Court Opinion

ID: 2729037
Source: CourtListenerOpinion
Date Created: 2014-09-08 21:38:27.983102+00
Date Added: 2024-06-11T15:45:18.994545
License: Public Domain

NO. COA13-975

                         NORTH CAROLINA COURT OF APPEALS

                                Filed:     4 March 2014

LARRY BARROW, LOIS BARROW, AND
DORIS MURPHREY,
     Plaintiffs,

    v.                                         Greene County
                                               No. 12 CVS 140
D.A.N. JOINT VENTURE PROPERTIES OF
NORTH CAROLINA, LLC, CONNIE
MURPHREY AND DONALD STOCKS,
     Defendants.

    Appeal       by      D.A.N.    Joint    Venture      Properties    of    North

Carolina, LLC from orders entered 10 May 2013 and 15 May 2013 by

Judge Paul L. Jones in Greene County Superior Court.                     Heard in

the Court of Appeals 6 January 2014.

    White & Allen, P.A., by John P. Marshall and Ashley C.
    Fillippeli, for plaintiffs-appellees.

    Driscoll Sheedy, P.A., by Susan E. Driscoll, for defendant-
    appellant   D.A.N.  Joint   Venture  Properties  of   North
    Carolina, LLC.

    Miller & Audino, LLP, by Jeffrey L. Miller, for defendant-
    appellee Donald Stocks.

    MARTIN, Chief Judge.

    D.A.N.       Joint    Venture    Properties     of    North    Carolina,   LLC

appeals   from    two     superior    court    orders    denying    D.A.N.   Joint

Venture’s    motion       for     summary     judgment    and     granting   Larry
                                        -2-
Barrow’s, Lois Barrow’s, Doris Murphrey’s, and Donald Stocks’s

motions for summary judgment.

    The facts relevant to appeal are that Larry Barrow, Lois

Barrow,    Doris    Murphrey,       Connie    Murphrey,     and   Donald       Stocks

(guarantors)       are     all     parties      to    a    guaranty      agreement

guaranteeing       notes   issued     by     Wachovia     Bank,   N.A.    to    L.L.

Murphrey Company.          In 2000, L.L. Murphrey filed a Chapter 11

petition with the United States Bankruptcy Court for the Eastern

District of North Carolina.           At the time the petition was filed,

L.L. Murphrey was in default on several Wachovia notes that were

guaranteed by the guarantors.                 On 4 May 2001, L.L. Murphrey

filed     its   Fourth     Amended    Plan     of    Reorganization      with    the

bankruptcy court, which was later confirmed by the bankruptcy

court in part because the “guarantors contributed $550,000 to

[L.L. Murphrey] to make confirmation of its plan feasible.”

    The Plan of Reorganization divided L.L. Murphrey’s Wachovia

debts into two notes:            Note A and Note B.       Wachovia sold Note A

and Note B to Cadlerock Joint Venture, L.P., which later sold

the notes to D.A.N. Joint Venture.              In addition to creating two

notes, the Plan of Reorganization provided that the “guaranties

will remain in full force and effect for the Notes except as

adjusted to reflect the amount of Recapitalized Debt, defined
                                       -3-
herein.”

    Because L.L. Murphrey and D.A.N. Joint Venture could not

agree on the amount of the recapitalized debt, L.L. Murphrey

filed a motion with the bankruptcy court to reopen the Chapter

11 case on 1 April 2011.             L.L. Murphrey, Larry Barrow, Lois

Barrow, and Doris Murphrey then filed an adversary proceeding,1

before the bankruptcy court, against D.A.N. Joint Venture.                   In

the adversary proceeding, Larry Barrow, Lois Barrow, and Doris

Murphrey   sought      a     declaration     that    the    guarantors      were

contingently liable for only the amount of the recapitalized

debt.   They also requested an injunction requiring D.A.N. Joint

Venture to stop demanding payment from L.L. Murphrey and the

guarantors in excess of the amount of the recapitalized debt.

    In an order entered on 16 December 2011, the bankruptcy

court   found   that   the    amount    of   the    recapitalized    debt   was

$6,186,362.     D.A.N.       Joint   Venture   filed    a   motion   with   the

bankruptcy court seeking reconsideration of the 16 December 2011

order, which was not a final order because it did not resolve

all of the claims between the parties.                 The bankruptcy court

granted D.A.N. Joint Venture’s motion.                 On 10 May 2012, the

1
  An adversary proceeding is a “lawsuit that is brought within a
bankruptcy proceeding, governed by special procedural rules, and
based on conflicting claims.”    Black’s Law Dictionary 58 (8th
ed. 2004).
                                         -4-
bankruptcy court issued a second order denying the claim for

injunctive relief, because there was no showing of irreparable

harm, and declaring that the liability of guarantors was capped

at the amount of the recapitalized debt.

      The present action was filed by Larry Barrow, Lois Barrow,

and   Doris   Murphrey        against     D.A.N.       Joint     Venture,     Connie

Murphrey, and Donald Stocks in superior court after the 10 May

2012 bankruptcy court order was entered.                      Larry Barrow, Lois

Barrow, and Doris Murphrey assert that they are entitled to a

declaration that the expiration of the statute of limitations

prevents D.A.N. Joint Venture from asserting any claims against

the guarantors based on the guaranties.                     D.A.N. Joint Venture

counterclaimed    and    crossclaimed          that   the     guarantors    were    in

breach of the guaranty agreements as modified by the Plan of

Reorganization.         The     parties    then       filed    cross-motions       for

summary   judgment.           D.A.N.    Joint     Venture      appeals     from    the

superior court’s grant of Larry Barrow’s, Lois Barrow’s, Doris

Murphrey’s, and Donald Stocks’s motions for summary judgment.

                              _________________________

      On appeal, D.A.N. Joint Venture argues that the 10 May 2012

bankruptcy    court      order,        which     addressed       the     guarantors’

liability under the Plan of Reorganization, precluded the trial
                                   -5-
court from granting summary judgment on the grounds that the

statute of limitations bars all claims asserted by D.A.N. Joint

Venture against    the guarantors based on          the guaranties.        We

agree.

    Summary judgment is appropriate when “there is no genuine

issue as to any material fact and . . . any party is entitled to

a judgment as a matter of law.”           In re Will of Jones, 362 N.C.

569, 573, 669 S.E.2d 572, 576 (2008) (internal quotation marks

omitted).   We apply a de novo standard of review when evaluating

a trial court’s grant of summary judgment.            Id.    Under de novo

review, we “consider[] the matter anew and freely substitute

[our] own judgment for that of the lower tribunal.”                State v.

Williams,   362   N.C.   628,   632–33,    669   S.E.2d   290,   294   (2008)

(internal quotation marks omitted).

    To resolve this interjurisdictional preclusion issue, which

involves the preclusive effect of a bankruptcy court order in

superior court, we must first determine whether state or federal

law applies.      In Semtek International Inc. v. Lockheed Martin

Corp., 531 U.S. 497, 506–09, 149 L. Ed. 2d 32, 41–43 (2001), the

Supreme Court of the United States considered whether federal or

state law controls the claim-preclusive effect of a federal-

court judgment based on diversity jurisdiction in a later state-
                                          -6-
court    proceeding.        From    the    outset,    the    Court       noted      that

“[n]either the Full Faith and Credit Clause, U.S. Const., Art.

IV, § 1, nor the full faith and credit statute, 28 U.S.C. §

1738, address the question.                By their terms they govern the

effects to be given only to state-court judgments.”                      Id. at 506–

07, 149 L. Ed. 2d at 41–42.                Furthermore, there is “no other

federal textual provision, neither of the Constitution nor of

any statute, [that] addresses the claim-preclusive effect of a

judgment     in   a   federal      diversity     action,”     or        “the       claim-

preclusive    effect   of    a   federal-court       judgment      in    a     federal-

question case.”        Id. at 507, 149 L. Ed. 2d at 42.                        Federal-

question   cases,     however,      have    a   preclusive    effect          on    later

proceedings because the Court “has the last word on the claim-

preclusive effect of all federal judgments,” and requires that

federal-question cases be given preclusive effect.                      Id.     Federal

common law, therefore, governs the claim-preclusive effect of

federal-court judgments.           See id. at 508, 149 L. Ed. 2d at 42.

       In this case, defendant argues that the bankruptcy court

order must be given preclusive effect.                 Therefore, we look to

federal common law to determine the preclusive effect of the

bankruptcy court order.2

2
    To assist in our determination of federal common law, we find
                                          -7-
       Because     the    terminology     used    to    describe    the   preclusive

effect of prior adjudications can be inconsistent, we begin by

defining the terms.            “[R]es judicata generally refers to the law

of former adjudications,” In re Varat Enters., Inc., 81 F.3d

1310, 1315 n.5 (4th Cir. 1996), and “encompasses two concepts:

claim preclusion and issue preclusion, or collateral estoppel.”

Id. at 1315.        Both claim preclusion and issue preclusion apply

to    bankruptcy    court      orders.     See    id.    (“The     doctrine   of   res

judicata applies in the bankruptcy context.”).

       Claim preclusion occurs when a suit——which arises from the

same cause of action as a second suit——precludes relitigation in

a second suit of matters actually decided and every claim that

might have been raised in the first suit.                  Id. (citing Nevada v.

United States, 463 U.S. 110, 129–30, 77 L. Ed. 2d 509, 524

(1983)).    Issue preclusion on the other hand, applies when the

first    suit    and     the   second    suit    involve   different      causes   of

action, but involve some of the same factual or legal issues.

Id.     In this situation, issue preclusion prevents relitigation,

in the second suit, of the legal and factual issues actually and

necessarily decided in the first suit.                   See id.     Thus, the key

the common law of the Fourth Circuit Court of Appeals persuasive
because it is the circuit in which the United States Bankruptcy
Court for the Eastern District of North Carolina is located.
                                         -8-
difference between claim and issue preclusion is whether the

first suit and the second suit involve the same cause of action.

      We believe that the adversary proceeding and the superior

court proceeding involve the same cause of action and therefore

consider whether claim preclusion applies to this case.                       Before

addressing   the    requirements         of    claim   preclusion,     however,    we

must address whether claim preclusion applies to a declaratory

judgment.

      Generally, the preclusive effect of declaratory judgments

is limited to matters “actually litigated by the parties and

determined   by    a    declaratory       judgment.”         18A   Charles     Allen

Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice

and Procedure § 4446 (2d ed. 2002).                      Thus, issue preclusion

clearly   applies      to   declaratory         judgments.     Federal        courts,

however, have consistently held that the general rule limiting

the   preclusive       effect      of    declaratory       judgments     to     issue

preclusion   “applies       only    if    the    prior    action   solely     sought

declaratory relief.”        Laurel Sand & Gravel, Inc. v. Wilson, 519

F.3d 156, 164 (4th Cir. 2008).                As a result, if a claimant seeks

coercive relief, like an injunction, in addition to declaratory

relief, then the claimant forfeits the ability to limit the

preclusive effect of a declaratory judgment to issue preclusion.
                                        -9-
Id. (quoting Stericycle, Inc. v. City of Delavan, 929 F. Supp.

1162, 1164 (E.D. Wis. 1996) (citing Cimasi v. City of Fenton,

838 F.2d 298, 299 (8th Cir. 1988) and Mandarino v. Pollard, 718

F.2d 845, 848 (7th Cir. 1983))).              Accordingly, claim preclusion

also applies to the bankruptcy court order                     in this instance

because   Larry    Barrow’s,     Lois    Barrow’s,       and   Doris    Murphrey’s

complaint in the adversary proceeding sought injunctive relief

in addition to declaratory relief.

       Claim   preclusion    applies     to   an   adjudication        when   (1)   a

court of competent jurisdiction enters a final judgment on the

merits; (2) there is a second suit involving the claimants or

parties in privity with the claimants; and (3) the claims in the

second suit are based on the same cause of action as the first

suit or could have been asserted in the first suit.                      Varat, 81

F.3d at 1315; Bockweg v. Anderson, 333 N.C. 486, 492, 428 S.E.2d

157,    161    (1993).      In   this    case,     all    three   criteria      are

satisfied.

       To analyze the first criterion for claim preclusion, we

divide it into three subparts.            Subpart one requires a court of

competent jurisdiction.          Subpart two requires a final judgment.

Subpart three mandates that the final judgment be on the merits.

       First, Larry Barrow, Lois Barrow, and Doris Murphrey assert
                                       -10-
that    the    bankruptcy     court    was     not    a    court     of        competent

jurisdiction.       They    argue     that    the    bankruptcy      court          lacked

subject-matter     jurisdiction       over    the    claims      asserted        in   the

adversary     proceeding    because     they       were    not   core      bankruptcy

proceedings.        While   federal      courts      are    courts        of    limited

jurisdiction, federal courts have the power to decide whether

they have jurisdiction; their determination of jurisdiction may

be appealed, but it may not be collaterally attacked.                               In re

Bulldog Trucking, Inc., 147 F.3d 347, 352 (4th Cir. 1998).

       In the adversary proceeding, the 10 May 2012 bankruptcy

court order stated:

              [T]his   adversary  proceeding  is   a  core
              proceeding within the meaning of 28 U.S.C. §
              157(b)(2). . . .      Matters   related   to
              interpreting or implementing a plan post-
              conformation are still considered “core”
              even in light of the Supreme Court’s ruling
              in Stern v. Marshall, __ U.S. __, 131 S. Ct.
              2594 (2011).

Furthermore, the bankruptcy court stated:                   “The provisions of

this plan modifying guaranties are completely consistent with

applicable law at the time of confirmation, particularly since 7

contributed $550,000 to the debtor to make confirmation of its

plan feasible.”      Therefore, the bankruptcy court was a court of

competent      jurisdiction     because       it     was    conducting          a     core

bankruptcy proceeding.
                                        -11-
      Next, Larry Barrow, Lois Barrow, and Doris Murphrey assert

that the bankruptcy court could not issue a final order because

the   adversary    proceeding     involved     a   noncore     proceeding   that

required the consent of the parties before the bankruptcy court

could issue a final order.            As discussed above, the bankruptcy

court      had   subject-matter       jurisdiction     over     the   adversary

proceeding because it was a core proceeding.                    The bankruptcy

court, therefore, could issue a final judgment.                   See Stern v.

Marshall, __ U.S. __, __, 180 L. Ed. 2d 475, 488 (“Bankruptcy

judges     may   hear     and   enter     final    judgments     in   all   core

proceedings arising under title 11, or arising in a case under

title 11.” (internal quotation marks omitted)), reh’g denied, __

U.S. __, 180 L. Ed. 2d 924 (2011).

      Not only did the bankruptcy court have the power to issue a

final judgment but it entered a final judgment.                  “[A] judgment

will ordinarily be considered final in respect to a claim . . .

if    it    is   not     tentative,     provisional,    or     contingent   and

represents the completion of all steps in the adjudication of

the claim by the court.”         Restatement (Second) of Judgments § 13

cmnt.b (1982).         The 10 May 2012 bankruptcy court order completed

all steps in the adjudication of the adversary proceeding.                  This

is clear from the order for two reasons.               First, it disposed of
                                   -12-
all of the claims between the parties.              Second, one of the

reasons    the    bankruptcy     court    granted      the   motion    for

reconsideration was for the purpose of entering an “indisputably

final [order] for purposes of appeal.”          Therefore, the 10 May

2012 order is a final judgment.

       Finally, “judgment on the merits” is a term of art that

means a judgment was “‘based on legal rights as distinguished

from    mere   matters   of   practice,   procedure,    jurisdiction   or

form.’”    In re Gilson, 250 B.R. 226, 236 (Bankr. E.D. Va. 2000)

(quoting Fairmont Aluminum Co. v. Comm’r of Internal Revenue,

222 F.2d 622, 625 (4th Cir. 1955)).         There is no dispute that

the bankruptcy court order was rendered on the merits.                 All

parties to the adversary proceeding were able to appear before

the bankruptcy court at a hearing on 21 November 2011, where

they could raise issues and make legal arguments.              Thus, the

final judgment was on the merits because it was based on the

parties’ legal rights.

       Next, we address whether the superior court suit involves

the same claimants or those in privity with the claimants in the

adversary proceeding.         See Varat, 81 F.3d at 1315.         In the

adversary proceeding, L.L. Murphrey, Larry Barrow, Lois Barrow,

and Doris Murphrey sued D.A.N. Joint Venture.            In the superior
                                      -13-
court proceeding, Larry Barrow, Lois Barrow, and Doris Murphrey

sued D.A.N. Joint Venture and joined Connie Murphrey and Donald

Stocks as defendants.            However, for purposes of this appeal,

Donald Stocks is treated the same as Larry Barrow, Lois Barrow,

and   Doris    Murphrey   for     determining      whether    claim   preclusion

applies to the statute of limitations argument.

      Larry    Barrow,    Lois    Barrow,    and   Doris     Murphrey   asserted

claims against D.A.N. Joint Venture in both proceedings, and

claim preclusion should apply to them.              Thus, the only issue is

whether Donald Stocks        is in privity with Larry Barrow, Lois

Barrow, and Doris Murphrey.

      Privity exists when a non-party to a former adjudication is

“so identified in interest with a party to former litigation

that [the non-party has] . . . precisely the same legal right in

respect   to    the   subject      matter    involved.”        Martin   v.   Am.

Bancorporation Ret. Plan, 407 F.3d 643, 651 (4th Cir. 2005)

(internal quotation marks omitted).             That is, “the relationship

between the one who is a party on the record and another is

close enough to include that other within the res judicata.”

Id. (internal quotation marks omitted).               As discussed earlier,

Donald Stocks, Larry Barrow, Lois Barrow, and Doris Murphrey are

all parties to a guaranty agreement and both lawsuits address
                                    -14-
the liability of guarantors.          Therefore, Donald Stocks is in

privity   with   Larry    Barrow,   Lois   Barrow,   and    Doris    Murphrey

because they share the same legal rights with respect to the

guaranty agreements.

      Finally, we must address whether the adversary proceeding

and the superior court proceeding involve the same cause of

action.      See Varat, 81 F.3d at 1315.       The Fourth Circuit, for

the purpose of claim preclusion, has defined a cause of action

as all claims that arise “out of the same transaction or series

of transactions.”      Pittston Co. v. United States, 199 F.3d 694,

704   (4th     Cir.   1999)   (internal    quotation       marks    omitted).

“Transaction” in this context “connotes a natural grouping or

common nucleus of operative facts.”            Id. (internal quotation

marks omitted).

      We examine the adversary proceeding and the superior court

proceeding to determine if the claims asserted or which could

have been asserted in each case arise from a common nucleus of

operative facts.         In the adversary proceeding, Larry Barrow,

Lois Barrow, and Doris Murphrey sought a declaration from the

bankruptcy court that guarantors were contingently liable for

only the amount of the recapitalized debt.             Nothing precluded

guarantors from asserting that they were absolved from liability
                                          -15-
on statute of limitations grounds.                  The claim actually asserted

in   the     adversary       proceeding        focused    on    how     the   Plan     of

Reorganization            impacted      the      legal      relationship         between

guarantors and D.A.N. Joint Venture.                     In fact, the bankruptcy

court considered the language of the Plan of Reorganization in

reaching      its    holding      that     guarantors       were      entitled    to     a

declaration that “the liability of pre-petition guarantors is

capped at the amount of the Recapitalized Debt.”

     In      the    superior      court       proceeding,      Larry    Barrow,      Lois

Barrow,    and      Doris    Murphrey     sought    a    declaration,     and     Donald

Stocks relied on the affirmative defense, that the statute of

limitations        bars    any   claims    that    D.A.N.      Joint   venture    might

assert against guarantors based on the guaranty agreements.                            The

logic   of    this     argument      is   that     the   Plan    of    Reorganization

required Wachovia to prepare new loan documents, which Wachovia

apparently never prepared.                As a result, they argue, that the

only guaranty agreements are those executed before the Chapter

11 bankruptcy, and the statute of limitations bars enforcement

of the guaranty agreements because Wachovia notified guarantors

that they were in default under the guaranty agreements sometime

prior to the filing of the Chapter 11 bankruptcy petition.

     However, it is clear that the Plan of Reorganization has
                                         -16-
some    impact   on    the   guaranty      agreements       because       it    states:

“guaranties will remain in full force and effect for the Notes

except as adjusted to reflect the amount of the Recapitalized

Debt,    defined    herein.”       Thus,        the    central    focus    of    Larry

Barrow’s, Lois Barrow’s, Doris Murphrey’s, and Donald Stocks’s

superior    court     arguments    is    how     the    Plan     of   Reorganization

affected the legal relationship between guarantors and D.A.N.

Joint Venture.        This statute of limitations claim could have

been asserted in the adversary proceeding.                       Consequently, the

adversary   proceeding       and   the    superior      court     proceeding      arise

from the same cause of action because they both focus on how the

Plan of Reorganization affects the legal relationship between

guarantors and D.A.N. Joint Venture and the claims that were

available to guarantors.

       To summarize, claim preclusion applies to the 10 May 2012

bankruptcy court order because the claimants in the adversary

proceeding asked for an injunction in addition to declaratory

relief.     Next, the bankruptcy court was a court of competent

jurisdiction that issued a final judgment on the merits because

there was a hearing concerning the substance of the legal issues

in dispute between the parties on a core proceeding as well as

an order disposing of all claims between claimants.                        Also, the
                                        -17-
adversary proceeding and the superior court proceeding involved

the guarantors asserting rights against D.A.N. Joint Venture,

thus both cases involved the same claimants.                     Finally, both

cases arose from the same cause of action because both cases

focused     on    how   the     Plan    of     Reorganization        impacts   the

relationship of guarantors and D.A.N. Joint Venture and nothing

prevented guarantors from asserting their statute of limitations

claim in the adversary proceeding.               Therefore, Larry Barrow’s,

Lois Barrow’s, and Doris Murphrey’s failure to raise the statute

of limitations issue during the adversary proceeding precludes

us   from   now   considering     whether      the   statute    of    limitations

prevents defendant from recovering from the guarantors.

      Accordingly,      we    reverse    the   superior   court’s      order   and

remand the case to the superior court for a determination of the

amount of the guarantors’ liability.

      Reversed and remanded.

      Judges ERVIN and McCULLOUGH concur.