involving federal claims in the following statement made in a footnote:
Section 4 [of the Arbitration Act] provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue. E.g., Commercial Metals Co. v. Balfour, Guthrie & Co., 577 F.2d 264, 268-269 (CA1978) and cases cited.
Moses H. Cone, 460 U.S. at 25 n.32. They argue that the "plain language" in this footnote must be followed. See Morford v. Merrill Lynch, Pierce, Fenner & Smith Inc., No. 91-162-CIV.FTM 15 D (M.D. Fla. Dec. 6, 1991) (holding that removal of proceedings governed by the Federal Arbitration Act was proper where "the federal court would have jurisdiction over the underlying suit").
However, we do not find that the language in Moses Cone unequivocally requires federal courts to take subject matter jurisdiction based upon the federal nature of the underlying dispute in arbitration. Indeed, we find that language capable of two interpretations: one, as asserted by the customers, and the other indicating that there must be an ongoing suit based on federal question jurisdiction before an order compelling arbitration can issue. Thus, for clarification, we must turn to the case cited by the Supreme Court in that footnote. A careful analysis reveals that the Court's statement did not open the door to a federal forum for disputes such as the one here. In Commercial Metals Co. v. Balfour, Guthrie & Co., 577 F.2d 264 (5th Cir. 1978), the plaintiff brought a petition to compel arbitration over an alleged contract dispute. Since diversity jurisdiction was missing, the plaintiff sought a declaratory judgment that the arbitration provisions of the contract were valid under § 2 of the Federal Arbitration Act. The Commercial Metals court applied the principles enunciated in Gully in order to determine whether the plaintiff's right arose under the laws of the United States. Finding that the "right to compel arbitration" derived from the private agreement of the parties, not from any federal law, the Commercial Metals court held that federal question jurisdiction was absent. Id. at 268. Admittedly, unlike the present case, the dispute to be arbitrated in Commercial Metals did not involve federal law. However, the court there did not rely on the nature of the contract dispute to reject jurisdiction, but instead, following Gully, examined the source of the plaintiff's "right" as asserted in the complaint. Id. Following this analysis, a similar result would be reached here because Prudential's alleged right to stay arbitration derives from a private contract, the NASD contract, not from federal law.
Furthermore, we are persuaded by Judge Leval's opinion in Drexel Burnham Lambert, Inc. v. Valenzuela Bock, 696 F. Supp. 957 (S.D.N.Y. 1988), which finds that the text of § 4 does not confer federal question jurisdiction based upon the federal character of the underlying arbitration claims.
Accord Klein v. Drexel Burnham Lambert, Inc. 737 F. Supp. 319 (E.D. Pa. 1990). In Valenzuela Bock, respondents in an arbitration commenced an action in state court seeking to compel the arbitrators to sever the claims before them. The claimants then removed the action, asserting that federal jurisdiction was provided by the Federal Arbitration Act and the subject of the arbitration, which arose under the Securities Exchange Act of 1934. 696 F. Supp. at 959. Relying upon the language in § 4, which states in relevant part that "[a] party . . . may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28", 9 U.S.C. § 4, the plaintiffs argued that the federal court would have jurisdiction of their '34 Act complaint "save for" the arbitration agreement; and accordingly, it had jurisdiction over the § 4 petition.
Judge Leval rejected the claimants' interpretation, finding that the language of § 4 is not intended to confer jurisdiction, but may be read as a response to the arcane principle of common law that an agreement to arbitrate would oust the federal court of jurisdiction. Id. at 963. Thus, § 4 may be interpreted as providing that "a court which is otherwise vested of jurisdiction of the suit would not be divested [of jurisdiction] by the arbitration agreement and may proceed to order arbitration, contrary to prior precedent." Id.
The court further noted that if the Federal Arbitration Act is construed to provide for a federal forum whenever the underlying dispute involves a federal question, it must be seen as overturning the well-established rule that § 1331 federal question jurisdiction must be determined on the face of a "well-pleaded" complaint. Id. Judge Leval observed that when Congress intended to expand federal jurisdiction over arbitration cases or to provide exceptions to the well-pleaded complaint rule, it did so explicitly. He ultimately concluded that "it is unlikely that Congress intended to repeal the well-pleaded complaint rule in the Arbitration Act. The primary purpose of the Arbitration Act was to 'reverse the centuries of judicial hostility to arbitration agreements, by placing arbitration agreements upon the same footing as other contracts.'" Id. at 964. The court therefore rejected the notion that it possessed original jurisdiction and granted the remand, stating that "the nature of the underlying dispute, is not part of a well-pleaded complaint asking the court to order arbitration." Id. at 963.
Despite such strongly persuasive reasoning from this court, the customers argue that this court should ignore this precedent and deny the motion to remand because Second Circuit courts have heard cases involving stock exchange rules for arbitration. See PaineWebber Inc. v. Rutherford, 903 F.2d 106 (2d. Cir. 1990); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109 (2d Cir. 1990). However, none of those cases discuss the issue of whether a dispute in arbitration bestows federal question jurisdiction. Indeed, the facts indicate that diversity of citizenship probably provided an independent basis for jurisdiction in both Georgiadis and Rutherford. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 724 F. Supp. 120, 121 (S.D.N.Y. 1989); PaineWebber, Inc. v. Pitchford, 721 F. Supp. 542, 543, 545-46 (S.D.N.Y. 1989).
To conclude, as Prudential's right to stay arbitration under the NASD contract and the Federal Arbitration Act is not one of the federally created rights that gives rise to federal question jurisdiction, and Prudential's right to relief does not necessarily depend upon resolution of the RICO claims asserted by the customers in arbitration, we find that this court does not possess original jurisdiction. Accordingly, we remand the suit to state court.
Pursuant to 28 U.S.C. § 1447(c), federal courts may award costs and expenses, including attorneys' fees, when the removing party has acted in "bad faith" or removal is predicated upon a diversity of citizenship that clearly does not exist. See In re estate of Duane, 765 F. Supp. 1200, 1201-02 (S.D.N.Y. 1991); Syms, Inc. v. IBI Security Services, Inc., 586 F. Supp. 53 (S.D.N.Y. 1984); Zimmerman v. Conrail, 550 F. Supp. 84 (S.D.N.Y. 1982). We find no evidence of bad faith here, and therefore deny Prudential's motion for costs and expenses.
For the foregoing reasons, plaintiff's motion to remand is granted and the request for costs is denied.
Dated: White Plains, New York
July 30, 1992
Gerald L. Goettel