Opinion ID: 774029
Heading Depth: 2
Heading Rank: 1

Heading: Substantive State Limitations in Diversity Cases

Text: 24 When a federal court's jurisdiction is based on diversity of citizenship, [w]e put to one side the considerations relevant in disposing of questions that arise when a federal court is adjudicating a claim based on a federal law, Guaranty Trust Co. v. York, 326 U.S. 99, 101 (1945), and we act as only another court of the State, id. at 108. In Guaranty Trust, the Court considered whether a federal court whose jurisdiction over a suit for breach of trust was based solely on diversity was required to honor a state statute of limitations. The Court stated that the answer depended on whether the state's statute governed merely the manner and means by which a plaintiff could recover or whether it was instead a matter of substance in the sense that the federal court's disregard of the statute would significantly affect the result of [the] litigation, causing that result to differ from the outcome that would be reached in state court. Id. at 109. The Court stated that the intent of the decision in Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), 25 was to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court.... 26 Plainly enough, a statute that would completely bar recovery in a suit if brought in a State court bears on a State-created right vitally and not merely formally or negligibly. As to consequences that so intimately affect recovery or non-recovery a federal court in a diversity case should follow State law. 27 Guaranty Trust, 326 U.S. at 109-10 (emphasis added). The Court added that 28 The operation of a double system of conflicting laws in the same State is plainly hostile to the reign of law. Certainly, the fortuitous circumstance of residence out of a State of one of the parties to a litigation ought not to give rise to a discrimination against others equally concerned but locally resident. The source of substantive rights enforced by a federal court under diversity jurisdiction, it cannot be said too often, is the law of the States. Whenever that law is authoritatively declared by a State, whether its voice be the legislature or its highest court, such law ought to govern in litigation founded on that law, whether the forum of application is a State or a federal court and whether the remedies be sought at law or may be had in equity. 29 Id. at 112 (emphasis added). 30 These principles were applied to an arbitration question in Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 203 (1956), a contract action that raised the question of whether the federal court sitting in diversity was required to apply a Vermont statute that made an agreement to arbitrate revocable at any time before an arbitration award was actually made: 31 We deal here with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces the state-created right by rules of procedure which it has acquired from the Federal Government and which therefore are not identical with those of the state courts. Yet, in spite of that difference in procedure, the federal court enforcing a state-created right in a diversity case is, as we said in Guaranty Trust Co. v. York, 326 U.S. 99, 108, in substance only another court of the State. 32 Bernhardt, 350 U.S. at 202-03. The Bernhardt Court held that the State's requirements with respect to arbitration must be honored by the federal court because significant differences between arbitration and court adjudication create a very substantial potential for differences in outcome: 33 If the federal court allows arbitration where the state court would disallow it, the outcome of litigation might depend on the courthouse where suit is brought. For the remedy by arbitration, whatever its merits or shortcomings, substantially affects the cause of action created by the State. The nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action. The change from a court of law to an arbitration panel may make a radical difference in ultimate result. Arbitration carries no right to trial by jury.... Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial.... 34 Bernhardt, 350 U.S. at 203 (emphases added). In addition, 35 [w]hether the arbitrators misconstrued a contract is not open to judicial review.... Questions of fault or neglect are solely for the arbitrators' consideration.... Arbitrators are not bound by the rules of evidence.... They may draw on their personal knowledge in making an award.... Absent agreement of the parties, a written transcript of the proceedings is unnecessary.... Swearing of witnesses may not be required.... And the arbitrators need not disclose the facts or reasons behind their award. 36 Id. at 203 n.4. The Court concluded that [t]here would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be. Id. at 204.