Fundamental Administrative Services, LLC v. Cohen

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT October 3, 2017
_________________________________
Elisabeth A. Shumaker
Clerk of Court
FUNDAMENTAL ADMINISTRATIVE
SERVICES, LLC; FUNDAMENTAL
CLINICAL CONSULTING, LLC,
Plaintiffs - Appellants,
v. No. 17-2025
(D.C. No. 1:16-CV-00212-MCA-GJF)
SETH T. COHEN, as Personal (D. N.M.)
Representative for the Estate of Tessie
Hammann, deceased; VICKI MONTANO,
Defendants - Appellees.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before TYMKOVICH, Chief Judge, BALDOCK and HOLMES, Circuit Judges.
_________________________________
Fundamental Administrative Services, LLC, and Fundamental Clinical Consulting,
LLC (collectively, “Fundamental”), appeal from a district court order that dismissed their
complaint to compel arbitration. Exercising jurisdiction under 28 U.S.C. § 1291, we
affirm.
*
After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
BACKGROUND
In January 2014, Tessie Hammann was admitted to the Casa Arena Blanca
Nursing Center in New Mexico. As part of the admission process, her daughter and
attorney in fact, Vicki Montano, executed an agreement requiring arbitration of “serious
disputes, regardless of their cause or legal basis, involving an individual resident (or an
individual resident’s representative, family, heirs, assigns, etc.).” Aplt. App., Vol. I at 41.
The agreement also contained a delegation clause, stating that “any disagreements
regarding the applicability, enforceability or interpretation of th[e] Agreement will be
decided by the arbitrator and not by a judge or jury.” Id. at 42.
Ms. Hammann died not long after her admission to the Center. The personal
representative of her estate, Seth Cohen, and Ms. Montano filed a wrongful-death action
in state court against Fundamental, which provided management and consulting services
to the Center. Eight months later, Fundamental filed in federal district court a complaint
to compel arbitration based on the arbitration agreement that Ms. Montano had signed on
Ms. Hammann’s behalf.
Mr. Cohen and Ms. Montano then filed in state court a motion to determine
arbitrability. The state court ruled that Fundamental could not enforce the arbitration
agreement because Fundamental was neither a signatory to, nor a third-party beneficiary
of, the agreement.1 Fundamental sought review in the New Mexico Court of Appeals.
1
The state court also ruled that the arbitration agreement was unconscionable
because it allowed the Center to pursue actions against its residents in a judicial
forum but limited serious claims brought by residents and their representatives to
arbitration.
2
When the federal district court learned of the state court’s arbitrability ruling, it
invited briefing on the ruling’s res-judicata effect. The district court then dismissed
Fundamental’s complaint as precluded by res judicata. Fundamental now appeals.
DISCUSSION2
The applicability of res judicata is a question of law that we review de novo. See
Satsky v. Paramount Commc’ns, Inc., 7 F.3d 1464, 1467-68 (10th Cir. 1993). To
determine the preclusive effect of a state court judgment in a subsequent federal lawsuit,
we use the preclusion law of the state in which the prior judgment was rendered. See
Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985).
Under New Mexico law, “[t]he doctrine of claim preclusion, or res judicata, bars
re-litigation of the same claim between the same parties or their privies when the first
litigation resulted in a final judgment on the merits.” Bank of N.Y. v. Romero, 382 P.3d
991, 996 (N.M. Ct. App. 2016) (internal quotation marks omitted). The doctrine has
“four requirements: (1) the parties must be the same, (2) the cause of action must be the
2
Mr. Cohen and Ms. Montano state they now “consent[ ] to the arbitration of
their [wrongful-death] claims” as “the only way to reach a [timely] resolution of this
matter.” Aplee. Br. at 4. They “request[ ] that this Court remand to the district court
with instructions to refer this case to arbitration.” Id. at 5. But they “strenuously
disagree” with Fundamental’s appellate arguments and they “ask this Court not to
reach the merits of [those] arguments.” Id. at 4, 5. Fundamental objects to this
proposal and insists that its appeal be resolved on the merits. We reject Mr. Cohen
and Ms. Montano’s proposal as it essentially asks us to disregard the state court’s
decision, which we may not do, see 28 U.S.C. § 1738 (requiring that state “judicial
proceedings” be given “the same full faith and credit in every court within the United
States . . . as they have by law or usage in the courts of such State”). Further,
Mr. Cohen and Ms. Montano’s offer to consent to arbitration does not moot this
appeal. See Murphy v. Hunt, 455 U.S. 478, 481 (1982) (per curiam) (“In general a
case becomes moot when the issues presented are no longer live or the parties lack a
legally cognizable interest in the outcome.” (internal quotation marks omitted)).
3
same, (3) there must have been a final decision in the first suit, and (4) the first decision
must have been on the merits.” Id. (internal quotation marks omitted). Fundamental
challenges the second and fourth requirements, arguing that the causes of action were not
the same and that the state court’s decision was not on the merits.
As for the claim’s similarity, Fundamental contends the state case involved the
arbitrability of Mr. Cohen and Ms. Montano’s wrongful-death action, whereas the federal
case involved the antecedent issue of who should decide arbitrability—an arbitrator or a
court. To be accurate, though, Fundamental raised both points in the district court.
Specifically, Fundamental asserted that either (a) the arbitration agreement’s delegation
clause required arbitration of the arbitrability issue, but if not, then (b) Fundamental had
the authority to enforce the arbitration agreement and could compel arbitration of the
wrongful-death action.
The district court concluded that the arbitration claim in the state and federal
proceedings was the same for res judicata purposes. We agree.
New Mexico courts follow the transactional approach to identifying claims. That
approach “considers all issues arising out of a common nucleus of operative facts [to be]
a single [claim].” Potter v. Pierce, 342 P.3d 54, 57 (N.M. 2015) (internal quotation
marks omitted). “The facts comprising the common nucleus should be identified
pragmatically, considering (1) how they are related in time, space, or origin, (2) whether,
taken together, they form a convenient trial unit, and (3) whether their treatment as a
single unit conforms to the parties’ expectations or business understanding or usage.”
Id. (internal quotation marks omitted).
4
At its core, this case is about Fundamental’s attempt to invoke the arbitration
agreement and keep Mr. Cohen and Ms. Montano’s wrongful-death action out of court.
Whether the claim is presented in terms of arbitrability on the one hand, or the
determination of arbitrability on the other hand, the claim originates from the same
source—the arbitration agreement. Further, the facts form a convenient unit, as they
present contractual issues of intent to arbitrate, see, e.g., Ragab v. Howard, 841 F.3d
1134, 1137 (10th Cir. 2016), intent as to whether arbitrability questions should
themselves be arbitrated, see, e.g., Belnap v. Iasis Healthcare, 844 F.3d 1272, 1281 (10th
Cir. 2017), and intent to benefit a third party, allowing enforcement of the agreement by a
nonsignatory such as Fundamental, see, e.g., O’Connor v. R.F. Lafferty & Co., 965 F.2d
893, 901 (10th Cir. 1992). Finally, it is difficult to see how treating the two arbitrability
issues as a single unit would violate the parties’ expectations. In particular, Mr. Cohen
and Ms. Montano’s state court motion to determine arbitrability sought relief under N.M.
Stat. Ann. § 44-7A-8(b), which requires a summary judicial proceeding when arbitration
has been threatened and the party opposing arbitration claims “there is no agreement to
arbitrate.” And significantly, Fundamental states on appeal that it “fairly invoked the
Delegation Clause in State Court” by submitting its “federal briefs . . . to the State Court”
and “ask[ing] the State Court to consider [them] before deciding [the § 44-7A-8(b)]
Arbitrability Motion.” Aplt. Opening Br. at 27-28. Under these circumstances, the
parties could expect the antecedent and substantive arbitrability issues to be examined by
both courts.
5
Thus, we conclude that the state and federal cases involved the same claim
because the issues presented arose out of a common nucleus of operative facts.3
In regard to the fourth res-judicata factor—whether the first decision was on the
merits—Fundamental argues that the state court did not decide its delegation-clause
claim that only an arbitrator could decide arbitrability. Granted, the state court did not
mention that clause in its arbitrability order. But Fundamental placed the claim “front
and center” in its federal briefs that it submitted to the state court. Id. at 27. And in
proceeding under N.M. Stat. Ann. § 44-7A-8(b), the state court was tasked with deciding
whether there was an enforceable arbitration agreement. The state court answered that
question in the negative, applying principles of contract formation and concluding that
Fundamental was not a party to the agreement or even a third-party beneficiary who
could enforce the agreement. Thus, the state court necessarily rejected Fundamental’s
attempt to use the delegation-clause to obtain arbitration of arbitrability.
On a related point, Fundamental argues the state court lacked authority to issue a
judgment on arbitrability. Fundamental asserts that only an arbitrator had “the power to
decide arbitrability.” Aplt. Opening Br. at 16. Fundamental’s argument lacks merit.
3
To the extent Fundamental relies on Belnap to argue that the claims in the
state and federal courts were “entirely distinct,” Aplt. Opening Br. at 17, that reliance
is misplaced. Belnap simply noted that “questions of arbitrability encompass two
types of disputes: (1) disputes about whether a particular merits-related dispute is
arbitrable because it is within the scope of a valid arbitration agreement, and
(2) threshold disputes about who should have the primary power to decide whether a
dispute is arbitrable.” 844 F.3d at 1280 (citation, emphases, and internal quotation
marks omitted). Belnap did not involve res judicata. And in the instant case, both
types of dispute were present in the state and federal courts. Indeed, as already
indicated, Fundamental asked the state court to consider the same merits-related and
antecedent arbitrability issues it was asserting in federal court.
6
The state court acted under the authority granted by N.M. Stat. Ann. § 44-7A-8(b)
to examine whether there was an enforceable arbitration agreement. That examination
covers antecedent questions of who decides arbitrability, as well as the arbitrability of the
merits. See Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 70 (2010) (indicating that
a delegation provision requiring arbitration of gateway questions, such as arbitrability, “is
simply an additional, antecedent agreement the party seeking arbitration asks the . . .
court to enforce” (emphasis added)); Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199,
202 (5th Cir. 2016) (explaining that “if the party seeking arbitration points to a purported
delegation clause, the court’s analysis is limited. It performs the first step—an analysis
of contract formation—as it always does. But the only question, after finding that there
is in fact a valid agreement, is whether the purported delegation clause is in fact a
delegation clause—that is, if it evinces an intent to have the arbitrator decide whether a
given claim must be arbitrated” (emphasis added)); Felts v. CLK Mgmt., Inc., 254 P.3d
124, 131 (N.M. Ct. App. 2011) (“[W]hen deciding whether the parties agreed to arbitrate
a certain matter (including arbitrability), courts generally should apply ordinary state-law
principles that govern the formation of contracts.” (ellipsis and internal quotation marks
omitted)). To the extent Fundamental is actually arguing the state court’s judgment is
erroneous, the proper avenue for that argument is its appeal in state court.
7
CONCLUSION
The judgment of the district court is affirmed.
Entered for the Court
Jerome A. Holmes
Circuit Judge
8