Developers Surety and Indemnity Company v. Carothers Construction Inc
ORDER AND OPINION GRANTING IN PART 4 Defendant Carothers Construction Inc's Motion to Dismiss or to transfer and TRANSFERS this action to the Southern District of Mississippi. AND IT IS SO ORDERED. Signed by Honorable Richard M Gergel on 7/18/2017.(sshe, ) [Transferred from South Carolina on 7/18/2017.]
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
Civil Action No. 9:17-1419-RMG
Developers Surety and Indemnity Company,)
ORDER AND OPINION
Carothers Construction, Inc.,
This matter is before the Court on Defendant Carothers Construction, Inc. ' s motion to
dismiss or in the alternative to transfer. For the reasons set forth below, the Court grants in part
the motion and transfers this action to the Southern District of Mississippi.
On July 16, 2015, Liberty Enterprises Specialty Contractor ("Liberty") and Carothers
entered into a subcontract for work to be performed at Marine Corps Air Station Beaufort (the
"Project"). (Dkt. No.
Plaintiff Developers Surety and Indemnity Company ("DSI")
is not a signatory to that subcontract, but it executed a performance bond and a payment bond for
that subcontract on behalf of Liberty and in favor of Carothers for work on the Project. (Id.
South Carolina law governs the bonds.
Carothers claims Liberty defaulted and
abandoned the Project, and asserts claims of approximately $130,000 against the bonds issued on
behalf of Liberty. (Id. at Ex. C ~~ 20, 29.)
On April 17, 2017, Carothers filed a demand for arbitration with the American Arbitration
12.) That demand combines over $4,000,000 in claims against DSI regarding
four unrelated projects in four states: Georgia, Connecticut, Kansas, and the South Carolina work
at issue in this matter. (Id.
13.) According to Carothers, the bonds incorporate by reference the
subcontract's mandatory arbitration clause. (See Dkt. No. 1-2 at 15- 16.)
arbitration in Jackson, Mississippi, which is the forum the arbitration clause specifies. (See id.)
On April 28, 2017, DSI filed the present action in the Beaufort County Court of Common
Pleas, seeking declaratory judgment that it is not subject to a binding arbitration agreement with
Carothers and injunctive relief.
15.) On May 31 , 2017, Carothers removed to this Court.
On June 7, 2017, Carothers moved to dismiss or in the alternative to transfer, arguing that DSI's
claims are subject to arbitration and that DSI is estopped from denying it is bound by the
subcontract's arbitration provision. Carothers seeks dismissal or, in the alternative, transfer to the
Southern District of Mississippi (where Carothers could seek an order compelling arbitration), or,
in the further alternative, transfer to the Middle District of Georgia.
Motion to Compel Arbitration
The Federal Arbitration Act ("FAA") reflects a liberal policy toward arbitration. The Act
provides that a written agreement to arbitrate in any contract involving interstate commerce or a
maritime transaction "shall be valid, irrevocable and enforceable" unless there exists grounds for
revocation in law or equity. 9 U.S.C. § 2; Moses H Cone Memorial Hosp. v. Mercury Constr.
Corp., 460 U.S . 1, 24 (1983). A litigant can compel arbitration under the FAA ifthe litigant can
demonstrate: '" (1) the existence of a dispute between the parties; (2) a written agreement that
includes an arbitration provision which purports to cover the dispute; (3) the relationship of the
transaction, which is evidenced by the agreement, to interstate or foreign commerce; and (4) the
failure , neglect or refusal of the [party] to arbitrate the dispute. "' Am. Gen. Life & Accident Ins.
Co. v. Wood, 429 F.3d 83, 87 (4th Cir. 2005) (quoting Adkins v. Labor Ready, Inc., 303 F.3d 496,
500-01 (4th Cir. 2002)). District courts have "no choice but to grant a motion to compel arbitration
where a valid arbitration agreement exists and the issues in a case fall within its purview." Adkins,
303 F.3d at 500. However, "[t]he majority view holds that, where the parties have agreed to
arbitrate in a particular forum, only a district court in that forum has the authority to compel
arbitration under§ 4 of the FAA." Am. Int 'l Specialty Lines Ins. Co. v. A. T Massey Coal Co., 628
F. Supp. 2d 674, 683 (E.D. Va. 2009). Where a valid arbitration agreement covering the issues in
a case exists but the agreement specifies an arbitral venue outside the district, transfer is the
appropriate remedy, because "if the forum selection clause is mandatory, then, the interest of
justice would weigh toward transfer." Id. at 685 (internal quotation marks omitted).
Motion to Dismiss or to Stay Proceedings
The FAA requires a court to stay "any suit or proceeding" pending arbitration of"any issue
referable to arbitration under an agreement in writing for such arbitration, and "[t]his stay-oflitigation provision is mandatory." Adkins, 303 F.3d at 500; see also 9 U.S.C. § 3; Hooters, 173
F.3d at 937. The Fourth Circuit has also held that if all of the claims asserted in a complaint are
subject to arbitration, dismissal of the complaint is "an appropriate remedy." Choice Hotels Int'!,
Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001). The Fourth Circuit has
noted the inconsistency between its opinions on this issue. Aggarao v. MOL Ship Mgmt. Co., 675
F.3d 355, 376 n.18 (4th Cir. 2012) ("There may be some tension between our decision in
Hooters-indicating that a stay is required when the arbitration agreement 'covers the matter in
dispute'-and Choice Hotels-sanctioning dismissal 'when all of the issues presented ... are
arbitrable. "'). It has also noted that the circuits are divided on this question, which it has not
resolved for this Circuit. Id. A motion to dismiss in favor of arbitration may be made under Rule
12(b)(l) or Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Lomax v. Weinstock,
Friedman & Friedman, P.A, No. CIV. CCB-13-1442, 2014 WL 176779, at *2 (D. Md. Jan. 15,
2014) (collecting cases), affd sub nom. Lomax v. Weinstock, Friedman & Friedman, P.A., 583 F.
App'x 100 (4th Cir. 2014).
Carothers seeks dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure for
failure to state a claim upon which relief can be granted. Carothers argues DSI has not stated a
claim for relief because DSI is bound to arbitrate the claims it presents to this Court for
adjudication. (Dkt. No. 4-1at6.) DSI, however, seeks only "determination of whether a valid,
enforceable agreement to arbitrate exists" and an order "Declaring that DSI is not required to
arbitrate any of Defendant's claims against it," and an injunction against compelled arbitration.
(Dkt. No. 1-1
16, 22.) The validity of an arbitration clause is not subject to mandatory
arbitration when the clause itself is challenged. See Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 445-46 (2006) ("[U]nless the challenge is to the arbitration clause itself, the issue
of the contract's validity is considered by the arbitrator in the first instance."). DSI has properly
pleaded a claim for declaratory judgment adjudicating whether Carothers' s claims against it as
surety for Liberty are subject to binding arbitration. 1
The Court therefore declines to dismiss this matter for failure to state a claim and proceeds
to consider the first alternative relief Carothers seeks, transfer to the Southern District of
Mississippi for the purpose of compelling arbitration. Whether DSI agreed to binding arbitration
is a legal question of contract interpretation. Johnson v. Circuit City Stores, Inc., 148 F.3d 373,
377 (4th Cir. 1998). The relevant contracts are attached to and integral to the complaint and may
Because the Court holds, infra, that DSI is subject to binding arbitration under the FAA and as a
matter of South Carolina contract law, it does not reach Carothers' s argument that the complaint
should be dismissed because DSI is equitably estopped from refusing to arbitrate. In South
Carolina, "equity is only available when a party is without an adequate remedy at law." EllisDon
Const., Inc. v. Clemson Univ., 707 S.E.2d 399, 401 (S.C. 2011).
be considered on a motion to dismiss. Occupy Columbia v. Haley, 738 F.3d 107, 116 (4th Cir.
The parties agree the subcontract has a mandatory arbitration clause and the parties agree
that clause is incorporated into the bonds by reference. (See Dkt. No. 5 at 9.) But DSI argues that
the language of the arbitration clause, which states, "all claims, disputes, and other matters in
controversy between the Contractor and the Subcontractor arising out of or relating to this
Subcontract shall be decided by binding arbitration" (Dkt. No. 1-2 at 15-16), does not cover DSI
because DSI is neither the contractor nor the subcontractor. According to DSI, disputes arising
out of the subcontract between parties other than the contractor and subcontractor are not subject
to binding arbitration. DSI also argues claims arising from the bonds, as distinct from claims
arising from the subcontract, are not subject to the arbitration clause.
Carothers's claims plainly arise from the subcontract. It is difficult to imagine how
Carothers could articulate a claim for payment from DSI on behalf of Liberty based on breach of
the subcontract between Carothers and Liberty that does not arise from the subcontract between
Carothers and Liberty. Further, the arbitration clause at issue here is a "broad" arbitration clause.
The agreement applies to any claims, disputes or other matters "arising out of or relating to" the
subcontract. (Dkt. No. 1-2 at 15-16.) "Both the Supreme Court and [the Fourth Circuit] have
characterized similar formulations to be broad arbitration clauses capable of an expansive reach."
Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996). Broad
arbitration clauses do not "limit arbitration to the literal interpretation or performance of the
contract[, but] embrace every dispute between the parties having a significant relationship to the
contract regardless of the label attached to the dispute." Id. (internal quotation marks omitted). A
claim for money damages for a breach of the subcontract is a dispute with a "significant
relationship" to the subcontract.
DSI' s contrary argument is based on a misreading of an Eighth Circuit case applying North
Dakota law. See AgGrow Oils, L.L. C. v. Nat'! Union Fire Ins. Co. of Pittsburgh, Pa. , 242 F.3d
777, 780 (8th Cir. 2001); cf Great Am. Ins. Co. v. Hinkle Contracting Corp., 497 F. App' x 348,
354 & n.1 (4th Cir. 2012) (finding AgGrows "unpersuasive" when vacating a district court's
holding that an obligee' s claims were not arbitrable under the terms of a subcontract incorporated
in a performance bond).
In AgGrow, the Eighth Circuit held that performance bond ' s
incorporation of an arbitration clause was ambiguous about whether disputes between the obligee
and surety must be arbitrated. Id. at 781. Applying a North Dakota statute permitting courts to
resolve contract ambiguity "by reference to the circumstances under which it was made and the
matter to which it relate," the court held that the incorporation clause's "obvious purpose was to
clarify the extent of the surety's secondary obligation" and not "to compel arbitration of all disputes
between the surety and the obligee." Id. at 782 (citing N.D. Cent. Code§ 9-07-12). AgGrow held
that an obligee and surety did not agree to arbitrate their disputes; it does not suggest that the
obligee's claims for payment from the surety of an underlying contract do not arise from or relate
to the underlying contract.
In the present case, this Court must look to South Carolina law, not North Dakota law.
(Dkt. No. 1-1ii8 (South Carolina choice oflaw clause).) Under South Carolina law, " [a]rbitration
of disputes arising under a contract may be provided for by reference to outside documents. " First
BaptistChurchofTimmonsville v. George A. Creed&Son, Inc., 281S.E.2d121 , 122(S.C.1981));
see also Maxum Founds., Inc. v. Salus Corp., 779 F.2d 974, 978 (4th Cir. 1985) (" It is well settled
that, under the Federal Arbitration Act, an agreement to arbitrate may be validly incorporated into
a subcontract by reference to an arbitration provision in a general contract."). In Goodwin v.
Stanley Smith and Sons, the South Carolina Court of Appeals addressed whether a subcontract's
incorporation of an arbitration term from the prime contract required the parties to the subcontract
to arbitrate their claims. 386 S.E.2d 464, 465-66 (S.C. Ct. App. 1989). The Court of Appeals
concluded it did, and that conclusion applies with even more force where the secondary agreement
incorporating terms from a prime agreement is a guarantee of the prime agreement.
DSI argues Godwin is distinct because the agreement at issue there also had an
incorporation provision providing that the subcontractor is "bound to the Contractor by the terms
of the Contractor Documents and this Agreement, and assume[ s] toward the Contractor all the
obligations and responsibilities that the Contractor, by those documents, assumes toward the
Owner as applicable to this Subcontract." 386 S.E.2d at 465. According to DSI, because no such
clause exists in the bonds, and because DSI is neither the contractor nor the subcontractor identified
in the arbitration clause, the arbitration clause does not bind DSI. But that argument is without
merit. Under South Carolina law, "[t]he obligation of the surety being accessory or collateral to
the obligation contracted by the principal, it follows as a general rule that the liability of the surety
is measured precisely by the liability of the principal." Greenville Airport Com 'n v. U.S. Fid. &
Guar. Co. of Bait., Md. , 86 S.E.2d 249, 252 (S.C. 1955). If the principal, Liberty, is liable for
arbitral awards arising from the subcontract, then so is the surety, DSI. Moreover, "[w]here an
agreement is incorporated into a bond so as to become a part of it the two are construed together
as a whole to ascertain the intent of the parties." Employers Ins. of Wausau v. Constr. Mgmt.
Engineers of Florida, Inc., 377 S.E.2d 119, 121 (S.C. Ct. App. 1989) (emphasis added). When
the Court construes the bonds and the subcontract together as a whole, it is clear the parties
intended to submit disputes to binding arbitration. If DSI did not want to be bound by that term
of the subcontract, then DSI should not have guaranteed the performance of the subcontract by
issuing bonds incorporating that term.
DSI is bound by the subcontract' s arbitration clause, including the selection of Jackson,
Mississippi as the arbitral forum. The Court therefore transfers this matter to the Southern District
of Mississippi and does not reach arguments regarding venue in Georgia.
For the foregoing reasons, the Court GRANTS IN PART Defendant's motion to dismiss
or to transfer (Dkt. No. 4) and TRANSFERS this matter to the Southern District of Mississippi.
AND IT IS SO ORDERED.
United States District Court Judge
Charleston, South Carolina
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