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Ortiz-Espinosa v. BBVA Securities of Puerto Rico, Inc.

United States Court of Appeals, First Circuit

January 20, 2017

LUIS ORTIZ-ESPINOSA; MARITZA SOTO-GARCIA; CONJUGAL PARTNERSHIP ORTIZ-SOTO; LUIS ORTIZ-ESPINOSA, as Trustee of Centro Dermatológico San Pablo PSC Retirement Plan, Plaintiffs, Appellants,


          Harold D. Vicente Colon, with whom Harold D. Vicente-González and Vicente & Cuebas were on brief, for appellants.

          Luis A. Oliver, with whom Melissa Hernández-Carrasquillo and Fiddler González & Rodríguez, PSC were on brief, for appellees.

          Mark C. Fleming, Ari J. Savitzky, Peter J. Macdonald, Ross E. Firsenbaum, Adriel I. Cepeda Derieux, Michael J. Morillo, and Wilmer Cutler Pickering Hale and Dorr LLP on brief for UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico, amici curiae.

          Before Howard, Chief Judge, Dyk [*] and Thompson, Circuit Judges.


         This case requires us to determine the test for district court federal question jurisdiction in the context of motions to vacate or modify an arbitration award. This turns on whether the court may look through the motion to the underlying dispute to determine whether the court would have federal question jurisdiction. Here, the district court applied the look-through test, finding that jurisdiction existed and that there was no basis for setting aside the award. We affirm, holding that the look-through approach is the correct test, that federal jurisdiction existed, and that the district court did not err in refusing to vacate the award and in confirming it.


         In 2006, appellants Dr. Luis Ortiz-Espinosa and his wife, Maritza Soto-García; the conjugal partnership formed by them (Espinosa-Soto); and Luis Ortiz-Espinosa, as trustee of Centro Dermatológico San Pablo PSC Retirement Plan, opened two sets of brokerage investment accounts with BBVA Securities of Puerto Rico, Inc. ("BBVA"). The accounts included personal accounts for the married couple and accounts for a retirement plan. Rafael Rodríguez-Abella, a securities broker employed at BBVA, managed the accounts. The married couple deposited $2, 113, 154 into the personal accounts and $491, 054 into the retirement plan accounts. By September 2009, the accounts had collectively suffered large losses in the amount of $2, 049, 340. The married couple believed that BBVA and Rodríguez-Abella were responsible for the losses. The brokerage agreements provided for arbitration of disputes before the Federal Industry Regulatory Authority ("FINRA").

         On March 25, 2010, the married couple and representatives of the retirement plans (hereinafter, "claimants") sought arbitration with BBVA and Rodríguez-Abella in the FINRA forum. We refer to BBVA and Rodríguez-Abella as "defendants." In their statement of claim requesting arbitration, claimants alleged that between 2006 and 2009, defendants

in total disregard and open violation of the instructions received from [c]laimants and of [c]laimants' investment objectives, engaged in a pattern of unsuitable investments in high risk securities, with the sole objective of maximizing commissions or trading profits for [defendants], while deceiving [c]laimants about the true nature of the investments made by [defendants] in the Accounts. Said investments were made by [defendants] without consulting [c]laimants, and [defendants] exercised unauthorized discretion in the handling of the Accounts.

         Appellants' Appx. 23-24.

         Claimants asserted several claims under both federal and Puerto Rico law, alleging, inter alia, violations of Section 10(b) of the Securities Exchange Act, Rule 10b-5 of the Securities Exchange Commission, and also the securities laws of Puerto Rico. The statement of claim alleged claims under state tort and contract law as well. With respect to the retirement plan accounts, claimants also alleged that the investments and margin loans were violations of the Employee Retirement Income Security Act. Finally, in addition to compensatory damages in the amount of at least $2, 102, 976, claimants sought punitive damages, interest, attorney's fees, expenses, and disgorgement of defendants' commissions and service fees.

         A FINRA arbitration panel comprised of three members conducted seventeen hearing sessions in Puerto Rico. On April 3, 2012, the arbitrators issued an award denying claimants' claims. The award stated in its entirety:

After considering the pleadings, the testimony and evidence presented at the hearing, and the post-hearing submissions, the Panel has decided in full and final resolution of the issues submitted for determination as follows:
The Panel finds for Respondents and Claimants' claims are denied in their entirety.
Any and all relief not specifically addressed herein, including Claimants' request for attorneys' fees and punitive damages, is denied.

         Appellants' Appx. 38.

         On July 29, 2012, claimants filed a complaint (hereinafter, "petition to vacate") in the Puerto Rico Court of First Instance requesting that the court vacate or modify the arbitration award. Claimants, in their petition to vacate, did not invoke the Federal Arbitration Act ("FAA"); instead, claimants sought relief under the Puerto Rico Arbitration Act ("PRAA"), 32 L.P.R.A. §§ 3201 et seq. The petition alleged various errors of the arbitrators, including the fact that they denied claimants' claims despite an alleged admission of responsibility by defendants and "clear evidence" supporting claimants' claims on the merits. Appellants' Appx. 15. The petition to vacate also alleged that the arbitrators were biased against claimants and had refused to hear relevant evidence.

         On July 30, 2012, defendants removed the case to the United States District Court for the District of Puerto Rico asserting that the district court had federal question jurisdiction. There was no basis for diversity jurisdiction because all of the parties in this case are residents of Puerto Rico or are entities created or organized under the laws of Puerto Rico. Defendants based their claims of federal subject matter jurisdiction on a look-through approach, asserting that the underlying claims were based on federal securities laws, and that the district court would have had jurisdiction if the claims had been filed in district court. Defendants urged that the court also had supplemental jurisdiction over the state law claims.

         On August 17, 2012, claimants moved to remand the case to Puerto Rico state court for lack of jurisdiction. The district court denied the motion for remand, holding that the court had federal question jurisdiction. It applied the look-through approach, determining that the underlying statement of claim alleged federal claims. Claimants filed an interlocutory appeal of the order denying their motion to remand, but on May 28, 2013, this Court dismissed the appeal because the order was not a final decision under 28 U.S.C. § 1291.

         On December 17, 2015, the district court denied claimants' petition to vacate or modify the arbitration award and entered a judgment confirming the award, holding that claimants "did not demonstrate any plausible ground to vacate or modify the award." Appellants' Br. Add. 28. The court did not decide whether the FAA or PRAA standards for vacating or modifying an arbitration award applied. Instead, the court held that "given the similarities between the FAA and PRAA with respect to the grounds for vacating or modifying" an arbitration award, disturbing the award "is not warranted under FAA or PRAA." Appellants' Br. Add. 24 n.9. Claimants appeal both the district court's denial of their motion to remand and the judgment confirming the arbitration award. We have jurisdiction pursuant to 28 U.S.C. § 1291.


         We first consider the issue of federal question jurisdiction. Where pertinent facts are not in dispute, we review the district court's determination of subject matter jurisdiction de novo. Sa ...

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