FCCI Insurance Company v. Nicholas County Library
Filing
31
MEMORANDUM OPINION & ORDER: (1) Plaintiff's 28 MOTION for Leave to File a supplemental brief is GRANTED; (2) Defendant's 11 MOTION to Dismiss and MOTION to Compel is construed as a motion for summary judgment; (3 ) Defendant's 11 Motion for summary judgment is GRANTED; (4) Summary judgment is granted in favor of Nicholas Co. Library in the narrow sense that the complete incorporation of the construction contract into the performance bond requires FCCI to submit its claims to the arbitrator for the threshold determinations on jurisdiction; (5) This action is DISMISSED WITHOUT PREJUDICE; and (6) Judgment consistent with this opinion will be entered contemporaneously herewith. Signed by Judge Joseph M. Hood on 3/15/2019.(JJ)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
FCCI INSURANCE COMPANY,
Plaintiff,
v.
NICHOLAS COUNTY LIBRARY,
Defendant.
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Case No.
5:18-cv-038-JMH
MEMORANDUM OPINION
AND ORDER
***
Defendant Nicholas County Library (“the Library”) has moved
to dismiss this action and to compel arbitration.
[DE 11].
The
Library argues that Plaintiff FCCI Insurance Company’s claims are
subject
to
arbitration
provisions
that
were
incorporated
by
reference into the performance bond to which FCCI was a party.
[Id.].
Alternatively, Plaintiff FCCI has responded in opposition
to the motion to dismiss.
[DE 25].
Additionally, FCCI has moved
for leave to supplement its response.
[DE 28].
The Library has
replied to the response [DE 29] and filed a response in opposition
to FCCI’s motion for leave to file a supplemental brief [DE 30].
For the reasons that follow, FCCI’s motion for leave to file
a supplemental brief [DE 28] is GRANTED. Nicholas County Library’s
motion to dismiss and compel arbitration [DE 11] is construed as
a motion for summary judgment and is GRANTED.
The complete
incorporation of the construction contract into the performance
bond requires FCCI to submit its claims to the arbitrator for
threshold determinations about jurisdiction.
As a result, FCCI’s
claims in this action are DISMISSED WITHOUT PREJUDICE.
I.
The
Nicholas
Factual & Procedural Background
County
Library
entered
into
a
construction
contract with Crace & Co., Inc., related to the construction of a
two-story addition to the Nicholas County Library.
FCCI issued
payment and performance bonds for the project, naming Crace as
principal and Nicholas County Library as obligee.
The
construction
contract
between
Crace
and
the
Library
states,
For any claim subject to, but not resolved by,
mediation pursuant to Section 21.3, the method of
binding dispute resolution shall be as follows:
[X] Arbitration pursuant to Section 21.4 of this
Agreement.
[DE 11-2 at 6, Pg ID 56].
Additionally, the contract provided
that “[i]f the parties have selected arbitration as the method for
binding dispute resolution in the Agreement, any claim, subject
to,
but
not
arbitration.”
resolved
by,
mediation
shall
be
subject
[Id. at 8, Pg ID 58].
Moreover, the construction contract states,
If the parties have selected arbitration as the
method for binding dispute resolution in the Agreement,
any claim, subject to, but not resolved by, mediation
shall be subject to arbitration which, unless the
parties mutually agree otherwise, shall be administered
by the American Arbitration Association, in accordance
with the Construction Industry Arbitration Rules in
effect on the date of this Agreement.
2
to
[Id. at 8, Pg ID 58].
The construction contract defines a “claim” as
. . . a demand or assertion by one of the parties
seeking, as a matter of right, payment of money, or other
relief with respect to the terms of the Contract. The
term “Claim” also includes other disputes and matters in
question between the Owner and Contractor arising out of
or relating to the Contract.
[DE 11-2 at 12, Pg ID 62]. Additionally, the construction contract
further states, “The Contract Documents shall not be construed to
create a contractual relationship of any kind between any persons
or entities other than the Owner and the Contractor.”
[DE 28-1 at
12, Pg ID 200].
FCCI was not a party to the construction contract between
Crace and the Library.
Still, the FCCI performance bond states,
The Condition Of This Obligation is such that whereas,
the Principal entered into a certain contract with the
Owner, dated the 18th day of October, 2016, a copy of
which is hereto attached and made part hereof for the
construction of: Nicholas Co. Library, New Two Story
Addition, Carlisle, KY.
[DE 1-1 at 1, Pg ID 6].
One of the special conditions in the performance bond was
that Crace install rebar to reinforce the walls of the library
addition.
After investigation, FCCI claims that this condition
was not met.
As a result, FCCI terminated Crace under the
performance bond.
At the same time, Nicholas County Library made
a claim on the performance bond.
3
Subsequently, FCCI filed this action seeking a declaratory
judgment on the alleged default and overpayment.
[DE 1].
The
Library moved to dismiss for lack of jurisdiction and to compel
arbitration.
[DE 11].
Additionally, if FCCI was not compelled to
arbitrate, the Library has asked the Court to stay this case until
Crace and the Library can submit their dispute to arbitration.
[Id.].
Before the Court could rule on that motion, the parties agreed
to stay the case and mediate the dispute.
[DE 13].
Recently, the
parties notified the Court that they had failed to resolve the
dispute through mediation and asked that the stay be lifted and
that a briefing schedule be implemented for the pending motion to
dismiss or compel arbitration.
[DE 17; DE 18].
FCCI responded to
the motion to dismiss or compel on February 20, 2019.
[DE 19].
A
demand for arbitration from the Library, dated January 25, 2019,
is attached to the FCCI’s response in opposition to the motion to
dismiss.
[DE 19-1].
Then, FCCI filed a motion for a temporary restraining order
and preliminary injunction and asked for an expedited hearing on
their motion.
[DE 20; DE 21].
The parties provided oral argument
at an expedited motion hearing on March 5, 2019.
Subsequently,
relief.
the
Court
denied
[DE 27].
4
FCCI’s
motion
for
[DE 26].
injunctive
Then, FCCI filed a motion for leave to file a supplement to
their response in opposition, including an exhibit of the full
construction contract.
[DE 28].
The Library replied to FCCI’s
response [DE 29] and filed a response in opposition to FCCI’s
motion for leave to file a supplement [DE 30].
As a result, the
motion to dismiss and motion for leave are ripe for review.
II.
Standard of Review and Applicable Law
The Federal Rules of Civil Procedure do not line up perfectly
with the provisions contained in the United States Arbitration
Act, 9 U.S.C. § 1 et seq., more commonly referred to as the Federal
Arbitration Act (“FAA”).
Rule 12 of the Federal Rules of Civil
Procedure does not list “motion to compel arbitration” as a
potential responsive pleading.
As a result, federal courts have
split on the proper procedural vehicle to be used for dismissal
based on a motion to compel arbitration.
Federal courts are split on whether a motion to dismiss based
on an arbitration provision should be brought based on lack of
subject matter jurisdiction under Federal Rule of Civil Procedure
12(b)(1), whether the motion to dismiss to compel arbitration
should be brought for failure to state a claim upon which relief
may be granted under Rule 12(b)(6), or whether a motion to dismiss
to compel arbitration should be brought based on lack of proper
venue under Rule 12(b)(3).
Federal courts address motions to
5
compel arbitration in drastically different ways and splits of
authority exist even within the same circuits and districts.
(A)
Motion to Dismiss Under 12(b)(1)
Initially, some courts have held that binding arbitration
provisions divest the court of subject matter jurisdiction.
These
courts hold that if no obstacle prevents the plaintiff from
litigating his or her claims as a result of this dismissal, then
the motion should be considered under Rule 12(b)(1).
See Powers
Distrib. Co. v. Grenzebach Corp., No. 16-12740, 2016 WL 6611032,
at *2-3 (E.D. Mich. Nov. 9, 2016) (discussing the split among
district courts in the Sixth Circuit and citing cases).
In fact, the weight of federal authority seems to favor
considering a motion to dismiss and compel arbitration under Rule
12(b)(1).
See, e.g., Gilbert v. Donahoe, 751 F.3d 303, 306, 306
n.1 (5th Cir. 2014); Geographic Expeditions, Inc. v. Estate of
Lhotka, 599 F.3d 1102, 1106-07 (9th Cir. 2010); Harris v. United
States, 841 F.2d 1097, 1099 (Fed. Cir. 1988); Mann v. Equifax Info.
Servs., LLC, No. 12-cv-14097, 2013 WL 3814257, at *2 (E.D. Mich.
July 22, 2013); MRI Scan Ctr., LLC v. Nat’l Imaging Assocs., Inc.,
No. 13-60051-CIV, 2013 WL 1899689, at *2 (S.D. Fla. May 7, 2013);
Orange Cty. Choppers, Inc. v. Goen Techs. Corp., 274 F. Supp. 2d
372, 373 (S.D.N.Y. 2005).
Moreover, the conclusion that federal courts lack subject
matter jurisdiction over claims where parties have agreed to
6
arbitrate may be supported by the text of the FAA.
Section four
of the FAA 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 which, save for such agreement, would
have jurisdiction under title 28, in a civil action, .
. . of the subject matter of a suit arising out of the
controversy between the parties, for an order directing
that such arbitration proceed in the manner provided for
in such agreement.
9 U.S.C. § 4 (emphasis added).
Of course, the language that says,
“save for such [arbitration] agreement, [the district court] would
have jurisdiction under title 28,” seems to indicate that the
federal district courts do not have subject matter jurisdiction in
the presence of a valid arbitration agreement between parties.
Curiously though, the FAA also allows for courts to retain
jurisdiction and stay a case pending arbitration and then enter a
judgment on the award after arbitration.
9 U.S.C. §§ 3, 9.
In
fact, there is a split of authority on whether the FAA mandates a
stay of litigation as opposed to a dismissal in certain situations.
See Wilczewski v. Charter West Nat’l Bank, 889 N.W.2d 63, 71 n.34
(Neb. 2016) (acknowledging the split among the federal circuits
and citing cases).
Thus, it follows that, if a court can stay
litigation when it compels arbitration that courts have and retain
subject matter jurisdiction over the dispute, even when compelling
the parties to arbitrate based on a valid arbitration clause.
7
As a result, some courts have expressly held that valid
arbitration clauses do not divest the court of subject matter
jurisdiction.
See Liveware Publishing, Inc. v. Best Software,
Inc., 252 F. Supp. 2d 74, 78-79 (D. Del. 2003) (“[An arbitration
agreement]
requires
the
Court
to
forego
the
exercise
of
jurisdiction in deference to the parties' contractual agreement to
address in another forum those disputes which fall within the scope
of the agreement to arbitrate.”); see also Nationwide Ins. Co. of
Columbus, Ohio v. Patterson, 953 F.2d 44, 45 n. 1 (3d Cir. 1991).
Alternatively, other courts simply acknowledge the dispute about
how to best address motions to compel but then hold that the
distinction
is
immaterial
because,
under
either
rule,
the
arbitration agreement requires the parties to submit their claims
to arbitration.
Moore v. Ferrellgas, 533 F. Supp. 2d 740, 744
(W.D. Mich. 2008).
Finally, the Sixth Circuit has cautioned courts to be more
precise
when
“jurisdiction.”
considering
challenges
phrased
as
attacks
on
See Primax Recoveries, Inc. v. Gunter, 433 F.3d
515, 518-19 (6th Cir. 2006).
In fact, the United States Supreme
Court has also urged courts to use the term “jurisdiction” with
more precision, describing the term jurisdiction as “a word of
many, too many, meanings.”
Kontrick v. Ryan, 540 U.S. 443, 453
(2004) (quoting Steel Co. v. Citizens for a Better Env't, 523 U.S.
83, 90 (1998)).
And for good reason.
8
Here, the defect created by
the binding arbitration clause, assuming it applies to these
claims, does not appear to be a lack of subject matter jurisdiction
where
the
Court
in
fact
has
and
may
retain
subject
matter
jurisdiction pending arbitration.
B.
Motion to Dismiss Under 12(b)(3)
Other courts have considered motions to compel arbitration as
motions to dismiss for lack of proper venue pursuant to Rule
12(b)(3).
See Grasty v. Colorado Tech. Univ., 599 F. App’x 596,
597 (7th Cir. 2015).
These courts treat arbitration agreements as
types of forum-selection clauses.
Regardless, it appears that the United States Supreme Court
has foreclosed the use of Rule 12(b)(3) motions to dismiss to
enforce mandatory forum-selection clauses.
Atl. Marine Constr.
Co. v. U.S. Dist. Court for the Western Dist. Of Texas, 571 U.S.
49, 55-56 (2013). The Court explained that “Rule 12(b)(3) allow[s]
dismissal only when venue is ‘wrong’ or ‘improper.’ Whether venue
is ‘wrong’ or ‘improper’ depends exclusively on whether the court
in which the case was brought satisfies the requirements of federal
venue laws, and those provisions say nothing about a forumselection clause.”
Id. at 55 (citing 28 U.S.C. § 1406(a) and Fed.
R. Civ. P. 12(b)(3)); see also In re Union Elec. Co., 787 F.3d
903, 907 (8th Cir. 2015) (stating that Atlantic Marine “clearly
eliminated the possibility of using Rule 12(b)(3) as a means to
enforce a forum-selection clause”).
9
But, while Atlantic Marine did not discuss the mandatory
versus permissive forum-selection clause distinction, most courts
have “limited the Atlantic Marine framework to situations where
the
forum
selection
clause
is
mandatory.”
Waste
Mgmt.
of
Louisiana, LLC v. Jefferson Par., 48 F. Supp. 3d 894, 909 (E.D.
La. 2014); see also BAE Sys. Tech. Sols. & Servs., Inc. v. Republic
of Korea’s Def. Acquisition Program Admin., 884 F.3d 463, 470-72
(4th Cir. 2018) (citing cases); Scepter, Inc. v. Nolan Transp.
Grp., LLC, 352 F. Supp. 3d 825, 832-33 (M.D. Tenn. 2018).
Still, to the extent that Rule 12(b)(3) applies to dismissal
based on arbitration provisions, it appears applicable only in the
limited circumstance where a federal court is asked to compel
arbitration outside of its district.
See Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 327 (7th Cir. 1995)
(“[W]here the arbitration agreement contains a forum selection
clause, only the district court in that forum can issue a § 4 order
compelling arbitration.” (emphasis in original)).
Thus, dismissal
of
an
an
action
provision
arbitration
district.
is
due
only
will
to
improper
venue
appropriate
result
in
where
based
on
the
arbitration
motion
in
arbitration
to
another
compel
federal
See Faulkenberg v. CB Tax Franchise Sys., LP, 637 F.3d
801, 808 (7th Cir. 2011).
Here, Rule 12(b)(3) is inapplicable for three reasons. First,
if the arbitration provisions are applicable and constitute forum10
selection clauses, they appear to be more appropriately construed
as mandatory, not permissive.
The language in the construction
contract says, “If the parties have selected arbitration as the
method for binding dispute resolution in the Agreement, any claim,
subject to, but not resolved by, mediation shall be subject to
arbitration . . . .”
[DE 11-2 at 8, Pg ID 58 (emphasis added)].
As a result, the use of a 12(b)(3) motion to dismiss based on a
mandatory forum-selection clause is foreclosed by the Atlantic
Marine framework.
See Atl. Marine Constr. Co., 571 U.S. at 55-56
(2013).
Second, venue is not improper here because the Court is not
being asked to compel arbitration outside the Eastern District of
Kentucky.
If arbitration occurs between the parties in this
dispute, it will occur in this district.
Finally, even if a motion to dismiss under 12(b)(3) is
permitted, such relief has been waived by the Defendant because no
such motion was made in the Defendant’s original motion to dismiss.
See Fed. Rs. Civ. P. 12(g), (h).
As a result, the motion to compel
arbitration in this case may not be considered as a motion to
dismiss for improper venue under Rule 12(b)(3).
C.
Motion to Dismiss Under 12(b)(6) and Motion for Summary
Judgment Under Rule 56
Alternatively,
other
courts
address
motions
to
compel
arbitration as motions to dismiss for failure to state a claim
11
upon which relief may be granted under Rule 12(b)(6).
See, e.g.,
City of Benkelman, Nebraska v. Baseline Eng’g Corp., 867 F.3d 875,
881-82 (8th Cir. 2017) (discussing the split and citing cases);
High v. Capital Senior Living Props. 2—e Heatherwood, Inc., 594 F.
Supp. 2d 789, 795 (E.D. Mich. 2008).
Similarly, the motion to compel arbitration in this case is
most appropriately considered as a motion to dismiss under Rule
12(b)(6).
The
defect
imposed
by
the
mandatory
arbitration
provisions, if they apply to the claims brought by FCCI, is not
lack of subject matter jurisdiction or improper venue.
Simply
put, a federal court may not grant relief on claims that are
subject to a mandatory arbitration provision.
Still, that does not end the analysis, because in litigating
the Library’s motion to compel, both parties have submitted matters
outside the pleadings.
As a result, the motion to dismiss under
Rule 12(b)(6) must be treated as a motion for summary judgment
under Rule 56.
See Fed. R. Civ. P. 12(d) (“If, on a motion under
Rule 12(b)(6) . . . , matters outside the pleadings are presented
to and not excluded by the court, the motion must be treated as
one
for
summary
judgment
under
Rule
56.”).
supported by analogous cases in this Court.
This
result
is
See Treved Exteriors,
Inc. v. Lakeview Const., Inc., No. 12-cv-83-DLB-JGW, 2014 WL
1047117, at *3 (E.D. Ky. Mar. 18, 2014); Bruszewski v. Motley Rice,
LLC, No. 5:12–cv–46–JMH, 2012 WL 6691643, at *3 (E.D. Ky. Dec. 21,
12
2012); Arnold v. Rent–A–Center, No. 11–cv-18–JBC, 2011 WL 1810145,
at
*2
(E.D.
Ky.
May
12,
2011)
(surveying
cases
from
other
circuits).
In sum, the motion to compel here is most properly considered
as a motion to dismiss under Rule 12(b)(6).
Still, because the
parties have submitted outside the pleadings, the motion to compel
must be considered as a motion for summary judgment.
D.
Summary Judgment Standard and Applicable Law
Summary judgment is appropriate only when no genuine dispute
exists as to any material fact and the movant is entitled to
judgment as a matter of law.
Fed. R. Civ. P. 56(a).
A material
fact is one “that might affect the outcome of the suit under
governing law.”
248 (1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
The moving party has the burden to show that “there
is an absence of evidence to support the nonmoving party’s case.”
Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
“A dispute
about a material fact is genuine if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.”
Smith v. Perkins Bd. of Educ., 708 F.3d 821, 825 (6th Cir. 2013)
(internal quotations omitted).
The Court construes the facts in
the light most favorable to the nonmoving party and draws all
reasonable
inferences
in
the
non-moving
party’s
favor.
See
Anderson, 477 U.S. at 248; Hamilton Cty. Educ. Ass'n v. Hamilton
Cty. Bd. of Educ., 822 F.3d 831, 835 (6th Cir. 2016).
13
Normally, in a diversity action like this one, the Court must
apply the substantive law of the forum state and federal procedural
law.
Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427-
28 (1996); Hanna v. Plumer, 380 U.S. 460, 465-66 (1965); Erie R.R.
Co. v. Tompkins, 304 U.S. 64, 78-80 (1938); Hoven v. Walgreen Co.,
751 F.3d 778, 783 (6th Cir. 2014).
But
here,
the
construction
contract
provides
that,
“The
contract shall be governed by the law of the place where the
Project is located, except, that if the parties have selected
arbitration as the method of binding dispute resolution, the
Federal Arbitration Act shall govern Section 21.4.”
[DE 11-2 at
7, Pg ID 57].
The United States Supreme Court has long recognized that the
FAA “establishe[d] a national policy favoring arbitration when the
parties contract for that mode of dispute resolution.”
Ferrer, 552 U.S. 346, 349 (2008) (citing
Keating, 465 U.S. 1 (1984)).
authority
under
the
Preston v.
Southland Corp. v.
The FAA, “which rests on Congress'
Commerce
Clause,
supplies
not
simply
a
procedural framework applicable in federal courts; it also calls
for the application, in state as well as federal courts, of federal
substantive law regarding arbitration.”
As
a
arbitration
result,
the
provisions
Federal
in
Id.
Arbitration
Section
21.4
of
Act
governs
the
the
construction
contract, including threshold questions about the arbitrability of
14
claims.
See Henry Schein, Inc. v. Archer & White Sales, Inc., 139
S.Ct. 524, 529 (2019); see also Hathaway v. Eckerle, 338 S.W.3d
83, 87-88 (Ky. 2011) (contracts selecting the Federal Arbitration
Act as the law governing dispute resolution between the parties
are generally valid in Kentucky and citing cases).
Under the FAA,
“arbitration is a matter of contract, and courts must enforce
arbitration contracts according to their terms.”
Henry Schein,
139 S.Ct. at 529 (citing Rent–A–Center, West, Inc. v. Jackson, 561
U.S. 63, 67 (2010)).
III.
Analysis
At present, there are only two narrow disputes before the
Court.
First, FCCI has moved for leave to file a supplement to
its response in opposition to the motion to dismiss and compel
arbitration, including the full text of the construction contract,
which is attached as an exhibit to the motion for leave.
Second,
arbitration
the
primary
provisions
in
dispute
the
is
whether
construction
the
binding
contract
were
incorporated by reference into the FCCI performance bond meaning
that
FCCI
agreed
to
submit
its
jurisdictional issue to arbitration.
claims
and
any
related
It is undisputed that the
construction contract contains arbitration provisions that assign
jurisdiction to the arbitrator under the AAA Construction Industry
Arbitration Rules. It is also undisputed that the FCCI performance
bond incorporated the construction contract without exclusion.
15
Here, FCCI does not challenge the facial validity of the
arbitration
clause
in
the
construction
contract
but
instead
asserts that the clause does not apply to FCCI’s claims because
FCCI was not a “party” to the construction contract.
As such, the
discrete dispute at this juncture is whether the arbitration
provisions in the construction contract, which were incorporated
into the performance bond, apply to FCCI’s claims for relief in
this lawsuit.
decide
If so, then the arbitrator has jurisdiction to
whether
arbitration.
the
claims
in
this
action
are
subject
to
If not, then this lawsuit will continue in the
ordinary course of litigation.
A.
Motion for Leave to Supplement FCCI’s Response
First, in response to discussion in the Court’s previous
memorandum opinion and order denying injunctive relief, FCCI moved
for leave to file a supplemental response brief and to provide the
entire construction contract to the Court.
responded
in
opposition.
[DE
30].
[DE 28].
The
The Library
Library’s
response
indicates no objection to providing the Court a copy of the entire
construction contract between the Library and Crace but states
that the Library opposes FCCI’s request to file a supplemental
brief because “it improperly contains additional argument on page
2.”
The argument at issue here is FCCI’s contention that even
though the performance bond to which FCCI was a party incorporated
16
the provisions of the construction contract between Crace and the
Library, the arbitration provisions in the construction contract
refer to any “claim” raised by the “parties,” and FCCI argues that
the arbitration provisions are inapplicable because they are not
a “party” to the construction contract.
The Library is correct that normally, failure to raise an
argument results in waiver.
Still, the argument in dispute was
actually raised for the first time at the hearing on FCCI’s motion
for injunctive relief, not in the motion for leave to file a
supplemental brief.
Counsel for the Library addressed FCCI’s
argument at the hearing and failed to object to this new argument.
Furthermore,
and
more
importantly,
the
Library
has
addressed
FCCI’s new argument in its reply to FCCI’s response in opposition.
Thus, this new argument advanced by FCCI has been fully briefed
and the Library has had an opportunity to respond in opposition.
Furthermore,
the
Court
finds
consideration
of
the
entire
construction contract between Crace and the Library informative.
As a result, the Court will grant FCCI’s motion for leave to file
a supplemental brief and will consider FCCI’s argument about the
potential impact of its not being a “party” to the construction
contract on the duty to arbitrate.
B.
Incorporation and Applicability of the Arbitration Provisions
Second, the primary dispute between the parties is whether
the arbitration provisions in the construction contract apply to
17
the claims that FCCI has asserted in this lawsuit.
There is no
dispute that the construction contract between Crace and the
Library selected arbitration as the method for binding dispute
resolution.
Additionally, it is clear from the plain text of the
performance bond that all provisions of the construction contract
are incorporated into the performance bond by reference without
any exclusions.
Still, FCCI raises an interesting argument, stating that the
arbitration
provisions
and
definition
of
“claim”
in
the
construction contract are expressly limited to “the parties” and
that,
since
they
are
not
a
“party”
to
the
agreement,
arbitration provisions do not apply to their claims.
the
But, while
novel, upon closer review of the applicable law and facts of this
case, this argument does not exclude FCCI’s claims from the
arbitration provisions in the construction contract, at least for
consideration of threshold issues pertaining to arbitrability.
When FCCI issued the performance bond and assumed the role of
surety for Crace, FCCI stepped into the shoes of Crace and became
responsible
contract.
for
Crace’s
obligations
under
the
construction
Javitch v. First Union Sec., Inc., 315 F.3d 619, 629
(6th Cir. 2003) (“[N] onsignatories may be bound to an arbitration
agreement
under
ordinary
contract
and
agency
principles.”);
Exchange Mut. Ins. Co. v. Haskell Co., 742 F.2d 274 (6th Cir. 1984)
(“Although Exchange Mutual was not a signatory to the primary
18
construction
reference
contract,
the
terms
the
of
performance
the
bond
underlying
incorporated
subcontract.
by
The
subcontract, in turn, incorporated by reference the terms of the
primary
construction
contract
which
imposed
an
obligation
to
submit all unresolved disputes to arbitration.”); Stones River
Elec., Inc. v. Chevron Energy Sols. Co., No. 5:06-CV-115-R, 2007
WL 433083, at *3 (W.D. Ky. 2007).
Kentucky law is accord and has
held that a surety to a construction contract stands in the shoes
of the contractor on the project.
Buck Run Baptist Church, Inc.
v. Cumberland Sur. Ins. Co., Inc., 983 S.W.2d 501, 503 (Ky. 1998)
(“Cumberland, in effect, stood in the shoes of Z & J and became
the contractor on the project.” (emphasis added)) (involving a
surety enforcing an incorporated arbitration provision).
Of course, as FCCI points out, there are differences between
the language of the arbitration clauses in the aforementioned cases
and the case at bar, but those differences do not change the legal
import of the incorporation of the arbitration provisions.
FCCI
cites AgGrow Oils, LLC v. Nat’l Union Fire Ins. Co., 242 F.3d 777
(8th Cir. 2001) for the proposition that it is inappropriate to
require performance bond issues to be arbitrated based on an
incorporation clause where it is unclear if the parties have agreed
to arbitrate.
In AgGrow, the court found that AgGrow Oils and
National Union had not manifested a clear intent to submit their
disputes under the bond to arbitration.
19
Id. at 781.
Still, as the library points out, the bond in AgGrow contained
a provisions that said, “Any proceeding, legal or equitable, under
this Bond may be instituted in any court of competent jurisdiction
in the location in which the work or part of the work is located
. . . within two years after the Surety refuses or fails to perform
its obligations under this Bond.”
Id. at 780.
No such language
exists in the performance bond at issue here.
Moreover, even if the AgGrow decision reaches a result that
would not compel FCCI to arbitrate, the decision only constitutes
persuasive authority for this Court. Additionally, since the Eight
Circuit’s decision in AgGrow, federal courts, including the United
States
Supreme
Court
have
continually
reaffirmed
a
clear
preference in favor or arbitration, generally deferring to the
contractual agreements of the parties and deferring in favor of
arbitration when disputes arise.
See Preston, 552 U.S. at 349;
see also Huffman v. Hilltop Companies, LLC, 747 F.3d 391, 394-95
(6th Cir. 2014).
Furthermore,
arbitration.
FCCI
argues
that
But that is not so.
it
is
being
coerced
into
FCCI is a sophisticated party
that was on equal footing with the other parties, if not in a
superior position, when negotiating the terms of the performance
bond.
In fact, all the parties to the construction contract and
performance
bond
are
sophisticated
business
or
governmental
entities that presumably have ready access to consultation of
20
counsel and who regularly deal in contracts and performance bonds
of this type.
Simply put, if FCCI did not want the arbitration
provisions in the construction contract to be incorporated into
the performance bond, they simply needed to bargain for a different
method of dispute resolution and/or clearly manifest an intent to
exclude the arbitration provisions on the face of the bond.
Otherwise, it is difficult to believe that FCCI did not know that
they were agreeing to arbitrate any claims in this matter, seeing
as
FCCI
is
a
sophisticated
party
that
regularly
deals
in
transactions of this type.
In sum, while FCCI was not a party to the construction
contract
between
Crace
Construction
and
the
Nicholas
County
Library in the sense that FCCI was not an initial signatory to the
construction contract, FCCI did incorporate all the terms of the
construction contract into the performance bond, including the
binding arbitration provisions.
As surety, FCCI stepped into the
shoes of Crace Construction under the construction contract.
As
a result, the arbitration provisions in the construction contract
were incorporated into the performance bond and apply to FCCI,
requiring FCCI, at least initially, to submit their claims to
arbitration to rule on other jurisdictional or threshold issues.
C.
Impact of Arbitration Provisions on Threshold Issues
FCCI has raised additional threshold arguments, including
arguments
that
the
claims
brought
21
do
not
arise
out
of
the
construction contract and that the scope of the arbitration clause
it limited to disputes between Crace and the Nicholas County
Library.
[DE 19].
Normally, Courts must analyze the following
factors when asked to dismiss claims and compel arbitration,
[F]irst, it must determine whether the parties agreed to
arbitrate; second, it must determine the scope of that
agreement; third, if federal statutory claims are
asserted, it must consider whether Congress intended
those claims to be nonarbitrable; and fourth, if the
court concludes that some, but not all, of the claims in
the action are subject to arbitration, it must determine
whether to stay the remainder of the proceedings pending
arbitration.
Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000).
But
here,
questions,
parties
including
arbitrator.
contract
the
questions
to
about
submit
any
threshold
jurisdiction,
to
the
The main arbitration provision in the construction
provides
administered
agreed
by
that
the
arbitration
American
proceedings
Arbitration
“shall
be
Association,
in
accordance with the Construction Industry Arbitration Rules in
effect on the date of this Agreement.”
The
jurisdiction
Association
(“AAA”)
provisions
of
Construction
[DE 11-2 at 8, Pg ID 58].
the
American
Industry
Arbitration
Arbitration
Rules
provide that “[t]he arbitrator shall have the power to rule on his
or her own jurisdiction, including any objections with respect to
the existence, scope, or validity of the arbitration agreement.”
AM. ARBITRATION ASS’N, CONSTRUCTION INDUSTRY ARBITRATION RULES
PROCEDURES 18 (2016) (Regular Track Procedure R-9(a)).
22
AND
MEDIATION
Recently, the United States Supreme Court held that “[w] hen
the parties' contract delegates the arbitrability question to an
arbitrator, the courts must respect the parties' decision as
embodied in the contract.”
Henry Schein, 139 S.Ct. at 531.
As a
result, seeing as the parties agreed to let the arbitrator rule on
his or her own jurisdiction, any other threshold questions about
arbitrability must be submitted to the arbitrator, not this Court.
D.
Whether a Stay or Dismissal is Most Appropriate
Finally, the last consideration that remains is whether this
Court should dismiss the claims in FCCI’s complaint or stay the
case pending the outcome of the arbitration proceedings.
A split of authority on whether the Section 3 of the FAA
mandates a stay of litigation as opposed to a dismissal in certain
situations.
See Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d
1072 (9th Cir. 2014); Green v. SuperShuttle Intern., Inc., 653
F.3d 766 (8th Cir. 2011); Choice Hotels Intern. v. BSR Tropicana
Resort, 252 F.3d 707 (4th Cir. 2001); Bercovitch v. Baldwin School,
Inc., 133 F.3d 141 (1st Cir. 1998); Alford v. Dean Witter Reynolds,
Inc., 975 F.2d 1161 (5th Cir. 1992). But see, Katz v. Cellco
Partnership, 794 F.3d 341 (2d Cir. 2015); Halim v. Great Gatsby's
Auction Gallery, Inc., 516 F.3d 557 (7th Cir. 2008); Lloyd v.
Hovensa, LLC., 369 F.3d 263 (3d Cir. 2004); Adair Bus Sales, Inc.
v. Blue Bird Corp., 25 F.3d 953 (10th Cir. 1994).
23
The Sixth Circuit has permitted courts to dismiss actions
where the parties did not explicitly request a stay of the action.
See Hilton v. Midland Funding, LLC, 687 F. App’x 515, 518-19 (6th
Cir. 2017) (explaining that the FAA requires a court to stay
proceedings pending arbitration only “on application of one of the
parties” (quoting 9 U.S.C. § 3)).
Here, the Library requested a
stay of the matter while Crace and the Library arbitrate only if
the
Court
determines
arbitration.
that
FCCI’s
claims
[DE11-1 at 8, Pg ID 48].
are
not
subject
to
Additionally, and more
importantly, FCCI has argued that a stay of this action is not
appropriate.
[DE 19 at 9-10, Pg ID 107-08].
As a result, neither
of the parties have explicitly requested a stay of this matter
pending arbitration in lieu of dismissal.
As a result, having found that FCCI must submit all claims
and
threshold
questions
pertaining
to
jurisdiction
to
the
arbitrator, the Court will dismiss this action without prejudice.
If the arbitrator determines that the claims raised by FCCI are
outside the scope of the arbitration provisions in the construction
contract or that any of the claims are otherwise not arbitrable,
FCCI mat refile an action for relief.
IV.
Conclusion
Here, the complete incorporation of the provisions of the
construction contract into the performance bond requires that FCCI
submit its claims to the arbitrator, at least for initial threshold
24
determinations about arbitrability.
Accordingly, IT IS ORDERED as
follows:
(1)
FCCI’s motion for leave to file a supplemental brief [DE
28] is GRANTED;
(2)
Nicholas County Library’s motion to dismiss and compel
arbitration [DE 11] is construed as a motion for summary judgment;
(3)
Nicholas County’s motion [DE 11] is GRANTED;
(4)
Summary judgment is granted in favor of Nicholas County
Library in the narrow sense that the complete incorporation of the
construction contract into the performance bond requires FCCI to
submit its claims to the arbitrator for threshold determinations
on jurisdiction;
(5)
This action is DISMISSED WITHOUT PREJUDICE; and
(6)
Judgment consistent with this opinion will be entered
contemporaneously herewith.
This the 15th day of March, 2019.
25
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