Court Opinion

ID: 2642851
Source: CourtListenerOpinion
Date Created: 2013-11-18 16:52:52.785145+00
Date Added: 2024-06-11T12:53:02.895021
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                              September 16, 2013 Session

   MARLIN FINANCIAL & LEASING CORP. v. LUCIUS E. BURCH, III

                Appeal from the Chancery Court for Hamilton County
                  No. 10-0208    Jeffrey M. Atherton, Chancellor

            No. E2013-00178-COA-R3-CV-FILED-NOVEMBER 18, 2013

This appeal arises from a dispute over the enforcement of guaranty agreements in light of a
bankruptcy. Marlin Financial & Leasing Corp. (“Marlin”) sued Lucius E. Burch, III
(“Burch”) in the Chancery Court for Hamilton County (“the Trial Court”) alleging breach of
contract, conversion, and, unjust enrichment. Marlin asserted that Burch owed money under
certain guaranty agreements he had signed for leases entered into by Marlin. After a trial,
the Trial Court dismissed the case for lack of jurisdiction. Marlin appeals to this Court. We
hold that, given the Bankruptcy Court’s orders deeming all claims related to the leases at
issue satisfied, the Trial Court lacked subject matter jurisdiction. We affirm the judgment
of the Trial Court.

 Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed;
                                  Case Remanded

D. M ICHAEL S WINEY, J., delivered the opinion of the Court, in which C HARLES D. S USANO,
J R., P.J., and T HOMAS R. F RIERSON, II, J., joined.

F. Scott LeRoy, Chattanooga, Tennessee, for the appellant, Marlin Financial & Leasing Corp.

William N. Helou and R. Mark Donnell, Nashville, Tennessee, for the appellee, Lucius E.
Burch, III.
                                                 OPINION

                                                Background

              As noted by Marlin on appeal, the relevant facts of this case largely are
contained in documents entered into the record without objection by the parties.1 Marlin is
a Chattanooga-based commercial equipment leasing company that has been in business for
more than thirty years. Marlin serves as a “leasing arm” for upwards of fifty banks, primarily
in Tennessee, Kentucky, Georgia, and Alabama.

              In September 2006, Santa Fe Cattle Company (“Santa Fe”) entered into a series
of commercial leases with Marlin, mainly for restaurant equipment. Between September
2006 and May 2009, Marlin and Santa Fe entered into 23 distinct leasing agreements. In
connection with each lease agreement, a separate guaranty agreement was signed by Burch
in which he guaranteed Santa Fe’s obligations under the leases. Marlin then assigned the
leases to various banks. Marlin’s role, therefore, was that of a broker and servicer of the
leases.2 The banks acquired the right to payment. Marlin’s “take” was the difference
between the interest charged under the leases and that interest which the banks charged
Marlin. Marlin received its fee up-front. Marlin also had a residual payment of $1 for each
lease under a purchase option.

               In 2009, the arrangement ran into financial difficulties. Santa Fe and its related
entities filed for bankruptcy in the U.S. Bankruptcy Court for the Middle District of
Tennessee. The Santa Fe debtors received approval from the Bankruptcy Court to sell a
number of entities and assign the leases to DBMC Investments, LLC. The sale and
assignment proceeded. As relevant to the issues on appeal, the DBMC sale order contains
the following language:

               The Debtors have cured, or have provided adequate assurance of cure
        of, any defaults existing prior to the Closing Date, which is the effective date
        of the assumption of the Assumed Leases and Contracts, and have provided
        compensation or adequate assurance of compensation to any non-Debtor party
        to such contracts for any of their actual pecuniary losses resulting from any
        default arising prior to the Closing Date under the Amended Leases and

        1
        The record contains a Statement of Evidence summarizing the trial testimony in this case, and from
which both sides draw for their briefs.
        2
            According to Marlin, the rights retained under the assignment were the rights to full payouts.

                                                      -2-
       Contracts, within the meaning of section 363(b)(1)(B) of the Bankruptcy Code
       (collectively, the “Cure Amounts”).

The DBMC sale order goes on to state:

               All Objections filed to the Sale Motion that were not withdrawn prior
       to or at the Sale Hearing are hereby overruled. Moreover, except as set forth
       below, any creditor, prospective purchaser, counterparty to an Assumed Lease,
       or other party in interest that did not file and serve, on or before September 25,
       2009, a written objection to the Sale Motion or the sale contemplated by the
       Purchase Agreement shall be, and hereby is, conclusively deemed to have
       waived any objection it may have to the Sale Motion or the Sale and to have
       waived and released all Encumbrances in or on or with respect to the Assets.
       Further, any counterparty to an Assumed Lease or Contract shall also be, and
       hereby is, conclusively deemed to have waived any objection it may have to
       the assumption and assignment of its contract to Purchaser, and any objection
       to the cure amount set out in the First Amended Notice of Proposed Assumed
       Leases and Contracts and Cure Amounts filed by Debtors and Purchaser.
       Absent a cure objection which has been timely filed, counterparties to the
       Assumed Leases and Contracts shall be bound by the cure amounts, and shall
       be deemed to have forever released and waived any claims related to breaches
       or obligations of any kind under the Assumed Leases and Contracts other than
       the cure amounts (or amounts set out in any agreement regarding between the
       Purchaser and the non-Debtor party), which shall satisfy such obligations in
       full.

Marlin had notice of the Santa Fe bankruptcy, the sale of the entities, and the assignment of
the leases. Marlin, however, did not file a proof of claim or object to the sale and
assignment.

               Nevertheless, according to Marlin, the sale did not conclude the matter. Marlin
alleged that not all rents provided for in the leases were paid in full. Marlin asserted
$1,313,372.08 was owed in the deficiency of rents due under the leases. In March 2010,
Marlin sued Burch in the Trial Court seeking, among other things, enforcement of the
guaranty agreements. In April 2010, Burch filed a motion to dismiss, arguing that Marlin
lacked a protectable interest in the leases, guaranties, or rents. Additionally, Marlin argued
that the lawsuit represented an improper collateral attack on the Bankruptcy Court sale order
and that the Trial Court, therefore, lacked jurisdiction. In May 2010, the Trial Court denied
the motion to dismiss. In March 2011, Marlin filed a motion for partial summary judgment,
seeking a determination that the guaranty agreements were enforceable. In May 2011, Burch

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filed a response, contending that Marlin no longer had a protectable interest. In June 2011,
the Trial Court denied Marlin’s motion for partial summary judgment.

               In April 2012, trial was held. Tommy Marlin, President of Marlin, testified,
as did Burch. After the trial, the Trial Court entered its final order in September 2012. The
Trial Court, in its ruling incorporated into the final order, held that Marlin failed to carry its
burden on the conversion and unjust enrichment claims. With respect to breach of contract,
the Trial Court held that Marlin had, in fact, carried its burden. The Trial Court stated: “In
light of the acknowledgement of the execution of the guaranties, the failure of the complete
payment of the amounts due by Santa Fe as the debtor under the lease agreements,
Defendant’s acknowledged lack of payment under the guaranties after the default by the
debtor . . . Plaintiff carried its burden.” However, the Trial Court ultimately held that it
lacked jurisdiction. The Trial Court stated in this regard:

              Having made this determination, the next inquiry is whether the
       Defendant has carried its burden under any of the affirmative defenses
       submitted. I have reviewed the language in the guaranties, as well as the loan
       documents, that purport to continue certain obligations in the face of a
       bankruptcy filing. I am also aware of the testimony presented by Mr. Marlin
       concerning the attempts he made on behalf of the Plaintiff to continue to assert
       the claims of Plaintiff after the filing of the bankruptcy, most of which,
       however occurring prior to the Section 363 Sale. The e-mail streams noted in
       Exhibits 13 and 14-5 are also most informative concerning the position taken
       by Plaintiff relative to the involved equipment and the expectation of Plaintiff
       before and after the 363 Sale. Of particular importance, however, are the
       bankruptcy court orders. It is clear that Plaintiff declined to object (or
       withdrew its objection) to the 363 Sale, regardless of the language in the lease
       documents asserting that it retained title to the equipment.

              Similarly, it is also clear that the proceedings before the bankruptcy
       court were intended to include not only the rights of the debtor and the listed
       creditors, but also incorporated “non-Debtors party to any related agreements.”
       Having reviewed the essentially all-encompassing language contained in the
       orders, I find, as a conclusion of law, that this court lacks jurisdiction to award
       judgment in Plaintiff’s favor and that this matter represents a collateral attack
       on the bankruptcy court’s judgment. State ex rel. City of Chattanooga v. 2003
       Delinquent Taxpayers, No. E2008-00457-COA-R3-CV, 2009 WL 137216
       (Tenn. Ct. App. Jan. 21, 2009) is on all fours with this case. Although I
       appreciate the arguments of Plaintiff that the assignments to the various banks
       did not convey the entirety of the Plaintiff’s interest in the equipment, Plaintiff

                                               -4-
        had the opportunity, if not obligation, to pursue its interests, including the
        “related agreements” (such as the guaranties), in bankruptcy court.
        Furthermore, its failure to do so, including the assertion to the Banks and,
        ultimately, to Burch, that the sale of the assets would be authorized with no
        amounts due to Marlin Financial Leasing Corp., also supports Defendant’s
        collateral estoppel defense.3

                This matter is, therefore, dismissed. Costs are to be taxed to the
        Plaintiff and surety. Defense counsel is to prepare an order reflecting this
        ruling.

(Citations omitted). The Trial Court denied Marlin’s motion to alter or amend. Marlin filed
a timely appeal to this Court.

                                                Discussion

             We restate and consolidate Marlin’s issues on appeal as one dispositive issue:
whether the Trial Court erred in dismissing the case for lack of subject matter jurisdiction.

               Our review is de novo upon the record, accompanied by a presumption of
correctness of the findings of fact of the trial court, unless the preponderance of the evidence
is otherwise. Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727 (Tenn. 2001).
A trial court's conclusions of law are subject to a de novo review with no presumption of
correctness. S. Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn.
2001). Whether subject matter jurisdiction exists is a question of law, and our review is de
novo, with no presumption of correctness. Northland Ins. Co. v. State, 33 S.W.3d 727, 729
(Tenn. 2000).

                 We have previously discussed subject matter jurisdiction and its significance:

               A court must have jurisdiction over the subject matter of the proceeding
        as well as over the parties. State ex rel. Whitehead v. Thompson, No.
        01A01-9511-CH-00538, 1997 WL 749465 at *2 (Tenn. Ct. App. Dec. 5,
        1997). The question of subject matter jurisdiction relates to a court's power to
        adjudicate a particular type of controversy. Toms v. Toms, 98 S.W.3d 140, 143
        (Tenn. 2003); Northland Ins. Co. v. State, 33 S.W.3d 727, 729 (Tenn. 2000).

        3
          “I decline to formally rule in Defendant’s favor on the issue of collateral estoppel/issue preclusion
as the record before me is unclear concerning the finality of the proceedings before the bankruptcy court.”
(Footnote in original).

                                                     -5-
       Subject matter jurisdiction “relates to the nature of the cause of action and the
       relief sought” and “is generally defined by the constitution or statute and
       conferred by the authority that organizes the courts.” Meighan v. U.S. Sprint
       Communications Co., 924 S.W.2d 632, 639 (Tenn. 1996); Kane v. Kane, 547
S.W.2d 559, 560 (Tenn. 1977). The parties cannot confer subject matter
       jurisdiction on a court by either appearance, plea, consent, silence, or waiver.
       Dishmon v. Shelby State Cmty. Coll., 15 S.W.3d 477, 480 (Tenn. Ct. App.
       1999). A court cannot enter a valid, enforceable order without subject matter
       jurisdiction. Brown v. Brown, 198 Tenn. 600, 610, 281 S.W.2d 492, 497
       (1955); SunTrust Bank v. Johnson, 46 S.W.3d 216, 221 (Tenn. Ct. App. 2000).
       Accordingly, when subject matter jurisdiction is questioned the court must first
       determine the nature of the case and then ascertain whether the Tennessee
       Constitution, the General Assembly, or the common law have conferred on it
       the power to adjudicate its cases. Staats v. McKinnon, 206 S.W.3d 541 at 542
       (Tenn. Ct. App. 2006). Subject matter jurisdiction may be raised at any time
       by the parties or by the appellate court sua sponte on appeal. County of Shelby
       v. City of Memphis, 211 Tenn. 410, 365 S.W.2d 291 (Tenn. 1963).

Graham v. Graham, No. E2008-00180-COA-R3-CV, 2009 WL 167071, at *6 (Tenn. Ct.
App. Jan. 26, 2009), no appl. perm. appeal filed.

                 As pointed out by the Trial Court, this Court addressed a similar situation in
State ex rel. City of Chattanooga v. 2003 Delinquent Taxpayers, No. E2008-00457-COA-R3-
CV, 2009 WL 137216 (Tenn. Ct. App. Jan. 21, 2009), no appl. perm. appeal filed. There,
a company that owned real property in Chattanooga filed for bankruptcy. Id. at *1.
Chattanooga filed a proof of claim for unpaid property taxes. Id. Chattanooga did not object
to a sale of this property. Id. Following the sale, Chattanooga filed suit, attempting to collect
unpaid taxes from the purchaser of the property. Id. at *2. We stated, inter alia:

              The trial court also correctly ruled that the City was barred from
       collaterally attacking the Delaware Bankruptcy Court's valid final order in
       Tennessee Chancery Court. This court recently observed the following
       principles regarding the rule against collateral attack upon another court's
       judgment:

              “A collateral attack is an attempt to avoid, defeat, or evade a
              judgment, or to deny its force and effect, in some incidental
              proceeding not provided by law for the express purpose of
              attacking it.” 50 C.J.S. Judgments § 505 (1997). It is well
              settled that a judgment or order cannot be collaterally attacked

                                               -6-
              unless it affirmatively appears, on the face of the record, “(1)
              that the Court had no general jurisdiction of the subject matter
              of the litigation; or (2) that the decree itself is wholly outside of
              the pleadings, and no binding consent thereto is shown in the
              record; or (3) that the Court had no jurisdiction of the party
              complaining, in person or by representation of interest; in which
              case it is void only as to such party, or his privies.” Gentry v.
              Gentry, 924 S.W.2d 678, 680 (Tenn. 1996). However, “[w]here
              no relief is sought against a judgment, as, for instance, where the
              proceeding is for the purpose of construing the judgment, or
              determining its scope and effect or its nature, there is no
              infraction of the rule against collateral attack.” 50 C.J.S.
              Judgments § 505 (1997).

       Andrews v. Fifth Third Bank, 228 S.W.3d 102, 107-08 (Tenn. Ct. App. 2007);
       see also Sims v. Adesa Corp., No. E2007-00899-COA-R9-CV, 2008 WL
793786, at *5 (Tenn. Ct. App. E.S., filed Mar. 25, 2008), perm. app. denied
       Oct. 27, 2008.

               In this case, the Bankruptcy Court's order expressly states that
       governmental entities are “forever barred, estopped and permanently enjoined
       from asserting” any prior “liens, claims, encumbrances and interests” against
       the real property at issue, so it is clear that the City's request that the Chancery
       Court enforce an allegedly unpaid tax lien incurred prior to the bankruptcy
       action is a direct attack on the earlier judgment. It is equally clear that none
       of the exceptions to the rule against collateral attack as discussed in Andrews
       applies here because, among other reasons, the valid jurisdiction of the
       Bankruptcy Court has not been questioned. Any claim the City had should
       have been raised in the Delaware Bankruptcy Court, which retained
       jurisdiction and in which the City had notice of all pertinent proceedings and
       ample opportunity to present its arguments regarding the sale of debtor's assets
       and the Bankruptcy Code. We therefore affirm the trial court's ruling that the
       City is barred from asserting this action in state chancery court.

State ex rel. City of Chattanooga, 2009 WL 137216, at *5.

               We agree with the Trial Court that State ex rel. City of Chattanooga is on point
with the present case. While perhaps not “on all fours” with the instant appeal, State ex rel.
City of Chattanooga is sufficiently analogous for persuasive purposes. In this case now
before us, the Bankruptcy Court deemed claims related to the leases at issue satisfied. Marlin

                                               -7-
declined to object to the sale of the equipment despite being placed on notice of said sale.
Given the clarity of the Bankruptcy Court’s orders, we are hard-pressed to see how the Trial
Court could provide Marlin its requested relief.

              Marlin points to Hickory Springs Mfg. Co., Inc. v. Evans, 541 S.W.2d 97
(Tenn. 1976), wherein a creditor demanded payment from guarantors under a guaranty
agreement in the context of a voluntary settlement between the debtor and creditor.
Ultimately, our Supreme Court held, among other things:

       By the terms of the agreement, the guaranty is not expressly limited to
       involuntary situations, nor do we think the parties intended the agreement to
       be so limited. As the terms of a commercial guaranty agreement are to be
       construed as strongly against the guarantor as the sense will admit,
       Farmers-Peoples Bank v. Clemmer, 519 S.W.2d 801 (Tenn. 1975), we hold
       that the agreement contemplated voluntary as well as involuntary settlements
       and compromises, and that respondents remain liable on their guaranty.

Hickory Springs Mfg. Co., Inc., 541 S.W.2d at 99.

               Marlin asserts that the instant case is a straightforward guaranty case, and that
Burch has obligations according to the terms of the guaranties. We believe Hickory Springs
Mfg. Co., Inc to be inapposite. The Bankruptcy Court’s clear orders here are significant and
dispositive–the sale orders declared the debt satisfied in full.

                  Marlin also points to the 2011 U.S. Supreme Court opinion Stern v. Marshall, -
- - U.S. - - - -, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011) for the proposition that a bankruptcy
judge cannot nullify a contract between parties that are not in front of the bankruptcy court.
The U.S. Bankruptcy Court for the Eastern District of Michigan conducted a succinct review
and analysis of Stern, which we quote from:

              In Stern v. Marshall, the Supreme Court held that the “judicial power
       of the United States” can only be exercised by an Article III court and “that in
       general, Congress may not withdraw from judicial cognizance any matter
       which, from its nature, is the subject of a suit at the common law, or in equity,
       or admiralty.” 131 S. Ct. at 2608–12. The Court held that a bankruptcy court
       therefore lacks the constitutional authority to enter a final judgment on a
       debtor's counterclaim that is based on a private right when resolution of the
       counterclaim is not necessary to fix the creditor's claim. 131 S. Ct. at 2611–19.
       The Court described the issue before it as “narrow.” 131 S. Ct. at 2620.

                                              -8-
       The Sixth Circuit has adhered to a narrow reading of Stern in the two
cases that have addressed the issue: Onkyo Europe Elect. GMBH v. Global
Technovations Inc. ( In re Global Technovations Inc.), 694 F.3d 705 (6th Cir.
2012), and Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012).

      In Global Technovations, the Sixth Circuit summarized Stern as
follows:

       Stern's limited holding stated the following: When a claim is “a
       state law action independent of the federal bankruptcy law and
       not necessarily resolvable by a ruling on the creditor's proof of
       claim in bankruptcy,” the bankruptcy court cannot enter final
       judgment. Id. at 2611. In those cases, the bankruptcy court may
       only enter proposed findings of fact and conclusions of law.
       Ibid.

694 F.3d at 722. Based on this view of Stern, the Global Technovations court
held that the bankruptcy court did have the authority to rule on the debtor's
fraudulent transfer counterclaim against a creditor that had filed a proof of
claim. Id.

      In Waldman, the Sixth Circuit summarized the holding of Stern as
follows:

       When a debtor pleads an action under federal bankruptcy law
       and seeks disallowance of a creditor's proof of claim against the
       estate—as in Katchen [ v. Landy, 382 U.S. 323, 86 S. Ct. 467, 15
L. Ed. 2d 391 (1966) ]—the bankruptcy court's authority is at its
       constitutional maximum. 131 S. Ct. at 2617–18. But when a
       debtor pleads an action arising only under state-law, as in
       Northern Pipeline [v. Marathon Pipe Line Co. 458 U.S. 50, 102
S. Ct. 2858, 73 L. Ed. 2d 598 (1982) ]; or when the debtor pleads
       an action that would augment the bankrupt estate, but not
       “necessarily be resolved in the claims allowance process[,]” 131
S. Ct. at 2618; then the bankruptcy court is constitutionally
       prohibited from entering final judgment. Id. at 2614.

698 F.3d at 919. Based on this view of Stern, the Waldman court held that the
bankruptcy court lacked authority to enter a final judgment on the debtor's

                                      -9-
       prepetition fraud claim against a creditor that was not necessary to resolve in
       adjudicating the creditor's claim.

In re City of Detroit, Michigan, 2013 WL 5425104, at **2-3 (Bankr. E.D. Mich. Sept. 26,
2013) (footnote omitted).

              We acknowledge Stern and the subsequent opinions applying that opinion, but
we fail to see what specific pertinence it has to the instant appeal. Here, there is no
counterclaim of a bankruptcy estate. Rather, Marlin’s suit constitutes a collateral attack on
the Bankruptcy Court’s judgment that the underlying debt had been satisfied in full. As such,
consistent with our holding in State ex rel. City of Chattanooga, we hold that the Trial Court
correctly held that it lacked subject matter jurisdiction in this attempted collateral attack on
the decision of the Bankruptcy Court. We affirm the judgment of the Trial Court.

                                         Conclusion

              The judgment of the Trial Court is affirmed, and this cause is remanded to the
Trial Court for collection of the costs below. The costs on appeal are assessed against the
Appellant, Marlin Financial & Leasing Corp., and its surety, if any.

                                                     _________________________________
                                                     D. MICHAEL SWINEY, JUDGE

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