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January 30, 2009

Removal of New York Convention Case from State to Federal Court

I report today on an unusual case, involving a rarely-encountered issue. The case, decided by a U.S. District Judge in New York in the last days of 2008, is Vistra Trust Co. v. Stoffel, 2008 U.S. Dist. LEXIS 106493 (S.D.N.Y. Dec. 29, 2008). The issue: the right of a litigant to transfer a case filed in state court to a federal court (in federal practice parlance, “removal”) when the case involves an arbitration agreement or award governed by the U.N. Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).

In Vistra, a family trust brought fraud claims against its former trustee, and two entities related to the trustee, in the New York State Supreme Court. The trustee, claiming the disputes were arbitrable, and that arbitrations involving the same issues were pending in Switzerland, sought to remove the case to the U.S. District Court under Chapter Two of the Federal Arbitration Act (“FAA”), which implements the New York Convention. Presumably the trustee’s intention was to move before the U.S. court to compel arbitration, and for dismissal or a stay of the action pending arbitration. But the result in the case is that the removal was held to be improper, because the consent of the related entities to the removal was not obtained by the defendant trustee. And so the case has been sent back (“remanded”) to the New York State court.

Some background is in order: Chapter 1 of the FAA, governing domestic arbitrations, does not confer jurisdiction on U.S. federal courts. Federal jurisdiction in a domestic case to enforce an arbitration agreement or award is based on two requirements. First, the matter must involve interstate or foreign commerce (a requirement usually met given federal law giving broad interpretation to such “commerce” ). Second, the case must meet traditional requirements for federal jurisdiction: either a question of United States law (other than a question under the FAA) or diversity of citizenship. Chapter 2 of the FAA has a jurisdiction-conferring provision that Chapter 1 lacks: It provides that a case “falls under the [New York] Convention” when it involves international commerce, and further states that a case that “falls under the Convention. . . arises under the laws and treaties of the United States.” That is to say, such a case qualifies for federal jurisdiction based on a question of federal law, even if the only question presented is the application of the Convention or Chapter Two of the FAA.

Section 205 of the FAA governs removal of New York Convention cases from state to federal court. It provides that such a case, i.e. one “that relates to an arbitration agreement or award falling under the Convention” may be removed to the federal court by “the defendant or the defendants.” That section goes on to state that “[t]he procedure for removal of causes otherwise provided by law shall apply.”

Case law interpreting the same phrase “the defendant or the defendants” found in the general removal statute, has held that the statute requires that multiple defendants give unanimous consent to the removal, absent some narrow exceptions (e.g. separate and independent claims, or defendants named as parties in the pleading but never served with process).

In Vistra, the Defendants argued that the same words in the arbitration statute should not be construed to require unanimity – for the reason that it was inferable, from the very existence of a special removal statute for New York Convention cases, that Congress sought to channel Convention cases into the federal courts to encourage uniformity of application. But the Court found no concrete evidence of such Congressional intent. And indeed, the Court noted that in the Foreign Sovereign Immunities Act, cases brought in the state court are specifically made removable by the foreign state, even if other non-state defendants are involved, whereas no such right of any foreign private entity or person was established when the New York Convention was implemented by Chapter Two of the FAA.

The result of the remand to State Court is that the same motion to compel arbitration and to stay or dismiss the action will, presumably, be made in that forum. The New York State court is bound to apply the Convention and Chapter Two of the FAA.

That outcome is not necessarily unsatisfactory, from the standpoint of consistent enforcement of the Convention. In New York, at least, where a special part of the State Supreme Court is devoted to complex commercial cases, and cases involving international commerce are by no means infrequent, the judges may be expected to have considerable familiarity with the FAA and the Convention. A source of concern to practitioners, however, and one of the reasons removal to federal court of cases initiated in the State court involving the Convention is frequently sought, is that New York, like other states, has its own arbitration statute. It is generally speaking a pro-arbitration statute that does not impose requirements for enforcement of an arbitration agreement that are materially different from federal law. Pre-emption of state arbitration law by the FAA is not categorical, and the general principle is that where state law does not impose more stringent requirements for enforcement of an agreement or award than does federal law, the state and federal statutes shall co-exist and both sha be applied. But in the details of state law concerning enforcement of arbitration agreements – on issues not specifically addressed by statute such as rights and obligations of non-signatories, the scope of arbitrable issues, etc., there may be important deviations from judge-made federal law that has evolved in cases involving the FAA generally and the New York Convention in particular. Thus in the state courts some practitioners will be tempted to seek advantage of requirements under state law, and to argue against pre-emption. This tends to add unnecessary issues, complexity, confusion, and cost.

Despite these concerns, there appears to be no organized initiative in the U.S. arbitration community to promote legislative change that would exclude state court jurisdiction in New York Convention cases. However, cases like Vistra in which the consent of all defendants cannot be obtained should be relatively rare, and in most instances a foreign defendant served in a state court action that should be arbitrated will be able to remove the case and have the arbitrability determination made by a U.S. District Court Judge.