Court Opinion

ID: 2978401
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:24:54.530854+00
Date Added: 2024-06-11T11:44:12.355730
License: Public Domain

By order of the Bankruptcy Appellate Panel, the precedential effect
             of this decision is limited to the case and parties pursuant to 6th
             Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).

                                File Name: 09b0007n.06

          BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: WILLIAM E. GUNTHER, Jr.,                 )
                                                )
            Debtor(s).                          )
______________________________________          )
                                                )
QUINTIN AND COURTNEY MACDONALD,                 )
                                                )
            Appellants,                         )             No. 08-8108
                                                )
            v.                                  )
                                                )
WILLIAM E. GUNTHER, Jr.,                        )
                                                )
            Appellee.                           )
______________________________________          )
                                                )
                                                )

                     Appeal from the United States Bankruptcy Court
                    for the Middle District of Tennessee, at Nashville.
                                     No. 07-08516.

                               Submitted: August 19, 2009

                          Decided and Filed: September 30, 2009

     Before: FULTON, HARRIS, SHEA-STONUM, Bankruptcy Appellate Panel Judges.

                                 ____________________

                                       COUNSEL

ON BRIEF: James David Nave, ROTHSCHILD, NAVE & AUSBROOKS, PLLC, Nashville,
Tennessee, for Appellee. Quintin G. Macdonald, Nashville, Tennessee, pro se.
                                      ____________________

                                            OPINION
                                      ____________________

       MARILYN SHEA-STONUM, Bankruptcy Appellate Panel Judge. Quintin and Courtney
Macdonald (the “Macdonalds”) appeal the December 8, 2008 order of the bankruptcy court
sustaining the objection of William E. Gunther (the “Debtor”) to the amount of the Macdonalds’
unsecured claim against Debtor. The bankruptcy court granted the Debtor’s objection and allowed
the Macdonalds’ claim in the amount of $114,270.47 based on the amount of a prepetition
arbitration award against the Debtor and in favor of the Macdonalds, plus post-judgment interest.
The Macdonalds argue that they are entitled to an additional $14,246.29 pursuant to the provisions
of a July 2005 agreement to arbitrate between the Debtor and the Macdonalds (the “July
Agreement”).

                                    I. ISSUES ON APPEAL

       Whether the Bankruptcy Court erred when it disallowed the part of the Macdonalds’ claim
which was based on certain provisions of the July Agreement?

                    II. JURISDICTION AND STANDARD OF REVIEW

       The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Middle District of Tennessee has authorized appeals to the
Panel and no party has elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6)
and (c)(1). A final order of the bankruptcy court may be appealed as of right. 28 U.S.C. § 158(a)(1).
An order disallowing a claim is a final order. Beneke Co. v. Economy Lodging Sys., Inc. (In re
Economy Lodging Sys., Inc.), 234 B.R. 691, 693 (B.A.P. 6th Cir. 1999); see Spencer Central
Developers v. Sterling Rubber Products Co. (In re Sterling Rubber Products Co.), No. 04-8090,
2006 WL 348143 (B.A.P. 6th Cir. Feb. 15, 2006).

       Insofar as the appellant asserts that the order disallowing its claim represents an error
       of law, the order is reviewed de novo. E .g., Corzin v. Fordu ( In re Fordu), 201 F.3d
693, 696 n. 1 (6th Cir. 1999). “De novo means that the appellate court determines the
       law independently of the trial court’s determination.” Treinish v. Norwest Bank
       Minn., N.A. ( In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001) (quoting

                                                  -2-
        Myers v. IRS (In re Myers), 216 B.R. 402, 403 (B.A.P. 6th Cir. 1998) (quoting Corzin
        v. Fordu (In re Fordu), 209 B.R. 854, 857 (B.A.P. 6th Cir. 1997), aff’d, 201 F .3d
        693 (6th Cir. 1999)), aff’d, 196 F.3d 622 (6th Cir. 1999)). Insofar as the appellant
        challenges the order disallowing its claim on the basis of an error of fact, the order
        is reviewed for clear error. Fed. R. Bankr. P. 8013 & 7052; Fed.R.Civ.P. 52(a). “A
        finding of fact is clearly erroneous ‘when although there is evidence to support it, the
        reviewing court, on the entire evidence, is left with the definite and firm conviction
        that a mistake has been committed.” ’ United States v. Mathews (In re Mathews), 209
B.R. 218, 219 (B.A.P. 6th Cir. 1997) (quoting Anderson v. City of Bessemer City,
        470 U.S. 564, 573, 105 S. Ct. 1504, 1511 (1985)).
In re Sterling Rubber Products Co., 2006 WL 348143, *1.

                                              III.   FACTS

        In July, 2001, the Macdonalds hired the Debtor to perform a property inspection on certain
residential property. Following conclusion of the inspection upon which the Macdonalds relied, the
Macdonalds closed on the purchase of the residential property. Shortly after closing, the Macdonalds
discovered problems with the residential property, which they felt the Debtor should have found
during the course of his inspection. In July, 2002, the Macdonalds filed suit against Debtor in the
Chancery Court of Tennessee (the “Chancery Court”) to resolve the disputes surrounding the home
inspection. Three years later, the litigation was still pending in Chancery Court, and the Debtor and
the Macdonalds agreed to resolve their dispute pending in the Chancery Court through binding
arbitration.

        An arbitration was held. In the Award, the arbitrator found in favor of the Macdonalds and
awarded them damages in the amount of $98,347.30. The Award consists of compensatory damages,
consumer protection act damages and attorney’s fees, costs and expenses incurred in pursuing the
Chancery Court litigation. In addition, the Award provides that each party is to bear their own
arbitration costs and expenses.

        The Macdonalds sought confirmation of the Award by the Chancery Court and requested an
increase in the Award against the Debtor. The Chancery Court denied the request to increase the
Award citing Tenn. Code Ann. § 29-5-314, part of the Uniform Arbitration Act as adopted in
Tennessee.1 The Chancery Court did, however, confirm the Award on April 4, 2006 in the amount

        1
            Section 29-5-314 provides,
        (a) Upon application made within ninety (90) days after delivery of a copy of the award to the

                                                     -3-
of $98,347.30 and “tax court costs to the [Debtor].” No other costs, expenses or attorney’s fees were
awarded by the Chancery Court. The Macdonalds did not appeal the order confirming the Award.

        The Debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on
November 17, 2007 (the “Petition Date”). The Macdonalds timely filed a proof of claim in the
amount of $128,516.76 consisting of the following: $98,347.30 for “unpaid principal amount of
judgment;” $27,669.46 for “ interest pursuant to statute & arbitration exp.;” and $2,500 for “attorney
fee for representation in Bankruptcy Court if provided in note or contract and actually paid.”.

        On June 4, 2008, the Debtor filed an objection to the amount of the Macdonalds’ claim.
Specifically, the Debtor challenged the Macdonalds’ claim for arbitration expenses and attorney’s
fees. The Court held a hearing on the objection to the claim on December 1, 2008. At the hearing,
the Macdonalds argued that they are entitled to arbitration expenses and attorney’s fees and costs
incurred in the enforcement of the Award pursuant to the July Agreement. The July Agreement
provides, in pertinent part,

               WHEREAS, the parties have agreed to stay the referenced litigation and to
        represent themselves in binding arbitration ...; and
                WHEREAS, the parties ... now desire to reach an agreement concerning
        certain issues regarding arbitration.
                 NOW, THEREFORE, Gunther and Macdonalds agree as follows:
                 1.       The Macdonalds shall be responsible for payment of attorney
                          Blankenship’s fee for serving as arbitrator, except that, in the event
                          the Macdonalds obtain an award against Gunther in excess of the sum
                          of ten thousand dollars ($10,000), then Gunther shall pay the entire
                          fee of the arbitrator.
                          ....

        applicant, the court shall modify or correct the award where:

        (1) There was an evident miscalculation of figures or an evident mistake in the description of any
        person, thing or property referred to in the award;
        (2) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected
        without affecting the merits of the decision upon the issues submitted; or
        (3) The award is imperfect in a matter of form, not affecting the merits of the controversy.
Tenn. Code Ann. § 29-5-314.

                                                         -4-
                  3.       The Agreement is strictly confidential and neither this Agreement nor
                           the terms thereof shall be disclosed to any third party, including the
                           arbitration (sic).
                           ....

                  7.       In the event either party files suit to enforce any of the terms of this
                           Agreement, then the prevailing party shall be entitled to recover his
                           reasonable attorney’s fees and other costs associated with such
                           litigation.

Appellants’ Appendix at 82-83. This July Agreement was not provided to the arbitrator during the
arbitration.2 The bankruptcy court held that the Macdonalds were precluded from asserting claims
based on the July Agreement and allowed the Macdonalds’ claim in the amount of $114,270.47 and
disallowed it to the extent of the $14,246.29.

                                              IV.     DISCUSSION

         On appeal, the Macdonalds argue that the July Agreement and the obligations arising
thereunder are separate and distinct from the issues determined by the arbitrator or the Chancery
Court, and therefore the bankruptcy court erred in disallowing the portion of the Macdonalds claim
based on the July Agreement. The key issue in this case is the claim preclusive effect of the Award
and the Chancery Court judgment confirming it. Once an arbitration award has been confirmed by
the appropriate court, it is entitled to the same preclusive effect as would be given a decision of that
court. Hybert v. Shearson Lehman/American Exp. Inc., 688 F. Supp. 320 (N.D. Ill. 1988) (citing the
Restatement (Second) of Judgments § 84(1)(1982)).

         In Migra v. Warren City School District Board of Education, 465 U.S. 75, 77 n. 1,
         104 S. Ct. 892, 79 L. Ed. 2d 56. (1984), the United States Supreme Court expressed its
         preference for the use of the terms “issue preclusion” and “claim preclusion” to refer
         to the preclusive effect of a judgment in foreclosing future litigation rather than the
         more traditionally utilized terms “collateral estoppel” and “res judicata.” “Claim
         preclusion generally refers to the effect of a judgment in foreclosing litigation of a
         matter that never has been litigated, because of a determination that it should have
         been advanced in an earlier suit.” Migra, 465 U.S. at 77 n. 1, 104 S. Ct. 892. Issue

         2
           Obviously, there is a tension here because the July Agreement was apparently not disclosed to the arbitrator,
but the arbitration went forward based on some agreement of the parties. It remains unclear what the document submitted
to the arbitrator actually said about the terms of the parties’ agreement to arbitrate.

                                                          -5-
       preclusion refers to the effect of a judgment in foreclosing relitigation of a matter that
       has been actually litigated and decided. Id.
In re Fordu, 201 F.3d 693, 702-03 (6th Cir. 1999).

       “Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 384, 105 S. Ct.
1327, 84 L. Ed. 2d 274 (1985), teaches that a federal court must apply the law of the state where the
prior judgment was rendered in determining the extent to which a prior judgment should be given
preclusive effect.” In re Fordu, 201 F.3d at 706 n.17. “[I]f an individual is precluded from litigating
a suit in a state court by the traditional principles of res judicata, he is similarly precluded from
litigating the suit in federal court.” Gutierrez v. Lynch, 826 F.2d 1534, 1537 (6th Cir. 1987) (footnote
omitted).

       Under Tennessee law,

       The doctrine of res judicata bars a second suit between the same parties on the same
       cause of action with respect to all the issues which were or could have been brought
       in a former suit. Wall v. Wall, 907 S.W.2d 829, 832 (Tenn. App. 1995). A plaintiff
       may not, by disclaiming or failing to present a particular fact or theory, preserve such
       fact or theory to be used as a ground for a second suit. McKinney v. Widner, 746
S.W.2d 699 (Tenn. App. 1987).

Barnett v. Milan Seating Systems, 215 S.W.3d 828, 834-35 (Tenn. 2007). To invoke claim
preclusion under Tennessee law, the following elements must be established:

       (1) the judgment in the prior case was final and concluded the rights of the party
       against whom the defense is asserted, and (2) both cases involved the same parties,
       the same cause of action, or identical issues.

Id. (citing Scales v. Scales, 564 S.W.2d 667, 670 (Tenn.App. 1977)).

       There is no dispute that there is a final decision on the merits by the Chancery Court
confirming the Award or that the subsequent action is between the same parties, the Macdonalds and
the Debtor.

       The allocation of costs and expenses of arbitration, applications to confirm an arbitration
award and subsequent related proceedings is necessarily one of the matters determined by an
arbitrator and subsequently by the court being asked to confirm an award. “Unless otherwise

                                                  -6-
provided in the agreement to arbitrate, the arbitrators’ expenses and fees, together with other
expenses, not including counsel fees, incurred in the conduct of the arbitration, shall be paid as
provided in the award.” Tenn. Code Ann. § 29-5-311. In addition, arbitration awards can be
modified only for the reasons set forth in Tenn. Code Ann. § 29-5-314(a)(1) and (3). Tenn. Code
Ann. § 29-5-310. A challenge to the allocation of arbitration expenses is not one of the recognized
reasons for modifying an arbitration award. In this case, the arbitrator awarded costs and expenses,
including some attorney’s fees, but he also directed that each party was to bear its own arbitration
costs and expenses. It appears that the issue of who should bear the cost and expense of arbitration
was decided by the arbitrator and confirmed by the Chancery Court.

       If the Macdonalds believed that the allocation of the costs of arbitration was beyond the scope
of what the arbitrator was to decide, they should not have sought confirmation of the award by the
Chancery Court without a request that the allocation of costs be severed from the judgment as
beyond the scope of the arbitrator’s authority. See, e.g., D&E Const. Co., Inc. v. Robert J. Denley
Co., Inc., 38 S.W.3d 513, 518-19 (Tenn. 2001). Having failed to make such an argument
successfully before the Chancery Court, the Macdonalds are precluded from asserting it as a basis
for their claim in the Debtor’s bankruptcy case.

       In addition, “[u]pon the granting of an order confirming ... an award a, [sic] judgment or
decree shall be entered in conformity therewith... . Costs of the application [to confirm the award],
and of the proceedings subsequent thereto, and disbursements may be awarded by the court.” Tenn.
Code Ann. § 29-5-315. Thus, at the hearing on the application to confirm the Award, the
Macdonalds could have requested an award of the costs and expenses of pursuing confirmation and
of proceedings subsequent thereto. It does appear that, at a minimum, the Macdonalds requested an
increase in the Award.3 The Chancery Court denied that request citing Tenn. Code Ann. § 29-5-314.
The Chancery Court did, however, “tax court costs to the [Debtor].” No other costs, expenses or
attorney’s fees were awarded. Either the Macdonalds requested additional costs, expenses or
attorney’s fees and were denied, or they could have made such a request pursuant to Tenn Code Ann.
§ 29-5-315, but did not.

       3
           The record on appeal does not reveal the basis for the Macdonalds’ request to increase the Award.

                                                         -7-
       In Creech v. Addington, 281 S.W.3d 363 (Tenn. 2009) the Tennessee Supreme Court recently
addressed the issue of what constitutes the “same cause of action” for purposes of res judicata or
claim preclusion. After analyzing case law from federal courts and other state courts, as well as
various commentaries, the Tennessee Supreme Court formally endorsed the “transactional approach”
espoused by the Restatement (Second) of Judgments. 281 S.W.3d at 378-81. That standard provides
as follows:

       When a valid and final judgment rendered in an action extinguishes the plaintiff’s
       claim ..., the claim extinguished includes all rights of the plaintiff to remedies against
       the defendant with respect to all or any part of the transaction, or series of connected
       transactions, out of which the action arose.

Restatement (Second) of Judgments § 24(1). “Under the Restatement standard, ‘the concept of a
transaction is ... used in the broad sense,’ and ‘connotes a natural grouping or common nucleus of
operative facts.’ Id. § 24 cmt. b.” Creech v. Addington, 281 S.W.3d at 380 (footnote omitted).
Clearly, the Macdonalds’ claims against the Debtor for additional costs and expenses, including
attorney’s fees, based on the July Agreement arose out of the same transaction or series of connected
transactions that resulted in the judgment of the Chancery Court confirming the Award.

                                        V. CONCLUSION

       Therefore, as a matter of law, the July Agreement and any rights thereunder, have been
subsumed by the Award and the judgment of the Chancery Court confirming the Award. The
Macdonalds are precluded from claiming expenses and fees based on the July Agreement.
Therefore, the bankruptcy court’s decision to exclude the July Agreement and disallow the portion
of the Macdonalds’ claim for arbitration expenses and attorney’s fees based on the July Agreement
is affirmed.

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