Elzinga & Volkers, Inc. v. LSSC CORP.

• Decision Date: 08 December 1993
• Docket Number: No. 1:93CV294.,1:93CV294.
• Citation: 838 F. Supp. 1306
• Parties: ELZINGA & VOLKERS, INC., Plaintiff, v. LSSC CORP. and Leggett & Platt, Inc., Defendants.
• Court: U.S. District Court — Northern District of Indiana

838 F. Supp. 1306

ELZINGA & VOLKERS, INC., Plaintiff, v. LSSC CORP. and Leggett & Platt, Inc., Defendants.

No. 1:93CV294.

United States District Court, N.D. Indiana, Fort Wayne Division.

December 8, 1993.

Dane L. Tubergen, Hunt Suedhoff Borror and Eilbacher, Fort Wayne, IN, Larry A. Hanson, Moore Costello and Hart, St. Paul, MN, for plaintiff.

R. Frederick Walters, Karen D. Wedel, Kansas City, MO, Frank J. Gray, Beckman Lawson Sandler Snyder and Federoff, Fort Wayne, IN, for defendants.

ORDER

WILLIAM C. LEE, District Judge.

This matter is before the court on Elzinga & Volkers' Motion for Preliminary Injunction to enjoin arbitration proceedings initiated by defendants and on defendants LSSC Corporation and Leggett & Platt's Motion to Compel Arbitration. In July, 1993 the defendants initiated arbitration proceedings against the plaintiffs. On October 29, 1993 the plaintiff filed a Motion for Temporary Restraining Order in the Noble Superior Court of Indiana. The Noble Superior Court granted the TRO on October 29, 1993 and set a hearing date for the preliminary injunction. On November 12, 1993 the case was removed from Noble County to this court. A hearing was held in this court on November 29, 1993 on the preliminary injunction and motion to compel arbitration. For the following reasons the plaintiff's motion for preliminary injunction is DENIED.

FACTUAL BACKGROUND

Elzinga & Volkers, Inc. ("E & V") entered into a contract with No-Sag Products to construct a factory for No-Sag in Kendallville, Indiana. Under the contract, E & V's responsibilities included acting as the general contractor for the construction of the factory. E & V obtained bids from subcontractors for the required work and No-Sag and E & V decided which bids to accept. Under the terms of the contract, No-Sag assumed the risk of defective work by the subcontractors, if not due to the fault of E & V and if these amounts were not recoverable from the subcontractor. See Standard Form of Agreement Between Owner and Contractor ("Standard Contract") Article 7.2.4. The contract also contained an arbitration clause which read as follows:

Any controversy or claim arising out of or related to the Contract, or breach thereof, shall be settled by arbitration in accordance with the construction industry Arbitration Rule of the American Arbitration Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof, except controversies or Claims relating to aesthetic effect and except those waived as provided for in Subparagraph 4.3.5. Such controversies or Claims upon which the Architect has given notice and rendered a decision as provided in Subparagraph 4.4.4 shall be subject to arbitration upon written demand of either party. Arbitration may be commenced when 45 days have passed after a claim has been referred to the Architect as provided in paragraph 4.3 and no decision has been rendered.

Standard Contract, Article 4.51. The factory was completed on September 1, 1988.

In June 1989, No-Sag merged with Lear Siegler Seymour Corporation. In 1993 the corporation's name was changed to LSSC Corporation ("LSSC"). In June 1990, LSSC (formerly No-Sag) sold all of its right, title and interest in its assets of the No-Sag Division, including the Kendallville factory, to Leggett & Platt ("L & P"). The new owners advised E & V of the sale.

Problems with the construction of the Kendallville factory arose in 1989. LSSC, and later L & P, communicated with E & V about the problems. In a letter dated March 4, 1991 E & V was advised that L & P, the new owners of the factory, would now be pursuing resolution of the construction problems. Negotiations continued between L & P and E & V regarding the various construction problems. E & V resolved a minor problem with the loading dock in 1992, although in its communications it contested L & P's authority to pursue defect claims with E & V.

On March 2, 1993 E & V was asked to consent to the assignment of the No-Sag construction contract to L & P. E & V did not consent. On July 28, 1993, defendants LSSC and L & P mailed E & V a "Demand for Arbitration". The claim in arbitration, which was instituted by both defendants as claimants, asserts that the subcontractors did not properly construct the factory. Also on July 28, 1993 defendants filed suit in state court against the subcontractors.

Preliminary Injunction Standard

The Seventh Circuit has outlined the actions that a district judge must take when considering a motion for preliminary injunction. Darryl H. v. Coler, 801 F.2d 893, 898 (7th Cir.1986).

(1) He must evaluate the traditional factors enumerated in the case law; whether there is an adequate remedy at law, a danger of irreparable harm, some likelihood of success on the merits. See Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 386-88 (7th Cir.1984).

(2) He must make factual determinations on the basis of a fair interpretation of the evidence before the court.

(3) He must draw legal conclusions in accord with a principled application of the law.

Id. at 898. The court stated further that "the district court must somehow balance the nature and degree of the plaintiff's injury, the likelihood of prevailing at trial, the possible injury to the defendant if the injunction is granted, and the wild card is the public interest." Id. Additionally, "the statutory grant of the power to issue a preliminary injunction carries with it the power to issue whatever ancillary relief is necessary to the effective exercise of the granted power." Federal Trade Commission v. Elders Grain, Inc., 868 F.2d 901, 907 (7th Cir.1989). Preliminary injunctions are an exercise of far-reaching power. Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429, 1433 (7th Cir.1986).

The Seventh Circuit has adopted a sliding scale approach in which the possibility of mistake in issuing the injunction would be minimized by weighing the costs of the injunctive relief against the benefits. This principle was stated in mathematical terms in American Hospital Supply Corp. v. Hospital Products Limited, 780 F.2d 589, 593 (7th Cir.1986). The preliminary injunction should be granted if, but only if:

P × Hp > (1 - P) × Hd

The left side of the equation is the magnitude of erroneously denying the injunction, arrived at by multiplying the probability that the plaintiff will prevail at trial (P) by the harm to the plaintiff caused by the denial of the injunction (Hp). The right side represents the magnitude of an erroneously granted injunction measured by multiplying the probability that the defendant will prevail at trial (1-p) by the harm to the defendant caused by the granting of the motion (Hd). Id. at 593-94. This formula is not a substitute, but an aid to, judgment. Lawson, at 1434. The parties' briefs discuss the obligation to arbitrate which is the issue at the heart of "likelihood of success on the merits."

Standard to Compel Arbitration

Directly mirroring E & V's request for a preliminary injunction enjoining arbitration is the defendants' request for an order compelling arbitration. The Federal Arbitration Act, 9 U.S.C. § 4, provides that a party aggrieved by the failure of another to arbitrate under a written agreement for arbitration may petition a district court for an order compelling arbitration under the agreement. In considering the motion to compel arbitration the court is to decide two limited issues: 1) does a valid agreement to arbitrate exist between the parties, and 2) does the agreement to arbitrate cover the underlying dispute. See AT & T Technologies, Inc. v. Communication Workers of America, 475 U.S. 643, 648-650, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986); S + L + H S.P.A. v. Miller-St. Nazianz, Inc., 988 F.2d 1518, 1523 (7th Cir.1993); Chicago Typographical Union v. Chicago Sun-Times, 860 F.2d 1420, 1423 (7th Cir.1988). Once a court answers these questions in the affirmative, the parties must take up all additional concerns with the arbitrator.

Obligation to Arbitrate

E & V does not dispute that it agreed to arbitrate all claims related to the construction contract with No-Sag. However E & V argues that it has not agreed to arbitrate claims with LSSC or Leggett & Platt.

LSSC's Right to Arbitrate

Originally, E & V argued that LSSC is not entitled to bring an arbitration claim because it is a separate entity from No-Sag. In response the defendants submitted the affidavit of James F. Matthews, corporate counsel for LSSC. Mr. Matthews stated that No-Sag Products, which is named as the contracting party in the construction contract with E & V, merged in 1989 with Lear Siegler Seymour Corporation. The resulting company was called "Lear Siegler Commercial Products Corp.". Matthews further states that on August 6, 1990 Lear Siegler Commercial Products amended its certificate of incorporation to change the name of the company back to Lear Siegler Seymour Corporation. Finally Matthews states that in 1993 the name of the corporation was changed to LSSC. LSSC is the same corporation, through merger and name change, as No-Sag and is the same party that contracted with E & V. Therefore E & V does have an agreement to arbitrate with LSSC and this court will compel E & V to arbitrate claims arising under the construction contract with LSSC.¹

Next E & V argues that, even if it has agreed to arbitrate with LSSC, LSSC has "no standing" to bring a claim against E & V because LSSC has sold the factory. E & V argues that because LSSC has no ownership interest in the factory it has no claim for damages. In addition, E & V points out that LSSC sold the property "as is" so is not liable to L & P for defects and has no damages in that respect. The court finds that this argument goes to the merits of LSSC's claim for damages. Once the court determines that the underlying dispute is within the ambit of a valid arbitration clause, issues regarding the merits...