Developers Sur. v. Church

759 F.Supp.2d 665

DEVELOPERS SURETY AND INDEMNITY COMPANY, Plaintiff

v.RESURRECTION BAPTIST CHURCH, et al., Defendants.

Case No. RWT 10cv1224.

United States District Court, D. Maryland.

Dec. 1, 2010.

Lauren Pacelli McLaughlin, Robert Joseph Dietz, Shannon J. Briglia, Briglia McLaughlin PLLC, Vienna, VA, for Plaintiff.Joseph S. Ferretti, Daniel E. Toomey, Duane Morris LLP, Washington, DC, Sidney S. Friedman, Rosemary E. Allulis, Weinstock Friedman and Friedman PA, Baltimore, MD, for Defendants.

MEMORANDUM OPINION

ROGER W. TITUS, District Judge.

In late 2006, AHL Development (“AHL”) and Resurrection Baptist Church (“Resurrection Baptist”), entered into a contract under which AHL agreed to construct a worship facility for Resurrection Baptist at 900 Ednor Road, Silver Spring, Maryland for $994,000. Compl. ¶ 9. Around the same time, Resurrection Baptist and AHL entered into a separate contract under which AHL agreed to perform preliminary site development work for the Silver Spring facility for $429,000. Id. ¶ 7.

The parties modified the contract for site development work (“Site Development Contract”) on or about March 13, 2008. Pursuant to the modification, AHL agreed to do additional site development work and the contract price was raised to $473,800. Id. ¶ 8. On or about May 2, 2008, the contract to build the worship facility (“Building Contract”) was modified to increase the size of the facility. Id. ¶ 10. The amount AHL would be paid for the facility's construction was increased to $1,269,000. Id. After both the Site Development and Construction Contracts had been amended, AHL entered into a general indemnity agreement with Developers Surety and Indemnity Company (“Developers Surety”) under which Developers Surety agreed to act as surety for AHL, issuing payment and performance bonds securing AHL's performance under the Building Contract. Id. ¶¶ 11–13. The bonds were issued soon thereafter, and named Resurrection Baptist and PNC Bank as co-obligees. Id. ¶ 14.

In February 2010, Resurrection Baptist declared AHL to be in default. Id. ¶ 21. As of the date of the default, the building was only 80% complete and there were insufficient contract funds to complete the project. Id. ¶ 24. Resurrection Baptist made demand against Developers Surety's performance bond to complete the facility's construction. Id. ¶ 21. Developers Surety refused this demand, asserting that Resurrection Baptist and PNC Bank materially deviated from the payment application process required under the Building Contract and made payments to AHL and its vendors without differentiating between the work that was being performed under the Building and Site Development Contracts. Id. ¶¶ 17–19. Developers Surety also claimed that Resurrection Baptist and PNC Bank failed to withhold a percentage of payments made to AHL in order to protect themselves in the event that AHL defaulted. Id. ¶ 20.

On May 14, 2010, Developers Surety initiated this action naming Resurrection Baptist and PNC Bank as defendants. Developers Surety claims that Resurrection Baptist and PNC Bank are liable for breach of contract and it seeks a declaratory judgment that its obligations under the performance and payment bonds are discharged. Id. at ¶¶ 44–45.

PNC Bank and Resurrection Baptist answered Developers Surety's complaint on August 2, 2010 and September 16, 2010 respectively. ECF Nos. 7 & 12. Resurrection Baptist filed a motion to stay this litigation and to compel mediation and arbitration simultaneously with its Answer. ECF No. 15. PNC Bank later joined in that motion. ECF No. 24. Resurrection Baptist and PNC Bank argue that Developers Surety is contractually obligated to mediate and arbitrate its claims as a condition precedent to maintaining this suit. Developers Surety opposes any stay of this action and argues that it is not bound by the terms of the Building Contract which mandate mediation and arbitration. For the reasons that follow, this action will be stayed pending the completion of mediation and arbitration.

THE FEDERAL ARBITRATION ACT

The Federal Arbitration Act (the “Act”), 9 U.S.C. § 2, states that:

A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The Act further provides:

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.

9 U.S.C. § 3.

DISCUSSION

I. ARBITRABILITY

Whether this action must be stayed pending mediation and arbitration turns on the interpretation of the contracts entered into by Developers Surety, Resurrection Baptist and PNC Bank. In Maryland, contract interpretation is a question of law and contracts must be interpreted objectively. Ambling Mgmt. Co. v. University View Partners, LLC, 581 F.Supp.2d 706, 712 (D.Md.2008).

Developers Surety's claims against Resurrection Baptist and PNC Bank are based upon their alleged breach of the terms of the Building Contract. In addition to seeking damages for breach of contract, Developers Surety seeks a declaratory judgment that as a result of those alleged breaches, it has no further obligations under the payment and performance bonds it issued to secure AHL's performance. Compl. at 7–10. Whether Developers Surety's claims must be stayed pending arbitration therefore depends upon whether there is language in the Building Contract and the payment and performance bonds subjecting disputes between Developers Surety, Resurrection Baptist and PNC Bank to mandatory mediation and arbitration.

Although the payment and performance bonds contain no language compelling mediation and arbitration, they contain a clause incorporating the Building Contract between Resurrection Baptist and AHL by reference. The performance bond provides:

“Whereas Contractor [AHL] has by written agreement dated May 2, 2008, entered into a contract with Owner [Resurrection Baptist] for CONSTRUCT NEW FACILITY, 900 EDNOR ROAD, SILVER SPRING, MD 20905, in accordance with Drawing and Specifications prepared by [blank] which contract is by reference made a part hereof, and is hereinafter referred to as the Contract.” (emphasis added). Compl. Ex. F. ECF No. 1–6 at 2.

The payment bond contains a similar provision. Id. Ex. F. ECF No. 1–6 at 5.

The payment and performance bonds therefore incorporate the Building Contract by reference. The Building Contract contains mandatory mediation clauses which provide:

§ 4.5.1 Any claim arising out of or related to the Contract, ... shall, after initial decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party.

§ 4.5.2 The parties shall endeavor to resolve their Claims by mediation which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect. Request for mediation shall be filed in writing with the other party to the Contract and with the American Arbitration Association. The request may be made concurrently with the filing of a demand for arbitration but, in such event, mediation shall proceed in advance of arbitration or legal or equitable proceedings, which shall be stayed pending mediation for a period of 60 days from the date of filing, unless stayed for a longer period by agreement of the parties or court order.

Compl. Ex. C at 31. ECF No. 1–3 (emphasis added).

The Building Contract also contains mandatory arbitration clauses which provide:

§ 4.6.1 Any claim arising out of or related to the Contract, ... shall, after decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of Section 4.5.

§ 4.6.2 Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect.

Compl. Ex. C, at 31. ECF No. 1–3.

“An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, see Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2.” Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) (internal quotations omitted) (emphasis added). The Federal Arbitration Act “preempts state laws which either directly contradict federal law or obstruct the realization and execution of Congressional objectives regarding the Act.” Glass v. Kidder Peabody & Co., Inc., 114 F.3d 446 (4th Cir.1997).

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