Fifth Circuit Sides With Minority in Circuit Split on Whether Stay Pending the Appeal of an Arbitrability Determination Is Automatic
Andrea J. Chiller | Bloomberg Law
Weingarten Realty Investors (WRI) and Miller Sheriden, LLC, entered into a joint venture, to which WRI lent $75 million. The loan agreement contained an arbitration clause, but a related guarantee on the loan executed by Stewart Miller did not. After WRI filed suit against Miller under the guarantee, Miller moved to compel arbitration, but the district court denied the motion. Miller appealed the denial to the U.S. Court of Appeals for the Fifth Circuit and argued that the Fifth Circuit should stay the district court proceedings pending appeal.
The motion for a stay implicated a circuit split on the question of whether a party who appeals the denial of a motion to compel arbitration is entitled to an automatic stay of the proceedings in the district court. Of the circuit courts that have addressed the question, only the Second and Ninth Circuits have held that such a stay is not automatic. As a general matter, an appeal from a collateral order does not divest the district court of jurisdiction over the merits of the dispute. Relying on the U.S. Supreme Court’s decision in Moses H. Cone Memorial Hospital, 460 U.S. 1 (1983), which held that the question of arbitrability of a dispute is severable from its merits, the Second and Ninth Circuits found that an arbitrability determination is a collateral issue and does not preclude the district court from addressing the merits.
On the other hand, the Third, Fourth, Seventh, Tenth, and Eleventh Circuits rejected the notion that arbitrability was collateral to the merits of the appeal and therefore concluded that an appeal does preclude the district court from proceeding to the merits while the appeal is pending. Specifically, they reasoned that “the underlying claims before the district court are not collateral to the issue presented by an appeal, because the appeal is to determine whether the matter should be litigated in the district court at all.” In so holding, they drew an analogy to appeals of determinations regarding double jeopardy, sovereign immunity, and qualified immunity, all of which automatically preclude a district court from adjudicating the merits.
In the instant case, the Fifth Circuit took the minority position and held that a party appealing the district court’s determination of a motion to compel arbitration was not entitled to an automatic stay. The bar against district courts addressing the merits of an issue being appealed is based on the danger of inconsistent simultaneous rulings from the district and appellate courts on the same legal questions. According to the Fifth Circuit, whether a dispute is subject to arbitration is separate and distinct from the underlying merits of that dispute. As it explained, “[a] determination of the arbitrability of a claim has an impact on what arbiter—judge or arbitrator—will decide the merits, but that determination does not itself decide the merits.”
The Court also rejected the analogies between arbitrability determinations and the issues of double jeopardy, sovereign immunity, and qualified immunity drawn by the courts that took the majority approach. Double jeopardy and sovereign immunity are constitutionally guaranteed protections from suit that are “different in character from rights fixed by private contracts.” Similarly, qualified immunity reflects a public policy determination that certain individuals should be able to carry out their official duties without the threat of future lawsuits. In contrast, the Court observed that “[t]here is no public policy favoring arbitration agreements that is as powerful.”
Accordingly, the Court held that there was no right to an automatic stay and that it had to undergo the traditional stay analysis to determine if Miller was entitled to one.
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