that "Despite the FAA's policy favoring arbitration, and the views of several of my colleagues, I find that this court cannot prevent Merrill Lynch from bringing a federal action in light of General Atomic, which holds that a state court may not interfere with an in personam federal action 'regardless of whether [such] federal litigation is pending or prospective.'" 434 U.S. at 15." Davis, at 4.
The teaching of the Supreme Court is clear and unequivocal. State courts are simply without the power to enjoin the commencement of a federal court action, and that is the only issue the Court need decide on the merits of the plaintiff's complaint. Merrill Lynch has clearly established a substantial likelihood of success on the merits. The holdings in Donovan and General Atomic I and II make it clear that a state court is without power to enjoin the commencement of any federal action that may be commenced under the jurisdictional statutes, regardless of the type of claim brought, and therefore it is clear that Merrill Lynch may bring an action seeking status quo injunctive relief in any federal court that has jurisdiction to hear the claim. It is free to do so without interference by a state court.
In considering Merrill Lynch's likelihood of success on the merits, the Court has not addressed the likelihood that Merrill Lynch will ultimately prevail on a claim for status quo injunctive relief when it files one. Merrill Lynch's entitlement to such relief is not directly at issue in the merits of this action, because Merrill Lynch has only requested a declaration that it is entitled to file such a claim without interference from a state court, not a declaration requiring evaluation of its chance of success on that claim. Merrill Lynch plainly has a well established right to seek injunctive relief to preserve the status quo and protect its customers pending the arbitration. See Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049 (2d Cir. 1990). But Banks will have every opportunity to resist on the merits any such claim and this Court will ensure that he is provided adequate notice and an opportunity to avoid any ex parte efforts by Merrill Lynch. Claims -- even for provisional relief -- should be decided wherever possible on notice, with an opportunity for both sides to be heard, and not on the fortuities of ex parte applications where courts are not adequately informed of all the facts and the law.
After the filing of Merrill Lynch's motion for preliminary declaratory relief, Banks filed a cross-motion to dismiss the complaint for lack of subject matter jurisdiction, for failure to state a claim, and for failure to join a necessary party. Because Banks briefed these issues in his memorandum in opposition to the motion for preliminary declaratory relief, the Court has carefully considered all the issues raised in those motions to determine if they undercut the conclusion that Merrill Lynch has shown a substantial likelihood of prevailing on the merits. They do not. The review of these issues here is merely for the purpose of explaining why Banks' claims do not diminish Merrill Lynch's showing of a substantial likelihood of success on the merits. These issues will be explained at greater length when the motions are actually ruled upon after argument.
Banks argues that the Court lacks subject matter jurisdiction, because under the Rooker-Feldman doctrine, a district court lacks jurisdiction to review state court decisions. In Rooker v. Fidelity Trust, 263 U.S. 413, 68 L. Ed. 362, 44 S. Ct. 149 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 75 L. Ed. 2d 206, 103 S. Ct. 1303 (1983), the Supreme Court held that a federal district court is without power to review the judgments of a state court or of the District of Columbia Court of Appeals, a state court analogue. In both cases, and in other cases relied on by Banks, review of such a judgment was directly sought by the plaintiff. In this case, review of a state court judgment is simply not sought, not only because the state court has not issued a judgment, but because Merrill Lynch does not seek review of a state court order, although it seeks to litigate the same issues considered by Justice Lobis when she issued her temporary restraining order. Indeed, Merrill Lynch brought the present action before any state court order was issued and correctly points out that Justice Lobis specifically modified her order to allow Merrill Lynch to proceed in this Court.
Banks further claims that the Court lacks subject matter jurisdiction, alleging that it possesses neither diversity jurisdiction nor federal question jurisdiction. As discussed above, this Court has both federal question and diversity jurisdiction. Banks argues that the Court does not possess federal question jurisdiction because, by analogy to removal cases, the federal question in this case is a defense -- violation of the Supremacy Clause -- and that the claim for declaratory relief is simply an effort to turn a federal defense into a federal claim which would not be allowed under the removal statute. See Franchise Tax Board of Cal., 463 U.S. 1, 14, 77 L. Ed. 2d 420, 103 S. Ct. 2841 (1983) ("Since 1887 it has been settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption, even if the defense is anticipated in the plaintiff's complaint . . ."). But, there is a plain basis for federal question jurisdiction under the Supremacy Clause and the jurisdictional statutes for federal courts. See, e.g., Illinois v. General Electric Co., 683 F.2d 206, 211 (7th Cir. 1982), cert. denied, 461 U.S. 913, 77 L. Ed. 2d 282, 103 S. Ct. 1891 (1983). Moreover, it is evident that this case has not been "removed" to federal court, because the state court action is still proceeding and there is no basis for translating the removal cases into a challenge to a case which was brought in federal court, with an independent basis for federal jurisdiction, and not removed.
Banks alleges that Merrill Lynch has failed to state a claim upon which relief may be granted, because it has not stated any claim against Banks, but only a claim against the New York State Supreme Court. He also argues that the New York State Court is a necessary party. Both arguments are without merit. The New York State Supreme Court would not enjoin Merrill Lynch from prosecuting another action if Banks did not seek such relief. And courts have often issued injunctions which had the effect of staying a state court action without joining the state court as a party. See, e.g., Bekoff v. Clinton, 344 F. Supp. 642, 645-46 (S.D.N.Y. 1992) (Frankel, J.); Complaint of Cosmopolitan Shipping, 453 F. Supp. 268 (S.D.N.Y. 1978) (Carter, J.). The same rule should apply to the even less intrusive remedy of a preliminary declaratory judgment.
Finally, Banks argues that various principles of comity argue against the issuance of declaratory relief here. However, principles of comity have not prevented the Supreme Court from declaring in clear terms in the context of injunctions issued to state courts that they lacked the power to enjoin in personam suits in federal court. See, e.g., General Atomic Co. v. Felter, 434 U.S. 12, 54 L. Ed. 2d 199, 98 S. Ct. 76 (1977) (holding that a state court could not enjoin a person from filing or prosecuting an in personam action in a federal forum) ("General Atomic I") ; General Atomic Co. v. Felter, 436 U.S. 493, 56 L. Ed. 2d 480, 98 S. Ct. 1939 (1978) (holding that mandamus was a proper remedy if the state court in General Atomic I continued to interfere with attempts the attempts of a party to arbitrate in a federal forum) ("General Atomic II").
The issuance of this preliminary declaration reinforces rather than undercuts comity among federal and state courts. See Amalgamated Sugar Co. v. NL Indus., 825 F.2d 634, 639 (2d Cir. 1987) ("While the Anti-Injunction Act is designed to avoid disharmony between federal and state systems, the exception in § 2283 reflects congressional recognition that injunctions may sometimes be necessary in order to avoid that disharmony"), cert. denied 484 U.S. 992, 98 L. Ed. 2d 511, 108 S. Ct. 511 (1987); In re Pan American Corp., 950 F.2d 839, 847 (2d Cir. 1991) (noting that, in the bankruptcy context, "'the notion of 'comity' . . . is 'not strained when a federal court cuts off state proceedings that entrench upon the federal domain"") (citations omitted). The preliminary declaration is occasioned by Banks' efforts to obtain an injunction against Merrill Lynch from proceeding with its right to pursue claims in federal court. Indeed in this case it reinforces the judicious decision by Justice Lobis, after she had an opportunity to hear from counsel for Merrill Lynch, to specifically allow Merrill Lynch to continue with its application to this Court.
If issues of comity warrant a federal court's denial of preliminary injunctive relief to Merrill Lynch, all of these issues of comity, including whatever deference is owed to an earlier filed suit in state court, can be argued to any federal court with jurisdiction that hears Merrill Lynch's claim for an injunction in aid of arbitration. Merrill Lynch will also have the opportunity at that time to argue the applicability of Moses H. Cone, which held that the District Court in that case should not have deferred to the earlier filed state case.
In any event, the merits of that injunctive action, and the proper role of comity in that action are not the issue on this application for preliminary declaratory relief. The issue here is whether this Court should issue a preliminary declaration that Merrill Lynch has a right to pursue its claim for injunctive relief in aid of arbitration in federal court without being restrained by a state court. For all of the reasons explained above, the Court concludes that it should.
B. Irreparable Injury:
Merrill Lynch has demonstrated that it will suffer irreparable injury if the temporary declaratory relief which it requests is not granted. If Merrill Lynch is barred from its right to avail itself of its opportunity to be heard in a federal district court, as declared in Donovan, it will suffer irreparable harm. Merrill Lynch would lose its right and would face all of the consequences for its inability to pursue its claim for preliminary status quo relief pending arbitration, which numerous courts, including the Court of Appeals for the Second Circuit have acknowledged as a viable basis for relief. See generally, Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith Inc., 910 F.2d 1049 (2d Cir. 1990). Merrill Lynch alleges that it will inevitably lose customers and client information and that the losses would be incalculable and irreparable. Those same arguments have prevailed in the numerous courts which have afforded status quo injunctive relief in aid of arbitration. Unless Merrill Lynch has the opportunity to prosecute that claim, the extent of the harm that it will suffer will not be able to be calculated or remedied.
Moreover, it is also clear that Merrill Lynch risks state contempt sanctions if it seeks to assert its alleged right to status quo relief and Justice Lobis continues her order. In Universal Marine Insurance Co., Ltd. v. Beacon Insurance Co., 592 F. Supp. 945 (W.D.N.C. 1984), a Tennessee court issued orders enjoining the parties from engaging in an arbitration that had been ordered by the federal court. The district court found, under Donovan, that the Tennessee court impermissibly entrenched upon the district court's jurisdiction. The court found irreparable injury and enjoined the parties who had prosecuted the state court action from seeking contempt sanctions in the state court for violation of the state court order. The district court found the irreparable harm necessary for issuance of the injunction in the facts that the state court's orders were invalid, had a chilling effect on the exercise of litigation rights, posed an unwarranted threat of contempt, and delayed the harmed party's right to a speedy and just resolution of their claim. All of these conditions exist in this case.
C. Balance of the Equities:
As described above, Merrill Lynch has shown both that it has a substantial claim to assert in federal court and that it will be subject to state contempt sanctions if it attempts to assert it and incalculable and irreparable harms if it is not able to assert it. On the other side of the balance, the only harm that Banks faces is having to litigate with Merrill Lynch in a forum in which, pursuant to this Court's order, he will have notice and opportunity to present all of his arguments. The balance of equities tips decidedly in Merrill Lynch's favor.
For all of the foregoing reasons, this Court will grant Merrill Lynch's request for preliminary declaratory relief.
John G. Koeltl
Dated: New York, New York
November 3, 1994