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Karl Koch Erecting Co. v. New York Convention Center Development Corp.

decided: February 3, 1988.

KARL KOCH ERECTING CO., INC., PLAINTIFF-APPELLANT,
v.
NEW YORK CONVENTION CENTER DEVELOPMENT CORPORATION, DEFENDANT-APPELLEE; NEW YORK CONVENTION CENTER DEVELOPMENT CORPORATION, PLAINTIFF-APPELLEE, V. KARL KOCH ERECTING CO., INC., AND FEDERAL INSURANCE COMPANY, DEFENDANTS-APPELLANTS



Appeals from judgments of the United States District Court for the Southern District of New York (Robert W. Swee, Judge) dismissing an original diversity action by a contractor against the owner of the New York City Convention Center and remanding the owner's action against the contractor, which had been removed to the district court, to state court pursuant to a forum-selection clause in the construction contract.

Pierce, Winter and Miner, Circuit Judges. Pierce, Circuit Judge, dissenting in part.

Author: Winter

WINTER, Circuit Judge:

These appeals concern the meaning and validity of a forum-selection clause. The New York Convention Center Development Corporation ("NYCCDC"), a public benefit corporation organized to develop the Jacob K. Javits Convention Center in New York City, brought a suit against a contractor working on the Center, Karl Koch Erecting Co., Inc. ("Koch"), in state court. Koch then brought a diversity action against NYCCDC in the Southern District and removed NYCCDC's state suit to that court. On NYCCDC's motion to dismiss the former action and remand the latter, Judge Sweet held that the forum-selection clause applied both to Koch's original diversity action and to its removal of NYCCDC's suit from state court. He also held that Koch, a sophisticated contractor, had failed to make a strong showing that the forum-selection clause should be set aside as unreasonable, unjust or contrary to the public policy of the forum. Karl Koch Erecting Co. v. New York Convention Center Dev. Corp., 656 F. Supp. 464, 466-67 (S.D.N.Y. 1987). We affirm.

BACKGROUND

The relevant facts are not in dispute. On or about September 5, 1980, Koch, a Delaware corporation with its principal place of business in New Jersey, entered into a contract with the NYCCDC to design, manufacture and construct the space frame for the Convention Center. Article 30.10 of the contract, entitled "Limitations on Actions," provided in part that: "No action or proceeding shall be commenced by [Koch] against [NYCCDC] except in the Supreme Court of the State of New York, County of New York." On November 14, 1986, after problems in the construction of the space frame had delayed completion of the Center, the NYCCDC brought suit against Koch in New York State Supreme Court, County of New York, seeking damages totalling more than $50 million for breach of contract, breach of express and implied warranties, negligence, fraud and misrepresentation. Federal Insurance Company, Koch's performance bond surety on the project, was also named as a defendant.

On November 20, 1986, Koch brought a separate diversity action against NYCCDC in the Southern District claiming damages of more than $13 million. On November 25, Koch removed NYCCDC's suit from the state court to the Southern District. NYCCDC then moved to dismiss Koch's diversity suit pursuant to the forum-selection clause and to remand the removed action to state court under 28 U.S.C. § 1447(c) (1982). Both motions were granted on March 19, 1987, and Koch appealed.

Discussion

Before turning to the merits, we must determine whether we have appellate jurisdiction over Judge Sweet's remand order. With the exception of civil rights cases, "an order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise." 28 U.S.C. § 1447(d). The Supreme Court held in Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 46 L. Ed. 2d 542, 96 S. Ct. 584 (1976), that Section 1447(d) was not a blanket rule. In that case, the district court had ordered remand solely because its docket was too crowded to allow it to hear the case expeditiously. The Court stated that "only remand orders issued under § 1447(c) and invoking the grounds specified therein -- that removal was improvident and without jurisdiction -- are immune from review under § 1447(d)." Id. at 346.

The NYCCDC contends that Thermtron does not govern the instant case. We disagree. A forum-selection clause, although it can have jurisdictional consequences, does not oust a district court of subject-matter jurisdiction. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 32 L. Ed. 2d 513, 92 S. Ct. 1907 (1972). Instead, such a clause requires a district court, after it has determined that it has personal and subject-matter jurisdiction, to consider whether it should "exercise[] its jurisdiction to do more than give effect to the legitimate expectations of the parties . . . by specifically enforcing the forum clause." Id. Moreover, in remanding this case, the district court neither mentioned Section 1447(c) nor questioned the jurisdiction or propriety of Koch's removal in the context of that provision. Karl Koch Erecting Co., 656 F. Supp. at 466 ("There is no suggestion that diversity jurisdiction is lacking."). Instead, the district court granted the motion for remand after reviewing the terms and validity of the clause, id., both of which involved contract law issues.

The rationale for Section 1447(d)'s nonreviewability rule is not implicated in the instant case. That rationale is "to prevent delay in the trial of remanded cases by protracted litigation of jurisdictional issues." Thermtron, 423 U.S. at 351. This policy is not applicable when a district court with subject-matter jurisdiction remands a case on the basis of its interpretation of a forum-selection clause. If Section 1447(d) applied in such cases, a party would have no right to appeal from the determination of the validity and meaning of a contract. In apparently the only other case on this question, the Ninth Circuit reasoned that "any delay caused by an appeal of the contract issue is a delay that must be countenanced." Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., 741 F.2d 273, 277 (9th Cir. 1984). We agree and hold that a remand order based on a district court's interpretation of a forum-selection clause is reviewable on appeal.*fn1

In addressing the merits, we first consider whether the district court properly interpreted the forum-selection clause as requiring dismissal of Koch's diversity suit and remand of NYCCDC's suit against Koch to state court. The forum-selection clause provided that "no action or proceeding shall be commenced by [Koch] against [NYCCDC] except in the Supreme Court of the State of New York." This language expressly forbids Koch from commencing suit in a forum other than state court. Koch's diversity suit in the Southern District therefore clearly violated the clause and was correctly dismissed.

The more difficult issue is whether the phrase "commenced by [Koch] against [NYCCDC]" precludes removal of a state action to the federal court. The phrase "commenced by Contractor against Owner" may not literally preclude removal by Koch. See District No. 1 -- Pacific Coast Dist. v. Trinidad Corp., 583 F. Supp. 262, 263-65 (S.D.N.Y. 1984) (motion to remand granted when enforceable forum-selection clause explicitly barred removal); cf. Pelleport Investors, 741 F.2d at 275 (remand order upheld when clause provided that all disputes arising out of contract were to be litigated in state court). We believe that the only plausible construction of the pertinent phrase is that Koch's removal constitutes the commencement of a "proceeding" in federal court. Indeed, the parties' inclusion of the forum-selection clause makes little sense unless it precludes removal by Koch. See Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 171-72, 305 N.E.2d 907, 909, 350 N.Y.S.2d 895, 898 (1973) (basic objective of contract interpretation is to determine intent of parties from language employed). If the clause does not bar removal, NYCCDC's action, although it originated in state court, would be tried in federal court. Koch, on the other hand, would not be permitted to assert counterclaims in federal court because they are an "action or proceeding . . . commenced by" Koch and subject to the clause. Koch's action against NYCCDC would therefore have to proceed in state court. That kind of bifurcation of litigation seems plainly at odds with the obvious purpose of the forum-selection clause, as well as with the purpose of Fed. R. Civ. P. 13(a) (compulsory counterclaim rule).

With regard to the validity of the forum-selection clause, it is well-established that such clauses "will be enforced unless it clearly can be shown that enforcement 'would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.'" Bense v. Interstate Battery Sys. of Am., 683 F.2d 718, 721-22 (2d Cir. 1982) ...


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