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Federal courts have subject matter jurisdiction to decide petitions to compel arbitration when the amount in controversy of the underlying cause of action meets the jurisdictional requirements, the Southern District of New York held.
In Castlewood (US), Inc. v. National Indemnity Insurance Company, No. 06-CV-6842(KMK), 2006 WL 3026039 (S.D.N.Y. Oct. 24, 2006), Castlewood asked the court for a preliminary injunction to prevent National Indemnity Insurance Company (NICO) from joining Castlewood to an arbitration proceeding.
NICO entered into Reinsurance Agreements with two companies, Seaton and Stonewall. Both Reinsurance Agreements contained arbitration clauses.
Seaton and Stonewall also entered into Administrative Agreements with Castlewood, whereby Castlewood would provide certain administrative services. NICO alleged that the terms of the Administrative Agreement violated the terms of the Reinsurance Agreement. No agreement between Castlewood and NICO existed.
Castlewood brought this action seeking a preliminary injunction to stop NICO’s attempts to join Castlewood in the NICO/Seaton/Stonewall arbitration. NICO argued that the federal courts did not have subject matter jurisdiction to issue the injunction because the amount in controversy requirement was not met.
However, the Court disagreed and held that it did have jurisdiction to decide the matter. To determine the amount in controversy in a motion to compel arbitration, courts look at the amount in controversy in the underlying action, or “‘the difference between winning and losing the arbitration.’” Maxons Restorations, Inc. v. Newman, 292 F.Supp.2d 477, 481 (S.D.N.Y. 2003) (quoting Doctor’s Assocs. v. Hamilton, 150 F.3d 157, 160 (2d Cir. 1998)).
In this case, the underlying cause of action that would be arbitrated could impair Castlewood’s ability to carry out its obligations under the Administrative Agreements with Seaton and Stonewall. Each company was to pay Castlewood $1.8 million a year for the three-year contracts. Therefore, if the arbitration panel enjoined Castlewood from performing its duties under the Administrative Agreements, Castlewood would suffer much more than $75,000 in damages.
The Court also found that Castlewood sufficiently demonstrated that it would suffer irreparable harm and had a likelihood of succeeding on the merits of the claim; therefore, the Court issued the preliminary injunction to prevent NICO from joining Castlewood to the arbitration.
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