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Developers Surety and Indemnity Co. v. Carothers Construction, Inc.

United States District Court, D. South Carolina, Charleston Division

July 18, 2017

Developers Surety and Indemnity Company, Plaintiff,
v.
Carothers Construction, Inc., Defendant.

          ORDER AND OPINION

          Richard Mark Gergel United States District Court Judge

         This matter is before the Court on Defendant Carothers Construction, Inc.'s motion to dismiss or in the alternative to transfer. For the reasons set forth below, the Court grants in part the motion and transfers this action to the Southern District of Mississippi.

         I. Background

         On July 16, 2015, Liberty Enterprises Specialty Contractor ("Liberty") and Carothers entered into a subcontract for work to be performed at Marine Corps Air Station Beaufort (the "Project"). (Dkt. No. 1-1 ¶¶ 3-4.) Plaintiff Developers Surety and Indemnity Company ("DSI") is not a signatory to that subcontract, but it executed a performance bond and a payment bond for that subcontract on behalf of Liberty and in favor of Carothers for work on the Project. (Id. ¶ 7.) South Carolina law governs the bonds. (Id. ¶ 8). Carothers claims Liberty defaulted and abandoned the Project, and asserts claims of approximately $130, 000 against the bonds issued on behalf of Liberty. (Id. at Ex. C ¶¶ 20, 29.)

         On April 17, 2017, Carothers filed a demand for arbitration with the American Arbitration Association. (Id. ¶ 12.) That demand combines over $4, 000, 000 in claims against DSI regarding four unrelated projects in four states: Georgia, Connecticut, Kansas, and the South Carolina work at issue in this matter. (Id. ¶ 13.) According to Carothers, the bonds incorporate by reference the subcontract's mandatory arbitration clause. (See Dkt. No. 1-2 at 15-16.) Carothers seeks arbitration in Jackson, Mississippi, which is the forum the arbitration clause specifies. (See id.)

         On April 28, 2017, DSI filed the present action in the Beaufort County Court of Common Pleas, seeking declaratory judgment that it is not subject to a binding arbitration agreement with Carothers and injunctive relief. (Id. ¶ 15.) On May 31, 2017, Carothers removed to this Court. On June 7, 2017, Carothers moved to dismiss or in the alternative to transfer, arguing that DSI's claims are subject to arbitration and that DSI is estopped from denying it is bound by the subcontract's arbitration provision. Carothers seeks dismissal or, in the alternative, transfer to the Southern District of Mississippi (where Carothers could seek an order compelling arbitration), or, in the further alternative, transfer to the Middle District of Georgia.

         II. Legal Standard

         A. Motion to Compel Arbitration

         The Federal Arbitration Act ("FAA") reflects a liberal policy toward arbitration. The Act provides that a written agreement to arbitrate in any contract involving interstate commerce or a maritime transaction "shall be valid, irrevocable and enforceable" unless there exists grounds for revocation in law or equity. 9 U.S.C. § 2; Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). A litigant can compel arbitration under the FAA if the litigant can demonstrate: '"(1) the existence of a dispute between the parties; (2) a written agreement that includes an arbitration provision which purports to cover the dispute; (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce; and (4) the failure, neglect or refusal of the [party] to arbitrate the dispute.'" Am. Gen. Life & Accident Ins. Co. v. Wood, 429 F.3d 83, 87 (4th Cir. 2005) (quoting Adkins v. Labor Ready, Inc., 303 F.3d 496, 500-01 (4th Cir. 2002)). District courts have "no choice but to grant a motion to compel arbitration where a valid arbitration agreement exists and the issues in a case fall within its purview." Adkins, 303 F.3d at 500. However, "[t]he majority view holds that, where the parties have agreed to arbitrate in a particular forum, only a district court in that forum has the authority to compel arbitration under § 4 of the FAA." Am. Int'l Specialty Lines Ins. Co. v. A. T. Massey Coal Co., 628 F.Supp.2d 674, 683 (E.D. Va. 2009). Where a valid arbitration agreement covering the issues in a case exists but the agreement specifies an arbitral venue outside the district, transfer is the appropriate remedy, because "if the forum selection clause is mandatory, then, the interest of justice would weigh toward transfer." Id. at 685 (internal quotation marks omitted).

         B. Motion to Dismiss or to Stay Proceedings

         The FAA requires a court to stay "any suit or proceeding" pending arbitration of "any issue referable to arbitration under an agreement in writing for such arbitration, and "[t]his stay-of-litigation provision is mandatory." Adkins, 303 F.3d at 500; see also 9 U.S.C. § 3; Hooters, 173 F.3d at 937. The Fourth Circuit has also held that if all of the claims asserted in a complaint are subject to arbitration, dismissal of the complaint is "an appropriate remedy." Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001). The Fourth Circuit has noted the inconsistency between its opinions on this issue. Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 376 n.18 (4th Cir. 2012) ("There may be some tension between our decision in Hooters-indicating that a stay is required when the arbitration agreement 'covers the matter in dispute'-and Choice Hotels-sanctioning dismissal 'when all of the issues presented ... are arbitrable.'"). It has also noted that the circuits are divided on this question, which it has not resolved for this Circuit. Id. A motion to dismiss in favor of arbitration may be made under Rule 12(b)(1) or Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Lomax v. Weinstock, Friedman & Friedman, P.A, No. CIV. CCB-13-1442, 2014 WL 176779, at *2 (D. Md. Jan. 15, 2014) (collecting cases), affd sub nom. Lomax v. Weinstock, Friedman & Friedman, P.A., 583 F.App'x 100 (4th Cir. 2014).

         III. Discussion

         Carothers seeks dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. Carothers argues DSI has not stated a claim for relief because DSI is bound to arbitrate the claims it presents to this Court for adjudication. (Dkt. No. 4-1 at 6.) DSI, however, seeks only "determination of whether a valid, enforceable agreement to arbitrate exists" and an order "Declaring that DSI is not required to arbitrate any of Defendant's claims against it, " and an injunction against compelled arbitration. (Dkt. No. 1-1 ¶¶ 16, 22.) The validity of an arbitration clause is not subject to mandatory arbitration when the clause itself is challenged. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006) ("[U]nless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance."). DSI has properly pleaded a claim for declaratory judgment adjudicating whether Carothers's claims against it as surety for Liberty are subject to binding arbitration.[1]

         The Court therefore declines to dismiss this matter for failure to state a claim and proceeds to consider the first alternative relief Carothers seeks, transfer to the Southern District of Mississippi for the purpose of compelling arbitration. Whether DSI agreed to binding arbitration is a legal question of contract interpretation. Johnson v. Circuit City Stores, Inc.,148 F.3d 373, 377 (4th Cir. 1998). The relevant contracts are attached to and integral to ...


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