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IFC Interconsult, AG v. Safeguard International Partners

February 13, 2006; as amended February 23, 2006


Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 04-mc-00107) District Judge: Hon. Marvin Katz.

The opinion of the court was delivered by: Roth, Circuit Judge


Argued on November 14, 2005

Before: ROTH, FUENTES and BECKER, Circuit Judges


These consolidated appeals involve the propriety of the District Court's confirmation of an arbitration award and, in connection with that award, also involve the questions whether the District Court had ancillary jurisdiction over a garnishment action to collect on the award and whether the District Court properly denied summary judgment on the garnishment action. For the reasons stated below, we will affirm the District Court's confirmation of the arbitration award, reverse the District Court's ruling that it lacked ancillary jurisdiction over the garnishment action, reverse the District Court's alternative ruling denying the garnishor summary judgment, and direct that summary judgment be entered in favor of the garnishor.

I. Factual and Jurisdictional Background

The parties to the arbitration are Safeguard International Partners, LLC (SIP) and IFC Interconsult, AG (IFC). SIP is the general partner of SIF Management, L.P., which manages a hedge fund, Safeguard International Fund, L.P. (the Fund).*fn1 In July 1996, SIP hired IFC to recruit investors for the Fund under an agreement (the Agreement) that stated that the parties would submit disputes under the contract to binding arbitration in Philadelphia, Pennsylvania, conducted by the American Arbitration Association. The Agreement did not specify what court would have jurisdiction over the arbitration.

SIP claims that IFC and related parties began to defraud it and, as a result, SIP refused to pay IFC all of the finder's fees. In August 2002, IFC responded by initiating arbitration against SIP under the Agreement. IFC wanted George H. Carter and Carter's company, CFC, related parties who were also owed fees, to be involved in the arbitration; SIP did not. In September 2002, SIP filed a complaint for declaratory judgment in the United States District Court for the Eastern District of Pennsylvania to determine who was eligible for arbitration under the Agreement. The District Court dismissed the complaint for lack of subject matter jurisdiction because there was not complete diversity of citizenship between the multiple parties. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806); 28 U.S.C. § 1332.

In October 2002, SIP filed a similar declaratory judgment action in the Philadelphia Court of Common Pleas. In November, the Court of Common Pleas ruled that the arbitration could proceed but only between IFC and SIP and with certain restrictions. Various motions and appeals followed, but eventually the parties reached a settlement. The Court of Common Pleas on February 26, 2003, reflected this settlement in the following order:

The Court, having been advised that the within case has been settled, the case shall be marked "discontinued" on the prothonotary's docket and removed from the applicable list and inventory of pending cases. If the instant proceedings involve an appeal from a compulsory arbitration award, any lien from the arbitration award is released. This case may be restored to the trial list only upon written order of the team/program leader. This relief shall be requested by formal motion.

Safeguard Int'l Partners, LLC v. IFC Interconsult, AG, No. 02-0904980, Order of Feb. 26, 2003.

The case then proceeded to arbitration. In June 2004, the arbitration panel entered an award in favor of IFC in the amount of nearly four million dollars. IFC filed a application in the District Court for the Eastern District of Pennsylvania to confirm the award. SIP moved for a one month extension to respond, which the District Court granted.

Rather than responding on the merits, however, SIP filed an application in the Court of Common Pleas to modify, correct and/or vacate the arbitration award under the Pennsylvania Uniform Arbitration Act, 42 PA.C.S.A. §§ 7314-15 and for sanctions against IFC.*fn2 SIP also filed a motion in the District Court to dismiss or stay IFC's confirmation petition under FED. R. CIV. P. 12(b)(6).*fn3

Before the Court of Common Pleas addressed SIP's application to amend or vacate the arbitration award, the District Court ruled on IFC's application and SIP's motion in opposition. In the same order, the District Court granted IFC's application to confirm the arbitration award and denied SIP's motion. SIP then filed a motion to strike the judgment for lack of subject matter jurisdiction under FED. R. CIV. P. 60(b). The motion remonstrated that IFC had improperly alleged diversity jurisdiction when filing its petition to confirm the arbitration award in the District Court. The District Court denied the motion to strike the judgment because, although there is not complete diversity between the parties, there is federal subject matter jurisdiction based on the Federal Arbitration Act, 9 U.S.C. § 203. SIP then filed a motion for reconsideration. The District Court denied it and SIP appealed.

SIP presents two grounds to support its position that the arbitration award should not have been confirmed. First, SIP argues that the District Court abused its discretion in declining to abstain from the exercise of jurisdiction over IFC's application to confirm the arbitration award. Second, SIP contends that the District Court denied it an opportunity to be heard on the merits of IFC's application to confirm the award.

While the appeal has been pending, SIP has refused to satisfy the judgment. For that reason, IFC initiated a garnishment action against the Fund under FED. R. CIV. P. 69. The Fund is scheduled to liquidate on March 31, 2006, after which IFC will not be able to look to its assets to satisfy the judgment. IFC's garnishment action is based on the Fund's contractual duty to indemnify SIP. The Agreement of Limited Partnership of the Fund provides that:

The Fund shall indemnify and hold harmless each Indemnified Person [including SIP] from any and all reasonable costs and expenses and all damages and claims which may be incurred or asserted against him or it by reason of . . . [its] connection to or relationship with the [Fund ] . . ..

Based on this language and on the Fund's interrogatory responses, IFC moved for summary judgment on the garnishment action against the Fund. The Fund argued that it was not liable to SIP because the indemnification clause of the Agreement did not cover placement fee arrangements and because the indemnification was only for actual loss, so that SIP's mere liability did not trigger the indemnification obligation. The District Court denied IFC summary judgment because it found that a genuine issue of material fact still remained regarding whether the Agreement provided for loss or liability indemnification.

In the same order that denied summary judgment, the District Court dismissed the action for lack of subject matter jurisdiction. The District Court found that it did not have original federal question jurisdiction over the garnishment and that ancillary jurisdiction was not possible because the garnishment action relied "not only on different facts than the award-confirmation suit, but also upon a new theory of liability--essentially, breach of contract between the Fund and SIP." IFC Interconsult, AG v. Safeguard Int'l Partners, LLC, No. 04-00107 (E.D.Pa.), Memorandum and Order of February 10, 2005. IFC then appealed both the denial of summary judgment and the dismissal for lack of subject matter jurisdiction.

We have jurisdiction over SIP's appeal under 9 U.S.C. § 16 and 28 U.S.C. § 1291 and over IFC's appeal under 28 U.S.C. § 1291.

II. Discussion

This consolidated appeal presents four separate issues, each presented in turn below.

A. Did the District Court Abuse Its Discretion by not Abstaining under Colorado River from Hearing IFC's Motion to Confirm the Arbitration?

Federal district courts have a "virtually unflagging obligation . . . to exercise the jurisdiction given them." Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). Federal district courts may abstain from hearing cases and controversies only under "exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest." Id. at 813 (internal quotations omitted). "Generally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction," id. at 817 (internal quotations omitted), although there are certain categories of cases in which abstention is proper.

Colorado River categorized three situations in which the Supreme Court had previously found federal abstention proper: (1) cases that present federal constitutional issues that "might be mooted or presented in a different posture by a state court determination of pertinent state law," id. at 814; see R.R. Comm'r v. Pullman Co., 312 U.S. 496 (1941); (2) cases that present "difficult questions of state law bearing on policy problems of substantial import whose importance transcends the result in the case then at bar," Colorado River, 424 U.S. at 814; see Burford v. Sun Oil Co., 319 U.S. 315 (1943); La. Power & Light Co. v. Thibodaux, 360 U.S. 25 (1959); and (3) cases in which federal jurisdiction has been invoked for the purpose of restraining valid, good faith state criminal proceedings, Colorado River, 424 U.S. at 816; see Younger v. Harris, 401 U.S. 37 (1971); Huffman v. Pursue, 420 U.S. 592 (1975) (extending Younger to quasi-criminal civil proceedings).

None of these situations is implicated in this case. Colorado River also recognized a fourth category of cases in which abstention might be proper out of respect for "considerations of [wise] judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation." 424 U.S. at 817 (internal quotations omitted). SIP argues that the District Court should have abstained based on these principles underlying this fourth category of abstention.

We review the District Court's decision not to abstain for abuse of discretion, although the underlying legal questions that determine whether the case falls within the range in which the District Court may exercise discretion are subject to plenary review. Riley v. Simmons, 45 F.3d 764, 770 (3d Cir. 1995); Grode v. Mut. Fire, Marine & Inland Ins. Co., 8 F.3d 953, 958 (3d Cir. 1993). As we stated in United Services Automobile Ass'n v. Muir:

A district court has little or no discretion to abstain in a case that does not meet traditional abstention requirements. Within these constraints, determination whether the exceptional circumstances required for abstention exist is left to the district court, and will be set aside on review only if the district court has abused its discretion.

792 F.2d 356, 361 (3d Cir. 1986) (citation omitted).

The threshold requirement for a district court to even entertain abstention is a contemporaneous parallel judicial proceeding. For judicial proceedings to be parallel, there must be identities of parties, claims, and time. As we noted in Yang v. Tsui, "[P]arallel cases involve the same parties and 'substantially identical' claims, raising 'nearly identical allegations and issues.'" 416 F.3d 199, 205 (3d Cir. 2005) (quoting Timoney v. Upper Merion Twp., 66 Fed. Appx. 403, 405 (3d Cir. 2003)).

We have never required complete identity of parties for abstention. See Trent v. Dial Med. of Fla. Inc., 33 F.3d 217, 224 (3d Cir. 1994). However, even when there is a substantial identity of parties and claims, abstention is still appropriate only when there are "ongoing, not completed parallel state proceedings," or else we would be considering issues of res judicata. Bass v. Butler, 258 F.3d 176, 179 (3d Cir. 2001). In this case, the proceedings in the Court of Common Pleas involved the parties in this appeal, as well as additional parties, but there is no identity of time.

Even if we were to view all issues concerning the arbitration as necessarily related, there was no action pending in the Court of Common Pleas when IFC moved the District Court to confirm the arbitration award. The Court of Common Pleas effectively discontinued jurisdiction over its case in February 2003, more than a year before our case came before the District Court for confirmation of the arbitration award. After a settlement was reached regarding the appeals from the Court of Common Pleas' declaratory judgment on eligibility for arbitration, the Court of Common Pleas discontinued the case and expressly noted that it could be reopened only by written order upon request by a formal motion. SIP never made such a motion, and the Court of Common Pleas issued no such written order. Even if we were to view SIP's Application to Modify or Vacate the Arbitration Award as constituting such a formal motion, we are unaware of any written order from the Court of Common Pleas that reopened the case. In any event, SIP filed the Application in the Court of Common Pleas only after IFC moved for confirmation ...

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