Sun Healthcare Group, Inc. et al v. Dowdy
Filing
10
MEMORANDUM OPINION & ORDER denying 6 Motion to Dismiss. Signed by Senior Judge Thomas B. Russell on 2/26/2014. cc:counsel (KJA)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
PADUCAH DIVISION
CIVIL ACTION NO. 5:13-CV-00169-TBR
SUN HEALTHCARE GROUP, INC.;
HBR PADUCAH, LLC,
d/b/a Paducah Care and Rehabilitation Center;
HBR KENTUCKY, LLC;
HARBORSIDE HEALTHCARE, LLC;
SUNBRIDGE HEALTHCARE, LLC;
GENESIS HEALTHCARE, LLC;
Plaintiffs
v.
PATTI JO DOWDY
Defendant
MEMORANDUM OPINION AND ORDER
This matter is before the Court upon Defendant Patti Jo Dowdy’s Motion to
Dismiss. (Docket No. 6.) Plaintiffs have responded. (Docket No. 7.) This matter is
now ripe for adjudication. For the following reasons and consistent with the below
opinion, the Court will DENY Defendant Patti Jo Dowdy’s Motion to Dismiss. (Docket
No. 6.)
BACKGROUND
On or around June 1, 2012, Defendant Patti Dowdy admitted herself to Paducah
Care and Rehabilitation Center, a nursing home. (Docket No. 1, ¶ 16.)
As part of the
admission process, Defendant signed a Long Term Care Arbitration Agreement, (Docket
No. 1-2), which provides, in summary, that any claims arising out of or in any way
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relating to the Agreement, the Admission Agreement, or the resident’s stay at the facility
“shall be submitted to binding arbitration.” (Docket No. 1, ¶ 17, 19.)
In a related state court action in McCracken Circuit Court filed on August 1,
2013, (Case No. 13-CI-00714), Defendant Dowdy alleges that while residing at
Paducah Care and Rehabilitation Center she “suffered physical and emotional injuries
due to inadequate care, and her health and physical condition deteriorated beyond that
caused by the normal aging process.” (Docket No. 6-1, at 1.) Specifically, in that state
court action, Defendant claims negligence, medical negligence, corporate negligence,
and violation of a long term care resident’s rights against Plaintiffs Sun Healthcare
Group 1 and two administrators—Cathy Ortega and Sonja Henderson-Maddox—of
Paducah Care & Rehabilitation Center. Id. These administrators are not parties to the
action before this Court and are citizens of Kentucky for purposes of diversity
jurisdiction, unlike Plaintiffs Sun Healthcare Group. Plaintiffs Sun Healthcare Group
are corporations with their principal place of business outside of Kentucky.
Plaintiffs Sun Healthcare Group filed the Complaint in this case on September 9,
2013. (Docket No. 1.) Plaintiffs’ Complaint seeks to (i) compel arbitration of the
claims asserted by Defendant in the McCracken Circuit Court, (Case No. 13-CI-00714),
pursuant to 9 U.S.C. § 4; (ii) enjoin Defendant from further pursuing the state court
1
Plaintiffs include Sun Healthcare Group, Inc.; HBR Paducah, LLC; HBR Kentucky, LLC; Harborside
Healthcare, LLC; Sunbridge Healthcare, LLC; and Genesis Healthcare, LLC. The Court will refer to
these Plaintiffs collectively as “Sun Healthcare Group.”
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action; and (iii) related relief. 2 Defendant moves the Court to dismiss Plaintiffs’
Complaint based on several different arguments. (Docket No. 6.)
STANDARD
Federal Rule of Civil Procedure 12(b)(1) provides that a party may file a motion
to dismiss for lack of subject-matter jurisdiction. “Subject matter jurisdiction is always
a threshold determination,” Am. Telecom Co. v. Republic of Lebanon, 501 F.3d 534, 537
(6th Cir. 2007) (citing Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 101 (1998)),
and “may be raised at any stage in the proceedings,” Shultz v. Gen. R.V. Ctr., 512 F.3d
754, 756 (6th Cir. 2008). Where subject matter jurisdiction is challenged pursuant to
Rule 12(b)(1), the plaintiff bears the burden of proving jurisdiction in order to survive
the motion. Moir v. Greater Cleveland Reg’l Transit Auth., 895 F.2d 266, 269 (6th Cir.
1990) (citing Rogers v. Stratton Indus., Inc., 798 F.2d 913, 915 (6th Cir. 1986)); see
also DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir. 2004). “If the court determines
at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.”
Fed. R. Civ. P. 12(h)(3); see also Bauer v. RBX Indus. Inc., 368 F.3d 569 (6th Cir.
2004). A federal district court has original diversity jurisdiction over an action between
citizens of different states and where the amount in controversy exceeds $75,000,
exclusive of interest and costs. 28 U.S.C. § 1332(a).
The Federal Rules of Civil Procedure require that pleadings, including
complaints, contain a “short plain statement of the claim showing that the pleader is
2
Plaintiffs made the same allegation that the state court claims are subject to a binding alternative dispute
resolution agreement in their Answer filed on September 3, 2013, to Defendant’s Complaint in
McCracken Circuit Court.
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entitled to relief.” Fed. R. Civ. P. 8(a)(2). A defendant may move to dismiss a claim or
case because the complaint fails to “state a claim upon which relief can be granted.”
Fed. R. Civ. P. 12(b). When considering a Rule 12(b)(6) motion to dismiss, the court
must presume all of the factual allegations in the complaint are true and draw all
reasonable inferences in favor of the non-moving party.
Total Benefits Planning
Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008)
(citing Great Lakes Steel v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir. 1983)). “The
court need not, however, accept unwarranted factual inferences.” Id. (citing Morgan v.
Church’s Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987)).
Even though a “complaint attacked by a Rule 12(b)(6) motion to dismiss does
not need detailed factual allegations, a plaintiff’s obligation to provide the grounds of
his entitlement to relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007) (citations omitted).
Instead, the plaintiff’s “[f]actual
allegations must be enough to raise a right to relief above the speculative level on the
assumption that all the allegations in the complaint are true (even if doubtful in fact).”
Id. (citations omitted). A complaint should contain enough facts “to state a claim to
relief that is plausible on its face.” Id. at 570. A claim becomes plausible “when the
plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S.Ct.
1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). If, from the well-pleaded facts,
the court cannot “infer more than the mere possibility of misconduct, the complaint has
alleged - but has not ‘show[n]’ - ‘that the pleader is entitled to relief.’” Id. at 1950
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(citing Fed. R. Civ. P. 8(a)(2)). “Only a complaint that states a plausible claim for relief
survives a motion to dismiss.” Id.
DISCUSSION
Because Defendant has claimed there are several different bases are under which
the Court should dismiss Plaintiffs’ Complaint, the Court will address each in turn.
I.
Subject-Matter Jurisdiction — Diversity
Defendant argues that Plaintiffs’ Complaint should be dismissed due to a lack of
subject-matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1).
(Docket No. 6, at 2.) Specifically, Defendant alleges that two of the properly-named
defendant parties in the McCracken Circuit Court action are citizens of Kentucky,
thereby violating the complete diversity requirement—even though those parties are not
actually before the Court.
Defendant argues that Vaden v. Discover Bank, 556 U.S. 49 (2009), stands for
the proposition “that, in cases involving arbitration questions, it is to the underlying
controversy to which this Court must look regarding questions of subject-matter
jurisdiction.” The Federal Arbitration Act (FAA), 9 U.S.C. § 4, states:
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration may
petition any United States district court which, save for such
agreement, would have jurisdiction under Title 28, in a civil
action or in admiralty of the subject matter of a suit arising out
of the controversy between the parties, for an order directing that
such arbitration proceed in the manner provided for in such
agreement.
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9 U.S.C.A. § 4 (emphasis added). Defendant emphasizes the bolded language, arguing
the FAA requires that an independent basis in the underlying controversy to be
arbitrated is necessary for subject-matter jurisdiction to exist. Both parties agree that
federal-question is not a basis for jurisdiction here and that the dispute centers around
whether or not complete diversity exists.
Defendant argues that no diversity jurisdiction exists because the parties to the
underlying controversy in the McCracken Circuit Court are not diverse, while Plaintiffs
argue that because the named parties in this present action are diverse, diversity
jurisdiction does exist. As for Defendant’s reliance on Vaden, Plaintiffs argue its
analysis applies only to federal-question jurisdiction, not diversity of citizenship
jurisdiction.
In Vaden a credit card company, Discover, asserted a state law claim to recover
past-due charges from one of its credit cardholders. Vaden, 556 U.S. at 53. The holder
counterclaimed, alleging Discover’s finance charges, interest, and late fees violated
state law. Id. Invoking an arbitration clause in its cardholder agreement, Discover filed
a 9 U.S.C. § 4 petition in federal district court to compel arbitration of the holder’s
counterclaims, arguing they were preempted by federal law. Id.
The Supreme Court framed the question presented as:
Should a district court, if asked to compel arbitration pursuant to §
4, ‘look through’ the petition and grant the requested relief if the
court would have federal-question jurisdiction over the underlying
controversy? And if the answer to that question is yes, may a
district court exercise jurisdiction over a § 4 petition when the
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petitioner’s complaint rests on state law but an actual or potential
counterclaim rests on federal law?
Vaden, 556 U.S. at 53. The Supreme Court ultimately held that a federal court may
“look through” a § 4 petition and order arbitration if the court would have jurisdiction
over the underlying controversy between the parties. Id. However, the Court found that
the district court incorrectly compelled arbitration because the claims in the Complaint
were based on state law and federal-question jurisdiction cannot be invoked on the basis
of a defense or counterclaim under the well-pleaded complaint rule. Id. at 1254.
Plaintiffs correctly point out that Vaden concerned only federal-question
jurisdiction and did not involve diversity jurisdiction. Plaintiffs assert that the “look
through” analysis in Vaden is not applicable when diversity jurisdiction exists as an
independent jurisdictional basis because “there is no support in the text of the Vaden
decision (or in any other case) for such broad reaching conclusions.” (Docket No. 7, at
4.) Plaintiffs rely on an Eighth Circuit case, Northport Health Services of Arkansas v.
Rutherford, 605 F.3d 483 (8th Cir. 2010), involving circumstances similar to this case
where the “look through” analysis was rejected in the context of the determination of
diversity jurisdiction.
In Northport, state law claims were brought by the estates of deceased nursing
home patient against a number of defendants, including administrator defendants who
were not diverse. Id. at 485. Prior to being admitted to the nursing homes, the
administrators had signed arbitration agreements.
Id.
The defendants, with the
exception of the non-diverse administrators, petitioned the federal court for enforcement
of the arbitration agreement based on diversity jurisdiction. Id.
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The representatives opposed compelling arbitration, claiming that a federal court
did not have diversity jurisdiction over a § 4 petition to compel arbitration of claims that
were part of a pending state court action that includes one or more non-diverse parties
not named in the § 4 petition. Northport, 605 F.3d at 485. The district court compelled
arbitration concluding that, while Vaden addressed only federal-question jurisdiction, its
“look through” analysis implicitly overruled prior federal cases compelling arbitration
based upon diversity of citizenship. Id. at 485-86. The Eighth Circuit ultimately
reversed the district court, concluding that while “some of the reasoning in Vaden
supports the district court’s rulings, we are not persuaded that Vaden implicitly
overruled the otherwise on-point decisions in Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1 (1983), and Advance America Servicing of
Arkansas v. McGinnis, 526 F.3d 1170 (8th Cir. 2008).” Northport, 605 F.3d at 486.
While not binding, the Court is persuaded by the well-reasoned analysis in
Northpoint. As the Eighth Circuit recognized, Defendant’s argument for applying the
“look through” analysis in this case distorts the Supreme Court’s decision in Vaden.
Northport, 605 F.3d at 488-89. It ignores that Vaden involved a federal-question,
explicitly stated it was only applicable to federal-question cases, and that the circuit
conflict it sought to resolve involved only federal-question cases. See Northport, 605
F.3d at 488-89. Vaden did not mandate a new analysis for § 4 diversity jurisdiction
disputes. Furthermore, Moses H. Cone is persuasive because the Supreme Court found
the independent basis of federal jurisdiction was diversity of citizenship, but the
Court—despite noting the existence of a non-diverse party in the underlying state court
action—did not address a would be defect in diversity jurisdiction based on Defendant’s
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interpretation of Vaden. See Moses H. Cone Memorial Hosp. v. Mercury Const. Corp.,
460 U.S. 1, 4-8 (1983).
Therefore, as was recognized in Northport, Defendant’s
contention would require this Court to assume the Supreme Court “overlooked a serious
diversity jurisdiction issue in Moses H Cone and then implicitly overruled Cone’s
jurisdictional underpinnings in Vaden.” Northport, 605 F.3d at 490. “The Supreme
Court does not normally overturn, or so dramatically limit, earlier authority sub
silentio.” Northport, 605 F.3d at 490 (citations omitted). Therefore, in this case, for
purposes of determining if diversity of citizenship exists, we look only to the citizenship
of the parties to the federal action.
i.
Conclusion — Subject-Matter Jurisdiction Exists
The FAA bestows no federal jurisdiction but rather requires for access to a
federal forum an independent jurisdictional basis over the parties’ dispute. Here, that
independent basis exists because the parties before this Court are completely diverse.3
As discussed above, the makeup of the parties in the underlying controversy is
irrelevant for the determination of whether or not diversity jurisdiction exists. The
determinative inquiry is the makeup of the parties before this Court.
The parties
presently before the Court, which does not include the administrators, are diverse.
Therefore, this Court has subject-matter jurisdiction on the basis of diversity.
3
28 U.S.C. 1332 “confers federal jurisdiction only if complete diversity of citizenship exists, such that no
party has the same citizenship of any opposing party.” PaineWebber, Inc. v. Cohen, 276 F.3d 197 (2001)
(citations omitted).
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II.
Indispensable Party Analysis
Defendant also moves to dismiss the Complaint for failure to join an
“indispensable” party, pursuant to Federal Rule of Civil Procedure 12(b)(7) and 19.4
(See Docket No. 6-1, at 17.) Federal Rule of Civil Procedure 19(a) states:
(a) Persons Required to Be Joined if Feasible
(1) Required Party. A person who is subject to service of
process and whose joinder will not deprive the court of subjectmatter jurisdiction must be joined as a party if:
(A) in that person’s absence, the court cannot accord
complete relief among existing parties; or
(B) that person claims an interest relating to the subject
of the action and is so situated that disposing of the
action in the person’s absence may:
(i) as a practical matter impair or impede the
person’s ability to protect the interest; or
(ii) leave an existing party subject to a
substantial risk of incurring double, multiple, or
otherwise inconsistent obligations because of
the interest.
Essentially, under Rule 19(a), a “necessary” party is one having an interest in the
controversy, and whose absence would result in some aspect of the suit being left
outstanding. See, e.g., Shields v. Barrow, 58 U.S. 130, 139 (1854). A “necessary” party
must be joined if feasible—if they are “subject to service of process” and would “not
deprive the court of subject-matter jurisdiction.” FED. R. CIV. P. 19(a). The parties are
in agreement that the administrators are “necessary” parties under Rule 19(a). Without
their presence in an arbitration or action in this Court, actions against them would be
left outstanding from the underlying controversy.
4
Federal Rule of Civil Procedure 12(b)(7) provides that a party may move for dismissal based on the
“failure to join a party under Rule 19.”
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However, the administrators cannot be joined because they would deprive the
Court of subject-matter jurisdiction because they are not diverse.
In certain
circumstances, a “necessary” party is “indispensable” and the action should be
dismissed in the absence of the indispensable party. See, e.g., PaineWebber, Inc. v.
Cohen, 276 F.3d 197, 200-01 (6th Cir. 2001). Federal Rule of Civil Procedure 19(b)
states:
(b) When Joinder Is Not Feasible. If a person who is required to
be joined if feasible cannot be joined, the court must determine
whether, in equity and good conscience, the action should proceed
among the existing parties or should be dismissed. The factors for
the court to consider include:
(1) the extent to which a judgment rendered in the person’s
absence might prejudice that person or the existing parties;
(2) the extent to which any prejudice could be lessened or
avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or
(C) other measures;
(3) whether a judgment rendered in the person’s absence would
be adequate; and
(4) whether the plaintiff would have an adequate remedy if the
action were dismissed for nonjoinder.
Indispensable parties are those “who not only have an interest in the controversy, but an
interest of such a nature that a final decree cannot be made without either affecting that
interest, or leaving the controversy in such a condition that its final termination may be
wholly inconsistent with equity and good conscience.” See, e.g., Shields v. Barrow, 58
U.S. 130, 139 (1854).
The parties dispute whether the administrators are
“indispensable” parties under Rule 19(b)—which would require dismissal because
joinder of the administrators as parties would deprive the Court of jurisdiction.
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Defendant concedes that a party’s status as a joint tortfeasor does not make a
party indispensable per se, (Docket No. 6-1, at 18), but argues the administrators are
indispensable parties based on Jenkins v. Reneau, 697 F.2ds 160 (6th Cir. 1983). In
Jenkins, a plaintiff brought a legal malpractice action against a law firm for the
mishandling of a wrongful death and nursing home abuse action in a federal court in
Tennessee on diversity jurisdiction grounds. Id. at 161. The plaintiff was an Alabama
resident and the defendant firm a Tennessee entity. Id. However, the law firm had been
retained by the plaintiff to pursue an action on behalf of the plaintiff and all other heirs
at law of the decedent nursing home resident. Id. The plaintiff’s sister, an heir at law of
the decedent, was a Tennessee resident. Id. The Sixth Circuit affirmed the district
court’s dismissal and found that since the sister was a real party in interest in the single
controversy regarding malpractice, she was an indispensable party in that action. See
also Jamison v. Memphis Transit Management Co., 381 F.2d 670 (6th Cir. 1967)
(finding mother was an indispensable party in statutory wrongful death action because
she and the father had a joint right of action against the defendant).
On the other hand, Defendant argues that these administrators are not
“indispensable” parties, relying on PaineWebber, Inc. v. Cohen, 276 F.3d 197, 200-206
(6th Cir. 2001). In PaineWebber, an executor of an individual’s estate brought an
action against an investment brokerage firm, PaineWebber, and the branch manager in
state court. Id. at 199-200. Based on an arbitration clause in the “Client’s Agreement,”
the investment brokerage firm—and not the branch manager—brought a diversity
action in federal court to compel arbitration of a dispute with a client’s executor and to
stay the executor’s state court action against the firm and an individual branch manager.
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Id. The executor filed a motion to dismiss the federal case on the basis that the branch
manager was an indispensable party. Id.
In reversing the district court’s determination that the branch manager was an
indispensable party, the Sixth Circuit analyzed the four Rule 19(b) factors the Courts
are instructed to consider. Id. at 202. Those factors are:
(1) the extent to which a judgment rendered in the person’s
absence might prejudice that person or the existing parties;
(2) the extent to which any prejudice could be lessened or
avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or
(C) other measures;
(3) whether a judgment rendered in the person’s absence would
be adequate; and
(4) whether the plaintiff would have an adequate remedy if the
action were dismissed for nonjoinder.
FED. R. CIV. P. 19(b).
i.
First Rule 19(b) Factor – Extent to which a judgment rendered in the
person’s absence might prejudice that person or the existing parties
With respect to the first factor concerning the potential prejudice the parties may
face if a judgment was rendered in the absence of the necessary party, the Sixth Circuit
noted the possibility of inconsistent legal obligations that might result from conflicting
interpretations of the arbitration clause by state and federal courts. PaineWebber, 276
F.3d at 202. However, the Sixth Circuit found the potential prejudice to either the
plaintiff in the state court action or the branch manager was minimal, noting it was
“crucial” that the executor was a state court plaintiff who sued both PaineWebber and
the branch manager, rather than demanding arbitration.
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Id.
In so doing, the
PaineWebber Court cited approvingly to Bio-Analytical Servs., Inc. v. Edgewater
Hosp., Inc., 565 F.2d 450, 453 (7th Cir. 1977).
In Bio-Analytical Services, the plaintiff entity sought an order from federal court
to compel arbitration of claims that the defendant brought against it and a non-diverse
doctor in state court. Id. In determining that the absence of the doctor would not be
prejudicial to either the parties or the doctor, the Seventh Circuit explained that the state
court plaintiff’s concern with repetitious lawsuits was solely the result of its own state
court lawsuit. Id. The Sixth Circuit analogized to the situation in PaineWebber, and
similarly found that any potential prejudice was caused by the executor’s own state
court lawsuit. Furthermore, the Court noted that the executor faced no possible liability
to the branch manager, although the branch manager may be liable to the executor. The
Sixth Circuit also stated that the fear that federal and state courts will reach conflicting
interpretations of an arbitration clause did not present the degree of prejudice necessary
to support a conclusion that the branch manager was an indispensable party:
This possibility exists because Cohen [the state court plaintiff]
chose to name both PaineWebber [the investment brokerage firm]
and Wilheim [the branch manager] as defendants in the state court
action. Although such a decision ordinarily would preclude federal
adjudication of a case . . . the FAA allows any party to an
arbitration agreement to file a petition to compel arbitration.
PaineWebber, 276 F.3d at 203. The possibility of inconsistent results in state and
federal court can always occur whenever joint tortfeasors are not parties to the same
lawsuit, and, joint tortfeasors are not by their status as a joint tortfeasor alone a
necessary party, much less an indispensable party. PaineWebber, 276 F.3d at 204.
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Similarly, in this case, any potential concern with repetitious lawsuits is solely
the result of Defendant Patti Dowdy’s state court lawsuit—where she is the sole
plaintiff. Additionally, as the Sixth Circuit recognizes, “the possibility of piecemeal
litigation is a necessary and inevitable consequence of the FAA’s policy that strongly
favors arbitration.”
PaineWebber, 276 F.3d at 203; see also GGNSC Louisville
Hillcreek, LLC v. Warner, 2013 WL 6796421, at *3 (W.D. Ky. December 19, 2013).
Accordingly, the first factor does not weigh in favor of dismissing the action.
ii.
Second Rule 19(b) Factor – Extent to which any prejudice could be
lessened or avoided
As for the second factor, the Sixth Circuit has noted that it becomes less
important when there is only a small degree of potential prejudice if the action
proceeds. PaineWebber, 276 F.3d at 205. Here too, as discussed above, there is
minimal potential prejudice—if any at all. Therefore, this second factor is neutral and
does not weigh in favor of or against dismissing the action.
iii.
Third Rule 19(b) Factor – Whether judgment rendered in person’s
absence would be adequate
As for the third factor, the Sixth Circuit found a judgment rendered in the branch
manager’s absence “would be adequate.” The Court again noted that “the possibility of
Cohen [the state court plaintiff] having to arbitrate his claims against PaineWebber
while proceeding with his claims against Wilhelm [the branch manager] does not render
a judgment between Cohen and PaineWebber inadequate.” PaineWebber, 276 F.3d at
205. The same rationale applies here and, therefore, the third factor does not weigh in
favor of dismissing the action based the administrators being indispensable parties.
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iv.
Fourth Rule 19(b) Factor – Whether the plaintiff would have an adequate
remedy if the action were dismissed for nonjoinder
As for the final factor, the Sixth Circuit determined that, unlike the first three
factors, it favored dismissal because the state court presents an alternative
forum/adequate remedy where the state court plaintiff executor could bring claims
against the state court defendants. PaineWebber, 276 F.3d at 205. However, the Sixth
Circuit noted “the potential existence of another forum does not, in and of itself,
outweigh a plaintiff’s right to the forum of his or her choice.” Id. (citations omitted).
Furthermore, the Sixth Circuit opined that a “major policy consideration” weighed
against a finding of an indispensable party: such a finding would virtually eliminate the
availability of federal courts to enforce arbitration clauses in diversity cases by the
expedient action by one of the parties of filing a preemptive suit in state court with at
least one non-diverse defendant. Id. Allowing such actions to prevent federal courts
from enforcing arbitration clauses would fatally undermine the FAA. See id. at 205-06.
Accordingly, the Court declined to find the branch manager was an indispensable party.
As demonstrated, the Sixth Circuit’s analysis in PaineWebber is determinative
as to the question of whether or not the administrators are “indispensable” parties.
Based on an application of the four factors in Rule 19(b), they are not indispensable
parties and therefore dismissal is not required. To the extent, Defendant Dowdy relies
on Jackson, the Court notes that there was very little analysis of the four factors in that
case and it is factually distinguishable.
In any event, PaineWebber has greater
similarities from a factual standpoint to this case, and PaineWebber is the more recent
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case. 5
Furthermore, this Court has recently found an administrator was not an
indispensable party in very similar circumstances. GGNSC Louisville Hillcreek, LLC v.
Warner, 2013 WL 6796421 (W.D. Ky. Dec. 19, 2013).6 Accordingly, the Court finds
that the administrators in the state court action are not “indispensable” parties to this
present case.
III.
Abstention Analysis
Defendant also argues that the Plaintiffs’ Complaint should be dismissed
because this Court should abstain from exercising jurisdiction, relying on Colorado
River Water Conservation Dist. v. U.S., 424 U.S. 800 (1976). Defendant points out that
there is a parallel proceeding in state court with substantially the same parties and
issues.
“Abstention from the exercise of federal jurisdiction is the exception, not the
rule.” Colorado River, 424 U.S. at 813. Abstention is an “extraordinary and narrow
exception” to the “virtually unflagging obligation” of federal courts to exercise
jurisdiction given them. Id. at 813, 817. As has been recognized by the Sixth Circuit,
the Supreme Court has identified eight factors, four in Colorado River and four in
subsequent decisions, that a district court must consider when deciding whether to
5
The Court notes that:
In the arbitration context, to our knowledge every circuit to consider the issue
has concluded that a party joined in a parallel state court contract or tort action
who would destroy diversity jurisdiction is not an indispensable party under
Rule 19 in a federal action to compel arbitration.
Northport Health Services of Arkansas, LLC v. Rutherford, 605 F.3d 483 (7th Cir. 2010) (citations
omitted).
6
To the extent Plaintiff relies on the Cytec, the Court notes that Cytec is a non-binding case from the
Northern District of West Virginia and the Court is bound to follow Sixth Circuit precedent.
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abstain from exercising its jurisdiction due to concurrent jurisdiction of a state court.
PaineWebber, 276 F.3d at 206. These factors are:
(1) whether the state court has assumed jurisdiction over any res or
property; (2) whether the federal forum is less convenient to the
parties; (3) avoidance of piecemeal litigation; ... (4) the order in
which jurisdiction was obtained[;] ... (5) whether the source of
governing law is state or federal; (6) the adequacy of the state court
action to protect the federal plaintiff's rights; (7) the relative
progress of the state and federal proceedings; and (8) the presence
or absence of concurrent jurisdiction.
PaineWebber, 276 F.3d at 206. The consideration of these factors “does not rest on a
mechanical checklist, but on a careful balancing of the important factors as they apply
in a given case, with the balance heavily weighted in favor of the exercise of
jurisdiction.” Id. at 207.
1) First Factor – Whether the state court has assumed jurisdiction over
any res or property
The first factor weighs in favor of the Court exercising jurisdiction and denying
Defendant’s Motion to Dismiss because the state court has not assumed jurisdiction
over any res or property.
2) Second Factor – Whether the federal forum is less convenient to the
parties
The second factor “relates to geographical considerations, not to the relative
jurisdiction scope of state versus federal courts.” PaineWebber, 276 F.3d at 207. Both
the state court and this Court are situated in Paducah, Kentucky. As such, federal court
is not less convenient for Defendant or Plaintiffs. Accordingly, this factor weighs in
favor of the Court exercising jurisdiction.
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3) Third Factor – Avoidance of piecemeal litigation
The third factor would, at first glance, appear to counsel against taking
jurisdiction because it would result in parallel proceedings and the possibility of
inconsistent outcomes. However, for the same reasons that the threat of piecemeal
litigation does not make the administrators indispensable parties, “the desire to avoid
litigating a single issue in multiple forums is insufficient to overcome the strong federal
policy supporting arbitration.” PaineWebber, 276 F.3d at 207. In these circumstances,
where a Complaint to compel arbitration has been filed, FAA policy favoring piecemeal
litigation prevails.
Therefore, this factor weighs in favor of the Court exercising
jurisdiction based on the congressional intent expressed in the FAA.
4) Fourth Factor – Order in which jurisdiction was obtained
As for the fourth factor, Defendant filed her state court action before the present
action was filed by Plaintiffs in this Court. However, Plaintiffs filed the present action
shortly after filing their Answer to Defendant’s Complaint in the state court action and
the state court matter has not proceeded beyond the initial pleadings. “Priority should
not be measured exclusively by which complaint was filed first, but rather in terms of
how much progress has been made in the two actions.” Moses H. Cone, 460 U.S. at 22;
see also PaineWebber, 276 F.3d at 207. Therefore, this factor is either neutral or
slightly in favor of abstention.
5) Fifth Factor – Whether the source of governing law is state or federal
As for the fifth factor, the Sixth Circuit noted in PaineWebber that where the
FAA provides the source of the law for interpreting the disputed arbitration agreement,
this factor weighs in favor of the Court exercising jurisdiction. PaineWebber, 276 F.3d
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at 208. The Sixth Circuit noted that this factor is less significant where there is
concurrent jurisdiction, but also noted the task under the Colorado River analysis was
not to search for “some substantial reason” for the exercise of federal jurisdiction by the
district court; rather, the task is to ascertain whether there exists “exceptional
circumstances” to justify the surrender of that jurisdiction.
omitted).
Id. at 208 (citations
Therefore, the fifth factor weighs in favor of this Court exercising
jurisdiction.
6) Sixth Factor – Adequacy of the State Forum
As for the sixth factor, adequacy of the state forum, the state court action is
adequate to protect Plaintiffs’ rights.
Plaintiffs’ rights under the FAA would be
protected in the state court proceeding and FAA motions may be considered
concurrently on their merits in the state court. In fact, in their Answer in the state court
case, Plaintiffs make the same claim that the arbitration clause requires that these claims
be arbitrated. Accordingly, the sixth factor weighs in favor of this Court abstaining.
7) Seventh Factor – Relative progress of the proceedings
The seventh factor supports exercising jurisdiction because, as in PaineWebber,
the state court action has not progressed to any significant degree. Plaintiffs’ Complaint
in this Court was filed shortly after their Answer was filed in the state court action. It
appears there has been no further substantive progression in the state court action and
the last filing was a notice of the pending Complaint in this federal court case.
Accordingly, this factor weighs in favor of this Court exercising jurisdiction.
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8) Eighth Factor – Presence or absence of concurrent jurisdiction
As for the eighth factor, the source of governing law is the FAA but state courts
possess concurrent jurisdiction over these claims. As recognized in PaineWebber, the
presence of concurrent jurisdiction “only marginally, if at all, favors abstention.”
PaineWebber, 276 F.3d at 208. In fact, “the preceding discussion of the fifth factor
demonstrates that the eighth factor is insufficient to justify abstention despite concurrent
jurisdiction in state and federal court where a congressional act provides the governing
law and expresses a preference for federal litigation.” Id. Accordingly, this factor is
either neutral or marginally in favor—but not determinatively so—of abstention.
As in PaineWebber, this Court finds the vast majority of factors are either
neutral or supportive of federal jurisdiction. The fact that the state court can protect
Plaintiffs’ rights under the FAA does not provide the “exceptional” circumstances
necessary to justify abandoning the “virtually unflagging obligation of the federal courts
to exercise the jurisdiction given them.”
Colorado River, 424 U.S. at 818.
Accordingly, abstention is not warranted in this case.
IV.
Allegation that Arbitration Agreement is Invalid and Unenforceable
Defendant also moves to dismiss Plaintiffs’ Complaint pursuant to Federal Rule
of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted,
alleging the underlying Arbitration Agreement is invalid and unenforceable.
Specifically, Defendant claims that (i) the agreement does not evidence a transaction
involving interstate commerce; (ii) it is impossible to perform according to its terms;
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and (iii) the agreement is facially unenforceable because it is unconscionable and void
as against public policy. (Docket No. 6-1, at 26.)
i.
Interstate Commerce
The Supreme Court has interpreted the language “involving commerce” in the
FAA as signaling the broadest permissible exercise of Congress’ Commerce Clause
power. Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003); see also GGNSC
Louisville Hillcreek, LLC v. Warner, 2013 WL 6796421, at *3 (W.D. Ky. December 19,
2013).
Defendant argues the contract does not evidence a transaction involving
interstate commerce—meaning the FAA is not applicable.
Defendant cites only one case in support of their position that that the
transaction does not involve interstate commerce: Saneii v. Robards, 289 F. Supp. 2d
855, 858 (W.D. Ky. 2003). In Saneii, the Court held that the single sale of residential
real estate was intrastate, emphasizing the commodity of land “is firmly planted in one
particular state” and that the citizenship of the immediate parties was incidental to the
real estate transaction. Id. at 858-59. Defendant argues the agreement at issue here,
which concerns a Kentucky citizen with a personal care facility located within
Kentucky, would similarly be “inherently intrastate.”
On the other hand, Plaintiffs argue that Defendant’s own state court Complaint
essentially concedes this transaction involves interstate, as opposed to intrastate,
commerce by alleging that foreign entities own, operate, manage, control, and/or
provide services for Paducah Care and Rehabilitation Center. Plaintiffs also point out
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that Defendant specifically invoked Kentucky’s long-arm statute to bring some of the
Plaintiffs before the McCracken Circuit Court.
Many cases have found the FAA applies to arbitration agreements in the context
of nursing home residents. (See Docket No. 7, at 17.) Furthermore, this Court recently
found an admissions agreement to a nursing home evidenced a nexus with interstate
commerce at a high level of abstraction because it involves a provision of health care.
GGNSC Louisville Hillcreek, LLC v. Warner, 2013 WL 6796421, at *7-8 (W.D. Ky.
December 19, 2013). In GGNSC, this Court emphasized that, while the nursing care
may occur wholly within the borders of Kentucky, the food, medicine, medical, and
other supplies all likely come from elsewhere and that it would be impracticable for the
nursing home to procure all goods necessary for the daily operations purely through
intrastate channels. Id. at *8. This Court also noted that the complaint alleged that
foreign entities owned, operated, manager, controlled, and provided services for the
nursing home. Id. In a footnote, this Court explicitly distinguished Saneii, stating in
that case the only factor incidentally linking the transaction to interstate commerce was
that one party to the residential real estate sale was an out-of-state commercial entity.
Id. at *8 n.11. Therefore, the admissions agreement, containing the arbitration clause,
reflects a transaction involving interstate commerce.
argument that the FAA does not apply is inapplicable.
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Accordingly, Defendant’s
ii.
Allegation that the Arbitration Agreement is Impossible to Perform
Defendant also alleges the arbitration agreement is impossible to enforce
according to its terms and, therefore, Plaintiffs are not entitled to compel its
enforcement. The provision at issue is Section C, Paragraph Six:
6. Procedural Rules and Substantive Law. The Arbitrator shall
apply NAF’s Code of Procedure (in effect as of May 1, 2006)
unless otherwise stated in this Agreement. The parties’ selection
of the NAF Code of Procedure to govern the arbitration
proceedings is not tantamount to the selection of NAF as the
administrator of the arbitration . . .
(Docket No. 1-2, at 2.) Defendant argues that, while facially the agreement makes the
National Arbitration Forum’s (NAF) participation optional, it makes the NAF Code of
Procedure mandatory. Defendant alleges that this code is inoperable without NAF
participation and NAF no longer administers consumer related pre-dispute arbitration
agreement.
Rule One of the NAF Code of Procedure states: “This Code shall be
administered only by the National Arbitration Forum or by any entity or individual
providing administrative services by agreement with the National Arbitration Forum.”
Defendant also cites several other provisions in the NAF Code of Procedure that
indicate NAF is imposed with the duty to administer arbitration that take place under
the Code. (See Docket No. 6-1, at 29-31.) In particular, Defendant emphasizes NAF
Code Rule 48(D) and (E), which provides that if the parties are denied the opportunity
to arbitrate a dispute before NAF they may “seek legal and other remedies in accord
with applicable law.” (See Docket No. 6-1, at 30.)
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The arbitration agreement itself only references the NAF Code of Procedure
once, in Paragraph Six of Section C. There is no indication that the usage of the NAF
Code is integral to arbitration of this matter. The agreement specifically states that the
selection of the NAF Code of Procedure to govern the arbitration proceedings “is not
tantamount to the selection of NAF as the administrator of the arbitration.”
The
agreement also provides the process for choosing an administrator, and at no point does
it require a NAF administrator. Furthermore, the FAA contains a provision allowing
the Court to select an arbitrator and the Sixth Circuit has found that an arbitratorselection provision was severable from the remainder of an arbitration agreement. See
McMullen v. Meijer, Inc., 166 Fed. App’x. 154 (6th Cir. 2006). Therefore, because of
the federal policy in favor of arbitration evinced in the FAA, the parties’ intent to utilize
arbitration as the exclusive method of resolving disputes, and the finding that the use of
the NAF Code of Procedure was not integral to the agreement, the Court finds
Defendant’s argument of impossibility is not a basis for dismissing Plaintiffs’
Complaint.
iii.
Allegation of Unconscionability
Defendant also argues the agreement is unenforceable because it is
unconscionable, both procedurally and substantive. The doctrine of unconscionability
is a narrow exception to the fundamental rule of contract law that, absent fraud in the
inducement, a written agreement duly executed by the party to be held, who had an
opportunity to read it, will be enforced according to its terms. See, e.g., Conseco Fin.
Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky. Ct. App. 2001) (finding arbitration
clause was not unconscionable).
Defendant claims this arbitration agreement was
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“likely presented to the Defendant within a lengthy stack of admissions paperwork” and
that there was an “gross disparity of bargaining power between the parties[.]” (Docket
No. 6-1, at 33.) Defendant also cites a Wall Street Journal article which alleges unequal
bargaining positions and criticizes the inclusion of arbitration clauses in the context of
nursing home cases.
The Court notes that the arbitration agreement at issue here is: (1) a stand-alone
agreement; (2) six pages printed in normal font; (3) the last page contains a bold face all
capital letter provision noting waiver of right to a jury trial; (4) no limitation on type or
amount of damages claimed; (5) no limitation on
causes of action; and (6) the
agreement is titled in bold face all capital letters stating it governs important legal rights
and should be read carefully. (See Docket No. 1-2.) Therefore, from a procedural
standpoint, Defendant’s argument of unconscionability has no merit.
From a substantive standpoint, Defendant’s arguments essentially amount to an
allegation that arbitration will not afford her an adequate opportunity to present her
claims.
Under the FAA, such a presumption is not a proper basis for refusing
enforcement of an arbitration clause under the doctrine of unconscionability.
iv.
Allegation of Violation of Public Policy
Defendant also claims the arbitration agreement is void as against public policy.
It appears Defendant’s argument is based on the existence of statutes instructing nursing
home facilities to encourage and assist residents in exercising their rights and the notion
that arbitration interferes with their right to bring an action in court. (Docket No. 6-1, at
36-37.)
The Supreme Court has unequivocally stated that pre-dispute arbitration
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agreements in the nursing home context are not exempted under the FAA. Marmet
Health Care Center, Inc. v. Brown, 132 S.Ct. 1201, 1203-04 (2012). Accordingly, there
is no public policy that could support Defendant’s position here.
CONCLUSION
For these reasons, and consistent with the Court’s conclusions above,
IT IS HEREBY ORDERED that Defendant Patti Dowdy’s Motion to Dismiss, (Docket
No. 6.), is DENIED, consistent with the above opinion.
IT IS SO ORDERED.
Date:
cc:
February 26, 2014
Counsel
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