EC Ernst, Inc. v. Potlatch Corp.

• Decision Date: 01 December 1978
• Docket Number: No. 78 CIV 4866 (LBS).,78 CIV 4866 (LBS).
• Citation: 462 F. Supp. 694
• Parties: E. C. ERNST, INC., Petitioner, v. POTLATCH CORPORATION, Respondent.
• Court: U.S. District Court — Southern District of New York

462 F. Supp. 694

E. C. ERNST, INC., Petitioner, v. POTLATCH CORPORATION, Respondent.

No. 78 CIV 4866 (LBS).

United States District Court, S. D. New York.

December 1, 1978.

Friedman & Gass, P.C., Arthur S. Friedman, New York City, Smith, Currie & Hancock, Glower W. Jones, Atlanta, Ga., of counsel, for petitioner.

Sacks, Montgomery, Pastore & Levine, David E. Montgomery and Stuart M. Levine, New York City, of counsel, for respondent.

OPINION

SAND, District Judge.

In this case of first impression, the Court is called upon to decide, among other issues, a question raised but unanswered by the Seventh Circuit, i. e., whether ... "the Federal Arbitration Act denied federal courts the discretionary power to decline to exercise jurisdiction because of a pending state proceeding." Bio-Analytical Services, Inc. v. Edgewater Hospital, Inc., 565 F.2d 450, 454 n. 5. We conclude that this question should be answered in the negative. We also conclude that the action cannot be transferred to a more convenient forum because of the language of the Act as construed by the controlling precedents and without regard to the equities of this controversy.

These issues arise as follows:

E. C. Ernst, Inc. ("Ernst") has petitioned this Court for an order, pursuant to 9 U.S.C. § 4, directing arbitration in the manner provided in an agreement between Ernst and Potlatch Corporation ("Potlatch"). In response, Potlatch has moved for an order transferring this petition to the United States District Court for the Eastern District of Arkansas or dismissing or staying this petition pending the determination of the Arkansas state court proceeding.¹ By cross-motion filed November 3, 1978, Ernst moves for a summary determination of its entitlement to an order directing arbitration.²

Ernst's motion was originally heard on November 2, 1978. At that time, the parties stressed the importance of a prompt resolution of their motions in light of the pending Arkansas state court action. Accordingly, this Court issued an oral opinion the following day, denying the motion to transfer. Decision on all other motions was reserved, pending the submission of additional briefs by the parties.³

Having reviewed the requested briefs, this Court restates its reasons for denying the motion to transfer and grants Potlatch's motion for a stay.

FACTS

This dispute arises out of a 1976 agreement between Ernst, a District of Columbia corporation engaged in the business of electrical contracting, and Potlatch, a Delaware corporation engaged in the business of manufacturing paper products. Under the terms of the construction agreement, Ernst agreed to make certain electrical installations in a paper mill being constructed by Potlatch at McGehee, Arkansas, for a contract price of $5,163,188.

Besides Ernst, Potlatch employed a number of contractors in connection with the project and many of these contractors employed subcontractors. In May, 1978, one of the subcontractors sued its prime contractor and Potlatch in the Chancery Court in Desha County, Arkansas, to enforce a mechanics lien against the project in the amount of $43,559.12. In response, the parties asserted cross-claims and counterclaims.

In July, 1978, Potlatch impleaded Ernst in the Arkansas action seeking indemnity from Ernst for any amount for which it might be liable to the subcontractor or the prime contractor. Specifically, Potlatch sought damages totalling $26,514.31. The third-party complaint, however, also indicated that the ad damnum clause might be increased at a later date: "In addition, Potlatch has sustained and is sustaining other damages due to the above described conduct of Ernst, and Potlatch reserves the right to amend this third-party complaint at a later date to include a prayer for such damages from Ernst."⁴

Before filing a response to this third-party complaint, Ernst served a demand for arbitration on Potlatch with the American Arbitration Association.⁵ Following this demand, Ernst demurred to the Arkansas complaint alleging that the Arkansas court lacked jurisdiction of the subject of the action because the claim is controlled by a binding arbitration agreement. On October 16, 1978, three days after filing its demurrer, Ernst filed the instant petition in this Court for an order directing arbitration.

Potlatch responded in several ways to Ernst's demurrer and demand for arbitration. On October 28, 1978, Potlatch filed its detailed response to the demurrer of Ernst, alleging, among other things, that the contract provision upon which Ernst based its arbitration demand did not cover the type of disputes alleged and that Ernst had waived any right it may have had to demand arbitration by failing to make a timely demand as required by contract.

At the same time that it responded to the demurrer, Potlatch filed with the American Arbitration Association a "Special Appearance for Objection to Arbitration Proceedings" and moved in the Arkansas state action for a stay of arbitration.

The Arkansas court overruled Ernst's demurrer on October 31, 1978. Ernst was directed to respond to the third party complaint by November 20, 1978. The Arkansas court also directed that a hearing on Potlatch's motion to stay arbitration be held after November 20, 1978.

I FORUM NON CONVENIENS

Potlatch urges that this action should be transferred to the Eastern District of Arkansas pursuant to 28 U.S.C. § 1404(a). This section provides:

"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."

In support of this motion, Potlatch argues that New York is an inconvenient forum because the dispute arose out of a construction project in McGehee, Arkansas; Ernst's work was performed in Arkansas; the agreement provides that it is to be governed by Arkansas law; the necessary witnesses primarily reside in Arkansas or nearby states; and the voluminous records for the project are located in Arkansas. Moreover, as is pointed out in the affidavits of J. T. Gressette and S. M. Rollinson submitted in support of this motion, part of the Ernst claim requires an understanding of the soil and weather conditions in the McGehee area. The witnesses who have the relevant knowledge of the soil and weather conditions of the project area reside in Arkansas. Finally, Potlatch stresses that the sole connection with New York is that both Potlatch and Ernst are qualified to do business in New York.

We agree with Potlatch that the equities favor a transfer of this action to the Eastern District of Arkansas; we conclude, nevertheless, that we are without power to transfer this case to Arkansas. In Aaacon Auto Transport, Inc. v. Ninfo, 490 F.2d 83 (2d Cir. 1974), the Second Circuit held that the Federal Arbitration Act mandates that a district court faced with an arbitration petition proceed summarily to the merits and is without power to transfer the case pursuant to 28 U.S.C. § 1404(a).

At oral argument, Potlatch attempted to distinguish this case on several grounds. First, it argued that in Aaacon the contracts provided for arbitration in New York, the same place where the petition was originally filed. Thus, in Aaacon if the court had transferred the action to another district, the arbitration would not have been held in New York. Under Econo-Car International, Inc. v. Antilles Car Rentals, Inc., 499 F.2d 1391 (3d Cir. 1974), arbitration must take place within the district of the court compelling arbitration regardless of the designation of locale in the contract. According to Potlatch, transfer of the instant action would not create the anomalous situation which would have been created by a transfer in Aaacon. Rather than achieving a result which the parties did not bargain for, Potlatch contends that transfer here would achieve the contract objective: arbitration in Arkansas.⁶

Besides distinguishing Aaacon on its facts, Potlatch also argues that § 4 need not be read as narrowly as the Second Circuit apparently read it. Although the section provides that the "hearing and proceedings ... shall be within the district in which the petition ... is filed", Potlatch urges that "is filed" should be construed to mean the district in which the petition is currently pending. Under its interpretation, a petition could be filed in different courts at various stages in the same litigation. Thus, the language of the statute is not limited to the district where the petition was originally filed.

Finally, Potlatch resorts to a contention related to the legislative history of the Act. According to its reading of the 1925 legislative history of § 4, Congress evidenced a concern that arbitration proceed in a convenient forum. In support of this interpretation of the sketchy legislative history,⁷ Potlatch quotes the portion of the Senate debates where Senator Caraway, who was not a member of the Committee on the Judiciary which had proposed the arbitration bill, asked whether the amendment⁸ "touching the question as to where the arbitration shall take place" was still in the bill "so it was not possible to drag a man across the country to arbitrate."⁹ Except for the comment on the Senate floor, the legislative history is silent as to the precise reason Congress adopted the amendment relied on by the Second Circuit in Aaacon. Potlatch, however, assumes that Congress tied the place of arbitration to the district court in which the petition was filed to ensure that "a man could not be dragged across the country to arbitrate." Moreover, Potlatch argues that this amendment, although not efficacious in 1978, achieved its intended purpose in 1925. Because the venue provisions at that time provided that a corporation resided for diversity purposes only in its state of incorporation, this limitation guaranteed that the district in which arbitration could be compelled would be the state of incorporation of at least...