Fcci Ins. Co. v. Nicholas Cnty. Library, Case No. 5:18-cv-038-JMH

• Decision Date: 15 March 2019
• Docket Number: Case No. 5:18-cv-038-JMH
• Parties: FCCI INSURANCE COMPANY, Plaintiff, v. NICHOLAS COUNTY LIBRARY, Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

FCCI INSURANCE COMPANY, Plaintiff, v. NICHOLAS COUNTY LIBRARY, Defendant.

Case No. 5:18-cv-038-JMH

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY CENTRAL DIVISION at LEXINGTON

March 15, 2019

MEMORANDUM OPINION AND ORDER***

Defendant Nicholas County Library ("the Library") has moved to dismiss this action and to compel arbitration. [DE 11]. The Library argues that Plaintiff FCCI Insurance Company's claims are subject to arbitration provisions that were incorporated by reference into the performance bond to which FCCI was a party. [Id.]. Alternatively, Plaintiff FCCI has responded in opposition to the motion to dismiss. [DE 25]. Additionally, FCCI has moved for leave to supplement its response. [DE 28]. The Library has replied to the response [DE 29] and filed a response in opposition to FCCI's motion for leave to file a supplemental brief [DE 30].

For the reasons that follow, FCCI's motion for leave to file a supplemental brief [DE 28] is GRANTED. Nicholas County Library's motion to dismiss and compel arbitration [DE 11] is construed as a motion for summary judgment and is GRANTED. The complete incorporation of the construction contract into the performance bond requires FCCI to submit its claims to the arbitrator for threshold determinations about jurisdiction. As a result, FCCI's claims in this action are DISMISSED WITHOUT PREJUDICE.

I. Factual & Procedural Background

The Nicholas County Library entered into a construction contract with Crace & Co., Inc., related to the construction of a two-story addition to the Nicholas County Library. FCCI issued payment and performance bonds for the project, naming Crace as principal and Nicholas County Library as obligee.

The construction contract between Crace and the Library states,

For any claim subject to, but not resolved by, mediation pursuant to Section 21.3, the method of binding dispute resolution shall be as follows:

[X] Arbitration pursuant to Section 21.4 of this Agreement.

[DE 11-2 at 6, Pg ID 56]. Additionally, the contract provided that "[i]f the parties have selected arbitration as the method for binding dispute resolution in the Agreement, any claim, subject to, but not resolved by, mediation shall be subject to arbitration." [Id. at 8, Pg ID 58].

Moreover, the construction contract states,

If the parties have selected arbitration as the method for binding dispute resolution in the Agreement, any claim, subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association, in accordance with the Construction Industry Arbitration Rules in effect on the date of this Agreement.

[Id. at 8, Pg ID 58].

The construction contract defines a "claim" as

. . . a demand or assertion by one of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the Contract. The term "Claim" also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.

[DE 11-2 at 12, Pg ID 62]. Additionally, the construction contract further states, "The Contract Documents shall not be construed to create a contractual relationship of any kind between any persons or entities other than the Owner and the Contractor." [DE 28-1 at 12, Pg ID 200].

FCCI was not a party to the construction contract between Crace and the Library. Still, the FCCI performance bond states,

The Condition Of This Obligation is such that whereas, the Principal entered into a certain contract with the Owner, dated the 18th day of October, 2016, a copy of which is hereto attached and made part hereof for the construction of: Nicholas Co. Library, New Two Story Addition, Carlisle, KY.

[DE 1-1 at 1, Pg ID 6].

One of the special conditions in the performance bond was that Crace install rebar to reinforce the walls of the library addition. After investigation, FCCI claims that this condition was not met. As a result, FCCI terminated Crace under the performance bond. At the same time, Nicholas County Library made a claim on the performance bond.

Subsequently, FCCI filed this action seeking a declaratory judgment on the alleged default and overpayment. [DE 1]. The Library moved to dismiss for lack of jurisdiction and to compel arbitration. [DE 11]. Additionally, if FCCI was not compelled to arbitrate, the Library has asked the Court to stay this case until Crace and the Library can submit their dispute to arbitration. [Id.].

Before the Court could rule on that motion, the parties agreed to stay the case and mediate the dispute. [DE 13]. Recently, the parties notified the Court that they had failed to resolve the dispute through mediation and asked that the stay be lifted and that a briefing schedule be implemented for the pending motion to dismiss or compel arbitration. [DE 17; DE 18]. FCCI responded to the motion to dismiss or compel on February 20, 2019. [DE 19]. A demand for arbitration from the Library, dated January 25, 2019, is attached to the FCCI's response in opposition to the motion to dismiss. [DE 19-1].

Then, FCCI filed a motion for a temporary restraining order and preliminary injunction and asked for an expedited hearing on their motion. [DE 20; DE 21]. The parties provided oral argument at an expedited motion hearing on March 5, 2019. [DE 26]. Subsequently, the Court denied FCCI's motion for injunctive relief. [DE 27].

Then, FCCI filed a motion for leave to file a supplement to their response in opposition, including an exhibit of the full construction contract. [DE 28]. The Library replied to FCCI's response [DE 29] and filed a response in opposition to FCCI's motion for leave to file a supplement [DE 30]. As a result, the motion to dismiss and motion for leave are ripe for review.

II. Standard of Review and Applicable Law

The Federal Rules of Civil Procedure do not line up perfectly with the provisions contained in the United States Arbitration Act, 9 U.S.C. § 1 et seq., more commonly referred to as the Federal Arbitration Act ("FAA"). Rule 12 of the Federal Rules of Civil Procedure does not list "motion to compel arbitration" as a potential responsive pleading. As a result, federal courts have split on the proper procedural vehicle to be used for dismissal based on a motion to compel arbitration.

Federal courts are split on whether a motion to dismiss based on an arbitration provision should be brought based on lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), whether the motion to dismiss to compel arbitration should be brought for failure to state a claim upon which relief may be granted under Rule 12(b)(6), or whether a motion to dismiss to compel arbitration should be brought based on lack of proper venue under Rule 12(b)(3). Federal courts address motions tocompel arbitration in drastically different ways and splits of authority exist even within the same circuits and districts.

(A) Motion to Dismiss Under 12(b)(1)

Initially, some courts have held that binding arbitration provisions divest the court of subject matter jurisdiction. These courts hold that if no obstacle prevents the plaintiff from litigating his or her claims as a result of this dismissal, then the motion should be considered under Rule 12(b)(1). See Powers Distrib. Co. v. Grenzebach Corp., No. 16-12740, 2016 WL 6611032, at *2-3 (E.D. Mich. Nov. 9, 2016) (discussing the split among district courts in the Sixth Circuit and citing cases).

In fact, the weight of federal authority seems to favor considering a motion to dismiss and compel arbitration under Rule 12(b)(1). See, e.g., Gilbert v. Donahoe, 751 F.3d 303, 306, 306 n.1 (5th Cir. 2014); Geographic Expeditions, Inc. v. Estate of Lhotka, 599 F.3d 1102, 1106-07 (9th Cir. 2010); Harris v. United States, 841 F.2d 1097, 1099 (Fed. Cir. 1988); Mann v. Equifax Info. Servs., LLC, No. 12-cv-14097, 2013 WL 3814257, at *2 (E.D. Mich. July 22, 2013); MRI Scan Ctr., LLC v. Nat'l Imaging Assocs., Inc., No. 13-60051-CIV, 2013 WL 1899689, at *2 (S.D. Fla. May 7, 2013); Orange Cty. Choppers, Inc. v. Goen Techs. Corp., 274 F. Supp. 2d 372, 373 (S.D.N.Y. 2005).

Moreover, the conclusion that federal courts lack subject matter jurisdiction over claims where parties have agreed toarbitrate may be supported by the text of the FAA. Section four of the FAA provides,

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action, . . . of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.

9 U.S.C. § 4 (emphasis added). Of course, the language that says, "save for such [arbitration] agreement, [the district court] would have jurisdiction under title 28," seems to indicate that the federal district courts do not have subject matter jurisdiction in the presence of a valid arbitration agreement between parties.

Curiously though, the FAA also allows for courts to retain jurisdiction and stay a case pending arbitration and then enter a judgment on the award after arbitration. 9 U.S.C. §§ 3, 9. In fact, there is a split of authority on whether the FAA mandates a stay of litigation as opposed to a dismissal in certain situations. See Wilczewski v. Charter West Nat'l Bank, 889 N.W.2d 63, 71 n.34 (Neb. 2016) (acknowledging the split among the federal circuits and citing cases). Thus, it follows that, if a court can stay litigation when it compels arbitration that courts have and retain subject matter jurisdiction over the dispute, even when compelling the parties to arbitrate based on a valid arbitration clause.

As a result, some courts have expressly held that valid arbitration clauses do not divest the court of subject matter...