Introduction
The U.S. Court of Appeals for the Eighth Circuit recently decided a case that provides a good—and simple—example of how subject matter jurisdiction can be a trap for the unwary, especially for parties seeking to confirm or vacate arbitration awards under the Federal Arbitration Act (the “FAA”). In Prospect Funding Holdings (N.Y.) v. Ronald J. Palagi, P.C., No. 22-1871, slip op. (8th Cir. Aug. 7, 2023), the Eighth Circuit vacated a district court’s judgment vacating two arbitration awards because the petitioner failed to plead the citizenship of the parties and therefore could not establish the requisite independent basis for subject matter jurisdiction. But there was more to it than that.
Subject Matter Jurisdiction | Prospect Funding: Background
Attorney A was an attorney who, along with his law firm, the “Attorney A Firm,” represented Client B in a lawsuit. Client B entered into a contract with Litigation Funder C, under which Client B sold to Litigation Funder C a portion of Client B’s interest in the lawsuit, in exchange for litigation funding.
The Client B-Litigation Funder C contract contained an arbitration agreement, a dispute arose, and Litigation Funder C demanded arbitration against Client B and the Attorney A Firm. In 2017 the arbitrators made awards against Client B and the Attorney A Firm, which Litigation Funder C sought to confirm in federal district Court under the FAA. But Client B and the Attorney A Firm cross-petitioned to vacate the awards and the district court granted the motions to vacate.
Rather than pursuing an appeal, Litigation Funder C commenced a new arbitration against the Attorney A Firm and Attorney A in an individual capacity. In 2021 arbitration awards were made against the Attorney A Firm and Attorney A in his individual capacity.
Attorney A and his firm moved to vacate and did so by filing a motion in the 2017 proceeding that had resulted in vacatur of the original, 2017 awards against Client B and the Attorney A Firm.
Litigation Funder C asserted a lack of subject matter jurisdiction but the district court disagreed and vacated the awards. The Eighth Circuit, however, vacated the judgment for lack of subject matter jurisdiction because the requisite basis for diversity jurisdiction was not pleaded.
Regretfully, at some unspecified time during these events, Attorney A passed away and his estate’s “Special Administrator” substituted in his place. (Attorney A’s passing, however, had no bearing on the subject matter jurisdiction question.)
FAA Subject Matter Jurisdiction Basics
Before discussing the Eighth Circuit’s decision, a brief word about subject matter jurisdiction in FAA cases is warranted, especially because of the U.S. Supreme Court’s recent decision in Badgerow. See Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here). As many readers know (e.g., here, here, and here) the FAA does not confer federal question jurisdiction on a court – an independent basis for subject matter jurisdiction is required. See, e.g., Badgerow, 142 S. Ct. at 1314. Put differently, making a claim governed exclusively by Chapter 1 of the FAA does not, in and of itself, present a federal question for subject matter jurisdiction purposes.
Federal question subject matter jurisdiction over an FAA Section 4 petition to compel arbitration can be established based on whether the underlying, allegedly arbitrable controversy presents a federal question. This is sometimes referred to as “looking-through” the petition or application. But in cases arising under FAA Section 9 (confirmation of awards) or 10 (vacatur of awards) —and presumably in cases arising under Sections 5 (arbitrator appointment), 7 (arbitral summonses), or 11 (modification of awards)—the independent basis for subject matter jurisdiction must appear on the face of the petition or application. See Badgerow, 142 S. Ct. at 1314, 1320) (“Without that statutory instruction [authorizing a court to “look-through” the application], a court may look only to the application actually submitted to it in assessing its jurisdiction.”); see also 142 S. Ct. at 1320.
Because subject matter jurisdiction to confirm or vacate awards cannot, after Badgerow, be established by “looking through” the petition or application to the underlying arbitrable (or allegedly arbitrable) controversy, Section 9 or 10 petitions or applications that fall only under Chapter 1 of the FAA must be based on diversity jurisdiction, and the existence of that diversity jurisdiction must be assessed based only on the application submitted. See Badgerow, 142 S. Ct. at 1314; see 28 U.S.C. § 1332(a); 142 S. Ct. at 1320. If the award or the agreement falls under Chapters 2 or 3 of the FAA (governing the New York Convention and the Inter-American Convention), then those Chapters provide an independent basis for federal subject matter jurisdiction. See 9 U.S.C. §§ 203, 302.
The requirement that the court have subject matter jurisdiction—whether in a case governed by the FAA or otherwise—cannot be waived or forfeited. Gonzalez v. Thaler, 565 U.S. 134, 141 (2012). It is the obligation of all federal appellate and trial courts to ascertaining whether they have, and continue to have subject matter jurisdiction, and the issue can be raised at any time by a party (including on appeal) or by the trial or appellate court sua sponte. See Arbaugh v. Y H Corp., 546 U.S. 500, 506-07 (2006); Thaler, 565 U.S. at 141.
The Eighth Circuit’s Subject Matter Jurisdiction Decision
These subject-matter-jurisdiction rules came into play in Prospect Funding and the outcome for Attorney A and the Attorney A Firm was unfortunate and probably also costly in terms of wasted time and resources. The lesson of the case is that parties and their counsel must ensure that they are able to present to the Court a solid basis for federal subject matter jurisdiction and to proceed in state court if subject matter jurisdiction cannot be established. That, unfortunately, was not done here.
The Eighth Circuit determined that the dispute over confirmation and vacatur did not present a federal question, which meant that diversity jurisdiction was the only possible subject-matter-jurisdiction basis. But the application to vacate the 2021 awards did not specify any basis for subject matter jurisdiction. Slip op. at 3.
“Crucially,” said the Court, “[Attorney A] and his firm failed to plead the parties’ citizenship in [that] application.” Id. And, “[e]ven if [the Court] consider[ed] [Litigation Funder C’s and the Attorney A Firm’s citizenships as pleaded in the action for the 2017 awards, [Attorney A’s] individual citizenship has never been pleaded before the court.” Slip op. at 3.
Attorney A and his firm did not establish that the district court had subject matter jurisdiction, and accordingly, the Eighth Circuit vacated the district court judgment vacating the 2021 Awards and remanded the case to be dismissed for lack of subject matter jurisdiction. Slip op. at 3.
Analysis
The Court’s decision is effectively a finding that this matter should have been dismissed for lack of subject matter jurisdiction back when Litigation Funder C sought confirmation of the 2017 Awards.
Because citizenship was never alleged, we cannot determine whether there was, in fact, a basis for diversity jurisdiction in this case. If there was, then it should have been pleaded, both by Litigation Funder C, who commenced the unsuccessful proceeding to confirm the 2017 Awards, and also by the Attorney A Firm, which successfully sought to vacate: (a) those 2017 Awards; and (b) the 2021 Awards in that same proceeding. It should have been pleaded by Attorney A, who successfully applied for vacatur of the 2021 Awards.
Doing so would have avoided the loss of time and resources that took place in this case. It would have spared Attorney A and the Attorney A Firm from being in the position of having won vacatur of the 2021 Awards only to have that victory nullified nunc pro tunc, and to be relegated to whatever remedies, if any, state law might provide to similarly situated litigants. It would also have spared them from the possibility that the arbitration proponent might now, depending on what applicable state law provides, be able to obtain confirmation of the 2021 Awards without having to deal with any argument that those Awards should have been vacated.
Of course, if there was no basis for subject matter jurisdiction, then the parties should have proceeded in a state court, beginning with the 2017 Awards.
Parties and their counsel are well advised to avoid situations like that in Prospect Funding by fully educating themselves about subject matter jurisdiction in general and how it works in FAA proceedings in particular. Armed with that knowledge, parties and counsel should ensure that complaints, counterclaims, petitions, cross-petitions, applications and cross-applications allege a legitimate basis for subject matter jurisdiction, and the facts supporting that assertion of subject matter jurisdiction. They should refer to, and where appropriate submit to the court, the supporting evidence for those allegations as Section 5, 7, 9, 10, and 11 proceedings are summary in nature and must, like other motions, be supported by evidence, including affidavits or declarations. Memorandum of Law submitted in support of such petitions and applications should also describe the basis for subject matter jurisdiction, cite supporting authorities, and provide record cites to the evidence.
A modest investment in time and resources can save you from heartache (or worse) down the road.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that The Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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Tags: Amount in Controversy, Application, Badgerow, Citizenship, Cross-Petition, Diversity, Eighth Circuit, Face of Petition, federal question, Independent Basis, Litigation Funding, look through, Motion, Petition, pleading, Prospect Funding, Subject Matter Jurisdiction, Vaden
