Lummus Company v. COMMONWEALTH OIL REFINING COMPANY

• Decision Date: 07 June 1961
• Citation: 195 F. Supp. 572
• Parties: In the Matter of the Arbitration of Certain Differences between LUMMUS COMPANY, Petitioner, and COMMONWEALTH OIL REFINING COMPANY, Inc., Respondent.
• Court: U.S. District Court — Southern District of New York

195 F. Supp. 572

In the Matter of the Arbitration of Certain Differences between LUMMUS COMPANY, Petitioner, and COMMONWEALTH OIL REFINING COMPANY, Inc., Respondent.

United States District Court S. D. New York.

June 7, 1961.

Cahill, Gordon, Reindel & Ohl, New York City, for petitioner. Lawrence J. McKay, Raymond L. Falls, Jr., Thomas F. Curnin, Joseph M. McLaughlin, New York City, of counsel.

Sullivan & Cromwell, New York City, for respondent. Richard deY. Manning, New York City, Ruben Rodriguez-Antongiorgi, San Juan, P. R., Milton Pollack, John F. Dooling, Jr., New York City, of counsel.

DAWSON, District Judge.

Commonwealth Oil Refining Company, Inc. (hereinafter referred to as "Commonwealth") moved by order to have the Lummus Company (hereinafter referred to as "Lummus") show cause why all proceedings in connection with the arbitration demanded by Lummus should not be stayed until after Lummus has brought on for hearing its pending petition to compel arbitration and until the determination thereof. Alternatively, Lummus was ordered to show cause why an immediate trial of the issues of arbitrability and the making of the alleged contracts should not be had. This motion was argued on February 28, 1961. Decision was reserved until after a motion to remand, which was then sub judice before Judge Weinfeld, was decided, 195 F.Supp. 47.

A History of the Proceedings

The problems confronting the Court arise out of two contracts between Lummus and Commonwealth dated July 8, 1954, and March 14, 1956. Under these contracts Lummus was to construct oil refining facilities for Commonwealth in Puerto Rico for which Commonwealth paid Lummus more than $32,000,000. Commonwealth alleges that it entered into these contracts on the basis of guaranties given by Lummus as to anticipated net income and productive capacity. After three years of operation, instead of realizing the expected income, Commonwealth accumulated losses allegedly amounting to over $14,000,000. Commonwealth charges that these "losses were caused by Lummus' fraudulent and misleading representations as to the yield capabilities, operating costs and resulting profits which induced Commonwealth to enter into the two challenged contracts." Commonwealth's memorandum in support of application for stay, pages 3 and 4.

Negotiations attempting to reconcile the differences between the parties were conducted in 1959. In February and March of that year, Commonwealth retained Purvin & Gertz, Inc., as consulting engineers to ascertain the amount of their claims against Lummus. Between April 29th and May 4th, Lummus mailed Commonwealth a demand for arbitration, dated April 27, 1959, claiming $4,697,997.85, with interest, and demanding "a determination of any setoffs or counterclaims against the undersigned which Commonwealth may assert." On May 4, 1959, enforced with the Purvin & Gertz studies, Commonwealth filed a complaint in the District Court of Puerto Rico seeking $60,000,000 as damages caused by Lummus' fraud, rescission, and other relief. Simultaneously Commonwealth filed a motion in the Puerto Rican court to stay the arbitration demanded by Lummus.

On or about May 20, 1959, Lummus commenced an action in the Supreme Court of New York County seeking to compel Commonwealth to proceed with arbitration. This petition was removed to the Southern District on May 25th. The details of the play and counterplay proceedings engaged in by the parties immediately thereafter are set forth in Lummus Co. v. Commonwealth Oil Refining Co., 1 Cir., 1960, 280 F.2d 915, 919 and need not be reviewed here.

The next action having pertinence to this proceeding took place on July 20, 1959, when Judge Ruiz-Nazario entered an order staying the arbitration "until this Court enters its order finally determining whether there are valid and existing arbitration agreements * *." and granting the preliminary injunction enjoining Lummus from taking any steps in furtherance of the arbitration in the Southern District of New York or elsewhere.

Judge Ruiz-Nazario's order was appealed to the First Circuit. An opinion was rendered on June 16, 1960, in which the Court of Appeals vacated the District Court orders. The Circuit suggested that the District of Puerto Rico, though it had been the first court to pass on the action, stay its own proceedings to permit a resolution of the matters in New York. On rehearing the First Circuit's position was clarified. The court said that it had decided that Commonwealth, in its $60,000,000 Puerto Rican action, was not really pursuing a restitutionary remedy, that the true nature of the action was one for damages and rescission of the arbitration agreement alone. The opinion on rehearing explains the stay which it suggested as follows:

"The stay that we indicated is not the equivalent of the stay which would be entered upon a motion for a stay of the action under an arbitration statute. Such a stay would indeed settle all questions of arbitrability. The stay we suggested is based on the belief that there should be no further duplication of litigation in two Federal courts of concurrent jurisdiction. We intimated at the beginning of our opinion that there would have been sound reasons for the court below to have deferred initially to the New York court. * * * Under the terms of the arbitration agreement arbitration will take place in New York. New York law will be controlling. We think that a court in New York should supervise the arbitration." 280 F.2d at page 933.

Thereafter the Puerto Rican district court entered an order on mandate staying further proceedings "until the entry of a final judgment or order by a Court of competent jurisdiction in the State of New York determining the issues of the arbitrability of the claims between the parties and until the making, after such determination, of such further Order of this Court respecting the stay or continuance of this action in whole or in part as is appropriate in the light of the final determination of such court of competent jurisdiction in New York." This order was signed by Judge Ruiz-Nazario on January 3, 1961. There are no additional proceedings currently taking place in either the First Circuit or the District of Puerto Rico.

A motion to remand the action to the State court was argued before Judge Weinfeld on January 31, 1961. In an opinion dated June 2, 1961, the motion to remand was denied. Judge Weinfeld held that Puerto Rico is a "State" for purposes of diversity jurisdiction and that its inclusion as a State under section 1332(d) of Title 28 United States Code, was not beyond the constitutional competence of Congress. In addition the court held that section 1450 of the New York Civil Practice Act should be applied. Contentions that this statute provides a "peculiar" remedy and that section 1450 is...