Sanchez VS. James Borelli, et al.

Filing 34

ORDER dismissing Plaintiff's ECF No. 1 Motion to Vacate Arbitration Award for lack of subject matter jurisdiction; denying as moot ECF Nos. 11 , 18 , 25 , and 28 motions. Signed by Judge Larry R. Hicks on 8/10/2016. (Copies have been distributed pursuant to the NEF - KR)

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UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA

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***

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JON GREGORY SANCHEZ,

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Plaintiff,

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v.

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3:15-CV-00455-LRH-WGC

ORDER

JAMES BORELLI and KELLY BORELLI and
the FINANCIAL INDUSTRY
REGULATORY AUTHORITY
Defendants.

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Before the Court is Plaintiff Jon Gregory Sanchez’s (“Sanchez”) Motion to Vacate

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Arbitration Award. ECF No. 1. 1 Defendants James Borelli and Kelly Borelli (“the Borellis”)

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filed an Opposition to Motion to Vacate and Countermotion to Confirm. ECF No. 11. Sanchez

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filed a Reply to the Opposition to Motion to Vacate and an Opposition to the Countermotion to

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Confirm. ECF No. 22. Sanchez also filed a Motion to Strike Opposition and Related

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Documents. ECF No. 18. The Borellis filed an Opposition to the Motion to Strike and a

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Countermotion to Dismiss. ECF No. 23 and 25. Sanchez filed a Reply to the Opposition to the

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Motion to Strike. ECF No. 26. He also filed an Opposition to the Countermotion to Dismiss.

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ECF No. 27. Defendant Financial Industry Regulatory Authority (“FINRA”) filed a Motion to

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Dismiss. ECF No. 28. Sanchez filed a Response. ECF No. 30. FINRA filed a Reply. ECF No.

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33.

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///

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Refers to the Court’s docket number.

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I.

Factual Background

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On April 29, 2014, the Borellis brought a claim against Sanchez for the mismanagement

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of part of their investment portfolio. The dispute was arbitrated by FINRA. After a hearing, the

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FINRA arbitrator issued a written decision awarding the Borellis $40,000 in damages on August

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5, 2015. On September 4, 2015, Sanchez filed a Petition for Judicial Review/Motion to Vacate

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the Arbitration Award. ECF No. 1. On December 14, 2015, the Borellis filed an Opposition to

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Motion to Vacate and Countermotion to Confirm. ECF No. 11. On December 31, 2015,

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Sanchez filed a Reply to the Opposition to Motion to Vacate and an Opposition to the

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Countermotion to Confirm. ECF No. 22. Sanchez also filed a Motion to Strike Opposition and

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Related Documents on December 22, 2015. ECF No. 18. On January 4, 2016, the Borellis filed

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an Opposition to the Motion to Strike and a Countermotion to Dismiss. ECF No. 23 and 25. On

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January 11, 2016 Sanchez filed a Reply to the Opposition to the Motion to Strike. ECF No. 26.

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He also filed an Opposition to the Countermotion to Dismiss on January 21, 2016. ECF No. 27.

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On February 5, 2016, FINRA filed a Motion to Dismiss. ECF No. 28. On February 17, 2016,

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Sanchez filed a Response. ECF No. 30. On February 26, 2016, FINRA filed a Reply. ECF No.

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33.

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II.

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Legal Analysis
The federal court is one of limited jurisdiction. Gould v. Mutual Life Ins. Co. of New

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York, 790 F.2d 769, 774 (9th Cir.1986). The Court possesses only that power authorized by the

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Constitution or a statute. See Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106

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S.Ct. 1326, 89 L.Ed.2d 501 (1986). It is presumed that a cause lies outside this limited

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jurisdiction. Turner v. President of Bank of N. Am., 4 U.S. (Dall.) 8, 11 (1799). The burden of

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establishing subject matter jurisdiction is on the party asserting it. See Kokkonen v. Guardian

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Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). The party

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asserting jurisdiction in this case is the petitioner, as Sanchez commenced the instant action in

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this court. Tosco Corp. v. Communities For A Better Env't, 236 F.3d 495, 499 (9th Cir. 2001)

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(quoting Smith v. McCullough, 270 U.S. 456, 459, 46 S.Ct. 338, 70 L.Ed. 682 (1926)) (“A

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plaintiff suing in federal court must show in his pleading, affirmatively and distinctly, the
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existence of whatever is essential to federal jurisdiction, and, if he does not do so, the court, on

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having the defect called to its attention or on discovering the same, must dismiss the case, unless

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the defect be corrected by amendment.”). The court cannot reach the merits of any dispute until

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it confirms its own subject matter jurisdiction. Steel Co. v. Citizens for a Better Env't, 523 U.S.

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83, 93–94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). “Jurisdiction is power to declare the law,

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and when it ceases to exist, the only function remaining to the court is that of announcing the fact

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and dismissing the cause.” Id. (quoting Ex parte McCardle, 74 U.S. (7 Wall.) 506, 514, 19 L.Ed.

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264 (1868)).

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Although the Federal Arbitration Act (“FAA”) creates substantive law governing

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arbitration agreements, the statute does not confer subject matter jurisdiction on the federal

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courts. Southland Corp. v. Keating, 465 U.S. 1, 16, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Carter

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v. Health Net of Cal., Inc., 374 F.3d 830, 833 (9th Cir. 2004). Accordingly, a petition under the

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FAA to confirm, vacate, or modify an arbitration award may be brought in federal court only if

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an independent basis of jurisdiction exists. Id.

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A. Diversity Jurisdiction

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In order to establish federal jurisdiction under § 1332, Sanchez must establish that the

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petitioner and the respondent are citizens of different states and that the amount in controversy

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exceeds $75,000. 28 U.S.C. § 1332. The parties here are citizens of different states. Sanchez is

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a resident of California, and the Borellis are residents of Nevada. Thus, the key issue is the

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amount in controversy. In the initial, underlying arbitration, the Borellis sought $100,000, but

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the arbitration award was only $40,000, which would be under the required amount in

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controversy.

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In Theis Research, Inc. v. Brown & Bain, 400 F.3d 659, 661 (9th Cir. 2005), the Ninth

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Circuit was asked to determine whether the amount-in-controversy requirement for diversity

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jurisdiction was “measured by the amount of the [arbitration] award or by the amount in dispute

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in the underlying litigation between the parties.” The plaintiff had moved to vacate an arbitration

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award of zero dollars, and at the same time the plaintiff also filed a complaint seeking damages

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for substantially the same claims asserted in the underlying arbitration. Id. The court held that
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the amount in controversy was met because the plaintiff was seeking to obtain $200 million in

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damages, which equated to a request to reopen its arbitrated claims: “Although neither Theis nor

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B & B asked that the arbitration proceedings be reopened, Theis sought to obtain by its district

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court complaint substantially what it had sought to obtain in the arbitration. Theis simply chose

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to ‘reopen’ its claims in the district court rather than in arbitration.” Id. at 665.

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In reaching its conclusion, the Theis Research court noted that there is a split among the

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circuits on this issue, and in general “the cases have turned upon whether the party seeking to

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vacate an arbitration award also sought to reopen the arbitration.” Id. at 664 (citing cases). The

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court cited Baltin v. Alaron Trading Corp., 128 F.3d 1466 (11th Cir. 1997), in which the court

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found the amount in controversy was not met where the plaintiffs sought to vacate an arbitration

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award requiring them to pay $36,284.69 but did not seek to reopen arbitration, because “[t]he

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maximum remedy sought by the Baltins was the vacatur of the arbitration award” which did not

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meet the jurisdictional minimum. Theis Research, 400 F.3d at 665. The same result was reached

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in Ford v. Hamilton Investments, Inc., 29 F.3d 255 (6th Cir.1994), because the plaintiffs sought

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only to vacate a $30,524 arbitration award and neither party sought additional damages. Theis

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Research, 400 F.3d at 665. The court in Ford “was quite clear that had the losing party sought to

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challenge the arbitrator's denial of that party's counterclaims,” which were valued over the

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jurisdictional minimum, then the amount in controversy would have been met. Id. (citing Ford,

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29 F.3d at 260; accord Peebles v. Merrill Lynch, Pierce, Fenner & Smith Inc., 431 F.3d 1320

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(11th Cir. 2005) (holding amount in controversy was met where plaintiff sought to vacate a zero-

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dollar award and requested a new hearing before a different arbitration panel where he would

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seek recovery of up to $2 million).

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“When a petitioner seeks confirmation or vacatur of an award, without seeking a remand

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for further arbitration proceedings, ‘the amount in controversy is the value of the award itself to

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the petitioner.’” Wise v. Marriott Int'l, Inc., 2007 WL 2200704, at *4 (S.D.N.Y. July 30, 2007)

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(quoting N. Am. Thought Combine, Inc. v. Kelly, 249 F.Supp.2d 283, 285 (S.D.N.Y.2003)).

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Here, Sanchez is simply asking the Court to set aside the arbitrator’s $40,000 award. Neither of

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the parties is asking this Court for an order reopening arbitration or awarding damages. Because
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all that is at stake from the outcome of this matter is $40,000 that is the amount in controversy.

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See Coffey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. CV 12-00176 PA PJWX, 2012

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WL 94545, at *3 (C.D. Cal. Jan. 11, 2012); Hansen Beverage Co. v. DSD Distributors, Inc., No.

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08CV0619-LAB(RBB), 2008 WL 5233180, at *5 (S.D. Cal. Dec. 12, 2008). Because $40,000

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does not exceed $75,000, there is no diversity subject matter jurisdiction in this case.

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B. Federal Question Jurisdiction

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Section 1331 invests in district courts “original jurisdiction of all civil actions arising

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under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. While “the

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mere presence of a federal issue in a state cause of action does not automatically confer federal-

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question jurisdiction [,]” Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 813, 106 S. Ct.

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3229, 3234, 92 L. Ed. 2d 650 (1986) (footnote omitted), a case is deemed to “arise under” federal

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law “where the vindication of a right under state law necessarily turns on some construction of

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federal law ...” Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 9, 103 S.Ct.

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2841, 77 L.Ed.2d 420 (1983).

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The FAA does not itself confer federal subject matter jurisdiction; rather, there must be

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an independent jurisdictional basis. Carter v. Health Net of Cal., Inc., 374 F.3d 830, 833 (9th

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Cir. 2004). Additionally, a petition to vacate or confirm an arbitration award does not “arise

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under” federal law merely because “the underlying arbitration involves a federal question.”

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Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1111 (9th Cir. 2004). A court may not “look

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through” to the arbitration claims in determining subject matter jurisdiction; the fact that the

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underlying arbitration involved federal claims does not confer federal jurisdiction for the petition

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to vacate, modify, or correct. See Doscher v. Sea Port Grp. Sec., LLC, No. 15-CV-384 JMF,

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2015 WL 4643159 (S.D.N.Y. Aug. 5, 2015); Goldman v. Citigroup Glob. Markets Inc., No.

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CIV.A. 12-4469, 2015 WL 2377962 (E.D. Pa. May 19, 2015); Crews v. S & S Serv. Ctr. Inc.,

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848 F. Supp. 2d 595 (E.D. Va.) aff'd sub nom. Crews v. S&S Serv. Ctr. Inc., 474 F. App'x 370

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(4th Cir. 2012). However, a federal court has subject matter jurisdiction over a petition to vacate

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an arbitration award where the basis for vacating an arbitration award is that the arbitrator

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manifestly disregarded federal law. Sharlands Terrace, LLC v.1930 Wright St., LLC, No. C-115

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2503-EDL, 2011 WL 3566816, at *4 (N.D. Cal. Aug. 12, 2011). An exception to this rule exists

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where the allegation that the arbitrator manifestly disregarded federal law is “patently without

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merit.” Id. Other courts in other circuits have held that federal question jurisdiction in a petition

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to vacate extends to cases where the interpretation of substantial questions of federal law is

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required. See, e.g. Gimbel v. UBS Fin. Servs., Inc., No. 08 C 4319, 2009 WL 1904554, at *6

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(N.D. Ill. May 28, 2009) (where the court found jurisdiction because petitioners’ claim for relief

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in their petition relied upon an interpretation of SEC rules and regulations).
Here, nothing in Sanchez’s petition indicates any issues with federal law or how the

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arbitrator handled federal law. Sanchez seeks to vacate the arbitration award because (1) the

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Arbitrator exceeded his powers by disregarding the law by failing to apply Nevada Law on the

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issue of statute of limitations which would have barred all the claims, and (2) the Arbitrator

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exceeded his powers by disregarding the law by awarding damages to the Borellis with the effect

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of putting the Borellis in a better position than if the alleged mismanagement had not occurred.

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As to his first argument, it is entirely premised on the misapplication of a Nevada state law. The

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only mention of a federal law is when Sanchez states “although not clear in the complaint,

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Respondents appear to have alleged violation of Rules 10-b and 10-b(5) of the Securities

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Exchange Act of 1934,” and notes that the statute of limitations on the Securities Exchange Act

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is dependent upon Nevada’s Blue Sky laws. However, there Sanchez is arguing that the

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arbitrator misinterpreted Nevada’s Blue Sky laws, not any federal law. As to Sanchez’s second

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argument, Sanchez does not indicate any federal law that was disregarded, misinterpreted, or

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even important to the question at issue. Sanchez’s grievance is with the arbitrator’s misuse of

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the general legal principle that the award should not put the wronged party in a better position

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than if the wrong had never occurred. Because Sanchez is not raising any federal issue in his

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motion to vacate, there is no federal question jurisdiction.

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III.

Conclusion
IT IS THEREFORE ORDERED that Plaintiff Sanchez’s Motion to Vacate Arbitration

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Award (ECF No. 1) is DISMISSED for lack of subject matter jurisdiction.

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IT IS FURTHER ORDERED that all other pending motions (ECF Nos. 11, 18, 25, and
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IT IS SO ORDERED.

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DATED this 10th day of August, 2016.

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________________________________
LARRY R. HICKS
UNITED STATES DISTRICT JUDGE

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