September 23, 2010

Principles Governing Removal of Convention Cases to Federal Court Clarified in Recent Decision

For arbitration lawyers outside the United States, the allocation of adjudicatory power, in arbitration-related cases, between U.S. federal courts and courts of the individual states, is considered to be a rather arcane subject. But it is a subject of keen interest to American lawyers acting for their foreign clients because of the perceived decisive advantages of litigating issues arising under the New York Convention and the Federal Arbitration Act (“FAA”)  before a federal district court judge.

Certain provisions in federal procedural law allow for a defendant in a case brought in a state court to insist that the case proceed instead in federal court. The transfer process is called “removal.” Removal is always conditional upon the existence of a statute granting subject matter jurisdiction over the dispute to a U.S. federal court. Chapter 2 of the FAA contains, in Section 205, what is said to be the broadest removal provision in all of federal law.  It provides for removal of any case that “relates to” an arbitration agreement or award falling under the New York Convention. Section 202 of the FAA provides that any case that “falls under the Convention” is deemed to arise under the treaties and laws of the United States, and thus to involve a “federal question” that a federal court has jurisdiction to adjudicate.

A recent decision from the federal district court in New York identifies a case that is clearly not removable from state court under FAA Section 205: one involving orders of attachment to obtain execution of a court judgment entered upon a Convention award. Samsun Logix Corp. v. Bank of China, 2010 U.S. Dist. LEXIS 96306 (S.D.N.Y. Sept. 9, 2010).

The defendants seeking removal in the Samsun case were Chinese banks allegedly holding deposit accounts of the judgment debtor.

The Court seems to adopt a sensible position that for an action to be “relat[ing] to” the New York Convention, it should be at least “conceivable” that a claim or defense in the action could depend on an interpretation of the agreement to arbitrate or the award. It gives, as an example, a case in which plaintiff had asked a New York State court to dismiss the arbitration panel that had been constituted pursuant to the parties’ agreement. In that case the Court found that the dispute had a clear relationship to the arbitration agreement, the panel having been constituted purportedly pursuant to the arbitration rules therein adopted. Accordingly, removal under Section 205 in that case had been upheld.

But in this case not only was the arbitration concluded and an award entered, but judgment had been entered on the award. A point not mentioned in the opinion is that under U.S. law the judicially-confirmed award is considered to be merged into the resulting judgment, and it ceases to have a separate existence. This principle would seem to reinforce the notion that there was nothing about the judgment creditor’s ability to obtain execution through a garnishment process against the defendant banks would conceivably turn upon interpretation of the arbitration clause or the award.  As the defendant banks offered no contention that the award somehow immunized the deposit accounts from execution, their defenses depended entirely on applicable law concerning execution of judgments and aspects of the bank-depositor relationship that might perhaps protect the accounts.

 

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