Ideal Mfg., Inc. v. NGC Grp.

IDEAL MANUFACTURING, INC., Plaintiff v. NGC GROUP, INC., ET AL., Defendants

Civil Action No. 1:19-cv-164

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS BROWNSVILLE DIVISION

February 4, 2020

MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION

The Court is in receipt of Plaintiff Ideal Manufacturing, Inc.'s opposed "Motion to Compel North American Specialty Insurance Company to Arbitrate, Motion to Stay Litigation, and Brief in Support" (hereinafter, Plaintiff's "Opposed Motion"). Dkt. No. 19. For the reasons provided below, it is recommended that the Court: (1) DENY Plaintiff's Opposed Motion to the extent it seeks to compel arbitration; (2) GRANT Plaintiff's Opposed Motion to the extent it seeks a stay of litigation; and (3) DIRECT the Clerk of the Court to stay this case until further order of the Court.

I. Jurisdiction

This case involves the construction of a wind farm in Cameron County, Texas. Dkt. No. 24 at 2; Dkt. No. 26 at 3-4. In brief, Plaintiff alleges that Defendants are liable for failing to pay Plaintiff adequately for the materials and services Plaintiff provided in connection with the wind farm's construction. Dkt. No. 26 at 3-4. The Court has jurisdiction over this civil action pursuant to 28 U.S.C. § 1332.

II. Background

On October 11, 2019, United States District Judge Rolando Olvera signed the parties' "Stipulation and Agreed Order Regarding Defendants' Motion to Compel Arbitration and Dismiss or Stay Proceedings" (hereinafter, "Agreed Order"). Dkt. No. 22. Pursuant to the Agreed Order, Plaintiff and Defendant NGC Group Inc., (hereinafter, "NGC") have agreed that Plaintiff's claims against NGC will be resolved in arbitration and will be stayed in this Court pending the outcome of that arbitration. Id. The only other remaining defendant in this case is NGC's surety, North American Specialty Insurance Company (hereinafter, "NASIC"). See Dkt. No. 19 at 2 (referring to NASIC as NGC's surety); Dkt. No. 24 at 1 (same). Despite negotiating, Plaintiff and NASIC have failed to reach agreement regarding whether Plaintiff's claims against NASIC should be arbitrated or stayed pending the resolution of the arbitration between Plaintiff and NGC. Dkt. No. 22 at 2. Having failed to reach an agreement, Plaintiff filed its instant Opposed Motion. Dkt. No. 19.

Plaintiff's Opposed Motion asks the Court to compel NASIC to arbitrate, and to stay the litigation of Plaintiff's claims against NASIC until their arbitration is complete. Dkt. No. 19 at 13. Plaintiff acknowledges that NASIC did not sign a contract with Plaintiff requiring it to arbitrate, but asserts that the Court can compel NASIC to arbitrate under the direct-benefits-estoppel doctrine and the incorporation-by-reference doctrine. Id. at 5. Plaintiff argues that there are additional practical reasons to require NASIC to arbitrate. Id. at 4-5, 11-13. In response, both NASIC and NGC argue that requiring NASIC to arbitrate is inappropriate and unnecessary.Dkt. No. 24. NASIC and NGC contend that Plaintiff's claims against NASIC should be stayed pending the outcome of the arbitration between NGC and Plaintiff because: (1) NASIC's liability as NGC's surety only arises if NGC is found liable to Plaintiff in the arbitration; and (2) NASIC has not subjected itself to mandatory arbitration through agreement, "estoppel, incorporation, or otherwise." Id. at 1.

III. Discussion

Plaintiff's Opposed Motion refers to its "claims" against NASIC. Dkt. No. 19 at p. 3, ¶ 4 ("Ideal would show that the surety, NASIC, should also be compelled to arbitrate Ideal's claims against it."). At the time Plaintiff filed its Opposed Motion, Plaintiff's Original Petition was the live complaint in this action. See Dkt. No. 1-4. Plaintiff's Original Petition asserted only one claim against NASIC, which Plaintiff described as a "Common Law Payment Bond Claim." Id. at 6-7.

After filing its Opposed Motion, and with the Defendants' written consent, Plaintiff filed its First Amended Complaint (hereinafter, "Live Complaint"). Dkt. No. 26. The parties have agreed that Plaintiff's amendment should not affect the pendency of Plaintiff's Opposed Motion, which the parties agree should still be considered by the Court. Dkt. No. 25 at 1. Plaintiff's Live Complaint adds a claim against NASIC and NGC entitled "Claim on Bonds to Release Mechanic's Lien" (hereinafter, the "Lien Release Claim"). Dkt. No. 26 at 6.¹ Thus, Plaintiff's LiveComplaint contains two claims against NASIC: the new Lien Release Claim, and Plaintiff's existing claim against NASIC and NGC entitled "Common Law Payment Bond Claim" (hereinafter, the "Bond Claim"). Id. at pgs. 6-7, ¶¶18, 21-22. In support of these two claims, Plaintiff alleges as follows:

Claim on Bonds to Release Mechanic's Lien (NGC and NASIC)

18. As demonstrated in Exhibit "A" attached hereto, IDEAL timely and properly filed and served its statutory liens in compliance with the laws and constitution of the state of Texas. IDEAL brings this action for recovery of the perfected balances due and asserts a claim against each of the Bonds to Release Mechanic's Lien issued by NASIC as Surety and NGC as Principal pursuant to Subchapter H of Chapter 53 of the Texas Property Code. The timely and perfected amounts owed in connection with the hens filed by IDEAL are the principal amount of $1,787,216.82 in connection with materials provided by IDEAL to the Project pursuant to the Materials Agreement, and the principal amount of $171,174.47 in connection with services provided by IDEAL to the Project pursuant to the Installation Agreement, for a total perfected amount of $1,958,391.29 asserted against the Bonds to Release Mechanic's Lien and their applicable riders. IDEAL also seeks recovery of its necessary and reasonable attorney's fees and costs pursuant to Texas Property Code § 53.156.

Common Law Payment Bond Claim (NGC and NASIC)

21. IDEAL furnished and delivered the necessary materials and services pursuant to the Agreements with NGC. IDEAL sent the requisite notices of the amounts unpaid and due on its Agreements in accordance with the terms of the Payment Bond issued by NASIC asSurety and NGC as Principal. IDEAL has performed all of the acts required of IDEAL to establish a common law payment bond claim against NASIC and NGC for services and materials supplied and utilized on the Project.

22. IDEAL brings this suit for recovery of the balance due and for judgment on its payment bond claim against NGC, as Principal, and against NASIC, as Surety, on the Payment Bond (and any Rider to same) in the amount of $3,069,215.52. IDEAL also seeks recovery of its necessary and reasonable attorney's fees and costs pursuant to the terms of the Payment Bond and applicable law.

Id.

The parties do not dispute certain facts which are critical to resolving Plaintiff's request to compel NASIC to arbitrate. First, the parties agree that Plaintiff did not sign the "Payment Bond" at issue. Dkt. No. 19 at 2 ("NASIC, as surety, and NGC, as principle executed [the] payment bond"); Dkt. No. 24 at 9 (citing Dkt. No. 19-2 and noting that "the parties to the payment bond are NGC as Contractor, NASIC as Surety, and Acciona as Owner."); Dkt. No. 19-2 (containing a copy of the Payment Bond). Second, the parties agree that there is no contract between Plaintiff and NASIC, much less a contract with an arbitration agreement. See Dkt. No. 19 at p. 4, ¶ 7, and p. 8, ¶ 15; Dkt No. 24 at p. 2, ¶ 5. Third, the parties agree that Plaintiffs may not recover against NASIC without first prevailing against NGC. Dkt. No. 8 at p. 3, ¶ 11; Dkt. No. 19 at p. 9, ¶ 19; Dkt. No. 24 at 11. As Plaintiff admits, "in order to prove its bond claim against NASIC, [Plaintiff] must first establish its claims against NGC on the Subcontracts." Dkt. No. 19 p. 9, ¶ 19.

As will be demonstrated below, these facts are critical because they undermine Plaintiff's argument that NASIC must be compelled to arbitrate. Specifically, thesefacts undermine Plaintiff's reliance upon: (1) the arbitration provisions in the relevant contracts; (2) the Payment Bond, which Plaintiff claims incorporates an arbitration provision in one of the relevant contracts by reference; (3) the incorporation-by-reference doctrine; (4) the direct-benefits-estoppel doctrine; and (5) the alleged practical reasons to compel NASIC to arbitrate. Dkt. No. 19 at 5-6.

A. Plaintiff's Reliance upon the Incorporation-by-Reference Doctrine and the Three Relevant Contracts. "Incorporation by reference" refers to "[a] method of making a secondary document part of a primary document by including in the primary document a statement that the secondary document should be treated as if it were contained within the primary one." See Incorporation by Reference, Black's Law Dictionary (10th ed. 2014). When the substantive law of Texas applies,² the incorporation-by-reference doctrine allows an unsigned paper to be incorporated by reference into "the paper signed by the person sought to be charged." In re Prudential Insurance Co. of America, 148 S.W.3d 124, 135 (Tex. 2004); Norred v. Cotton Patch Cafe, LLC, No. 3:19-CV-1010-G, 2019 WL 5425479, at *4 (N.D. Tex. Oct. 22, 2019) (same).

Plaintiff relies upon two subcontracts it executed with NGC: the "Material Supply Agreement," and the "Installation Agreement" (hereinafter, the "Subcontracts" or the "Materials Subcontract" and the "Installation Subcontract," respectively). Dkt. No. 19 at pgs. 1-2 at ¶¶ 1-2. Plaintiff states that both Subcontracts incorporate the "Prime Contract" between NGC and the generalcontractor, by reference, and that the Prime Contract requires arbitration. Id. at p. 3, ¶ 4.³ Plaintiff adds that both Subcontracts also contain arbitration provisions. Id. at pgs. 6-7, ¶ 13.

Plaintiff admits that NASIC did not sign the Prime Contract, or the Subcontracts. Dkt. No. 19 at p. 8, ¶ 15. Because NASIC did not sign the Prime Contract or the Subcontracts, NASIC is a non-signatory for purposes of the arbitration provisions in those three...