Jones et al v. National Home Insurance Company (A Risk Retention Group) and Home Buyers Warranty Corporation

Filing 16

REPORT AND RECOMMENDATIONS- re 6 MOTION to Remand to State Court. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Objections (no longer than ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 6/12/2018. Signed by Judge Sherry R. Fallon on 5/29/2018. (lih)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
JASON JONES and AMANDA JONES,

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Petitioners,
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HOME BUYERS WARRANTY CORPORATION,)
and NATIONAL HOME INSURANCE
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COMP ANY (A RISK RETENTION GROUP),
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'
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Respondents.
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Civil Action No. 17-773-JFB-SRF

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REPORT AND RECOMMENDATION
I.

INTRODUCTION
Presently before the court in this action for breach of contract and alleged residential

construction defects is Petitioners Jason and Amanda Jones' (collectively, "Petitioners") motion
to remand the case to the Delaware Court of Chancery. (D.I. 6) Respondents, Home Buyers
Warranty Corporation{"HBW'') and National Home Insurance Company (A Risk Retention
Group) ("NHIC") (together, "Respondents"), oppose the motion. (D.1. 9) For the following
reasons, I recommend DENYING Petitioners' motion to remand.

II.

BACKGROUND
Petitioners are citizens of the Commonwealth of Pennsylvania. (D.I. 1 at 2) HBW is a

Colorado corporation with its principal place of business in Denver, Colorado. (Id.) NHIC is a
Colorado corporation with its principal place of business in Denver, Colorado. (Id.) Petitioners
executed a sales agreement with BPG Residential Partners IV, LLC ("seller") on March 31, 2004
for the purchase of a new home at 156 Christina Landing in Wilmington, Delaware (the
"Home"), which included a warranty (the ''Warranty") that provided for binding arbitration to

resolve any disputes arising out of any part of the sales agreement. (D.I. 1, Ex. A at 48) HBW is
the administrator of the Warranty on the Home, and NHIC is the Warranty insurer. (D.I. 1 at 2)
On October 15, 2015, Petitioners filed a complaint in the Superior Court of the State of
Delaware (the "Superior Court Action") 1 against HBW and NHIC. (D.I. 1, Ex. A at 20) The
complaint alleged breach of contract, negligent construction, negligent repair, breach of the
Warranty, bad faith, promissory estoppel, consumer fraud, and deceptive trade practices. (Id. at
33-43) Petitioners also sought a declaratory judgment establishing the Warranty as a contract of
adhesion and declaring its arbitration provision, waivers, disclaimers, and exclusions as
ambiguous, unconscionable, and unenforceable. (Id.)
On November 30, 2015, HBW and NHIC filed a petition to compel arbitration of·
Petitioners' claims in the United States District Court for the District of Delaware, invoking
diversity jurisdiction. (Id. at 163) On May 4, 2016, in a Report and Recommendation, the court
found that, because petitioners claimed $31,777 in repairs to their home, and also asserted fraud,
bad faith, and consumer fraud, for which they sought treble damages,2 it had diversity
jurisdiction pursuant to 28 U.S.C. § 1332. Home Buyers Warranty Corp. v. Jones, 2016 WL
2350103, at *3 (D. Del. May 4, 2016), report and recommendation adopted, 2016 WL 3457006
(D. Del. June 21, 2016). The court granted Respondents' petition to compel arbitration because

1

This case is captioned Jones v. BPG Residential Partners IV, LLC, C.A. No. N15C-10. 131WCC CCLD.
2
The claim for treble damages exceeded the statutory threshold. Home Buyers Warranty Corp.,
2016 WL 2350103, at *3. Petitioners argued that Respondents based jurisdiction on Petitioners'
non-warranty claims, for which there was no agreement to arbitrate. Id. at *3 n.2. However, the
court held that the arbitration provision's broad language, if valid, encompassed all of
Petitioners' claims. Id.
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it found the agreement to arbitrate all claims valid and enforceable3 and delegated issues of
arbitrability (namely, Petitioners' unconscionability argument) to the arbitrator. Id. at *5-6.
The Report and Recommendation was adopted and clarified on June 21, 2016. Home

Buyers Warranty Corp. v. Jones, 2016 WL 3457006, at *3 (D. Del. June 21, 2016). The court
held that the Magistrate Judge did not err in concluding Petitioners had agreed to the arbitration
provision in the Warranty, and "read the report as deciding only the questions of the existence of
the parties' agreement to arbitrate and the terms of that agreement." Id. at *2. The court found
that validity challenges to the arbitration provisions, such as challenges relating to
unconscionability and enforceability, were distinct from the threshold determination of whether
there was an agreement to arbitrate. Id. Namely, the court found only that the parties agreed to
arbitrate, but all other validity challenges were to be decided by the arbitrator. Id.
Following the District Court's adoption of the Report and Recommendation, Petitioners
filed a demand for arbitration with the American Arbitration Association ("AAA") on July 22,
2016. (D.I. 1, Ex. A at 367) Petitioners sought "a ruling that the arbitration clause in [the]
disputed Warranty [was] not valid or enforceable." (Id.) The purported dollar amount of the
claim was indicated as "less than $75,000." (Id.) On August 19, 2016, Respondents denied all
allegations and asserted a counterclaim in the amount of $99,503.03 "for attorney's fees and
costs incurred by [Respondents] in enforcing [Petitioners'] agreement to arbitrate all disputes
between the parties." (Id. at 401)
3

As Judge Andrews clarifies in adopting the Report and Recommendation, it appears the court
did not mean to find the arbitration clause "valid," but rather finds petitioners "validly" agreed to
it. Home Buyers Warranty Corp., 2016 WL 2350103, at *5. The court rejected Petitioners'
assertion that they were unaware of the existence of the arbitration provision and did not intend
to be bound by it due to the agreement they executed. Id. at *4. Specifically, the agreement
explicitly stated that all disputes under the Warranty were to be submitted to binding arbitration,
the seller had provided a sample warranty, and Petitioners read the sample. Id. As such, "the
court [found] [Petitioners] did agree to arbitration." Id.
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The AAA assigned the matter to arbitrator Howard D. Venzie, Jr. ("Arbitrator~'), who
issued the arbitration award on May 10, 2017. (Id. at 403-10) The Arbitrator found the
arbitration clause in the Warranty valid and enforceable. (Id. at 409) On June 13, 2017,
Petitioners filed an action in the Delaware Court of Chancery to vacate the AAA award. (Id. at
2) On June 16, 2017, Respondents removed the case to this court. (D.1. 1) On July 12, 2017,
Petitioners filed the instant motion to remand the action to the Court of Chancery. (D.I. 6) On
August 9, 2017, Petitioners filed a motion to vacate, modify, or correct the arbitration award,
which remains pending. (D.I. 11)

III.

LEGAL STANDARD
To remove a case to federal district court, a party must establish that the district court has

original jurisdiction by either a federal question or diversity of citizenship. 28 U.S.C. §§ 1331,
1332, 1441. If jurisdiction is based on diversity of citizenship, complete diversity must exist and
the amount in controversy must exceed $75,000. 28 U.S.C. § 1332(a). "Only state court actions
that originally could have been filed in federal court may be removed to federal court by the
defendant." Kline v. Security Guards, Inc., 386 F.3d 246,251 (3d Cir. 2004) (quoting
Caterpillar Inc. v. Williams, 482 U.S. 386,392 (1987)). If the case could not have been filed
originally in federal court, then removal under 28 U.S.C. § 1441 is improper and remand is

appropriate. Id. (citations omitted).
A federal court must remand a removed case "[i]f at any time before final judgment it
appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). The party
seeking removal bears the burden of demonstrating that removal is proper. Steel Valley Auth. v.
Union Switch Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987); Zoren v. Genesis Energy, L.P.,

195 F. Supp. 2d 598, 602 (D. Del. 2002). According to the Third Circuit Court of Appeals, it "is

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settled that the removal statutes are to be strictly construed against removal and all doubts should
be resolved in favor of remand." Steel Valley Auth., 809 F.2d at 1010. In determining whether
remand based on improper removal is appropriate, the court "must focus on the plaintiff's
complaint at the time the petition for removal was filed." Id.; Abels v. State Farm Fire & Cas.

Co., 770 F.2d 26, 29 (3d Cir. 1985). Unless the law gives a different rule, "the sum claimed by
the plaintiff controls." St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283,288 (1938).

IV.

DISCUSSION
Petitioners allege that the court lacks diversity jurisdiction because neither Petitioners'

demand for arbitration, nor the award itself, included damages or monetary relief and, as such,
the amount in controversy requirement is not met. (D .I. 7 at 8) Respondents contend that
diversity jurisdiction exists because in an action to vacate an arbitration award, the amount in
controversy is determined by looking at the financial consequences which will ensue if the
federal court vacates the award. (D .I. 9 at 6)
"The amount in controversy in a petition to compel arbitration or appoint an arbitrator is
determined by the underlying cause of action that would be arbitrated." Jumara v. State Farm

Ins. Co., 55 F.3d 873, 877 (3d Cir. 1995). But when the complaint in a removed action seeks to
confirm or vacate an existing arbitration award, there are two main approaches courts use in
determining the amount in controversy: the award approach and the demand approach. Under
the award approach, courts look only to the amount of the arbitration award. See, e.g.,

MannesmannDematic Corp. v. Phillips, Getschow Co., 2001 WL282796 (N.D. Tex. Mar. 16,
2001); Baltin v. Alaron Trading Corp., 128 F.3d 1466 (11th Cir. 1997); Ford v. Hamilton Invs.,

Inc., 29 F.3d 255 (6th Cir. 1994); Goodman v. CIBC Oppenheimer & Co., 131 F. Supp. 2d 1180
(C.D. Cal. 2001). Under the demand approach, courts look to the amount sought in the

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underlying arbitration rather than the amount awarded. See, e.g., Hough v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 757 F. Supp. 283 (S.D.N.Y. 1991); Wise v. Marriot Int'/ Inc., 2007
WL 2200704 (S.D.N.Y. Jul. 30, 2007); Doctor's Assoc., Inc. v. Stuart, 11 F. Supp. 2d 221 (D.
Conn. 1998). District courts within the Third Circuit have applied both approaches. See Capital

Mfg., Inc. v. Rayco Indus., Inc., 2005 WL 1084649 (E.D. Pa. May 6, 2005) (applied award
approach); Sutter v. Oxford Health Plans, LLC, 2005 WL 6795061 (D.N.J. Oct. 31, 2005), aff'd,
227 F. App'x 1'35 (3d Cir. 2007) (same); but see also US. Olympic Comm. v. Ruckman, 2010
WL 2179527 (D.N.J. May 28, 2010) (applied demand approach); Benhenni v. Bayesian Efficient

Strategic Trading, LLC, 2016 WL 5660461 (D.N.J. Sept. 29, 2016), aff'd, 2017 WL 2422862 (3d
Cir. June 5, 2017) (same).
Although the Third Circuit has yet to explicitly address which approach is favored, the
demand approach is consistent with the Third Circuit's practice concerning motions to compel
arbitration. Benhenni, 2016 WL 5660461 at *2. Applying the demand approach recognizes the
"true scope of the controversy between the parties." Id. (quoting Pershing, L.L. C. v. Kiebach,
819 F.3d 179, 182 (5th Cir. 2016)). This "avoids the potential problem (which would arise under
the award approach) that the court could compel arbitration but then lack jurisdiction to review
the arbitration it ordered if a petition to confirm or vacate an arbitration award subsequently
arose from the same claim." Benhenni, 2016 WL 5660461 at *2 (quoting Karsner v. Lothian,
532 F.3d 876, 882-83 (D.C. Cir. 2008)); see also Pershing, 819 F.3d at 182-83 (adopting the
demand approach because the award approach would divest the same federal court which
compelled arbitration of jurisdiction to subsequently confirm or vacate the award if the award
fell below the jurisdictional threshold).

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In the instant case, there is no reasonable basis to conclude that this court is divested of

jurisdiction to review a petition to vacate the arbitration award resulting from the very arbitration
it originally ordered on the same claims in dispute.
Petitioners contend that their motion to remand should be granted even if the court
follows the demand approach because "Petitioners did not seek monetary damages in their
demand for arbitration." (D.I. 10 at 7) Rather, Petitioners sought declaratory relief that "the
arbitration clause in [the] disputed Warranty Iwas] not valid or enforceable." (D .I. 1, Ex. A at
367) However, when no monetary award is sought by a party in the arbitration proceeding, the
court should determine the amount in controversy by the underlying cause of action that would
be arbitrated and the value of such claims, not just the amount sought in the demand for
arbitration. Ruckman, 2010 WL 2179527, at *7. "In actions seeking declaratory or injunctive
relief, it is well established that the amount in controversy is measured by the value of the object
of the litigation." Hunt v. Wash. State Apple Advertising Comm 'n, 432 U.S. 333,347 (1977);
Colum'f;Jia Gas Transmission C01p. v. Tarbuck, 62 F.3d 538,541 (3d Cir. 1995). The object of
the litigation is to determine the merits of Petitioners' warranty related claims against
Respondents. As previously determined by the District Court, the stakes involved in this action
exceed $75,000, giving rise to diversity jurisdiction. Home Buyers Warranty Corp., 2016 WL

2350103, at *3; Home Buyers Warranty Corp., 2016 WL 3457006, at *2.
Thus, it is recommended that the court retains diversity jurisdiction under 28 U.S.C. §
1332(a) - Petitioners are citizens of the Commonwealth of Pennsylvania, Respondents are
Colorado corporations, and the amount in controversy exceeds $75,000. Respondents have met
their burden of demonstrating that removal is proper.

V.

CONCLUSION

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For the foregoing reasons, I recommend that the court deny Petitioners' motion to
remand. (D.I. 6)
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(l)(B), Fed. R.
Civ. P. 72(b)(l), and D. Del. LR 72.1. The parties may serve and file specific written objections
within fourteen (14) days after being served with a copy of this Report and Recommendation. Fed.
R. Civ. P. 72(b)(2). The objection and responses to the objections are limited to ten (10) pages
each. The failure of a party to object to legal conclusions may result in the loss of the right to de
novo review in the District Court. See Sincavage v. Barnhart, 171 F. App'x 924,925 n.l (3d Cir.
2006); Henderson v. Carlson, 812 F.2d 874, 878-79 (3d Cir. 1987).
The parties are directed to the court's Standing Order For Objections Filed Under Fed. R.
Civ. P. 72, dated October 9, 2013, a copy of which is available on the court's website,
http://www.ded.uscourts.gov.

Dated: May;lil_, 2018

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