In Hursh v. DST Systems, Inc., No 21-3554 (8th Cir. Nov. 28, 2022), appeals of awards to 177 claimants –who prevailed in ERISA arbitrations about losses in their 401(k) profit sharing plan – result in the judgments being vacated and remanded owing to doubts about the district court’s subject-matter jurisdiction.
“DST was the Plan’s sponsor, administrator, and a designated fiduciary. Ruane Cunniff & Goldfarb Inc. (‘Ruane’) was a Plan fiduciary involved in managing the Plan’s investments. When a stock in which the Plan was heavily invested dropped from $258 per share in 2015 to $15 per share in 2016, the Plan suffered nearly $400M in losses. Substantial litigation ensued, including class action lawsuits in the Western District of Missouri and the Southern District of New York alleging breaches of fiduciary duty by DST and by Ruane in managing the defined-contribution Plan.”
Because the employees had signed arbitration agreements, the case devolved into 554 or more individual arbitrations (although courts had, in fact, divided about whether the arbitrations were enforceable). DST decided strategically to participate in a New York class action as a defendant, the Ferguson case, while defaulting on the arbitration proceedings in Missouri. This resulted in numerous awards in favor of the employees, who then hastened to federal court to have the awards confirmed under Section 9 of the Federal Arbitration Act, 9 U.S.C. § 9. DST appealed the judgments.
The Eighth Circuit vacates and remands. “On March 31, 2022, with briefing not yet completed [on the appeals], the Supreme Court issued its decision in Badgerow v. Walters, 596 U.S. —, 142 S. Ct. 1310 (2022), dramatically limiting federal jurisdiction to confirm or vacate arbitration awards under Sections 9-10 of the FAA.” Previously, lower courts had held that subject-matter jurisdiction for confirmation of awards under Section 9 could be determined by whether the underlying claim involved a federal question and could have been filed as an action in federal court, the so-called “look-through” principle. But the Supreme Court, which had endorsed this principle in Section 4 actions to compel arbitration, found that the language of Section 9 (and 10) differed enough to warrant a different result. An applicant seeking federal court confirmation of an arbitration award must establish an “independent jurisdictional basis [on] the face of the application itself.”
Plaintiffs below had not alleged a basis for subject-matter jurisdiction other than federal-question pursuant to 9 U.S.C. § 9 and 28 U.S.C. § 1332(a)(2). The panel concludes that this was “obviously the assertion of federal question jurisdiction under the ‘look-through’ principle rejected in Badgerow.”
The panel also holds that the record did not reveal any clear independent basis for jurisdiction.
“[O]n appeal, faced with new jurisdictional uncertainty, Plaintiffs sing a new tune, arguing that the district court had federal question jurisdiction because their Section 9 motions to confirm and DST’s motions to vacate ‘implicate[d] significant federal issues,’ a basis for federal question jurisdiction recognized in Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308, 312 (2005).” The panel rejects this argument, finding that it was not alleged in the complaint below. It also holds that, even if the argument had been made, the underlying dispute concerned enforcement of an arbitration contract governed by state law, and did not “relate to any employee benefit plan” to warrant preemption under 29 U.S.C. § 1144(a).
The panel also explores the prospect of diversity jurisdiction and finds the record insufficiently developed. Nevertheless, it notes that “DST argues the district court lacked subject-matter diversity jurisdiction over at least 84 of the 177 orders because, according to the motions to confirm, 53 claimants are Missouri residents and therefore not diverse, and 31 others lack the requisite amounts in controversy [in excess of $75,000]. Additionally, DST argues, many of the remaining 93 actions appear to lack diversity jurisdiction based on public records, address information produced by counsel, or arbitration pleadings contradicting allegations that they reside in Kansas.”
The panel rejects the parties’ entreaties to reach the merits, irrespective of doubts about jurisdiction. “Most of these issues we cannot and will not address until the district court’s subject matter diversity jurisdiction is established on a case-by-case basis. Defendants insist that the Southern District of New York’s mandatory class certification and preliminary injunction in Ferguson precluded the district court from confirming arbitration awards. The proposition is supported by less-than-conclusive authorities. In any event, it is not an issue we can or should address before jurisdiction has been established. Among other reasons, the answer may depend on how many of the 177 awards the district court has subject matter jurisdiction to confirm. Likewise, Plaintiffs insist that we can and should affirm based on the district court’s alternative judicial estoppel ruling. But they simply assume, without even acknowledging the issue, that a party’s judicial estoppel can create subject matter jurisdiction that is otherwise lacking. And Plaintiffs’ argument that we should affirm the district court’s separate awards of attorney’s fees conveniently ignores the question whether claimants whose awards are held to be beyond the district court’s subject matter jurisdiction can be considered prevailing parties.”
The panel does, however, urge the district court to reconsider the prospect of transferring these cases to New York in the interest of justice under 28 U.S.C. § 1631. “[T]he ongoing proceedings in Ferguson may provide the parties a transferee court with subject matter jurisdiction that can resolve the entire controversy, including the transferred claims, by settlement or otherwise, in a manner that is fair and more efficient than keeping some Plaintiffs’ claims pending in the Eighth Circuit and leaving the remaining arbitration claimants to seek confirmation in state court. These issues can best be determined by the district court on remand, with input from the parties based on their views of the post-Badgerow alternatives for resolving this dispute.”