Court Has Discretion to Decline Relief under Declaratory Act But Not to Decline Relief under Federal Arbitration Act (Here, by Remanding First pursuant to DJ Act)

From Countrywide Home Loans, Inc. v. Mortgage Guaranty Ins. Corp., 2011 U.S. App. LEXIS 12066 (9th Cir. June 15, 2011):

Appellant Mortgage Guaranty Insurance Company ("MGIC") appeals the district court's decision to remand this suit back to state court pursuant to its discretion under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202 ("DJA"). MGIC argues that the district court was required to consider its motion under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("FAA"), before exercising its discretion under the DJA. We agree. ***

II.

The question presented by MGIC's appeal is whether a district court's discretion under the DJA allows the court to decline to consider and to award relief under the FAA. This question is one of first impression in this circuit. ***

A. [Declaratory Judgment Act]

*** Generally, district courts have a "virtually unflagging obligation . . . to hear jurisdictionally sufficient claims." Snodgrass, 147 F.3d at 1167 (internal citations and quotation marks omitted). The DJA relaxes this obligation in cases where a party seeks declaratory relief. It provides that "any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a) (emphasis added).

Both the Supreme Court and this court have, at times, characterized the discretion provided under the DJA as the ability to "accept" or "decline" "discretionary" jurisdiction, or to decide whether to "exercise jurisdiction," in an action seeking declaratory relief. See Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494, 62 S. Ct. 1173, 86 L. Ed. 1620 (1942) ("Although the District Court had jurisdiction of the suit under the [DJA], it was under no compulsion to exercise that jurisdiction."); United Nat. Ins. Co. v. R&D Latex Corp., 242 F.3d 1102, 1112 (9th Cir. 2001) (analyzing whether the court's "jurisdiction over actions with both declaratory and monetary claims remained discretionary" or whether the non-declaratory claims triggered "mandatory" jurisdiction); Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220, 1227 (9th Cir. 1998) (holding that, "[W]hen constitutional and statutory jurisdictional prerequisites to hear a case brought pursuant to the [DJA] have been satisfied, the district court may proceed with consideration of the action without sua sponte addressing whether jurisdiction should be declined."); Snodgrass, 147 F.3d at 1166-67 (reviewing the "district court's decision to decline jurisdiction under the [DJA]"). Understandably, then, the district court's remand order invokes and relies upon this "discretionary jurisdiction" language.

As MGIC correctly points out, however, it is imprecise to describe the discretion provided by the DJA in terms of jurisdiction. A court's jurisdiction is distinct from its remedial powers. Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 90, 118 S. Ct. 1003, 140 L. Ed. 2d 210 (1998). In passing the DJA, "Congress enlarged the range of remedies available in the federal courts but did not extend their jurisdiction." Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S. Ct. 876, 94 L. Ed. 1194 (1950); see also Wilton v. Seven Falls Co., 515 U.S. 277, 288, 115 S. Ct. 2137, 132 L. Ed. 2d 214 (1995) (noting that "[b]y the Declaratory Judgment Act, Congress sought to place a remedial arrow in the district court's quiver" and that "[c]onsistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment" (emphasis added)). Therefore, while the DJA expanded the scope of the federal courts' remedial powers, it did nothing to alter the courts' jurisdiction, or the "right of entrance to federal courts." Skelly Oil, 339 U.S. at 671. Put another way, the DJA gave district courts the discretion to provide a type of relief that was previously unavailable, but did not "impliedly repeal[ ] or modif[y]" the general conditions necessary for federal adjudication (e.g., a federal question or diversity of citizenship). Id. at 672.

The Seventh Circuit recently made clear this distinction. In Brandt v. Village of Winnetka, 612 F.3d 647 (7th Cir. 2010), the court affirmed the district court's decision to dismiss a declaratory judgment action. The court explained, however, that the district court's dismissal "for lack of jurisdiction" was a "misstep," because the exercise of discretion as to whether to issue a declaratory judgment does not speak to "judicial power." Id. at 649. The court accordingly modified the district court's judgment "to provide that the suit is dismissed in exercise of the court's discretion not to issue a declaratory judgment." Id. at 650-51.

We agree with the Seventh Circuit's analysis. Federal courts' regular use of "discretionary jurisdiction" language implicitly and inaccurately suggests that the DJA confers jurisdiction that the federal courts have the discretion to decline. The DJA, however, does not confer jurisdiction, and therefore also does not afford the opportunity to decline it. The DJA gives district courts the discretion to decline to exercise the conferred remedial power, Wilton, 515 U.S. at 286, but in no way modifies the district court's jurisdiction, which must properly exist independent of the DJA. In other words, federal courts have discretion under the DJA only as to whether to award declaratory relief pursuant to the jurisdiction that they must properly derive from the underlying controversy between the litigants. Generally, then, when courts refer to a district court's discretion to "exercise" or "accept" jurisdiction under the DJA, they invoke the court's discretion to provide a declaratory remedy pursuant to its otherwise proper subject matter jurisdiction over a dispute.

Here, as we previously noted, the parties do not dispute that the district court had proper diversity jurisdiction over this case. The district court's exercise of its remedial discretion under the DJA did nothing to alter its subject matter jurisdiction over the underlying controversy between the parties.

B.

In light of our conclusion that the district court's proper subject matter jurisdiction remained unaffected by the DJA, we now turn to the court's obligation under the FAA. MGIC's motion, filed before the district court had ruled on Countrywide's motion to remand, sought under § 3 of the FAA a stay of the declaratory judgment action pending arbitration.

First, the FAA, like the DJA, does not confer federal jurisdiction, but rather requires an "independent jurisdictional basis." Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 581-82, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008). In order for a court to adjudicate an FAA claim, then, it must have proper jurisdiction over the conflict even assuming the parties had never entered into an agreement to arbitrate. Here, as explained above, the district court did have independent diversity jurisdiction. Therefore, the district court had the power to adjudicate MGIC's FAA motion, regardless of how it exercised its discretion to award relief under the DJA.

Second, unlike the DJA, the FAA gives the adjudicating court no discretion as to whether to award relief. The statute provides that when a party seeks relief under § 3 of the FAA, "the court . . . , upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement." 9 U.S.C. § 3 (emphasis added). As the Supreme Court has recognized, the language of the FAA leaves no room for discretion: "By its terms, the Act leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985); see also AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748, 179 L. Ed. 2d 742 (2011) (noting that FAA "§ 3 requires courts to stay litigation of arbitral claims pending arbitration of those claims 'in accordance with the terms of the agreement'" (emphasis added)); Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004) (noting that the FAA limits a court's discretion in ordering arbitration). The express terms of the statute do not allow a district court to abstain from granting relief in cases where its jurisdiction is proper.

We therefore hold that the FAA's mandatory terms, combined with the court's proper diversity jurisdiction, required the district court to reach the merits of MGIC's motion before it remanded the suit back to state court.

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