The opinion
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MIDDLETOWN WATER JOINT : CIVIL ACTION NO. 1:19-CV-1402
VENTURE LLC, :
: (Chief Judge Conner)
Petitioner :
:
v. :
:
BOROUGH OF MIDDLETOWN, :
:
Respondent :
MEMORANDUM
Both parties in this case have asked us to enforce an arbitration agreement.
Middletown Water Joint Venture LLC (“Middletown Water”) petitions the court to
confirm an arbitration award that it claims grants it the right to compensation for
certain contractually defined projects. (See Docs. 1, 14). The Borough of
Middletown (“Middletown Borough” or “Borough”) opposes the petition and claims
it has the right to review and approve of, or disapprove of, those same contractually
defined projects. (See Docs. 7, 15). We will deny Middletown Water’s petition.
I. Factual Background & Procedural History
This case arises from a contractual relationship and subsequent arbitration
proceedings between a governmental body and a private contractor. Middletown
Borough is a subdivision of the Commonwealth of Pennsylvania. (Doc. 1 ¶ 9).
Middletown Water is a Delaware limited liability company headquartered in New
York. (Id. ¶ 8). The parties entered into a Municipal Water and Wastewater Utility
System Concession and Lease Agreement (“Concession Agreement” or
“Agreement”) on September 30, 2014. (Id. ¶ 2).
A. Concession Agreement
Under the Concession Agreement, Middletown Water leased Middletown
Borough’s water and sewer systems for a 50-year period. (Doc. 1-2 at 2).1 The
Agreement makes Middletown Water responsible for all capital improvements to
the Borough’s system, including “Major Capital Improvements.” (Id. at 3; Doc. 1-4
at 64). A “Major Capital Improvement” is
(a) any capital improvement required to increase the
treatment capacity of the Wastewater Utility System as
contemplated by Section 3.21, (b) any amount required to
fund a Casualty Cost in excess of net insurance proceeds
under Section 13.3(a) and (c) any other capital
improvement to the Utility System (1) having an estimated
cost in excess of $500,000, Adjusted for Inflation from the
Closing Date to the dale such estimate is made and (2)
which, in the written opinion of an Engineering Firm,
constitutes an expansion to or renewal, replacement or
betterment of the Utility System and has a useful life of at
least five years.
(Doc. 1-4 at 19 (emphasis added)). As described below, Middletown Water may seek
reimbursement for Major Capital Improvements. (See id. at 69, 77).
Section 4.5 of the Concession Agreement, entitled “Major Capital
Improvement Project Implementation,” describes the process that Middletown
Water must undertake before performing Major Capital Improvements. (Id. at
67-70). In the spirit of brevity, we will describe only the processes and related
information relevant to the instant dispute.
1 The Middletown Borough Authority (“Authority”) owns the assets that
make up Borough’s water utility system. (Doc. 1-4 at 1). The Authority leased the
water utility system and its assets to the Borough. (Id.) References to the Authority
in the Concession Agreement are therefore treated as references to the Borough.
For any project fitting the definition of Major Capital Improvement,
Middletown Water must first create a “Major Capital Improvement Conceptual
Design,” which is simply a “basic description” of the Major Capital Improvement.
(Id. at 67). Pursuant to subsection 4.5(a)(iii)—entitled “Review and Approval”—the
Major Capital Improvement Conceptual Design is subject to the review,
commentary, and approval of the Borough. (See id. at 67-68). Middletown Water
must attempt to address the Borough’s comments, resolve those comments, and
thereafter distribute meeting minutes “for Approval by the [Borough].” (Id.) The
Borough then either approves of or disapproves of the minutes. (Id. at 68).
Approval of the minutes amounts to approval of the Major Capital Improvement
Conceptual Design. (Id.)
After the Major Capital Improvement Conceptual Design is approved,
Middletown Water must submit a report called a “Major Capital Improvement
Substantially Complete Design.” (Id.) This report must include “detailed,
substantially complete engineering drawings, plans, specifications and technical
documents to show the character, detail and scope of the work and services to be
performed with respect to the Major Capital Improvement.” (Id.) This report is
also subject to Borough review, comment, and approval pursuant to subsection
4.5(b)(iv), entitled “Review and Approval.” (Id. at 68-69). The approval process for
this report is similar to that applied to the Major Capital Improvement Conceptual
Design. (Id.) After receiving approval of the Major Capital Improvement
Substantially Complete Design, Middletown Water may take the necessary steps to
begin construction. (Id. at 69-70).
Section 7.1(f) allows Middletown Water to seek a “Capital Cost Recovery
Charge” for Major Capital Improvements. (Id.; see also id. at 77). A “Capital Cost
Recovery Charge” is a reimbursement and consists of: (i) the amount of principal
and debt incurred to finance the Major Capital Improvement; and (ii) the return on
equity contributed to pay capital costs associated with the Major Capital
Improvement, equal to a standardized return. (Id. at 7). To impose a Capital Cost
Recovery Charge, Middletown Water must submit a financial report regarding
implementation of the Major Capital Improvement. (Id. at 77). The report is then
reviewed by and “subject to the Approval of the [Borough].” (Id.) The Borough
may not “unreasonably condition[], delay[] or withh[o]ld” approval of Middletown
Water’s report. (Id.) Middletown Water retains “sole and absolute discretion” to
begin construction on a Major Capital Improvement before a Capital Cost Recovery
Charge is approved. (Id. at 69-70). Its decision to do so, however, “shall not alter or
amend the obligations of the Parties to agree upon and the Authority to permit the
imposition of the Capital Cost Recovery Charge for the Major Capital
Improvement.” (Id.)
B. Arbitration
Article 19 of the Concession Agreement provides that “[a]ny dispute arising
out of, relating to, or in connection with this Agreement” shall be resolved through
a combination of informal dispute resolution, mediation, and arbitration. (Id.
at 136-41). While performing under the Agreement, the parties disagreed about
whether certain capital improvements—specifically, “Water Main Replacement
Work”—qualified as Major Capital Improvements for which Capital Cost Recovery
Charges could be imposed. (Doc. 1-2 at 4). Following failed negotiations, the
parties sought arbitration. (Id. at 9). After several days of hearings, the arbitration
panel issued its final award in July 2019. (Id. at 9-16).
1. Arbitration Panel’s Final Award
As relevant here, the arbitration panel was tasked with deciding whether
“Water Main Replacement Work constitutes a Major Capital Improvement under
the terms of the Concession Agreement, and [whether] the [Middletown Water] is
entitled to impose Capital Cost Recovery Charges for Water Main Replacement
Work.” (Id. at 17). “Water Main Replacement Work” involves annual replacement
of 2,500 linear feet of water mains. (Id. at 4). The panel concluded: (a) that Water
Main Replacement Work is a Major Capital Improvement under the Concession
Agreement; and (b) that Middletown Water is entitled to impose and recover
Capital Cost Recovery Charges for Water Main Replacement Work. (Id. at 17, 22,
52). Critical here is the panel’s holding in Paragraph 1(e) of Section XII of the
award:
[Middletown Borough] is enjoined from taking any action
to oppose, frustrate, dispute, object to or interfere with
[Middletown Water’s] recovery of any Capital Cost
Recovery Charges due for the Water Main Replacement
Work it has performed or will perform in the future when
such work otherwise meets the requirements of clause
(c) of the definition of Major Capital Improvement in the
Concession Agreement.
(Id. at 52-53).
In reaching its conclusion, the panel thought the Concession Agreement’s
terms were unambiguous. (Id. at 20-22). It nonetheless supported its holding by
reference to certain extracontractual evidence confirming that Water Main
Replacement Work constitutes a Major Capital Improvement. (Id. at 22-27).
2. Arbitration Panel’s “Clarification of Award”
After the final award was issued, Middletown Borough timely filed an
application for clarification of award. (See Doc. 15-2). The Borough specifically
requested clarification of Paragraph 1(e)’s injunctive language that prohibits it from
interfering with Middletown Water’s ability to recover Capital Cost Recovery
Charges. (Doc. 15-2 at 1-2; Doc. 1-3 at 1). The panel responded in its Disposition of
Application for Clarification of Award that “the intent of its award is clear.” (Doc. 1-
3 at 1). It nonetheless stated that
Paragraph 1(e) of Section XII of the Award is not
intended to alter or modify any terms or provisions of the
Concession Agreement, and in particular, is not intended
to detract or require the Parties to deviate from either the
procedures set forth in Section 4.5 of the Concession
Agreement entitled Major Capital Improvement Project
Implementation, or the procedures set forth in Section
7.1(f) of the Concession Agreement for the imposition of a
Capital Cost Recovery Charge for Major Capital
Improvements.
(Id. at 1-2). Middletown Borough has not submitted a motion to vacate, modify, or
correct the panel’s award. (Doc. 1 ¶ 6; Doc. 15 at 12).
C. Procedural History
The underlying arbitration proceeding in this case commenced on March 20,
2018, and the panel issued its final award on July 10, 2019. Middletown Water then
filed a petition to confirm the arbitration award in this court. Middletown Borough
answered that petition and Middletown Water filed its motion for judgment on the
pleadings shortly thereafter. The motion is fully briefed and ripe for disposition.
II. Legal Standard
A motion for judgment on the pleadings is the procedural hybrid of a motion
to dismiss and a motion for summary judgment. Westport Ins. Corp. v. Black, Davis
& Shue Agency, Inc., 513 F. Supp. 2d 157, 162 (M.D. Pa. 2007). Rule 12(c) of the
Federal Rules of Civil Procedure provides: “After the pleadings are closed—but
early enough not to delay trial—a party may move for judgment on the pleadings.”
FED. R. CIV. P. 12(c). To succeed on a Rule 12(c) motion, the movant must clearly
establish that no material issue of fact remains to be resolved and that the movant
“is entitled to judgment as a matter of law.” Sikirica v. Nationwide Ins. Co., 416
F.3d 214, 220 (3d Cir. 2005); see 5C CHARLES ALAN WRIGHT ET AL., FEDERAL
PRACTICE AND PROCEDURE § 1368 (3d ed. 2015). A Rule 12(c) motion for judgment on
the pleadings is decided under a standard similar to a Rule 12(b)(6) motion to
dismiss. See Zimmerman v. Corbett, 873 F.3d 414, 417 (3d Cir. 2017). That is,
judgment on the pleadings should be granted only when, accepting as true the facts
alleged by the nonmovant and drawing “all reasonable inferences” in that party’s
favor, the movant is entitled to judgment as a matter of law. See id. (citation
omitted).
III. Discussion
In its motion for judgment on the pleadings, Middletown Water seeks
enforcement of the arbitration panel’s final award. It specifically asks that we
enjoin Middletown Borough from rejecting Capital Cost Recovery Charges for
Water Main Replacement Work. Middletown Water additionally claims that
Middletown Borough is wrongfully attempting to amend the award outside the 30-
day limitations period. Middletown Borough rejoins that it is not seeking to modify
or vacate the award but is instead also asking us to enforce it. The Borough asks
that we read the award in light of the panel’s clarification, which it argues
preserved various review and approval procedures. For the reasons described
below, we agree with the Borough.
A federal court sitting in diversity, like here, applies state substantive law.
Erie R.R. v. Tompkins, 304 U.S. 64, 78-80 (1938).2 Under Pennsylvania law, which
governs the applicable limitations period, (see Doc. 1-4 at 145), the court “shall
confirm an award” unless there is a timely motion to vacate, modify, or correct the
award, 42 PA. CONS. STAT. § 7313. A motion to vacate, modify, or correct the award
must be filed within 30 days after the award is made. Id. § 7342(b). This limitations
period applies to both common law and statutory arbitration. See Moscatiello v.
Hilliard, 939 A.2d 325, 327 (Pa. 2007) (citations omitted).
The Commonwealth’s 30-day limitations period is strictly enforced. See Serv.
Emp. Int’l Union, Local No. 36, AFL-CIO v. Office Ctr. Servs., Inc., 670 F.2d 404, 412
2 In resolving arbitration disputes, courts sitting in diversity must determine
whether the dispute is governed by the Federal Arbitration Act or state law. See
State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713 n.1 (3d Cir. 2000)
(citations omitted). Federal law applies if the arbitration agreement implicates
interstate commerce. Id. (citation omitted). We need not make this determination,
however, because the parties agreed to a valid choice-of-law provision and do not
dispute that Pennsylvania law applies. (Doc. 1-4 at 145). In any event, “there is no
meaningful difference between federal and Pennsylvania law when reviewing the
scope of an arbitration clause.” Coviello, 233 F.3d at 713 n.1.
(3d Cir. 1982). The Third Circuit has explained that a defendant must raise all
“important defenses to an arbitration award . . . within the period prescribed for
actions to vacate rather than wait to raise them as defenses in a confirmation
proceeding.” Id. This rule consequently prohibits untimely defenses that
“challenge[] the underlying validity of the arbitration proceeding and award.” Id.
Middletown Borough concedes that it did not file a motion to vacate, modify, or
correct the panel’s award. (Doc. 1 ¶ 6; Doc. 7 ¶ 1).
We conclude that Middletown Borough is not required to forego the review-
and-approval processes established in the Concession Agreement and blindly
compensate Middletown Water for Water Main Replacement Work. As an initial
matter, we note that Middletown Water relies heavily on the panel’s seemingly
absolute use of the word “recovery”—specifically, its statement that the Borough “is
enjoined from taking any action to oppose, frustrate, dispute, object to or interfere
with [Middletown Water’s] recovery of any Capital Cost Recovery Charges due for
the Water Main Replacement Work.” (See generally Doc. 14). This word choice,
says Middletown Water, suggests that the panel vitiated the Borough’s right to
approve of Capital Cost Recovery Charges for Water Main Replacement Work. (See
id. at 8-9). The final award does authorize Middletown Water to recover Capital
Cost Recovery Charges for Water Main Replacement Work. (Doc. 1-2 at 52). It also
prohibits the Borough from hindering that recovery. (Id. at 52-53). But this
prohibition applies only to Capital Cost Recovery Charges that are “due” from
system customers. (Id. at 52). Under the Concession Agreement’s plain terms,
Capital Cost Recovery Charges do not become due until they have been approved
by the Borough. (See id. at 69, 77). The panel’s award was therefore not as absolute
as Middletown Water claims.
Several other reasons support this reading. First, the panel’s focus,
reasoning, and conclusion confirm that its award did not eliminate the Concession
Agreement’s review and approval provisions. The panel addressed a narrow
question: Whether “Water Main Replacement Work constitutes a Major Capital
Improvement under the terms of the Concession Agreement, and [whether]
[Middletown Water] is entitled to impose Capital Cost Recovery Charges for Water
Main Replacement Work.” (Id. at 17). The panel answered that question in the
affirmative. (Id. at 17-27). Its award focused on the threshold inquiry of whether
this type of work constitutes a Major Capital Improvement; it did not discuss the
process by which Capital Cost Recovery Charges are reviewed and approved by
Middletown Borough. As described above, Capital Cost Recovery Charges must go
through an approval process to become “due.” Supra at pp. 2-4. All this is to say
that Middletown Water is entitled to impose Capital Cost Recovery Charges, but its
ability to ultimately recover those charges is dependent upon the Borough’s
approval and charges becoming due.
Second, the panel’s clarification makes clear that its final award maintained
the Concession Agreement’s review and approval procedures. Middletown
Borough timely asked the panel to elaborate on the scope of the prohibitive
language in Paragraph 1(e) of the award. (Doc. 1-2 at 52-53; Doc. 15-3 at 1). The
panel responded in no uncertain terms: “[T]he Award is not intended to alter or
modify any terms or provisions of the Concession Agreement, and in particular, is
not intended to detract or require the Parties to deviate from either the procedures
set forth in Section 4.5 . . . or the procedures set forth in Section 7.1(f).” (Doc. 1-3
at 1-2). Those sections describe the Borough’s rights to review and approve
Middletown Water’s proposed Capital Cost Recovery Charges and associated
submissions. The panel thus preserved the process described in the Concession
Agreement.
Third, and lastly, Middletown Borough’s so-called “defense” (i.e., its different
reading of the panel’s final award) is not the sort that must be raised in a motion to
vacate, modify, or correct within 30 days. Middletown Water cites two
distinguishable cases—Service Employees International Union, Local No. 36, AFL-
CIO v. Office Center Services, Inc., 670 F.2d 404 (3d Cir. 1982), and SEIU Healthcare
Pennsylvania v. Regional Hospital of Scranton, No. 3:13-CV-02669, 2015 WL 150069
(M.D. Pa. Jan. 12, 2015)—in support of its argument that Middletown Borough is
attempting to submit a disguised motion to vacate, modify, or correct the award
beyond the permitted time period. (See Doc. 14 at 10). In both Office Center
Services and SEIU, the party opposing confirmation of the arbitration award
sought to nullify or invalidate the award after the applicable deadline. The
respondent in Office Center Services untimely attempted to bring a due process
claim, among others, to challenge the arbiters’ findings and conclusions, and
declare the arbiters’ award unenforceable. See Office Ctr. Servs., 670 F.2d at 406
n.5. The respondent in SEIU similarly tried to attack the arbiters’ award on the
theory that it was unenforceable. SEIU, 2015 WL 150069, at *11. In both cases, the
court correctly rejected the untimely requests. Middletown Borough is not
“challeng[ing] the underlying validity of the arbitration proceeding and award.”
Office Ctr. Servs., 670 F.2d at 412. It is asking us to enforce the award according to
its understanding of the award’s scope. We thus reject Middletown Water’s
argument that the Borough is advancing an improper request to vacate, modify, or
correct the panel’s award.
IV. Conclusion
We conclude that the arbitration award does not exempt Middletown Water’s
Water Main Replacement Work from the procedures described in Sections 4.5 and
7.1(f) of the Concession Agreement regarding review and approval of Capital Cost
Recovery Charges. We emphasize, however, that under the terms of those sections,
the Borough may not “unreasonably condition[], delay[] or with[o]ld” its review and
approval of the Middletown Water’s relevant submissions. (Doc. 1-4 at 77).3 For
3 We make one final point of clarification. Middletown Water asks that we
enjoin Middletown Borough from preventing its recovery of “any Capital Recovery
Charges due for any Major Capital Improvements.” (Doc. 1 at 18 (emphasis added)).
Strangely, Middletown Borough also includes this expansive language in its
proposed judgment. (Doc. 7 at 5). The final award did not make such a far-reaching
holding. It applies only to Middletown Water’s right to recover “Capital Cost
Recovery Charges due for the Water Main Replacement Work.” (Doc. 1-2 at 52).
these reasons, we will deny Middletown Water’s motion (Doc. 13) for judgment on
the pleadings. An appropriate order shall issue.
/S/ CHRISTOPHER C. CONNER
Christopher C. Conner, Chief Judge
United States District Court
Middle District of Pennsylvania
Dated: April 13, 2020