Summary
declining to give res judicata effect to unconfirmed arbitration award
Summary of this case from In re Bao-Tran Xuan NgoOpinion
Case No. 03-15025-SSM.
January 7, 2005
Kevin M. O'Donnell, Esquire, Henry, Henry, O'Donnell Dahnke, P.C., Fairfax, VA, Counsel for the movant.
Thomas P. Gorman, Esquire, Tyler, Bartl, Gorman Ramsdell, PLC, Alexandria, VA, Counsel for the debtor.
Robert M. Gants, Esquire, Redmon, Peyton Braswell, LLP, Alexandria, VA, Counsel for Gordon P. Peyton, chapter 7 trustee.
C. Erik Gustafson, Esquire, LeClair Ryan, A Professional Corporation, Alexandria, VA, Counsel for Edward Dorris and Nancy Dorris.
MEMORANDUM OPINION
The issue before the court is whether the automatic stay should be modified to permit the American College of Dentists Foundation, Inc. ("ACDF") to seek confirmation in federal district court of a pre-petition arbitration award against the debtor. The motion is opposed by the debtor and by Edward and Nancy Dorris, who ACDF alleges are alter egos of the debtor and therefore liable for its debts.
Background
Dorris Marketing Group, Inc. ("the debtor") was in the business of conducting fundraising campaigns for charitable organizations. It filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this court on November 4, 2003. Gordon P. Peyton has been appointed as trustee and is pursuing fraudulent conveyance and alter ego claims against Edward and Nancy Dorris, the principals of the corporation. Prior to the bankruptcy filing, ACDF had brought an arbitration proceeding against the debtor under the commercial arbitration rules of the American Arbitration Association for breach of an agreement to manage a fund-raising campaign. The debtor was represented by counsel in the arbitration, and the parties took substantial discovery over a period of several months prior to a five-day evidentiary hearing. On October 7, 2003, the arbitrator issued an award in favor of ACDF in the amount of $1,033,401.57. ACDF then filed a complaint in the United States District Court for the Eastern District of Virginia on October 16, 2003, under the Federal Arbitration Act to confirm the award and enter it as a judgment of the court. ACDF's motion to confirm the award and the debtor's motion to vacate the award were both noticed for a hearing on November 7, 2003. The debtor, as noted, filed its bankruptcy petition three days prior to the hearing. The debtor filed a suggestion of bankruptcy in the district court, which then stayed the action.
Discussion I.
The filing of a bankruptcy petition operates as a stay of, among other things,
the commencement or continuation . . . of a judicial . . . or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case . . . or to recover a claim against the debtor that arose before the commencement of the case[.]
§ 362(a)(1), Bankruptcy Code. On request of the affected party, however, the stay may be annulled, terminated, modified, or conditioned for "cause." § 362(d)(1). To determine whether "cause" exists for relief from the automatic stay, the court must "balance potential prejudice to the bankruptcy debtor's estate against the hardships that will be incurred by the person seeking relief from the automatic stay if relief is denied." Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992). "Cause" may exist to permit litigation to go forward in nonbankruptcy forum where (1) only issues of state law involved, (2) judicial economy will be promoted, (3) the litigation will not interfere with the bankruptcy case, and (4) the estate can be protected by requiring that any judgment obtained be enforced only through the bankruptcy court. Id.
That said, it is nevertheless the exceptional case in which the stay will be modified to permit litigation against the debtor to go forward in another forum. There are several reasons. First, claims against a debtor in bankruptcy are not asserted by filing suit against the debtor but by filing a proof of claim. § 501, Bankruptcy Code. Upon the filing of a proof of claim, the claim is allowed unless a party in interest objects, in which event the bankruptcy court, after notice and a hearing, must determine the amount of the claim. §§ 502(a) (b), Bankruptcy Code. The allowance or disallowance of claims (except for personal injury or wrongful death claims) against the estate is a "core" proceeding in which a bankruptcy judge may enter a final judgment or order. 28 U.S.C. § 157(b)(2)(B). The centralization of claims litigation in the bankruptcy court promotes judicial economy; reduces expense to the debtor and the estate (which otherwise might be forced to litigate in distant and inconvenient forums); and prevents efficient administration of bankruptcy cases from being held hostage to the crowded condition of another court's docket.
Occasionally, however, there will be good reason to permit litigation of a claim to go forward in another forum, such as where the action (such as a divorce suit) will not directly affect administration of the bankruptcy case; or where the debtor is a nominal defendant and recovery is being sought only against third parties or insurance policies; or where the proceedings are so extensive or so far advanced that to require the parties to start over again in bankruptcy court would be unreasonable; or where there are co-defendants over whom the bankruptcy court lacks jurisdiction, and separate trials of the claims against the debtor and the co-defendants would unreasonably increase the expense to the plaintiff and risk inconsistent verdicts.
II.
The justification advanced by ACDF in this case for permitting the action to confirm the arbitration award to go forward is the unsettled question of whether an unconfirmed arbitration award is entitled to preclusive effect in other proceedings. Where a party's claim has been reduced to judgment, that judgment is normally res judicata as to the validity and amount of a claim in bankruptcy. In re Wizard Software, Inc., 185 B.R. 512 (Bankr. E.D. Va. 1995). Additionally, ACDF may have claims against other parties in privity with the debtor and would like to take advantage of collateral estoppel to the extent possible. The Virginia Supreme Court, however, has never expressly held whether an unconfirmed arbitration award is entitled to res judicata or collateral estoppel effect.
A.
The court has previously considered this issue in an unreported decision and has concluded that under Virginia law an unconfirmed arbitration award is not entitled to preclusive effect. Grayson, Kubli Hoffman, P.C. v. Giovanni (In re Giovanni), No. 03-14066, A.P. No. 04-1005 (Bankr. E.D. Va., March 26, 2004). To evaluate the preclusive effect of a state court judgment, a federal court must apply the preclusion law of the state which rendered the judgment. See 28 U.S.C. § 1738; Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 381, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985); Pahlavi v. Ansari ( In re Ansari), 113 F.3d 17, 19 (4th Cir. 1997); Hagan v. McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir. 1995). It has been held that the Full Faith and Credit statute "obliges federal courts to give the same preclusive effect to . . . state-court judgment[s] as would the courts of the State rendering the judgment[s]." McDonald v. City of W. Branch, 466 U.S. 284, 287-288, 104 S.Ct. 1799, 1801-1802, 80 L.Ed.2d 302 (1984). Although Congress could presumably have broadened the reach of § 1738 to extend to arbitration awards as well, it has not done so. Id. at 288, 104 S.Ct. at 1802 ("Arbitration is not a `judicial proceeding' and, therefore, § 1738 does not apply to arbitration awards."). In the absence of a state court "judgment," therefore, there appears to be no basis upon which collateral estoppel would apply in this court.
The opinion, although unpublished, is available on the court's Internet web site at www.vaeb.uscourts.gov/opinions/ssm/giovanni.pdf.
The Supreme Court of Virginia has explained that the application of collateral estoppel requires the following elements to be shown:
[1.] the parties to the two proceedings, or their privies, must be the same;
[2.] the factual issue sought to be litigated actually must have been litigated in the prior action and must have been essential to the prior judgment; and
[3.] the prior action must have resulted in a valid, final judgment against the party sought to be precluded in the present action.
[4.] Additionally, collateral estoppel in Virginia requires mutuality, that is, a party is generally prevented from invoking the preclusive force of a judgment unless that party would have been bound had the prior litigation of the issue reached the opposite result.
TransDulles Ctr., Inc. v. Sharma, 252 Va. 20, 22-23, 472 S.E.2d 274, 275 (1996) (emphasis added). Under § 8.01-581.012, Code of Virginia,"[u]pon granting an order confirming, modifying or correcting an [arbitration] award, a judgment or decree shall be entered in conformity therewith and be docketed and enforced as any other judgment or decree." See also Moore Bros. Constr. Co. v. Brown Root, Inc., 962 F. Supp. 838, 842 (E.D. Va. 1997) ("In Virginia, by statute and under the common law, arbitration awards, which have been confirmed by a court are given full collateral estoppel effect.") (emphasis added), rev'd in part on other grounds, 207 F.3d 717 (4th Cir. 2000); accord Jalil v. Avdel Corp., 873 F.2d 701, 704 (3rd Cir. 1989); Caldeira v. County of Kauai, 866 F.2d 1175, 1178 (9th Cir. 1989). Although the statute and case law do not in so many words state that unconfirmed arbitration awards are not to be given collateral estoppel effect, the import of the cited authorities is that an arbitration award must be confirmed and judgment entered before collateral estoppel can be applied.
The only Virginia decision arguably to the contrary is Waterfront Marine Construction, Inc. v. North End 49ers Sandbridge Bulkhead Groups A, B C, 251 Va. 417, 468 S.E.2d 894 (1996). In that case, the plaintiffs claimed in an arbitration that the defendant had breached a warranty, and the arbitrators denied the claim. The arbitrators' decision was not confirmed by a court. The plaintiffs then made a second demand to arbitrate the breach of warranty claim, and the defendant argued that res judicata barred the demand. The Virginia Supreme Court held that the plaintiffs' "claim for breach of warranty is barred by res judicata." Id. at 435, 468 S.E.2d at 905. However, neither party in that case raised the issue of whether there was a difference between a confirmed and an unconfirmed award, and the Virginia Supreme Court expressly did not decide the issue:
While res judicata may operate to bar subsequent judicial proceedings based on a prior confirmed arbitration award, here WMC seeks to bar a subsequent arbitration proceeding based on the res judicata effect of an unconfirmed arbitration award. These factual differences do not preclude application of the res judicata plea in this case, however. The parties have made no distinction between a confirmed and unconfirmed award. Therefore, we will assume, without deciding, that an unconfirmed arbitration award is treated in the same manner as a confirmed award for purposes of res judicata analysis.
Id. at 431, 468 S.E.2d at 902 (emphasis added).
B.
Given the high likelihood that an unconfirmed arbitration award is not entitled to preclusive effect under Virginia law and in any event is not entitled to full faith and credit under 28 U.S.C. § 1738, it is understandable that ACDF would want to seek judicial confirmation of the award. Of course, there is no reason why the action to confirm the award could not be brought in this court. (Indeed, the district court, if the question were put to it, might determine that the pending action should be referred to this court under the standing order of reference.) At the same time, the pleadings and briefs are already on file in the district court and the matter is ripe for determination. If this court were to rule on the motions to confirm and to vacate the award, there would be potentially three levels of appeal: the district court, the U.S. Court of Appeals for the Fourth Circuit, and the United States Supreme Court. If the district court — which already has the matter — were to rule, there would be at most two levels of appeal. This is not a case, moreover, in which any party would be put to unwarranted expense or difficulty by having to appear in a distant or inconvenient forum, since the courthouse of the United States District Court is located only a mile from this court. The bankruptcy estate can be appropriately protected by requiring that any enforcement of the judgment, if one is entered, occur in this court.
In the Matter of the Administration of the Bankruptcy Courts and Reference of Bankruptcy Cases and Proceedings to the Bankruptcy Judges of this District (E.D. Va., August 15, 1984).
A separate order will be entered modifying the automatic stay to permit the pending action in the United States District Court to confirm the arbitration award to go forward.