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Soaring Wind Energy, L.L.C. v. Catic USA Inc.

United States Court of Appeals, Fifth Circuit

January 7, 2020

SOARING WIND ENERGY, L.L.C.; TANG ENERGY GROUP, LIMITED; THE NOLAN GROUP INCORPORATED; MITCHELL W. CARTER; JAN FAMILY INTERESTS, LIMITED; MARY M. YOUNG, Individually and as the Independent Executrix of the Estate of Keith P. Young, Jr., Deceased, Plaintiffs-Appellees,

          Appeals from the United States District Court for the Northern District of Texas

          Before DAVIS, SMITH, and COSTA, Circuit Judges.

          JERRY E. SMITH, Circuit Judge

         Catic USA, [1] a California corporation with Chinese corporate parentage, appeals the confirmation of an adverse arbitral award. Having determined that this court has jurisdiction, we affirm: The arbitration panel was fairly constituted and did not exceed its authority.


         A dispute among members of Soaring Wind Energy, LLC (sometimes called "the LLC"), was submitted to an arbitration panel, which awarded the LLC $62.9 million against Catic USA (and its AVIC-group affiliates) and ordered that Catic USA be divested of its shares in the LLC without compensation. A judgment of the district court confirmed that award. Catic USA, joined by its various Chinese affiliates, appeals.

         The origins of Soaring Wind Energy trace to 2007, when representatives of Tang Energy Group ("Tang Energy") and Catic USA began talks of creating a vehicle for wind-energy marketing and project development. They confirmed those talks in a Memorandum of Understanding, which the Soaring Wind Agreement (the "Agreement") superseded.

         The Agreement created the LLC, whose "business" would be "to provide worldwide marketing of wind energy equipment, services and materials related to wind energy, including, but not limited to, marketing wind turbine generator blades and wind turbine generators and developing wind farms." Each member agreed to "conduct activities constituting the Business [only] in and through [Soaring Wind] and its Controlled subsidiaries." Class A members agreed that such prohibition extended to their affiliates.

         The Agreement also outlined a procedure for resolving disputes. Under its terms, "any controversy, dispute, or claim arising under or related to [the Agreement]," after failed attempts at negotiation, "shall be submitted to binding arbitration." Each "Disputing Member"-defined as "each Member that is a party to [the] Dispute"-would then have the opportunity to name its own arbitrator. Those selected as arbitrators would themselves choose an additional arbitrator (or two additional arbitrators if necessary to achieve an odd number). The panel would have the authority "to grant injunctive relief and enforce specific performance" and to issue a final, court-enforceable decision, though it would lack "authority to award special, exemplary, punitive or consequential damages."

         After years without Catic USA's providing Soaring Wind any financial support, a representative from Tang Energy requested that one of Catic USA's Chinese AVIC-group affiliates[2] help fund Soaring Wind. An AVIC representative responded that "AVIC International has already provided a total of 50 million USD in financing to wind power projects in the U.S. and will keep[] trying in the future." Paul Thompson-himself a Class B member of Soaring Wind-served as president and CEO of one such affiliate, [3] through which the AVIC group appeared to have invested millions of dollars in wind power project development.[4]

         Tang Energy subsequently demanded arbitration against Catic USA, Thompson, and Catic USA's non-signatory corporate affiliates. Among other things, Tang claimed that Catic USA had breached the Agreement through the actions of its Chinese corporate affiliates. Tang named its arbitrator in its demand, and the four remaining Class A members[5] joined Tang in the dispute and, accordingly, named their respective arbitrators. Catic USA and Thompson answered Tang's demand and named their own arbitrators, but Catic USA's non-signatory Chinese affiliates refused to participate in the arbitration. As the Agreement required, the seven selected arbitrators then collectively appointed two more.

         Catic USA and Thompson preemptively sued the claimants in federal court, seeking a declaratory judgment that the panel was improperly consti-tuted.[6] Specifically, they claimed both that fundamental fairness and the Agreement required each side of the dispute to select an arbitrator, who would then select a third and final arbitrator. The district court dismissed those claims for lack of subject matter jurisdiction under the FAA.[7] Catic USA and Thompson made similar arguments before the arbitration panel, which determined for itself that it was constituted according to the Agreement's unambiguous terms.

         After a five-day hearing, the arbitration panel issued its final award in favor of the claimants. The panel determined that "Catic USA breached the [Soaring Wind] Agreement by its Affiliates engaging in the 'Business' of [Soaring Wind Energy]." It further found that the AVIC group, including Catic USA, "operate[d] as one entity" and that "AVIC HQ and its wholly owned subsidiaries created additional subsidiaries in an attempt to get around its promises made in the [Soaring Wind] Agreement to Claimants." The panel concluded that Catic USA and its non-signatory Chinese affiliates should be held "jointly and severally liable to [Soaring Wind] in the amount of $62.9 USD million" in lost profits owed to the LLC.[8]

         The arbitration panel noted that "[t]he lost profits set forth in [its] award are due to [Soaring Wind Energy] for distribution to the Claimants through their percentages set forth in the [Soaring Wind] Agreement." The panel did not, however, stop at ordering that Catic USA pay the monetary damages: "[I]n order to prevent [Catic] USA and Thompson from profiting from their breaches of the [ ] Agreement," the panel wrote, "they should be prohibited from receiving any profit from any award to [Soaring Wind]." Thus, in addition to the $62.9 million damages, the panel ordered that "[Catic] USA and Thompson's equity interest in [Soaring Wind] should be divested . . . ."[9]

         The claimants sought judicial confirmation of the arbitral award against Catic USA and its Chinese affiliates. At the claimants' request, the district court bifurcated the proceedings, staying the case against the Chinese enti-ties.[10] The court then confirmed the award in its entirety against Catic USA. Catic USA and its Chinese affiliates appeal.


         "[C]ourts, including this Court, have an independent obligation to determine whether subject-matter jurisdiction exists . . . ." Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006). Accordingly, we requested nostra sponte that the parties address federal subject-matter jurisdiction under either complete diversity or the New York Convention ("NY Convention").[11]

         The parties vainly try to taint each other's assertions with those made in the district court. Catic USA notes that "diversity jurisdiction," not jurisdiction under the NY Convention, "is the only basis for jurisdiction" that the plaintiffs had invoked. Similarly, the plaintiffs highlight that, although Catic USA contends that jurisdiction is lacking on appeal, it invoked the NY Convention when seeking declaratory judgment before arbitration. Those points are irrelevant, as "[i]t is well settled . . . that the subject matter jurisdiction of a federal court can be challenged at any stage of the litigation (including for the first time on appeal), even by the party who first invoked it." Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 585 (5th Cir. 1999).

         Attempting to sidestep that maxim, the plaintiffs characterize jurisdiction under the NY Convention-here, whether a legal relationship bears a "reasonable relation" to a foreign state-as a "jurisdictional fact" capable of party admission. But what should amount to a "reasonable relation" under 9 U.S.C. § 202 is patently a question of law, not of fact. Catic USA could certainly admit facts-such as the existence of its Chinese affiliates or of projects Soaring Wind contemplated abroad-and those binding facts might be decisive in a jurisdictional inquiry. See State Farm Fire & Cas. Co. v. Flowers, 854 F.3d 842, 845 (5th Cir. 2017). A party is not, however, bound by its previous legal arguments as to jurisdiction. See Canion, 196 F.3d at 585.

         The district court did not address whether there is complete diversity, but it appears to have assumed, without explanation, the applicability of the NY Convention. We examine de novo the presence of federal subject-matter jurisdiction, Pershing, LLC v. Kiebach, 819 F.3d 179, 181 (5th Cir. 2016), keeping in mind that its absence would require dismissal, Arbaugh, 546 U.S. at 506.


         For the district court to have diversity jurisdiction under 28 U.S.C. § 1332, "all persons on one side of the controversy [must] be citizens of different states than all persons on the other side" at the time the complaint was filed. Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1079 (5th Cir. 2008). Catic USA is a California corporation. It is undisputed that, as of the initiation of the arbitration, Catic USA was a member of Soaring Wind, LLC, and because, for diversity jurisdictional purposes, "the citizenship of a LLC is determined by the citizenship of all of its members," id. at 1080, Soaring Wind was at least at that point a citizen of California.

         The arbitration panel purported to divest Catic USA of its membership interest in Soaring Wind. The question is whether that decision alone-absent subsequent judicial confirmation-effected Catic USA's termination from Soaring Wind and, consequently, Soaring Wind's loss of California citizenship. If not, this court would lack diversity jurisdiction.

         Catic USA contends that diversity jurisdiction is lacking because the arbitral award divesting it of its membership in Soaring Wind had no legal effect pending court confirmation. The plaintiffs respond that, under the freedom of contract recognized under Delaware law, the Agreement must be interpreted as granting the arbitration panel "final, binding" authority to terminate Catic USA's membership in the LLC.

         Plaintiffs' focus on Delaware's freedom of contract misses the point. The question is not whether the Agreement granted the arbitration panel authority to issue an award divesting Catic USA of membership. Even assuming the panel did have such authority, it is an entirely separate question whether the panel's decision had immediate legal effect.

         It did not. It is well settled that, absent voluntary compliance, an arbitral award requires judicial confirmation to effect a change in legal status.[12]Plaintiffs' attempt to characterize the "final, binding" authority of the panel as including coercive legal authority is unpersuasive. Such commonly used terms "merely reflect a contractual intent that the issues joined and resolved in the arbitration may not be tried de novo in any court." M & C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844, 847 (6th Cir. 1996). They do not grant arbitrators "the coercive power to enforce the award" without being first "transformed into a judgment, which can be executed with the enforcement mechanism of the state." Schlumberger, 195 F.3d at 220. That an arbitral award be "final" does not obviate the need for judicial confirmation; it only allows for such confirmation.[13]

         Granted, parties may contract to change membership in an LLC without court approval. It is entirely different, however, when parties seek an involuntary termination of membership. Plaintiffs acknowledge that "a judgment would be needed, for example, to enforce a damages award by levying the judgment debtor's assets." But equity interest in an LLC is also an asset, an involuntary transfer of which no arbitrator may effect without judicial confirmation.

         The plaintiffs are correct that the Agreement does not mandate judicial review of arbitration awards. Indeed, it specifies that an arbitral award "may be filed in any court of competent jurisdiction and may be enforced by any Disputing Member as a final judgment of such court." But the "optional" nature of judicial review here does not mean, as plaintiffs contend, that the arbitral award has inherent legal effect. Instead, judicial confirmation would be unnecessary (or "optional") should all parties voluntarily acquiesce to the award. Catic USA has not done so, which is precisely why plaintiffs seek judicial confirmation.

         B. Even without diversity of citizenship, this court would have jurisdiction should this case relate to an arbitration agreement or award "falling under" the NY Convention.[14] It is undisputed that the action to confirm the award "relates to" the award; the question is whether that award "falls under" the Convention. An "arbitral award arising out of a legal relationship" between U.S. citizens falls under the Convention if that "relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states."[15]

         Catic USA contends that the Agreement does not involve property abroad and does not reasonably relate to a foreign state. Catic USA suggests that this court remand with instruction to determine whether its non-signatory Chinese corporate affiliates were party to the Agreement and whether the agreement contemplated performance abroad. If the answer to both questions be no, then there would be no subject matter jurisdiction.

         The plaintiffs respond that the Agreement has a reasonable relation to China. They note that Catic USA is a subsidiary of AVIC IHC, which is itself a subsidiary of AVIC HQ-a state-owned enterprise of the People's Republic of China. They further note the arbitrators' finding that "AVIC HQ exercised such complete control" over Catic USA so that the two companies "operate[d] as one entity," and "[w]hen [Catic] USA signed the [Soaring Wind] Agreement, it was doing so on orders from AVIC HQ." According to the plaintiffs, "the Chinese entities'-and ...

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