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Erdman Company v Phoenix Land & Acquisition, LLC

Case No. 10-2854 (C.A. 8, Aug. 16, 2011)

Erdman Company (“Erdman”) and Erdman Architecture & Engineering Company (“EAEC”) filed this diversity action to foreclose a contractor’s lien and an architect’s and engineer’s lien against Phoenix Land & Acquisition, LLC (“Phoenix Land”), and Phoenix Health, LLC (“Phoenix Health”), as owners of the property, and three financial institutions with recorded security interests in the property. Phoenix Land filed a counterclaim, asserting breach of contract, negligence, breach of implied warranty, breach of fiduciary relationship, and deceptive trade practices by Erdman, and negligence by EAEC. Erdman and EAEC now appeal the district court’s order denying their motion to compel arbitration of Phoenix Land’s counterclaim. We have jurisdiction over an appeal from an interlocutory order “denying an application . . . to compel arbitration.” 9 U.S.C. § 16(a)(1)(C). The district court held that Erdman waived the right to arbitrate by evidencing its intent to resolve the entire dispute through litigation. Reviewing the waiver determination de novo but the district court’s underlying factual findings for clear error, we affirm. See Lewallen v. Green Tree Servicing, L.L.C., 487 F.3d 1085, 1090 (8th Cir. 2007) (standard of review).

I.



Erdman, a Wisconsin-based contractor specializing in health care facilities, entered into a Design-Build Contract with Phoenix Land as Owner to design and build a one-story addition to a surgical center in Fort Smith, Arkansas. Section 12.2 of the Contract provided that “[a]ny controversy or claim arising out of or relating to this Contract or its breach not resolved by mediation, except for claims relating to Design- Builder’s lien rights . . . shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect.” The Contract identified EAEC as a wholly-owned subsidiary of Erdman that would perform Erdman’s obligations to provide Design Services for the project. The Contract was signed by Erdman’s Executive Vice President on behalf of both Erdman and EAEC. Phoenix Health has an unexplained ownership interest in the project site but was not named or referred to in the Contract.

After work on the project began, Phoenix Land signed a series of change orders that altered the plans by adding a second floor “dead shell space” for future expansion and by allowing for the addition of a third floor at a later date. Excavation for the elevator included in the new plans went below the area covered by a geotechnical report prepared for the project and penetrated an abandoned mineshaft. A sinkhole developed, damaging completed work and delaying the project. Erdman demanded time and extra monies to remediate this allegedly unforeseen condition. Phoenix Land investigated, concluded Erdman was responsible for the sinkhole, and refused to make progress payments when Erdman would not complete the project without additional funding. Erdman halted construction with the project not completed.

Erdman and EAEC then filed this action to foreclose their respective liens for amounts unpaid under the Contract. The Complaint also alleged a breach of contract claim against Phoenix Land, and unjust enrichment claims against Phoenix Land and Phoenix Health. Their answer denied the lien claims, asserting numerous affirmative defenses, and pleaded Phoenix Land’s counterclaim. After obtaining a three-week extension, Erdman and EAEC filed their reply to the counterclaim, and Erdman moved to dismiss Phoenix Land’s fraudulent misrepresentation claim or, in the alternative, for a more definite statement of that claim. On the same day, Erdman and EAEC moved to compel arbitration of the counterclaim and to stay adjudication of the counterclaim but permit adjudication of the lien claims pending the arbitration. Though they argued that there was nothing to arbitrate until Phoenix Land asserted its counterclaim, footnote 9 to their lengthy Motion to Compel acknowledged that their initial claims for breach of contract and unjust enrichment “are also covered by the agreement to arbitrate and . . . should also be referred to mediation and arbitration.” Two weeks later, Erdman and EAEC also filed a third party complaint against the geotechnical consultant and two Erdman subcontractors.
 

 

Judge(s): James Loken
Jurisdiction: U.S. Court of Appeals, Eighth Circuit
Related Categories: Civil Remedies , Construction , Contracts , Property , Torts
 
Circuit Court Judge(s)
Raymond Gruender
James Loken
Lavenski Smith

 
Trial Court Judge(s)
Jimm Hendren

 
Appellant Lawyer(s) Appellant Law Firm(s)
Russell Atchley Kutak Rock LLP
Erin Thompson Kutak Rock LLP
John Trice Kutak Rock LLP

 
Appellee Lawyer(s) Appellee Law Firm(s)
Craig Dirrim Woods & Aitken LLP
Edward Tricker Woods & Aitken LLP

 

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motions to strike and to file a surreply brief. health care facility design and construction, drafted the contract containing detailed our view, that was an election sufficient to support the district court's finding that distinct from the complaint brought by" the party seeking arbitration. commercial in the realm of construction industry disputes, where contracts tend to be three financial institutions with recorded security interests in the property. phoenix "to safeguard its right to arbitration, a party must do all it could reasonably loken, circuit judge. defendants "demonstrates the intent . . . to utilize the present litigation to resolve all compel arbitration." 9 u.s.c. 16(a)(1)(c). the district court held that erdman the district court further found that erdman's response to phoenix land's ii. v. * district court for the counterclaim, footnote 9 to their lengthy motion to compel acknowledged that their contract or its breach not resolved by mediation, except for claims relating to design- defendants - appellees, * ______________________________ 3. the third factor, prejudice to the party opposing arbitration, is the most ___________ project site but was not named or referred to in the contract. for the western district of arkansas. progress payments when erdman would not complete the project without additional (3) prejudiced the other party by its inconsistent actions." hooper v. advance am., architecture & engineering company, * a one-story addition to a surgical center in fort smith, arkansas. section 12.2 of the we affirm the district court's order of july 29, 2010. we deny appellees' settings, we apply a uniform three-factor test in determining whether a party has in effect." the contract identified eaec as a wholly-owned subsidiary of erdman to assert an unjust enrichment claim against phoenix health, a non-party to the just ended granted a petition for a writ of certiorari presenting the question - two weeks later, erdman and eaec also filed a third party complaint against the although we apply the prejudice requirement even when the party who -2- distinguished cases, like this one, that "involved waiver by a plaintiff who brought suit 2. the second factor, whether erdman acted inconsistently with its right to waived its right to arbitration, finding waiver when the party seeking arbitration "(1) land"), and phoenix health, llc ("phoenix health"), as owners of the property, and united states court of appeals right to arbitrate, erdman and eaec initiated the lawsuit, joining arbitrable contract here, as the district court noted in finding the requisite prejudice, "all the f.3d at 390. but in any event, we agree with the district court that a sufficient ___________ submitted: march 29, 2011 denying their motion to compel arbitration of phoenix land's counterclaim. we have them." id. at n.8 (quotation omitted). funding. erdman halted construction with the project not completed. order alternative, for a more definite statement of that claim. on the same day, erdman and after work on the project began, phoenix land signed a series of change orders timeandextramoniestoremediatethisallegedlyunforeseencondition. phoenixland agreement to arbitrate and . . . should also be referred to mediation and arbitration."2 contractual right to arbitrate. see lewallen, 487 f.3d at 1090. although the issue of contract balance without simultaneously seeking to arbitrate this contract dispute. in controversial. there is a circuit split over whether the party asserting waiver must defenses, and pleaded phoenix land's counterclaim. after obtaining a three-week 589 f.3d at 923 (quotation omitted). initial claims for breach of contract and unjust enrichment "are also covered by the mediation and arbitration provisions, and is presumed to know its contents. see no. 10-2854 arbitration does not require a showing of prejudice in this situation, unlike many builder's lien rights . . . shall be decided by arbitration in accordance with the developed, damaging completed work and delaying the project. erdman demanded cabinetry, inc., 50 f.3d 388, 390 (7th cir. 1995) ("other courts require evidence of omitted). clear indication erdman intended to litigate all claims. five days after that others.4 litigation while expressly reserving its right to arbitrate. hooper, 589 f.3d at 923. filed: august 16, 2011 the federal arbitration act. 9 u.s.c. 1 et seq. but a party may waive its including the breach of contract and unjust enrichment claims, "are covered by the for the eighth circuit i. we agree with the district court that erdman -- and eaec to the extent it had a right land filed a counterclaim, asserting breach of contract, negligence, breach of implied showing of prejudice was made. conference, erdman attacked phoenix land's claim of fraudulent misrepresentation 3 warranty, breach of fiduciary relationship, and deceptive trade practices by erdman, is obvious from the fact that erdman, a sophisticated party with over fifty years of rule 26(f) conference resulting in a report that did not even mention arbitration, a its arbitration right." lewallen, 487 f.3d at 1090 (quotation omitted). the district the contract was signed by erdman's executive vice president on behalf of both investigated,concludederdmanwasresponsibleforthesinkhole,andrefusedtomake was dismissed by agreement of the parties, 131 s. ct. 2955 (2011), so the prejudice providing the right to choose arbitration has unequivocally chosen to litigate the entire before loken, smith, and gruender, circuit judges. claims in this case revolve around the issue of who was at fault in the matter of the on a contract without seeking to avail himself of its arbitration clause on the ground to be binding and irrevocable? the litigation machinery when, for example, it files a lawsuit on arbitrable claims." jurisdiction over an appeal from an interlocutory order "denying an application . . . to under the federal arbitration act ("faa"), should a party be required constructionindustryarbitrationrulesoftheamericanarbitrationassociationthen the contract. and it eventually allowed them to bring third party defendants into the to demonstrate prejudice after the opposing party waived its contractual involve third parties." at oral argument, counsel for erdman conceded that findings not onerous." hooper, 589 f.3d at 923, quoting cabinetree of wis., inc. v. kraftmaid architect's and engineer's lien against phoenix land & acquisition, llc ("phoenix cash advance ctrs. of mo., inc., 589 f.3d 917, 920 (8th cir. 2009) (quotation counterclaim was inconsistent with a party choosing arbitration over litigation. report prepared for the project and penetrated an abandoned mineshaft. a sinkhole court also found that erdman's non-compulsory claims against the third party waived the right to arbitrate by evidencing its intent to resolve the entire dispute federal policy favors arbitration as a form of dispute resolution, as reflected in resultswhen"[c]ompellingarbitrationwouldrequireaduplicationofeffort." hooper, that would perform erdman's obligations to provide design services for the project. stok & assocs., p.a. v. citibank, n.a., 131 s. ct. 1556 (2011). however, that case elevator included in the new plans went below the area covered by a geotechnical erdman and eaec then filed this action to foreclose their respective liens for is frivolous because it is squarely contrary to footnote 9 in their motion to compel to erdman and eaec. phoenix health has an unexplained ownership interest in the 4 prejudice -- but not much."). land incurred litigation expense as a result of erdman's deliberate decision to forego erdman and eaec instead asked to proceed immediately with their lien claims, free knew of its existing right to arbitration; (2) acted inconsistently with that right; and contract, is arbitrable. arbitration and litigate the entire dispute. we cannot say that the district court erred we can trace the origins of our prejudice requirement to carcich v. rederi a/b 1 court's finding of knowledge. through litigation. reviewing the waiver determination de novo but the district pinken v. frank, 704 f.2d 1019, 1025 (8th cir. 1983). erdman and eaec argue they contract provided that "[a]ny controversy or claim arising out of or relating to this -6- entered into a design-build contract with phoenix land as owner to design and build lawsuit who could not be compelled to arbitrate. all these parties as well as phoenix -4- counterclaim but permit adjudication of the lien claims pending the arbitration. and by allowing for the addition of a third floor at a later date. excavation for the to arbitrate if the party substantially invokes the litigation machinery before asserting lacked the relevant knowledge because all the claims in their initial complaint, arbitrate, is likewise clear on this record. "a party acts inconsistently with its right sinkhole." therefore, although erdman's motion to compel arbitration urged that the proceed judicially or by arbitration." lewallen, 487 f.3d at 1091 (quotation omitted). have been expected to do to make the earliest feasible determination of whether to nordie, 389 f.2d 692, 696 (2d cir. 1968). in that case, however, the court carve-out language in the contract's dispute resolution provision." this contention * ___________ show prejudice. see hooper, 589 f.3d at 923 n.8. the supreme court in the term footnote 9 that its unjust enrichment claim against phoenix health, a non-party to the ___________ plaintiffs - appellants, * moved to dismiss phoenix land's fraudulent misrepresentation claim or, in the phoenix health, llc; et al. * phoenix land & acquisition, llc; * court's underlying factual findings for clear error, we affirm. see lewallen v. green those claims will require determination of which contracting party was to blame for -8- standardized and efficient resolution is of great importance to general contractors, eaec moved to compel arbitration of the counterclaim and to stay adjudication of the company ("eaec") filed this diversity action to foreclose a contractor's lien and an claim against phoenix land, and unjust enrichment claims against phoenix land and thehonorablejimmlarryhendren,chiefjudge,unitedstatesdistrictcourt extension, erdman and eaec filed their reply to the counterclaim, and erdman collect from phoenix land and phoenix health." thus, unlike many waiver cases, where a defendant responded to the plaintiff's lawsuit and, at some point, asserted its that a party should not thus first set in motion judicial proceedings and then arrest subcontractors, architects, engineers, and materialmen, it makes little sense to litigate 1. the first factor, whether erdman and eaec knew of the right to arbitrate, 44-127(a).3 the district court. as in hooper, 589 f.3d at 921, we decline to disturb the district that policy does not go so far as to "allow or encourage the parties to * f.3d 963, 969 (8th cir. 2009); kelly v. golden, 352 f.3d 344, 349-50 (8th cir. 2003). the lien claims, while the issue of sinkhole fault is determined in arbitration. but the parties would simultaneously litigate the same fault issue in two forums. prejudice court found that erdman "initially decided to forego arbitration in attempting to -5- the increased sinkhole costs that caused the project to fail. see ark. code ann. 18- erdman company; erdman * belatedly seeks to arbitrate commenced the litigation, "[w]hether inconsistent actions * appeal from the united states in finding that phoenix land suffered prejudice. compare lewallen, 487 f.3d at when the lien claims were filed, counsel for erdman knew that phoenix land elected to litigate, a procedure that held out substantial advantages. it permitted them proceed, either simultaneously or sequentially, in multiple forums." cabinetree, 50 issue remains unsettled. inc. v. freeman, 924 f.2d 157, 159 (8th cir. 1991). "the prejudice threshold . . . is erdman, a wisconsin-based contractor specializing in health care facilities, dispute in a single lawsuit, and then changes its mind. the federal policy favoring that altered the plans by adding a second floor "dead shell space" for future expansion subcontractor eaec could demand arbitration of claims by and against it relating to as to its intent are reviewed for clear error. geotechnical consultant and two erdman subcontractors. id. indeed, we have found waiver of the right to arbitrate when a party engaged in thus, this is not a case where the counterclaim "can be viewed as separate and erdman company ("erdman") and erdman architecture & engineering lien claims not be stayed pending arbitration, adjudication of the amounts owing on and negligence by eaec. erdman and eaec now appeal the district court's1 union ins. co. v. gilbane bldg. co., 992 f.2d 386, 387 n.1 (1st cir. 1993). of phoenix land's counterclaim. if that occurred, and the arbitration was not stayed, 2 as subcontractor to invoke the contract's arbitration remedy -- failed to do so. endlessly over the details of prejudice when the party who drafted the contract aspects of its dispute with phoenix land and phoenix health, including those that -3- right to arbitrate by participating in litigation, in order for such waiver erdman and eaec moved for additional time to respond and then participated in a constitute prejudice is determined on a case-by-case basis." stifel, nicolaus & co., contract who could not be compelled to arbitrate. it avoided the issue of whether * western district of arkansas. on the merits, filing a motion to dismiss or for more definite statement. the district amounts unpaid under the contract. the complaint also alleged a breach of contract the district court did not need to address erdman's unsupported assertion in though they argued that there was nothing to arbitrate until phoenix land asserted its -7- waiver arises under a variety of arbitration agreements and in a variety of procedural 1093; s.e. stud & components, inc. v. am. eagle design build studios, llc, 588 and unjust enrichment claims against phoenix land for the alleged $2,559,948 unpaid erdman acted inconsistently with its right to arbitrate. "a party substantially invokes tree servicing, l.l.c., 487 f.3d 1085, 1090 (8th cir. 2007) (standard of review). would assert contract defenses and could reasonably anticipate the other claims ___________ asserted by phoenix land in its counterclaim. yet erdman and eaec deliberately phoenix health. their answer denied the lien claims, asserting numerous affirmative presumably, the district court could stay the entire litigation, including


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