Court Opinion

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Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-24-1994

Virgin Isl. Housing Auth. v. Coastal Gen'l Constr.
Svcs Corp., et al.
Precedential or Non-Precedential:

Docket 93-7819

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Recommended Citation
"Virgin Isl. Housing Auth. v. Coastal Gen'l Constr. Svcs Corp., et al." (1994). 1994 Decisions. Paper 60.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/60

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                  UNITED STATES COURT OF APPEALS
                      FOR THE THIRD CIRCUIT
                           ____________

                           No. 93-7819
                           ____________

                 VIRGIN ISLANDS HOUSING AUTHORITY;
                AMERICAN ARBITRATION ASSOCIATION,
                     Virgin Islands Housing Authority, Appellee

                                v.

                COASTAL GENERAL CONSTRUCTION SERVICES CORPORATION;
                CHARLEY'S TRUCKING,
                          Coastal General Construction
                          Services Corporation, Appellant

               COASTAL GENERAL CONSTRUCTION SERVICES
          CORPORATION,
                                        Appellant
                                v.

                AMERICAN ARBITRATION ASSOCIATION;
                VIRGIN ISLANDS HOUSING AUTHORITY,
                     Virgin Islands Housing Authority, Appellee

                                ____________

      APPEAL FROM THE DISTRICT COURT OF THE VIRGIN ISLANDS
               DIVISION OF ST. THOMAS AND ST. JOHN
              (D.C. Civ. Nos. 93-00039 & 93-00042)1
                           ___________

                      Argued April 22, 1994

      Before:   STAPLETON, ALITO, and WEIS, Circuit Judges

                     Filed June 24, 1994
                            ___________

Peter Goetz, Esquire (ARGUED)
William B. Flynn, Esquire

1
 This Court's order entered April 5, 1994 amending the caption on
   motion of the Virgin Islands Housing Authority is vacated as
    improvidently granted. The district court's order that was
appealed and the notice of appeal by Coastal General Construction
     Services Corporation include the captions of both cases.

                                1
Goetz, Fitzpatrick & Flynn
One Pennsylvania Plaza, Suite 4401
New York, New York 10119-0196

Matthew J. Duensing, Esquire
D'Amour Jones Stryker & Duensing
Upper Level Drake's Passage
Charlotte Amalie, St. Thomas
USA Virgin Islands 00804

Attorneys for Appellant, Coastal General Construction Services
Corporation

Christopher M. Kise, Esquire (ARGUED)
Edward C. Adkins, Esquire
Adkins & Kise, P.A.
2175 Barnett Plaza
101 East Kennedy Boulevard
Tampa, Florida 33602

Vincent F. Frazer, Esquire
Law Offices of Frazer & Williams
#9 Contant-Soto Plaza
Charlotte Amalie, St. Thomas
USA Virgin Islands 00803

Attorneys for Appellee, Virgin Islands Housing Authority

                           ____________

                       OPINION OF THE COURT
                           ____________

WEIS, Circuit Judge.

          In this appeal, we hold that in the Virgin Islands,

unless an independent basis for federal jurisdiction exists, a

suit to confirm or vacate an arbitrator's award pursuant to the

Federal Arbitration Act must be brought in the Territorial Court,

not in the District Court of the Virgin Islands.   We also decide

that an arbitrated dispute that is based on the breach of a

construction contract growing out of a territorial housing

                                2
project financed by federal funds does not establish federal

question jurisdiction.   Accordingly, we will reverse an order of

the district court vacating an arbitrator's award.

          Plaintiff Virgin Islands Housing Authority entered into

a contract with defendant Coastal General Construction Services

Corp. for renovation of the Donoe Housing Project on St. Thomas.

Funding for the project was supplied by a program that receives

part of its funding from the United States Department of Housing

and Urban Development (HUD) under the Comprehensive Improvement

Assistance Program, 42 U.S.C. 1437l (Supp. 1993).

          The contract was executed on September 29, 1988, but no

notice to proceed was issued.   The Housing Authority terminated

the contract on June 6, 1989, as permitted by the terms of the

agreement.   Contending that it was entitled to compensation for

the work it had performed before the termination, Coastal

submitted the matter for a hearing before the American

Arbitration Association as provided in the contract.

          On February 5, 1992, Coastal presented its claim for

termination damages in the amount of $1,114,799.40 (amended on

October 5, 1992 to be $1,149,922).    One day before the hearing

scheduled for November 17, 1992, however, Coastal presented an

amended claim in the amount of $2,343,933, almost double the

amount it had previously requested.    At the beginning of the

hearing, the Housing Authority asked the arbitrator to either

disallow the latest amended claim or continue the hearing to

allow time for further evaluation of the amount claimed.    The

arbitrator did not postpone the hearing, and in its final written

                                3
argument to the arbitrator, the Housing Authority asserted that

consideration of the amended claim was unfair and prejudicial.

          After final submissions by the parties, the arbitrator

awarded Coastal $1,262,049.   The Housing Authority filed suit in

the Territorial Court seeking to vacate the arbitration award

because of Coastal's alleged fraud in inflating its claim.

Coastal then removed the case to the District Court of the Virgin

Islands, and filed a separate action in that forum seeking

confirmation of the award.    The two cases were consolidated by an

order that was originally limited to discovery.      However, the

court and the parties treated the consolidation as applicable

generally.

          The District Court determined that it had federal

question jurisdiction and denied the Housing Authority's motion

for remand.   In a subsequent memorandum, the court found that

Coastal's last-minute submission of an amended claim with its

accompanying documentation presented sufficient cause for

postponement and concluded that the arbitrator had improvidently

closed the hearing.   Based on evidence that some of the expenses

claimed by Coastal might have been inflated or completely false,

the district court reasoned that the Housing Authority may have

been prejudiced, vacated the award and "remanded for completion

of the agreed upon arbitration."      Coastal has appealed.

                                 I.

          The first question confronting us is whether the

District Court's order is appealable.      We resolve this issue by

reference to the statutory provisions of the Federal Arbitration

                                 4
Act, 9 U.S.C. § 1, et seq.    Section 16(a)(1) of the Act

authorizes an immediate appeal from an order that (A) refuses a

stay of an action under 9 U.S.C. § 3; (B) denies a petition to

order arbitration to proceed; (C) refuses to compel arbitration;

(D) confirms or denies confirmation of an award; or (E) modifies,

corrects, or vacates an order.   Id. § 16(a)(1).    On the other

hand, section 16(b) of the Act prohibits an appeal from

interlocutory orders directing or permitting arbitration to

proceed.

           If the District Court had simply vacated the award in

this case, the order would be clearly appealable under subsection

16(a)(1)(E), but the additional direction for a remand has

clouded the issue.   The appealability of such an order was

discussed by the United States Court of Appeals for the Fifth

Circuit in Atlantic Aviation, Inc. v. EBM Group, Inc., 11 F.3d
1276, 1280 (5th Cir. 1994).   That Court observed that the Federal

Arbitration Act "does not distinguish between orders vacating

arbitration awards without directing a rehearing and those orders

which vacate awards and direct a rehearing of the arbitration

dispute; both are appealable."   Id.
           Forsythe Int'l, S.A. v. Gibbs Oil Co. of Texas, 915
F.2d 1017 (5th Cir. 1990), presented a similar issue.     In that

case, the district court found that the misrepresentation by one

of the parties and the failure of the arbitrators to take any

corrective action required that the award be vacated and the

matter remanded to a new panel of arbitrators.     The Court of

Appeals concluded that the order was appealable because otherwise

                                 5
the parties could never determine whether the district court had

complied with the narrow statutory limits governing vacatur.      Id.

at 1020.    The Court stated in a footnote, however, that if the

district court had simply remanded the case to the original

arbitration panel for clarification of its award, "the policies

disfavoring partial resolution by arbitration would preclude

appellate intrusion until the arbitration was complete."    Id. at

1020 n.1.

            In the case before us, the District Court's order does

not specify whether it is the original arbitrator who is to

conduct the hearing on remand.   Even if that is the implication,

however, we do not believe that the order is an interlocutory one

within the scope of 9 U.S.C. § 16(b).    Here, the District Court

did not simply request clarification, but instead directed a re-

evaluation of the entire controversy based on the Housing

Authority's allegations that Coastal's claim for reimbursement

was submitted with fraudulent documentation.

            We are not convinced by the dictum in Forsythe that

appealability in situations of this nature should be determined

by whether the remand is to the original or a new arbitrator.

Rather, the distinction is whether the additional hearing is

ordered merely for purposes of clarification -- an order that

would not be appealable -- or whether the remand constitutes a

re-opening that would begin the arbitration all over again. Here,

the vacation and remand order is essentially no different from

that of the district courts in Atlantic Aviation and Forsythe
where the Court of Appeals held that the orders were appealable.

                                 6
We therefore follow the rulings in those cases and hold that we

do have jurisdiction to entertain this appeal.

                                II.

          Having found that the order is appealable, the next

question is whether the District Court or the Territorial Court

had jurisdiction over the Housing Authority's petition to vacate

the arbitration award and Coastal's request for confirmation.

          In Brow v. Farrelly, 994 F.2d 1027, 1032-34 (3d Cir.

1993), we discussed the division of jurisdiction between the

District Court of the Virgin Islands and the Territorial Court.

The opinion reviewed the history of the two courts as well as the

congressional and local legislative enactments that resulted in

the allocation of various forms of civil litigation between the

two forums.    Id.

          In brief, the Territorial Court has original

jurisdiction over all local civil actions.     Id. at 1034; see 48

U.S.C. § 1612(b); V.I. Code tit. 4, § 76(a).     The District Court

of the Virgin Islands has exclusive jurisdiction equivalent to

United States District Courts over such fields as admiralty,

bankruptcy, patent, copyright and trademark, and other matters

not relevant here.    Brow, 994 F.2d at 1034 (citing 48 U.S.C.
§ 1612(a)).    The Territorial Court and the District Court have

concurrent jurisdiction over federal question and diversity

cases.   Id.

          Because complete diversity of citizenship does not

exist between the parties in this case, the jurisdiction of the

                                 7
District Court cannot rest on that ground.2      Nor does this case

involve those matters that would come within the exclusive

jurisdiction of the District Court.      That leaves for

determination whether a federal question exists here to give the

District Court jurisdiction.

          28 U.S.C. § 1331(a) gives district courts jurisdiction

over "civil actions arising under the Constitution, laws, or

treaties of the United States."       The Supreme Court has explained

that section 1331(a) authorizes the courts to hear either

originally or by removal "only those cases in which a well-

pleaded complaint establishes either that federal law creates the

cause of action or that the plaintiff's right to relief

necessarily depends on resolution of a substantial question of

federal law."   Franchise Tax Bd. v. Construction Laborers

Vacation Trust, 463 U.S. 1, 27-28 (1983); see also 13B Charles A.

Wright et al., Federal Practice and Procedure § 3562, at 46

(1984).

          Removal jurisdiction exists only if the case could have

been brought in the federal court under its original
2
Coastal's complaint in the District Court named the American
Arbitration Association and the Housing Authority as defendants.
Because diversity of citizenship existed between Coastal and the
Arbitration Association, Coastal asserted that the District Court
had supplemental jurisdiction over the Housing Authority under 28
U.S.C. § 1367. That contention was an erroneous interpretation
of section 1367 because that statute does not affect the
traditional rule of complete diversity. Even though Coastal
chose the wrong route in its complaint, the District Court
properly considered whether the suit raises a federal question to
support jurisdiction on grounds other than diversity. See
Boarhead Corp. v. Erickson, 923 F.2d 1011, 1018 (3d Cir. 1991);
see also 5 Charles A. Wright & Arthur R. Miller, Federal Practice
and Procedure § 1210, at 121 (1990).

                                  8
jurisdiction.   Franchise Tax Bd., 463 U.S. at 10.   Moreover, the

fact that a defense based on federal law will be raised does not

create jurisdiction in the federal courts unless the case falls

within that small category where the governing federal statute

preempts the field and was clearly intended to support removal

jurisdiction.   See Metropolitan Life Ins. Co. v. Taylor, 481 U.S.
58, 66-67 (1987).   That circumstance is not present here.

           Federal and state courts have concurrent jurisdiction

to enforce the provisions of the Arbitration Act.    In Moses H.

Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32

(1983), the Supreme Court observed that the "Arbitration Act is

something of an anomaly" in federal court jurisdiction.      The

statute creates federal substantive law regulating an agreement

to arbitrate, but "it does not create any independent federal-

question jurisdiction under 28 U.S.C. § 1331 . . . or otherwise."

Id.   As we noted in Isidor Paiewonsky Assocs., Inc. v. Sharp

Properties, Inc., 998 F.2d 145, 153 n.8 (3d Cir. 1993), the

Arbitration Act does not supply federal jurisdiction where it

does not otherwise exist.

           The Arbitration Act thus does not answer the

jurisdictional issue in the case at hand.   In Prudential-Bache
Sec., Inc. v. Fitch, 966 F.2d 981 (5th Cir. 1992), a brokerage

firm filed suit in federal court to compel arbitration of a

dispute with its customer.   The underlying controversy arose over

contentions that the brokerage firm had violated federal

securities laws.    However, because the complaint did not include

any reference to a federal statute other than the Arbitration

                                 9
Act, the Court of Appeals followed the well-pleaded complaint

rule and held that no federal question jurisdiction existed.    Id.

at 988-89.    Prudential-Bache thus emphasizes that not only must

federal jurisdiction exist aside from the Arbitration Act, but

the independent basis must appear on the face of the complaint.

             The record in the case at hand establishes that neither

of the complaints filed by the Housing Authority and Coastal

contain allegations sufficient under the well-pleaded complaint

rule to support a finding of a substantial federal question.     On

that basis alone, the District Court lacked jurisdiction.

             Even if it were permissible to look beyond the

complaint to the substance of the arbitrated dispute between the

parties, we would still conclude that no federal question is

present here.    The District Court concluded that it had

jurisdiction based on four factors:     (1) enforcing or vacating

the award implicates contractual obligations between HUD and the

Housing Authority "with respect to the use of federal funds

earmarked for the construction projects at issue in which funds

Coastal has an interest"; (2) resolution of the dispute requires

construction of HUD requirements for the termination of a

contract and a federal interest exists in maintaining the uniform

interpretation of federal contractual provisions; (3) the Housing

Authority's allegations that Coastal had submitted fraudulent

documentation with its claim required an interpretation of the

Arbitration Act; and (4) judicial economy would be best served by

not remanding because any appeal from the Territorial Court would

be to the District Court.

                                  10
          The last factor, judicial economy -- unfortunately as

this case demonstrates -- cannot be a factor in determining the

jurisdiction of federal courts.    The allocation of judicial

business to the courts is a matter of constitutional and

legislative mandates that must be honored by the courts

regardless of considerations of efficiency.

          Nor does the Housing Authority's claim that fraud

occurred in the arbitration process confer jurisdiction on the

District Court.   The Arbitration Act provides that a court may

vacate an award that has been procured by fraud or where the

arbitrator was guilty of misconduct in refusing a postponement of

the hearing.   9 U.S.C. § 10(a)(1), (3).     Nevertheless, as noted

earlier, the Supreme Court made plain in Moses H. Cone Memorial

Hosp. that the Arbitration Act alone cannot serve as a basis for

finding federal jurisdiction.   "[T]he substantive law the Act

created [is] applicable in state and federal courts," Southland

Corp. v. Keating, 465 U.S. 1, 12 (1984), but the Act does not

supply independent federal question jurisdiction.     Id. at 15 n.9.

          The possibility, therefore, that the court would be

required to interpret the fraud provisions the Arbitration Act

does not meet federal question standards; another independent

basis of jurisdiction must exist.      As the Southland Court noted,
"a party may assert general contract defenses such as fraud to

avoid enforcement of an arbitration agreement."      Id. at 16 n.11.

That, however, like other general contract defenses does not

establish federal jurisdiction under the Arbitration Act.

                                  11
          We come, then, to the other two factors cited by the

district court, namely that enforcing or vacating the award not

only implicates contractual obligations between HUD and the

Housing Authority with respect to the use of federal funds, but

also that a resolution of the dispute requires an interpretation

of HUD requirements for termination of a contract.   In this

connection, the court noted the federal interest in maintaining a

uniform interpretation of federal contract provisions.

          We may assume, albeit hesitantly, that resolution of

the dispute between Coastal and the Housing Authority would

implicate these factors.   That assumption, however, does not

supply the necessary independent basis for jurisdiction.

Preliminarily, we note that the interest in uniformity in

construction of federal contractual provisions is not enough to

pose federal question issues.   Merrell Dow Pharmaceuticals Inc.

v. Thompson, 478 U.S. 804, 815-16 (1986).

          As we said in Lindy v. Lynn, 501 F.2d 1367, 1369 (3d

Cir. 1974), an action under 28 U.S.C. § 1331(a) arises only if

the complaint seeks a remedy expressly granted by federal law or

if the action requires construction of a federal statute, or at

least a distinctive policy of a federal statute requires the

application of federal legal principles.    "[T]he fact that a

contract is subject to federal regulation does not, in itself,

demonstrate that Congress meant that all aspects of its

performance or nonperformance are to be governed by federal law

rather than by the state law applicable to similar contracts in

businesses not under federal regulation."    Id.

                                12
          In Lindy, the dispute between the parties was focused

on the correct interpretation and effect of contractual documents

normally determined by state law.    We concluded that "[t]he fact

that these documents were subject to the regulations of [a

federal agency] is not significant . . . ."     Id.

          The Court of Appeals in West 14th St. Commercial Corp.

v. 5 W. 14th Owners Corp., 815 F.2d 188, 192 (2d Cir. 1987),

outlined the two tests to be applied when reviewing federal

question jurisdiction.   First, the question is whether federal

law creates the cause of action.     If not, the second inquiry is

whether the complaint poses a substantial federal question.       The

Supreme Court has cautioned that "`the mere presence of a federal

issue in a state cause of action does not automatically confer

federal question jurisdiction.'"     Id. at 193 (quoting Merrell

Dow, 478 U.S. at 813).   The nature of the federal interest at

stake is determinative of whether it is sufficiently substantial

to displace state law.   Id.

          In Weeks Constr., Inc. v. Oglala Sioux Housing Auth.,

797 F.2d 668 (8th Cir. 1986), HUD provided funds for construction

of housing units by a Housing Authority for an Indian tribe.       A

contractor sued the Housing Authority and asserted federal

question jurisdiction.   The Court of Appeals rejected that

assertion, holding that the contractor's claims were based on its

agreement with the Housing Authority -- an interpretation of

which was governed by local, not federal, law.        Id. at 672. "[The
contractor's] action for money damages may have a connection with

activities undertaken as part of functions authorized by federal

                                13
law, but did not itself arise under federal law and requires only

the interpretation and application of contract principles under

local law."    Id. at 675 n.8; see also Morongo Band of Mission

Indians v. California State Bd. of Equalization, 858 F.2d 1376,

1385-86 (9th Cir. 1988) (In suit for breach of lease, fact that

it was entered into under authority conferred by federal statute

did not support federal question jurisdiction).

          Even if Coastal's complaint contained assertions

respecting the use of federal funds in the construction project

and the adoption of contractual forms authorized by HUD, federal

question jurisdiction would still not be established.

Essentially, the dispute between the parties is whether the

Housing Authority could terminate the contract without paying for

the expenses that Coastal had incurred up to that point.    This

dispute is thus governed by local, not federal, law.

          The contract explicitly states that HUD is not a party

to the agreement in this case.   Moreover, the agency

understandably declined to participate in the arbitration

proceedings.   Coastal does not seek money from HUD, but from the

Housing Authority.   Nor has Coastal cited any HUD regulation or

any statutory provision that would substantially affect the

disposition of the claim against the Housing Authority.    In these

circumstances, federal question jurisdiction would not exist even

in the absence of the well-pleaded complaint rule.

          We conclude, therefore, that the Territorial Court has

exclusive jurisdiction over the complaint filed by the Housing

Authority and that removal to the District Court was improper.

                                 14
Thus, the suit must be remanded to the Territorial Court.

Similarly, because the Territorial Court also has exclusive

jurisdiction over the action filed by Coastal, the district court

must either dismiss that action or it may, "in the interest of

justice," transfer the suit to the Territorial Court pursuant to

the authority conferred in V.I. Code tit. 4, § 32(b).    See Brow,
994 F.2d at 1037 n.10.

           One final matter remains for determination.   The

Housing Authority has requested that we impose sanctions against

Coastal for its improvident removal of the litigation to the

District Court.   Coastal had relied primarily upon a theory of

allocation of jurisdiction between the District and Territorial

Courts that was not clarified until this Court issued its opinion

in Brow.   Because the removal took place before the date of that

opinion, we conclude that Coastal had a colorable claim of

jurisdiction at the time it began the removal action.    In these

circumstances, we do not believe that sanctions would be

appropriate.

           The judgment of the District Court will be vacated, and

the cases will be remanded to the District Court with directions

to remand the suit brought by the Housing Authority to the

Territorial Court and to dismiss or transfer the complaint filed

by Coastal in the District Court.    Each party to bear its own

costs.

                                15
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