Opposition Brief — Veranda Beach, LLC v. RLI Insurance

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No. 04-1297

IN THE

Supreme Court of the United States

VERANDA BEACH, LLC,

Petitioner,

RLI INSURANCE CO.,

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CourT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF IN OPPOSITION

RussEL_ S. GILL

Counsel of Record

Russe. S. Gitt, PLLC

638 Howard Avenue

Of Counsel: Biloxi, MS 39530

MariLyn H. Davip (228) 432-0007

Attorneys for Respondent

194590 g

COUNSEL PRESS

(800) 274-3321 * (800) 359-6859

CORPORATE DISCLOSURE STATEMENT

Respondent RLI Insurance Company’s only parent

corporation is RLI Corporation. There is no publicly held

company that owns 10% or more of the corporation’s stock.

TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT .....

TABLE OF CONTENTS ........-.-eeeeeeeees

TABLE OF CITED AUTHORITIES ..........-.

TABLE OF APPENDICES ...........----+00::

OPINIONS BELOW ...........---eeeeeeeeeees

STATEMENT OF THE CASE ..........-------

Proceedings Below ..........--+-+++0eeee5:

Factual Misstatements by Veranda .........-...

REASONS FOR DENYING THE PETITION ....

Il.

RLI oBJECTS TO VERANDA’S FIRST QUESTION

PRESENTED BECAUSE IT IS NOT GROUNDED IN THE

FACTS OF THIS CAME... naa cudeucceteeesee

RLI oBJECTS TO VERANDA’S SECOND QUESTION

PRESENTED BECAUSE THERE IS NO REAL CONFLICT

BETWEEN THE FIFTHAND EIGHTH CIRCUITS ...

A. The Fifth Circuit has not rendered an

opinion on allegedly conflicting judicial

dispute resolution and arbitration

provisions, as did the Eighth Circuit. ..

Page

vill

II.

IV.

VI.

ili

Contents

B. Subsequent Eighth Circuit cases appear

to adopt use of equitable estoppel to

compel arbitration similar to the Fifth

SR a ik aoe aw acs oboe eens

Tuts COURT SHOULD NOT REVIEW THE ISOLATED

DISTRICT COURT OPINION BELOW. ............

VERANDA’S ALLEGED GROUNDS FOR CERTIORARI

ARE MERELY COMPLAINTS ABOUT A DISTRICT

COURT ’S APPLICATION OF A PROPERLY STATED RULE

DP /Ons 060 C4 0060606460080 6600860006

A. Veranda complains about use of equitable

estoppel and incorporation by reference.

B. The circuits have already correctly

addressed when to use state-court contract

formation principles and when to use

federal doctrines like equitable estoppel

in an arbitration context.............

C. Use of equitable estoppel is the district

court’s discretionary call. ...........

VERANDA MISLEADS THE COURT BY ASSERTING THE

DISTRICT COURT’S HOLDING IN THIS CASE

“REWRITES” STANDARD AIA FORMS USED

EL has Saas ual bus esc ae.e baw ws

THE DISTRICT COURT’S HOLDING DID NOT DEPRIVE

VERANDA OF ITS CONSTITUTIONAL RIGHTS

Page

Contents

Page

VII. EVEN IF THERE WERE A CONFLICT BETWEEN THE

CIRCUIT COURTS OR A FEDERAL QUESTION, THIS IS

NOT THE CASE TO RESOLVE IT. ............. 22

A. This case can be decided on alternative

CS ad hoc bse eensesskenes ass 22

B. Deciding for petitioner will not reverse

Pe Ou e oe had sear ae wake 23

C. Veranda should not be allowed to avoid

arbitration by suing only the surety. ... 24

ee PFT TT ee ee er eae er ree 25

TABLE OF CITED AUTHORITIES

Page

Cases:

AgGrow Oils v. National Union Fire Ins. Co., 242

Fie et? Ce Gk BE 3 oak re ck passim

Bridas SAPIC v. Gov. of Turkmenistan, 345 F.3d 347

PG Bee. sa ccitieeeel ae 18

Brockett re Spokane Arcade, 472 U.S. 491 (1985) ... 22

Dominium Austin Partners, LLC v. MJ Emerson, 248

ee Fg & re bi, 12, 13, 17, 18

E.I. DuPont de Nemours v. Rhone Poulenc Fiber, 269

Fae Be? Ge” Ge Me 8 cs Sade eek eee 12

Fidelity & Deposit Co. v Parsons & Whittemore

Contractors Corp., 48 N.Y .2d 127, 397 N.E.2d 380

GE. Rg SIRE cin heh ae 5, 19, 20

Frisby v. Schultz, 487 U.S. 474 (1988) .......... 16

Gloucester City Board of Education v. American

Arbitration Association, 333 N.J. Super. 511, 755

A.2d 1256, 126 Ed. Law Rep. 310 (Sup. Ct. N.J.

POD . 6 s.neveedsuvadassnas eee ee a.

Grigson v. Creative Artists Agency, LLC, 210 F.3d 524

CO” Gy. BONN oko ckkivkdanscsa ce eee passim

Hill v. GE Power Systems, Inc., 282 F.3d 343 (5" Cir.

WOOO fic oes canscas cece ee. 18

Cited Authorities

Page

International Paper Co. v. Schwabedissen Maschinen

& Anlagene GMBH, 206 F.3d 411 (4" Cir. 2000)

oc cccsasunvestcsubésduueseesaksaaanae 17

J.S.&H. Construction Co. v. Richmond County Hosp.

Auth., 473 F.2d 212 (S® Cir. 1973) ........... 11, 16

McBro Planning & Development Co. v. Triangle

Electrical Construction Co., Inc., 741 F.2d 342

tiek* S.. MPeEPprrrrryrT rr rey Pe 12

MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942

(hit * BPP rrr rr rr re 10, 12

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

US. SRS CIGD 6 cvacccctdsiessissueeee 16

Rice v. Sioux City Memorial Park Cemetary, 349 U.S.

70, 75 S. Ct. 614, 99 L. Ed. 897 (1955) ....... 14, 21

Taylor Ridge Estates, Inc. v. Statewide Insurance Co.,

No. Civ. 4-01-DV-90058, 2001 WL 1678745

GD. lowe Gat, 6, BOGE) sdansseccecncs 13, 14, 17, 18

Thomson-CSF, SA v. American Arbitration Assoc., 64

P.36 773 COB UR. BORED cncsccssessabavcavasa 13, 17

Warwick v. Gautiee Utility District, 738 So.2d 212

Glas. ISGP) 2.00 ccciodsekseubesuauennaeree 20

vii

Cited Authorities

Page

United States Constitution:

Wage ME Fis Sl ga Rd es kad aS ccke 21

Seventh Amendment ......... Ohabdestssesoves 21

Statute:

Pena OO coe becca tna ch ctu onsen 3

Rules:

EE 6 cd as ad ddkokdaneuseancann cas 4

I OR iW hur dtes Seah coined pale eu | 15, 16

Other Authorities:

Biack’s Law Dictionary (5" ed. 1979) .......... 6

Bonp Derautt MANuaL (Duncan L. Clore ed., 2d ed.,

Tort & Insurance Practice Section, American

fe eer ae Ue 7-8

vili

TABLE OF APPENDICES

Page

Appendix A — Memorandum Opinion And Order Of

The United States District Court For The Southern

District Of Mississippi, Southern Division Filed

Rae FE, BD a nk se sci seacdsnscesnsceases la

Appendix B — Arbitrators’ Decision ............ 14a

Respondent, RLI Insurance Company (“RLI’), opposes

Veranda Beach, LLC’s (“Veranda”) petition for a

writ of certiorari to review the judgment of the United States

Court of Appeals for the Fifth Circuit entered in this matter on

December 9, 2004.

OPINIONS BELOW

Veranda included the opinion of the Fifth Circuit that

affirmed the district court at Appendix | of its petition. However,

Veranda failed to include the final district court opinion that the

Fifth Circuit affirmed. Therefore, the final opinion is included

as Appendix A to this opposition brief. (Veranda included as its

Appendix 2 the district court’s earlier order compelling

arbitration. )

RLI has included as Appendix B to this opposition brief

the arbitrators’ decision, the written findings and final award of

which the district court opinion incorporated by reference.

(District Court Opinion, Apr. 30, 2004, Res. App. 3a.)

STATEMENT OF THE CASE

Facts

In May 2000, Veranda and a general contractor signed a

construction contract containing a mandatory arbitration

agreement. The contractor was to build a condominium complex

owned by Veranda in Biloxi, Mississippi. (Res. App. 1a.)

In June 2000, the contractor bought a performance bond

from RLI, a surety. (Res. App. 2a.) The bond incorporated by

reference the construction contract. The bond stated at

paragraph 1:

The Contractor and the Surety, jointly and severally,

bind themselves, their heirs, executors,

administrators, successors and assigns to the Owner

for the performance of the Construction Contract,

which is incorporated herein by reference.

(Performance Bond, R. 14', Pet. App. 8a.)

Only the contractor and RLI signed the performance bond,

which bound the contractor and RLI to Veranda for performance

of the construction contract. In the event of default by the

contractor, the bond obligated RLI for, inter alia, correction of

defective work (as measured by the construction contract) and

for completion of the construction contract. The bond provided

that any lawsuit against RLI be brought in a court of competent

jurisdiction where the work was located. (Order, Pet. App. 3a.)

(This is the provision Veranda refers to as “the judicial dispute

resolution provision.” (Pet. Br. at 2, 6.))

The contractor defaulted on the project in May 2001.

(Res. App. 2a.) In June 2001, the contractor, Veranda, and RLI

entered a Memorandum of Understanding (“MOU”), or takeover

agreement (Res. App. 2a), providing that RLI would take over

the project and arrange for the defaulted cuntractor to complete

the work according to the terms of the construction contract,

and that Veranda would agree to pay to RLI the balance of the

contract price ir accordance with the terms of the construction

contract. (MOU, R.102, paras. 1-3, 6; SRE 2.) The bond’s

paragraph 3 stated that RLI’s obligations under the bond did

not arise until the owner made this agreement. (Bond, R. 14,

para. 3; RE 6.)

The MOU required arbitration of disputes between any of

the three parties. The MOU stated: “Upon full completion of

the project, the parties will discuss and negotiate any claims

1. “R” denotes the Record before the Fifth Circuit.

2. “SRE” denotes Supplemental Record Excerpts submitted to the

Fifth Circuit.

3. “RE” denotes Record Excerpts submitted to the Fifth Circuit.

between the parties including but not limited to, liquidated

damages, change orders, time extensions, claims by

sub-contractors for extra work, etc. .. . All unreconciled disputes

between the owner, the contractor and the surety will be resolved

as provided by the [construction] Contract.” (Order, Pet.

App. 4a.) The construction contract in turn required arbitration.

RLI arranged for completion of the project. The city

issued a Certificate of Occupancy on December 17, 2001.

(Res. App. 2a.) (During the later arbitration of this case, the

arbitrators found the project was substantially complete as of

that date. (Res. App. 16a.))

Proceedings Below

On March 19, 2002, Veranda sued RLI, but not the

contractor, in federal district court, making claims including

defective, late, and incomplete work as measured against the

‘terms of the construction contract. Veranda also made allegations ©

of substantially interdependent and concerted misconduct by

both RLI and the contractor. (Res. App. 2a.)

Upon RLi’s motion, the court on November 5, 2002,

compelled arbitration under the Federal Arbitration Act,

9 US.C.A. §§ 1 - 14. Under the doctrines of equitable estoppel

and incorporation by reference, the court found RLI could move

to enforce the construction contract’s arbitration clause signed

by Veranda and the contractor, even though RLI had not signed

the construction contract. (Order, Nov. 5, 2002, Pet. App. 8a.)

After nine months of pre-trial preparation and litigating

numerous motions, a five-day arbitration trial was held

beginning June 9, 2003. (Res. App. 3a.) The three arbitrators,

who were experts in the industry and/or construction law,

ordered Veranda to pay RLI $237,154.71 and to pay 75% of the

arbitration fees, costs, and expenses. (Arbitrators’ Decision,

Res. App. 21a-22a.)

Veranda moved to vacate the arbitration award, and RLI

moved to affirm the award. In its motion to vacate, Veranda

challenged, inter alia, the November 2062 order compelling

arbitration. The district court found Veranda’s challenge was a

motion to alter or amend a prior order under Rule 60 of the

Federal Rules of Civil Procedure and that Veranda had not met

its burden of proof for such a motion. (Opinion, Res. App. 4a-

5a.) The district court upheld the arbitration award on April 30,

2004. (Opinion, Res. App. 11a; Final Order & Judgment, Res.

App. 12a-13a.)

Veranda appealed to the Fifth Circuit, claiming arbitrator

bias in reaching a decision and arbitrator “misbehavior” in

rulings on discovery motions. (Appellant’s Original Brief before

the Fifth Circuit, at 42-51, 57; Res. App. Sa-9a.) Veranda also

challenged the bases for the order compelling arbitration,

asked for a vacation of the arbitration order, and demanded a

jury trial. (Appellant’s Original Brief before the Fifth Circuit, ©

at 13, 57; Res. App. 4a.)

After oral argument, the Fifth Circuit affirmed without

written opinion the district court’s decision to uphold the

arbitration award. (Pet. App. Ia.)

Factual Misstatements by Veranda

First, in its Statement of the Case, Veranda speculates that,

because the construction contract and the performance bond

are both forms from the American Institute of Architects

(“AIA”), they set up a “regime” for dispute resolution. (Pet. Br.

at 4.) Veranda claims this regime requires disputes between an

owner and a contractor to be arbitrated, and disputes between

an owner and a surety to be litigated in court. (Pet. Br. at 4.)

Veranda states that, in accordance with this regime,

RLI and Veranda “agreed to resolve disputes in court.” (Pet. Br.

at 7.)

These claims are wrong, as has been recognized by the

courts. See discussion at Reason V, infra, regarding Gloucester

City Board of Education v. American Arbitration Association,

333 N.J. Super. 511, 522, 755 A.2d 1256, 1262, 126 Ed. Law

Rep. 310 (Sup. Ct. N.J. 2000), and Fidelity & Deposit Co. v

Parsons & Whittemore Contractors Corp., 48 N.Y .2d 127, 421,

397 N.E.2d 380 (N.Y. App. 1979).

Second, in its Statement of the Case, Veranda incorrectly

claims the “district court’s order recognized problems in the

formation and interpretation of the alleged arbitration provision

in the Memorandum of Understanding and implicitly rejected

it as a basis for arbitration.” (Pet. Br. at 4.) However, under its

findings, the court stated:

RLI and Veranda Beach executed a

memorandum of understanding on May 25, 2001,

which provided in part as follows: “... All

unreconciled disputes between the owner, the

contractor, and the surety will be resolved as

provided by the contract.” (Order, Pet. App. 4a.)

The court went on to describe the arguments of the parties

with regard to the MOU. (Order, Pet. App. 5a-6a.) The court

made no “recognition” of “problems in the formation and

interpretation” of the MOU’s arbitration agreement.

Third, in its Statement of the case, Veranda incorrectly

claims the district court’s order “overrode the judicial dispute

resolution provision” in the performance bond. (Pet. Br. at 6.)

However, the district court made no holding “overriding” the

judicial dispute resolution provision. The district court made

its decision on only two independent bases: equitable estoppel

and incorporation by reference, neither of which required or

addressed “overriding” the judicial dispute resolution provision.

Fourth, Veranda goes on in its Statement of the Case to

mischaracterize the district court’s order. Veranda claims the

district court gave no explanation “why the arbitration provision

in the Construction Contract was construed to create an

arbitration agreement between Veranda and RLI.” (Pet. Br.

at 6.) However, Veranda claims the performance bond was a

contract between Veranda and RLI, and the district court was

clear in its finding that the performance bond incorporated by

reference the construction contract and its arbitration clause.

(Order, Pet. App. 8a-9a.)

Fifth, Veranda implies that RLI’s role in this case is that of

an insurer. (Pet. Br. at ii, 13.) Veranda claims that state law

requires the performance bond and any ambiguities therein to

be strictly construed against RLI, as it would be against an

insurer. (Pet. Br. at 13.) Veranda is wrong.

This case is not about insurance, but about a surety bond. A

division of RLI that operates as a surety, not as an insurance

company, issued and sold to the contractor the performance bond

at issue.

A surety undertakes to pay money or do any other act in the

event its principal fails to perform. A surety is bound with its

principal for performance of some duty or promise and is entitled

to be indemnified by the one that ought to have performed.

Biack’s Law Dictionary 1293 (5 ed. 1979). A surety bond

involves three parties: surety (in this case, RLI), obligor or

principal (in this case, the contractor), and obligee (in this case, -

Veranda). When a surety issues a performance bond on a

construction contract, the surety agrees to “stand in the shoes”

of the contractor with regard to contract obligations. Gloucester,

755 A.2d at 1262.

On the other hand, an insurer engages in the business of

providing contracts by which the company (the insurer), for a

valuable consideration, known as a premium, assumes a risk of

loss or liability that rests upon the other party (the insured),

pursuant to a plan for distribution of such risk. BLAcK’s Law

DICTIONARY, supra, at 725, 295.

Another difference between an insurance company and a

surety is that a surety is liable only in accordance with the strict

terms of the surety bond, while, in contrast, all ambiguities in

an insurance contract are construed against an insurer:

In most jurisdictions, sureties are liable only in

accordance with the strict terms of their

undertaking. . . . See, e.g., United States v. Seaboard

Sur. Co., 817 F.2d 956, 963 (2d Cir.), cert. denied,

484 U.S. 855 (1987); Monmouth Lumber Co. v.

Indemnity Ins. Co. of N. America, 21 N.J. 439, 452,

122 A.2d 604, 611 (N.J. 1956) and Mendel-Mesick-

Cohen-Architects v. Peerless Ins. Co., 426 N.Y.S.2d

124, 126 (N.Y. App. Div. 1980). ... As one court

has declared:

[T]he obligation of a surety is measured

by the contract of surety. The surety’s

obligation cannot be extended by

implication or enlarged by construction

beyond the terms of the suretyship

agreement.... State of Florida ex rel.

Westhinghouse Elec. Supply Co. v. Wesley

Constr. Co., 316 F. Supp. 490, 497 (S.D.

Fla. 1970), aff'd by 453 F.2d 1366 (5" Cir

1972). ...

This doctrine of interpretation is substantially

different from that applicable to insurance

policies where, generally, all ambiguities are

construed against the carrier. This is one of the

reasons it is important to emphasize to claimants as

well as judges and adversaries that the surety, even

if also an insurance company, is acting in its

capacity as a surety.

BonpD DEFAULT MANUAL 3 (Duncan L. Clore ed., 2d ed., Tort &

Insurance Practice Section, American Bar Assoc. 1995)

(emphasis added).

REASONS FOR DENYING THE PETITION

I. RLI oBsects To VERANDA’S FIRST QUESTION PRESENTED

BECAUSE IT IS NOTGROUNDED IN THE FACTS OF THIS CASE.

RLI objects to the first question Veranda presents, which

is, in effect, whether the Federal Arbitration Act prevents a

federal district court from “overriding” a judicial disputes

resolution provision in an AIA performance bond. (Pet. Br. at

i.) However, there is no language in the district court’s opinion

in this case about overriding the judicial disputes resolution

provision in the performance bond. The district court based its

decision upon the two independent grounds of equitable estoppel

and incorporation by reference. The district court did not reach

any question conceming the “overriding” of a judicial dispute

resolution provision.

The Fifth Circuit in this case affirmed without opinion, so

it is not discernible what grounds the Fifth Circuit based its

decision upon. As explained more at Reason VII. A, infra, RLI

presented the Fifth Circuit with several alternative grounds for

upholding the district court’s judgment. Therefore, the facts of

this case do not give mise to this question.

II. RLI oBseEcts To VERANDA’S SECOND QUESTION PRESENTED

BECAUSE THERE IS NO REAL CONFLICT BETWEEN THE Firta

AND EicuTH CIRCUITS.

A. The Fifth Circuit has not rendered an opinion on

allegedly conflicting judicial dispute resolution and

arbitration provisions, as did the Eighth Circuit.

RLI objects to the second question Veranda presents, which

is, in effect, whether the Court should resolve an alleged conflict

between the Fifth and Eighth Circuits over “conflicting judicial

dispute resolution and arbitration provisions” in an AIA

performance bond and an AIA construction contract. (Pet. Br.

at 1.) The Eighth Circuit rendered an opinion in AgGrow Oils v.

Nationai Union Fire Ins. Co., 242 F.3d 777 (8" Cir. 2001), that

addressed this issue.

Again, the Fifth Circuit in the case below affirmed without

opinion, so it is not discernible what grounds the Fifth Circuit

based its decision upon, or whether the Fifth Circuit in the case

at hand conflicts with the Eighth Circuit.

In addition, the allegedly conflicting Fifth Circuit opinion

cited by Veranda (Pet. Br. at 14), Grigson v. Creative Artists

Agency, LLC, 210 F.3d 524 (5" Cir. 2000), does not address

any conflict between dispute resolution provisions in a

performance bond and a construction contract, or in any

standard-form contracts; it addresses only the application of

equitable estoppel to compel arbitration in a non-construction-

industry context, i.e., it involved a distribution agreement in

the entertainment industry. Even Veranda attempts to distinguish

the Grigson facts from those in AgGrow, by Claiming there was

no contract between the parties as there was in AgGrow.

(Pet. Br. at 14.)

In applying equitable estoppel, Grigson correctly held that

a signatory cannot

“have it both ways”: it cannot, on the one hand, seek

to hold the nonsignatory liable pursuant to duties

imposed by the agreement, which contains an

arbitration provision, but, on the other hand, deny _

arbitration’s applicability because the defendant is

a nonsignatory. ... [T]o allow such inconsistent

positions would be inequitable, to say the least.

Grigson, 210 F.3d at 528.

Grigson further held that a nonsignatory can compel a

signatory to arbitration under either of two circumstances, known

as the “intertwined claims” test: (1) equitable estoppel applies

when the signatory (e.g., Veranda) to a written agreement

containing an arbitration clause must rely on the terms of the

written agreement in asserting its claims against the nonsignatory

(e.g., RLI), or (2) equitable estoppel applies when the signatory

(e.g., Veranda) to the contract containing the arbitration clause

raises allegations of substantially interdependent and concerted

misconduct by both the nonsignatory (e.g., RLI) and a signatory

(e.g., the contractor). As the Eleventh Circuit stated, ““Otherwise

the arbitration proceedings between the two signatories would

be rendered meaningless and the federal policy in favor of

arbitration effectively thwarted.”” MS Dealer Serv. Corp. v.

Franklin, 177 F.3d 942, 947 (11 Cir. 1999), quoted in Grigson,

210 F.3d at 527.

The district court below based one independent ground for

its decision on Grigson’s equitable estoppel analysis. The district

court found that “the dispute regarding liability for the alleged

default in the construction contract is precisely why the

performance bond was procured. Accordingly, the Court further

finds that RLI can move to enforce the arbitration clause even

though RLI did not sign the construction contract.” (Order, Pet.

App. 8a.) In essence, the district court held that an owner, who

is a signatory to a construction contract containing an arbitration

agreement, and whose claims against a nonsignatory-surety arise

from the terms of the construction contract, can be equitably

estopped from asserting that the surety’s being a nonsignatory

precludes arbitration. Thus, the court found the first of the two

Grigson conditions was met. *

4. In addition, the second of the two Grigson conditions was met.

The complaint in this case shows Veranda made many allegations of

substantially interdependent and concerted misconduct by both RLI and

the contractor, including failure to complete work in a timely manner,

abandoning the job site, installing defective work, damaging

condominiums under construction, misrepresenting claims for change

orders, overcharging, fraud, etc. (R. 4-9; Res. App. 2a.) These allegations

(Cont’d)

The district court based the other independent ground for

its decision on incorporation by reference, without discussing

any conflict between dispute resolution provisions. The district

court held the performance bond incorporated-by reference the

arbitration provision from the construction contract. (Pet. App.

8a.) The Fifth Circuit case relied upon by the district court for

this second ground was J.S.&H. Construction Co. v. Richmond

County Hosp. Auth., 473 F.2d 212 (5" Cir. 1973). J.S.&H. does

not address any conflict between dispute resolution provisions

in a performance bond and a construction contract, or in any

standard-form contracts; it addresses only incorporation by

reference of an arbitration provision into a subcontract.

It can be seen that neither the Fifth Circuit in Grigson and

J.S.&.H., nor the district court in its opinion below, addressed

the issue raised in AgGrow.

B. Subsequent E. ighth Circuit cases appear to adopt use

of equitable estoppel to compel arbitration similar to

the Fifth Circuit.

Veranda points to AgGrow as the Eighth Circuit case that

allegedly conflicts with the Fifth Circuit. AgGrow addressed an

alleged conflict between dispute resolution provisions in a

performance bond and a construction contract. The Eighth

Circuit looked to state-law contract interpretation principles to

find that the performance bond did not incorporate by reference

the arbitration provision from the construction contract. The

Eighth Circuit did not ascertain whether the facts of the case

raised the issue of equitable estoppel and thus did not apply

equitable estoppel to compel arbitration.

However, the Eighth Circuit since then has applied, in

Dominium Austin Partners, LLC v. MJ Emerson, 248 F.3d 720,

(Cont'd)

arose from the fact that, with Veranda’s agreement (R.101), RLI hired

the defaulted contractor to complete the work when RLI took over the

job. (Res. App. 2a.)

728 (8" Cir. 2001), the doctrine of equitable estoppel to compel

arbitration and even cited approvingly to cases that relied upon

the “intertwined claims” basis for equitable estoppel. The

“intertwined claims” basis was put forth by the Eleventh Circuit

to allow a nonsignatory to compel arbitration against a signatory

to an arbitration agreement, exactly the situation in the case at

hand. See MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942,

947 (11 Cir. 1999); McBro Planning & Development Co. v.

Triangle Electrical Construction Co., Inc., 741 F.2d. 342

(11 Cir. 1984). These Eleventh Circuit cases were the ones the

Fifth Circuit in Grigson looked to when adopting the

“intertwined claims” test. Grigson, 210 F.3d at 527.

The “intertwined claims” test was relied upon by the district

court below to compel arbitration.

The Eighth Circuit decided Dominium in May 2001, two

months after it decided AgGrow in March 2001. Dominium held

that signatories to a partnership agreement containing an

arbitration clause could be compelled to arbitration against non-

signatories to the agreement. Mirroring the Fifth Circuit’s

reasoning in Grigson, the Eighth Circuit held: “It would be

inequitable to allow appellants [signatories] to claim that these

parties [non-signatories] are liable for failure to perform under

a contract and at the same time to deny that they are contractual

parties in order to avoid enforcement of the arbitration clause.”

Dominium, 248 F.3d at 728.

The Third Circuit in E.J. DuPont de Nemours v. Rhone

Poulenc Fiber, 269 F.3d 187, 202 (3™ Cir. 2001), noted the

Eighth Circuit’s holding in Dominium as one in a line of cases

where “the circuits have been willing to estop a signatory from

avoiding arbitration with a nonsignatory when the issues the

nonsignatory is seeking to resolve in arbitration are intertwined

with the agreement that the estopped party has signed.’”

(Emphasis in original.) The Second Circuit has noted that courts

have held that signatories were “estopped from avoiding

arbitration because they had catered into written arbitration

agreements, albeit with the affiliates of those parties

asserting the arbitration and not the parties themselves.”

Thomson-CSF, SA v. American Arbitration Assoc., 64 F.3d773, -

779 (2d Cir. 1995).

Based upon Dominium, the Fifth Circuit in Washington

Mutual Finance Group, LLC v. Bailey, 364 F.3d 260, 267 (5"

Cir. 2004), recognized the Eighth Circuit as one of the

“[njumerous federal circuit courts ... [that] have recognized

the operation of the doctrine of equitable estoppel on non-

signatories in an arbitration context.” The Fifth Circuit also

recognized the Fourth, Seventh, and Eleventh Circuits.

A district court in the Eighth Circuit declined to apply

AgGrow in a case similar to the one at hand, where a performance

bond incorporated by reference a construction contract

containing an arbitration provision: Taylor Ridge Estates, Inc.

v. Statewide Insurance Co., No. Civ. 4-01-DV-90058, 2001

WL 1678745 (S.D. lowa Oct. 1, 2001). Instead, the Taylor

court appeared to apply equitable estoppel and reconciled it

with AgGrow. The court agreed with the Eighth Circuit in

AgGrow that

the Surety cannot be made to arbitrate claims solely

based upon interpretation of the Performance Bond,

which contains no arbitration provision. But to the

extent that [the owner’s] claims are dependent upon

defining [the owner’s] duties or the Surety’s

secondary obligations under the Construction

Contract, the Surety is bound to arbitrate.

Taylor, supra, at *8. The Taylor court’ elaborated, “Given the

5. The Taylor court sought to distinguish AgGrow by stating:

“Unlike AgGrow, where one party resisted full incorporation, [the owner]

and the Surety both seek the benefits of fully incorporating the

Construction Contract into the Performance Bond — [the owner] for the

purpose enforcing the arbitration clause, and the Surety for purposes of

(Cont’d)

terms of the Construction Contract, the related incorporation of

that contract into the Performance Bond and the fact that the

Surety has relied upon other favorable provisions in the

Construction Contract, it is the belief of this Court that the Surety

is a proper participant in this arbitration.” /d.

Although Veranda claims there is uncertainty “in the

construction industry” regarding the meaning of the terms of

the performance bond and the construction contract (Pet. Br. at

16), the clarity of the Taylor holding shows there is not.

RLI has found no case that has followed AgGrow’s holding

when a signatory sues a nonsignatory on claims intertwined with

a contract containing an arbitration clause. It is arguable that

the AgGrow holding may be anomalous and limited to its facts.

This Court has in effect stated it will not grant certiorari to

address problems that are academic or episodic. Rice v. Sioux

City Memorial Park Cemetary, 349 U.S. 70, 74, 75 S. Ct. 614,

616, 99 L. Ed. 897 (1955). This Court should not do so in the

present case.

Based upon the reasons above, there appears to be no real

conflict among the circuits. Thus, neither the facts of this case

nor the circuit court decisions cited by Veranda give rise to

Veranda’s second question presented.

(Cont’d)

barring consequential damages.” Taylor, supra, at *8. In the case at hand,

both parties similarly are required to seek the benefits of relying upon

the construction contract in order to bring their claims. Veranda must

rely on the contract terms to establish any claims of defective, late, or

incomplete work. RLI also relied upon the contract terms to bring its

counterclaims (including those for delays) and to enforce the arbitration

clause against Veranda.

IfI. Tais Court SHOULD NOT REVIEW THE ISOLATED DISTRICT

COURT OPINION BELGW.

Because there is no Fifth Circuit opinion that addresses the

same issue as AgGrow (allegedly conflicting judicial dispute

resolution and arbitration provisions), Veranda tries to assert

that the opinion of the district court below does. (See REASON I,

supra, for why Veranda is incorrect.) Veranda in effect is asking

this Court to review the isolated district court opinion below.

This is not a proper ground for certiorari, as identified in

Rule 10.

IV. VERANDA’S ALLEGED GROUNDS FOR CERTIORARI ARE MERELY

COMPLAINTS ABOUT A DISTRICT COURT'S APPLICATION OF A

PROPERLY STATED RULE OF LAW.

A. Veranda complains about use of equitable estoppel

and incorporation by reference.

This Court’s Rule 10 states that a petition for a writ of

certiorari is rarely granted when the asserted error consists of

the misapplication of a properly stated rule of law. Yet, that is

all Veranda’s complaint amounts to.

Veranda identifies the complaint at the heart of its petition:

the district court “employed the doctrines of equitable estoppel

and incorporation by reference to compel arbitration .. .”

(Pet. Br. at 7.) Veranda complains that equitable estoppel should

not have been used in this case (Pet. Br. at 14), but that ordinary

state-law principles governing formation of contracts should

have been (Pet. Br. at 13). Veranda claims the district court

“contravened several of Mississippi’s fundamental rules for

contract interpretation.” (Pet. Br. at 13.) Veranda requests this

Court to instruct lower courts “not to ignore or misapply state

law ...” (Pet. Br. at 13.)

It is clear that Veranda is complaining about the application

of the doctrine of equitable estoppel, which the district court

properly stated from Grigson, supra, and the application of

incorporation by reference, which the district court properly

stated from J.S.&H., supra. (Order, Pet. App. 7a-8a.)

In accordance with Rule 10, this Court should not entertain this

complaint.

In addition, this Court rarely reviews a construction of state

law agreed upon by two lower courts. The Court believes that

the federal district and circuit courts are better schooled in, and

more able to interpret, the laws of their respective states.

Frisby v. Schultz, 487 U.S. 474, 482 (1988). In analogy to this

reasoning, RLI believes this Court should defer to the district

court’s application and/or interpretation of Mississippi contract

law and deny certiorari.

B. The circuits have already correctly addressed when

to use State-court contract formation principles and

when to use federal doctrines like equitable estoppel

in an arbitration context.

In support of its argument against equitable estoppel,

Veranda quotes from this Court’s holding in Prima Paint Corp.

v. Flood & Conklin Mfg. Co., 388 U S. 395, 404 n.12 (1967):

“[{T]he purpose of Congress in 1925 was to make arbitration

agreements as enforceable as other contracts, but not more so.”

(Pet. Br. at 9.) Veranda argues that this means courts are only to

use state-law principles governing formation of contracts to

determine whether arbitration should be compelled. (Pet. Br.

at 13.) Veranda believes that is what the Eighth Circuit in

AgGrow did.

The circuits have already addressed the issue of when to

use state-court contract formation principles and when to use

federal doctrines like equitable estoppel. The Fifth Circuit in

Washington Mutual noted that “whether a court should apply

state law [as did the AgGrow court] or ‘the federal substantive

law of arbitrability’” (which includes the doctrine of equitable

estoppel outlined by the federal courts) is an issue in determining

whether a party should be compelled to arbitrate its claims

against another. Washington Mutual, 364 F.3d at 267, n. 6. The

court observed that nearly all federal circuit courts — including

the Eighth Circuit — faced with the question of whether a

nonsignatory can be bound to an arbitration provision have

applied the federal substantive law of arbitrability to resolve

the issue. /d.

The Fifth Circuit adopted the Fourth Circuit’s reasoning in

International Paper Co. v. Schwabedissen Maschinen &

Anlagene GMBH, 206 F.3d 411, 417-18 (4" Cir. 2000):

“{B]ecause the determination of whether a nonsignatory is

bound by an arbitration provision ‘presents no state law

question of contract formation or validity,’ a court should

‘look to the federal substantive law of arbitrability to resolve

this question.” Washington Mutual, 364 F.3d at 268, n.6

(emphasis added).° The federal substantive law of arbitrability

includes using the doctrine of equitable estoppel to compel

arbitration.

It is apparent that, without basis, Veranda disagrees with

the Fourth and Fifth Circuits that the determination of whether

a nonsignatory is bound by an arbitration provision “presents

6. The Fifth Circuit also cited to the Second Circuit’s analysis in

Thomson-CSF, 64 F.3d at 776, of when non-signatories may be bound

to arbitration agreements, regardless of state-law contract formation

principles:

As the Second Circuit has accurately noted, while

arbitration is contractual by nature:

It does not follow ... that under the [Federal

Arbitration] Act an obligation to arbitrate attaches

only to one who has personally signed the written

arbitration provision. [We have made] clear that a

nonsi;,natory party may be bouad to an arbitration

agree: sent if so dictated by the ordinary principles of

contract and agency.

Washington Mutual, 364 F.3d at 267 (alterations in original).

‘18

no state law question of contract formation or validity.” Despite

Veranda’s contentions, even the Eighth Circuit has acted

consistently with this pronouncement. Dominium, supra; Taylor,

supra, and applied equitable estoppel to compel arbitration.

At the end of the day, Veranda merely disagrees with the

district court’s application in this case of the properly stated

doctrines of equitable estoppel and incorporation by reference.

C. Use of equitable estoppel is the district court’s

discretionary call.

The Fifth Circuit held that whether to utilize equitable

estoppel to compel arbitration is within a district court’s

discretion; the federal circuits will review only to determine

whether that discretion has been abused. “To constitute an abuse

of discretion, the district court’s decision must be either premised

on an application of the law that is erroneous, or on an

assessment of the evidence that is clearly erroneous.” Grigson,

210 F.3d at 528; Hill v. GE Power Systems, Inc., 282 F.3d 343,

348 (S" Cir 2002); Bridas SAPIC v. Gov. of Turkmenistan,

345 F.3d 347, 360 (5 Cir. 2003).

As there has been no erroneous application of the law or

erroneous assessment of evidence, reviewing courts should defer

to the district court’s decision in the case at hand. As the Fifth

Circuit stated, “In sum, the district court is better equipped to

make the call than this court, and we do not lightly override

that discretion.” Hill, 282 F.3d at 349.

V. VERANDA MISLEADS THE COURT BY ASSERTING THE DISTRICT

COURT’S HOLDING IN THIS CASE “REWRITES” STANDARD AIA

FORMS USED INDUSTRY-WIDE.

In an attempt to manufacture an issue of public import,

Veranda incorrectly asserts that the district court’s holding

“potentially replaces the judicial dispute resolution provision

in all [AIA (American Institute of Architects) Form A312]

performance bonds with compulsory arbitration.” (Pet. Br. at

10.) Veranda questions why, as a matter of public policy, should

sureties be allowed to compel arbitration “whenever they prefer”

by using equitable estoppel, incorporation by reference, or any

other doctrine. (Pet. Br. at 11.) Veranda reiterates its speculation

that the performance bond and construction contract establish

an industry-wide regime that requires all disputes between an

owner and a surety to be judicially resoived and those between

an owner and a contractor to be arbitrated. (Pet. Br. at 11.)

Vevanda’s assertion that the district court’s holding replaces

the judicial dispute resolution provision in all AIA performance

bonds with compulsory arbitration is simply not true. Neither

is Veranda’s implication that sureties can arbitrarily compel

arbitration whenever they want and without basis. Grigson and

the other federal circuit cases applying equitable estoppel make

it clear that arbitration can only be compelled when the

“intertwined claims” test is satisfied. I.e., one of the following

conditions must be met: (1) the signatory raises allegations of

substantially interdependent and concerted misconduct by both

the nonsignatory and one or more of the signatories to the

contract, or (2) the signatory must rely on the terms of the written

agreement in asserting its claims against the nonsignatory.

Grigson, 210 F.3d at 527. (Order, Pet. App. 7a.) It is only when

these circumstances are present that fairness requires the

signatory be estopped from avoiding the written arbitration

agreement it signed.

Veranda’s speculation about an industry-wide regime is

ill-founded. If there is any such regime, it is what the courts in

Gloucester, 755 A.2d at 1262, and F; idelity, 397 N.E.2d at 380,

described. Those courts found that the performance bond’s

incorporation by reference of the construction contract meant

that the surety was required to arbitrate disputes relating to

performance of the construction contract, but not disputes arising

under the bond that were not related to performance of the

construction contract.

’

The court in Gloucester cited to a line of cases holding that

the intent of an arbitration clause in the underlying

contract is to require the submission to arbitration

of any dispute concerning the adequacy of the

contractor’s performance, and when a performance

bond incorporates the terms of contract by reference,

it constitutes an agreement by the surety to stand in

the shoes of the principal [contractor] in the event a

claim is made under the bond, and to arbitrate any

issue concerning the principal’s performance of the

contract.

The court held the surety was required to arbitrate any dispute

the contractor would have been required to arbitrate, but was

not required to arbitrate any disputes between the surety and

the owner not related to contract performance. As in the present

case, the bond in Gloucester had a judicial disputes resolution

provision. Gloucester, 755 A.2d at 1262, 1259, 1260, 1265.

In Fidelity, another court in a different state recognized there

is a distinction between requiring a surety that has executed a

bond for performance of 2 construction contract containing an

arbitration clause to arbitrate disputes concerning performance

of the contract, and requiring the surety to arbitrate disputes

conceming the enforceability of its performance bond. The court

held the surety was required to arbitrate disputes relating to

performance of the construction contract, but not disputes arising

under the bond that were not related to performance of the

construction contract. Fidelity, 397 N.E. 2d at 382.

‘A court should read a contract as a whole and interpret a

contract to give meaning and effect to all terms. Warwick v.

Gautiee Utility District, 738 So.2d 212, 215 (Miss. 1999). The

interpretations of the Gloucester and Fidelity courts give

meaning and effect to all terms of the performance bond and

construction contract at issue. Therefore, this Court should give

weight to the carefully considered interpretations of those courts,

especially over the unfounded speculations of Veranda.

Veranda is wrong about the industry-wide regime, and the

district court’s holding does not rewrite an industry-wide regime

as claimed by Veranda.

VI. THE DISTRICT COURT’S HOLDING DID NOT DEPRIVE VERANDA

OF ITS CONSTITUTIONAL RIGHTS.

Veranda claims the district court’s holding deprived it

without notice of its Fifth Amendment right to due process in a

court of law and its Seventh Amendment right to a jury tial.

(Pet. Br. at 12.) However, this Court has stated it has a duty to

avoid decision of constitutional issues unless avoidance becomes

evasion. Rice, 349 U.S. at 74. In addition, this Court does not

sit for the benefit of the particular litigants affected by the district

court opinion in this case. /d.

Veranda claims the performance bond gave it, as the obligee,

the right to institute “any proceeding, legal or equitable, under

this Bond .. . in atiy court of competent jurisdiction” where the

construction project was located. (Pet. Br. at 12.) However, there

is no language in the bond per se giving any party the right to

institute such a proceeding. The bond does establish rules for

forum-selection and timeliness of filing. Section 9 states:

Any proceeding, legal or equitable, under this Bond

may be instituted in any court of competent

Jurisdiction in the location in which the work or part

of the work is located and shall be instituted within

two years after Contractor Default or within two

years after the Contractor ceased working or within

two years after the Surety refuses or fails to perform

its obligations under this Bond, whichever occurs

first.

(R.14, RE 6; Pet. Br. at 2-3.)

In any event, as established above in REASON V, arbitration

could only be compelled because Veranda’s own actions

provided the basis for satisfying the “intertwined claims” test.

In addition, Veranda knew it was a signatory to the underlying

construction contract containing the arbitration clause, and

Veranda also knew it later signed a third document, the MOU,

that specifically provided that disputes between any of the three

parties (owner, contractor, or surety) would be resolved in

accordance with the procedures in the construction contract.

(Pet. App. 4a.) Although these facts show Veranda knowingly

waived any right to a jury trial, it is not necessary to decide any

constitutional issues raised by Veranda when this case can be

resolved by looking to the MOU. Brockett re Spokane Arcade,

472 U.S. 491, 501 (1985) (it is a cardinal rule governing federal

courts never to anticipate a question of constitutional law in

advance of the necessity of deciding it). This is elaborated more

in Reason VII, infra.

VII. EVEN IF THERE WERE A CONFLICT BETWEEN THE CIRCUIT

COURTS OR A FEDERAL QUESTION, THIS IS NOT THE CASE TO

RESOLVE IT.

Even if there were a conflict between the Fifth and Eighth

Circuits or a question involving the Federal Arbitration Act,

this case is not the one to resolve it, for the following reasons.

A. This case can be decided on alternative grounds.

- Before the district court and the Fifth Circuit, RLI offered

several grounds for affirming the decision to compel arbitration.

One was that Veranda, RLI, and the contractor signed an MOU,

or takeover agreement, that clearly incorporated the construction

contract’s disputes resolution provision. That provision included

a mandatory arbitration clause and made it applicable to all three

parties. (Order, Pet. App. 4a.) They signed the MOU after

Veranda and the contractor signed the construction contract, and

after RLI and the contractor signed the performance bond.

(Opinion, Res. App. 2a; Order, Pet. App. 4a.) RLI asked the

Fifth Circuit to find as a matter of law that the MOU clearly and

unambiguously incorporated the binding arbitration clause.

As the Fifn Circuit issued no written opinion in this case,

it is not discemible on what grounds the Fifth Circuit affirmed

the district court’s decision to compel arbitration. Based upon

the Fifth Circuit’s interest in the MOU issue during oral

argument, it could well have affirmed on that ground, and not

on the equitable estoppel and incorporation by reference grounds

relied upon by the district court and presented by Veranda in its

questions for certiorari.

This case can still be decided on the MOU issue, without

ever reaching the questions of whether equitable estoppel :and

incorporation by reference are appropriate in this case.

B. Deciding for petitioner will not reverse this case.

If the Court were to grant certiorari and ultimately agree

with Veranda that the district court should not have applied

equitable estoppel or incorporation by reference to compel

arbitration, the appropriate disposition would be to remand for

decision on whether the MOU as a matter of law required

arbitration.

RLI believes the MOU clearly and unambiguously

incorporates the construction contract’s arbitration clause.

However, if the lower court should decide it was not clear, then

the appropriate disposition would be to hold an evidentiary

hearing on the intent behind the disputes resolution language in

the MOU.

If the MOU were found not to require arbitration, then

Veranda has made clear it intends to demand a federal jury trial.

Veranda has already had one bite at the apple, where it fully

litigated all of its claims on the merits in a five-day arbitration.

The expensive arbitration took nine months of pretrial

preparation, including litigating several motions and conducting

many depositions. Three arbitrators, who were experts in the

industry and/or construction law, ordered Veranda to pay RLI

$237,154.71 and to pay 75% of the arbitration fees, costs, and

expenses. (Arbitrators’ Decision, Res. App. 21a-22a.) Veranda

is dissatisfied, and now wants a second bite at the apple.

Deciding for Veranda would only drag out a costly,

protracted litigation even further and retry issues that have

already been fully heard and fairly decided. This would not be

an efficient use of already-strained judicial resources.

C. Veranda should not be allowed to avoid arbitration

by suing only the surety.

As pointed out in footnote 4, supra, Veranda made many

allegations of substantially interdependent and concerted

misconduct by both RLI and the contractor, including failure to

complete work in a timely manner, abandoning the job site,

installing defective work, damaging condominiums under

construction, misrepresenting claims for change orders,

overcharging, fraud, etc. (R. 4-9; Res. App. 2a.) These allegations

arose from the fact that, with Veranda’s agreement (R.101), RLI

hired the defaulted contractor to complete the work when

RLI took over the job. (Res. App. 2a.)

It is worth note that Veranda did not name the contractor as

a defendant in this lawsuit. This Court should not let Veranda

avoid the arbitration clause in the construction contract it signed

by suing only the surety, and not the contractor who actually

performed the allegedly untimely and defective work, and

participated in the alleged misconduct.

When such interdependent allegations are made, as the Fifth

Circuit found, the signatory-contractor — even though not sued

— in essence becomes a party, with resulting loss of time and

money because of its required participation in the proceeding.

Concomitantly, detrimental reliance by the signatory-contractor

cannot be denied:

it and the signatory-plaintiff [in this case, Veranda]

had agreed to arbitration in lieu of litigation

(generally far more costly in terms of time and

expense); but, the plaintiff is seeking to avoid that

agreement by bringing the action against a

nonsignatory [in this case, RLI] charged with acting

in concert with that non-defendant signatory [in this

case, the contractor].

Grigson, 210 F.3d at 528.

These are conditions ripe for the application of equitabl:

estoppel.

CONCLUSION

For the foregoing reasons, the Court should deny the petition

for certiorari.

Respectfully submitted,

RusseELt S. Git

Counsel of Record

RusseE._ S. Gitt, PLLC

638 Howard Avenue

Of Counsel: Biloxi, MS 39530

MariLyn H. Davip (228) 432-0007

Attorneys for Respondent

APPENDIX

APPENDIX A — MEMORANDUM OPINION AND

ORDER OF THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF MISSISSIPPI,

SOUTHERN DIVISION FILED APRIL 30, 2004

IN THE UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF MISSISSIPPI

SOUTHERN DIVISION

CIVIL ACTION NO. 1:02CV110SR

VERANDA BEACH, L.L.C.

PLAINTIFF

RLI INSURANCE COMPANY

DEFENDANT

MEMORANDUM OPINION

This action arises from a dispute concerning the

performance of a construction contract. The case is before

the Court for review of the decision of an arbitration panel.

Facts

Plaintiff Veranda Beach, L.L.C. (Veranda), a Mississippi

limited liability company, is the owner of and developer of

the Magnolia Shores Condominium project in Biloxi,

Mississippi. In May 2000, Veranda hired United Contractors

(United) to build these condominiums. The construction

Appendix A

contract contained an arbitration clause. In June 2000,

Defendant RLI Insurance Company (RLI) issued a

performance bond covering this project. The performance

bond did not contain an arbitration clause.

The project did not go smoothly. There were substantial

delays. Veranda ultimately declared United to be in default

under the construction contract and called upon RLI to

complete the project. In May 2001, Veranda and RLI

circulated a “Memorandum of Understanding.” Although this

agreement was signed by representatives of both RLI, United,

and Veranda, there is a dispute whether the parties ever agreed

to a single set of terms. RLI took over the project, and, with

the consent of Veranda, RLI re-hired United to complete

construction of this project. On December 17, 2001, the City

of Biloxi issued its certificate of occupancy.

Veranda has never considered the construction of this

project complete. Veranda contends that RLI and United

abandoned the project. Veranda withheld a large portion of

the contract price, and this litigation ensued.

Proceedings in this Court

Veranda filed its complaint against RLI in March 2002.

Veranda sought damages for cost overruns, delay damages,

and punitive damages based on allegations of fraud. RLI

moved to compel arbitration. On November 5, 2002, the

Court granted RLI’s motion to compel arbitration. While

RLI’s motion to compel arbitration was pending, both

Veranda and RLI commenced state court proceedings related

Appendix A

to RLI’s construction lien on the project. The state court

actions were stayed, by agreement, pending the outcome of

arbitration.

The Arbitration

Arbitration was conducted June 9-13, 2003. In July 2003,

the arbitrators rendered their decision, awarding the unpaid

contract balance and compensation for certain change orders

to RLI, less certain credits for Veranda Beach. The arbitrators

found mutual fault for the construction delays and declined

to award delay damages to either party. The arbitrators made

a net award to RLI of approximately $237,000. The

Arbitrator’s written findings and final award are incorporated

into this opinion by reference.

Issues Now Before the Court

The primary issue now before the Court is whether the

arbitrators’ award should be confirmed or set aside. Veranda

seeks to have the arbitrators’ award set aside, and RLI asks

that the award be confirmed.

Veranda presents three grounds in support of its motion

to set aside the arbitrators’ award. Veranda contends that:

1. The Court erred in ordering that this matter be

submitted for arbitration;

2. The arbitrators were biased in favor of RLI; and

3. The arbitrators erred in failing to award delay

damages.

Appendix A

Standard of Review

A court considering the validity of an arbitration award

applies a deferentia! standard of review. Glover v. IBP, Inc.,

344 F.3d 471 (5" Cir. 2003). The party moving to vacate an

award has the burden of proof. Spector v. Torenberg,

852 F.Supp. 201, 206 (S.D.N.Y. 1994). Review is limited to

a determination of fundamental fairness in the arbitration

proceeding. Williams v. Cigna Financial Advisors, Inc.,

197 F.3d 752 (5" Cir. 1999).

The Federal Arbitration Act (FAA) provides that an

arbitration award may be vacated only if: (1) the award was

procured by corruption, fraud, or undue means; (2) there is

evidence of partiality or corruption among the arbitrators;

(3) the arbitrators were guilty of misconduct that prejudiced

the rights of one of the parties; or (4) the arbitrators exceeded

their powers. 9 U.S.C. § 10(a). An additional non-statutory

ground for vacating an arbitration award is that the arbitrators

acted with “manifest disregard of the law.” This additional

ground, not found in the FAA, is extremely narrow, and

implies a gross departure from clearly established legal

principles. Prestige Ford v. Ford Dealers Computer Services,

Inc., 324 F.3d 391 (5 Cir. 2003).

Order Granting RLI Motion To Require Arbitration

Veranda contends that this Court’s November 5, 2002,

order granting RLI’s motion to require arbitration was

erroneous. Although this order was entered by Judge Gex,

who was presiding in this case at that time, it is nevertheless

the order of this District Court. This Court’s authority to alter

Appendix A

or amend a prior order is governed by Rule 6° »f the Federal

Rules of Civil Procedure. Veranda does not ast any of the

six grounds for relief set out in Rule 60. Veranda d-es not

allege that the order requiring arbitration was the result of

“mistake, inadvertence, surprise, or excusable neglect”; it

presents no new evidence; it does uot allege “fraud .. .

misrepresentation or other misconduct” by RLI; it does not

allege that the order is void; it does not allege that the order

has been released or discharged by RLI; and it does not assert

any other reason or grounds for the relief it is seeking that

was aot presented in opposition to RLI’s original motion.

In essence, Veranda is asking this Court to sit as an

appellate court and review the validity of the order entered

on November 5, 2002. This is an invitation I will decline. I

am of the opinion that there were good grounds in fact and

law for Judge Gex’s decision to require that this matter be

submitted to arbitration, and I do not believe that Veranda

has met its burden of proof under Rule 60. Accordingly,

considering the first grounds for relief asserted by Veranda

as a motion for relief from the Court’s November 5, 2002,

order under Rule 60, that motion will be denied.

Bias of Arbitrators

Veranda has asserted that the arbitrators in this case were

partial to RLI. Most of Veranda’s contentions on this point

relate to the Chairman of the arbitration panel, Pat Scanlon

(Scanlon), but Veranda also alleges that there are grounds to

question the impartiality of the other two arbitrators,

John H. Allgood, III, (Allgood) and Craig Kaster (Kaster).

If Veranda can prove this contention, it would have grounds

Appendix A

for relief under § 10(a) of the FAA. Evidence of partiality

among the arbitrators is a specific statutory ground for relief

under the act.

Veranda’s contentions concerning Scanlon are based

upon what it perceives to be a web of relationships among

Scanlon, RLI, Bottrell Insurance Agency (Bottrell), and

Trustmark Bank (Trustmark). Veranda contends that these

relationships were not disclosed prior to the mediation, in

violation of the rules of the American Arbitration Association.

Bottrell was the agent for the sale of the RLI completion

bond that covered the condominium construction project at

issue. Trustmark now owns Bottrell. Pat Scanlon now works

for a law firm (Watkins & Eager) that represents Trustmark.

During the arbitration hearings, RLI produced a copy of

the construction contract that had been faxed to Bottrell

during contract negotiations, and by using the fax date stamp

on this document, RLI was able to impeach one of Veranda’s

witnesses concerning a key date. Veranda has not shown that

the document was procured by illegitimate means or that it

could not have procured this same document from Bottrell

during the discovery phase of the arbitration proceeding.

Neither Trustmark nor Bottrell was a party or a witness in

the arbitration proceeding. Bottrell came into possession of

this document in its capacity as the agent for the sale of the

RLI performance bond.

At the end of the arbitration hearing, which was

conducted in Biloxi, Mississippi, Pat Scanlon acceded to a

request by counsel for RLI that-he return certain original

. - Poneman meron sane ra eutts mae ese Sr IE RES I EER areca

SEIS LINE EE RRND te ROE TR ee Ate TRY PEN Sach ey Set ne kee a e ak " lit ttl aS a = i r "

Appendix A

documents that had been part of the arbitration proceedings

to Bottrell. Bottrell is headquartered in Jackson, Mississippi,

where Scanlon lives. Veranda contends that this is evidence

of an improper relationship between RLI and Scanlon.

Before the arbitration, Scanlon disclosed that he was

representing a client who was negotiating a construction bond

with RLI. Veranda did not make any objection to Scanlon’s

participation in the arbitration based upon the disclosures he

made prior to the arbitration proceedings.

At the time he was appointed an arbitrator in this case,

Scanlon was a member of the law firm Scanlon, Sessums,

Parker, & Dallas. At some point before the arbitration was

completed, Scanlon joined the law firm of Watkins & Eager.

Watkins & Eager maintains a relationship with Trustmark.

Veranda contends that Scanlon’s partiality to RLI arises from

his law firm’s (Watkins & Eager) representatior. of Trustmark

Bank, which owns Bottrell.

Neither Trustmark nor Bottrell was identified by Veranda

or by RLI as interested parties at the time the arbitration

proceedings commenced. Since neither party identified

Trustmark or Bottrell as interested parties, it is difficult to

see how Scanlon or either of the other arbitrators could have

had any duty to disclose their relationships, if any, with these

businesses. Indeed, it appears to me that neither Trustmark

nor Bottrell has any interest in the outcome of this

controversy.

I do not perceive in this record any substantial evidence

of bias or partiality on the part of Pat Scanlon. Since neither

Appendix A

Trustmark nor Bottrell was in any way interested in the merits

of the matter under arbitration, i.e. in the performance of the

RLI bond and the underlying construction contract or in the

conflicting claims and counterclaims for damages for

breaches of these undertakings, I do not believe there is any

reasonable basis to question Pat Scanlon’s impartiality based

on his relationship with the firm that represents Trustmark

Bank. Likewise, I do not believe that Scanlon’s agreeing to

return a file to Bottrell as a courtesy to one of RLI’s attorneys

is evidence of bias or partiality on his part. As to the facts

disclosed by Scanlon prior to the arbitration, Veranda has

waived any objection it may have had by its failure to raise

its objection in a timely manner.

As to Allgood, Veranda points out that his (Allgood’s)

construction company was doing business with RLI by

completing a construction project under an RLI performance

bond. Allgood disclosed this before the arbitration

proceeding, and Veranda raised no objection. If Veranda had

an objection on the grounds of this disclosure, it has, in -my

opinion, waived that objection.

As to Kaster, Veranda points out that he attended West

Point Military Academy with E.B. Williams, RLI’s Director

of Bond Claims, who was one of the witnesses at the

arbitration proceedings. Kaster disclosed that at the time

Kaster was called to testify, and Veranda raised no objection.

If Veranda had an objection on the grounds of this disclosure,

it has, in my opinion, waived that objection.

A he Bn iar” ely 4S me: Sau atl oi’ | F qeausQna gr: ren

Appendix A

The Refusal To Award Delay Damages

The arbitrators made a specific finding that the delays

in this construction contract were the result of fault on the

part of four parties: Veranda, its architect, United, and RLI.

In these circumstances, the arbitrators found that neither of

the parties should be awarded delay damages. If this

determination is not a “manifest disregard of the law,” the

decision must be upheld. Prestige Ford v. Ford Dealers

Computer Services Inc., 324 F.3d 391 (5" Cir. 2003).

The Mississippi authorities I have examined establish

the right of an aggrieved party to recover delay damages when

there is proof that the damages are attributable to the fault of

the other party to the construction contract. See Mississippi

Transp. Comm'n v. SCI, Inc., 717 So.2d 332 (Miss. 1998);

Mississippi Transp. Comm’s v. Ronald Adams Contractor,

Inc., 753 So.2d 1077 (Miss. 2000). Authorities from other

jurisdictions establish the fundamental and sound rule that

the party seeking to collect damages for delay must bear the

burden of proving causation, i.e. the party seeking to establish —___

a right to recover damages for construction delays must

satisfy the finder of fact that the delays were attributable to

the action or inaction of the adverse party. See Fieldcrest

Builders, Inc. v. Antonucci, 724 N.E.2d 49 (Ill. App. 1999).

Both Veranda and RLI sought an award of delay damages.

The arbitrators found, as a fact, that the delays in this project

were jointly attributable to Veranda, its architects, United,

and RLI. Based on this finding, the arbitrators declined to

award damages to either party. While this approach may not

be the only reasonable way this issue could have been

10a

Appendix A

resolved, this Court’s review of the arbitrators’ decision is

limited to a determination whether the arbitrators “ignored

the existence of any clearly governing [legal] principle in

reaching its award.” Prestige Ford v. Ford Dealer Computer

Services, Inc., 324 F.3d 391 at 396 (5 Cir. 2003). In my

opinion the arbitrators acted within their authority in making

the factual determination that neither party had proved its

claims for delay damages, and | find that there has been no

manifest error of law in this aspect of the arbitration.

Conclusion

For the reasons set out above, I find that Veranda has

not proved any of the statutory grounds that would justify

setting aside the award of the arbitrators under 9 U.S.C.

§ 10(a), and I find that there has been no manifest error of

law committed by the arbitrators in making their award. There

is no substantial evidence in this record to support an

inference of bias or partiality on the part of any of the

arbitrators. There are no grounds for relief from the

November 5, 2002, order requiring that this matter be

submitted to arbitration. The award of the arbitrators will

therefore be confirmed.

Accordingly, it is

ORDERED

That the motion of Veranda Beach, L.L.C., for a hearing

on its motions [21-1] is hereby DENIED AS MOOT 1 light

of the hearing conducted on March 9, 2004;

ANDRAS POR LOE

lla

Appendix A

That the motion of Veranda Beach, L.L.C., to vacate the

arbitration order [27-1] is hereby DENIED;

That the motion of RLI to submit additional exhibits

[39-1] is hereby GRANTED;

That the motion of RLI for leave to file supplemental

affidavit [41-2] is hereby GRANTED.

That motion of RLI to strike [41-1] is hereby DENIED.

That the motion of RLI to reinstate this case to the active

docket for the purpose of confirming arbitration award and

issuance of judgment [21-1] is hereby GRANTED;

That the award of the arbitrators is hereby

CONFIRMED; and

That a separate judgment will be entered upon the award

of the arbitrators.

SO ORDERED this 29th day of April, 2004.

s/ L.T. Senter, Jr.

L.T. Senter, Jr.

Senior Judge

12a

Appendix A

IN THE UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF MISSISSIPPI

SOUTHERN DIVISION

CIVIL ACTION NO. 1:02CVI10SR

VERANDA BEACH, L.L.C.

PLAINTIFF

RLI INSURANCE COMPANY

DEFENDANT

ORDER AND JUDGMENT CONFIRMING

ARBITRATION AWARD

This matter was referred to arbitration by Order of this

Court on November 5, 2002. An arbitration hearing was

conducted on June 9-13, 2003, and the arbitration panel

rendered its award on July 11, 2003. The arbitrators’ award

has been filed of record in this cause by Defendant RLI

Insurance Co. in support of its motion to confirm the

arbitration award. For the reasons set out in the Memorandum

Opinion entered today in this matter, the Court has granted

Defendant RLI Insurance Co.’s motion to confirm the

arbitrators’ award pursuant to 9 U.S.C. §9.

l3a

Appendix A

Accordingly, it is

ORDERED and ADJUDGED

That the award of the arbitrators in this matter is hereby

CONFIRMED;

That Defendant RLI Insurance Co., shall have of and

recover from Veranda Beach, L.L.C., the principal sum of

$237,154.71, plus all taxable costs of Court, as set forth in

the award of the arbitrators dated July 11, 2003, and

incorporated into this judgment by reference; and

That interest at the rate of 1.7% per annum shall accrue

on the principal sum from the date of entry of this order until

the judgment is paid.

SO ORDERED this 29th day of April, 2004.

s/ L. T. Senter, Jr.

L. T. Senter, Jr.

Senior Judge

l4a

APPENDIX B — ARBITRATORS’ DECISION

AMERICAN ARBITRATION ASSOCIATION

CONSTRUCTION INDUSTRY ARBITRATION

TRIBUNAL

In the Matter of the Arbitration between

Re: 69 Y 110 00348 02

Veranda Beach, LLC

vs.

RLI Insurance Company

ADMINISTRATOR: Heather Presley

ARBITRATORS: Craig L. Kaster, Patrick H. Scanlon, and

John Hill Allgood, Ul

WE, THE UNDERSIGNED ARBITRATORS, having been

designated in accordance with the arbitration agreement

entered into by the parties, and having been duly sworn and

having duly heard the proofs and allegations of the parties

hereby, AWARD, as follows: -

This matter came up at the hearing in Biloxi, MS starting

June 9" and was concluded June 13". The hearing was closed

on June 13 and the arbitrators met thereafter for deliberation.

Based on the evidence presented through testimony and

exhibits, this project was doomed from the outset. The owner

and contractor chose to start work prior to obtaining a final

set of plans and with very limited specifications. To make

matters worse, the plans that were used were not complete.

15a

Appendix B

Furthermore, the architect did not provide complete

administrative services and the contractors work force as well

as supervision was poor for the first six months. Neither party

should have signed the contract based on the woefully

inadequate specifications and the incomplete plans. They

undertook substantial risk by signing a contract without

proper plans and specifications which led to a great deal of

confusion and ultimately substantial disputes.

The owner and contractor often made very important

decisions without adequately consulting the permitted

drawings and without input from the architect. This led to

rework and ultimately numerous code violations.

Both parties have made substantial delay claims. However,

they jointly share in the concurrent delays resulting in the

failure to complete this project in a timely fashion. The

defendants exhibited bate stamp 100271 is an October 12,

2001 letter from Mr. Gentle to Mr. Hopkins regarding a stop

work notice from the city of Biloxi. It sets forth the code

violations which resulted in a project being stopped by the

city. On October 19, 2001, the city issued its memorandum

of code violations.

Based on the evidence, a couple of out of state buyers went

to the permit office and in reviewing the project plans on

file, found code violations which were reported to the city.

This resulted in the city’s code enforcement manager shutting

the project down. If two third parties could review and find

code violations, then certainly the owner, through its architect

and the contractor as well as the surety could and should

have found these problems long before October of 2001. As

16a

Appendix B

a result of the joint failure of the owner/architect and

contractor/surety to properly monitor the work and be sure it

complied with the code requirements, the parties are jointly

responsible for the concurrent delays and neither party is

entitled to delayed damages.

The owner argues that the project is still not substantially

complete. However, the city issued a Certificate of

Occupancy on December 17, 2000 (Exhibit G1987). This

allowed units to be sold. The owner did start closing on sales

and the architect did issue a punch list (Exhibit P257). Based

on the evidence the arbitrators find the project was

substantially complete as of December 17, 2001, even though

the parties did not sign a Certificate of Substantial

Completion.

A large amount of time was taken up in the arbitration with

regard to the allegations of fraud and claim for punitive

damages brought by Veranda Beach, LLC, Claimant. Fraud

must be proven by clear and convincing evidence. In this

hearing, evidence was introduced on the issue of fraud. There

was evidence relating to changes to the “outlined

specifications” Ms. Sherry gave expert testimony on this

issue. However, her testimony was of no assistance in

determining who, when or why changes were made to the

“outlined specifications”. Counsel for Veranda Beach, LLC

questioned nearly every witness on this issue and it is still

unclear as to who, when or why these “outlined

specifications” were altered.

Furthermore, there has been no evidence as to the use of the

altered “outlined specifications”. During the hearing, some

17a

Appendix B

witnesses for both parties gave testimony that was

inconsistent with written documents or other tesamony. This

may have an impact as to their credibility, but does not meet

the legal requirements amounting to fraud.

There were change orders submitted to the owner related to

disputed issues, and in fact, RLI Insurance Company filed a

lien including money for disputed change orders.

Mr. Williams testified that the lien was filed to protect RLI’s

rights because of possible foreclosure on the property. Neither

the submission of disputed change orders nor the filing of

the lien was fraudulent.

Much of the case presented by Veranda Beach has been an

attempt to prove fraud on the part of RLI and persons related

to the Surety. The arbitrators listened carefully to the

testimony and reviewed the exhibits on this issue. It is the

unanimous finding the panel there has been absolutely no

evidence produced amounting to fraudulent conduct on the

part of RLI Insurance Company, Robert Gentle, Russell Gill,

Ms. David, Christopher Gilley, or Edgar Williams.

Accordingly, all claims for punitive damages by Veranda

Beach, LLC are dismissed with prejudice. Since a large

portion of the time in arbitration was spent on this issue,

Veranda Beach is ordered to pay one-half of the arbitrator

expenses, fees and costs associated with this proceeding since

it was not able to prove these allegations.

There was a great deal of conflict in testimony as to what

plans and specifications were included as part of the contract

documents. After much deliberation, it is the finding of

the arbitration panel that the contract included the March 2,

18a

Appendix B

Credit 6 inch sewer

Backflow preventor

Curb and gutters

Credit for Brick Ledge

at Handicap Ramp

Credit Walks

Credit Front Balconies/

Store Rooms

Credit Interior Trim Panels

e/c Doors

Credit Trim at Door Frames

Credit Window Seals

Fix and Adjust Windows

Add Parking Bumpers

Correct 8 Pane Window

Clear A/C Drain

Brick at Back Stairs

Rework Soffit at Rear

Balconies

Coping at Pool

Replace Elevator Room

Roof

Replace Pool house Roof

Gutters/DP Rear Building

Tub Surrounds

FiwHH SH

2,100.00

2,800.00

480.00

140.00

4,190.00

14,634.00

1,080.00

1,500.00

500.00

50.00

500.00

150.00

1,500.00

1,200.00

960.00

384.00

636.00

2,800.00

2000 plans set forth in Defendant’s Exhibit 3B Gilley Volume

II, and the type written specifications with the handwritten

notes (Plaintiff Exhibit A-3).

The following is awarded to Veranda Beach for the cost to

complete, incomplete or defective work and work omitted:

19a

Appendix B

Replace Dryer Vents $ 240.00

Replace Washer Drains $ 240.00

Credit Wire Mold at FA Wire $ 720.00

Microwave Outlets $ 1,500.00

Mold Remediation for one

unit $ 3,400.00

Total $ 42,354.00

All other claims of Veranda Beach, LLC are denied.

RLI has made claims for change order work. It is the finding

of the arbitration panel that change orders 1-4 were agreed

to by the parties through the Memorandum of Understanding.

However, while the change order procedure set forth in the

contract documents were not followed, there was change

order work performed by the contractor with the knowledge

and consent of Veranda Beach and therefore RLI is entitled

to recover with regard to those change order, but since the

change order procedure was not followed, the recovery is

limited to a quantum meruit basis. The following is awarded

to RLI, in addition to change orders 1-4:

No. 5: Modify Roof

Trusses for New Roof

Design $ 5,446.00

No. 7: Add Knee Walling

Behind Cabinets $ 3,255.00

No. 8: Ductwork Removed

and Relocated $ 2,500.00

No. 11: Additional Fire

Caulk $ 465.00

20a

Appendix B

No. 14: 5/8” Drywall at

Separation Walls

No. 16: Pool Elevation

Change

No. 17: Add Sidewalk to

East Wall

No. 24: Upgrade Counter-

tops in Bathroom

No. 26: Add Bartops

No. 27: AC Pads

No. 28: Construction Loan

Payment

No. 30: Replace Handicap

Ramp

No. 31: Sprinkler Pipe

Enclosure

No. 32: Iron Gate, Metal

Fencing (Front)

No. 33: Further Upgrades

Per Sales Agreement

No. 34: Mechanical Room

Modifications

No. 36: Add Vanity Lights

No. 37: Add Gates at Rear

Balconies

No. 41: Pre-wire Security/

Alarm Systems

Total

$ 3,487.50

$ 6,855.28

$ 1,046.25

$ 2,053.00

$ 826.50

$ 1,924.00

$ 6,500.00

$ 4,966.00

$ 6,159.00

$ 16,305.00

$ 2,381.00

$ 7,595.51

$ 872.29

$ 1,400.00

$2,471.38

$ 76,508.71

All other claims by RLI Insurance Couuipany are denied.

21a

Appendix B

The following is a summary of the award:

Unpaid Contract Balance $ 186,190.00

Change Orders 1-4 $ 16,810.00

Additional Change Orders

on Quanium Meruit

Subtotal

76,508.71

279,508.71

AAA

Less Credits to Veranda -

Beach $ 42,354.00

Balance to be paid by

Veranda Beach, LLC to

RLI Insurance Company $ 237,154.71

It is the finding of the arbitration panel that Veranda Beach,

LLC is to pay RLI Insurance Company $237,154.71. The

funds on deposit in escrow are to be released to RLI Insurance

Company as part of this payment. Once Veranda Beach, LLC

has paid the full $237,154.71, the lien filed by RLI Insurance

Company is to be canceled.

Since a portion of the contract claims for both parties was

granted a portion denied, the parties are equally obligated to

pay the remaining arbitration cost, fees and expenses.

22a

Appendix B

Accordingly, Veranda Beach, LLC is obligated to pay 75%

of the arbitration fees, costs and expenses, and RLI Insurance

Company is obligated to pay the remaining 25% of the

arbitration fees, costs and expenses. Any amounts not paid

to RLI Insurance Company within 30 days will bear legal

interest in accordance with Mississippi law.

The administrative fees and expenses of the American

Arbitration Association (“the Association”) totaling

$16,500.00 and the compensation and expenses of the

arbitrators totaling $34,800.05 shall be both 75% by Veranda

Beach, LLC and the 25% by RLI Insurance Company.

Therefore, Veranda Beach, LLC shall pay to RLI Insurance

Company the sum of $10,466.89 representing its share of

deposits previously advanced the Association.

The shove meee Se

date of this Award.

This Award is in full settlement of all claims and

counterclaims submitted to this Association. All claims not

expressly granted herein are, hereby denied.

This Award may be executed in any number of counterparts,

each of which shall be deemed an original, and all of which

shall constitute together one and the same instrument.

SIGNED: Pat H. Scanlon DATED: 7/11/03

Patrick H. Scanlon, Arbitrator

23a

Appendix B

Accordingly, Veranda Beach, LLC is obligated to pay 75%

of the arbitration fees, costs and expenses, and RLI Insurance

Company is obligated to pay the remaining 25% of the

arbitration fees, costs and expenses. Any amounts not paid

to RLI Insurance Company within 30 days will bear legal

interest in accordance with Mississippi law.

The administrative fees and expenses of the American

Arbitration Association (“the Association”) totaling

$16,500.00 and the compensation and expenses of the

arbitrators totaling $34,800.05 shall be both 75% by Veranda

Beach, LLC and the 25% by RLI Insurance Company.

Therefore, Veranda Beach, LLC shall pay to RLI Insurance

Company the sum of $10,466.89 representing its share of

deposits previously advanced the Association.

The above sums are to be paid on or before 30 days from the

date of this Award.

This Award is in full settlement of all claims and

counterclaims submitted to this Association. All claims not

expressly granted herein are, hereby denied.

This Award may be executed in any number of counterparts,

each of which shall be deemed an original, and all of which

shall constitute together one and the same instrument.

SIGNED: John Hill Allgood, III DATED: 7/11/03

John Hill Allgood, III, Arbitrator

24a

Appendix B

Accordingly, Veranda Beach, LLC is obligated to pay 75%

of the arbitration fees, costs and expenses, and RLI Insurance

Company is obligated to pay the remaining 25% of the

arbitration fees, costs and expenses. Any amounts not paid

to RLI Insurance Company within 30 days will bear legal

interest in accordance with Mississippi law.

The administrative fees and expenses of the American

Arbitration Association (“the Association”) totaling

$16,500.00 and the compensation and expenses of the

arbitrators totaling $34,800.05 shall be both 75% by Veranda

Beach, LLC and the 25% by RLI Insurance Company.

Therefore, Veranda Beach, LLC shall pay to RLI Insurance

Company the sum of $10,466.89 representing its share of

deposits previously advanced the Association.

The above sums are to be paid on or before 30 days from the

date of this Award.

This Award is in full setthement of all claims and

counterclaims submitted to this Association. All claims not

expressly granted herein are, hereby denied.

This Award may be executed in any number of counterparts,

each of which shall be deemed an original, and all of which

shall constitute together one and the same instrument.

SIGNED: Craig L. Kaster DATED: 7/11/03

Craig L. Kaster, Arbitrator

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