Arbitration between Trans Chem. Ltd. and China Nat., Civil Action No. H-95-4114.

Citation978 F.Supp. 266
Decision Date07 July 1997
Docket NumberCivil Action No. H-95-4114.,Civil Action No. H-96-0166.,Civil Action No. H-95-5553.
PartiesIn the Matter of the ARBITRATION BETWEEN: TRANS CHEMICAL LIMITED, Petitioner, AND CHINA NATIONAL MACHINERY IMPORT AND EXPORT CORPORATION, Respondent.
CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas

Ronald D. Secrest, Beck, Redden and Secrest, Kenneth L. Rothey, Kenneth L. Rothey & Associates, Houston, TX, for petitioner.

Edward J. Murphy, Bell & Murphy, Bell & Murphy, Houston, TX, Robert E. Campbell, Cadwalader, Wickersham & Taft, Los Angeles, CA, for respondent.

MEMORANDUM AND ORDER

LAKE, District Judge.

This consolidated action involves efforts by the successful party in an arbitration to enforce the award in the face of challenges by the unsuccessful party to the court's jurisdiction and the validity of the arbitration award.

I. Background

In 1987 two United States citizens, Dr. Shardar Khan and Dr. Mohammed Halipoto, both emigrants from Pakistan, decided to build the first hydrogen peroxide plant in Pakistan. They contacted a number of companies who might actually build the plant. One of the companies was China National Machinery Import and Export Corporation ("CNMC"). In September of 1987, when it became apparent that an agreement might be reached, Drs. Khan and Halipoto formed Trans Chemical Limited ("TCL"), a Pakistani corporation, and the subsidiary of United International ("UI"), an American corporation owned by the doctors.1 CNMC engaged N.E.M., Inc., as its agent in the United States to negotiate with TCL. On December 22, 1987, after weeks of negotiation, TCL and CNMC signed a contract in which TCL agreed to purchase and CNMC agreed to sell a complete hydrogen peroxide plant and related technical services.2 The 1987 contract was amended in December of 1988.3 Both the original and amended contracts provided for binding arbitration of disputes between the parties in Houston, Texas, in accordance with the procedures of the American Arbitration Association ("AAA").4

Disputes between the parties soon arose. TCL claimed that CNMC had failed or refused to provide the goods and services required under the contracts and that CNMC had made material misrepresentations in connection with the sale, construction, and operation of the hydrogen peroxide plant. CNMC claimed breach of contract, fraud in the inducement, and trade libel.5 Pursuant to the arbitration clause in the contracts the parties submitted their disputes to arbitration conducted by the AAA in Houston. A panel of three arbitrators heard evidence from June 21, to July 10, 1995. On August 15, 1995, the Panel awarded TCL $9,447,563.62.6

A. Civil Action No. H-95-4114

On the day of the award TCL filed an original Petition to Confirm Arbitration Award in this court, alleging subject matter jurisdiction under the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1330, 1605. TCL later amended its petition to also seek enforcement of the award under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 9; the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention" or "Convention"), and its implementing legislation, 9 U.S.C. § 207; and the Texas General Arbitration Act ("TGAA"), Tex.Rev.Civ. Stat. Ann. art. 236.7 CNMC filed a Motion to Dismiss TCL's Amended Petition to Confirm Arbitration Award and a Motion to Vacate Arbitration Award, Subject to the Motion to Dismiss.8

At a January 26, 1996, hearing the court ruled that additional discovery was appropriate regarding TCL's failure to produce a feasibility study about hydrogen peroxide production in Pakistan until the morning of the arbitration.9 The court also ordered further briefing and discovery addressing the court's subject matter jurisdiction. The parties filed supplemental briefs on these issues and also filed various objections to each other's filings, which the court denied.10 TCL also filed a Motion for Sanctions.11

Pending before the court in Civil Action No. H-95-4114 are TCL's Amended Petition to Confirm Arbitration Award, Motion for Order Confirming Arbitration Award and for Entry of Judgment, and Motion for Sanctions and CNMC's Motion to Dismiss TCL's Amended Petition to Confirm Arbitration Award, Motion to Vacate Arbitration Award, and Motion to Continue Discovery.

B. Civil Action No. H-95-5553

On October 20, 1988, Dr. Halipoto and his wife, Zareen Halipoto, filed a Voluntary Petition for Bankruptcy under Chapter 11 in the Bankruptcy Court for the Southern District of Texas.12 On June 1, 1995, as the date for arbitration approached, CNMC filed an adversary proceeding in the Halipoto bankruptcy case.13 CNMC sought a declaration that (1) the arbitration involved property of the Halipoto bankruptcy estate, (2) TCL/UI, Dr. Halipoto, and/or Dr. Khan exercised unauthorized control over such property of the bankruptcy estate, and (3) the arbitration clause in the 1988 contract was obtained by fraud or fraud in the inducement because of the pending bankruptcy and was therefore void or voidable.

On June 9, 1995, CNMC filed an Emergency Motion for Temporary Restraining Order with the bankruptcy court alleging that the pending arbitration set for June 21, 1995, was stayed by the bankruptcy petition and requesting a TRO to prevent the arbitration from proceeding as scheduled.14 At a hearing held the same day Bankruptcy Judge Karen Brown denied the request for a TRO.15 On June 14, 1995, the Bankruptcy Trustee filed an Answer to CNMC's Complaint16 and an Emergency Motion for TRO seeking the same relief sought earlier by CNMC.17 On June 15, 1995, Judge Brown again denied the motion.18 On September 21, 1995, the Trustee and TCL filed a Joint Motion to Withdraw Reference in the adversary proceeding,19 which was granted on December 8, 1995.20 The case as assigned Civil Action No. H-95-555321 and was consolidated with Civil Action No. H-95-4114.22

Pending before the court in the adversary action are TCL's Motion for Sanctions Against CNMC and its Counsel,23 CNMC's Motion to Dismiss the Trustee's Claim for Confirmation of the Arbitration Award,24 CNMC's Motion to Reconsider and Vacate Order Entered September 22, 1995,25 the Motion to Dismiss of the Khans filed on September 15, 1995,26 the Motion to Dismiss of United International filed on September 18, 1995,27 CNMC's Motion to Dismiss TCL's First Amended Cross-Claim,28 CNMC's Motion to Vacate Arbitration Award,29 CNMC's Motion to Extend Scheduling Deadlines,30 and CNMC's Objections and Motion to Strike TCL's Evidence.31

C. Civil Action No. H-96-0166

On November 13, 1995, while Civil Action No. H-95-4114 was pending, CNMC filed an Original Petition to Vacate Arbitration Award in the 190th District Court of Harris County, Texas, seeking vacatur under the TGAA, the FAA, and the New York Convention.32 TCL removed the case to federal court pursuant to 28 U.S.C. § 1441(b), alleging federal subject matter jurisdiction over CNMC's claims under the FAA and the New York Convention, and CNMC filed a Motion to Remand. The case was consolidated with Civil Action No. H-95-4114.33 Pending before the court in the removed action are CNMC's Original Petition to Vacate Arbitration Award34 and CNMC's Motion to Remand.35

II. Subject Matter Jurisdiction

Because the court cannot address the merits of this case unless it has subject matter jurisdiction, the court must first address CNMC's jurisdictional challenges in Civil Action No. H-95-4114. See Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 172 (5th Cir. 1994). TCL alleges that the court has jurisdiction to confirm the arbitration award: (1) under the FSIA because CNMC is an "agency or instrumentality of a foreign state" and is subject to the Act's exceptions to sovereign immunity; (2) under the New York Convention; and (3) under federal bankruptcy law. CNMC responds that the court should dismiss this action for lack of jurisdiction because (1) it is not an agency or instrumentality of a foreign state within the meaning of the FSIA; (2) the New York Convention does not provide for enforcement of an arbitral award rendered in the United States under American arbitration rules; and (3) CNMC dismissed the bankruptcy action before service by an adverse party of a responsive pleading, or alternatively, the adversary action should be dismissed since the arbitration claims predominate over the ownership claims.

A. Standard of Review

Federal courts are courts of limited jurisdiction and possess power only over cases authorized by the Constitution and laws of the United States. Coury v. Prot, 85 F.3d 244, 248 (5th Cir.1996). The burden of establishing jurisdiction rests with the party alleging it. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 376-78, 114 S.Ct. 1673, 1675, 128 L.Ed.2d 391 (1994). In ruling on a motion to dismiss for lack of subject matter jurisdiction the court may evaluate (1) the complaint alone, (2) the complaint supplemented by undisputed facts evidenced in the record, or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts. Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981); Barrera-Montenegro v. United States, 74 F.3d 657, 659 (5th Cir.1996).

In this case the court will use the third approach. In doing so the "court is given the authority to resolve factual disputes, along with the discretion to devise a method for making a determination with regard to the jurisdictional issue." Moran, 27 F.3d at 172. When the court bases its decision on its resolution of disputed facts it must give the plaintiff an opportunity for discovery and a hearing that is appropriate to the nature of the motion to dismiss. McAllister v. FDIC, 87 F.3d 762, 766 (5th Cir.1996); Delgado v. Shell Oil Co., 890 F.Supp. 1315, 1322 (S.D....

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