 9 U.S.C. § 4, and staying ongoing state court proceedings, see 28 U.S.C. § 2283. For the reasons set forth below, Petitioners' motion is denied in both respects.
I. BACKGROUND
The underlying subject matter of this action concerns a feature-length film entitled "Box Marley," a movie starring Tom Arnold about a boxer who "struggles with issues of identity and contentment." (Badway Decl. Ex. H.) On or about April 1, 1999, Empire and Wanderlust allegedly entered into an Initial Deal Memo, (Badway Decl. Ex. A), which was later reduced on or about July 16, 1999, to the Deal Memo, (Badway Decl. Ex. A). Pursuant to these agreements, Empire allegedly invested nearly $1 million in the production of the film, which Wanderlust was responsible for producing and shooting. The film remains unfinished and requires post-production work before it can be distributed commercially.
In December 2000, Empire brought suit in New York Supreme Court seeking an accounting and appointment of a receiver. Empire alleged that Wanderlust had refused to provide information about the status of Empire's investment and had withheld other important information about the film's financing and whereabouts. Wanderlust countered that Empire reneged on its financing obligations and thus delayed completion of the film.
Contained in a second amendment to the Deal Memo, allegedly executed on or about April 12, 2000, is a provision requiring that any claim for breach of the parties' agreement be submitted to arbitration. (Badway Decl. Ex. A.) Relying on the arbitration provision, Wanderlust moved in state court to stay the action pursuant to N.Y. C.P.L.R. 2201 pending a determination of arbitration, or alternatively to compel arbitration under N.Y. C.P.L.R. 7503(a). (Badway Decl. Ex. B.) In its memorandum of law in support of its motion to compel, Wanderlust argued that both New York law and the Federal Arbitration Act dictated that the, dispute go to arbitration. (Badway Decl. Ex. B.) In response, Empire argued that notwithstanding the arbitration clause, the court was empowered to appoint a receiver and order an accounting, relief that an arbitrator does not have the power to order. (Badway Decl. Ex. B.)
In February 2001, at oral argument on the motion to compel arbitration, the state court judge indicated that the arbitration agreement before him had only been signed by Empire's agents, not by Wanderlust's agents, and he noted that there had been no formal demand for arbitration. (Badway Decl. Ex. D at 4.) The judge then denied from the bench the motion to compel arbitration and to stay the proceedings, enjoined Wanderlust from removing the film from the post-production lab, and ordered Empire to take Defendant Christopher Cherot's deposition within forty days, noting that they would see where they were at that point. In denying Wanderlust's motions, the judge told Wanderlust's counsel that they could submit a copy of the arbitration agreement that had been signed by their clients. It is unclear whether Wanderlust ever did so.
On March 2, 2001, Wanderlust appealed the denial of its motions to compel arbitration and to stay the proceedings to the Appellate Division, and on May 1, 2001, that court denied a stay pending its ruling on the arbitration question. (Badway Decl. Exs. F, I.) In the interim, the parties had agreed to a stay of discovery pending the appellate court's ruling on the stay of proceedings. At a conference subsequent to the Appellate Division's ruling, the state judge gave Wanderlust permission to make another motion to compel arbitration. (Conf. Tr. Before J. Martin, 6/8/01, at 11-12, 14.) So far as this Court is aware, Wanderlust has not renewed its motion before the state court judge. On May 25, 2001, Wanderlust withdrew its appeal from the Appellate Division and that same day filed this action by way of order to show cause seeking to compel arbitration and to stay the ongoing state court proceedings. Judge Rakoff, sitting in this Court's absence, denied Wanderlust's motion for a temporary restraining order, and this Court heard oral argument on Wanderlust's motions on June 8, 2001.
II. DISCUSSION
One purpose of the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 1et. seq., is to afford relief in federal court to a party whose right to arbitrate has been frustrated in another venue, including a state court.See, e.g., Olde Discount Corp. v. Tupman, 1 F.3d 202, 213-14 (3d Cir. 1993). As the Third Circuit noted in Tupman, "[t]he concern underlying a federal right to enforcement of arbitration agreements is a party's entitlement to a proceeding and a forum that are, at least ideally, speedy, efficient, and simpler than litigation in the agencies." Id. at 213. However, the prerequisite for obtaining relief under the FAA, whether one is in federal or state court, is that an agreement to arbitrate exists which the opposing party has refused to honor. See 9 U.S.C. § 4; Burns v. New York Life Ins. Co., 202 F.3d 616, 620 (2d Cir. 2000); Singer v. Jefferies v. Co., 575 N.E.2d 98, 100-01 (N.Y. 1991).
While federal courts are required to effectuate the policies underlying the FAA, competing principles may require that a federal court abstain from considering the merits of a party's claimed right to arbitration. For example, principles of federalism embodied in the jurisdictional parameters that constrain the federal courts deprive those courts of jurisdiction to review a prior state court ruling. See generally Dist. of Columbia Ct. of Appeals v. Feldman, 460 U.S. 462, 476, 103 S. Ct. 1303, 1311 (1983); Atlantic Coast Line R.R. Co. v. Brotherhood of Locomotive Eng's, 398 U.S. 281, 285-87 296, 90 S. Ct. 1739, 1742-43, 1748 (1970);Rooker v. Fidelity Trust Co., 263 U.S. 413, 415-16, 44 S. Ct. 149, 150 (1923); Vernitron Corp. v. Benjamin, 440 F.2d 105, 108 (2d Cir. 1971). Thus, a party cannot invoke the federal policy in favor of arbitration as a means of improperly appealing a state court ruling, whether or not that ruling has attained preclusive effect. See, e.g., Brown Root, Inc. v. Breckenridge, 211 F.3d 194, 198-202 (4th Cir. 2000) This is precisely what Wanderlust seeks to do here.
In the typical case, the petitioner moves in a timely fashion to compel arbitration in federal court after a state proceeding has begun. See, e.g., Nuclear Elec. Ins. Ltd. v. Central Power Light Co., 926 F. Supp. 428 (S.D.N.Y. 1996). In such cases, a federal court must exercise its jurisdiction in order to further the goals of the FAA. See Moses Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 22-23, 103 S. Ct. 927, 940-41 (1983); Burns, 202 F.3d at 620. But where the petitioner delays a federal action and chooses instead to litigate the issue of arbitration in state court, and seeks the aid of a federal court only after receiving an adverse ruling in state court, the petitioner runs the risk that constraints on a district court's jurisdiction, rules of preclusion, or principles of equity will prevent or hamper its suit. See, e.g., Brown Root, 211 F.3d at 199-201;Ultracashmere House, Ltd. v. Meyer, 664 F.2d 1176, 1181-82 (11th Cir. 1981); Colt's Mfg. do. v. Devteck Corp., 961 F. Supp. 382, 386-87 (D. Conn. 1997).
Here, the state judge found that the evidence before him at the time that he ruled on Wanderlust's motions was insufficient to demonstrate the existence of an enforceable agreement to arbitrate. Although the state court judge did not issue a written opinion addressing the merits of the motion to compel arbitration, he indicated from the bench that several problems existed with respect to the motion. The arbitration agreement upon which Wanderlust sought to compel arbitration had not been signed by any agents of Wanderlust. Nor had Wanderlust made a formal demand for arbitration. Accordingly, the judge denied the motion from the bench.
While the state court's ruling may not be entitled to preclusive effect under New York law, the Rooker-Feldman doctrine nonetheless governs this dispute. Under this doctrine, where a litigant in federal court seeks relief that would effectively void or reverse a related state court ruling, the federal court has no subject matter jurisdiction over the suit. See Doctor's Assocs., Inc. v Distajo, 107 F.3d 126, 137 (2d Cir. 1997); see also Bosdorf v. Beach, 79 F. Supp.2d 1337, 1341 (S.D. Fla. 1999) ("[T]he spirit of the [Rooker-Feldman] doctrine is to prevent federal courts from interfering with state court rulings."). TheRooker-Feldman doctrine applies to interlocutory rulings of lower state courts, and brushes more broadly than do rules of preclusion. See Distajo, 107 F.3d at 137-38.
Applying res judicata or collateral estoppel is inappropriate because there has been no final judgment on the merits of the enforceability of the arbitration provision. This is evident from the state judge's contemplation that Wanderlust might renew its motion to compel.
The Second Circuit has indicated that in the arbitration context, theRooker-Feldman doctrine does not bar a federal court from considering claims ruled on by a state court where the federal action was commenced prior to a state court ruling on the merits and where it does not otherwise appear that the petitioner is attempting to appeal a state court ruling. See Distajo, 107 F.3d at 138. The Court noted in Distajo that "the parties have not cited, nor have we found, any cases applying the Rooker-Feldman doctrine to deprive a district court of subject matter jurisdiction over a petition to compel arbitration under 9 U.S.C. § 4."Id.
Subsequent to the Distajo decision, several courts have applied theRooker-Feldman doctrine in cases where a state court has ruled on a party's right to arbitrate prior to the petitioner's filing of the federal suit. See generally Central Reserve Life Insurance Co. v. Marello, No. Civ. A. 00-3344, 2001 WL 41129, at *3 (E.D. Pa. Jan. 17, 2001). In order to determine whether the federal suit constitutes an improper attempt to appeal the state court's ruling, these courts have examined the state court proceedings in order to determine whether the arbitration issue was actually decided and whether the petitioner was given a reasonable opportunity to raise his federal claims. See, e.g., Brown Root, 211 F.3d at 199-201 ("The state court heard extensive argument on this issue and specifically addressed the applicability of the FAA in the proceedings before it."); Int'l Cement Aggregates, Inc. v. Antilles Cement Corp., 62 F. Supp.2d 412, 415 (D.P.R. 1999) ("ICA's arbitration petition strikes the Court as an attempt to circumvent the Bayamon Court's ruling and forego the appeal process before the Puerto Rico Court of Appeals and the Supreme Court of Puerto Rico."); see also Marello, 2001 WL 41129, at *3-4 (noting that where the federal action is filed after the state court rules on the merits, the federal suit should be barred). If the petitioner's motion was fully and fairly heard, then any attempt to seek in federal court what amounts to appellate review of an adverse ruling, will be denied.
The concerns underlying the Rooker-Feldman doctrine are directly implicated here, Wanderlust argues that the state court refused to consider the merits of its motion to compel arbitration, and instead set the motion aside and ordered forty days of expedited discovery. Wanderlust asserts that the state court's actions contravene the purpose of the FAA to provide for a swift and efficient ruling on the parties' right to arbitrate so that they need not go through pointless litigation in state court. However, the record indicates that the state court judge did not arbitrarily refuse to consider the merits of Wanderlust's motion to compel arbitration, thus depriving Wanderlust of the protections of the FAA, nor did it ignore the existence of an obvious agreement to arbitrate. Rather, the state judge found that Wanderlust had failed to submit sufficient evidence of an enforceable arbitration agreement. In addition, it was not evident that Empire had refused to arbitrate since no formal demand for arbitration had been made.
It is also worth noting that the arbitration agreement covers disputes for breach of the parties' contract, while the state suit seeks appointment of a receiver and an accounting. Thus, even the existence of an enforceable arbitration agreement not necessarily mean that the state proceedings could not have gone forward.
Moreover, the state judge gave Wanderlust permission to submit a fully executed copy of the arbitration agreement in order to remedy one of those deficiencies, and according to the parties, the judge later gave Wanderlust permission to' renew its motion. Wanderlust has apparently taken advantage of neither of these invitations. The only conclusion possible is that by withdrawing its appeal from the Appellate Division after that court declined to stay the proceedings pending a ruling on the merits, and the same day filing this action, Wanderlust has come to this Court to seek a more favorable ruling on its motions and to circumvent the procedures that the state court has implemented for resolving the issue of arbitration.
While Wanderlust argues that it is enduring needless and burdensome discovery in state court, as a practical matter, it would likely be required to submit to at least some portion of that discovery in arbitration. Its complaint is also undermined by the fact that it has not renewed its motion to compel in state court.
The cases that Wanderlust cites in support of its petition are distinguishable, not least because each of them involved a clear agreement to arbitrate which the state court, for whatever reason, refused to enforce. Ferrari North America, Inc. v. Crown Auto Dealerships, No. 94 Civ. 8541, 1995 WL 614558, at *4 (S.D.N.Y. Oct. 19, 1995), aff'd, 101 F.3d 686 (2d Cir. 1996), involved a pending proceeding before a Florida administrative agency. That agency denied the petitioner's motion to compel arbitration because it had no authority to enforce an arbitration agreement. Had the district court not heard the motion to compel, the petitioner would no forum in which to compel arbitration. In Network Cinema Corp. v. Glassburn, 357 F. Supp. 169, 717-72 (S.D.N.Y. 1973), the district judge granted a motion to compel arbitration that had been denied in the Kansas state court because the state judge found that the provision was not enforceable in Kansas. That case, however, was decided at a time when it was unclear whether states were bound to enforce the FAA. In Snap-On Tools Corp. v. Vetter, 838 F. Supp. 468, 470 (D. Mon. 1993), the petitioner filed its motion to compel in federal court prior to making a motion to stay the proceedings pending arbitration in state court. Similarly, in Central Reserve Life Insurance Co. v. Marello, No. Civ. A. 00-3344, 2001 WL 41129, at *3 (E.D. Pa. Jan. 17, 2001), the federal petition was filed before the state court ruled on the merits of the petitioner's arbitration objection. Although McGuire, Cornwell Blakey v. Grider, 765 F. Supp. 1048, 1051-52 (D. Colo. 1991), is factually similar to the present case in that the state court denied the petitioner's motion to dismiss or compel arbitration before the federal suit was filed, the federal court did not address the applicability of the Rooker-Feldman doctrine. It held only that prejudgment orders are not given preclusive effect under Oklahoma law, and therefore the state court ruling was not entitled to full faith and credit.
In light of Wanderlust's conduct in withdrawing its appeal from the Appellate Division and seeking relief here only after receiving unfavorable decisions in the state courts, this Court finds that it is without jurisdiction to entertain Wanderlust's motion to compel arbitration because to do so would amount to improper review of the state courts' prior rulings.
III. CONCLUSION
For the foregoing reasons, Petitioner's motion to compel arbitration and to stay the ongoing state court proceedings is denied.