Cip Constr. Co. v. W. Sur. Co.

• Decision Date: 20 July 2018
• Docket Number: 1:18cv58
• Court: U.S. District Court — Middle District of North Carolina
• Parties: CIP CONSTRUCTION COMPANY, Plaintiff, v. WESTERN SURETY COMPANY, Defendant.

CIP CONSTRUCTION COMPANY, Plaintiff, v. WESTERN SURETY COMPANY, Defendant.

1:18cv58

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

July 20, 2018

MEMORANDUM OPINION AND ORDER

THOMAS D. SCHROEDER, Chief District Judge.

This is a construction dispute involving the claim of a general contractor, CIP Construction Company ("CIPC"), against its subcontractor's surety, Western Surety Company ("Western"). Western now moves to dismiss or, alternatively, to stay judicial proceedings and seeks to compel CIPC to pursue its claims in arbitration. (Doc. 5.) Western also moves to disregard CIPC's surreply brief. (Doc. 15.) The motions have been fully briefed and are ready for decision. (Docs. 7, 11, 13, 14, 17 and 18.)

For the reasons set forth below, the court will consider the surreply, deny the motion to dismiss or stay insofar as it is made pursuant to Federal Rule of Civil Procedure 12(b)(1) and the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3, but exercise its discretion to stay these judicial proceedings pending the outcome of the ongoing arbitration between CIPC and its subcontractor.

I. BACKGROUND

CIPC is the general contractor and owner of Bellemeade Village, a construction project in Greensboro, North Carolina (the "project"). (Doc. 1 ¶¶ 5, 6.) CIPC contracted with United Forming, Inc. ("UFI"), a subcontractor, to complete the reinforced concrete for the project (the "subcontract"). (Id. ¶ 8; Doc. 1-2.) Additionally, Western issued a performance bond to CIPC on which Western is the surety, UFI is the principal, and CIPC is the obligee (the "performance bond"). (Doc. 1 ¶ 5; Doc. 1-1.)

Western's performance bond incorporates the subcontract "by reference." (Doc. 1-1 ¶ 1.) The subcontract contains an arbitration provision, which states in relevant part:

Arbitration. In the event of a dispute between the parties with respect to the terms of this Agreement or the parties' performance under this Agreement (a "Dispute"), the parties will submit the Dispute to arbitration pursuant to the provisions of the North Carolina Revised Uniform Arbitration Act . . . .

(Doc. 1-2 ¶ 34.) The subcontract defines the "parties" as CIPC and UFI. (Id. ¶ 1.) The performance bond contains a judicial resolution provision, which states in relevant part:

Any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located and shall be instituted within two years after a declaration of Contractor Default . . . .

(Doc. 1-1 ¶ 11.)

The present dispute arose between CIPC and UFI under thesubcontract, and UFI served CIPC with a written arbitration demand. (Doc. 5-3; Doc. 7 at 4.) CIPC gave Western written notice that UFI had refused to perform under the subcontract and was in default. (Doc. 1 ¶¶ 29, 31.) CIPC demanded that Western fulfill its duties under the performance bond and honor UFI's obligations under the subcontract. (Id. ¶ 31; Doc. 1-6.) Western responded that it was ready to meet its obligations under the performance bond once UFI's liability had been determined in arbitration. (Doc. 1 ¶ 35, Doc. 7 at 4.)

CIPC filed the present action on February 1, 2018. Western now moves to dismiss, or alternatively to stay, the action and compel arbitration, contending that the subcontract's arbitration provision governs this dispute. (Doc. 5.) Pursuant to the parties' agreement filed in connection with Western's motion to dismiss, CIPC and UFI began an evidentiary hearing before an arbitrator concerning their dispute on June 18, 2018, and they anticipate an award by July 23, 2018. (Doc. 5-4 at 4.)

II. ANALYSIS

Western argues that CIPC's dispute against it arising under the performance bond must be arbitrated and that the court should therefore dismiss or, alternatively, stay this lawsuit pursuant to the FAA or via the court's discretionary power, pending the resolution of CIPC's arbitration with Western. Western further contends that its obligation under the performance bond isdependent on UFI's liability, which will be determined in the ongoing arbitration. (Doc. 7 at 4, 8; Doc. 13 at 2, 9.) In response, CIPC contends that the arbitration clause in the subcontract is not incorporated into the performance bond and that its claim against Western may proceed.

A. Motion to Compel Arbitration

1. Subject Matter Jurisdiction

Western moves to dismiss, or alternatively stay, the proceedings and compel arbitration, pursuant to Federal Rule of Civil Procedure Rule 12(b)(1), the North Carolina Revised Arbitration Act, N.C. Gen. Stat. §§ 1-569.1, et seq., and the FAA, 9 U.S.C. § 3. Western's argument is based on the contention that the court lacks subject matter jurisdiction to entertain the action because all issues before the court are subject to arbitration.

A court must consider its subject matter jurisdiction as a "threshold matter" prior to addressing the merits of the case. Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94-95 (1998); Holloway v. Pagan River Dockside Seafood, Inc., 669 F.3d 448, 452 (4th Cir. 2012). A plaintiff bears the burden of proving subject matter jurisdiction. Evans v. B.F. Perkins Co., a Div. of Standex Int'l Corp., 166 F.3d 642, 647 (4th Cir. 1999). When subject matter jurisdiction is challenged pursuant to Federal Rule of Civil Procedure 12(b)(1), "the district court is to regard the pleadings as mere evidence on the issue, and may consider evidenceoutside the pleadings without converting the proceeding to one for summary judgment." Id. (quoting Richmond, Fredericksburg & Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991) (internal citations omitted)). The court should only grant the Rule 12(b)(1) motion "if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Id. (quoting Richmond, Fredericksburg & Potomac R. Co., 945 F.2d at 768).

In challenging this court's subject matter jurisdiction, Western relies on the Fourth Circuit's decision in Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., for the proposition that the dismissal of a complaint for lack of subject matter jurisdiction is proper when all the issues before the court are arbitrable. (Doc. 7 at 8 (citing Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001)). Western similarly argues that the text of § 4 of the FAA supports its interpretation that the court lacks subject matter jurisdiction over the dispute. (Id.); see 9 U.S.C. § 4 (providing that an aggrieved party may petition a "district court which, save for such agreement, would have jurisdiction under title 28 . . . for an order directing that such arbitration proceed in the manner provided for in such agreement").

While the Fourth Circuit in Choice Hotels recognized that dismissal may be a proper remedy under the FAA where all mattersare subject to arbitration, the court did not address whether a binding arbitration agreement would divest the court of subject matter jurisdiction. Choice Hotels, 252 F.3d at 709-10. Western's reliance on the Fifth Circuit's opinion in Alford v. Dean Witter Reynolds, Inc. is similarly misplaced. 975 F.2d 1161 (5th Cir. 1992). In Alford, the Fifth Circuit held that the district court properly acted within its discretion when it dismissed an action pursuant to the FAA where all claims were subject to arbitration. Id. at 1164. As the Fifth Circuit recently clarified, however, "a dismissal may be appropriate 'when all of the issues raised in the district court must be submitted to arbitration,'" but "agreements to arbitrate implicate forum selection and claims-processing rules not subject matter jurisdiction." Ruiz v. Donahoe, 784 F.3d 247, 249-50 (5th Cir. 2015) (quoting Alford, 975 F.2d at 1164).

Though neither party has addressed the issue further, Western's argument is contrary to other case law. For example, in DiMercurio v. Sphere Drake Ins., PLC, the First Circuit held that an arbitration agreement does not divest the court of subject matter jurisdiction, recognizing that "[a]greements to arbitrate are now typically viewed as contractual arrangements for resolving disputes rather than as an appropriation of a court's jurisdiction." 202 F.3d 71, 76 (1st Cir. 2000). Notably, the court considered and rejected similar statutory arguments based on the language of 9 U.S.C. § 4, holding that Western's interpretationreflected an outmoded view of a federal court's jurisdiction and conflicted with the other statutory provisions in the FAA. Id. at 76-77. While noting that § 4 authorizes a party to petition the court, "which, save for the agreement would have jurisdiction," 9 U.S.C. § 4, the court held that legislative history indicated that "the drafters understood that the problem was not really jurisdictional, but rather that the jurisdiction concept was an illogical remnant of ancient English law." Id. at 76 (citing H.R. Rep. No. 96, 68th Cong., lst Sess., 1-2 (1924)). In addition, the court noted that other more recently enacted provisions of the FAA affirm the court's jurisdiction to hear such disputes and its ultimate authority over a case even after a referral to arbitration. Id. at 77 (citing 9 U.S.C. §§ 204, 207); 9 U.S.C. § 204 ("An action or proceeding over which the district courts have jurisdiction . . . may be brought in any such court in which save for the arbitration agreement an action or proceeding with respect to the controversy between the parties could be brought . . . . (emphasis added)), § 207 (permitting a party to seek an order confirming arbitrator's award).

Courts have generally not regarded the presence of an arbitration agreement as a proper basis for a challenge to the court's subject matter jurisdiction. See, e.g., City of Benkelman, Nebraska v. Baseline Eng'g Corp., 867 F.3d 875, 880-81 (8th Cir. 2017) ("[A]n arbitration agreement has no relevance to thequestion of whether a given case satisfies...