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December 1, 1978

E. C. ERNST, INC., Petitioner,

The opinion of the court was delivered by: SAND

In this case of first impression, the Court is called upon to decide, among other issues, a question raised but unanswered by the Seventh Circuit, I. e., whether . . . "(t)he Federal Arbitration Act denied federal courts the discretionary power to decline to exercise jurisdiction because of a pending state proceeding." Bio-Analytical Services, Inc. v. Edgewater Hospital, Inc., 565 F.2d 450, 454 n. 5. We conclude that this question should be answered in the negative. We also conclude that the action cannot be transferred to a more convenient forum because of the language of the Act as construed by the controlling precedents and without regard to the equities of this controversy.

These issues arise as follows:

E. C. Ernst, Inc. ("Ernst") has petitioned this Court for an order, pursuant to 9 U.S.C. § 4, directing arbitration in the manner provided in an agreement between Ernst and Potlatch Corporation ("Potlatch"). In response, Potlatch has moved for an order transferring this petition to the United States District Court for the Eastern District of Arkansas or dismissing or staying this petition pending the determination of the Arkansas state court proceeding. *fn1" By cross-motion filed November 3, 1978, Ernst moves for a summary determination of its entitlement to an order directing arbitration. *fn2"

 Ernst's motion was originally heard on November 2, 1978. At that time, the parties stressed the importance of a prompt resolution of their motions in light of the pending Arkansas state court action. Accordingly, this Court issued an oral opinion the following day, denying the motion to transfer. Decision on all other motions was reserved, pending the submission of additional briefs by the parties. *fn3"

 Having reviewed the requested briefs, this Court restates its reasons for denying the motion to transfer and grants Potlatch's motion for a stay.


 This dispute arises out of a 1976 agreement between Ernst, a District of Columbia corporation engaged in the business of electrical contracting, and Potlatch, a Delaware corporation engaged in the business of manufacturing paper products. Under the terms of the construction agreement, Ernst agreed to make certain electrical installations in a paper mill being constructed by Potlatch at McGehee, Arkansas, for a contract price of $ 5,163,188.

 Besides Ernst, Potlatch employed a number of contractors in connection with the project and many of these contractors employed subcontractors. In May, 1978, one of the subcontractors sued its prime contractor and Potlatch in the Chancery Court in Desha County, Arkansas, to enforce a mechanics lien against the project in the amount of $ 43,559.12. In response, the parties asserted cross-claims and counterclaims.

 In July, 1978, Potlatch impleaded Ernst in the Arkansas action seeking indemnity from Ernst for any amount for which it might be liable to the subcontractor or the prime contractor. Specifically, Potlatch sought damages totalling $ 26,514.31. The third-party complaint, however, also indicated that the Ad damnum clause might be increased at a later date: "In addition, Potlatch has sustained and is sustaining other damages due to the above described conduct of Ernst, and Potlatch reserves the right to amend this third-party complaint at a later date to include a prayer for such damages from Ernst." *fn4"

 Before filing a response to this third-party complaint, Ernst served a demand for arbitration on Potlatch with the American Arbitration Association. *fn5" Following this demand, Ernst demurred to the Arkansas complaint alleging that the Arkansas court lacked jurisdiction of the subject of the action because the claim is controlled by a binding arbitration agreement. On October 16, 1978, three days after filing its demurrer, Ernst filed the instant petition in this Court for an order directing arbitration.

 Potlatch responded in several ways to Ernst's demurrer and demand for arbitration. On October 28, 1978, Potlatch filed its detailed response to the demurrer of Ernst, alleging, among other things, that the contract provision upon which Ernst based its arbitration demand did not cover the type of disputes alleged and that Ernst had waived any right it may have had to demand arbitration by failing to make a timely demand as required by contract.

 At the same time that it responded to the demurrer, Potlatch filed with the American Arbitration Association a "Special Appearance for Objection to Arbitration Proceedings" and moved in the Arkansas state action for a stay of arbitration.

 The Arkansas court overruled Ernst's demurrer on October 31, 1978. Ernst was directed to respond to the third party complaint by November 20, 1978. The Arkansas court also directed that a hearing on Potlatch's ...

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