Geographic Expeditions, Inc. v. Estate of Lhotka

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GEOGRAPHIC EXPEDITIONS, INC., 

Petitioner-Appellant,

No. 09-15069

v.

THE ESTATE OF JASON LHOTKA BY  D.C. No.

3:08-cv-04624-SI

ELENA LHOTKA, executrix; SANDRA

OPINION

MENEFEE,

Respondents-Appellees.



Appeal from the United States District Court

for the Northern District of California

Susan Illston, District Judge, Presiding

Argued and Submitted

March 11, 2010—San Francisco, California

Filed March 31, 2010

Before: Betty B. Fletcher, Richard R. Clifton and

Carlos T. Bea, Circuit Judges.

Opinion by Judge Bea

5083

GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA 5085

COUNSEL

Rodney E. Gould, Rubin Hay & Gould P.C. for Geographic

Expeditions, Inc., petitioner-appellant.

5086 GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA

Daniel U. Smith, Law Office of Daniel U. Smith, David J.

Bennion, Law Offices of David J. Bennion, for the Estate of

Lhotka and Sandra Menefee, respondents-appellees.

OPINION

BEA, Circuit Judge:

Geographic Expeditions, Inc. (“GeoEx”), appeals the dis-

trict court’s dismissal of GeoEx’s petition to compel arbitra-

tion for lack of subject matter jurisdiction. Fed. R. Civ. P.

12(b)(1). GeoEx contends subject matter jurisdiction exists

under 28 U.S.C. § 1332(a), which provides federal jurisdic-

tion over disputes between citizens of different states in which

the amount in controversy exceeds $75,000 exclusive of inter-

est and costs. The district court held that GeoEx had to estab-

lish by a preponderance of the evidence that the amount in

controversy exceeded $75,000, and that, because a clause in

the arbitration agreement limited damages to $16,831, GeoEx

could not meet its burden. We conclude the district court

erred both when it applied a preponderance of the evidence

standard and when it held that the liability cap precludes fed-

eral jurisdiction. We therefore reverse and remand for further

proceedings.

I. Factual and Procedural Background1

The underlying dispute in this case arose out of a series of

events on Mount Kilimanjaro in October 2007. GeoEx, a Cal-

ifornia corporation with its principal place of business in San

1

We take these facts from the First Amended Complaint, on file in the

district court, and declarations filed in support of and in opposition to the

motion to dismiss. All are part of our record. See Trentacosta v. Frontier

Pac. Aircraft Indus., Inc., 813 F.2d 1553, 1558-59 (9th Cir. 1987) (quoting

5C C. Wright & A. Miller, Federal Practice and Procedure, § 1363, at

653-54 (1969)).

GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA 5087

Francisco, leads guided expeditions for profit to various desti-

nations throughout the world. Jason Lhotka, who was 37

years old, and his mother, Sandra Menefee, both citizens of

Colorado, purchased tickets for a GeoEx expedition to Mount

Kilimanjaro. As part of their registration for the trip, Lhotka

and Menefee each signed a GeoEx trip participant contract,

which included a provision requiring them to submit any dis-

pute they might have with GeoEx to binding arbitration. The

agreement further provided that the amount of recovery would

be capped at “the sum of the land and air cost of my trip with

GeoEx,” which the parties agree is $16,831.2

The expedition began in Africa on September 29, 2007, and

was to last until October 8, 2007. On October 1, Jason Lhotka

began to suffer difficulty sleeping and experienced sudden

onset of severe fatigue—early symptoms of high altitude sick-

ness. On October 2, Jason Lhotka told the head expedition

guide he needed to go back down the mountain because of his

fatigue. He began his descent, accompanied by a GeoEx assis-

tant guide. Although supplemental oxygen was available, it

was not administered to Lhotka, nor was a rapid descent

ordered, although such a route was also available. Both of

these procedures are proper protocol for a person with high

altitude sickness. On October 4, while descending the moun-

tain, Lhotka died.

2

The full text of the clause is:

I agree that in the unlikely event a dispute of any kind arises

between me and GeoEx, the following conditions apply: (a) the

dispute will be submitted to a neutral third-party mediator in San

Francisco, California, with both parties splitting equally the costs

of such mediator. If the dispute cannot be resolved through medi-

ation, then (b) the dispute will be submitted for binding arbitra-

tion to the American Arbitration Association in San Francisco,

California; (c) the dispute will be governed by California law;

and (d) the maximum amount of recovery to which I will be enti-

tled under any and all circumstances will be the sum of the land

and air cost of my trip with GeoEx. I agree that this is a fair and

reasonable limitation on the damages, of any sort whatsoever,

that I may suffer.

5088 GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA

In July 2008, Lhotka’s estate and his survivors filed suit in

San Francisco Superior Court alleging, inter alia, that Lhot-

ka’s death from high altitude sickness was caused by the neg-

ligence of GeoEx employees in failing to recognize and treat

Lhotka’s symptoms. In accord with California Code of Civil

Procedure § 425.10(b), the state court complaint did not spec-

ify the amount of damages sought. In September 2008, GeoEx

filed with the state court a motion to compel arbitration pursu-

ant to the parties’ arbitration agreement. In December 2008,

the state trial court denied GeoEx’s motion to compel arbitra-

tion; it held the arbitration agreement unconscionable and thus

unenforceable. GeoEx appealed, and, on January 29, 2010,

the California Court of Appeal affirmed. GeoEx then filed a

petition for review with the California Supreme Court, which

is currently pending.3 In October 2008—after filing in state

court its motion to compel arbitration, but before the state trial

court had ruled on the motion—GeoEx filed in federal district

court the current petition to compel arbitration. The district

court held that GeoEx had the burden to prove by a prepon-

derance of the evidence that the amount in controversy

exceeded $75,000 and that, because of the contractual dam-

ages limitation, recovery was limited to $16,831. Because

GeoEx could not carry its assigned burden of proof, the dis-

trict court dismissed GeoEx’s petition under Rule 12(b)(1) for

3

Although the California Court of Appeal held the arbitration agreement

to be unenforceable, that does not yet prevent the federal suit from pro-

ceeding. It is true that “federal courts are compelled by the ‘full faith and

credit’ statute” to give the same collateral estoppel and res judicata effects

to state court judgments as would the courts of that state. Se. Res. Recov-

ery Facility Auth. v. Montenay Int’l. Corp., 973 F.2d 711, 712 (9th Cir.

1992). However, the California Court of Appeal’s judgment that the arbi-

tration agreement is unenforceable is not yet final. Under California law,

a judgment is not final for the purposes of collateral estoppel until it is free

from the potential of a direct attack, i.e. until no further direct appeal can

be taken. Abelson v. Nat’l Union Fire Ins. Co., 35 Cal. Rptr. 2d 13, 19 (Ct.

App. 1994). Here, the parties agree that the state court judgment is not yet

final because GeoEx filed a petition for review in the California Supreme

Court, which petition remains pending. Thus, this court can proceed on the

merits.

GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA 5089

lack of subject matter jurisdiction. This appeal from the order

of dismissal timely followed.

II. Standard of Review

We review de novo a district court’s dismissal for lack of

subject matter jurisdiction. Crum v. Circus Circus Enters.,

231 F.3d 1129, 1130 (9th Cir. 2000).

III. Analysis

A. Burden of Proof

[1] The district court erred when it held GeoEx had to

prove by a preponderance of the evidence that the amount in

controversy exceeded $75,000. GeoEx filed a petition to com-

pel arbitration under § 4 of the Federal Arbitration Act

(“FAA”). Section 4 provides:

A party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agree-

ment for arbitration may petition any United States

district court which, save for such agreement, would

have jurisdiction under title 28, in a civil action . . .

of the subject matter of a suit arising out of the con-

troversy between the parties, for an order directing

that such arbitration proceed in the manner provided

for in such agreement.

9 U.S.C. § 4. As the Supreme Court has explained, § 4 “be-

stows no federal jurisdiction but rather requires for access to

a federal forum an independent jurisdictional basis over the

parties’ dispute.” Vaden v. Discover Bank, 129 S. Ct. 1262,

1271 (2009). Thus, a federal court has jurisdiction over a peti-

tion to compel arbitration if the federal court would have

jurisdiction over the underlying substantive dispute—here the

negligence action filed by Lhotka’s estate and survivors. See

id. at 1273.

5090 GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA

[2] A federal court has jurisdiction over the underlying dis-

pute if the suit is between citizens of different states,4 and the

amount in controversy exceeds $75,000 exclusive of interest

and costs (i.e., diversity jurisdiction). 28 U.S.C. § 1332(a).

Where the plaintiff originally files in federal court, “the

amount in controversy is determined from the face of the

pleadings.” Crum, 231 F.3d at 1131 (9th Cir. 2000). The

amount in controversy alleged by the proponent of federal

jurisdiction—typically the plaintiff in the substantive dispute

—controls so long as the claim is made in good faith. Id. “To

justify dismissal, it must appear to a legal certainty that the

claim is really for less than the jurisdictional amount.” Id.

(internal quotation omitted). This is called the “legal certain-

ty” standard, which means a federal court has subject matter

jurisdiction unless “upon the face of the complaint, it is obvi-

ous that the suit cannot involve the necessary amount.” St.

Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283,

292 (1938).

[3] On the other hand, in a case that has been removed

from state court to federal court under 28 U.S.C. § 1441 on

the basis of diversity jurisdiction, the proponent of federal

jurisdiction—typically the defendant in the substantive

dispute—has the burden to prove, by a preponderance of the

evidence, that removal is proper. See Gaus v. Miles, Inc., 980

F.2d 564, 567 (9th Cir. 1992). The preponderance of the evi-

dence standard applies because removal jurisdiction ousts

state-court jurisdiction and “must be rejected if there is any

doubt as to the right of removal in the first instance.” Id. at

566. This gives rise to a “strong presumption against removal

jurisdiction [which] means that the defendant always has the

burden of establishing that removal is proper.” Id. For these

reasons, “[w]e strictly construe the removal statute against

removal jurisdiction.” Id.5

4

The parties concede this is a suit between citizens of different states.

5

See also Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09

(1941) (“The power reserved to the states under the Constitution to pro-

GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA 5091

[4] Here, the district court cited Sanchez v. Monumental

Life Ins. Co., 102 F.3d 398, 404 (9th Cir. 1996)—a removal

case—and held that, because Lhotka’s estate did not specify

damages in its state court complaint, GeoEx had the burden

to prove the amount in controversy was satisfied by a prepon-

derance of the evidence. This was error, however, because

GeoEx did not remove the case from state to federal court and

then file a motion to compel arbitration. Rather, GeoEx com-

menced an action in federal court by filing a petition to com-

pel arbitration. Because a parallel action to compel arbitration

commenced in federal court does not oust state court jurisdic-

tion, the presumption against removal jurisdiction and atten-

dant preponderance of the evidence standard, found in

removal cases, do not apply.6 Thus, we hold that the legal cer-

tainty standard applies when a party files a petition in federal

court to compel arbitration, even when the opposing party is

suing the federal petitioner in state court. Two other circuits

have come to the same conclusion. E.g., Doctor’s Assocs.,

Inc. v. Hamilton, 150 F.3d 157 (2d Cir. 1998); Woodmen of

the World Life Ins. Soc’y v. Manganaro, 342 F.3d 1213 (10th

Cir. 2003).

vide for the determination of controversies in their courts, may be

restricted only by the action of Congress in conformity to the Judiciary

Articles of the Constitution. Due regard for the rightful independence of

state governments, which should actuate federal courts, requires that [fed-

eral courts] scrupulously confine their own jurisdiction to the precise lim-

its which [§ 1441] has defined.”(internal quotation omitted)).

6

Although the petitioner in a motion to compel arbitration is typically

the defendant in the underlying substantive dispute, like the proponent of

federal jurisdiction in a removal case, that does not mean the removal

standard should apply in the non-removal context. When a case is

removed to federal court, the federal court completely precludes the state

court’s authority to adjudicate the controversy. A petition filed in federal

court to compel arbitration is much less intrusive on state court jurisdic-

tion. In fact, as this case demonstrates, it does not preclude the state action

from proceeding in any way. Thus the rationale for the higher burden of

proof is absent.

5092 GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA

[5] Under the legal certainty standard, the good faith alle-

gations in GeoEx’s petition as to the amount in controversy

suffice to establish the jurisdictional amount unless it appears

legally certain that the amount in dispute is $75,000 or less.

Here, GeoEx’s petition alleges that Lhotka’s damages in the

state court action are reasonably in excess of $75,000. GeoEx

bases this allegation on the fact that Lhotka’s state court com-

plaint requests damages: (1) for the alleged wrongful death of

Jason Lhotka, who was 37 years old at the time of the trip,

was married, and had at least one dependant; (2) for loss of

consortium for his wife and his son; (3) for fraud, misrepre-

sentation, gross negligence, and intentional infliction of emo-

tional distress; (4) for violations of California’s consumer

fraud statutes; and (5) for funeral, medical, and burial

expenses. GeoEx alleged that, based on Lhotka’s requests in

state court, it “has a reasonable, good-faith belief that the

damages exceed $75,000” even though the state court com-

plaint does not specify an amount.7 This allegation is suffi-

cient to confer subject matter jurisdiction on a federal court

because it is not legally certain the amount in controversy is

$75,000 or less.

B. Potential Defenses

[6] GeoEx’s potential defense to the state court action that

the damages limitation restricts recovery to less than $75,000

(indeed, to $16,831) does not preclude federal jurisdiction. As

the Supreme Court has explained, “the fact that the complaint

discloses the existence of a valid defense to the claim” does

not eliminate federal jurisdiction, nor do events “occurring

subsequent to the institution of suit which reduce the amount

recoverable below the statutory limit.” St. Paul Mercury

Indemnity Co., 303 U.S. at 289-90. This rule makes sense;

just because a defendant might have a valid defense that will

7

As is perhaps quite predictable, Lhotka does not claim GeoEx’s allega-

tion that the amount in controversy exceeds $75,000 is not made in good

faith.

GEOGRAPHIC EXPEDITIONS v. ESTATE OF LHOTKA 5093

reduce recovery to below the jurisdictional amount does not

mean the defendant will ultimately prevail on that defense.8

Further, if a district court had to evaluate every possible

defense that could reduce recovery below the jurisdictional

amount the district court would essentially have to decide the

merits of the case before it could determine if it had subject

matter jurisdiction. This rule applies even though GeoEx is

asserting the potential defense, and at the same time seeking

a federal forum based on diversity jurisdiction.

[7] Thus, the district court erred when it held the amount

in controversy cannot exceed $16,831. The district court

should not have relied on GeoEx’s potential contractual

defense to determine the amount in controversy. Because it

does not appear to a legal certainty that the underlying amount

in controversy is below $75,000, the district court erred when

it dismissed for lack of subject matter jurisdiction GeoEx’s

petition to compel arbitration.

REVERSED and REMANDED

8

Indeed, in the context of this case, the state court determined that the

liability cap along with the rest of the arbitration agreement was uncon-

scionable and therefore unenforceable.