Court Opinion

ID: 4584426
Source: CourtListenerOpinion
Date Created: 2020-11-06 15:12:30.510744+00
Date Added: 2024-06-11T13:47:25.391747
License: Public Domain

11/05/2020
               IN THE COURT OF APPEALS OF TENNESSEE
                            AT JACKSON
                         Assigned on Briefs January 2, 2020

 NEW PHASE INVESTMENTS LLC ET AL. v. ELITE RE INVESTMENTS
                      LLC ET AL.

                 Appeal from the Chancery Court for Shelby County
                  No. CH-19-0335 Walter L. Evans, Chancellor
                     ___________________________________

                           No. W2019-00980-COA-R10-CV
                       ___________________________________

An internecine conflict led to a suit asserting breach of contract and a variety of torts.
The defendants moved to compel arbitration, but the trial court deferred ruling on the
motion. Instead, the court granted the plaintiff’s request for a temporary injunction and
ordered the parties to mediate their dispute. When the defendants refused to participate
in mediation, the court held them in contempt. We granted the application of the
defendants for an extraordinary appeal to determine whether the trial court erred in not
proceeding summarily to the determination of whether there was an agreement to
arbitrate. Upon review, we vacate the three orders issued after the motion to compel
arbitration was filed and remand for the court to determine whether a valid agreement to
arbitrate exists.

   Tenn. R. App. P. 10 Extraordinary Appeal; Judgment of the Chancery Court
                          Vacated and Case Remanded

W. NEAL MCBRAYER, J., delivered the opinion of the court, in which J. STEVEN
STAFFORD, P.J., W.S., and THOMAS R. FRIERSON II, J., joined.

Wesley J. Riddle, Collierville, Tennessee, for the appellants, Zack Fuelling and Elite RE
Investments, LLC.

Alan G. Crone and Catherine C. Walsh, Memphis, Tennessee, for the appellee, New
Phase Investments, LLC.
                                       OPINION

                                            I.

                                           A.

       In 2012, brothers Earl and Zack Fuelling purchased The Villas, a distressed
property in Memphis, Tennessee. The brothers transferred ownership of The Villas to
South Beale Company, LLC (“South Beale”), a limited liability company created to own
and operate the property. New Phase Investments, LLC (“NPI”) and Elite RE
Investments, LLC (“Elite”) each owned a fifty percent interest in South Beale. Earl
Fuelling was the sole member of NPI; Zack Fuelling was the sole member of Elite.

       Two years later, the brothers purchased the Wilson Townhomes, another
distressed Memphis property. They created a second limited liability company, Wilson
Townhomes, LLC (“Wilson”) to own and operate this property. As with South Beale,
NPI and Elite owned Wilson.

       The operating agreements for Wilson and South Beale were nearly identical. Both
operating agreements vested control of the companies in the two member managers, who
were required to make decisions by unanimous vote. Both members initially agreed to
hire Nathaniel Robataille as asset director and Shawn Woods as accountant for Wilson
and South Beale.

       The members also agreed to settle all disputes through binding arbitration. The
operating agreements provided as follows:

      10.4. Arbitration of Disputes. Any dispute between Members(s) and/or
      Manager(s) and/or Managing Member(s) and/or Member Representative(s)
      and/or the Company shall be resolved only by arbitration. The governing
      authority shall be the Tennessee Arbitration Act(s).

       After the first asset director proved ineffective, South Beale and Wilson entered a
management agreement with Elite. Per the agreement, Elite performed management
services, including the duties of asset director, for the two companies for a monthly fee.
The members agreed that Shawn Woods would assist Elite and be compensated at a set
rate. The management agreement also contained an arbitration clause, which provided:

      7) BREACH OR VIOLATION OF THIS AGREEMENT: If there is
      any violation and/or breach of this Agreement by any party in this
      agreement . . . then any one party may at their discretion terminate this
      Agreement with notice in writing to the other Members, Managers, and
      Companies stating the exact details of the violation and/or breach. The
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       entity being accused on the breach or violation will have 30 days to respond
       and prove their case that they were not in violation. If the parties cannot
       agree then the plaintiff must set up binding arbitration within 14 days.

                                                  B.

       On March 6, 2019, NPI, individually and on behalf of South Beale and Wilson,
sued Elite, Zack Fuelling, and others for breach of the management agreement and the
two operating agreements, breach of fiduciary duty, fraud, conversion, and unjust
enrichment. Among other things, the complaint alleged that Zack Fuelling and Elite had
mismanaged the companies, commingled funds, and dissipated company profits. The
complaint sought injunctive relief, compensatory and punitive damages, and judicial
dissolution of South Beale and Wilson. See Tenn. Code Ann. § 48-249-617 (2019).

        NPI also filed a contemporaneous motion for a temporary restraining order and a
temporary injunction. See Tenn. R. Civ. P. 65.01. According to NPI, Zack Fuelling and
Elite were jeopardizing the continued viability of South Beale and Wilson by failing to
properly manage the properties and by diverting property income into Memphis
Management, LLC, another entity controlled by Zack Fuelling. NPI asked the court to
(1) transfer control of South Beale and Wilson to NPI, (2) grant NPI the authority to
appoint a new management company, (3) remove Zack Fuelling from the companies’
bank accounts, (4) require an accounting, and (5) prohibit dissipation of company
profits.1 The court issued a temporary restraining order that same day. The restraining
order prohibited further violations of the management and operating agreements and
ordered Elite to cede control of South Beale and Wilson to NPI. The order also
prohibited Zack Fuelling from withdrawing any company funds or writing checks on
company accounts.

        On March 15, Zack Fuelling and Elite filed a motion to compel arbitration and to
stay the judicial proceedings pending the outcome of arbitration. NPI responded that the
arbitration provisions were unenforceable because Elite had materially breached the
underlying agreements. The court did not immediately address the arbitration issue.
Instead, the court granted NPI a temporary injunction. The injunction essentially
mirrored the temporary restraining order, with the following additional provisions:

       Zach [sic] Fuelling, Elite, and/or Memphis Management, LLC shall
       produce all documents evidencing accounts payable, accounts receivable,
       operating expenses or any funds expended for the South Beale or Wilson

       1
         NPI also asked the court to order Elite and Zack Fuelling to place any funds received from the
pending sale of a related property into a trust account.

                                                  3
        Townhomes from January 1, 2017 to March 19, 2019 to Plaintiffs on or
        before April 22, 2019.

        Zach [sic] Fuelling, Elite, and/or Memphis Management, LLC shall provide
        all electronic records and access to view all Memphis Management, LLC’s
        bank accounts to Plaintiff on or before March 20, 2019.

       NPI also asked the court to order mediation. See Tenn. R. Sup. Ct. 31 § 3(b). The
court granted NPI’s request and ordered the parties to mediate “all issues currently
pending before the court” within fourteen days. The court expressly reserved ruling on
the arbitration issue until after mediation.

       Zack Fuelling and Elite refused to participate in mediation. And on April 24, they
again sought a ruling on the arbitration issue. NPI responded with a motion for civil
contempt for violation of the court’s mediation order.2

        After a hearing, the court found Elite and Zack Fuelling in willful contempt for
their refusal to participate in mediation. The defendants were ordered to comply with the
court’s mediation order or pay a $100 fine for each day they were not in compliance. The
court also denied the motion for an arbitration ruling.

                                                      II.

       Zack Fuelling and Elite applied for an extraordinary appeal. See Tenn. R. App. P.
10. In granting their request, we limited our review to the following issue:

        Whether the trial court failed to comply with Tennessee Code Annotated
        section 29-5-303 when it did not stay the proceeding pending adjudication
        of the motion for arbitration and did not “proceed summarily” to address
        the question of arbitration.

See Culbertson v. Culbertson, 455 S.W.3d 107, 127 (Tenn. Ct. App. 2014) (explaining
that the issues on an extraordinary appeal “are limited to those specified in this court’s
order granting the extraordinary appeal”).3

        2
          NPI also asked the court to sanction Zack Fuelling and Elite for their failure to produce the
financial documentation required by the temporary injunction.
        3
          In their appellate briefs, the parties seek to raise additional issues. As this is not an appeal as of
right, we confine our analysis to the issue specified in our order granting the extraordinary appeal. See
Heatherly v. Merrimack Mut. Fire Ins. Co., 43 S.W.3d 911, 914 (Tenn. Ct. App. 2000) (discussing
differences between appeals as of right and extraordinary appeals).
                                                       4
        The outcome of this appeal turns on Tennessee Code Annotated § 29-5-303, which
is part of the Tennessee Uniform Arbitration Act. The Tennessee Uniform Arbitration
Act “governs the extent of judicial involvement in the arbitration process.” Glassman,
Edwards, Wyatt, Tuttle & Cox, P.C. v. Wade, 404 S.W.3d 464, 466 (Tenn. 2013). Courts
have the power to enforce arbitration agreements. Tenn. Code Ann. § 29-5-302(b)
(2012). When one party to a lawsuit claims the dispute is subject to arbitration and the
other party refuses to arbitrate,

       the court shall order the parties to proceed with arbitration, but if the
       opposing party denies the existence of the agreement to arbitrate, the court
       shall proceed summarily to the determination of the issue so raised and
       shall order arbitration if found for the moving party; otherwise, the
       application shall be denied.
Id. § 29-5-303(a) (2012). At the same time, the trial court must stay “[a]ny action or
proceeding involving an issue subject to arbitration.” Id. § 29-5-303(d).

        Here, Zack Fuelling and Elite asked the court to compel arbitration based on the
arbitration provisions in the parties’ agreements. NPI took the position that the
arbitration provisions were unenforceable. At this juncture, the Tennessee Uniform
Arbitration Act required the court to do two things—stay any proceedings involving an
arbitrable issue and decide whether a valid agreement to arbitrate existed. The trial court
did neither. As explained by our supreme court,

       The purpose of arbitration is to promote the settlement of disputes without
       judicial involvement. The TUAA effectuates this purpose by limiting the
       authority of a trial court to conduct proceedings on the merits prior to
       determining whether arbitration should be enforced. The language of the
       TUAA clearly and unambiguously instructs courts to determine whether
       arbitration is required before delving into the merits of the case.

Glassman, Edwards, Wyatt, Tuttle & Cox, P.C., 404 S.W.3d at 467 (citations and
footnotes omitted). The trial court had no authority to order mediation on the merits of
an arbitrable issue.4 See id. at 468. And the court compounded this error by finding Zack
Fuelling and Elite in contempt of an unlawful order. See Konvalinka v. Chattanooga-
Hamilton Cty. Hosp. Auth., 249 S.W.3d 346, 355 (Tenn. 2008) (“A lawful order is one
issued by a court with jurisdiction over both the subject matter of the case and the
parties.”).

       4
          We find NPI’s argument that the court ordered the parties to mediate the validity of the
agreement to arbitrate unconvincing. The court expressly stated that the parties were to mediate “all
issues currently pending before the court.”

                                                 5
       Despite the Tennessee statutory mandate, NPI asks this Court to leave the
temporary injunction issued by the trial court in place, citing federal case law interpreting
the Federal Arbitration Act. See Performance Unlimited, Inc. v. Questar Publishers, Inc.,
52 F.3d 1373, 1380 (6th Cir. 1995). We decline to do so because the Federal Arbitration
Act does not govern in this circumstance.

       While the Federal Arbitration Act and the Tennessee Uniform Arbitration Act
have similar goals, they are not identical. See Owens v. Nat’l Health Corp., 263 S.W.3d
876, 883 (Tenn. 2007) (“The question of whether the contract is governed by the state or
federal arbitration act is not an academic one.”); Taylor v. Butler, 142 S.W.3d 277, 282-
83 (Tenn. 2004) (noting distinctions between the Federal Arbitration Act and the
Tennessee Uniform Arbitration Act). The Federal Arbitration Act directs the trial court
to “stay the trial of the action” pending the outcome of arbitration. 9 U.S.C.A. § 3
(2009). So federal courts have almost uniformly determined that the Federal Arbitration
Act does not preclude the issuance of a preliminary injunction in appropriate
circumstances. See Toyo Tire Holdings of Ams. Inc. v. Cont’l Tire N. Am., Inc., 609 F.3d
975, 981 (9th Cir. 2010); Performance Unlimited, Inc., 52 F.3d at 1380; Ortho Pharm.
Corp. v. Amgen, Inc., 882 F.2d 806, 811-14 (3d Cir. 1989); Teradyne, Inc. v. Mostek
Corp., 797 F.2d 43, 47-51 (1st Cir. 1986); Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Bradley, 756 F.2d 1048, 1053-54 (4th Cir. 1985); Roso-Lino Beverage Distribs., Inc. v.
Coca-Cola Bottling Co. of New York, 749 F.2d 124, 125 (2d Cir. 1984). But see Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1292 (8th Cir. 1984)
(ruling otherwise).

        By contrast, the Tennessee Uniform Arbitration Act requires the trial court to stay
“[a]ny action or proceeding involving an issue subject to arbitration.” See Tenn. Code
Ann. § 29-5-303(d). “Any action or proceeding” encompasses more than the trial on the
merits. See Action, BLACK’S LAW DICTIONARY (11th ed. 2019) (defining “action” as “[a]
civil or criminal judicial proceeding”); Proceeding, BLACK’S LAW DICTIONARY (11th ed.
2019) (defining “proceeding” as “[t]he regular and orderly progression of a lawsuit,
including all acts and events between the time of commencement and the entry of
judgment”). “Proceeding” is a comprehensive term that “‘include[s] in its general sense
all the steps taken or measures adopted in the prosecution or defense of an action.’”
Proceeding, BLACK’S LAW DICTIONARY (11th ed. 2019) (quoting EDWIN E. BRYANT,
THE LAW OF PLEADING UNDER THE CODES OF CIVIL PROCEDURE 3-4 (2d ed. 1899)).
Under Tennessee law, the court may address non-arbitrable issues but only if the non-
arbitrable issues are severable from the issues subject to arbitration. See Tenn. Code
Ann. § 29-5-303(d).

      We conclude that the trial court erred in deferring decision on the motion to
compel arbitration and in failing to stay any proceeding involving an arbitrable issue. So
we vacate the order granting a temporary injunction, the mediation order, and the civil
                                             6
contempt ruling. On remand, the trial court should determine whether a valid agreement
to arbitrate exists. See Taylor, 142 S.W.3d at 283-84 (explaining that the trial court is
permitted to determine whether an arbitration agreement is valid “before submitting the
remainder of the dispute to arbitration”). If so, the court must enforce it. The court must
also stay any proceedings that involve an issue subject to arbitration. If the arbitrable
issues are severable from other issues in dispute, the court may limit the scope of the stay
to the arbitrable issues. See Tenn. Code Ann. § 29-5-303(d). We decline to grant the
additional relief requested by the appellants as beyond the scope of this extraordinary
appeal.

                                            III.

       We vacate the court’s order granting a temporary injunction, the order compelling
mediation, and the order on NPI’s motion for contempt. On remand, the court shall
determine whether any of the agreements at issue require arbitration and take such further
actions as necessary and consistent with this opinion.

                                                   _________________________________
                                                   W. NEAL MCBRAYER, JUDGE

                                             7