Fifth Circuit Holds Diversity Jurisdiction Exists After FINRA Issues $10K Arbitration Award

The United States Court of Appeals for the Fifth Circuit has ruled that federal diversity jurisdiction existed after the Financial Industry Regulatory Authority (“FINRA”) issued a $10,000 arbitration award.  In Pershing, LLC v. Kiebach, No. 15-30396 (5th Cir. April 6, 2016), several investors filed an $80 million arbitration complaint with FINRA against a clearing broker, Pershing, after the investors suffered a financial loss due to a Ponzi scheme.   In their complaint, the investors accused Pershing of failing to disclose certain adverse financial information to them.  Following a hearing, a FINRA panel rejected the investors’ claims.  Despite this, the panel ordered Pershing to pay $10,000 in arbitration-related expenses.

Next, Pershing sought to confirm the arbitral award in federal court.  In response, the investors asked the court to dismiss the case because the arbitration award fell well below the amount in controversy requirement enumerated in 28 U.S.C. §1332(a).   The district court ruled the $75,000 amount in controversy requirement was met based on the investors’ initial $80 million claim.  The investors then filed an interlocutory appeal with the U.S. Court of Appeals for the Fifth Circuit.

On appeal, the Fifth Circuit stated:

In its order denying Appellants’ motion to dismiss, the district court concluded that the demand approach was the correct one: “[e]ach approach has strengths and weaknesses, and the issue is one that will be resolved by the Fifth Circuit. However, having considered . . . [the cited authority] the Court finds that the demand approach is more appropriate.” Pershing, 101 F. Supp. 3d at 573.

We agree. Based on Appellants’ arbitration demand of $80 million, the district court correctly concluded that the $75,000 amount in controversy requirement was met. First, the demand approach recognizes the true scope of the controversy between the parties. The only logical assumption about Appellants’ efforts to prevent confirmation of this arbitration award is that they want a second chance to pursue their claims. The $10,000 award “is but the last stage of litigation” that began with an $80 million controversy. Pershing, 101 F. Supp. 3d at 573. Therefore, the amount at stake is the $80 million that Appellants initially sought in arbitration, not the minimal award for arbitration-related costs.

The Court of Appeals added, “the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy.”  The Fifth Circuit also stated using the demand approach ensured that “the amount in controversy is measured the same way in federal court for litigation and for matters submitted on petitions to compel arbitration: the plaintiff’s pleading, not the ultimate result in the case, governs jurisdiction.”

Finally, the U.S. Court of Appeals for the Fifth Circuit affirmed the lower court’s decision stating diversity jurisdiction existed in the case.

Disputing would like the thank Liz Kramer at Arbitration Nation for alerting us to this case.

Photo credit:  Joseph Paulino  / publicdomainpictures.net / Public Domain