Southeast Resource Recovery Facility Authority v. Montenay Intern. Corp.
| Decision Date | 18 August 1992 |
| Docket Number | No. 91-56241,91-56241 |
| Citation | 973 F.2d 711 |
| Parties | SOUTHEAST RESOURCE RECOVERY FACILITY AUTHORITY; City of Long Beach, Plaintiffs, v. MONTENAY INTERNATIONAL CORPORATION; Montenay Pacific Power Corporation, Third-party-defendants-Appellants, v. DRAVO CORPORATION, Defendant-third-party-plaintiff-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Douglas W. Beck, Tuttle & Taylor, Los Angeles, Cal., for third-party defendants-appellants.
Patrick M. Kelly and Robert M. Young, Jr., Wilson, Elser, Moskowitz, Edelman & Dicker, Los Angeles, Cal., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before: CANBY, REINHARDT, and WIGGINS, Circuit Judges.
On November 1, 1988, MIC entered into an agreement with Dravo to purchase parts of Dravo's waste-to-energy business. Dravo assigned MIC its rights under an executory contract for operation of a waste-to-energy facility that Dravo was building. MIC then assigned the rights under the operation contract to MPPC. Subsequent to this agreement, Dravo experienced difficulty obtaining acceptance of the facility and was forced to alter other agreements concerning the operation of the facility. Dravo and MPPC entered into the Amended and Restated Master Subcontract Agreement under which MPPC operated the facility pursuant to an interim operations contract until Dravo could obtain acceptance of the facility. This amended master subcontract contained an arbitration agreement governed by Pennsylvania law with California as the forum state for any arbitration.
Dravo never did obtain acceptance of the facility, and litigation ensued. MPPC initiated an arbitration against Dravo pursuant to the arbitration agreement. Dravo participated in the arbitration proceedings at first, but then brought an action in Los Angeles County Superior Court to enjoin the arbitration proceedings.
Although Pennsylvania law encourages arbitration and requires that courts enforce arbitration agreements even if the result is piecemeal litigation, California law recognizes a narrow exception to the general policy in favor of arbitration. Under Cal.Civ.Proc.Code § 1281.2(c) (West 1982), California law allows a court to stay arbitration if a party to the arbitration agreement is involved in related litigation with a third party. Therefore, Dravo argued that section 1281.2(c) applied to the arbitration as the procedural law of the forum state and that the arbitration should be enjoined under section 1281.2(c).
The state court rejected Dravo's arguments and ruled that section 1281.2(c) did not apply because the arbitration agreement is governed by Pennsylvania law. Dravo then filed third-party complaints against MIC and MPPC in the federal district court where the litigation surrounding Dravo's waste-to-energy facility had been consolidated. Dravo immediately brought a motion to stay the arbitration and made the same arguments in the district court concerning the applicability of section 1281.2(c) that had been rejected by the state court. The federal district court, however, held that section 1281.2(c) did apply as a procedural rule of the forum state of the arbitration. MIC and MPPC appeal the district court's decision.
There are two primary issues raised in this appeal. First, we must determine whether the state court order was an order compelling arbitration that must be given full faith and credit in federal court. Second, we are asked to decide whether Cal.Civ.Proc.Code § 1281.2(c) is applicable to the arbitration in this case. Because the issues in this case turn on questions of state and federal law rather than questions of fact, they are reviewed de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc) (), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984); In re McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc) ().
Under California law, an order compelling arbitration is the final order in a special proceeding. Once the order is made, the special proceeding is complete and the arbitration must proceed. The order cannot be appealed or reviewed until after the arbitration is completed, and the trial court will not revisit the issue. See Atlas Plastering, Inc. v. Superior Court, Alameda County, 72 Cal.App.3d 63, 67, 140 Cal.Rptr. 59 (1977); Maddy v. Castle, 58 Cal.App.3d 716, 719, 130 Cal.Rptr. 160 (1976); Jardine, Matheson & Co. v. Pacific Orient Co., 100 Cal.App. 572, 280 P. 697, 698 (1929). Thus, an order compelling arbitration is "sufficiently firm to be accorded conclusive effect" and is entitled to full faith and credit. Sandoval v. Superior Court, 140 Cal.App.3d 932, 936, 190 Cal.Rptr. 29 (1983); see Lounge-A-Round v. GCM Mills, Inc., 109 Cal.App.3d 190, 198, 166 Cal.Rptr. 920 (1980) ().
Because a California court order compelling arbitration is given preclusive effect in federal court, the key to this case is whether the state court order is an order compelling arbitration. If the state court judgment was indeed an order compelling arbitration under California law, the federal district court erred by effectively overruling the state court and staying the arbitration.
Dravo argues that its state court action to enjoin the arbitration proceedings was simply a preliminary injunction action. Under this theory, Dravo asserts that the state court decision is entitled to no more preclusive effect than any ordinary denial of a preliminary injunction. Indeed, the cases cited by Dravo for the proposition that the state court order is not entitled to preclusive effect involve preliminary or pre-trial motions. However, Dravo is unable to provide any authority for the proposition that a refusal to enjoin arbitration is treated as an ordinary denial of a preliminary motion instead of an order compelling arbitration. We believe the better view is that a denial of an injunction against arbitration is an order compelling arbitration.
Under California law, the state court decision against Dravo is treated as an order compelling arbitration. The California courts have consistently held that an action for an injunction against arbitration is simply a defense to a petition to compel arbitration. California State Council of Carpenters v. Superior Court, 11 Cal.App.3d 144, 155-56, 89 Cal.Rptr. 625 (1970). It makes no difference who took the first step into court; the action is always treated as if the court were ruling on a petition to compel arbitration. Id.; Melchor Inv. Co. v. Rolm Sys., 3 Cal.App.4th 587, 591-92, 4 Cal.Rptr.2d 343 (1992) (); International Film Investors v. Arbitration Tribunal of the Directors Guild of Am., 152 Cal.App.3d 699, 704, 199 Cal.Rptr. 690 (1984) (). Thus, the denial of an injunction against the arbitration process is an order to compel arbitration.
Our analysis is supported by the decision of the Third Circuit in Towers, Perrin, Forster & Crosby, Inc. v. Brown, 732 F.2d 345 (3d Cir.1984). In Towers, the Third Circuit determined that a California state court decision allowing or denying arbitration is a final order for purposes of res judicata: "What little case law there is on point indicates that the decision that a dispute is or is not arbitrable is conclusive of that issue." Id. at 348. The court went on Moreover, the best example of California law on this issue is provided by the holdings of the California courts in this very case. Dravo brought an action for injunctive relief and argued that the state court should stay arbitration under Cal.Civ.Proc.Code § 1281.2(c)....
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