Lummus Company v. Commonwealth Oil Refining Co., 5552-5554.

• Decision Date: 10 August 1960
• Docket Number: No. 5552-5554.,5552-5554.
• Citation: 280 F.2d 915
• Parties: LUMMUS COMPANY, Defendant, Appellant, v. COMMONWEALTH OIL REFINING COMPANY, Inc., Plaintiff, Appellee (three cases).
• Court: U.S. Court of Appeals — First Circuit

280 F.2d 915 (1960)

LUMMUS COMPANY, Defendant, Appellant, v. COMMONWEALTH OIL REFINING COMPANY, Inc., Plaintiff, Appellee (three cases).

Nos. 5552-5554.

United States Court of Appeals First Circuit.

June 16, 1960.

Rehearing Denied August 10, 1960.

COPYRIGHT MATERIAL OMITTED

John T. Cahill, New York City, with whom Lawrence J. McKay, New York City, Raymond L. Falls, Jr., Youngstown, Ohio, Herbert S. McConnell, San Juan, P. R., Putnam, Bell, Santry & Ray, Boston, Mass., Cahill, Gordon, Reindell & Ohl, New York City, and McConnell, Valdes & Kelley, San Juan, P. R., were on brief, for appellant.

John F. Dooling, Jr., New York City, with whom Richard deY. Manning, Milton Pollack, Hamilton F. Potter, Jr., Jeffrey A. Fillman, New York City, Ruben Rodriguez-Antongiorgi, San Juan, P. R., Sullivan & Cromwell, New York City, and Fiddler, Gonzalez, Guillemard & Rodriguez, San Juan, P. R., were on brief for appellee.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

ALDRICH, Circuit Judge.

This is an appeal under 28 U.S.C. § 1292(a) (1) from an interlocutory order, dated July 20, 1959, of the United States District Court for the District of Puerto Rico entering a preliminary stay of arbitration and granting a preliminary injunction enjoining defendant-appellant from taking any further action in a case pending in the United States District Court for the Southern District of New York, or any other steps in furtherance of the arbitration. Defendant-appellant, The Lummus Company, a Delaware corporation with its principal office in New York, N. Y., is engaged, inter alia, in designing and constructing oil refineries. Plaintiff-appellee, Commonwealth Oil Refining Co., Inc., is a Puerto Rican corporation, which describes itself as the owner of an oil refinery in Puerto Rico built for it by the defendant. The controversy between the parties arises out of two contracts entered into in New York in July 1954, and March 1956, under which Lummus undertook to design, build, initially supervise, and guarantee the performance of, first, the original refinery, and then later its expansion facilities, for a guaranteed maximum cost of some $35,000,000. Both contracts contain the following clause:

"Any controversy or claim arising out of or relating to this Agreement shall be settled by arbitration * * *. The arbitration shall be held in New York, U.S.A."¹

The refinery has been built, and Lummus has received some $32,500,000 therefor. The original plant commenced operation on December 31, 1955, and the expansion facilities on September 30, 1957. Operation, however, has been at a marked loss, rather than at the substantial profit anticipated. Since at least 1957 Commonwealth has expressed dissatisfaction with Lummus' performance, and Lummus, inter alia, with Commonwealth's refusal to pay sums claimed to be due for work and materials.

On April 29, 1959, Lummus mailed, and on April 30 Commonwealth received, a demand for arbitration of its claim to recover some $4,700,000 from Commonwealth, and of "any set-offs or counterclaims * * * which Commonwealth may assert." On May 4, Commonwealth instituted an action in the District of Puerto Rico, in which it alleged, in substance, that Lummus had prepared "oil refinery economic and capability studies and earnings projections based thereon (herein called, collectively, `studies and projections')" relating to the refinery; that the "`studies and projections' were false and misleading," and that Lummus either knew this to be so or made the representations "with reckless indifference as to the truth or falsity thereof"; that Commonwealth relied on the "studies and projections" and was induced by the representations contained therein to execute the two contracts, "which plaintiff would not have executed but for such false and misleading `studies and projections' * * *"; and that, "by reason of the facts set forth in this complaint, plaintiff has suffered financial losses and damages in an amount exceeding $60,000,000 * * *." As relief, the complaint sought:

"(a) judgment * * * in the sum of $60,000,000, plus other sums as yet undetermined * * *; and

"(b) such rescission under the laws of the State of New York of the two contracts * * * as may be just and equitable * * * or a declaration as to their inexistence under the laws of the Commonwealth of Puerto Rico * * *."² At the same time Commonwealth served a motion in the district court, "pursuant to 32 L.P.R.A. § 3204(4) (a),"³ to stay the New York arbitration on the ground that the arbitration clauses were invalid by reason of fraudulent inducement of the contracts. On May 20 Lummus served a motion in the New York County Supreme Court to compel arbitration. On May 25 Commonwealth filed a petition to remove that proceeding to the United States District Court for the Southern District of New York, hereinafter called the Southern District. On May 29 Lummus obtained from that court an order for Commonwealth to show cause, returnable June 2, why the present proceedings should not be enjoined. No further steps were taken in the Southern District because on the same day Commonwealth obtained from the court below, ex parte, a temporary order restraining further proceedings in the Southern District. On June 1, Commonwealth moved for a preliminary injunction restraining Lummus from taking any further action in the Southern District or elsewhere in furtherance of arbitration until final determination of the motion of May 4 for a stay of arbitration. Decision was reserved on this motion, but the temporary restraining order was continued in force to June 18. On that date, Judge Ruiz-Nazario being out of the district, a hearing was held before Senior Judge Magruder, sitting in the district court by special assignment, on the matter of continuing the temporary restraining order pending determination by Judge Ruiz-Nazario of the original motion to stay arbitration, and of the motion for a preliminary injunction. On June 19 Judge Magruder entered a preliminary injunction, to expire July 20, stating that he was doing so in order to give Judge Ruiz-Nazario opportunity to make the final decision on the questions before him. See 174 F.Supp. 485. On July 6 Lummus moved for a modification of Judge Magruder's order to permit it to move in the Southern District to remand that action to the state court. This motion was denied on July 17. See 175 F.Supp. 873.⁴ On July 20 Judge Ruiz-Nazario entered an order preliminarily staying the arbitration "until this Court enters its order finally determining whether there are valid and existing arbitration agreements * * *," and granted the preliminary injunction enjoining Lummus from taking any steps in furtherance of the arbitration, in the Southern District or otherwise.

Admittedly Lummus' appeal from the decree of July 20 presents all pertinent matters. It raises a substantial number of difficult questions. They can be divided into three major groupings. First, Lummus contends that the district court, as a matter of equitable jurisdiction, should not have enjoined the New York proceedings, but should rather have stayed its own. It bases this contention, first, on the priority of the New York proceedings, arguing that they commenced with the service of the arbitration demand, and second, on the contention that New York is a more proper forum because New York law is controlling, because New York is more convenient for the parties and witnesses, and because jurisdiction over Lummus in Puerto Rico is doubtful.⁵ We do not stop to consider these contentions at any length. What we presently have here is simply a question of two pending actions, i. e., the motion to stay arbitration and the action to compel arbitration, in two federal courts of concurrent jurisdiction, each of which is being asked to consider what is basically a different side of the same coin. There is no reason why both suits should continue at the same time. This would be detrimental to both the parties and the federal judicial system. Although priority of suit is often taken as a basic factor in determining which should give way, see Martin v. Graybar Elec. Co., 7 Cir., 1959, 266 F.2d 202, "wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation, does not counsel rigid mechanical solution of such problems." Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 1952, 342 U.S. 180, 183, 72 S.Ct. 219, 221, 96 L.Ed. 200. We are disposed to believe that the District Court in Puerto Rico was in fact the first court to take hold of this matter. Cf. Marchant v. Mead-Morrison Mfg. Co., 2 Cir., 1928, 29 F.2d 40, 42-43, certiorari denied, 1929, 278 U.S. 655, 49 S.Ct. 179, 73 L.Ed. 565; American Houses, Inc. v. Schneider, 3 Cir., 1954, 211 F.2d 881, 885, 44 A.L.R. 2d 1352; Minkoff v. Scranton Frocks, Inc., D.C.S.D.N.Y., 1959, 172 F.Supp. 870, 876-877. We also believe that there were sufficient reasons which would have justified that court, as a matter of discretion, in staying its own proceedings in favor of those in New York. But as it has not done so, we are not prepared to hold that there was an abuse of discretion.

The second grouping of issues concerns the power of the district court. Lummus contends that a federal court sitting in Puerto Rico is unable to stay an arbitration which the parties have specified is to take place in New York. In the view we take of this case, this issue becomes moot. It also contends that the New York proceedings were improperly removed from the state court, and that had they remained there, 28 U.S.C. § 2283 admittedly would have prevented the court below from enjoining the proceedings in the state court. It assigns three reasons why the removal was improper. First, a motion to compel arbitration under a state statute involves a remedy which a federal court cannot grant; second, the removal was not timely because not made within twenty days after the...