Opinion ID: 745285
Heading Depth: 2
Heading Rank: 3

Heading: dismissal of an action involving an embedded

Text: 42 ARBITRABILITY PROCEEDING IS AN APPEALABLE FINAL JUDGMENT 43 There are two different courses of action that a district court may take when ordering arbitration in an embedded arbitrability proceeding. Most of the time, the district court stays the case pending the outcome of arbitration. It is well-settled that an order compelling arbitration in those circumstances is an interlocutory order. See Prudential, 42 F.3d at 1302. Occasionally, however, the district court dismisses the entire case upon ordering arbitration; this is true of the present case. In these circumstances, I believe that the order compelling arbitration is a final, appealable decision. Logic and the law of two federal circuits support this view. 44 While the Ninth Circuit has not ruled on the issue whether an order compelling arbitration and dismissing an action is a final decision, the Sixth and Tenth Circuits have held that, where the district court dismisses the action upon ordering arbitration, the order is an appealable final decision. In Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir.1990), the Sixth Circuit held that an order dismissing a complaint in deference to arbitration was a final decision because there was nothing left for the district court to do but execute the judgment. 920 F.2d at 1276. The court in Arnold stated that a final order is one which dismisses 'an action in deference to arbitration' and enters a final judgment. Id. at 1275 (quoting 134 Cong. Rec. S16284 (daily ed. Oct. 14, 1988)). 45 In Armijo v. Prudential Insurance Co. of America, 72 F.3d 793 (10th Cir.1995), the Tenth Circuit held that a district court's order granting [the defendant's] motion to compel arbitration and to dismiss [the][p]laintiffs' claims was clearly a final order over which the Court of Appeals had jurisdiction. Id. at 797; see also Adair Bus Sales, Inc. v. Blue Bird Corp., 25 F.3d 953, 955 (10th Cir.1994) (holding that, because appeal was presented to the appellate court upon the district court's order of dismissal, the appellate court had jurisdiction and could correct procedural error where the district court erroneously dismissed the action instead of granting defendant's motion for stay of action pending outcome of arbitration). 46 The majority, however, chooses to rely on the contrary holdings of the Eighth and Fifth Circuits. In Gammaro v. Thorp Consumer Discount Co., the Eighth Circuit held that a district court's order compelling arbitration and dismissing class allegations was an embedded proceeding and was therefore interlocutory. 15 F.3d 93, 95 (8th Cir.1994). The court in Gammaro acknowledged the harshness of the bright-line rule it adopted. Id. at 96. In Altman Nursing, Inc. v. Clay Capital Corp., 84 F.3d 769 (5th Cir.1996), the Fifth Circuit held that the test of finality is whether the order arose out of an independent or embedded arbitrability proceeding, regardless of whether the order completely ended the litigation on the merits in the district court. Id. at 771. 47 The majority opinion also cites to cases from several other circuits in support of its assertion that the majority of circuits that have addressed this issue have followed the holding of Gammaro. The majority's reliance on these cases is misplaced, however, because the facts of these cases involve stays rather than dismissals of actions. See F.C. Schaffer & Assocs., Inc. v. Demech Contractors, Ltd., 101 F.3d 40, 41, 43 (5th Cir.1996) (holding that a denial of a motion for declaratory judgment against arbitration and a stay of court litigation pending the outcome of arbitration is not a final decision); American Cas. Co. of Reading, Penn. v. L-J, Inc., 35 F.3d 133, 139 (4th Cir.1994) (holding that an order staying litigation pending arbitration of embedded claims is not a final decision); Filanto, S.P.A. v. Chilewich Int'l Corp., 984 F.2d 58, 61 (2d Cir.1993) (holding that an order compelling arbitration that did not dismiss the complaint was not appealable). 1 48 The majority opinion and the Eighth and Fifth Circuit authority on which it relies ignore the critical distinction between a stay and a dismissal. Under a stay, the district court retains jurisdiction over the action. Matter of Chung, 943 F.2d at 228 (Since a court retains jurisdiction over the parties to an embedded proceeding while they arbitrate a discrete portion of their dispute, it is logical to delay an appeal of a ruling compelling arbitration until the court subsequently confirms or rejects the arbitrator's decision.); Delta Computer Corp. v. Samsung Semiconductor & Telecomms. Co., 879 F.2d 662, 663 (9th Cir.1989) (noting that the district court stayed the proceedings and retained jurisdiction to monitor the case and enforce any arbitration award). By contrast, after a dismissal, the district court does not retain jurisdiction. Fed.R.Civ.P. 41(b); Matter of Chung, 943 F.2d at 228 ([O]nce a court conducting an independent proceeding determines that a dispute is or is not arbitrable, the court generally does not retain jurisdiction over the parties.). 49 By ignoring the distinction between a stay and a dismissal and treating the dismissal in this case as interlocutory, the majority creates a jurisdictional loophole that unjustifiably precludes immediate appeal in cases where the arbitrability issue is embedded but the action is dismissed rather than stayed. In this case, this loophole disadvantages the senior citizens and benefits Providential. Under the majority's approach, the senior citizens' claims are completely dismissed from the district court unless and until the senior citizens apply for review after the arbitration proceeding has run its course. Moreover, the senior citizens are denied the opportunity for immediate appeal that such a dismissal would ordinarily provide. Providential, however, is shielded from the possibility of immediate appeal of the arbitration order and also enjoys the benefit of an immediate dismissal of the senior citizens' claims from federal court. 50 Finally, I also note that the majority's new jurisdictional rule effectively deprives the senior citizens of any hope for review of their claims that Providential effectively cheated them out of their home equity. As stated above, TILA provides for class actions in federal court. 15 U.S.C. § 1640(a)(2)(B). Plaintiffs sought to represent the class of senior citizens who had purchased reverse mortgages from Providential, by bringing federal and state claims in federal court. 51 Instead, the senior citizens have been denied their day in federal court and have been told to turn to arbitration. Because we have held that the Federal Arbitration Act does not permit consolidation of separate arbitration claims absent express language in the arbitration clause that allows such consolidation, Weyerhaeuser Co., 743 F.2d at 637, the senior citizens will be forced to separately arbitrate each individual claim in a proceeding that may be prohibitively expensive. In support of its motion to compel arbitration, Providential submitted the 1993 Commercial Arbitration Rules of the American Arbitration Association. Based on the rates found within these rules, and assuming a multi-arbitrator panel sitting for five days, average minimum damages of $50,000, and a class-wide total of 1500 members, the senior citizens in the proposed class would have to pay over $3.75 million to even gain access to the arbitral system. (Appellants' Opening Brief at 14). Each senior citizen would be forced to pay $2,500 of out-of-pocket expenses to proceed to arbitration. Id. at 14 n. 10. This represents a tremendous sum for an elderly person who relies on income from a reverse mortgage. Hence the majority's new jurisdictional rule may do more than close the door on federal court proceedings; it effectively sounds a death knell for the entire action.