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Environmental Barrier Company LLC v. Slurry Systems

August 29, 2008

ENVIRONMENTAL BARRIER CO., LLC, PLAINTIFF-APPELLEE,
v.
SLURRY SYSTEMS, INC., DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 C 0212-Rebecca R. Pallmeyer, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.

ARGUED SEPTEMBER 17, 2007

Before FLAUM, RIPPLE, and WOOD, Circuit Judges.

After an arbitration hearing to resolve a construction contract dispute between Environmental Barrier Company ("EBC") and Slurry Systems, Inc. ("SSI"), Arbitrator Franklin I. Kral issued an award in favor of EBC in the amount of $388,919.88. When SSI did not pay, EBC filed suit in Illinois court to confirm the award, and SSI responded by removing the case to the U.S. District Court for the Northern District of Illinois. SSI urged the district court to vacate the arbitral award, or in the alternative, to modify it. The district court did neither: instead, it confirmed the award entered by Arbitrator Kral. In the course of doing so, the court held that EBC had "standing" to enforce the arbitration clause in the contract and that the arbitrator had not exceeded his powers. On appeal, SSI is now urging us to find that EBC never obtained the right to enforce the contract's arbitration clause. SSI's appellate briefs present this argument as a challenge to arbitrability, based on the fact that SSI agreed to arbitrate only with EBC's predecessor-in-interest, not with EBC itself. This is a major shift from the way SSI presented its case first to the arbitrator and later to the district court, where it framed the issue in terms of EBC's standing to pursue this arbitration. The difference is crucial-indeed, on these facts, fatal-to SSI's claim.

I.

On February 29, 2000, the U.S. Army Corps of Engineers entered into a contract with SSI for work on a project to reduce flooding during heavy rains. The McCook Reservoir Project, as it was called, involved the construction of a multibillion-gallon reservoir; SSI won the right to build the overburden cutoff wall. SSI in turn subcontracted part of its work to an entity called Geo-Con, Inc., using a form contract that the parties signed in April 2000. The parties' briefs recount in detail the progress of SSI's and Geo-Con's work from 2000 to 2003; we include only the facts pertinent to this appeal.

Attachment A to the SSI/Geo-Con subcontract elaborated on Article 8.1 of the text, specifying that "Contractor and Subcontractor shall jointly work together to perform all of the work together [sic] to minimize the overall cost of the work." Attachment A also included a longer version of Article 10.1, which described how the parties would allocate revenues, costs, profits, and loss and gave guidance for a final settling-up based on the actual distribution of costs. The subcontract also contained an exclusivity clause, Article 1.3; a broad arbitration clause covering "[a]ny claim arising out of or related to this Subcontract,"Article 6.2; and a clause restricting assignment or sub-subcontracting, Article 7.4.2.

The project's scope and methodology changed as the work proceeded, requiring the Corps at one point to suspend operations while it figured out an alternative way to finish the project. Once the modifications to the Prime Contract were in place, SSI and Geo-Con resumed their joint effort to complete their portion of the work. By April 2003, they were finished with their construction work. What remained to be done was the final reckoning of who owed whom how much; this proved to be more difficult. There were, for instance, several pending change orders, and it was unclear how costs and profits would be shifted among the parties. To the extent that these financial details are relevant, we return to them later.

EBC entered the picture in September 2003, when GeoCon, for reasons unrelated to the McCook project, filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. During Geo-Con's reorganization, EBC (through two intermediary entities) acquired substantially all of Geo-Con's assets for a purchase price of $2.1 million. The bankruptcy court found that EBC was the only qualified purchaser of Geo-Con's assets. In an order dated April 16, 2004, the court approved the sale in accordance with the terms set forth in a letter from the intermediaries. Part II of the offer letter addressed the Geo-Con acquisition and set forth a list of "excluded assets." The exclusions included "[a]ll contracts for services to be performed by Geo-Con, except . . . P90099 McCook, IL" (emphasis added). In other words, the McCook contract was acquired by the intermediary, and then passed along to EBC. There was a Schedule A to the offer letter that listed equipment loans and leases. This was the "Schedule A" to which the bankruptcy court referred when it said in its order that the contracts listed in Schedules A and C were executory.

The sale of the McCook contract was later reflected on Schedule D to the April 29, 2004, bill of sale between GeoCon and EBC that carried out the bankruptcy court's order. The bill of sale provided that Geo-Con was selling "all of Seller's accounts receivable (including without limitation the accounts set forth on Schedule A hereto)," and "contracts" specified as the "Assumed Contracts." This was a different "Schedule A" than the one attached to the offer letter mentioned in the bankruptcy court's April 16 order. Schedule A to the bill of sale lists accounts receivable and contracts that EBC was acquiring, and it includes the McCook project. Thus, the fact that the bankruptcy court had described the contracts listed in Schedules A and C as executory has little bearing on this case.

SSI asserts that it was not aware of Geo-Con's bankruptcy proceedings as they were taking place. It learned about them, however, no later than June 17, 2004, when EBC notified SSI by letter that EBC had succeeded to GeoCon's rights under the subcontract. The letter contained a demand that SSI pay EBC the balance due to Geo-Con for the work that Geo-Con had performed under the subcontract. At the time, EBC believed that this balance was $711,000. (It later found out that SSI had received two additional payments from the Corps that it had not disclosed, totaling $425,951.38; the discrepancy is immaterial for our purposes.)

EBC's June 2004 letter also noted that the "subcontract between Geo-Con and Slurry Systems calls for mediation and arbitration of disputes," but it added that EBC's preference is to resolve its claim against Slurry Systems amicably, if possible, without the expenditure of mediation fees and expenses which, pursuant to the contract, are to be shared equally by the parties. Accordingly, we request an opportunity to meet with you within the next two weeks to discuss and hopefully resolve EBC's claim. If you are unwilling to meet with us within that time, EBC will commence mediation and arbitration proceedings.

SSI did not respond positively to EBC's letter. On July 7, 2004, SSI's attorneys sent a letter to EBC's counsel, expressing the opinion that "all disputes between Geo-Con and Slurry Systems have been resolved," and adding that, "[a]s a matter of fact, Geo-Con actually owes Slurry Systems, but because of Geo-Con's liquidation, there is no point in Slurry pursuing the matter." SSI's letter noted EBC's statement that the subcontract between Geo-Con and SSI "calls for the mediation and arbitration of disputes," and requested that EBC provide SSI "with a copy of the subcontract if you still plan to pursue this matter[.]"

EBC did pursue the matter. After mediation efforts failed, EBC's counsel called SSI's counsel to discuss arbitration. The following week, in a letter dated March 16, 2005, counsel for SSI wrote the following note to EBC's attorney:

As I stated on the phone, while I am pleased to resolve potential procedural issues by agreement, the first order of business is to determine whether your client, [EBC,] has any standing ...


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