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Date: 12-27-2001

Case Style: Paine Webber, Inc. v. Alfred M. Cohen, Executor of the Estate of Samuel Ginsburg

Case Number: 01-3228

Judge: Ronald Lee Gilman

Court: United States Court of Appeals for the Sixth Circuit

Plaintiff's Attorney: Jeffrey J. Jones of Jones, Day, Reavis & Pogue, Columbus, Ohio, for Appellant.

Defendant's Attorney: Stanley M. Chesley of Waite, Schneider, Bayless & Chesley, Cincinnati, Ohio, for Appellee.

Description: PaineWebber, Inc. filed a petition to compel arbitration and stay the state court action brought by Alfred Cohen, as executor of the Estate of Samuel J. Ginsburg, against PaineWebber and Richard Wilhelm, one of PaineWebber's branch managers. Following the district court's determination that Wilhelm, an Ohio resident whose presence would defeat complete diversity of citizenship, was a necessary and indispensable party to the federal proceeding, the court dismissed PaineWebber's petition for lack of subject matter jurisdiction. For the reasons set forth below, we REVERSE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.


A. Factual background

Ginsburg entered into a "Client's Agreement" with PaineWebber on August 11, 1992. This agreement contains a detailed arbitration clause providing "that any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration." Several days later, Ginsburg and PaineWebber executed a "Master Account Agreement" that contains an arbitration clause nearly identical to the one found in the Client's Agreement. One significant difference between the two documents, however, is that the Master Account Agreement's arbitration clause not only references disagreements between PaineWebber and Ginsburg, but also specifies that it governs disputes between Ginsburg and "[PaineWebber's] employees or agents." Both agreements include provisions that make their terms binding on Ginsburg's heirs, executors, administrators, successors, and assigns.

After Ginsburg died on October 9, 1999, Cohen, an Ohio resident, was appointed the executor of Ginsburg's estate. Acting in his capacity as executor, Cohen filed a lawsuit against PaineWebber and Wilhelm in the Hamilton County Court of Common Pleas on July 26, 2000, asserting claims of conversion and fraudulent concealment that relate to Ginsburg's brokerage account with PaineWebber.

B. Procedural background

PaineWebber filed a petition in the United States District Court for the Southern District of Ohio two days later, seeking to compel arbitration, enforce the arbitration agreements, and stay Cohen's state court action. It filed an amended petition seeking the same relief on August 10, 2000. Wilhelm was not named as a party in either PaineWebber's original or amended petition. The sole basis for federal jurisdiction over PaineWebber's petition was diversity of citizenship under 28 U.S.C. 1332.

PaineWebber also filed a motion in state court to stay the action there pending a ruling by the district court on PaineWebber's petition. The state court did not rule on this motion because the parties submitted an agreement not to proceed with the state court action while the federal petition was pending. Aside from the state court's issuance of a temporary restraining order to preserve evidence, no further proceedings occurred in the state court until after the district court ruled on PaineWebber's petition.

On January 31, 2001, the district court granted Cohen's motion to dismiss PaineWebber's petition for lack of subject matter jurisdiction. The district court determined, pursuant to Rule 19 of the Federal Rules of Civil Procedure, that Wilhelm was a necessary and indispensable party to PaineWebber's petition to compel arbitration. Because Ginsburg was and Wilhelm is a resident of Ohio, and Cohen is deemed to be a citizen of the same state as Ginsburg pursuant to 28 U.S.C. 1332(c), Wilhelm's presence would defeat complete diversity of citizenship. The district court therefore dismissed the petition.

* * *

Rule 19 of the Federal Rules of Civil Procedure establishes a three-step analysis for determining whether a case should proceed in the absence of a particular party. Keweenaw Bay Indian Cmty., 11 F.3d at 1345. A court must first determine "whether a person is necessary to the action and should be joined if possible." Soberay Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 763-64 (6th Cir. 1999); Fed. R. Civ. P. 19(a). If the party is deemed necessary for the reasons enumerated in Rule 19(a), the court must next consider whether the party is subject to personal jurisdiction and can be joined without eliminating the basis for subject matter jurisdiction. Keweenaw Bay Indian Cmty., 11 F.3d at 1345-46 (describing the second step of the Rule 19 analysis as an inquiry into whether the court has personal jurisdiction over the necessary party); Fed. R. Civ. P. 19(a) (requiring the court to join a necessary party "who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action").

The third step "involves an analysis under Rule 19(b) to 'determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent party [being] thus regarded as indispensable.'" Soberay Mach. & Equip. Co., 181 F.3d at 764 (quoting Fed. R. Civ. P. 19(b)). Dismissal should occur only if an indispensable party is not subject to personal jurisdiction or cannot be joined without eliminating the basis for subject matter jurisdiction. Id. at 770 (concluding that the district court erred in failing to consider the defendant's motion to dismiss the case under Rule 19, because joining the indispensable party would have eliminated complete diversity). If a necessary party is not deemed indispensable pursuant to Rule 19(b), that potential party need not be joined and the action can proceed with the original litigants.

* * *

Click the case caption above for the full text of the Court's opinion.

Outcome: For all the reasons set forth above, we REVERSE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: E-mail suggested corrections, comments and/or corrections to: Kent Morlan

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