Sharlands Terrace, LLC v. 1930 Wright Street LLC et al, No. 3:2011cv02503 - Document 48 (N.D. Cal. 2011)
Court Description: ORDER granting re 24 Motion to Remand. Signed by Magistrate Judge Elizabeth D. Laporte. (kns, COURT STAFF) (Filed on 8/12/2011)
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Sharlands Terrace, LLC v. 1930 Wright Street LLC et al Doc. 48 1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 9 SHARLANDS TERRACE, LLC, Plaintiff, United States District Court For the Northern District of California 10 ORDER GRANTING MOTION TO REMAND v. 11 12 No. C-11-2503-EDL 1930 WRIGHT STREET, LLC, et al. Defendants. 13 14 15 16 I. Introduction On March 25, 2011, Petitioner Sharlands Terrace LLC filed a petition to confirm an 17 arbitration award in San Francisco Superior Court. On May 23, 2011, Respondents Windgate 18 Apartments LP, M&G LLC, Barry Lewis and Mary Sparks (“Removing Respondents”) removed 19 the action to this Court on the basis that the grounds for confirmation “depend on the Court’s 20 resolution of a substantial question of federal law, namely, whether the arbitrators exceeded their 21 powers under 9 U.S.C. § 10(a)(4) by manifestly disregarding the Fair Housing Act, 42 U.S.C. § 22 3601, et seq. in rendering their award.” Dkt. #1. Respondents 1329 Wright Street LLC, 3859 23 Annandale Lane LLC, 5311 College Oak Drive LLC, John Artal, Jim Brittian, Sandee Brittain, 24 Christopher Martin Trust, Thomas Finnegan, Barbara Finnegan, Richard B. Hutchins, Jon E. 25 Krabbenschmidt, Barabara F. Novogradac, Michael J. Novogradac, O'Brien Family Trust, 26 Sharlands Terrace Apartments I, LLC, Sharlands Terrace Apartments II, LLC, Robert P. Spalholtz, 27 Robert S. Thesman, Robert B. Tracy, and the Stephen B. Tracy & Victoria L. Johnson Revocable 28 Trust (“Joining Respondents”) joined in the removal. Dkt. #3. The Joining Respondents and Responding Respondents are collectively referred to as “Respondents” herein. Dockets.Justia.com 1 On May 31, 2011, the Joining Respondents filed a Petition to Vacate and/or Modify 2 Arbitration Award. Dkt. #8. The Removing Respondents filed a joinder to the Petition to Vacate 3 and/or Modify, and filed their own Petition to Vacate a Portion and Confirm a Portion of 4 Arbitration Award and Motion to Vacate Arbitration Award. Dkt. # 10, 12, 13. Both Petitions to 5 Vacate argue that the arbitrators manifestly disregarded applicable law by: (1) failing to award 6 attorneys fees under the FHA, (2) failing to properly offset Respondents’ contract and FHA 7 damages prior to calculating interest on Petitioner’ contract claim, and (3) awarding a “penalty” 8 12% interest rate on Petitioner’s damages. On June 21, Petitioner filed a Motion to Remand, arguing that the Petition to Confirm is the 10 United States District Court For the Northern District of California 9 only document to be considered for purposes of removal and remand and it did not raise any federal 11 issue to supply this Court with jurisdiction. Alternatively, Petitioner contends that Respondents’ 12 argument that the arbitrators manifestly disregarded applicable federal law in refusing to award 13 FHA fees is patently without merit. The Court heard argument on the Motion to Remand on 14 August 9, 2011, and delayed argument on the Petitions to Vacate until resolution of the remand 15 issue. For the following reasons, the Motion to Remand is hereby GRANTED and therefore the 16 Court does not reach the issue of whether to vacate the arbitration award.1 17 II. 18 Background This case originally arose out of the sale of an apartment complex in Reno, Nevada (the 19 “Property”). On November 4, 2003, Sharlands Terrace entered into a purchase agreement with 20 Pacific Regional Equities, Inc. whereby Pacific Regional agreed to purchase the Property for a total 21 purchase price of $25,880,000. Prior to the close of escrow, Pacific Regional assigned its rights 22 under the agreement to a group of entities, which were the buyers of the Property (the “Buyers”).2 23 1 24 25 26 27 All current parties to the Petition to Confirm the award have consented to this Court’s jurisdiction. Additionally, certain cross-defendants in the arbitration not named in the state court petition or the removal papers (Michael Blatt and Blatt Development of Nevada LLC; collectively “the Blatts”) were named in the later-filed Petition to Vacate filed by the Removing Respondents (but not the petition filed by the Joining Respondents). See Dkt. No. 11, 13 (adding the Blatts to caption without explanation). The Blatts specially appeared to object to being named in the Petition to Vacate, and have also consented to this Court’s jurisdiction. 2 28 The Buyers included 1930 Wright Street LLC, 5311 College Oak Drive LLC, 3859 Annadale Lane LLC, Windgate Apartments, LP, Sharlands Terrace I, LLC, and Sharlands Terrace II, LLC. 2 1 As part of the purchase agreement, Sharlands Terrace agreed to carry-back a promissory note for 2 $1,880,000. The note was executed, and secured by certain pledged collateral, by various 3 individuals and trusts that were members, shareholders, or otherwise associated with the Buyers.3 4 The Buyers and these individuals and trusts are the Respondents in this action. The Note had a 6% 5 interest rate, required no payment until maturity six months after escrow, and was due in full with 6 interest on or before July 7, 2004. The Note provided that the rate would increase to 12% 7 compounded monthly if it was not timely paid “for any reason.” Flynn Decl. Ex. B, C. 8 Respondents have never disputed the amount of the Note, but have not paid on the Note to this day 9 due to a claim of offset. United States District Court For the Northern District of California 10 On June 4, 2004, the Department of Justice (“DOJ”) instituted an action against Sharlands 11 Terrace, Blatt Development of Nevada, Inc. (the developer of the complex), Michael Blatt, the 12 architect, and the engineer to remediate various aspects of the Property that failed to comply with 13 the Fair Housing Act (“FHA”). The Buyers were also named in the DOJ Action. The defendants in 14 the DOJ Action (except the Buyers) paid over $1 million to remediate the construction defects. 15 When the Note came due, Respondents refused to remit payment to Petitioner because they 16 believed that the damages they would incur, including lost rental income resulting from the 17 remediation and attorneys’ fees in the DOJ Action, would offset the amount of the Note. 18 In the same case, Respondents filed a cross-claim against Petitioner and the Blatts for fraud 19 and breach of contract, but the dispute was dismissed and sent to arbitration pursuant to the 20 Purchase Agreement. In the arbitration, Petitioner brought a cause of action for breach of contract 21 to recover the principal and interest due under the promissory note. A three-arbitrator panel was 22 appointed and arbitration proceeded in San Francisco. Respondents filed a cross-arbitration 23 demand against Sharlands Terrace, Blatt Development of Nevada, Inc., Michael Blatt, Raymond 24 Blatt, and Michelle Blatt. In their sixth amended cross-demand filed in June 2008, Respondents 25 3 26 27 28 The individuals and trusts included Thomas J. Finnegan; Barbara Finnegan; Pacific Regional Group, Inc.; Philip Johnson and Victoria L. Johnson Revocable Trust; O’Brien Family Trust; M&G LLC; Barry Lewis; Mary Sparks; John Artal; Christopher Martin Trust Dated August 25, 2000; Robert P. Spalholtz; Jon E. Krabbenschmidt; Michael J. Novogradac; Barbara F. Novogradac; Richard B. Hutchins; Stephen B. Tracy; Robert B. Tracy; Robert S. Thesman; Jim Brittain; and Sandee Brittain. 3 1 asserted 14 claims arising from the construction defects, including claims for fraud, breach of 2 contract, and violation of the FHA, and sought to recover more than $5.4 million for alleged 3 diminution in value to the Property as a result of the FHA violations, lost profits, attorneys’ fees 4 incurred in the DOJ Action, and other damages. 5 A bifurcated arbitration generated two interim awards, and a final award was entered on 6 March 17, 2011. Phase I of the arbitration related to Petitioner’s liability for the breach of contract 7 and fraud claims, and the Phase I interim award found that Petitioner breached the contract and that 8 there were FHA violations. Flynn Decl. Ex. U. Phase II of the arbitration related to Respondents’ 9 damages claims under the FHA and contract claims, and Petitioner’s claim for breach of the Note. United States District Court For the Northern District of California 10 The panel issued a Phase II interim award finding that Respondents were “aggrieved persons” 11 under the FHA who had suffered approximately $946,000 in damages (reduced by $300,000 due to 12 a separate settlement), and that Petitioner was owed $1,880,000 on the Note and $2,295,358 in 12% 13 interest. Flynn Decl. Ex. V. Respondents moved for reconsideration of the interest calculation and 14 failure to offset, and pursuant to direction from the arbitrators both parties submitted briefs on the 15 issue of who was the prevailing party for purposes of attorneys fees. Flynn Decl. Ex. W, X, Y, Z, 16 AA. Respondents’ request for reconsideration was denied, and the panel stated that it: “has 17 reviewed the parties’ submissions on the [prevailing party] issue, has deliberated, and after due 18 consideration, orders that under the circumstances of this arbitration no party is determined to be a 19 ‘prevailing party’ for the purpose of recovering its or their attorneys’ fees and costs incurred in 20 connection with this arbitration. The parties shall each bear their own attorneys’ fees and costs 21 regarding this arbitration.” Petitioner’s Opp. to Motion to Vacate, Ex. M at 2 (3/1/11 Order 22 Denying Motion to Modify and Regarding Determination of Prevailing Party). 23 In the panel’s Final Award, Petitioner was awarded $4,102,758 on its breach of contract 24 claim against Respondents (including interest accruing at 12% compounded monthly), and 25 Respondents were separately awarded $646,324.83 on their (1) breach of contract claim against 26 Sharlands, and (2) claim for violation of the FHA against Sharlands Terrace, Blatt Development of 27 Nevada, Inc., and Michael Blatt (accruing interest at the legal rate of 10%). The final award did not 28 offset these separate awards, did not award Respondents costs or fees on their FHA claim, and 4 1 expressly found that neither side was a “prevailing party.” Flynn Decl. Ex. BB. 2 On March 28, 2011, Petitioner filed suit in San Francisco Superior Court to “confirm . . . an 3 award in an arbitration conducted according to an agreement between the parties that is subject to 4 the [California] Code of Civil Procedure section 1285 et seq.” Dkt. # 1, Ex. A ¶ 2. Petitioners 5 sought to confirm the arbitration award in their favor. Id. ¶ 8. On May 23, 2011, Respondents 6 removed the petition to federal court on the basis that this Court has jurisdiction under 28 U.S.C. § 7 1441(b) based on the existence of a federal question because “the arbitrators exceeded their powers 8 under 9 U.S.C. § 10(a)(4) by manifestly disregarding the Fair Housing Act, 42 U.S.C. § 3601, et 9 seq., in rendering their award.” United States District Court For the Northern District of California 10 Thereafter, the Joining Respondents filed a Petition to Vacate and/or Modify Arbitration 11 Award, claiming that the arbitrators “manifestly disregarded the FHA and federal law and 12 committed material mistakes in determining the Final Award amount by refusing to award 13 attorney’s fees to Respondents (the prevailing parties) on their FHA claim as mandated by the FHA 14 and federal law.” Dkt. #8 ¶ 4. The Petition to Vacate and/or Modify contends that it “requires the 15 Court to determine whether the arbitrators exceeded their powers and manifestly disregarded 16 federal law concerning the Fair Housing Act.” Id. ¶ 7. The Petition to Vacate also challenges the 17 panel’s refusal to offset the awards prior to making an interest calculation, and awarding interest at 18 a “penalty” rate of 12%. Id. ¶ 5-6. The Removing Respondents filed a joinder to the Petition to 19 Vacate and/or Modify, and filed their own Petition to Vacate a Portion and Confirm a Portion of 20 Arbitration Award, claiming that the panel exceeded its authority under the FAA by manifestly 21 disregarding the FHA by failing to award attorneys fees to them as prevailing parties under § 22 3613(c)(2), and improperly calculating damages award under the FHA in violation of § 23 3613(a)(1)(A). Dkt. # 10-12. This Petition to Vacate also makes almost identical arguments 24 regarding offset and interest. On June 21, Petitioner filed a Motion to Remand based on lack of 25 federal question jurisdiction. Dkt. # 24. 26 27 28 III. Motion to Remand The motion to remand must be considered first, because the Court must determine whether 5 1 it has subject matter jurisdiction before reaching the merits of the petitions to vacate. See 28 U.S.C. 2 § 1447(c); Toumajian v. Frailey, 135 F.3d 648, 655 (9th Cir. 1998). 3 A. 4 “[A]ny civil action brought in a State court of which the district courts of the Legal Standard United States have original jurisdiction, may be removed by the defendant or the defendants, to 6 the district court of the United States for the district and division embracing the place where such 7 action is pending.” 28 U. S. C. § 1441(a). District courts have original jurisdiction over “federal 8 question” cases, or those cases “arising under the Constitution, laws, or treaties of the United 9 States.” 28 U.S.C. § 1331. District courts must remand actions where subject matter jurisdiction is 10 United States District Court For the Northern District of California 5 lacking. 28 U.S.C. § 1447(c). The burden of establishing grounds for federal jurisdiction rests on 11 the removing party. Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir. 1988). 12 In general, under the “well-pleaded complaint rule,” a suit arises under federal law 13 only when the plaintiff’s statement of his own cause of action shows that it is based upon federal 14 law.” Vaden v. Discover Bank, 129 S. Ct. 1262, 1272 (2009) (internal quotation marks and 15 citation omitted). “Federal law cannot be predicated on an actual or anticipated defense . . . . 16 Nor can federal question jurisdiction rest upon an actual or anticipated counterclaim.” Id. 17 (citation omitted). “[C]ounterclaims, even if they rely exclusively on federal substantive law, do 18 not qualify a case for federal court cognizance.” Id. at 1273. 19 The Federal Arbitration Act (“FAA”) does not itself confer federal subject matter 20 jurisdiction; rather, there must be an independent jurisdictional basis. Carter v. Health Net of Cal., 21 Inc., 374 F.3d 830, 833 (9th Cir. 2004). Additionally, a petition to vacate or confirm an arbitration 22 award does not “arise under” federal law merely because “the underlying arbitration involves a 23 federal question.” Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1111 (9th Cir. 2004). 24 However, a federal court has subject matter jurisdiction over a petition to vacate an arbitration 25 award where the basis for vacating an arbitration award is that the arbitrator manifestly disregarded 26 federal law. Carter v. Health Net of California, Inc., 374 F.3d 830, 836 (9th Cir. 2004); Luong v. 27 Circuit City Stores, Inc., 368 F.3d 1109, 1112 (9th Cir. 2004). An exception to this rule exists 28 where the allegation that the arbitrator manifestly disregarded federal law is “patently without 6 1 merit.” See, e.g., Carter, 374 F.3d at 836-37. 2 B. Analysis 3 At its most basic, the parties’ dispute over remand boils down to an apparent tension 4 between the “well pleaded complaint rule” and the “manifest disregard” rule. Petitioner argues that 5 its original petition, filed in state court and removed to this Court, is the only document to be 6 considered for purposes of removal and remand under the well-pleaded complaint rule. There is no 7 dispute that the original petition to confirm the award does not implicate federal law or raise a 8 substantial federal question. Therefore, if the “well-pleaded complaint rule” governs without 9 exception, the case should be remanded without further consideration. Respondents counter, United States District Court For the Northern District of California 10 however, that under Carter v. Health Net of California, Inc., 374 F.3d 830, 836 (9th Cir. 2004), 11 their petitions to vacate the arbitration award – filed in this Court after removal – must also be 12 considered and are sufficient to confer federal jurisdiction. 13 As discussed below, the Ninth Circuit was not squarely presented with the issue presently 14 before this Court in Carter, and had it been it likely would have refused to consider the later-filed 15 petition to vacate in determining the existence of federal jurisdiction. Further, it did not have the 16 benefit of the Supreme Court’s decision in Vaden, issued five years later. However, in light of the 17 fact that the Carter court did consider both the petition to confirm and petition to vacate, albeit 18 without objection, the Court has considered both the petition to confirm and the petitions to vacate 19 in determining that it lacks jurisdiction. In light of the very high standard for this Court’s review of 20 arbitration decisions, the petitions to vacate the arbitrators’ award based on a manifest disregard of 21 federal law patently lack merit and do not bestow subject matter jurisdiction on this Court. 22 23 1. Should the Court consider the later-filed petitions to vacate? Petitioner argues that the cross-petitions to vacate cannot be considered in determining 24 federal question jurisdiction under the Supreme Court’s decision in Vaden v. Discover Bank, 129 S. 25 Ct. 1262, 1272, 1273(2009). There, the plaintiff, Discover Bank, brought a state court breach of 26 contract suit against a credit card consumer, and the consumer counterclaimed that the credit card 27 contract terms violated Maryland’s credit laws. Discover Bank removed and asked the district court 28 to compel arbitration, asserting federal jurisdiction on the basis that the state credit laws on which 7 1 the counterclaims were based were preempted by federal law. The Court relied on the well-pleaded 2 complaint rule to hold that the counterclaims implicating federal preemption were insufficient 3 where the complaint itself did not raise a federal question. Id. at 1275-79. The court reasoned that 4 “it would undermine the clarity and simplicity [of the well-pleaded complaint rule] if federal courts 5 were obligated to consider the contents not only of the complaint but also of responsive pleadings 6 in determining whether a case ‘arises under’ federal law.” Id. at 1272. Petitioner argues that 7 similarly, here, its original petition to confirm the arbitration award did not implicate federal law 8 and any potential federal issues raised in Respondents’ later-filed petitions to vacate should not be 9 considered. Respondents counter that Vaden is not controlling because it involved a complaint United States District Court For the Northern District of California 10 seeking to compel arbitration under section 4 of the FAA, not to confirm or vacate an award under 11 sections 9 or 10 of the FAA. However, they do not adequately explain why a petition to compel 12 leads to a different result than a petition to confirm. Vaden strongly supports Petitioner’s argument 13 that generally the pleading that was removed is the only document to be considered regarding 14 jurisdiction. 15 Respondents also argue that Petitioner’s underlying state court petition includes a statement 16 that “Respondents claimed they had a right to offset amounts due under the note as a result of 17 allegedly undisclosed FHA violations at the purchased property.” Notice of Removal Ex. A. 18 Respondents also point to the Phase 2 interim arbitration award, which states that “the Buyers 19 suffered damages as a result of Seller’s, Developer’s, and Mr. Blatt’s admitted violations of the 20 FHA . . . and qualify as ‘aggrieved’ under the statute.” However, it is unclear how statements in the 21 “summary of dispute” section of the state court petition or the underlying Phase 2 award – even 22 though they mention the FHA – support federal jurisdiction where the petition to confirm is not 23 based on either of these statements. See Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1111 24 (9th Cir. 2004). 25 Somewhat more persuasively, Respondents contend that their later-filed petitions to vacate 26 the arbitration award should be considered and are sufficient to confer federal jurisdiction because 27 they allege a “manifest disregard of federal law.” They rely on Luong and Carter, two Ninth 28 Circuit cases indicating that petitions to vacate alleging manifest disregard can serve as the basis for 8 1 federal question jurisdiction. See Carter v. Health Net of California, Inc., 374 F.3d 830, 836 (9th 2 Cir. 2004); Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1112 (9th Cir. 2004). However, in 3 Luong, the only petition at issue was a petition to vacate alleging manifest failure, unlike here 4 where the first filed petition was a petition to confirm under California law and the petition to 5 vacate alleging manifest disregard was filed after removal. Carter does lend some support to Respondents’ position, although it does not directly 6 address the issue of whether and why the Court can consider a later-filed petition to vacate in its 8 jurisdictional analysis, and its analysis appears to go against the Supreme Court’s subsequent 9 decision in Vaden and the well-pleaded complaint rule. In Carter, the plaintiff filed a state court 10 United States District Court For the Northern District of California 7 petition to confirm an arbitration award and the defendant removed. The district court denied a 11 motion to remand and the defendants then filed a petition to vacate, which was ultimately granted. 12 On appeal, the Ninth Circuit first addressed the question of whether the district court properly 13 exercised subject matter jurisdiction over the case. Without discussing whether or why it should 14 consider both the first petition to confirm and the later petition to vacate, and apparently without 15 objection, the Ninth Circuit simply stated that “where the petitions to confirm and vacate the 16 arbitration award are brought under a state arbitration statute,” the parties must establish diversity 17 or federal question jurisdiction.” 374 F.3d at 833-34. The Ninth Circuit first analyzed the petition 18 to confirm and determined that it did not confer jurisdiction, and then turned to the petition to 19 vacate. Even though the petition to vacate did not use the phrase “manifest disregard,” the Ninth 20 Circuit examined it to determine if the substantive allegations essentially made this argument, 21 which could have conferred federal jurisdiction. Id. at 837. Without discussing why it was 22 considering the later-filed petition to vacate, the Ninth Circuit ultimately held that, even liberally 23 construed, the allegations of the petition to vacate did not support jurisdiction on the basis of a 24 manifest disregard of federal law because “[t]he governing law alleged to have been ignored by the 25 arbitrators must be well defined, explicit, and clearly applicable” and any such argument would 26 have been patently without merit because Ninth Circuit law on the issue was unsettled. Id. at 838- 27 39. 28 9 1 Respondents contend that the reason Carter considered both petitions is because a petition to 2 confirm asks the Court to perform a purely ministerial act, and that the only substantive issue is 3 whether grounds for vacatur, modification or correction exist so a cross-petition to vacate should be 4 considered in tandem. However, Carter gave no such explanation for why it considered the petition 5 to vacate in addition to the motion to confirm, and following this reasoning there would have been 6 no reason for the Ninth Circuit to have considered the first-filed petition to confirm at all. 7 Petitioner contends that in Carter the Ninth Circuit did not explain its reason for considering 8 both petitions, and that “if it had considered the issue, it probably would have concluded, consistent 9 with its own precedent and that of the United States Supreme Court, that a cross-petition to vacate United States District Court For the Northern District of California 10 an arbitration award filed after an action is removed cannot be considered for purposes of 11 determining federal jurisdiction.” Reply at 4. In addition, arguably Carter’s entire discussion about 12 how the petition to vacate might be interpreted to assert a manifest failure claim is dicta (“even if 13 this argument could be construed as asserting manifest disregard of federal law, it is so patently 14 without merit that it cannot ground federal question jurisdiction . . .”). However, this Court will not 15 ignore the fact that Carter did consider both petitions in its jurisdictional analysis, and therefore the 16 Court proceeds to the question of whether the petitions to vacate confer federal jurisdiction over 17 this matter, in the event that it is appropriate to consider them. 18 19 2. Are the “Manifest Disregard” Allegations “Patently Meritless”? Even if the petitions to vacate are considered, they do not confer federal jurisdiction because 20 the allegations regarding manifest disregard of federal law are “patently meritless.” See Hagans v. 21 Lavin, 415 U.S. 528, 542-43 (1974) (no subject matter jurisdiction and dismissal appropriate if 22 federal question raised in complaint is patently meritless).4 23 4 24 25 26 27 28 Respondents contend that this argument improperly seek resolution of the merits of the petitions to vacate prior to a decision on subject matter jurisdiction. However, the two Ninth Circuit decisions primarily addressed by both sides specifically considered the merits of “manifest disregard” challenges to arbitration awards in the decisions considering whether federal jurisdiction was available (and both ultimately found that the allegations of manifest disregard were without merit). See Carter, 374 F.3d 838-38 (manifest failure allegation insufficient for federal jurisdiction because it was patently without merit where law at issue unsettled within Ninth Circuit); Luong, 368 F.3d at 1112 (manifest disregard allegations in petition to vacate sufficient for federal jurisdiction, but without merit). Therefore, some consideration of the merits of the manifest disregard allegations is appropriate in deciding whether federal jurisdiction is available. 10 1 The Federal Arbitration Act (FAA) allows a district court to vacate an arbitration award “where the arbitrators exceeded their powers.” 9 U.S.C. §10(a)(4). The Ninth Circuit has 3 explained that review of an arbitration award is “‘both limited and highly deferential’ ” and the 4 arbitration award “may be vacated only if it is ‘completely irrational’ or ‘constitutes manifest 5 disregard of the law.’” Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1290 (9th 6 Cir. 2009) (quoting Poweragent Inc. v. Elec. Data Sys. Corp. 358 F.3d 1187, 1193 (9th Cir.2004); 7 see also, Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 997(9th Cir. 2003) 8 (“We have held that arbitrators ‘exceed their powers’ in this regard not when they merely interpret 9 or apply the governing law incorrectly, but when the award is ‘completely irrational,’ or exhibits a 10 United States District Court For the Northern District of California 2 ‘manifest disregard of the law’.”). In order to establish that an arbitrator manifestly disregarded the 11 law, the party seeking to vacate the award must show that (1) “the arbitrators recognized the 12 applicable law”, (2) the law is “well defined, explicit, and clearly applicable”, and (3) the 13 arbitrators “ignored it.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879-80 (9th Cir. 2007); see also 14 Luong, 368 F.3d at 1112 (“‘manifest disregard of the law’ has a well-defined meaning” that the 15 petitioner could not possibly meet where it was clear from the record that the arbitrator did not 16 ignore relevant law). One court has interpreted this to mean that “[t]he error must have been 17 obvious and capable of being readily and instantly perceived by the average person qualified to 18 serve as an arbitrator.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 19 (2d Cir. 1986). 20 Respondents argue that the arbitrators manifestly disregarded the law by refusing to award 21 costs and fees under section 3613(c)(2) of the FHA. They point out that the panel expressly held 22 them to be “aggrieved persons” with standing to sue under the FHA, found that Petitioner had 23 violated the FHA, and awarded over $600,000 in damages. See Phase II Interim Award; Final 24 Award. They argue that this means that they were the “prevailing party” on their FHA claim 25 pursuant to Texas State Teachers v. Garland, 489 U.S. 782, 789 (1989) (“plaintiffs may be 26 considered ‘prevailing parties’ for attorney’s fees purposes [in civil rights cases] if they succeed on 27 any significant issue in litigation which achieves some of the benefit the parties sought in bringing 28 the suit”). They reason that, because they were the prevailing plaintiffs, attorneys fees and costs 11 1 were required under the FHA, despite the “discretion” afforded by the statute’s express language. 2 See 42 U.S.C. § 3616(c)(2) (“court, in its discretion, may allow the prevailing party, other than the 3 United States, a reasonable attorney’s fee and costs”). They do concede, however, that courts may 4 deny fees to a prevailing plaintiff based on exceptional circumstances, so fees are not mandatory. 5 To prevail under this theory, Respondents would need to show both that the arbitrators manifestly 6 disregarded the law by not finding them prevailing parties, and also by not awarding them costs and 7 fees under the FHA. 8 9 Before making a “prevailing party” determination, the panel invited additional briefing on the issue of “which if any party would be deemed the ‘prevailing party’ for the purpose of potential United States District Court For the Northern District of California 10 recovery of attorneys fees and costs” and held that: “ The Panel has reviewed the parties’ 11 submissions on this issue, has deliberated, and after due consideration, orders that under the 12 circumstances of this arbitration proceeding no party is determined to the be prevailing party for 13 the purpose of recovering its or their attorneys’ fees and costs.” Pet.’s Opp. to Petition to Vacate, 14 Ex. M (3/1/11 Order Respecting Determination of Prevailing Party) at 2 (emphasis added); see also 15 Vignolo Decl. ¶ 7-10, Exs. D-G. The panel reiterated this conclusion in its Final Award. Petition 16 to Vacate Ex. 8 (Final Award) at 3. Given that the panel received extensive briefing, considered the 17 issue, and made a reasoned determination that neither party was a prevailing party under the 18 unusual circumstances presented, which include the fact that the Respondents received no 19 additional damages for the FHA violation and the amount of the award to them was dwarfed by the 20 integrally related award against them for improper setoff for breach of contract), the Court cannot 21 find that the panel ignored well-defined, explicit and clearly applicable law in coming to this 22 conclusion. Even the sole Supreme Court case relied on by Respondents recognizes that a 23 prevailing party determination is within the decision-maker’s “discretion” based on a number of 24 factors. Texas State Teachers, 489 U.S. at 789. 25 Respondents’ contention that the panel ignored well-defined, explicit, and clearly applicable 26 federal law in electing not to award fees and costs under the FHA is also patently without merit. 27 Respondents contend that the fact that the panel was fully briefed on applicable FHA law supports 28 their position, because it shows that the panel was made aware of FHA law and ignored it. See 12 1 DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 81892d Cir. 1997) (no manifest disregard of 2 ADEA mandatory attorneys fees provision where petitioner failed to inform arbitrators of 3 applicable legal standard). Respondents also attempt to distinguish Luong, where the Ninth Circuit 4 rejected an argument that the arbitrator manifestly disregarded federal law by extending the holding 5 of a Supreme Court case because it was clear that the arbitrator did not “ignore” the decision and 6 instead “[v]irtually every line of the opinion and award discusses Toyota and how it plays out on 7 the facts of Luong’s case.” 368 F.3d at 1112. Respondents argue that neither of the interim nor the 8 final arbitration awards in this case address the issue of awarding costs and fees to the prevailing 9 party under the FHA or provide a reason for denying costs and fees. However, the award itself, as United States District Court For the Northern District of California 10 well as the record presented by both sides, shows that the panel was made aware of the parties’ 11 positions on the law governing attorneys’ fees (including the FHA), considered them, and decided 12 that neither party was entitled to fees. Respondents have cited no authority requiring the arbitrators 13 to elaborate on the reasoning behind their pointed reference to “under the circumstances.” 14 Additionally, Petitioner argues that an award of costs and fees under the FHA is 15 “discretionary,” so the decision not to award costs or fees could never be a manifest disregard of the 16 law. See 42 U.S.C. § 3616(c)(2) (“court, in its discretion, may allow the prevailing party, other 17 than the United States, a reasonable attorney’s fee and costs”). It is true that some courts have so 18 held, but the dominant view is that attorneys fees in civil rights cases are granted to prevailing 19 plaintiffs absent special circumstances. See, e.g., New Jersey Coalition v. City of Ashbury Park, 20 152 F.3d 219, 225 (3rd Cir. 1993) (though statute appears discretionary, “district court’s discretion 21 not to grant attorney’s fees and costs in civil rights cases is tightly cabined”). Respondents rely 22 heavily on DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459 (S.D.N.Y. 1997), where a district 23 court found that an arbitrator had manifestly disregarded federal law by not awarding fees to a 24 prevailing plaintiff in a Title VII case because there was no showing of special circumstances that 25 would have made such an award unjust. That court acknowledged that, while seemingly 26 discretionary, Title VII’s fee provision “establishes a presumptive entitlement to an award of 27 attorney’s fees for prevailing parties.” Id. at 462. However, in DeGaetano, there was no dispute 28 that the plaintiff was the prevailing party, where she recovered on her claims and the defendant did 13 1 not. Here, by contrast, Petitioner recovered significantly more than Respondents overall, 2 Respondents’ recovery was for both their breach of contract and FHA claims (i.e., Respondents did 3 not recover any additional damages for their FHA claim), and the panel expressly held that neither 4 side was the prevailing party for purposes of collecting attorneys fees. DeGaetano is 5 distinguishable on all of these points. Further, unlike the Third Circuit, other courts have held that 6 fees to the prevailing party under the FHA are discretionary. See LeBlanc-Sternberg v. Fletcher, 7 143 F.3d 748, 758 (2d Cir. 1998); Taylor v. Harbour Point Homeowners Ass’n, 2011 WL 1792766, 8 *1, 3 (W.D.N.Y. May 6, 2011). Even cases finding that fees to prevailing parties in FHA cases are 9 “mandatory” have recognized that “special circumstances” could prohibit an award of fees. See United States District Court For the Northern District of California 10 DeGaetano, 983 F. Supp at 462. 11 Both sides acknowledge that there are no Ninth Circuit cases directly on point, and that the 12 arbitration panel was not bound by a choice of law provision that would require the application of 13 any one of these standards. This lack of controlling authority means that there was no “well- 14 defined” or “explicit” law that the arbitrators could have manifestly disregarded in deciding not to 15 award fees. See Luong, 268 F.3d at 1112. For this additional reason, the “manifest failure” 16 argument is patently without merit and cannot confer federal jurisdiction even if the petitions to 17 vacate are considered. 18 Finally, Petitioner points out that it can be inferred that the panel determined that special 19 circumstances existed in this case. See Barbier v. Shearson, Lehman, Hutton Inc., 948 F.2d 117, 20 121 (2d Cir. 1991) (no judicial interference where ground for arbitrator’s decision can be inferred 21 from the facts). Specifically, Petitioner contends that the panel might have considered that 22 Respondents did not vindicate one disabled person’s rights and were really bringing private tort 23 claims, FHA recovery was not separated from recovery on breach of contract claims, Respondents 24 had already recovered their fees in another litigation that did directly address abatement of the FHA 25 violations, Respondents were awarded only a fraction of the amount of damages they sought, and 26 were awarded far less than the amount awarded to Petitioner on its claims. The arbitration award 27 does not expressly discuss any special circumstances, but the panel was not required to explain the 28 basis of its decision not to award fees or to enumerate what special circumstances it considered. 14 1 2 This Court has no authority to decide whether the panel “got it wrong.” For the foregoing reasons. Petitioner’s Motion to Remand is GRANTED.5 3 4 IT IS SO ORDERED. 5 6 Dated: August 11, 2011 7 ELIZABETH D. LAPORTE United States Magistrate Judge 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 As a last resort, the Removing Respondents argue that even if the Petition to Confirm should be remanded, the Court should maintain jurisdiction over their Petition to Vacate “as against the Blatts” because the Blatts did not file a Petition to Confirm and have not moved to remand, See Dkt. #35 at 7. The Court rejects this attempt to treat the petitions to vacate as a separate, severable action from the petition to confirm. Respondents have cited no authority for this procedure, and the Court is unaware of any. 15
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