Drum Lodge, LLC v. Martel Construction, Inc.

Opinion

----oo0oo---- DRUM LODGE, LLC, No. 2:24-cv-00219 WBS JDP Plaintiff, v. ORDER Defendant. ----oo0oo---- Congress passed the Federal Arbitration Act, 9 U.S.C. ch. 1, in 1925, observing that “action should be taken at this time when there is so much agitation against the costliness and delays of litigation . . . these matters can be largely eliminated by agreements for arbitration. . . .” H.R. Rep. No. 68-96, at 2 (1924). Alas. What started here as a simple dispute about a contract has morphed into this convoluted dispute about arbitration. After the parties agreed to submit their dispute to arbitration, plaintiff, unhappy with the arbitrators’ decision in favor of defendant, has petitioned this court to vacate the award. (Pet. (Docket No. 1); Mot. to Vacate (Docket No. 8).) The matter is now before the court on defendant’s motion to dismiss the petition. (Mot. to Dismiss (Docket No. 12-1).)1 So much for eliminating the agitation, costliness and delay of litigation. As the parties are familiar with the factual and procedural background, the court proceeds directly to the parties’ arguments. I. Timely Service (Rule 12(b)(5)) As a threshold matter, defendant argues that plaintiff failed to effect proper service pursuant to Federal Rules of Civil Procedure 12(b)(5) and 4(h), thereby creating a jurisdictional bar for the court to consider plaintiff’s petition. (See Mot. to Dismiss at 13-21.) Specifically, defendant argues that plaintiff’s ultimate service upon Rachel Buchner and Keeley Davisworth was defective service. In support, defendant relies on Rule 4(h)(1)(A), which states in relevant part that a foreign corporation must be served in the manner prescribed by Rule 4(e)(1) for serving an individual. See Fed. R. Civ. P. 4(h)(1)(A). (See Mot. to Dismiss at 16-17.) Rule 4(e)(1) in turn states in relevant part that an individual may be served by “following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the district court is located or where service is made.” Fed. R. 1 Meanwhile, defendant has filed a separate petition in a separate court to confirm the same arbitration award. (See Docket No. 12-2 Ex. 3.) Apparently, however, that petition is beyond this court’s current purview. Civ. P. 4(e)(1). Defendant accordingly argues that under Montana law regarding service, which Montana courts construe strictly, neither Ms. Buchner nor Ms. Davisworth belong in the category of persons empowered to accept service. See Mont. R. Civ. P. 4(i)(3). (See Reply (Docket No. 18) at 14 (citing In re Marriage of Zacher, 98 P.3d 309, ¶¶ 16-17 (Mont. 2004).) Here, however, Rule 4(e)(1) also permits service according to California state law. See Fed. R. Civ. P. 4(e)(1) (allowing service pursuant to law “in the state where the district court is located . . . .”).2 Unlike Montana law, California law does not require strict compliance with service requirements. See Ramos v. Homeward Residential, Inc., 223 Cal.App.4th 1434, 1442-43 (Cal. App. 4th Dist. 2014) (“It is axiomatic that strict compliance with the [California] code's provisions for service of process is not required. [. . .] [S]ubstantial compliance with the code occurs when, although not properly identified in a proof of service, the person to be served in fact actually received the summons.”).3 4

2 See also 1 Moore's Federal Practice - Civil § 4.90 (“If . . . the individual is to be served in some other state [than the forum state], process may be served under either the law of the state where service is made or the law of the forum state.”). 3 See also Days Inns Worldwide, Inc. v. Patel, 445 F.3d 899, 904 (6th Cir. 2006) (service was effective when it substantially complied with state statute, even though summons was mailed by attorney rather than by court clerk as required by statute); Nikwei v. Ross Sch. of Aviation, Inc., 822 F.2d 939, 943–945 (10th Cir. 1987) (although summons was mailed without request for return receipt, defendant’s refusal to accept service by certified mail warranted granting of default judgment for plaintiff). 4 This also accords with the federal rule in this circuit that “[s]o long as a party receives sufficient notice of the Defendant does not argue that it did not have actual notice or that it would be prejudiced by maintaining the action notwithstanding allegedly defective service. Further, plaintiff demonstrates that its process server tried several times to personally serve Mr. Tony Martel, defendant’s president and chair of its board, at his home and at defendant’s place of business. (Docket No. 17-4.) The record shows similar repeated efforts to physically serve defendant’s counsel. (Id.) Finally, defendant notes that plaintiff “cannot timely effectuate service on [defendant] within the FAA’s three-month deadline [to move to vacate a final award].”5 (Mot. to Dismiss at 19-20.) This is clear indication that plaintiff would be severely prejudiced if its petition were dismissed, even if given leave to re-attempt service. The court therefore concludes that plaintiff has effected substantially satisfactory service. Accordingly, the court will not dismiss plaintiff’s petition for failure to properly serve defendant.6 II. Subject Matter Jurisdiction (Rule 12(b)(1)) Next, defendant argues that this court lacks subject complaint, Rule 4 is to be ‘liberally construed’ to uphold service.” Travelers Cas. & Sur. Co. of Am. v. Brenneke, 551 F.3d 1132, 1135 (9th Cir. 2009) (quoting Chan v. Soc'y Expeditions, Inc., 39 F.3d 1398, 1404 (9th Cir. 1994)). 5 The final award was issued and delivered on October 25, 2023. The deadline to move to vacate was January 25, 2024. (See Mot. to Dismiss at 20.) 6 In its opposition, plaintiff also requests costs associated with service as a sanction for defendant’s purported “evasion of service.” (Opp’n (Docket No. 17) at 17.) The court declines to do so, as the record does not show any behavior anywhere near egregious enough to merit sanctions. matter jurisdiction over plaintiff’s petition pursuant to Federal Rule of Civil Procedure 12(b)(1). The court disagrees. The court plainly has diversity jurisdiction because the parties are diverse and the amount in controversy exceeds $75,000.7 See 28 U.S.C. § 1332. (See Pet. ¶ 3.) See also Badgerow v. Walters, 596 U.S. 1, 9 (2022) (“The issue here is about where a federal court should look to determine whether an action brought under [FAA] Section 9 or 10 has an independent jurisdictional basis. An obvious place is the face of the application itself. If it shows that the contending parties are citizens of different States (with over $75,000 in dispute), then § 1332(a) gives the court diversity jurisdiction.”). None of defendant’s arguments identify any 7 The final award exceeds $2 million. (Docket No. 8-3.) In addition, plaintiff’s petition to vacate the arbitration award pursuant to FAA § 10 is a separate proceeding arising from a separate cause of action, not a continuation of the state court action: “[T]he FAA authorizes parties to arbitration agreements to file specified actions in federal court -- most prominently, petitions to compel arbitration (under Section 4) and applications to confirm, vacate, or modify arbitral awards (under Sections 9 through 11).” Badgerow, 596 U.S. at 8 (emphasis added). Cf. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 171 F. App’x 545, 546 (9th Cir. 2006) (“[T]he FAA establishes a cause of action for confirming an arbitration award that is independent of any motion to compel arbitration. [. . .] The district court did not improperly allow Merrill Lynch to remove the case. As mentioned, under the FAA, a motion to confirm an arbitration award is independent of any earlier proceeding to compel arbitration.”). See also Aero Air, L.L.C. v. Sino Swearingen Aircraft Corp., No. CV-07-283-ST, 2007 WL 9809067, at *3 (D. Or. Mar. 13, 2007) (“Indeed, section 10 of the FAA creates a separate cause of action to vacate an arbitration award.” (citing Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193, 200-04 (2000)). authority vitiating diversity jurisdiction.8 Accordingly, the court will not dismiss plaintiff’s petition for lack of subject matter jurisdiction.9 III. Failure to State a Claim (Rule 12(b)(6)) Section 10 of the Federal Arbitration Act (“FAA”), 9 U.S.C. ch.1, provides the exclusive grounds for a federal court to vacate arbitration awards. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 584 (2008). Pursuant to Section 10, the court now examines whether plaintiff’s petition has alleged sufficient facts to secure the relief that it requests: (1) vacation of the entire arbitration award due to allegations of the panel’s partiality; or (2) in the alternative, vacation of the panel’s award of attorneys’ fees to defendant. (See Pet. at 3-4.) A. Partiality (FAA § 10(a)(2))10 8 Contrary to defendant’s representations, the parties’ joint stipulation to arbitrate contains no waiver of federal jurisdiction. (See Docket No. 17-3 ¶ 9 (“Martel and Drum Lodge will report to the [State] Court as soon as the final arbitration award is issued in this matter or, as the Court directs, Martel and Drum Lodge will provide the Court with periodic updates regarding the status of the arbitration process.”) (emphasis added).) 9 Defendant alternatively requests that the court decline jurisdiction pursuant to Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). The court will not do so, as plaintiff’s lack of a guarantee to be heard in state court conclusively tilts the Colorado River analysis in favor of this court retaining jurisdiction. 10 Defendant somewhat confusingly styles its partiality argument as a partial dismissal under Rule 12(b)(6) and its attorneys’ fees argument as an argument on the merits. However, the court’s inquiry regarding either argument is the same: Has plaintiff alleged sufficient facts to state a claim for relief? Under FAA § 10(a)(2), a federal court may vacate an arbitration award “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(2). However, the Ninth Circuit has held that “a party with constructive knowledge of potential partiality of an arbitrator waives its right to challenge an arbitration award based on evident partiality if it fails to object to . . . his failure to make disclosures until after an award is issued.” Fidelity Federal Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1313 (9th Cir. 2004). Plaintiff’s petition alleges that the panel’s partiality was evident from a May 2, 2023 conversation between the panel and defendant’s counsel, which plaintiff’s counsel also overheard.11 (Pet. ¶¶ 15-16.) However, plaintiff’s petition fails to allege that plaintiff raised any partiality objections, in any form, at any point before the panel issued its final award on October 25, 2023. Indeed, plaintiff’s opposition effectively concedes that its petition to vacate, which it filed on January 17, 2024, is the first such objection. (See Opp’n at 37-39 & n.7.) Plaintiff accordingly fails to allege sufficient facts for the court to vacate the entire arbitration award pursuant to FAA § 10(a)(2), and the court will not do so. B. Attorneys’ Fees (FAA § 10(a)(4))

11 In its opposition, plaintiff argues that the evident partiality was revealed by the adverse decision itself, thereby precluding plaintiff from making an otherwise timely objection. (See Opp’n at 36-39.) This merely begs the question. A district court may vacate an arbitration award under FAA § 10(a)(4) only where “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” 9 U.S.C. § 10(a)(4). See also Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 1002-03 (9th Cir. 2003) (Section 10(a)(4) “provides for vacatur only when arbitrators purport to exercise powers that the parties did not intend them to possess or otherwise display a manifest disregard for the law.”); Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 641 (9th Cir. 2010) (to vacate an arbitration award for manifest disregard, “[i]t must be clear from the record that the arbitrators recognized the applicable law and then ignored it”) (quoting Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995)). Thus, “[i]t is not enough for petitioners to show that the panel committed an error -- or even a serious error.” Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671 (2010). Accordingly, the court examines only whether the panel demonstrated “manifest disregard for the law.” Kyocera Corp., 341 F.3d at 1002-03. It makes no inquiries into the soundness of the panel’s decision. Upon review of the panel’s Interim Decision and Final Award (Pet. Ex. 2), the court concludes that no such “manifest disregard for the law” influenced the panel’s award. The panel explains at length the facts and authorities that it relies upon to justify an award of attorneys’ fees, and explains why it believes an award of attorneys’ fees is reconcilable with the parties’ underlying contract, which proscribes them.12 Plaintiff accordingly fails to allege sufficient facts for the court to vacate the panel’s award of attorneys’ fees pursuant to FAA § 10(a)(4), and the court declines to do so. C. No Leave to Amend Courts commonly consider four factors when deciding whether to grant leave to amend under Rule 15(a): bad faith, undue delay, prejudice, and futility of amendment. Roth v. Marquez, 942 F.2d 617, 628 (9th Cir. 1991). Because Rule 16(b)’s “good cause” inquiry essentially incorporates the first three factors, if a court finds that good cause exists, it should then deny leave to amend only if such amendment would be futile. Here, the court concludes that amendment would be futile. Plaintiff concedes that it did not object to the ex parte communication between defendant’s counsel and the panel until after the arbitration ended. The court cannot contemplate any additional allegations which might vitiate such a plainly effected waiver. As to the attorneys’ fee award, the panel’s Final Award

12 In its Final Award, the panel noted that (1) the parties’ contract includes an arbitration agreement that incorporates the Construction Rules; (2) Construction Rule 48 provides that the panel may grant “an award of attorneys’ fees if all parties have requested such an award”; (3) the panel asked the parties at the conclusion of arbitration whether each side was in fact seeking fees, to which both parties said yes; and (4) both parties then agreed to a proposed two-step briefing schedule where the parties would first brief the merits of their positions, then brief the issue of attorneys’ fees after an interim decision is rendered. (Docket No. 1-2 at 18-20.)

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decision conclusively negates any argument that the panel acted in “manifest disregard for the law” for the reasons discussed above. The court again cannot contemplate any additional allegations from outside the four corners of the panel’s decision that would disturb this conclusion. IT IS THEREFORE ORDERED that defendant’s motion to dismiss plaintiff’s petition to vacate arbitration award (Docket No. 12) be, and the same hereby is, GRANTED. Plaintiff’s petition to vacate (Docket No. 1) is DISMISED with prejudice.!% Dated: April 3, 2024 dbitlem (hi. □□□□□□□□□□□□□□□□□□□□□ UNITED STATES DISTRICT JUDGE 13 Plaintiff’s accompanying motion to vacate the 38 arbitration award (Docket No. 8) is also DENIED. 10