Colony Capital, Inc. v. Flaherty

Background

Colony Capital, Inc. sued James F. Flaherty III seeking two forms of relief. First, Colony sought an order stopping an arbitration between the parties. Second, it sought declarations that Flaherty’s indemnification dispute was not subject to arbitration and that Flaherty was not entitled to indemnification from Colony.

The dispute arose from a 2014 joint venture agreement between Colony and Flaherty. Meiko Dixon, a former Colony employee assigned to work for the joint venture as Flaherty’s Executive Assistant, later accused Flaherty of workplace sexual misconduct. Dixon’s employment agreement with Colony contained an arbitration clause, but Flaherty’s joint venture agreement with Colony did not. Flaherty demanded arbitration against Dixon concerning her allegations and against Colony concerning indemnification for the costs of defending against those allegations. Flaherty and Dixon later settled their dispute, leaving Flaherty’s indemnification claim against Colony.

The court denied Colony’s request for a preliminary injunction stopping the arbitration. The arbitration hearing then took place in California on June 14, 2021. On August 9, 2021, the arbitrator ruled that Flaherty’s indemnification claim was arbitrable and that Flaherty was entitled to $491,142 in indemnification. Colony subsequently moved to vacate, or overturn, the arbitration award, arguing in part that the indemnification claim was not arbitrable. That motion remained pending when the court decided Flaherty’s motion to dismiss.

Motion to dismiss

Flaherty moved under Federal Rule of Civil Procedure 12(b)(1), which permits dismissal when a federal court lacks subject-matter jurisdiction—the court’s authority to hear the dispute. He argued that Colony’s request to stop the arbitration was moot because the hearing had already happened. He also argued that the arbitrability question had been presented to the arbitrator and that there was no live controversy about whether Colony owed Flaherty indemnification.

The court agreed that the request to stop the completed arbitration hearing was moot and granted Flaherty’s motion to dismiss that portion of the Complaint. But the court concluded that the claims concerning arbitrability and indemnification remained live controversies because those issues also formed part of Colony’s pending motion to vacate the arbitration award. The court therefore concluded that it had subject-matter jurisdiction over those claims.

Disposition

The court granted in part and denied in part Flaherty’s motion to dismiss. It granted the motion to the extent it sought dismissal of Colony’s request to enjoin the completed arbitration hearing, and otherwise denied the motion. The court also treated the portion of Colony’s Complaint seeking a stay of arbitration as amended, to the extent necessary, to seek vacatur of the arbitration award. The court did not decide in this Order whether the indemnification dispute was arbitrable or whether Flaherty was entitled to indemnification; it stated that it would consider relevant arguments when resolving Colony’s pending motion to vacate.