Keystone Shipping Co. v. New England Power Co.

United States Court of Appeals
For the First Circuit

No. 96-1800

KEYSTONE SHIPPING COMPANY,

Plaintiff - Appellant,

v.

NEW ENGLAND POWER COMPANY,

Defendant - Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. George A. O'Toole, Jr., U.S. District Judge]

Before

Cyr, Circuit Judge,

Campbell, Senior Circuit Judge,

and Stahl, Circuit Judge.

Joseph D. Steinfield with whom Joshua A. Davis, C. Dylan Sanders,

and Hill & Barlow were on brief for appellant.

Stanley McDermott, III, with whom James D. Kleiner, Piper &

Marbury L.L.P., and John F. Sherman, III, were on brief for appellee.

March 20, 1997

STAHL, Circuit Judge. This case involving an
STAHL, Circuit Judge.

underlying dispute over who is to pay for some $14 million in

repairs to a coal cargo ship requires us to resolve one

question: whether claims asserted by defendant-appellee New

England Power Company ("NEP") against plaintiff-appellant

Keystone Shipping Co. ("Keystone") are arbitrable. We reach

two conclusions pointing to the same result. First, because

the issue has already been litigated by the parties in

Massachusetts state court, it is precluded from relitigation

under the doctrine of issue preclusion. Second, even if the

issue were not precluded, we find that Keystone and NEP have

a legally-enforceable agreement to arbitrate disputes like

the one here. We thus affirm.

Background and Prior Proceedings
Background and Prior Proceedings

In order to resolve this appeal we must consider a

long series of agreements and disputes between Keystone and

NEP concerning the S.S. Energy Independence, now named the

S.S. Energy Enterprise ("the Vessel"). The Vessel was

constructed in the early 1980s by the New England Collier

Company ("NECCO"), an unincorporated joint venture between

Keystone and an NEP affiliate, New England Energy

Incorporated ("NEEI"). NEP, in turn, chartered the Vessel

from NECCO to deliver coal to its electric power plants. The

joint venture agreement and the NEP time charter both

contained arbitration provisions.

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The relationship was not an entirely happy one and

a dispute between the parties followed. In 1987, Keystone

commenced arbitration against NEEI under the joint venture

agreement, while NEP commenced arbitration against NECCO

under the time charter. In a previous appeal to this Court,

we held that the two arbitrations were amenable to

consolidation by federal court order. See New England Energy

Inc. v. Keystone Shipping Co., 855 F.2d 1, 8 (1st Cir. 1988),

cert. denied, 489 U.S. 1077 (1989).

Before the arbitration was concluded, the parties

settled their differences through a settlement agreement

signed by Keystone, NEP, and NEEI in October 1989 ("the 1989

settlement agreement"). Under the agreement's terms,

ownership of the Vessel was to pass from NECCO to Keystone or

a Keystone nominee. The parties further agreed that the

Vessel's new owner would time charter the Vessel to NEP on

"terms and conditions agreed to by Keystone and NEP." They

annexed a draft of the proposed new time charter ("the draft

charter") to the settlement agreement. Like the then-

operative NEP time charter, the draft charter contained a

sweeping arbitration provision. In particular, Section 41 of

the draft charter provided that "[a]ny and all differences

and disputes of whatsoever nature arising out of this Charter

which cannot be resolved by the parties shall be put to

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arbitration in the City of Boston . . . before a board of

three persons."

Keystone nominated Intercoastal Bulk Carriers, Inc.

("IBC") to be the Vessel's new owner.1 In accordance with

the settlement agreement, NECCO sold the Vessel to IBC and

IBC, in turn, chartered the Vessel to NEP through a time

charter agreement executed by IBC and NEP on December 27,

1989 ("the 1989 time charter"). The executed time charter was

substantially similar to the October draft charter, but not

exactly identical. The arbitration provisions in the two

documents, however, were alike in all respects. That same

day, December 27, Keystone and IBC entered into a management

agreement which provided that Keystone would continue to

manage the Vessel.

The executed 1989 time charter gave NEP the option

to purchase the Vessel and terminate the charter with six

months' prior, written notice. In 1994, NEP decided to

exercise its option, resell the Vessel to International

Shipholding Corp. ("ISC"), and then recharter the Vessel from

ISC. On October 27, 1994, NEP and ISC signed a Memorandum of

Agreement to this effect. Several days later, on November 1,

1994, NEP notified Keystone and IBC that it was exercising

its six-month purchase option and would buy the Vessel on May

1. Like Keystone itself, IBC is a wholly-owned subsidiary of
Chas. P. Kurz & Co. ("Kurz").

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1, 1995. NEP concurrently demanded arbitration of its right

to do this, because Keystone had previously communicated that

it would contest NEP's right to exercise the purchase option.

Keystone alleged that in the negotiations that produced the

1989 settlement agreement NEP had represented that it would

not exercise the time charter's purchase option. NEP's

exercise of the option, Keystone suggested, indicated that

NEP had made misrepresentations at the time of the settlement

negotiations and had violated Mass. Gen. Laws ch. 93A. A

three-member arbitration panel was convened to hear the

parties' dispute.

On March 15, 1995, the arbitration panel decided

four threshold issues concerning NEP's service of the

purchase notice and demand for arbitration in favor of NEP.

IBC responded by filing an action in federal district court

under 9 U.S.C. 10 to vacate the arbitrators' ruling, but

the court dismissed the complaint as premature. See

Intercoastal Bulk Carriers, Inc. v. New England Power Co.,

No. 95-10880 RW2, (D. Mass. May 18, 1995). Thereafter,

Keystone and IBC resumed arbitration of the dispute. On May

17, 1995, Keystone and IBC announced that they were

withdrawing the challenge to NEP's right to exercise the

purchase option from arbitration, leaving to the panel the

issue of whether NEP's actions had violated Mass. Gen. Laws

ch. 93A.

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That same day, May 17, Keystone sued NEP in

Massachusetts state court, claiming that NEP had made

misrepresentations during the negotiations over the 1989

settlement agreement. NEP moved to dismiss Keystone's claims

on the ground that they were governed by the arbitration

provision of the 1989 time charter. Keystone responded that

its claims against NEP did not arise under the 1989 time

charter signed by NEP and IBC, but instead arose out of the

1989 settlement agreement, which did not have an arbitration

provision. The state court agreed with NEP and dismissed

Keystone's complaint. The state court concluded that the

settlement agreement's provisions meant that Keystone was

bound by the 1989 time charter's arbitration clause,

notwithstanding the fact that Keystone had not signed the

charter, which had been executed by its nominee, IBC, and

NEP. See Keystone Shipping Co. v. New England Power Co., No.

95-1141-B (Mass. Superior Court, Essex County, August 17,

1995).

The dispute thus returned to the original

arbitration panel, which, on August 21, 1995, concluded that

NEP had the right to exercise the purchase option in the 1989

time charter. The arbitrators ordered IBC to sell the Vessel

to NEP. Two days later, IBC filed an action in federal

district court seeking to vacate the arbitrators' latest

rulings. See Intercoastal Bulk Carriers, Inc. v. New England

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Power Co., C.A. No. 95-11881-GAO. Shortly thereafter, on

September 5, 1995, Keystone filed a notice of appeal from the

state court's decision to dismiss its state cause of action

against NEP.

This was the state of legal affairs between the

parties when, on September 20, 1995, IBC and NEP entered into

a new settlement agreement ("the 1995 settlement agreement").

Under the new settlement agreement, IBC agreed to transfer

the Vessel in accordance with NEP's wishes to ISC's nominee,

Enterprise Ship Co. ("Enterprise"). The parties expressly

acknowledged that the arbitration clause found in the 1989

time charter would govern the new settlement agreement. The

settlement agreement also provided for the mutual release of

claims by Keystone and IBC in favor of NEP and vice versa.

There was one exception to this general release. Exhibit B

of the agreement expressly provided that NEP did not release

Keystone and IBC from "claims, if any, by reason of the

Vessel not being in class at the Closing based upon a survey

. . . when the Vessel is drydocked immediately after the

Closing."

On September 28, 1995, the Vessel's new owner,

Enterprise, took title and sent the Vessel to a shipyard for

the agreed-upon inspection. The survey that followed

revealed corrosion damage to the Vessel's bulkheads and cargo

holds exceeding the tolerances established by the American

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Bureau of Shipping, thereby making the Vessel unseaworthy.

The ship inspectors refused to allow the Vessel to sail until

the needed repairs were completed. NEP alleges that the bulk

of the corrosion damage was a direct result of Keystone's

failure to maintain the Vessel. The total cost to bring the

Vessel to standard is claimed to be approximately $14 million

dollars. NEP argues that Keystone and IBC are responsible for

much of that amount under the terms of the 1989 time charter.

On December 20, 1995, NEP notified the arbitration

panel that it desired to arbitrate its claims for the

Vessel's repair costs against Keystone and IBC. Keystone

denied that it was required to arbitrate NEP's claims, and on

February 27, 1996 filed suit in federal district court

seeking a stay of arbitration pursuant to Mass. Gen. Laws ch.

251, 2(b). NEP cross-moved under the Federal Arbitration

Act, 9 U.S.C. 4, to compel arbitration. On May 24, 1996,

the district court granted NEP's motion to compel, concluding

that the arbitrability of NEP's claims against Keystone was

an issue that had been previously decided in Massachusetts

state court, and, in any event, was the result compelled by

the merits. This appeal ensued.

Standard of Review
Standard of Review

We review de novo the district court's application

of the doctrine of issue preclusion because "[t]he

applicability vel non of preclusion principles is a question

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of law." Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973,

978 (1st Cir. 1995). Accordingly, "[n]o special deference is

owed to the district court's determination." Grella v. Salem

Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994).

Similarly, we exercise plenary review over

determinations regarding arbitrability. "[A]rbitrability

depends on contract interpretation, which is a question of

law." PaineWebber Inc. v. Elahi, 87 F.3d 589, 592 (1st Cir.

1996) (construing Commercial Union Ins. Co. v. Gilbane Bldg.

Co., 992 F.2d 386, 388 (1st Cir. 1993)).

The Issue Preclusion Question
The Issue Preclusion Question

In issuing its order to compel arbitration, the

district court concluded that the Massachusetts state court

judgment precludes Keystone from relitigating the question of

arbitrability under the 1989 time charter. On appeal,

Keystone maintains that the district court misapplied the

issue preclusion doctrine. We disagree.

Initially, we note that "[t]he full faith and

credit statute, 28 U.S.C. 1738, requires us to give 'the

same preclusive effect to state court judgments -- both as to

claims and issues previously adjudicated -- as would be given

in the state court system in which the federal court sits.'"

Kyricopoulos v. Town of Orleans, 967 F.2d 14, 16 (1st Cir.

1992) (per curiam) (quoting Willhauck v. Halpin, 953 F.2d

689, 704 (1st Cir. 1991)). Massachusetts law thus governs

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the preclusion question in this case. However, we have

previously recognized that Massachusetts courts "apply the

doctrine of issue preclusion in a traditional manner."

Willhauck, 953 F.2d at 705 (citing Martin v. Ring, 514 N.E.2d

663, 664 (Mass. 1987); Fireside Motors, Inc. v. Nissan Motor

Corp., 479 N.E.2d 1386 (Mass. 1985); Restatement (Second) of

Judgments 27 (1982)). Because our cases apply the same

traditional preclusion principles that would control in a

Massachusetts court, our previous pronouncements in this area

of law are persuasive.

"The principle of collateral estoppel, or issue

preclusion," we have explained, "bars relitigation of any

factual or legal issue that was actually decided in previous

litigation 'between the parties, whether on the same or a

different claim.'" Grella, 42 F.3d at 30 (quoting Dennis v.

Rhode Island Hosp. Trust, 744 F.2d 893, 899 (1st Cir. 1984)

(quoting Restatement (Second) of Judgments 27 (1982))).

When the parties in a subsequent action are the same as those

in a prior one, a party seeking to invoke the doctrine of

issue preclusion needs to establish four essential elements:

"(1) the issue sought to be precluded must be the same as

that involved in the prior action; (2) the issue must have

been actually litigated; (3) the issue must have been

determined by a valid and binding final judgment; and (4) the

determination of the issue must have been essential to the

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judgment." Grella, 42 F.3d at 30; accord Ropes & Gray, 65

F.3d at 981. Each of these elements is present in the

instant case.

First, the arbitrability of NEP's claims in this

case raises the same issue raised in the Massachusetts state

cause of action. Keystone ingeniously attempts to argue that

there are two separate and distinct arbitrability issues.

Keystone in particular maintains that the state court decided

that claims against it under the 1989 settlement agreement

were arbitrable, but that this case raises a different issue:

"whether claims asserted by NEP against Keystone under the

1989 Time Charter and 1995 NEP-IBC Settlement Agreement are

arbitrable." Keystone fails to persuade for a very simple,

but inescapable, reason. The state court concluded that

Keystone was bound to arbitrate claims concerning the Vessel

under the 1989 settlement agreement because (1) it was bound

to arbitrate such claims under the terms of the executed 1989

time charter, and (2) Keystone had expressly agreed in the

1989 settlement agreement that ownership of the Vessel would

pass to Keystone or a Keystone nominee and that the Vessel's

new owner would time charter the Vessel to NEP on "terms and

conditions agreed to by Keystone and NEP." Because

arbitrability of claims concerning the Vessel was one such

term and condition in the executed time charter, the state

court concluded that the settlement agreement's express

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language bound Keystone to arbitrate such claims. Put in

another fashion, the state court found that Keystone, in the

1989 settlement agreement, had expressly agreed that it or a

nominee would execute a time charter on terms and conditions

agreeable to Keystone, and thus was bound to arbitrate all

disputes because the executed time charter, like the draft

charter attached to the settlement agreement and initialed on

every page by Keystone, made claims concerning the Vessel

arbitrable.

Keystone's argument about the 1995 settlement

agreement likewise fails to persuade because the parties to

the agreement expressly acknowledged that the arbitration

clause found in the 1989 time charter would apply and govern

the new settlement agreement. While it is true that the

settlement agreement provided for the mutual release of

claims by Keystone and IBC in favor of NEP and vice versa,

the agreement expressly carved out an exception to the

general release for "claims, if any, by reason of the Vessel

not being in class at the Closing." Because NEP did not

release such claims, and because such claims arise under the

1989 settlement agreement and are arbitrable under the terms

of that agreement and the 1989 time charter, their

arbitrability in the instant case is the very same issue

previously litigated and decided in Massachusetts state

court.

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This point carries us to the second element of the

issue preclusion standard: the issue raised here on appeal

has been "actually litigated." Grella, 42 F.3d at 30.

Keystone opposed NEP's motion to dismiss the Massachusetts

state cause of action before the state court with briefs,

affidavits, and at a motion hearing. Keystone feebly argues

that the state court should not have disposed of its cause of

action by motion, but instead should have conducted an

evidentiary hearing. As NEP correctly notes, the

Massachusetts court had before it the relevant contractual

documents, read and heard the litigants' opposing views on

what meaning and effect should be afforded to those documents

and the history of the parties' arbitration efforts, and

properly concluded that the arbitrability question could be

decided on motion. Well-settled principles of law indicate

that the arbitrability issue was actually litigated for

preclusion purposes because it was "subject to an adversary

presentation and consequent judgment" that was not "a product

of the parties' consent and is a final decision on the

merits." Jack H. Friedenthal et al., Civil Procedure

14.11, at 672, 673 (1985).

We thus reach the third and fourth essential

elements of collateral estoppel: the issue sought to be

precluded must have been determined by a valid and binding

final judgment and the issue's determination must have been

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essential to the judgment. See Ropes & Gray, 65 F.3d at 978;

Grella, 42 F.3d at 30. Keystone does not challenge the

validity and binding nature of the state court judgment.

Rather, Keystone argues that the state court judgment focused

on the 1989 settlement agreement and thus did not determine

the arbitrability of NEP's current claims because the court

did not decide whether claims against Keystone are arbitrable

under either the 1989 time charter or the 1995 settlement

agreement. This argument is nothing more than a recycled

version of the contention we have just rejected. As we have

seen, the state court determined that Keystone was bound to

arbitrate under the 1989 settlement agreement because that

agreement contemplated the 1989 time charter, which contained

a sweeping arbitration clause. The arbitrability of any

claims, including NEP's present ones, under the 1989 time

charter was an essential component in the state court's prior

determination, even if it itself was not the ultimate issue

the court decided. As we recently explained, an "issue may

be actually litigated and resolved 'even if it is not

explicitly decided,' as long as it is logically necessary to

[the court's] final decision." Ropes & Gray, 65 F.3d at 982

(quoting and construing Grella, 42 F.3d at 30-31) (emphasis

in original omitted).

Our review of the record indicates that the

arbitrability of NEP's present claims against Keystone is an

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issue that has already been litigated and decided by the

parties in Massachusetts state court. Under the doctrine of

issue preclusion, Keystone cannot seek to undo or redo in

federal court what has already been done in state court.

The Merits of the Arbitrability Issue
The Merits of the Arbitrability Issue

Our decision today would be the same even if

principles of collateral estoppel did not bar Keystone's

attempt to relitigate the arbitrability of NEP's current

claims against it. Our review of the record and the relevant

contractual documents contained therein convinces us that

Keystone is bound to arbitrate NEP's claims regarding the

Vessel. In view of the detailed factual discussion we have

already undertaken, we do not feel it necessary to replay all

of the evidence. We shall only briefly explain why we

conclude that Keystone is bound to arbitrate such claims as

those NEP presently advances.

Keystone entered into the 1989 settlement agreement

with NEP. In that agreement, Keystone expressly agreed that

ownership of the Vessel would pass to it or a Keystone

nominee and that the Vessel's new owner would time charter

the Vessel to NEP on "terms and conditions agreed to by

Keystone and NEP." Attached to the settlement agreement was a

draft of the contemplated time charter that Keystone

initialed on every page. The draft charter contained a

sweeping arbitration clause, which provided that "[a]ny and

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all differences and disputes of whatsoever nature arising out

of this Charter which cannot be resolved by the parties shall

be put to arbitration in the City of Boston." Keystone

subsequently nominated IBC to take title to the Vessel and

IBC, in turn, executed the time charter with NEP that was

contemplated in the 1989 settlement agreement. The executed

time charter contained the exact same arbitration provision

as the draft attached to the settlement agreement. The

inescapable conclusion from the foregoing is that Keystone

agreed to time charter the Vessel to NEP, via its nominee

IBC, under the terms and conditions established in the

executed time charter, including the terms and conditions

regarding the arbitrability of claims.

The 1995 settlement agreement between IBC and NEP

does not change this legal state of affairs. Both parties to

the agreement expressly acknowledged that the arbitration

clause found in the 1989 time charter would govern the new

settlement agreement. While the new settlement agreement

provided for the mutual release of claims by Keystone and IBC

in favor of NEP and vice versa, as we have said, the

agreement expressly carves out one exception from this

general release. The relevant language could not be more

clear: NEP does not release Keystone and IBC from "claims, if

any, by reason of the Vessel not being in class at the

Closing based upon a survey . . . when the Vessel is

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drydocked immediately after the Closing." Because NEP does

not release such claims against Keystone, and because such

claims arise under the 1989 settlement agreement and are

arbitrable under the executed time charter contemplated by

that earlier settlement agreement, Keystone is obligated to

arbitrate NEP's present claims.

The fact that Keystone itself did not sign either

the 1989 time charter or the 1995 settlement agreement is not

dispositive. Keystone is bound by the terms and conditions

of the executed time charter because of the commitments it

undertook in the 1989 settlement agreement. And the fact

that Keystone is not a signatory to the 1995 settlement

agreement is nothing more than a clever red herring because

that agreement specifically preserves Keystone's prior

exposure and liability under the 1989 settlement agreement

and time charter, for "claims, if any, by reason of the

Vessel not being in class at the Closing."

Having weighed the merits vel non of this appeal,

we find that the balance swings clearly in NEP's favor. We

conclude that NEP's claims are arbitrable and decline

Keystone's invitation to visit additional corollary issues.

Conclusion
Conclusion

Principles of collateral estoppel (issue

preclusion) raise a bar to Keystone's attempt to litigate the

arbitrability of NEP's present claims for recovery of repair

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costs to the Vessel. Even if this were not the case, NEP's

claims against Keystone are arbitrable as a consequence of

Keystone's contractual commitments. We thus conclude that

the district court's order to compel arbitration was correct.

Affirmed. Costs to appellee.
Affirmed. Costs to appellee.

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