M.C. Const. Corp. v. Gray Co.

• Decision Date: 30 July 1998
• Docket Number: Civil Action No. 98-7-D.
• Citation: 17 F.Supp.2d 541
• Parties: M.C. CONSTRUCTION CORP., Plaintiff, v. GRAY COMPANY, Defendant.
• Court: U.S. District Court — Western District of Virginia

17 F.Supp.2d 541

M.C. CONSTRUCTION CORP., Plaintiff, v. GRAY COMPANY, Defendant.

Civil Action No. 98-7-D.

United States District Court, W.D. Virginia, Danville Division.

July 30, 1998.

COPYRIGHT MATERIAL OMITTED

William Weldon Bennett, Jr., William W. Bennett, Jr. & Associates, Halifax, VA, James A.L. Daniel, Daniel, Vaughan, Medley & Smitherman, P.C., Danville, VA, Darren Joseph Duzyk, Stites & Harbison, Lexington, KY, for James N. Gray Co.

James A.L. Daniel, Daniel, Vaughan, Medley & Smitherman, P.C., Danville, VA, for M.C. Const. Co.

MEMORANDUM OPINION

KISER, Senior District Judge.

The parties' cross motions for summary judgment are currently before the court. For the reasons stated herein, I am of the opinion that, (1) the plaintiff's motion should be DENIED, (2) the defendant's motion for summary judgment should be GRANTED as to the defendant's counterclaim for a declaratory judgment that the Federal Arbitration Act preempts Va.Code Ann. § 8.01-262.1 and (3) because I am without power to compel the plaintiff to arbitrate this matter in Kentucky, the case should be transferred to the United States District Court for the Eastern District of Kentucky, Lexington Division for further proceedings.

I. BACKGROUND

M.C. Construction Corporation ("MC"), a North Carolina Corporation and Gray Company ("Gray"), a Kentucky corporation, entered into two subcontracts in May and October 1996 for work to be performed in Halifax County, Virginia. The two subcontracts contained largely identical provisions, including (1) an arbitration clause, (2) a choice of law clause¹ and (3) an arbitration forum selection clause.² Problems arose, delays resulted and the parties have both alleged damages from the delays.

In September 1997, MC filed a motion for judgment in Virginia state court seeking enforcement of the May 1996 subcontract. Apparently, the state court ordered the parties to arbitrate that contract. In January 1998, MC again filed a motion for judgment in state court, this time requesting a declaratory judgment that, pursuant to Va.Code Ann. § 8.01-262.1, the arbitration should take place in Virginia.³

Gray removed the case to federal court and filed an answer and counterclaim on February 6, 1998. In its counterclaim, Gray seeks a declaration that: (1) pursuant to Kentucky law the situs of the arbitration should be Kentucky; (2) Kentucky law applies; and (3) pursuant to the FAA the situs of the arbitration should be Kentucky. Jurisdiction for the removal and counterclaim is alleged to be based on 28 U.S.C. § 1332 (diversity), 28 U.S.C. § 2201 (the Declaratory Judgment Act) and 9 U.S.C. § 4 (the Federal Arbitration Act). Both parties have filed motions for summary judgment on their respective claims.

II. THE MOTION FOR SUMMARY JUDGMENT

A. THE STANDARD OF REVIEW

Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial and summary judgment is appropriate. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In considering a motion for summary judgment, "the court is required to view the facts and draw reasonable inferences in a light most favorable to the non-moving party." Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.1994) (citations omitted), cert. denied, 513 U.S. 813, 115 S.Ct. 67, 130 L.Ed.2d 24 (1994). There is a genuine issue of fact if "the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

B. THE DEFENDANT'S MOTION

The defendant argues that (1) Virginia choice of law rules apply to this dispute, (2) Virginia law recognizes and enforces choice of law provisions, and (3) the contract clause selecting Kentucky law should be enforced. Because Kentucky law applies, the defendant argues that Va.Code Ann. § 8.01-262.1 is inapplicable. In the alternative, the defendant argues that the Federal Arbitration Act preempts Va.Code Ann. § 8.01-262.1.

C. THE PLAINTIFF'S MOTION

The plaintiff argues that under Erie, a federal court sitting in diversity must apply the substantive law of the state in which it is sitting. As a result, the plaintiff's assert that Va.Code Ann. § 8.01-262.1 requires the arbitration to take place in Virginia. Moreover, the plaintiff notes that if the Federal Arbitration Act applies, this court can only compel arbitration within this district.

III. ANALYSIS

A. SUBJECT MATTER JURISDICTION

The defendant's notice of removal states that subject matter jurisdiction is based on diversity, 28 U.S.C. § 1332, and that "[j]urisdiction is also authorized by 28 U.S.C. § 2201 [the Declaratory Judgment Act] and 9 U.S.C. § 4 [the Federal Arbitration Act]." The plaintiff has not contested the validity of subject matter jurisdiction, but because of the unique procedural posture of this case. I believe that I should address the issue sua sponte. See Gibbs v. Buck, 307 U.S. 66, 72, 59 S.Ct. 725, 83 L.Ed. 1111 (1939) (court can address this issue sua sponte).

1. The Federal Arbitration Act

The defendant alleges jurisdiction under the Federal Arbitration Act. The Supreme Court explained the FAA's jurisdictional effect as follows:

The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976 ed., Supp. IV) or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue.

Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 26 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); see also Gibraltar, P.R., Inc. v. Otoki Group, Inc., 104 F.3d 616, 618 (4th Cir.1997). The defendant is therefore in error to the extent it asserts that subject matter jurisdiction for its notice of removal and counterclaim is based on the FAA.

2. The Declaratory Judgment Act

The defendant also alleges jurisdiction under the Declaratory Judgment Act. "The operation of the Declaratory Judgment Act is procedural only." Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72, 70 S.Ct. 876, 94 L.Ed. 1194 (1950) (quoting Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 240, 57 S.Ct. 461, 81 L.Ed. 617 (1937)). In passing the Act, Congress "enlarged the range of remedies available in the federal courts but did not extend their jurisdiction." Id. Relief under the Act can "only be given if the requisites of jurisdiction, in the sense of a federal right or diversity, provided foundation for resort to the federal courts." Id; see also CHARLES A. WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE: Civil § 2766 (1998); Gibraltar, 104 F.3d at 619. Jurisdiction is therefore not proper under the Declaratory Judgment Act.

3. Diversity Jurisdiction

The defendant also alleges that jurisdiction exists based on diversity. The parties are diverse: The plaintiff is incorporated in North Carolina and has its principal place of business in Halifax County, Virginia and the defendant is incorporated in Kentucky and has its principal place of business in Kentucky.

There is at least some question as to the amount in controversy. Diversity jurisdiction requires an amount in controversy of greater than $75,000. 28 U.S.C. § 1332(a)(1). The amount in controversy will be deemed to exceed the jurisdictional minimum unless it "appear[s] to a legal certainty that the claim is really for less than the jurisdictional amount." St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289, 58 S.Ct. 586, 82 L.Ed. 845 (1938).

"In an action for declaratory judgment, the amount in controversy is measured by the amount of the object of the obligation." Hunt v. Washington State Apple Ad. Comm'n, 432 U.S. 333, 347-48, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977). "When an insurer seeks a declaratory judgment regarding the coverage provided by an insurance policy, the object of the litigation is the policy and the value of the right to be protected is plaintiff's potential liability under that policy." St. Paul Reinsurance Co., Ltd. v. Greenberg, 134 F.3d 1250, 1252 (5th Cir. 1998). The amount in controversy in a declaratory judgment action "is not necessarily the money judgment sought or recovered, but rather the value of the consequences which may result from the litigation." Beacon Const. Co., Inc. v. Matco Elec. Co., Inc., 521 F.2d 392 (2d Cir.1975) (citing Smith v. Adams, 130 U.S. 167, 175, 9 S.Ct. 566, 32 L.Ed. 895 (1889)).

The parties have suggested that at least several hundred thousand dollars, and perhaps as much as several million dollars, are at stake in this arbitration. That amount clearly satisfies the jurisdictional minimum.

B. CHOICE OF LAW

1. Which State's Choice of Law Rules Apply?

As a federal court sitting in diversity, I must normally apply the substantive law of Virginia. Virginia's choice of law rules therefore apply in this matter.

2. Virginia's Choice of Law Rules

a. Choice of Law Clauses in Contracts

Virginia has long recognized that parties to a contract may agree in advance which jurisdiction's law will apply to their transaction. See Union Central Life Ins. Co. v. Pollard, 94 Va. 146, 26 S.E. 421, 422 (1896). In Pollard, the parties included language in their contract to the effect that it would be "held and construed to have been made in the city of Cincinnati, Ohio." Id. The court...