Franco's Athletic Club LLC v. Davis

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

FRANCO’S ATHLETIC CLUB, LLC et al. CIVIL ACTION

VERSUS NO. 21-1647

EMILY DAVIS et al. SECTION: “G”(2)

ORDER AND REASONS

Before the Court is Plaintiffs Franco’s Athletic Club, LLC; Franco Investments LLC; Spa

Management Systems LLC; Ronald Franco; Sandra Franco; and Fitcorp LLC’s (collectively

“Plaintiffs”) Motion to Remand.1 Defendants Certain Underwriters at Lloyd’s London, General

Security Indemnity Co. of Arizona, HDI Global Specialty SE, Indian Harbor Insurance Co.,

International Insurance Co. of Hannover SE, Lexington Insurance Co., Princeton Excess and

Surplus Lines Insurance Co., QBE Specialty Insurance Co., Steadfast Insurance Co., United

Specialty Insurance Co. (collectively, “Insurers”) oppose the motion.2 Having considered the

motion, the memoranda in support and in opposition, the record, and the applicable law, the Court

denies the motion.

I. Background

This litigation arises out of an alleged embezzlement scheme from 2008 to 2016.3 On June

9, 2017, Plaintiffs filed a Petition for Damages and Return of Stolen Property in the Twenty-

Second Judicial District Court for the Parish of St. Tammany.4 In the Petition, Plaintiffs allege that

1 Rec. Doc. 5.

2 Rec. Doc. 6. These Defendants are Plaintiffs’ insurers. See Rec. Doc. 5-1 at 1, n.1.

3 Rec. Doc. 1-2 at 255 (State Court Petition).

4 Id. at 253.

Defendants Emily Davis (“Davis”) and Jennifer Thompson (“Thompson”) were employees of

Plaintiff Franco’s Athletic Club (“Franco’s”).5 Plaintiffs aver that in July 2016, while Davis and

Thompson were both out of the office on vacation, Franco’s “received a telephone call from their

primary bank alerting them to some irregularities” with Franco’s bank accounts.6 Plaintiffs

launched an investigation which allegedly revealed “that Davis and Thompson had been working

in concert to commit theft and embezzle funds in excess of $1.7 million over an eight-year

period.”7 Plaintiffs assert state law tort claims against Davis and Thompson.8

While the case was in state court, on February 19, 2020, Plaintiffs filed a First

Supplemental and Amending Petition naming Insurers, as Plaintiffs’ insurers, and asserting claims

for insurance coverage for the alleged thefts of Davis and Thompson.9 On March 13, 2020,

Plaintiffs filed a Second Supplemental and Amending Petition asserting bad faith insurance claims

against Insurers.10 Insurers filed exceptions of prescription, no right of action, and insufficiency of

service, which the state court denied on August 26, 2021.11 The next day, Insurers removed the

action to this Court, asserting subject matter jurisdiction under 9 U.S.C. §§ 202, 203, and 205

because the “dispute falls under the Convention on the Recognition and Enforcement of Foreign

Arbitral Awards” (the “Convention”).12

5 Id. at 255.

6 Id.

7 Id.

8 Id. at 258–61.

9 Id. at 302–07.

10 Id. at 11–13.

11 Rec. Doc. 5-2 at 33–34.

12 Rec. Doc. 1.

Plaintiffs filed the instant motion to remand arguing that Insurers waived their right to

remove by asking the state court to adjudicate the merits of the case.13 Insurers oppose the motion,

arguing that the Convention contains “unique removal language, permitting removal at any time

before trial.”14

II. Parties’ Arguments

A. Plaintiffs’ Arguments in Support of the Motion to Remand

In the motion, Plaintiffs move the Court to remand this case to state court because Plaintiffs

argue that Insurers waived their right to remove.15 Plaintiffs concede that Insurers’ removal rights

under the Convention are “admittedly broad,” however, Plaintiffs argue that “nothing prevents a

foreign insurer from waiving the right to remove.”16 Plaintiffs contend that, under Fifth Circuit

precedent, “a party waives its right to remove a case to federal court when it asks the state court to

adjudicate the merits once the case is allegedly subject to removal.”17 Here, Insurers filed

peremptory exceptions of prescription, no right of action, and insufficiency of service.18 Plaintiffs

assert that “a judgment sustaining an exception of prescription is . . . a final judgment on the

merits.”19 Thus, Plaintiffs argue that by seeking a ruling on their peremptory exceptions, Insurers

13 Rec. Doc. 5. See also Rec. Doc. 5-1 at 1.

14 Rec. Doc. 6 at 1 (emphasis omitted).

15 Rec. Doc. 5.

16 Id. at 3 (citing Ensco Int’l, Inc. v. Certain Underwriters at Lloyd’s, 579 F.3d 442, 449 (5th Cir. 2009)).

17 Id. (citing Tedford v. Warner Lambert Co., 327 F.3d 423, 428 (5th Cir. 2003), superseded by statute on

other grounds, Federal Courts Jurisdiction and Venue Clarification Act of 2011, Pub. L. No. 112-63, § 103(b), 125

Stat. 758, 760 (2011), as recognized in Hoyt v. Lane Constr. Corp., 927 F.3d 287, 293–94 (5th Cir. 2019)).

18 Id. at 3. See also Rec. Doc. 5-2 at 33–34.

19 Rec. Doc. 5-1 at 4 (quoting Sours v. Kneipp, 40,770, p. 5 (La. App. 2 Cir. 2006); 923 So. 2d 981, 984).

sought an adjudication on the merits and therefore waived their right to remove.20

B. Insurers’ Arguments in Opposition to the Motion to Remand

In opposition, Insurers urge the Court to deny Plaintiffs’ motion.21 Insurers argue that

Plaintiffs rely on inapposite case law that does not apply in cases governed by the Convention.22

Insurers argue that the Convention contains uniquely broad removal language that permits removal

at any time before trial.23 Specifically, Insurers aver that Section 205 provides that “[w]here the

subject matter of an action . . . pending in a State court relates to an arbitration agreement . . . under

the Convention, [a defendant] may, at any time before the trial thereof, remove [the] action.”24

Insurers assert that Congress intended Section 205 to enable “easy” removal.25 Insurers insist that

“the general rule of construing removal statutes strictly against removal ‘cannot apply to

Convention . . . cases because in these instances, Congress created special removal rights to

channel cases into federal court.’”26 Insurers assert that “[t]here is a strong federal interest in favor

of arbitration in general.”27 More particularly, Insurers argue that this strong interest applies with

“special force” in Convention arbitration cases.28

20 Id. at 3–5.

21 Rec. Doc. 6.

22 Id. at 1 (citing Sw. Elec. Power Co. v. Certain Underwriters at Lloyd’s of London, No. 12-2065, 2012 WL

5866599, at *5 (W.D. La. Nov. 19, 2012); Acosta v. Master Maint. & Constr., Inc., 52 F. Supp. 2d 699 (M.D. La.

1999)).

23 Id. at 1.

24 Id. at 4 (quoting 9 U.S.C. § 205).

25 Id. at 4 (quoting Beiser v. Weyler, 284 F.3d 665, 674 (5th Cir. 2002)).

26 Id. (quoting Acosta v. Master Maint. & Constr., Inc., 452 F.3d 373, 376–77 (5th Cir. 2006)).

27 Id. at 3 (citing Green Tree Servicing, LLC v. Dove, 701 Fed. App’x 385, 386 (5th Cir. 2017)).

28 Id. at 3 (emphasis removed) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614, 638–39 (1985)).

Given this strong preference for international arbitration, Insurers argue that they have not

waived their right to remove under Section 205 for three reasons.29 First, Insurers assert that

Section 205 “necessarily contemplates that the case might be litigated to some extent before being

removed.”30 Second, Insurers contend that “only actual final resolution of a plaintiff’s claims by

the trial of an action, as opposed to other proceedings, can prevent removal under § 205.”31 Here,

Insurers aver that, because their exception of prescription “was denied, there has been no final

resolution of any of Plaintiffs’ claims.”32 Thus, Insurers posit that the state court’s denial of its

peremptory exception of prescription does not constitute the type of trial on the merits that would

preclude removal under Section 205.33 Finally, Insurers argue that the Fifth Circuit “will give

effect only to explicit waivers of Convention Act removal rights.”34 Therefore, Insurers ask the

Court to deny Plaintiffs’ motion.35

III. Law and Analysis

In this case, Plaintiffs argue that Insurers waived their right to remove by seeking an

adjudication on the merits in state court.36 Insurers contend that they did not waive their right to

29 Id. at 5.

30 Id. (quoting Sw. Elec. Power Co., 2012 WL 5866599, at *5).

31 Id. at 6.

32 Id. at 8.

33 Id. at 8–9.

34 Id. at 9 (quoting McDermott Int’l, Inc. v. Lloyd’s Underwriters of London, 944 F.2d 1199, 1209 (5th Cir.

1991)).

35 Id. at 11.

36 Rec. Doc. 5-1 at 5.

remove, because the Convention contains broad removal language that courts should construe

liberally in favor of removal.37

Under the general removal statute, 28 U.S.C. § 1441, a defendant may remove a state court

action to federal court if the federal court has original jurisdiction over the action.38 The removing

party bears the burden of demonstrating that federal jurisdiction exists.39 In assessing whether

removal was appropriate, the Court is guided by the principle, grounded in notions of comity, that

federal courts are courts of limited jurisdiction and that “removal statute[s] should be strictly

construed in favor of remand.”40

In contrast, the Convention’s removal provision, 9 U.S.C. § 205, contains broad language:

Where the subject matter of an action or proceeding pending in a State court relates

to an arbitration agreement or award falling under the Convention, the defendant or

the defendants may, at any time before the trial thereof, remove such action or

proceeding to the district court of the United States for the district and division

embracing the place where the action or proceeding is pending.41

The statute provides that under § 205 “the procedure for removal of causes otherwise provided by

law shall apply.”42 However, the United States Supreme Court has explained that the purpose of

the Convention is “to encourage the recognition and enforcement of commercial arbitration

agreements and international contracts and to unify the standard by which the agreements to

arbitrate are observed and arbitral awards are enforced in the signatory countries.”43 Indeed, there

37 Rec. Doc. 6 at 11.

38 28 U.S.C. § 1441(a); Syngenta Crop Prot., Inc. v. Henson, 537 U.S. 28, 34 (2002).

39 See Allen v. R&H Oil & Gas Co., 63 F.3d 1326, 1335 (5th Cir. 1995).

40 Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002).

41 9 U.S.C. § 205 (emphasis added).

42 Id.

43 Scherk v. Alberto-Culver Co., 417 U.S. 506, 520, n.15 (1974).

is a strong “federal policy in favor of arbitral dispute resolution” which “applies with special force

in the field of international commerce.”44 This federal policy led the Fifth Circuit to conclude that

Congress intended removal under § 205 to be “easy.”45 In Beiser v. Weyler, the Fifth Circuit noted

that the broad removal provision of § 205 “seem[ed] to be in tension with the rule that [courts]

strictly construe statutes conferring removal jurisdiction.”46 But the Fifth Circuit explained that it

was Congress’s intent to “confer [federal] jurisdiction liberally” in matters relating to international

arbitration agreements.47

A party may waive its right to remove a case from state court.48 However, the Fifth Circuit

“will give effect only to explicit waivers of Convention . . . removal rights” because “Congress

created special removal rights to channel [Convention] cases into federal court.”49 Given the strong

federal interest in promoting arbitration and the clear edict that Convention cases should be

liberally construed in favor of removal, the Court finds that Insurers did not waive their right to

remove by participating in the state court proceeding for three reasons. First, as the Fifth Circuit

has explained, § 205’s removal language is intentionally broad50 and permits removal “at any time

before the trial.”51 In the ordinary removal context, a defendant may waive its right to remove by

44 Mitsubishi Motors Corp., 473 U.S. at 631.

45 Beiser, 284 F.3d at 674.

46 Id.

47 Id. at 674–75.

48 See, e.g., McDermott Int’l, Inc., 944 F.2d at 1209 (discussing § 205).

49 Id. at 1209, 1213 (emphasis added).

50 Beiser, 284 F.3d at 674.

51 9 U.S.C. § 205.

participating in state court proceedings.52 But § 205’s broader removal language “necessarily

contemplates that the case might be litigated to some extent before being removed.”53

Second, Insurers did not obtain a judgment on the merits, as Plaintiffs assert.54 Instead, the

state court denied Insurers’ exceptions.55 A court’s denial of a motion is not a judgment on the

merits.56 Finally, Insurers expressly reserved their right to remove in their exceptions.57 Taken

together, these facts do not support a finding that Insurers clearly and unequivocally waived their

right to remove. This is particularly so given the guidance from the Fifth Circuit to construe § 205

in favor of removal. Moreover, this result conforms with decisions reached by federal courts across

the country that have weighed in on this issue.58 Accordingly, the Court finds that Insurers did not

waive their right to remove.

V. Conclusion

For the reasons explained above, the Court finds that Insurers did not unequivocally waive

52 See Brown v. Demco, Inc., 792 F.2d 478, 481 (5th Cir. 1986).

53 Sw. Elec. Power Co., 2012 WL 5866599, at *5.

54 Rec. Doc. 5 at 3–4.

55 Rec. Doc. 5-2 at 33–34.

56 See, e.g., Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 285 (5th Cir. 2006) (explaining “denial

of a motion to dismiss is not a final judgment on the merits” (emphasis omitted)). Additionally, the case law relied on

by Plaintiffs is distinguishable. Plaintiffs cite Sours v. Kneipp for the proposition that “a final judgment sustaining an

exception of prescription is not a mere interlocutory judgment . . . but a final judgment on the merits.” 40,770, p. 5

(La. App. 2 Cir. 3/8/06); 923 So. 2d 981, 984. Here, the state court did not sustain Defendants’ exception of

prescription but denied it. Rec. Doc. 5-2 at 33–34. This denial does not constitute “a final judgment on the merits.”

Sours, 40,770 at p.5; 923 So. 2d at 984.

57 Rec. Doc. 1-2 at 15 (reserving “the right to remove this matter to federal court”).

58 Sw. Elec. Power Co., 2012 WL 5866599, at *5; Ostrowiecki v, Aggressor Fleet, Ltd., No. 07-6598, 2007

WL 4365442, at *3 n.40 (E.D. La. Dec. 12, 2007) (Africk, J.); Acosta v. Master Maint. & Constr., Inc., 52 F. Supp.

2d 699 (M.D. La. 1999). See also Suter v. Munich Reinsurance Co., 223 F.3d 150, 162 (3d Cir. 2000) (“[P]articipation

in litigation . . . is irrelevant to the question of removal under the Convention Act, which provides that a defendant

may remove ‘at any time before trial’ and imposes no requirement that the defendant show cause for the delay.”)

(citing 9 U.S.C. § 205); A.O.A. v. Doe Run Res. Corp., 833 F. Supp. 2d 1126, 1135 (E.D. Mo. 2011).

their right to remove by participating in the state court proceedings. Accordingly,

IT IS HEREBY ORDERED that Plaintiffs’ Motion to Remand”’ is DENIED.

NEW ORLEANS, LOUISIANA, this 26th day of January, 2022.

NANNETTE J 2 polae BROWN

CHIEF JUDGE

UNITED STATES DISTRICT COURT

»° Rec. Doc. 5.