W.J. O'Neil Co. v. Shepley, Bulfinch, Richardson & Abbott, Inc.

• Decision Date: 02 October 2014
• Docket Number: No. 13–2320.,13–2320.
• Citation: 765 F.3d 625
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: W.J. O'NEIL COMPANY, Plaintiff–Appellant, v. SHEPLEY, BULFINCH, RICHARDSON & ABBOTT, INC.; Smith Seckman Reid, Inc., Defendants–Appellees.

765 F.3d 625

W.J. O'NEIL COMPANY, Plaintiff–Appellant,

v.SHEPLEY, BULFINCH, RICHARDSON & ABBOTT, INC.; Smith Seckman Reid, Inc., Defendants–Appellees.

No. 13–2320.

United States Court of Appeals, Sixth Circuit.

Argued: June 20, 2014.

Decided and Filed: Aug. 28, 2014.

Rehearing En Banc Denied Oct. 2, 2014.^*

ARGUED:David M. Zack, McAlpine PC, Auburn Hills, Michigan, for Appellant. Jeffrey C. Gerish, Plunkett Cooney, Bloomfield Hills, Michigan, for Appellee Smith Seckman Reid. Michelle A Thomas, Thomas, DeGrood, Witenoff, P.C., Southfield, Michigan, for Appellee Shepley, Bulfinch, Richardson. ON BRIEF:David M. Zack, McAlpine PC, Auburn Hills, Michigan, for Appellant. Jeffrey C. Gerish, Plunkett Cooney, Bloomfield Hills, Michigan, for Appellee Smith Seckman Reid. Michelle A Thomas, Thomas, DeGrood, Witenoff, P.C., Southfield, Michigan, for Appellee Shepley, Bulfinch, Richardson.

Before: COLE, Chief Judge; BOGGS and McKEAGUE, Circuit Judges.

COLE, C.J., delivered the opinion of the court, in which BOGGS, J., joined. McKEAGUE, J. (p. 635), delivered a separate dissenting opinion.

OPINION

COLE, Chief Judge.

After losing millions of dollars because of delays and coordination failures in building a hospital, W.J. O'Neil Company sued its construction manager in state court. The two ended up in arbitration. Shepley, Bulfinch, Richardson & Abbott, Inc., and Smith Seckman Reid, Inc., the defendants in this case, were added to the arbitration on indemnity claims. In the arbitration, O'Neil did not formally assert claims against the instant defendants, but O'Neil's claims against its construction manager arose from the defendants' defective and inadequate design of the hospital. O'Neil won the arbitration against its construction manager, but the construction manager did not establish its indemnity claims, so the defendants were not held liable. No party sought judicial confirmation or review of the arbitration award.

O'Neil then sued the defendants in federal court. The district court dismissed the claims, finding them barred by Michigan's doctrine of res judicata. We find this conclusion in error. An arbitration award cannot bar a claim that the arbitrator lacked authority to decide, and an arbitrator lacks authority to decide a claim that the parties did not agree to arbitrate. Here, O'Neil did not agree to arbitrate the instant claims. Accordingly, we reverse the district court's orders, vacate the judgment, and remand for further proceedings.

I.

The parties helped design and construct the Cardiovascular Center Hospital at the University of Michigan in Ann Arbor. The University hired Shepley, Bulfinch, Richardson & Abbott, Inc., to serve as the project's architect. Shepley Bulfinch, in turn, retained Smith Seckman Reid, Inc., to provide design services related to the mechanical, electrical, plumbing, and fire-protection systems of the new hospital. Separately, the University hired Barton Malow Company to serve as the construction manager. Barton Malow subcontracted W.J. O'Neil Company to serve as the mechanical contractor to supply and install plumbing, heating, ventilation, and cooling systems. O'Neil did not have a contract with Shepley Bulfinch or Smith Seckman.

According to O'Neil, design errors and other failures caused it to incur substantial damages during the construction. To recover its damages, O'Neil sued Barton Malow, Shepley Bulfinch, and Smith Seckman in state court in Michigan. The court dismissed Barton Malow because its contract with O'Neil required the two to resolve their disputes by binding arbitration. The court initially stayed O'Neil's claims against Shepley Bulfinch and Smith Seckman, but it eventually entered a stipulated order dismissing the claims without prejudice in light of the arbitration.

O'Neil filed a demand for arbitration against Barton Malow, alleging breach, cardinal change, and abandonment of contract “arising from substantial design errors and mismanagement of the project by the owner and general contractor.” O'Neil sought $19 million in damages. Barton Malow then filed its own demand for arbitration against the University, pursuant to their separate contract, seeking indemnity for the alleged design errors by the design team. The two arbitrations were consolidated over O'Neil's objection. The University filed a demand for indemnification against Shepley Bulfinch, which filed a demand for indemnification against Smith Seckman. Thus began a consolidated arbitration involving O'Neil, Barton Malow, the University, Shepley Bulfinch, and Smith Seckman.

The arbitration was quite large. O'Neil admits that discovery was “substantial.” And by Smith Seckman's count, the hearing lasted 42 days over the course of 9 months, the parties introduced more than 1400 exhibits, and more than 50 witnesses testified. In the arbitration, O'Neil formally asserted claims only against Barton Malow, the construction manager, but O'Neil's claims implicated and were hostile to Shepley Bulfinch and Smith Seckman, the design team.

After hearing the evidence and the parties' arguments, the arbitrators issued an interim award in O'Neil's favor for $2.4 million. They found that O'Neil incurred damages “due to a change in the schedule caused by many factors, but largely due to the [hospital] plans being more difficult, time consuming, and expensive to coordinate ... all of which constitutes a breach of O'Neil's contract [with Barton Malow].” (Interim Award of Arbitrators, R. 19–26, PageID 1133.) The arbitrators also found that Barton Malow failed to establish its indemnity claims against the University, noting that “the bulk of the claims that [Barton Malow] might have had against [the University] were all settled and released” by change orders Barton Malow had signed with the University. ( Id. at 1134.) The arbitrators thus denied the indemnity claims flowing through the University to Shepley Bulfinch and Smith Seckman. A few months later, the arbitratorsissued a final award, of which no party sought judicial confirmation or review.

O'Neil, a Michigan corporation, then filed this suit against Shepley Bulfinch and Smith Seckman, both non-Michigan corporations. O'Neil asserted claims for professional negligence, tortious interference, and innocent misrepresentation against both companies based on their design failures. Shepley Bulfinch and Smith Seckman jointly moved to dismiss on the pleadings under Federal Rule of Civil Procedure 12(c), and for summary judgment under Rule 56.

The district court granted the motion (under both rules), holding that Michigan's res judicata doctrine barred O'Neil's claims. The court declined to rule on three other arguments presented by the defendants for dismissal or summary judgment. O'Neil later filed a motion under Rule 59(e) to amend the district court's judgment, but the court denied the motion. O'Neil timely appealed both rulings.

II.

This court reviews de novo an order dismissing an action under Federal Rule of Civil Procedure 12(c), a grant of summary judgment, and a denial of a Rule 59(e) motion seeking review of a grant of summary judgment. Fritz v. Charter Twp. of Comstock, 592 F.3d 718, 722 (6th Cir.2010); Santiago v. Ringle, 734 F.3d 585, 589 (6th Cir.2013); Bruederle v. Louisville Metro Gov't, 687 F.3d 771, 776 (6th Cir.2012). We also review de novo a district court's application of res judicata. Buck v. Thomas M. Cooley Law Sch., 597 F.3d 812, 816 (6th Cir.2010).

The district court employed Michigan law to guide its res judicata analysis, but it was not required by statute to do so. True enough, the Full Faith and Credit Act requires federal courts to give state court “judicial proceedings” the same preclusive effect those proceedings would receive in courts of the same state. 28 U.S.C. § 1738; Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982). But “[a]rbitration is not a ‘judicial proceeding’ and, therefore, § 1738 does not apply to arbitration awards.” McDonald v. City of W. Branch, Mich., 466 U.S. 284, 288, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984). In other words, “federal courts are not required by statute to give res judicata or collateral-estoppel effect to an unappealed arbitration award.” Id.; see also Caldeira v. Cnty. of Kauai, 866 F.2d 1175, 1178 (9th Cir.1989) (explaining that the Supreme Court “has consistently held than an unreviewed arbitration decision does not preclude a federal court action”). Here, the record contains no indication that the arbitration award was confirmed or otherwise reviewed by a Michigan court, so the Full Faith and Credit Act does not require our court to consult Michigan preclusion law.

State law still might govern a federal court's determination of res judicata, however, when the federal court sits in diversity. The issue is underdeveloped and murky when it involves an unreviewed arbitration award. See FleetBoston Fin. Corp. v. Alt, 638 F.3d 70, 81 (1st Cir.2011); see also18B Wright, Miller, & Cooper, Federal Practice & Procedure § 4475.1 (2d ed.2002) (“The source of the law that governs the preclusion consequences of an arbitration award has not been much developed.”). A few courts have consulted state law to determine the preclusive effect of an unconfirmed arbitration award. See, e.g., Jacobs v. CBS Broad., Inc., 291 F.3d 1173, 1176–77 (9th Cir.2002). And, indeed, state law may control a case like this, where the federal case and the arbitration involve only state-law claims.

On the other hand, the parties agreed that the arbitration award could have been confirmed by a federal court in accordance with the Federal Arbitration Act. ( See9 U.S.C. § 9; Contract between Barton Malow and O'Neil § 23.2, PageID 378; Contract between the University and Barton Malow § O9.1.8, PageID 345.) If the arbitration had been confirmed by a federal court, we might apply federal preclusion law. See, e.g., J.Z.G. Res., Inc. v. Shelby Ins. Co., 84 F.3d 211, 214 (6th Cir.1996) (holding that this...