District Court May Enter Preliminary Injunction before Deciding Motion to Compel Arbitration

From Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011):

The Securities Exchange Commission ("SEC") brought suit against Stanford Group Company ("SGC"), along with various other Stanford corporate entities, including Stanford International Bank ("SIB"), for allegedly perpetrating a massive Ponzi scheme. The district court appointed Robert Janvey (the "Receiver") to marshal the Stanford estate. In November, this Court heard Janvey v. Adams, 588 F.3d 831 (5th Cir. 2009), a case concerning the frozen accounts of Stanford investors. Although the Fifth Circuit ordered the district court to thaw the accounts of the Stanford investors, the Receiver subsequently obtained a preliminary injunction against numerous former financial advisors and employees of SGC, freezing the accounts of those individuals pending the outcome of trial.

In this interlocutory appeal, the Employee Defendants contend that the district court should have granted their motion to compel arbitration, and that the district court had no power to grant the preliminary injunction when the motion to compel arbitration was pending. Additionally, the Employee Defendants claim that the district court abused its discretion when it granted the preliminary injunction, and that the Receiver's calculation of the amounts subject to the injunction was overly broad. The Bennett Defendants appeal separately, claiming that the district court erroneously found that SGC operated as a Ponzi scheme.

We hold that (1) the district court had the power to decide the motion for preliminary injunction before deciding the motion to compel arbitration***. We further hold that we do not have jurisdiction to rule on the motion to compel arbitration. ***

In its order, the district court relied on its equitable powers to preserve the status quo, and expressly reserved the question of whether the Receiver's claims were subject to arbitration. In so doing, the district court noted that the cases in the circuit split did not specifically address the issue in this case: whether a court may preserve the status quo pending its resolution of a motion to compel arbitration, not pending the actual arbitration itself. We agree with the district court that it court can grant preliminary relief before deciding whether to compel arbitration.

The language of the FAA does not touch on the ancillary power of the federal court to act before it decides whether the dispute is arbitrable. The federal law of arbitration is governed by the FAA. 9 U.S.C. §§ 1-16. As the Employee Defendants note, the Supreme Court has consistently expressed a strong preference for arbitration. See Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984) ("In enacting § 2 of the [FAA], Congress declared a national policy favoring arbitration . . . ."). However, these sections do not provide guidance on the issue of whether a court may issue a preliminary injunction before deciding whether the dispute is arbitrable. Section 3 provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, 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, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3 (emphasis added). Similarly, § 4 provides:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement. . . . The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.

9 U.S.C. § 4 (emphasis added). Section 3 only speaks to what the court should do once it is satisfied that the issue is referable to arbitration. Similarly, § 4 mandates that the court must direct the parties to proceed to arbitration only after it is satisfied that there is no issue as to whether a party failed to comply with the arbitration agreement. Both of these sections speak only to situations after the court has decided arbitration must ensue.

Here, the district court has yet to make up its mind as to arbitrability. The district court relied on its equitable powers to preserve the status quo, but expressly reserved the issue of whether the Receiver's claims were subject to arbitration for resolution at a later date. Nothing in the FAA controls a district court's approach to its docket. While the Supreme Court has stated that "Congress'[s] clear intent, in the [FAA], [was] to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible[,]" there is nothing to control the district court's expeditious determination of arbitrability. Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983) (emphasis added).

The cases cited by the Employee Defendants also do not bar the exercise of the district court's equitable powers here. The RGI Court found that "[t]he crux of the problem [in the circuit split] is whether the commands of the [FAA] require that a federal court immediately divest itself of any power to act to maintain the status quo once it decides that the case before it is arbitrable." RGI, 858 F.2d at 228-29 (emphasis added). Here, however, the district court has not yet decided whether the case is arbitrable and thus the circuit-split cases are not applicable. The Receiver's request for a preliminary injunction was entered before the motion to compel arbitration. We agree with the district court that if we were to reverse and hold that the district court must stop everything and consider the motion to compel arbitration, such a holding

would create a harsh procedural rule: in order to avoid irreparable injury, motions to compel arbitration where a request for injunctive relief is involved must be resolved before any temporary restraining order expires. Such a rule would be both burdensome for district courts and impracticable, given the time it takes motions to compel arbitration to become ripe for ruling, even if no discovery is required.

Janvey v. Alguire, No. 3:09-CV-724-N, at 6 n.5 (N.D. Tex June 6, 2010) (order granting preliminary injunction).

Though the circuit-split cases do not apply here, the reasoning of those circuits holding that a court may issue an injunction pending arbitration applies here. As explained by the First Circuit, "the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief to preserve the status quo pending arbitration and, ipso facto, the meaningfulness of the arbitration process." Teradyne v. Mostek Corp., 797 F.2d 43, 51 (1st Cir.1986). Here, the district court merely sought to preserve the status quo before deciding the motion to compel arbitration, and by doing so they sought to preserve the meaningfulness of any arbitration that might take place.

Even if applicable to the facts here, the Seventh Circuit case cited by the Employee Defendants would not bar the preliminary injunction issued by the district court. In Salvano, the Seventh Circuit held that the district court may issue injunctive relief only until the arbitration panel is able to address whether the equitable relief should remain in effect. 999 F.2d at 215-16. In the instant case, the district court expressly stated that if it decides to compel arbitration, the defendants may ask the district court to reconsider the preliminary injunction in light of Fifth Circuit precedent and the terms of the contracts.

F. Motion to Compel Arbitration

The parties also dispute whether the Receiver's claims against the Employee Defendants are subject to arbitration. The district court did not decide the motion to compel arbitration. Both parties ask this Court to decide the motion in the first instance. "We have appellate jurisdiction where an order is final, [the order] falls within a specific class of interlocutory orders made appealable by statute, or the issue falls within some jurisprudential exception." Silver Star Enters., Inc. v. M/V Saramacca, 19 F.3d 1008, 1013 (5th Cir. 1994). As there was no final or interlocutory order, and we could find no jurisprudential exception, we do not have jurisdiction to decide the motion to compel arbitration. WRIGHT, MILLER & COOPER, FED. PRACTICE & PROCEDURE: JURISDICTION 2D § 3291.1 (2011) ("Ordinarily the scope of appellate review under § 1292(a)(1) is confined to the issues necessary to determine the propriety of the interlocutory order itself. The curtailed nature of most preliminary injunction proceedings means that the broad issues of the action are not apt to be ripe for review, most obviously as to issues that have not yet been decided by the trial court . . . ."); see also Equal Emp't Opportunity Comm'n v. Recruit U.S.A., Inc., 939 F.2d 746, 757 (9th Cir. 1991) (declining to rule on sanctions motion on an interlocutory appeal of a preliminary injunction where the district court had yet to rule on the sanctions motion).

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