Eastgate Invs. II v. MW Builders, Inc.

1

EASTGATE INVESTMENTS II, LLC, Plaintiff, v. MW BUILDERS, INC., Defendant.

MW BUILDERS, INC., Third-Party Plaintiff, v. FOX VALLEY CONTRACTORS LLC; KORELLIS ROOFING, INC.; R-WALLS LLC; and RICHMOND GUTTERING COMPANY, Third-Party Defendants.

No. 2:20-CV-286-TLS-JPK

United States District Court, N.D. Indiana, Hammond Division

March 29, 2023

OPINION AND ORDER

JOSHUA P. KOLAR MAGISTRATE JUDGE JOSHUA P. KOLAR UNITED STATES DISTRICT COURT

Currently before the Court is the Renewed Motion To Compel Arbitration and Stay Proceedings [DE 94] filed by Third-Party Defendant Korellis Roofing, Inc. (“Korellis”). For the following reasons, Korellis's motion is DENIED.

BACKGROUND^[1]

This lawsuit involves disputes arising from the construction of two student housing apartment buildings in Valparaiso Indiana, commonly known as Buildings 3 and 4 of the Uptown East Apartments (“the Project”). Plaintiff Eastgate Investments II, LLC (Eastgate) is the Project Owner and Defendant/Third-Party Plaintiff MW Builders, Inc. (MWB) was the General Contractor on the Project. The Prime Contract between Eastgate and MWB,^[2] entered into on December 9, 2009, is a form document published by the American Institute of Architects (AIA)^[3]--A102-2007 Standard Form of Agreement Between Owner and Contractor (“Standard Agreement”) [DE 1-1 at 1-26]. The Standard Agreement incorporates by reference another AIA form-A201-2007 General Conditions of the Contract for Construction (“General Conditions”) [id. at 27-85].^[4] AIA Documents A102 and A201 are standard AIA forms that have been in service since 1992, SBP LLLP v. Hoffman Constr. Co. of Am., No. 1:19-cv-00266-DCN, 2019 WL 7040611, at *4 (D Idaho Dec. 20, 2019), which “detail[ ] the parties' respective rights, responsibilities and relationships on the project,” In re D. Wilson Constr. Co., 196 S.W.3d at 777.^[5]

The Project was substantially complete as of September 2010.^[6] Approximately ten years later, on August 4, 2020, Eastgate filed this lawsuit against MWB alleging that MWB was negligent in, among other things, failing to hire competent subcontractors to construct the exterior walls and roofing assemblies of the Buildings. MWB then brought the Third-Party Complaint against the allegedly negligent subcontractors alleging breach of contract and indemnity claims. [DE 11]. Relevant to the present motion are MWB's third-party claims against Korellis, who was the roofing subcontractor for Building 3.

Eastgate alleges in its Complaint against MWB that the construction of Building 3's roof assembly (consisting of the membrane, oriented strand board sheathing, insulation, integral vapor retarder, wood stud framing, furring strips, and painted interior gypsum board) was improper and in violation of applicable building codes and accepted industry standards. Specifically, Eastgate alleges extensive deterioration of the roof from moist air penetrating from the interior of the building as the result of a failure to properly install insulation and vapor retarder and seal penetrations within and through the roof assembly. [DE 1 ¶¶ 19-22]. In turn, MWB's Third-Party Complaint alleges that, to the extent Eastgate's allegations regarding defects in the roof assembly of Building 3 are proven to be true, Korellis breached its contractual obligations contained in the subcontractor agreement between MWB and Korellis (“the Subcontract”),^[7] and was negligent in performing the roofing work. [DE 11 ¶¶ 30-31, 34, 37]. MWB also alleges that, pursuant to the Subcontract, Korellis is required to indemnify, defend, and hold MWB harmless for all claims and causes of action incurred by MWB as a result of any fault by Korellis in connection with the performance of the Subcontract. [Id. ¶ 33].

By its present motion, Korellis seeks to stay all proceedings against it relating to MWB's Third-Party Complaint, and compel arbitration with MWB. Korellis's motion to compel arbitration is based on Section 14.1 of the Subcontract, which states in part that “Subcontractor [Korellis] agrees that the dispute resolution provisions of the Prime Contract between MW[B] and Owner [Eastgate], if any, are incorporated by reference as part of this Subcontract so as to be binding as to disputes between Subcontractor [Korellis] and MW[B] that involve, in whole or in part, questions of fact and/or law that are common to any dispute between MW[B] and Owner or others similarly bound to such dispute resolution procedures ....” [DE 11-2 at 7]. Section 13.2 of the Prime Contract, Standard Agreement, in turn, states that, “[f]or any Claim subject to, but not resolved by mediation pursuant to Section 15.3 of [the General Conditions], the method of binding dispute resolution shall be as follows: ... [X] Arbitration pursuant to Section 15.4 of [the General Conditions].” [DE 1-1 at 11)]. Korellis interprets these contractual provisions as broadly mandating arbitration for all disputes between it and MWB that arise out of or are related to the Prime Contract. [DE 95 at 6]. Korellis filed a previous motion to compel arbitration in November 2021. That motion was denied without prejudice with the consent of all parties, in order to allow Eastgate, MWB, Korellis, and the other subcontractor Third-Party Defendants to participate in informal discovery followed by mediation. Mediation was held on May 23, 2022, but did not result in a settlement of the lawsuit. Korellis then filed the Renewed Motion to Compel Arbitration And Stay Proceedings currently before the Court.

DISCUSSION

The Federal Arbitration Act (“FAA”) declares in relevant part that a written agreement to arbitrate “in any maritime transaction or a contract evidencing a transaction involving commerce ... shall be valid irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract ..” 9 U.S.C. § 2. The case law broadly defines transactions involving commerce to which the FAA applies to include “trade generally between citizens of the several states.” MPACT I, 785 N.E.2d at 636 n.6 (internal quotation marks and citation omitted).

MWB is a Texas corporation while Korellis is an Indiana corporation. [DE 11, 36, at ¶¶ 1, 3]. Therefore the Subcontract is an agreement evidencing a transaction involving interstate commerce. See MPACT II, 802 N.E.2d at 904 (citing, inter alia, Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 400-01 (1967)); see also SBP LLLP, 2019 WL 7040611, at *3 (citing Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 274-75 (1995) (the interstate-commerce requirement should be construed broadly to include all activities that merely affect interstate commerce)).

“Under the FAA, three things are needed to compel arbitration: (1) a written arbitration agreement, (2) a dispute within the scope of the agreement, and (3) a refusal to arbitrate that dispute.” Bonzani v. Goshen Health Sys., Inc., 459 F.Supp.3d 1139, 1147 (N.D. Ind. 2020) (citing Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir. 2005)). “‘[I]f a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation.' A court may not refuse to compel arbitration on claims merely because some of the claims are not arbitrable.” Id. (quoting KPMG LLP v. Cocchi, 565 U.S. 18, 19 (2011)).

The parties to the present motion, i.e., Korellis and MWB, agree that Korellis has satisfied the first and third requirements for a motion to compel arbitration in that it has shown that the Subcontract includes an enforceable agreement to arbitrate and that MWB refuses to arbitrate. It also is uncontested that, if the arbitration provision in the Prime Contract is included within the dispute resolution incorporation clause of the Subcontract and covers the present dispute, Korellis would be entitled to a stay of these proceedings.^[8] Finally, the Court notes that there is no waiver issue here. See Auto. Mechs. Loc. 701 Welfare & Pension Funds v. Vanguard Car Rental USA, Inc., 502 F.3d 740, 747 (7th Cir. 2007) (“Like many other contractual rights, ‘[a] contractual right to arbitrate may be waived, either expressly or implicitly.'” (quoting Grumhaus v. Comerica Sec., Inc., 223 F.3d 648, 650 (7th Cir. 2000))).^[9] That is, even though Korellis has been participating in these proceedings for more than a year, it has validly reserved its rights under the Subcontract's dispute resolution provision. See [DE 100].^[10] The only issue for the Court, therefore, is whether MWB's third-party claims against Korellis fall within the scope of the dispute resolution incorporation clause in the Subcontract (Section 14.1) and the arbitration agreement in the Prime Contract (Section 13.2 of the Standard Agreement and Section 15.3 of the General Conditions^[11]).

A. Federal and State Law Applicable to Arbitration Agreements

In a recent decision discussing the FAA, the Seventh Circuit summarized federal jurisprudence on the issue of arbitration explaining that the Supreme Court “has established four principles that guide [a court's] analysis” on a motion to compel arbitration. United Nat. Foods, Inc. v. Teamsters Local 414, 58 F.4th 927, 933 (7th Cir. 2023). “First and foremost, it is the parties' contract that determines the duty to arbitrate.” Id. Thus, although the case law frequently refers to “the FAA's ‘policy favoring arbitration,'” that policy “does not authorize federal courts to invent special, arbitration-preferring procedural rules.” Morgan v. Sundance, Inc., 142 S.Ct. 1708, 1713 (2022); see Johnson v. Mitek Sys., Inc., 55 F.4th 1122, 1124 (7th Cir. 2022) (“Courts cannot disfavor arbitration, compared with other agreements, but neither may courts jigger the rules to promote arbitration.” (...