Napleton v. General Motors Corp.

138 F.3d 1209, 1998 WL 117893

• Court: Court of Appeals for the Seventh Circuit
• Decided: March 18, 1998
• Docket: No. 96-3355
• Status: Published

Opinions

CUDAHY, Circuit Judge.

Katherine Napleton appeals from a district court order dismissing her action without prejudice to allow for arbitration. She asserts that the district court misconstrued the scope of the arbitration clause and referred a non-arbitrable issue to arbitration. But because the district court issued its order favoring arbitration in the course of an “embedded” proceeding, we lack jurisdiction to reach these issues.

I. Background

In 1955, General Motors Corporation leased property in Hinsdale, Illinois, from New England Life Insurance Company. The lease provided for an initial twenty-year rental term that ended on December 31, 1975. General Motors then had the option to renew the lease, first for a ten-year term ending on December 31, 1985, and then for a series of five-year terms, with the final one ending on December 31, 2005. General Motors had incentive to renew, because the lease specified fixed rental rates that decreased over time.¹ Not surprisingly, General' Motors thrice renewed with New England, extending the lease through December 31,1995.

New England transferred its fee interest in the Hinsdale property to Edward Naple-ton in December 1992. The day after Edward received the property, he conveyed it to his wife, Katherine Napleton.² Katherine also acquired from New England six properties outside of Illinois. New England had leased these other properties to General Motors as well.

In June 1993, New England notified General Motors that it had assigned the Hinsdale lease to Edward and the non-Illinois leases to Katherine. New England’s letter provided that General Motors should contact Edward whenever the Hinsdale lease required “payment, notice, demand or other communication” and Katherine when the non-Illinois leases so required. New England supplied the same address for both Edward and Katherine.

Although General Motors did not receive written notice that Edward had conveyed the Hinsdale property to Katherine, it nonetheless acted as though it knew Katherine was the owner. In September 1993, and February and December 1994, General Motors mailed Katherine statements of insurance for the Hinsdale property, as required by the lease. These statements listed Katherine as an additional insured. And in 1993, General Motors began to pay rent for the Hinsdale and non-Illinois properties with a single check made payable to Katherine.

The Hinsdale lease provided that to renew for a third five-year term that would extend until December 31, 2000, General Motors must notify the lessor by December 31,1994. But on October 24, 1994, General Motors sent a written renewal notice to Edward— not Katherine — at the address previously provided by New England. When Edward faded to respond, General Motors, on January 17, 1995, sent him a copy of the October 24 renewal. On February 2, Edward informed General Motors that Katherine owned the Hinsdale property and that all notices should-be sent to her. Finally, on February 16, General Motors mailed Katherine a copy of the October 24. renewal notice.

Katherine did not respond immediately. Instead, in June 1995, she informed the company that she did not consider it to have renewed the lease and that it should vacate the property on December 31, 1995, the end of its current term. General Motors replied that it would not surrender the property; as far as it was concerned, the lease had not expired.

On December 15, 1995, Katherine filed for declaratory and injunctive relief in the Circuit Court of Cook County, Illinois. General Motors removed the action to federal district court. General Motors then argued that an arbitration clause in the lease governed its dispute with Katherine and it presented to the district judge a motion to dismiss or stay the action pending arbitration. The district judge agreed that the arbitration clause applied. Accordingly, he issued an order “grant[ing] the motion to dismiss without prejudice to allow for arbitration.” Order of 7/29/96. After the district court denied Katherine’s motion for reconsideration, she filed this appeal.

Katherine challenges the dismissal on the grounds that: (1) no issue falls within the scope of the arbitration clause and; (2) the district court has referred to an arbitrator the question whether an enforceable contract exists, which is an issue only a court may determine. Katherine also suggests that the record would allow us to decide as a matter of law that she is entitled to relief. We do not reach these arguments because we lack jurisdiction over Katherine’s appeal.

II. Discussion

Katherine asserts that we have jurisdiction pursuant to 28 U.S.C. § 1291, which allows appeals from the final decisions of district courts. But we cannot take jurisdiction under § 1291 without first considering the Federal Arbitration Act, which controls the appealability of arbitration decisions by district courts. See 9 U.S.C. § 16. In general, the Act favors arbitration by assuring that appellate courts quickly review orders denying arbitration so that the parties may proceed promptly to an arbitrator if the district court has erred. See Perera v. Siegel Trading, 951 F.2d 780, 783 (7th Cir.1992). As for orders compelling arbitration, final decisions are appealable and interlocutory decisions are not.³ See id. Because § 16 does not define “final decision,” we have announced that it is a “legal term of art” animated by prior judicial opinions. Id.; see Amgen, Inc. v. Kidney Ctr. of Del. County, Ltd., 95 F.3d 562, 565 (7th Cir.1996). Thus, to grapple with the implications of Katherine’s dismissal without prejudice, we must look to our own precedents as well as to those of other circuits.

According to Katherine, the alpha and omega of the jurisdictional issue is that the district court dismissed her case, thereby divesting itself of jurisdiction and terminating all proceedings before it. But this alone cannot be dispositive, because we traditionally have distinguished between “independent” and “embedded” proceedings. In an independent proceeding, the request to compel arbitration is the sole issue before the district court. In an embedded proceeding, the motion for arbitration is made in the course of a larger, substantive suit. See Perera, 951 F.2d at 784-85. Here General Motors requested arbitration in the context of Katherine’s action for declaratory and injunctive relief. Hence Katherine has appealed from an embedded proceeding.

To date the distinction between independent and embedded proceedings has had a talismanic significance in our jurisprudence. We consistently have found jurisdiction over appeals from arbitration orders in independent proceedings and have declined to find jurisdiction over appeals from arbitration orders in embedded proceedings. Compare S+L+H S.p.A v. Miller-St. Nazianz, Inc., 988 F.2d 1518, 1523 (7th Cir.1993) (finding jurisdiction over an appeal from an independent proceeding), with Wilson Wear, Inc. v. United Merchants & Mfrs., Inc., 713 F.2d 324, 326 (7th Cir.1983) (holding that an order granting a stay and compelling arbitration in an embedded proceeding is not final within the meaning of 28 U.S.C. § 1291), and Whyte v. THinc Consulting Group Int'l, 659 F.2d 817, 818 (7th Cir.1981) (same). In some cases, our refusal to extend jurisdiction over appeals from arbitration orders in embedded proceedings is unremarkable; the order to arbitrate is akin to a “case management order” that does not touch on the merits of the claim and thus much work remains for the district court. See In the Matter of Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 784 F.2d 831, 833 (7th Cir.1986). However, we have even declined to find jurisdiction over an appeal from an embedded proceeding when the practical result of the order to arbitrate was to refer all claims to the arbitrator and terminate proceedings before the district court. See Perera, 951 F.2d at 785; see also Humphrey v. Prudential Sec. Inc., 4 F.3d 313, 317-18 (4th Cir.1993). Katherine’s appeal, however, adds an unfamiliar ingredient to the garden variety embedded proceeding. In most embedded proceedings, the district court stays the action pending arbitration; here the judge substitutéd a dismissal without prejudice for the usual stay. Thus we must decide whether, in the context of an embedded proceeding, a dismissal without prejudice “to allow for arbitration” constitutes an appealable — i.e. final — decision.

Other circuits have addressed similar questions, though there is no unanimity in their answers. Both the Tenth and Third Circuits have held that a dismissal in favor of arbitration is an appealable decision, even in an embedded proceeding. See Armijo v. Prudential Ins. Co. of America, 72 F.3d 793, 797 (10th Cir.1995); Nationwide Ins. Co. of Columbus, Ohio v. Patterson, 953 F.2d 44, 46 (3d Cir.1991); see also Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir.1990) (finding jurisdiction when the district court ordered arbitration, dismissed the proceedings and entered a Rule 54(b) judgment). In contrast, the Ninth Circuit has found that it lacks jurisdiction over an appeal from a dismissal in an embedded proceeding when the dismissal effectively requires the parties to arbitrate. See McCarthy v. Providential Corp., 122 F.3d 1242, 1244 (9th Cir.1997). Other circuits, while not expressly addressing the impact of a dismissal, seem to have hung their respective jurisdictional hats on the distinction between embedded and independent proceedings. See, e.g., In re Pisgah Contractors, Inc., 117 F.3d 133, 136 (4th Cir. 1997) (“The issue of whether an order compelling arbitration may be immediately appealed as a ‘final decision,’ then, depends on whether the order was issued in an ‘independent’ action ... or ... an ‘embedded’ ac-tion____”); Altman Nursing, Inc. v. Clay Capital Corp., 84 F.3d 769, 771 (5th Cir.1996) (“The appropriate test of finality is whether the order involved an independent or embedded proceeding. An order involving an embedded proceeding is always an interlocutory order; an order involving an independent claim is always final.”); Gammaro v. Thorp Consumer Discount Co., 15 F.3d 93, 96 (8th Cir.1994) (adopting a “bright-line rule” based on the distinction between independent and embedded proceedings).

For reasons that we explicate below, we elect to follow the Ninth Circuit and those other courts that have effectively determined that the jurisdictional lodestar of appealability is whether the decision favoring arbitration is from an independent or from an embedded proceeding. Accordingly, we hold that it is the nature of the underlying action, not the style of the district court’s decision requiring arbitration, that determines whether we have jurisdiction over appeals from decisions granting arbitration. We will continue to find jurisdiction over appeals from independent proceedings and decline to find jurisdiction over appeals from embedded proceedings.

This conclusion comports with our own case law. In Perera, we repeatedly emphasized the significance of the distinction between independent and embedded proceedings.⁴ See, e.g., 951 F.2d at 785 (“In fact, this court has found jurisdiction where the sole issue before the [district] court was arbitration and denied jurisdiction where arbitration was raised in an embedded proceeding.”); id. (“[Prior] eases demonstrate that this court finds arbitration orders final if arbitration is the sole issue before the court and interlocutory if raised in an embedded proceeding.”). Perera’s discussion of prior cases further illustrates that this Circuit has focused, almost myopically, on whether a proceeding is independent or embedded. For example, Perera discussed the extension of jurisdiction in Snyder v. Smith, 736 F.2d 409 (7th Cir.1984). See Perera, 951 F.2d at 785. There the district court dismissed the action in favor of arbitration. But what Per-era found most significant about Snyder was not the dismissal, but that “arbitration was the only issue before the [district] court.” Perera, 951 F.2d at 785. And to the extent that any case predating § 16 of the Federal Arbitration Act implies that an arbitration order in an embedded proceeding would be “final” if it resulted in the dismissal of an action, see, e.g., Wilson Wear, 713 F.2d at 326, Perera suggests that such language is inapplicable in light of the Act. See 951 F.2d at 785 (disregarding this court’s prior statement that an arbitration order is final if it terminates all proceedings before the district court) (citing In re Chicago, 784 F.2d at 833). In Perera we described the effects of appeals from independent and embedded proceedings; today we steadfastly adhere to that delineation.⁵

We also refused in Perera to elevate the form of a district court’s order over its substance. There the district judge seemingly wanted the appellate court to extend jurisdiction over Perera’s appeal — the judge entered a Rule 54(b) judgment with respect to his order compelling Perera to arbitrate and also invited this court to grant jurisdiction pursuant to 28 U.S.C. § 1292(b). See Perera, 951 F.2d at 781. After finding that the embedded nature of Perera’s claim was dispositive on the issue of jurisdiction, we noted that “the entry of a Rule 54(b) judgment does not change the interlocutory nature of the district court’s order____ [T]he district court cannot expand this court’s appellate jurisdiction by simply entering a Rule 54(b) judgment.” Id. at 786. Similarly, a rule that gave weight to whether the district judge dismissed rather than stayed an action would allow a district court to determine the jurisdiction of an appellate court. If the district court stayed the action, the parties would arbitrate; if the district court dismissed the action, the party seeking to avoid arbitration could appeal immediately. See McCarthy, 122 F.3d at 1244. We agree with the Ninth Circuit that Congress could not have “intended this arbitrary result when it barred appellate review of interlocutory orders compelling arbitration.” Id. Therefore we decline in this case to leave the jurisdictional trump card in the hand of the district court.⁶

In advocating that we exercise jurisdiction, Katherine asserts that doing so would promote judicial economy. As she views it, if we were to reach the merits, we might find that the arbitration clause is inapplicable because General Motors failed to timely notify Katherine of its intent to renew the lease. This would amount to a holding that the lease is no longer valid, and hence Katherine would be entitled to declaratory and injunctive relief as a matter of law.

Whether this scenario is plausible here is not for us to say at this juncture. However, in general, we perceive the issue of judicial economy differently in light of the national policy favoring arbitration. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (“[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.... ”). The rule Katherine advances — that we extend jurisdiction over appeals from dismissals without prejudice “to allow for arbitration” in embedded proceedings — is likely to result in an inordinate number of appeals in which we simply affirm the district court’s deference to an arbitration clause. On this point, the decisions in Armijo and Nationwide are instructive. In both cases the appellate courts, after laboriously exercising jurisdiction over dismissals in embedded proceedings, merely affirmed that the parties should litigate their claims before arbitrators.⁷ See Armijo, 72 F.3d at 800; Nationwide, 953 F.2d at 49; see also Arnold, 920 F.2d at 1281 (affirming the referral to arbitration after finding jurisdiction over an appeal from a Rule 54(b) judgment in an embedded proceeding). In most cases, then, the most economical approach is not to allow an intermission for appellate review, but rather for the parties to proceed expeditiously to arbitration.

We are cognizant that our decision may result in Katherine, as she describes it, “spend[ing] significant time and resources pursuing arbitration, before ... the propriety of arbitration is ever resolved.” PL’s Br. at 17. But this consequence is not inconsistent with the Federal Arbitration Act; indeed, Congress must have anticipated such expenditures when it determined that interlocutory decisions favoring arbitration were not immediately appealable. See 9 U.S.C. § 16(b). The Act “evidences a ‘pro-arbitration tilt,’ which ‘requires that, with respect to embedded actions, the party opposing arbitration ... bear the initial consequence of an erroneous district court. decision requiring arbitration.’ ” Gammaro, 15 F.3d at 96 (quoting Filanto, S.p.A. v. Chilewich Int'l Corp., 984 F.2d 58, 61 (2nd Cir.1993)). Moreover, our adherence to the demarcation between independent and embedded proceedings corresponds with the Act’s purpose of promoting greater use of arbitration. See McCarthy, 122 F.3d at 1245.⁸

Finally, as we have explained in the past, “the fact that the court of appeals could end the litigation does not make a decision on a single issue final.” Massey Ferguson Div. of Vanity Corp. v. Gurley, 51 F.3d 102, 105 (7th Cir.1995). . If it did, we would have jurisdiction “whenever a district judge addresses a single potentially-dispositive issue in the litigation.” Id. Today’s decision does not preclude review of the propriety of arbitration; instead, it merely “postpone[s] it until the arbitration proceeding has run its course.” McCarthy, 122 F.3d at 1245; see also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947, 115 S.Ct. 1920, 1925-26, 131 L.Ed.2d 985 (holding that appellate review of a district court decision confirming or vacating an arbitration award on the basis of whether the parties “agreed to submit their dispute to arbitration, should proceed like review of any other district court decision finding an agreement between parties, i.e., accepting findings of fact that are not ‘clearly erroneous’ but deciding questions of law de novo”). In sum, appellate review has never been in lockstep with each decision of the district court, no matter what the potential benefit to the parties. Accordingly, this appeal is dismissed for lack of appellate jurisdiction.

1 . During the initial twenty-year term, the rental rate was $3,177.99 per month for the first twelve years and $2,356.97 per month for the following eight years; during the ten-year renewal term, $1,095.86 per month; and during each five-year renewal term, $879.69 per month.

2 . During the events relevant here, Katherine has acted in her capacity as trustee for the Katherine R. Napleton Revocable Self-Declaration of Trust. For present purposes, however, this nuance is of no consequence. Thus we simply refer to “Katherine,” not to "Katherine in her capacity as trustee.”

3 . Section 16 provides:

(a) An appeal may be taken from—

(1) an order—

(A) refusing a stay of any action under section 3 of this title,

(B) denying a petition under section 4 of this title to order arbitration to proceed,

(C) denying an application under section 206 of this title to compel arbitration,

(D) confirming or denying confirmation of an award or partial award, or

(E) modifying, correcting, or vacating an award;

(2) an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or

(3)a final decision with respect to an arbitration that is subject to this title.

(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order—

(1) granting a stay of any action under section 3 of this title;

(2) directing arbitration to proceed under section 4 of this title;

(3) compelling arbitration under section 206 of this title; or

(4) refusing to enjoin an arbitration that is subject to this title.

9 U.S.C. § 16.

4 . The dissent argues that our approach is in serious tension with Perera, Dissent Op. at 1217, which stated that the terai "final decision” is "a legal term of art traditionally used to distinguish appealable and nonappealable lower court decisions under 28 U.S.C. § 1291 — the general provision governing appellate jurisdiction.” Perera, 951 F.2d at 783. But the dissent overlooks that opinion's critical next sentence: "Judicial decisions have given meaning to this term of art.” Id. And as we explain, our precedent has consistently held that the term “final decision” does not encompass orders that require arbitration in embedded proceedings.

5 . Farrand v. Lutheran Brotherhood, 993 F.2d 1253 (7th Cir.1993), does suggest that we should exercise jurisdiction over a dismissal without prejudice in favor of arbitration. But Farrand contains no discussion of the independent/embedded distinction that has dominated this Circuit’s other opinions, nor does its treatment of the jurisdictional question suggest that the issue was argued extensively, as it was here. In sum, we do not believe that Farrand was intended to stultify the reasoning of Perera; nor, apparently, do the parties, as neither has invoked Farrand here.

6 . The dissent states, "Neither the parties nor the district courts are likely to choose casually between the two options [of a stay or dismissal without prejudice].” Dissent Op. at 1218. But here General Motors styled its motion "a motion to dismiss or stay pending arbitration.” As far as anyone knows, the district court chose dismissal to rid its calendar (temporarily) of the case. Moreover, in circumstances where "important rights are at stake that at least one party ... wish[es] to protect,” id., the parties remain free to advocate either a stay or a dismissal without prejudice. All we hold today is that for the purposes of determining whether we have jurisdiction over an appeal, a dismissal without prejudice and a stay will be treated the same.

7 . The dissent illustrates the same judicial dise-conomy here.

8 . The dissent argues that the rule created by our opinion — that a party cannot appeal from a judgment favoring arbitration in an embedded proceeding — "will yield strange results." Dissent Op. at 1217., To prove its point, the dissent poses a hypothetical involving two claims. The district court dismisses the counterclaim as time-barred and the primaiy claim "without prejudice to allow for arbitration.” The dissent posits that the defendant would be "entitled to appeal immediately on its counterclaim.” Id. But under our ruling today, the "dismissal without prejudice to allow for arbitration” would be a non-final judgment. Therefore the defendant’s ability to pursue an immediate appeal would apparently depend on whether the district court entered a judgment pursuant to Rule 54(b).