Jr. Food Stores v. Hartland Constr. Grp.

Decision Date23 March 2020
Docket NumberCIVIL ACTION NO. 1:19-CV-00076-GNS
CourtU.S. District Court — Western District of Kentucky

This matter is before the Court on Plaintiff's Motion to Compel Mediation and Arbitration and Motion to Stay Proceedings in the Interim (DN 15). This motion is ripe for adjudication. For the reasons that follow, the motion is GRANTED IN PART and DENIED IN PART.

A. Statement of Facts

In early 2018, Plaintiff Jr. Food Stores, Inc. ("JFS") entered into a contract with Defendant Hartland Construction Group, LLC ("Hartland") for Hartland to build an IGA Crossroads Market in Lexington, Kentucky. (Pl.'s Mot. Compel Mediation & Arbitration & Stay Proceedings 1, DN 15 [hereinafter Pl.'s Mot. Arbitration]). This contract incorporated by reference American Institute of Architects ("AIA") Standard Form A101-2017, an Additions and Deletions Report, and AIA Form A201-2017 (collectively, the "Contract"). (Pl.'s Mot. Arbitration 1; Notice Removal Ex. A, at 1-56, DN 1-2). To secure performance of the Contract, Hartland obtained an irrevocable letter of credit ("ILOC")1 from Defendant Peoples Bank ("Peoples"), which named Peoples as thelender, Hartland as the borrower, and JFS as the beneficiary. (Pl.'s Mot. Arbitration 1; Notice Removal Ex. A, at 57-59, DN 1-2).

JFS alleges that Hartland defaulted under and is in breach of the Contract. (Compl. ¶ 7, DN 1-1). JFS further alleges that Hartland has failed to cure its default, and Peoples has denied any draw on the ILOC. (Compl. ¶ 11, DN 1-1). Article 6, Section 6.2 of AIA Standard Form A101 and Article 15, Section 15.4 of AIA Form A201 both govern the resolution of disputes between JFS and Hartland under the Contract and identify first mediation and then arbitration as the method of dispute resolution. (Notice Removal Ex. A, at 6, 52-53, DN 1-2). JFS has made the requisite demands to both Hartland and Peoples for mediation and arbitration. (Pl.'s Mot. Arbitration Ex. 1, DN 15-1).

B. Procedural History

JFS filed its initial complaint against Hartland and Peoples (collectively, the "Defendants") in Warren Circuit Court on May 16, 2019, in a case styled Jr. Food Stores, Inc. v. Hartland Construction Group, LLC, Warren Circuit Court, No. 19-CI-00681. On June 19, 2019, Peoples removed the matter to this Court pursuant to 28 U.S.C. § 1446 asserting diversity of citizenship under 28 U.S.C. § 1332 and 28 U.S.C. § 1441. (Notice Removal 2-3, DN 1). On November 13, 2019, JFS moved to compel mediation and arbitration and to stay proceedings in the interim. Peoples responded, and JFS replied. (Def.'s Resp. Pl.'s Mot. Arbitration, DN 29; Pl.'s Reply Mot. Arbitration, DN 30). Hartland did not respond to JFS's motion.


The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, provides that a written arbitration provision governing disputes under a contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.The FAA grants district courts the power to compel arbitration as provided for in an underlying agreement, so long as the court is "satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue . . . ." 9 U.S.C. § 4. "Thus, [w]hen asked by a party to compel arbitration under a contract, a federal court must determine whether the parties have agreed to arbitrate the dispute at issue." Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 889 (6th Cir. 2002) (alteration in original) (internal quotation marks omitted) (quoting Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000)). The party opposing arbitration has the burden to "show a genuine issue of material fact as to the validity of the agreement to arbitrate." Id. (citation omitted). As such, a motion to compel arbitration is considered under the motion for summary judgment standard. Weddle Enters., Inc. v. Treviicos-Soletanche, J.V., No. 1:14-CV-00061-JHM, 2014 WL 5242904, at *2 (W.D. Ky. Oct. 15, 2014).

A. Hartland

As noted, JFS and Hartland entered into the Contract, which includes an arbitration provision. (Pl.'s Mot. Arbitration 1; Notice Removal Ex. A, at 6, 52-53, DN 1-2). Specifically, the Contract selects arbitration as the method of binding dispute resolution and further provides that "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 . . . ." (Notice Removal Ex. A, at 52, DN 1-2). The term "Claim" is, in turn, defined 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." (Notice Removal Ex. A, at 50, DN 1-2). Hartland has not opposed JFS's motion to compel arbitration nor has it shown a genuine issue of material fact as to the validity of the Contract generally or the arbitration provision specifically.As such, Hartland is compelled to mediate and arbitrate this dispute pursuant to the terms of the Contract.

B. Peoples

JFS contends that Peoples should be compelled to arbitrate this dispute as well, even though Peoples was not a direct party to the underlying Contract. (Pl.'s Mot. Arbitration 2-3). Peoples agrees that Hartland should be compelled to arbitrate this dispute, but Peoples objects to being required itself to arbitrate. (Def.'s Resp. Pl.'s Mot. Arbitration 1).

"[N]onsignatories may be bound to an arbitration agreement under ordinary contract and agency principles." Javitch v. First Union Sec., Inc., 315 F.3d 619, 629 (6th Cir. 2003) (citing Arnold v. Arnold Corp., 920 F.2d 1269, 1281 (6th Cir. 1990)). Additionally, "a nonsignatory may be bound to an arbitration agreement under an estoppel theory when the nonsignatory seeks a direct benefit from the contract while disavowing the arbitration provision." Id. (citing Thomson-CSF v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995)). "Five theories for binding nonsignatories to arbitration agreements have been recognized: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) estoppel." Id. (citation omitted). Most relevant here, the Sixth Circuit has clarified that "[i]ncorporation by reference is proper where the underlying contract makes clear reference to a separate document, the identity of the separate document may be ascertained, and incorporation of the document will not result in surprise or hardship." Int'l Ass'n of Machinists & Aerospace Workers v. ISP Chems., Inc., 261 F. App'x 841, 848 (6th Cir. 2008) (citation omitted).

JFS argues strongly that the ILOC incorporated by reference the underlying Contract. (Pl.'s Mot. Arbitration 2-3). After all, the ILOC issued by Peoples makes extensive reference to the Contract, denoted in the ILOC as the "Construction Contract," and specifically states that it isissued "in connection with that Agreement . . . ." (Notice Removal Ex. A, at 57, DN 1-2). The ILOC also states, however, that "[a]ny action arising out of or relating to this Letter of Credit shall be commenced and prosecuted in a court of appropriate jurisdiction in the Commonwealth of Kentucky, and [Peoples] hereby consents to the jurisdiction of such courts." (Notice Removal Ex. A, at 59, DN 1-2). This portion of the ILOC clearly identifies judicial resolution, not arbitration, as the mode of dispute resolution. Insofar as Peoples might have implicitly incorporated by reference any part of the Contract, it has explicitly provided that disputes under the ILOC would be litigated, not arbitrated. Since Peoples unambiguously negated the Contract's arbitration provision, it cannot be compelled to arbitrate. See AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986) ("[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." (citations omitted)).

Without this specific dispute resolution language in the ILOC, the result very well may have been different. In Exchange Mutual Insurance Co. v. Haskell Co., 742 F.2d 274 (6th Cir. 1984), the Sixth Circuit addressed a similar situation and compelled arbitration: "Although Exchange Mutual was not a signatory to the primary construction contract, the performance bond incorporated by reference the terms of the underlying subcontract. The subcontract, in turn, incorporated by reference the terms of the primary construction contract which imposed an obligation to submit all unresolved disputes to arbitration." Id. at 276. This case is distinguishable, however, for two reasons. First, the performance bond in Haskell explicitly incorporated the underling contract: "which subcontract is hereby referred to and made a part hereof." Id. The ILOC here certainly refers to the underlying Contract, but it does not go so far as to explicitly incorporate it by reference. (Notice Removal Ex. A, at 57-59, DN 1-2). Second, and moreimportantly, the performance bond in Haskell did not include the dispute resolution language present here in the ILOC, which preserves litigation as the mode of dispute resolution.

A sister court followed Haskell in FCCI Insurance Co. v. Nicholas County Library, No. 5:18-CV-038-JMH, 2019 WL 1234319 (E.D. Ky. Mar. 15, 2019): "In sum, while FCCI was not a party to the construction contract . . . in the sense that FCCI was not an initial signatory to the construction contract, FCCI did incorporate all the terms of the construction contract into the performance bond, including the binding arbitration provisions." Id. at *8. Again though, the performance bond in that case explicitly incorporated the underlying contract—"a copy of which is hereto attached and made part hereof"—and it did not have the same limiting...

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