THE UNITED STATES OF AMERICA EX REL RED HAWK CONTRACTING, INC. v. MSK CONSTRUCTION, INC. et al
MEMORANDUM OPINION AND ORDER signed by JUDGE WILLIAM L. OSTEEN, JR on 5/8/2018; that Defendant MSK's Motion to Dismiss or Stay Pursuant to the Federal Arbitration Act (Doc. 19 ) is GRANTED IN PART and DENIED IN PART in that Defendant's mot ion to dismiss is DENIED and Defendant's motion to stay this action is GRANTED. FURTHER that this action is STAYED until arbitration has been had in accordance with the terms of the parties' arbitration agreement. To the extent that Defenda nt's motion seeks to compel arbitration, IT IS DENIED. The Clerk shall mark this case as inactive. Within 30 days of completion of arbitration, the parties shall file a joint report advising the court of completion of the arbitration and whether further proceedings in this court are required. (Sheets, Jamie)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
THE UNITED STATES OF AMERICA
ex rel RED HAWK CONTRACTING,
MSK CONSTRUCTION, INC., and
ENDURANCE AMERICAN INSURANCE
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
Presently before this court is Defendant MSK Construction,
Inc.’s (“MSK”) Motion to Dismiss or Stay Pursuant to the Federal
Arbitration Act (“FAA”). (Doc. 19.) Plaintiff the United States
of America, for the use and benefit of Red Hawk Contracting,
Inc. (“Plaintiff”) has responded. (Doc. 21.) No reply was filed,
and the matter is now ripe for resolution. For the reasons
stated herein, this court will grant in part and deny in part
Plaintiff’s Complaint brings a breach of contract claim
and, in the alternative, an unjust enrichment claim against MSK.
(Complaint (“Compl.”) (Doc. 1) at 4-5, 7-8.) Plaintiff also
asserts a claim under the Miller Act, 40 U.S.C. § 3131 et seq., 1
against MSK and Defendant Endurance American Insurance Company
(“Endurance”) to enforce a claim on a payment bond executed
between MSK and Endurance as surety, (Compl. (Doc. 1) at 5-7).
Plaintiff’s claims arise out of a subcontract agreement
between Plaintiff and MSK. (See id. at 2-4.) MSK was awarded a
contract by the federal government for a Department of Veterans
Affairs construction project in Durham, North Carolina. (See id.
at 2; Compl., Ex. A (Doc. 1-2) at 1.) In connection with this
project, MSK executed a subcontract with Plaintiff, (Compl., Ex.
A (Doc. 1-2)), wherein MSK would pay Plaintiff $400,404.00 in
exchange for Plaintiff performing a variety of services,
including demolition, earthwork, and sewerage and drainage
installation, (see id. at 2).
According to the Complaint, Plaintiff has fully performed
according to the terms and conditions of the subcontract.
(Compl. (Doc. 1) at 4, 6.) Plaintiff claims MSK breached the
subcontract by failing to fully pay for materials, equipment,
and labor; attempting to force Plaintiff to complete work
Civil actions under the Miller Act are brought “in the
name of the United States for the use of the person bringing the
action.” 40 U.S.C. § 3133(b)(3)(A).
- 2 -
outside the subcontract’s scope; failing to maintain the project
schedule; asserting wrongful back charges; and wrongfully
terminating Plaintiff. (Id. at 4-5.) Plaintiff asserts that,
after applying all payments and credit due, $80,180.90 is past
due and owing under the subcontract. (Id.)
MSK, as principal, and Endurance, as surety, executed a
Miller Act payment bond in connection with the contract between
MSK and the federal government. Plaintiff contends that it has
performed all conditions precedent to payment and that MSK and
Endurance are jointly and severally liable for the amount
claimed, with interests and costs allowable by statute. (Id. at
MSK’s 2 motion is based on an arbitration clause in the
subcontract, including the following provisions:
ARBITRATION: Subject to the requirements above, this
AGREEMENT is subject to arbitration pursuant to S.C.
Code Ann. §15-48-10, et. seq. [sic] All claims,
disputes, or other matters in question arising out of,
or relating to this AGREEMENT, the relationship of the
parties hereto, the Project, the WORK, or the Contract
Documents, including any breach thereof, shall, at
either party’s option, be fully and finally decided by
arbitration. . . . Either party may join (by
The motion appears to be brought solely by MSK but asserts
that the action should be dismissed in its entirety “because
each of Red Hawk’s claims against MSK and Endurance . . . is
subject to mandatory arbitration.” (See Defendant MSK
Construction, Inc.’s Memorandum of Law in Support of its Motion
to Dismiss or Stay Pursuant to the Federal Arbitration Act (Doc.
20) at 5.)
- 3 -
consolidation, joinder, or otherwise) such other
entities or persons whom that party believes to be
substantially involved in a common question of fact or
law as may be at issue in the arbitration. However, in
the event either party is for any reason unable to
compel such entities or persons to participate in the
arbitration, then either party may declare this
arbitration provision absolutely null and void, and
any pending arbitration shall be dismissed by the
parties in favor of litigation in the courts. . . .
The arbitration shall be conducted in Charleston,
South Carolina. Any demand for arbitration hereunder
shall be made in writing before the date when
institution of legal or equitable proceedings based on
such claim, dispute or other matter in question would
be barred by the applicable statute of limitations or
statute of repose.
(Compl., Ex. A (Doc. 1-2) at 15-16.) The subcontract also
contains a provision stating that the agreement shall be
governed by South Carolina law. (Id. at 15.) MSK asserts that
the arbitration provisions deprive this court of subject matter
jurisdiction over all of Plaintiff’s claims, and that the
Complaint should be dismissed under Federal Rule of Civil
Procedure 12. (Defendant MSK’s Memorandum of Law in Support of
its Motion to Dismiss or Stay Pursuant to the Federal
Arbitration Act (“Def.’s Br.”) (Doc. 20) at 4-6.) Alternately,
MSK asserts that if this court finds any of the claims not to be
- 4 -
arbitrable, that the court should stay the action until
arbitration between Plaintiff and MSK is completed. (Id. at 6) 3
MSK cites only to § 2 of the FAA, which provides that a
written arbitration agreement “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract.” 9 U.S.C. § 2. Two other
sections of the FAA are relevant: §§ 3 and 4 “provide[ ] two
parallel devices for enforcing an arbitration agreement: a stay
of litigation in any case raising a dispute referable to
arbitration, 9 U.S.C. § 3, and an affirmative order to engage in
arbitration, § 4.” Chorley Enters., Inc. v. Dickey’s Barbecue
Rests., Inc., 807 F.3d 553, 563 (4th Cir. 2015) (quoting Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22
(1983)). While not specifically invoking either §§ 3 or 4 of the
FAA, MSK’s motion seeking enforcement of the arbitration
agreement will nonetheless be construed as asking for both a
MSK also contends in its answer that Plaintiff failed to
agree to mediation as required by the subcontract and that the
case should therefore be stayed. (Answer and Counterclaim of MSK
Construction, Inc. (Doc. 16) at 6.) The fulfillment of a
condition precedent to arbitrability is a question for the
arbitrator, not the court, and so this court declines to address
whether Plaintiff fulfilled this condition. See Chorley Enters.,
Inc. v. Dickey’s Barbecue Rests., Inc., 807 F.3d 553, 565 (4th
Cir. 2015) (citing BG Grp. PLC v. Republic of Argentina, ____
U.S. ____, ____, 134 S. Ct. 1198, 1207–08 (2014)).
- 5 -
stay and an order compelling arbitration. See Rota-McLarty v.
Santander Consumer USA, Inc., 700 F.3d 690, 698 (4th Cir. 2012)
(favoring “substance rather than nomenclature” in determining
whether movant adequately invoked the FAA’s remedies).
In determining whether a stay of litigation is required
under § 3, courts must “engage in a limited review to ensure
that the dispute is arbitrable — i.e., that a valid agreement to
arbitrate exists between the parties and that the specific
dispute falls within the substantive scope of that agreement.”
Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d
297, 301-02 (4th Cir. 2002) (citation omitted).
To compel arbitration under § 4, a litigant must show “(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
defendant to arbitrate the dispute.” Adkins v. Labor Ready,
Inc., 303 F.3d 496, 500–01 (4th Cir. 2002) (citation omitted).
Dismissal may be appropriate if all claims asserted in a
complaint are subject to arbitration. Choice Hotels Int’l, Inc.
v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir.
- 6 -
Plaintiff concedes that the underlying dispute falls within
the scope of the arbitration agreement. (Plaintiff’s Response to
Defendant MSK’s Motion to Dismiss or Stay Pursuant to the
Federal Arbitration Act (“Pl.’s Resp. Br.”) (Doc. 21 at 2)
(“After the dispute . . . arose, Red Hawk did not commence
arbitration proceeding in South Carolina, as required under the
Subcontract.”).) However, Plaintiff claims that the arbitration
agreement is voided by N.C. Gen. Stat. § 22B-2, which relates to
improvements to real property in North Carolina. (Id. at 6.)
Plaintiff argues that the FAA does not preempt § 22B-2 because
the transaction (that is, the subcontract between Plaintiff and
MSK) bears no relation to interstate commerce and thus is not
governed by the FAA. (Id. at 4-5.) Alternatively, Plaintiff
argues that the arbitration clause should be rendered void on
equitable grounds because Plaintiff would be inconvenienced by
litigating separate actions against MSK and Endurance. (Id. at
3-4.) Finally, Plaintiff argues that the claim against Endurance
should be allowed to proceed even if its claims against MSK are
staying pending arbitration. (Id. at 4.) Each argument is
addressed in turn.
- 7 -
Applicability of the FAA
To evaluate Plaintiff’s argument that North Carolina law
voids the arbitration agreement, this court must first determine
whether North Carolina law or the FAA applies. The FAA applies
to written provisions in “contract[s] evidencing a transaction
involving commerce.” 9 U.S.C. § 2. The Supreme Court has
interpreted the term “involving commerce” in the FAA
as the functional equivalent of the more familiar term
“affecting commerce” - words of art that ordinarily
signal the broadest permissible exercise of Congress’
Commerce Clause power. Because the statute provides
for “the enforcement of arbitration agreements within
the full reach of the Commerce Clause,” it is
perfectly clear that the FAA encompasses a wider range
of transactions than those actually “in commerce” that is, “within the flow of interstate commerce.”
Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003) (per
curiam) (citations omitted). While diversity of citizenship
alone is insufficient to invoke the FAA, nor does the FAA
“require proof by affidavit or other specific evidence of the
nexus to interstate commerce.” See Maxum Founds., Inc. v. Salus
Corp., 779 F.2d 974, 978 n.4 (4th Cir. 1985). “Where . . . the
party seeking arbitration alleges that the transaction is within
the scope of the Act, and the party opposing application of the
Act does not come forward with evidence to rebut jurisdiction,”
no further proof is required for a court to conclude the
transaction evidences interstate commerce. Id. A specific effect
- 8 -
on interstate commerce does not need to be identified as long as
“in the aggregate the economic activity in question would
represent ‘a general practice . . . subject to federal
Rota-McLarty, 700 F.3d at 697–98 (quoting Citizens
Bank, 539 U.S. at 56–57).
Here, MSK alleges that the transaction is subject to the
FAA because “the parties are of diverse citizenship.” (Def.’s
Br. (Doc. 20) at 6.) Plaintiff, a North Carolina corporation,
offers no evidence to rebut jurisdiction but claims that the
transaction is not within the FAA’s scope because MSK’s status
as a North Carolina licensed general contractor means that the
contractual relationship was one of intrastate commerce. (Compl.
(Doc. 1) at 1; Pl.’s Resp. Br. (Doc. 21) at 5.)
Although MSK incorrectly assumes that diversity of
citizenship is sufficient to invoke the FAA, this court still
agrees that the transaction evidences a relationship to
interstate commerce. MSK remains a South Carolina corporation
with its principal place of business in Charleston, South
Carolina. (Compl. (Doc. 1) at 1.) The contract was “made and
entered into” in South Carolina. (Compl., Ex. A (Doc. 1-2) at
1.) MSK’s surety is a publicly held Delaware corporation.
(Compl. (Doc. 1) at 1; see also Disclosure of Corporate,
Affiliations and Other Entities with a Direct Financial Interest
- 9 -
in Litigation (Doc. 11).) The subcontract specifies methods for
transferring money from MSK — presumably from its principle
place of business in South Carolina, as the subcontract does not
describe MSK as having any other place of business — through the
mail to Plaintiff in North Carolina and notes that Plaintiff
must submit monthly billing and receipts to MSK. (Compl., Ex. A
(Doc. 1-2) at 3.) The “multistate nature” of MSK’s business is
itself evidence of a transaction involving interstate commerce.
See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 282
(1995). Therefore, the FAA applies.
Applicability of North Carolina law
The parties next dispute whether the FAA specifically
preempts N.C. Gen. Stat. § 22B-2. Only “generally applicable
contract defenses, such as fraud, duress, or unconscionability,
may be applied to invalidate arbitration agreements without
contravening § 2 [of the FAA].” Doctor’s Assocs., Inc. v.
Casarotto, 517 U.S. 681, 687 (1996). The FAA will preempt
contravening state law. See id. at 688.
Under § 22B-2,
A provision in any contract, subcontract, or purchase
order for the improvement of real property in this
State, or the providing of materials therefor, is void
and against public policy if it makes the contract,
subcontract, or purchase order subject to the laws of
another state, or provides that the exclusive forum
- 10 -
for any litigation, arbitration, or other dispute
resolution process is located in another state.
N.C. Gen. Stat. § 22B-2. Several district courts have
examined § 22B-2, reasoning that the statute invalidates
only certain provisions in a narrow subset of contractual
agreements. Thus, § 22B-2 is not generally applicable and,
as applied to arbitration agreements, directly conflicts
with and is preempted by the FAA. See United States ex rel.
TGK Enters., Inc. v. Clayco, Inc., 978 F. Supp. 2d 540, 549
(E.D.N.C. 2013); S. Concrete Prods., Inc. v. ARCO
Design/Build, Inc., Civil No. 1:11CV194, 2012 WL 1067906,
at *6 (W.D.N.C. Mar. 29, 2012); Wake Cty. Bd. of Educ. v.
Dow Roofing Sys., LLC, 792 F. Supp. 2d 897, 901–02
(E.D.N.C. 2011). This court adopts the reasoning of those
courts. Accordingly, this court finds that § 22B-2 is
preempted by the FAA in this case and cannot be a basis to
void the arbitration clause. 4
In its response to MSK’s counterclaim, Plaintiff also
claims that N.C. Gen. Stat. § 22B-3 voids the arbitration
clause. (Reply to MSK Construction, Inc.’s Counterclaim (Doc.
18) at 3.) Assuming Plaintiff properly raised this issue in its
response to the present motion, the result would be unchanged
because § 22B-3 is also preempted by the FAA. See, e.g., United
States ex rel. TGK Enters., Inc. v. Clayco, Inc., 978 F. Supp.
2d 540, 547-49 (E.D.N.C. 2013); Newman ex rel. Wallace v. First
Atl. Res. Corp., 170 F. Supp. 2d 585, 593 (M.D.N.C. 2001).
- 11 -
Next, Plaintiff argues that the arbitration clause should
be rendered void because Endurance “is a necessary party to this
action and it would be inconvenient for Plaintiff to be forced
to engage in separate legal actions against each Defendant.”
(Pl.’s Resp. Br. (Doc. 21) at 3.)
The inconvenience of Plaintiff having to engage in separate
actions is not sufficient to void an otherwise valid arbitration
agreement. See Moses H. Cone Mem’l Hosp., 460 U.S. at 20 (“[T]he
relevant federal law requires piecemeal resolution when
necessary to give effect to an arbitration agreement. Under the
[FAA], an arbitration agreement must be enforced notwithstanding
the presence of other persons who are parties to the underlying
dispute but not to the arbitration agreement.” (footnotes
omitted)). Therefore, Plaintiff’s argument that equity requires
the arbitration clause to be voided for its convenience fails.
Stay Pending Arbitration
First, this court notes that § 3’s “stay-of-litigation
provision is mandatory” for issues referable to arbitration.
Adkins, 303 F.3d at 500. Plaintiff’s claims against MSK are
referable to arbitration for the reasons described above and
therefore must be stayed pending arbitration.
- 12 -
As to Plaintiff’s Miller Act claim against Endurance, MSK
argues that the arbitration clause’s broad language encompasses
all counts of Plaintiff’s Complaint, “any doubts concerning the
scope of arbitrable issues should be resolved in favor of
arbitration,” and the Complaint should therefore be dismissed.
(See Def.’s Br. (Doc. 20) at 5-6 (quoting Moses H. Cone Mem’l
Hosp., 460 U.S. at 24-25.) Plaintiff argues, without citation,
that because its relationship with Endurance “is not governed by
the Subcontract,” its Miller Act claim against Endurance should
be permitted to proceed even if litigation between Plaintiff and
MSK is stayed. (Pl.’s Resp. Br. (Doc. 21) at 4.)
While the language in the arbitration clause is broad, this
court is not convinced that Plaintiff’s Miller Act claim against
Endurance falls within its scope. Endurance is not a party to
the subcontract. While courts have recognized several theories
under which nonsignatories may be bound to the contractual
agreements of others, including arbitration agreements, see,
e.g., Bartels ex rel. Bartels v. Saber Healthcare Grp., LLC, 880
F.3d 668, 679–80 (4th Cir. 2018), the parties do not assert that
any of those theories apply here.
While it appears that Plaintiff’s Miller Act claim against
Endurance is not itself arbitrable, “[w]hen arbitration is
likely to settle questions of fact pertinent to nonarbitrable
- 13 -
claims, ‘considerations of judicial economy and avoidance of
confusion and possible inconsistent results . . . militate in
favor of staying the entire action.’” Am. Heart Disease
Prevention Found., Inc. v. Hughey, 106 F.3d 389 (4th Cir. 1997)
(unpublished table decision), 1997 WL 42714, at *6 (quoting Am.
Home Assurance Co. v. Vecco Concrete Constr. Co. of Va., 629
F.2d 961, 964 (4th Cir. 1980)). Because determining the extent
of Endurance’s liability to Plaintiff will rely on common issues
of fact to be settled during the arbitration, this court finds
that, in the interest of judicial economy, the entire action
should be stayed until arbitration is had in accordance with the
agreement. See United States ex rel. MPA Constr., Inc. v. XL
Specialty Ins. Co., 349 F. Supp. 2d 934, 941–42 (D. Md. 2004)
(citation omitted) (discussing courts’ resolution of the
“tension between the Miller Act and the [FAA] by staying the
Miller Act claim pending arbitration of the underlying
dispute”); see also Agostini Bros. Bldg. Corp. v. United States
ex rel. Virginia-Carolina Elec. Works, Inc., 142 F.2d 854, 85657 (4th Cir. 1944) (reversing district court’s denial of stay of
Miller Act claim pending arbitration proceedings); Developers
Sur. & Indem. Co. v. Carothers Constr., Inc., Civil Action No.
9:17-1419-RMG, 2017 WL 3054646, at *3 (D.S.C. July 18, 2017)
(discussing obligations of a surety under South Carolina law).
- 14 -
To the extent that MSK’s motion may be construed as asking
this court to compel arbitration, the motion will be denied.
Section 4 provides that in granting a motion to compel
arbitration, “[t]he hearing and proceedings, under such
[arbitration] agreement, shall be within the district in which
the petition for an order directing such arbitration is filed.”
9 U.S.C. § 4. “A majority of courts interpreting this provision
have held that ‘where the parties agreed to arbitrate in a
particular forum only a district court in that forum has
authority to compel arbitration under § 4.’” TGK Enters., 978 F.
Supp. 2d at 551 (quoting Ansari v. Qwest Commc’ns Corp., 414
F.3d 1214, 1219–20 (10th Cir. 2005) (collecting cases)). The
subcontract provides that arbitration shall be conducted in
Charleston, South Carolina, which is in the District of South
Carolina. Having determined that this court cannot order
arbitration to be had in the District of South Carolina, this
court finds it sufficient to stay the action until arbitration
is had in accordance to the terms of the agreement.
For the reasons stated herein, IT IS HEREBY ORDERED that
Defendant MSK’s Motion to Dismiss or Stay Pursuant to the
Federal Arbitration Act (Doc. 19) is GRANTED IN PART and DENIED
- 15 -
IN PART in that Defendant’s motion to dismiss is DENIED and
Defendant’s motion to stay this action is GRANTED.
IT IS FURTHER ORDERED that this action is STAYED until
arbitration has been had in accordance with the terms of the
parties’ arbitration agreement. To the extent that Defendant’s
motion seeks to compel arbitration, IT IS DENIED.
The Clerk shall mark this case as inactive. Within 30 days
of completion of arbitration, the parties shall file a joint
report advising the court of completion of the arbitration and
whether further proceedings in this court are required.
This the 8th day of May, 2018.
United States District Judge
- 16 -
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?