Midwest Mechanical Contractors, Inc. v. Commonwealth Const. Co.

• Decision Date: 06 October 1986
• Docket Number: No. 85-2659,85-2659
• Citation: 801 F.2d 748
• Parties: MIDWEST MECHANICAL CONTRACTORS, INC., Plaintiff-Appellee, v. COMMONWEALTH CONSTRUCTION CO., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 748

801 F.2d 748

MIDWEST MECHANICAL CONTRACTORS, INC., Plaintiff-Appellee, v. COMMONWEALTH CONSTRUCTION CO., et al., Defendants-Appellants.

No. 85-2659.

United States Court of Appeals Fifth Circuit.

Oct. 6, 1986.

Allen R. Boudreaux, Boudreaux & Gunn, Thibodaux, La., for defendants-appellants.

Thomas Moore, Frederick G. Thompson, IV, Gould & Moore, Kansas City, Mo., and Charles Lyman, James Ebanks, Giessel, Stone, Barker & Lyman, Houston, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WISDOM, JOHNSON, and HIGGINBOTHAM, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Commonwealth Construction appeals the denial of its motion under 9 U.S.C. Sec. 3 to stay litigation of a breach of contract suit brought by Midwest Mechanical Contractors until after arbitration. Finding that the contract between the parties contains an agreement to arbitrate issues raised in the suit, we reverse the district court's denial of the motion for a stay.

I

Commonwealth Construction executed a subcontract with Midwest Mechanical Contractors for work in conjunction with Midwest's expansion construction at the Port Acres Sewage Treatment Plant at Port Arthur, Texas. In April 1985, before completion of the project, Commonwealth filed a demand with the American Arbitration Association for arbitration of a dispute between the parties. Midwest objected to arbitration and filed this suit in federal district court, alleging breach of contract and violation of the Texas Deceptive Trade Practices Act, Tex.Bus. & Com.Code Ann. Sec. 17.01 et seq.

Shortly thereafter, the American Arbitration Association found that the issues raised in Commonwealth's demand were arbitrable, and Commonwealth moved to stay litigation pending arbitration in accordance with section 3 of the Arbitration Act, 9 U.S.C. Sec. 1 et seq. The district court denied the motion, and Commonwealth's motion for a stay pending this appeal. ¹

While this appeal was pending, Commonwealth filed a petition to compel arbitration under section 4 of the Act in the Eastern District of Texas. In the ninth defense of its answer, Midwest called the court's attention to Commonwealth's appeal in this case, and asserted "[t]hat the lawsuit filed under Cause No. H-85-2734 [i.e. the case in this appeal] is the proper forum to resolve all issues between Commonwealth and Midwest on the Port Arthur Subcontract and the action herein should be dismissed." In an order within opinion, the district court dismissed Commonwealth's petition to compel arbitration; Commonwealth did not appeal the order.

Commonwealth now argues that its subcontract with Midwest contained a valid arbitration clause, and that the district court erred in not staying Midwest's suit until after arbitration as required by section 3. In response, Midwest argues that the issue of arbitrability was not raised by Commonwealth's motion, is therefore not presented in this appeal, and at any rate is barred by res judicata. Midwest also argues that Commonwealth's motion is void because at the time of filing Commonwealth had failed to pay its Texas franchise tax and had forfeited its state corporate charter. Finally, Midwest argues that the contract documents do not require arbitration as asserted by Commonwealth.

II

Midwest's argument that the issue of arbitrability was not raised in Commonwealth's motion for a stay of litigation under section 3 of the Arbitration Act misreads the Act. Midwest appears to argue that the motion for a stay required the district court to do no more than determine whether arbitration between the parties was actually pending; because it was not, Midwest argues that the motion was properly denied, and that to raise the question of whether the contract between the parties was arbitrable required a motion to compel arbitration under section 4 of the Act.

Section 3 provides that:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

A motion under this section requests the district court to refrain from further action in a suit pending arbitration, and requires the court to first determine whether there is a written agreement to arbitrate between the parties, and then whether any of the issues raised are within the reach of that agreement. Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 988 (2d Cir.1942). Contrary to Midwest's suggestion, so long as a written agreement to arbitrate exists there is no specific requirement that arbitration actually be pending before a stay of litigation can be granted; in fact, the Supreme Court has affirmed a stay of litigation in which no affirmative demand for arbitration had been made, no motion to compel arbitration had been sought, and there were as yet apparently no ongoing arbitration proceedings. Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, 453-54, 55 S.Ct. 310, 315, 79 L.Ed. 440 (1935). A petition under section 4 of the Arbitration Act, by contrast, is a request that the court compel specific performance of an agreement to arbitrate, and may be made in any district court which would have subject matter jurisdiction over the underlying dispute, in some cases even after a court has already refused to stay proceedings under section 3. ² See American Locomotive Co. v. Gyro Process Co., 185 F.2d 316, 318 (6th Cir.1950).

As noted in the Kukulundis case, the issue of whether there is an agreement to arbitrate is a threshold question raised in any motion under section 3. If the issues in a case are within the reach of the agreement, the district court has no discretion under section 3 to deny the stay. Accordingly, Midwest's contention that Commonwealth's motion for a stay under section 3 did not raise the issue of arbitrability is without merit. Moreover, because a district court may order a stay under section 3 even when it cannot compel arbitration in accordance with section 4 of the Act, Shanferoke, 293 U.S. at 453, 55 S.Ct. at 315, we hold that a motion to compel arbitration under section 4 is not a prerequisite to raising the issue of arbitrability under section 3, as suggested by Midwest.

III

Midwest next argues that the issue of arbitrability is barred by res judicata, since Commonwealth did not appeal the denial of its petition to compel arbitration in a separate action in another federal court. This court has defined the rules of res judicata as actually comprising two separate doctrines: "claim" preclusion and "issue" preclusion. Kaspar Wire Works, Inc. v. Leco Engineering and Machine, Inc., 575 F.2d 530, 535 (5th Cir.1978). Claim preclusion "treats a judgment, once rendered, as the full measure of relief to be accorded between the parties on the same 'claim' or 'cause of action.' " Id. (quoting Sea Land Services, Inc. v. Gaudet, 414 U.S. 573, 94 S.Ct. 806, 39 L.Ed.2d 9 (1974) ). Issue preclusion applies when suits involve separate claims, but present some of the same issues, and "bars the relitigation of issues actually adjudicated, and essential to the judgment, in a prior litigation between the same parties." Id. 575 F.2d at 535-36. As discussed above, a motion to stay litigation under section 3 and a petition to compel arbitration under section 4 serve separate purposes, and are not required to be presented at one time in the same proceeding. Therefore, the res judicata doctrine of "issue preclusion" rather than "claim preclusion" is applicable in this context.

Because both an application for a stay of litigation and a petition to compel litigation raise the question of whether there is an actual agreement to arbitrate between the parties, "issue preclusion" will bar relitigation of arbitrability once it has been actually litigated and is essential to the first decision. However, "the first rule for identifying the issues to be precluded is that if there is no showing as to the issues that were actually decided, there is no issue preclusion." C. Wright, A. Miller, and E. Cooper, Federal Practice and Procedure Sec. 4420 (1981) (emphasis added). Here, the order denying the petition to compel did not indicate its basis, and may have rested solely on Midwest's contention in its pleadings that this appeal "is the proper forum to resolve all issues between Commonwealth and Midwest on the Port Arthur Subcontract and the action herein should be dismissed." Because we cannot tell whether the court actually reached and decided the merits of the arbitration issue, Commonwealth's claim that there was a valid arbitration agreement between the parties is not barred by issue preclusion.

IV

Finally, before reaching the merits of the arbitration issue ourselves, we pause to address Midwest's contention that the motion to stay litigation was void because Commonwealth was not a corporation in good standing under Texas law at the time of filing. The record reflects that by the time of the hearing on the motion Commonwealth had paid its outstanding taxes, and that its corporate charter had been reinstated.

Under Texas law, a corporation that has forfeited its corporate privileges is denied the right to sue in a state court. Tex. Tax Code Ann. Sec. 171.252. A delinquent corporation may revive its privileges and access to the courts by obtaining reinstatement of its corporate charter through payment of the delinquent franchise taxes. Tex. Tax Code Ann. Secs. 171.313, 171.314, and 171.253. See also Speier Tire Co., Inc. v....