Opinion
Case No. 6:19-bk-05398-LVV Adv. No. 6:22-ap-00003-LVV
2022-06-15
IN RE: J.E.L. SITE DEVELOPMENT, INC., Debtor. Gene T. Chambers, Trustee, Plaintiff, v. Park Square Enterprises, LLC and RLI Insurance Company, Defendants.
Matthew G. Davis, Paskert Divers Thompson, Tampa, FL, for Defendant RLI Insurance Company. Rosemary Hanna Hayes, Carly Marie Newman, Hayes & Newman, PL, Orlando, FL, for Plaintiff Gene T. Chambers. John B. Hutton, Greenberg Traurig PA, Miami, FL, for Defendants Park Square Enterprises, LLC.
Matthew G. Davis, Paskert Divers Thompson, Tampa, FL, for Defendant RLI Insurance Company.
Rosemary Hanna Hayes, Carly Marie Newman, Hayes & Newman, PL, Orlando, FL, for Plaintiff Gene T. Chambers.
John B. Hutton, Greenberg Traurig PA, Miami, FL, for Defendants Park Square Enterprises, LLC.
ORDER GRANTING MOTION TO COMPEL ARBITRATION
Lori V. Vaughan, United States Bankruptcy Judge
THIS MATTER came before the Court on Park Square Enterprises, LLC ("Park Square") and RLI Insurance Company's ("RLI") (collectively, the "Defendants") Motion to Compel Arbitration and Dismiss Adversary Proceeding (Doc. No. 7) (the "Motion"), the Trustee's response in opposition (Doc. No. 11), and the Defendants’ reply (Doc. No. 14). Defendants request this Court compel arbitration of the claims asserted against them by the Trustee in accordance with a prepetition agreement to arbitrate and either dismiss or stay the adversary proceeding pending completion of the arbitration. For the reasons stated below, the Court will grant the Motion.
The Court heard argument on the Motion on April 11, 2022 and took the matter under advisement.
Background
Park Square purchased undeveloped land from an affiliate of Debtor pursuant to a vacant land contract. Debtor and Park Square then executed a "Site Development Contract" under which the Debtor would provide site development services to Park Square, who was developing the property into a residential subdivision. The site development contract contained an arbitration provision that stated:
Doc. No. 1 at 4.
Id.
Any and all claims, disputes, causes of action of controversies between OWNER [Park Square] and CONTRACTOR [Debtor] and/or its Surety [RLI] shall be subject to arbitration by the Arbitrator appointed by the American Arbitration Association ("AAA") as provided herein.
Doc. No. 1 Ex. 1 at 109.
This provision became relevant in early 2018 when a payment dispute arose between the Debtor and Park Square. The original contract price for the site development work was $2.8 million, which was increased to $4.3 million by a change order executed in September 2016 to account for site conditions at the property. Towards the end of the project, in January 2018, Debtor requested an additional change order to increase the contract price to just over $5.8 million, citing the unforeseen amount of fill dirt that had been required to prepare the property. Park Square denied the change order request and terminated the contract.
Doc. No. 7 Ex. A at 23, 140-43.
Doc. No. 1 at 5; Doc. No. 7 Ex. B at 168.
Doc. No. 1 at 5.
Debtor maintained it furnished work and materials incorporated in the property worth just over $5.86 million and having received payment of just under $4 million was owed $1,880,542.42. In early April 2018, Debtor recorded a construction lien against the property for this sum. As part of recording the construction lien, Debtor filed its "Contractor's Final Payment Affidavit." The affidavit listed Debtor's outstanding payables to its subcontractors, which totaled $1,079,742.11. To clear title on the property, Park Square posted a construction lien bond, transferring the lien to a bond issued by its surety, RLI. Debtor's unpaid subcontractors also filed construction liens against the property.
Id. at 5-6.
Doc. No. 14 Ex. A at 37.
Id. at 34
Id. at 36.
Doc. No. 1 Ex. 2.
Doc. No. 1 at 6.
In May 2018, Debtor sued Park Square (and by June 2018 amendment, RLI) in Florida state court to foreclose on its construction lien and for breach of contract. Park Square moved to compel arbitration, citing the arbitration provision in the contract. The state court entered an agreed order to stay the case "pending disposition of the arbitration proceedings[.]"
Doc. No. 7 Exs. A & B.
Doc. No. 7 Ex. C.
Doc. No. 7 Ex. D.
In the arbitration action, Park Square asserted a claim against Debtor for its costs to complete the project, for liens filed by Debtor's subcontractors, and for punitive damages in the amount of Debtor's construction lien, asserting it was fraudulently filed. Debtor filed a counterclaim that essentially re-stated its state court complaint. Some of Debtor's subcontractors also sued Park Square and RLI to foreclose on their liens. This included Star Trucking & Construction Services, Inc. ("Star Trucking") and Sunray Paving & Construction Co. ("Sunray"). Park Square unsuccessfully sought to consolidate or stay these cases while the arbitration was pending.
Proof of Claim 39-1 Part 8.
Doc. No. 14 Ex. C.
Doc. No. 1 at 6. Sunray also sued Debtor, while Park Square included Debtor as a third-party defendant in the Star Trucking litigation.
Id.
The parties selected a panel of three arbitrators, at least one of whom appears to have an extensive background in construction law, and proceeded to move forward in arbitration for close to 14 months. A final hearing was set for early August 2019, but continued to January 2020 while the parties engaged in settlement talks. At the time the arbitration was continued (June 2019), Defendants estimated they would need two months to be ready for the final hearing.
Doc. No. 7 at 5.
Id. at 6.
Id.
But before the final hearing could occur, in August 2019, Debtor filed for chapter 11 bankruptcy staying the arbitration proceeding. Park Square filed Proof of Claim Number 39, asserting the claims it raised in the arbitration proceeding, i.e., it was owed $1,030,240.02 as costs to complete the project, $713,106.31 for liens filed by Debtor's subcontractors, and $1,880,542.42 in punitive damages. In the addendum attached to its proof of claim, Park Square identified its claim was currently pending in arbitration. Star Trucking and Sunray also filed proofs of claim in the bankruptcy. Park Square did not seek stay relief and Debtor did not pursue its claims against Park Square.
Main Case Doc. No. 1.
Proof of Claim No. 39-1.
Proof of Claim 39-1 Part 2 ¶ 5.
Proof of Claim Nos. 34 and 20 respectively.
In July 2020, the case was converted to Chapter 7 and the Trustee was appointed. Later that year, Defendants made payments to Star Trucking and Sunray in exchange for releasing their liens. In January 2022, the Trustee initiated this adversary proceeding against the Defendants, filing a four-count complaint. Count I is for breach of the site development contract against Park Square. Count II is to foreclose on the construction lien transfer bond against RLI. Count III is an objection to Park Square's proof of claim. The Trustee objects to Park Square's proof of claim by reference to its breach of contract and foreclosure of lien claims. In essence, the Trustee takes issue with the amount asserted, because in her view, Park Square owes money to Debtor not the other way around. The Trustee also takes issue with the propriety of the post-conversion payments Defendants paid subcontractors who had sued them. The Trustee argues the payments made "suggest" Defendants violated the automatic stay and thwarted the administration of the estate. Last, the Trustee asserts that the proof of claim should be disallowed pursuant to §§ 502(d) and 547 unless Defendants return the money they paid to satisfy the subcontractors’ liens against them. Count IV is an unjust enrichment claim if Debtor is not found to have a contractual remedy.
Main Case Doc. No. 361.
Doc. No. 1.
Doc. No. 1 at 13.
Id. at 9.
Id. at 9-10.
Id. at 10.
Id. at 13.
Analysis
As a threshold matter, Defendants argue res judicata and the Rooker -Feldman doctrine require this Court to follow the state court's "rul[ing] on the enforceability of the arbitration agreement." The Court does not need to wade far into either of these preclusion doctrines because Defendants read too much into the state court order. The order, which is titled "Agreed Order to Stay Case Pending Arbitration" only states that the case is "abated pending disposition of the arbitration proceeding." Defendants offer no evidence that the state court made any determination as to the enforceability of the agreement, much less a final one, which binds this Court.
Doc. No. 7 at 7.
Doc. No. 7 Ex. D.
Id.
Rooker-Feldman is only applicable when a party asks a federal court to modify or overturn a state court judgment. Behr v. Campbell , 8 F.4th 1206, 1211–12 (11th Cir. 2021). Rooker-Feldman is not a bar to all attempts to litigate a matter previously litigated in state court—instead only those matters reduced to a final judgment are barred since federal courts do not have appellate jurisdiction. Here, because there is no final judgment or any prior determination as to the enforceability of the arbitration agreement, Rooker-Feldman does not apply. Res judicata is inapplicable for the same reason. See Solis v. Glob. Acceptance Credit Co., L.P ., 601 F. App'x 767, 770 (11th Cir. 2015) (identifying that the party invoking res judicata must establish four elements, including that "there [was] a final judgment on the merits"). While Defendants cite Kaplan v. Divosta Homes, L.P ., No. 2:10-cv-208, 2010 WL 3945110, at *2 (M.D. Fla. Oct. 7, 2010) for the proposition that an order compelling arbitration satisfies the final judgment element of res judicata, there are at least two distinguishing features between that case and this case. First, in Kaplan there was an order compelling mediation. In this case, there is only an agreed order staying the case while the parties arbitrate the dispute. Second, the order compelling mediation in Kaplan was also affirmed by the state appellate court, which the court identified when determining it was a final judgment.
Turning to the merits, the Eleventh Circuit provided the controlling law for motions to compel arbitration in bankruptcy proceedings in Whiting-Turner Contracting Co. v. Electric Machinery Enterprises (In re Electric Machinery Enterprises.) , 479 F.3d 791 (11th Cir. 2007). Against the backdrop of the federal policy favoring arbitration expressed by congress in the Federal Arbitration Act ("FAA"), Electric Machinery instructs courts to conduct a two-step inquiry. See In re Laubenstein , No. 9:20-bk-03697-FMD, 2020 WL 5746877, at *2-3 (Bankr. M.D. Fla. Sept. 9, 2020).
As stated by the Supreme Court this "policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’ " Morgan v. Sundance, Inc ., ––– U.S. ––––, 142 S. Ct. 1708, 1713, 212 L.Ed.2d 753 (2022) (quoting Granite Rock Co. v. Teamsters , 561 U.S. 287, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010) ). This is because "[a]rbitration under the [FAA] is a matter of consent, not coercion" and the enforcement of arbitration agreements is designed to "give effect to the contractual rights and expectations of the parties." In re Bateman , 585 B.R. 618, 624 (Bankr. M.D. Fla. 2018) (citations omitted).
1) Step One: Did the parties agree to arbitrate their dispute?
First, the Court must determine if the parties agreed to arbitrate their dispute. See Electric Machinery , 479 F.3d at 795 ; In re Bateman , 585 B.R. 618, 624 (Bankr. M.D. Fla. 2018). This entails an inquiry into whether there is a valid arbitration agreement, if the agreement encompasses the claims at issue, and whether the right to arbitration was waived. See Louis v. Aetna Health Inc. , No. 6:16-cv-1922-ORL-22DCI, 2017 WL 6939166, at *3 (M.D. Fla. Jan. 13, 2017). The Trustee does not seriously dispute the validity of the arbitration agreement or whether it encompasses the claims at issue, but instead argues that Park Square waived its right to arbitrate by filing a proof of claim and not raising the arbitration agreement or seeking relief from the stay to proceed in arbitration. Previously, the Eleventh Circuit applied a two-part test in determining whether a party waived its right to arbitrate. First, the party must "have acted inconsistently with the arbitration right and, [second] in so acting, has in some way prejudiced the other party." S & H Contractors, Inc. v. A.J. Taft Coal Co. , 906 F.2d 1507, 1508 (11th Cir. 1990). Recently, the Supreme Court resolved a circuit split and overruled nine circuits, including the Eleventh, that have "an arbitration-specific waiver rule demanding a showing of prejudice." Morgan v. Sundance, Inc. , ––– U.S. ––––, 142 S. Ct. 1708, 1711, 212 L.Ed.2d 753 (2022). Accordingly, the Court now applies a one-part test, and the Trustee must only show that Park Square "acted inconsistently with [its] arbitration right," such as by "substantially invoking] the litigation machinery prior to demanding arbitration." Garcia v. Wachovia Corp ., 699 F.3d 1273, 1277 (11th Cir. 2012). Under these facts, the Court finds Park Square did not waive its right to arbitration.
In any event, the Court finds the arbitration agreement is valid and encompasses the claims asserted by the Trustee. As to the validity of the agreement, pre-petition, Debtor executed the site development contract, which contained the arbitration clause. Post-petition, the Trustee steps into the shoes of Debtor's non-executory contracts, including arbitration agreements. Cohen v. Ernst & Young, LLP (In re Friedman's, Inc .), 372 B.R. 530, 540 (Bankr. S.D. Ga. 2007) ; Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 885 F.2d 1149, 1153 (3d Cir. 1989) ("We see no reason to make an exception for arbitration agreements to the general rule binding trustees to pre-petition non-executory contracts, especially in face of the strong federal policy favoring arbitration[.]"). In assessing whether an arbitration provision encompasses the claims at issue, "state law governs the interpretation and formation of [arbitration] agreements." Emplrs. Ins. of Wausau v. Bright Metal Specialties, Inc., 251 F.3d 1316, 1322 (11th Cir. 2001). For contracts with broad arbitration agreements, a claim must be submitted to arbitration where there is "some nexus between the dispute and the contract containing the arbitration clause." See Seifert v. United States Home Corp., 750 So. 2d 633, 638 (Fla. 1999). "A contractual nexus exists between a claim and a contract if the claim presents circumstances in which the resolution of the disputed issue requires either reference to, or construction of, a portion of the contract." Jackson v. Shakespeare Found., Inc ., 108 So. 3d 587, 593 (Fla. 2013). In this case, the arbitration clause is broad and there is more than "some nexus" between the dispute and contract containing the agreement. Indeed, resolution of the issues requires reference to or construction of the site development contract.
Doc. No. 11 at 3, n.1.
First, Park Square did not act inconsistently with its right to arbitrate by filing a proof of claim. The filing of a proof of claim does not initiate a contested matter or do anything but preserve Park Square's right to distribution in this case. See Scott v. AmeriCash Loans LLC (In re Scott), 608 B.R. 774, 782 (Bankr. S.D. Ga. 2019) ; In re Transport Associates, Inc. , 263 B.R. 531, 536 (Bankr. W.D. Ky. 2001). Litigation in the form of a contested matter is only invoked when an objection is filed. Second, Park Square has not substantially invoked the litigation machinery in this bankruptcy. It immediately raised its right to arbitration in its first responsive pleading after the Trustee initiated this adversary proceeding. Before then, Park Square had no reason to raise the arbitration agreement because the Trustee had not objected to its claim. Further, the proceeding is still at the pleading stage and the parties have not engaged in discovery. The Court finds the Trustee has failed to demonstrate Park Square has actively litigated the dispute or unduly delayed requesting arbitration. Accordingly, the Court finds no waiver. 2) Step Two: Is the dispute "core" and, if so, is there an inherent conflict between enforcement of arbitration and the Bankruptcy Code?
Next, the Court must examine the nature of claims at issue. "In general, bankruptcy courts do not have the discretion to decline to enforce an arbitration agreement relating to a non-core proceeding." Electric Machinery, 479 F.3d at 796. For core-proceedings, "the bankruptcy court must still analyze whether enforcing [the] ... arbitration agreement would inherently conflict with the underlying purposes of the Bankruptcy Code." Id. (citation omitted). If the party opposing arbitration establishes an inherent conflict, the Court may overlook an otherwise enforceable arbitration agreement.
A non-exclusive list of core proceedings is set forth in 28 U.S.C. § 157(b)(2). A proceeding is "core" if: "(1) it involves a right created by federal bankruptcy law; or (2) it would arise only in bankruptcy." In re Providence Fin. Invs., Inc ., 593 B.R. 884, 891 (Bankr. S.D. Fla. 2018) (citing Electric Machinery , 479 F.3d at 797 ). In turn, "[a] proceeding is not core ‘[if] the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy.’ " Electric Machinery, 479 F.3d at 797 (quoting Cont'l Nat'l Bank v. Sanchez (In re Toledo) , 170 F.3d 1340, 1348 (11th Cir. 1999) ).
The Court finds three of the claims asserted in the adversary complaint are clearly non-core: the breach of contract claim (Count I), the lien foreclosure claim (Count II), and the unjust enrichment claim (Count IV). These are state law contract, construction law, and common law claims. Not only could these claims arise outside the bankruptcy context, except for the unjust enrichment count, they did. They mirror Debtor's state court claim and counterclaim filed in the arbitration proceeding. See Hix v. Flood (In re Hix) , No. 10-40091-MGD, Adv. No. 10-04070, 2011 WL 1520013, at *2 (Bankr. N.D. Ga. Feb. 8, 2011) ("[T]he Bankruptcy Code does not create any substantive right for breach of contract. Second, a claim for breach of a contract is a state law claim that can and does arise outside of bankruptcy."). Accordingly, the Court does not have the discretion to decline to enforce the arbitration provision as to these claims.
Doc. No. 14 at 12-13.
The Trustee's objection to Park Square's proof of claim is not so simple, as under 28 U.S.C. § 157(b)(2)(B) core proceedings include "allowance or disallowance of claims against the estate." An objection to a proof of claim, at least on its face, is core. See In re Laubenstein , No. 9:20-BK-03697-FMD, 2020 WL 5746877, at *3 (Bankr. M.D. Fla. Sept. 9, 2020) (finding an objection to claim to be core under 28 U.S.C. § 157(b)(2)(B) ). However, as other courts have observed, "the label ... attached] to a claim does not require the court to wear blinders as to the claim's true substance." Achievable, Inc. v. Hamm , No. 2:11-cv-678-MEF, 2012 WL 1392950, at *6 (M.D. Ala. Apr. 23, 2012) ; Carin v. Wall & Assocs. (In re Tomberlin) , No. 16-10168-DHW, 2017 WL 410337, at *4 (Bankr. M.D. Ala. Jan. 30, 2017) (compelling arbitration as to fraudulent transfer avoidance and turnover claims under 11 U.S.C. §§ 542, 548 because they were "essentially extensions of the non-core breach of contract claim").
The Court finds that in substance, the Trustee's objection to Park Square's proof of claim is a restatement of the breach of contract and lien foreclosure counts. The count itself incorporates by reference the allegations supporting these claims and, ultimately, the dispute is whether Park Square owes the Debtor money or the other way around. While the Trustee also invokes §§ 502(d) and 547 of the Bankruptcy Code, contending the claim should be disallowed unless Park Square returns post-petition transfers it made to satisfy subcontractors’ liens, it is unclear how § 547 applies, as Park Square is not a "transferee." Nor for that matter is it clear how Defendants’ payments to subcontractors who sued them concerns property of the estate. In any event, the propriety of the Defendants’ payments to these subcontractors was raised under the Trustee's breach of contract claim (no § 547 claim was asserted), and accordingly exists outside the bankruptcy context. Last, while the Trustee also "suggests" these transfers violated the stay in the body of her complaint (incorporated by reference into her objection to claim), which would be a core matter, she does not actually allege a stay violation in her complaint.
Even assuming the claim objection constitutes a "core" proceeding, the Court finds the Trustee has not met her burden of establishing an inherent conflict between the enforcement of the arbitration provision as to this claim and the underlying purposes of Bankruptcy Code. "The objectives of the Bankruptcy Code relevant to this inquiry include ‘the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders." ’ Carn , No. 16-10168-DHW, 2017 WL 410337, at *4 (quoting MBNA Am. Bank, N.A. v. Hill , 436 F.3d 104, 108 (2nd Cir. 2006). The Trustee argues there is an inherent conflict because bankruptcy is designed to centralize dispute resolution and because the high cost of arbitration will adversely impact the estate's ability to continue pursuing these claims and prejudice creditors who were not parties to arbitration agreement. In her words, this is "a construction dispute that can be efficiently resolved in this Court and involves claims submitted in the main case."
As an aside, as noted in In re BFW Liquidation, LLC , 459 B.R. 757, 778 (Bankr. N.D. Ala. 2011), "the claims allowance process is the perfect ‘core’ candidate for arbitration" since "arbitration is more or less designed to be a summary proceeding as is the claims allowance process in bankruptcy" and the "goal of both is to determine if anything is owed and, if so how much. In other words, to liquidate the claim."
Doc. No. 11 at 7.
While these are all arguments in favor of the Court resolving this issue, they do not identify an inherent conflict with the underlying purposes of the Bankruptcy Code. The fact that parties other than the estate may be impacted by the arbitration does not pose an inherent conflict with the code. In re Shores of Panama, Inc. , 387 B.R. 864, 867 (Bankr. N.D. Fla. 2008). Further, while "arbitration may be inconsistent with the policy of centralization, such inconsistency does not rise to the level of an inherent conflict." Id. In addition, compelling arbitration would actually prevent piecemeal litigation, since three of the claims are non-core and necessarily must be arbitrated. Lastly, while some courts have considered whether arbitration would force the trustee to expend limited resources and diminish the estate unnecessarily in deciding whether to compel arbitration, see, e.g., Pardo v. PacifiCare of Tex., Inc. (In re APF Co.) , 264 B.R. 344, 364 (Bankr. D. Del. 2001), it is at least unclear in this case that arbitration would necessarily be more expensive. The dispute was in arbitration for about 14 months at the time of the filing, Debtor and the Defendants had already initiated discovery in the arbitration proceeding, the matter was scheduled to be heard before the arbitration panel for a final hearing within approximately three months of the filing date, and at least some preliminary matters have already been addressed there. In addition, the arbitration panel presumably is experienced in resolving construction disputes and has familiarity with the issues raised in this dispute, which would further an expeditious liquidation for the Debtor.
For these reasons, the Court finds arbitration is appropriate for these matters. Accordingly, it is
ORDERED that:
1. The Motion (Doc. No. 7) is GRANTED.
2. The parties are directed to arbitrate all disputes raised in Trustee's complaint. Defendants are directed to resume the arbitration currently in abeyance within fourteen (14) days.
3. The automatic stay is modified to permit the arbitration to move forward to resolution, including the claims pending in arbitration and the Trustee's claims asserted in this adversary proceeding.
4. The adversary proceeding is abated pending the completion of arbitration between the parties. Once an award is entered, the parties shall notify this Court within thirty (30) days and return for further proceedings.
The Court does not find any reason to dismiss this case as urged by Defendants as opposed to abating the matter pending the resolution of the arbitration. Further, by not dismissing the case, the Trustee will not need to refile the case in the event court action is required.
5. The pretrial conference scheduled for June 27, 2022 at 2:00 p.m. in this proceeding is cancelled.
ORDERED.