Court Opinion

ID: 2765477
Source: CourtListenerOpinion
Date Created: 2014-12-30 21:06:20.688193+00
Date Added: 2024-06-11T11:26:29.926199
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                             AT JACKSON
                               November 12, 2014 Session

              GEORGE ERNEST DIGGS v. DAVID LINGO, ET AL.

              Direct Appeal from the Chancery Court for Henry County
                       No. 22364     Donald E. Parish, Judge

              No. W2014-00525-COA-R3-CV - Filed December 30, 2014

This is an appeal from an order denying a motion to compel arbitration. The beneficiaries
of a trust filed this lawsuit against the trustee alleging trustee self-dealing arising from a
transaction in which the trustee and his wife purchased certain real property from the trust
as tenants by the entirety. The beneficiaries sought to set aside a portion of the sale. The
trustee filed a motion to compel arbitration pursuant to an arbitration clause in the trust
agreement. The beneficiaries opposed the motion, arguing that they could not be compelled
to arbitrate their claims against the trustee’s wife. The trial court agreed and denied the
motion. The court found that the trustee’s wife was a necessary party to the resolution of the
dispute, but because she was not a party to the trust agreement, there was no enforceable
arbitration agreement between her and the beneficiaries. We affirm the decision of the trial
court.

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

B RANDON O. G IBSON, J., delivered the opinion of the Court, in which J. S TEVEN S TAFFORD,
P.J., W.S., and A RNOLD B. G OLDIN, J., joined.

Todd D. Siroky, Jackson, Tennessee, for the appellants, David Lingo and Denise Lingo.

Steve Greer, Paris, Tennessee, for the appellee, George Ernest Diggs.

George Robert Whitfield, III, Paris, Tennessee, for the appellee, Barbara Roberts.

Robert E. Cooper, Jr., Attorney General and Reporter, Joseph F. Whalen, Solicitor General
and Ryan A. Lee, Assistant Attorney General, for the appellee, Tennessee Attorney General.
                                         OPINION

                      I. B ACKGROUND AND P ROCEDURAL H ISTORY

       On December 5, 1996, Leon Henderson executed and funded the Leon Henderson
Revocable Living Trust Agreement (referred to hereinafter as the “Trust” or “Trust
Agreement”). Mr. Henderson amended the Trust Agreement eight times prior to his death.
The Trust Agreement provided that its assets be distributed to three individual
beneficiaries–Ernest Diggs, David Lingo, and Barbara Roberts–and four charitable
beneficiaries at Mr. Henderson’s death. In addition to being a named beneficiary, the Trust
Agreement designated Mr. Lingo to act as the Trust’s sole trustee following Mr. Henderson’s
death. Mr. Henderson died on December 10, 2011.

        On May 1, 2013, Mr. Diggs filed a complaint in Henry County Chancery Court
against Mr. Lingo, individually and as trustee of the Trust, and his wife, Denise Lingo. The
complaint alleged that Mr. Lingo breached his fiduciary duty to the Trust by engaging in
trustee self-dealing. Specifically, the complaint challenged the sale of certain real estate
consisting of a residence and several tracts of farm land from the Trust to Mr. and Mrs. Lingo
as tenants by the entirety. Mr. Diggs acknowledged that the Trust Agreement gave Mr.
Lingo the option to purchase a certain portion of the real estate for “appraised value.” He
alleged, however, that Mr. Lingo, in his capacity as trustee, sold all of the real estate from
the Trust to himself and his wife for $1,743,850, a price well below its recent appraisal value
of $2,240,600. Mr. Diggs also alleged that Mr. and Mrs. Lingo financed the entire amount
with money borrowed from the Trust payable over a twenty year term with no down payment.
Mr. Diggs asked that the court require Mr. Lingo to reimburse the Trust for any bargain
received on the purchase of the portion of real estate he had an option to purchase and that
the sale of the remainder of the real estate to Mr. and Mrs. Lingo be set aside. In addition
to the breach of fiduciary duty claim, Mr. Diggs alleged that Mr. Lingo, as trustee, breached
a farm lease agreement Mr. Diggs entered with Mr. Henderson prior to his death and
requested that Mr. Lingo be ordered to provide an accounting of the Trust’s assets.

        On May 30, 2013, Ms. Roberts filed a cross-complaint against Mr. and Mrs. Lingo
that alleged trustee self-dealing by Mr. Lingo arising from the sale. Ms. Roberts alleged that
Mr. and Mrs. Lingo had been unjustly enriched by Mr. Lingo’s wrongful conduct and
requested that they be ordered to return the proceeds of such unjust enrichment to the Trust.
Additionally, Ms. Roberts asked the court to order a public auction of all of the real estate
purchased by the Mr. and Mrs. Lingo, with the proceeds distributed to the beneficiaries in
accordance with the Trust Agreement. She also requested a judgment for compensatory and
punitive damages be entered against Mr. Lingo.

                                              -2-
        On July 17, 2013, Mr. Lingo, individually and in his capacity as trustee, and Ms.
Lingo answered the complaints. On the same day, Mr. Lingo also filed a motion to compel
arbitration pursuant to Section 7.01 of the Trust Agreement. Section 7.01 of the Trust
Agreement, titled “Resolution of Conflict,” provides as follows:

        Any controversy between the Trustee or Trustees and any other Trustee or
        Trustees, or between any other parties to this Trust, including Beneficiaries,
        involving the construction or application of any of the terms, provisions, or
        conditions of this Trust shall, on the written request of either or any
        disagreeing party served on the other or others, be submitted to arbitration.
        The parties to such arbitration shall each appoint one person to hear and
        determine the dispute and, if they are unable to agree, then the two persons so
        chosen shall select a third impartial arbitrator whose decision shall be final and
        conclusive upon both parties. The cost of arbitration shall be borne by the
        losing party or in such proportion as the arbitrator(s) shall decide. Such
        arbitration shall comply with the commercial arbitration rules of the American
        Arbitration Association, 140 West 51st Street, New York, New York 10200.

Mr. Lingo argued that the parties were bound by the arbitration provision and requested that
the court enforce the provision and order that Mr. Diggs’s and Ms. Roberts’s breach of
fiduciary duty claims be submitted to binding arbitration.1 Mr. Diggs and Ms. Roberts each
filed responses in opposition to Mr. Lingo’s motion to compel arbitration. Subsequently, Ms.
Roberts filed a second amended complaint naming the Tennessee Attorney General as a party
to represent the interests of charitable beneficiaries,2 and the Attorney General also filed a
response opposing the motion to compel arbitration.

        On November 15, 2013, the trial court requested additional briefing from the parties
on two issues related to Mr. Lingo’s motion to compel arbitration. Specifically, the court
asked (1) whether arbitration between the beneficiaries and the trustee would be controlling
on Ms. Lingo, and (2) whether, given the number of parties, the court would be able to create
a method of selecting the arbitrators and deciding disagreements between them. In response
to the court’s request, each of the parties filed additional briefs on the issues.

        1
         Mr. Lingo conceded that Mr. Diggs’s complaint for breach of a farm lease agreement was not
subject to arbitration.
        2
          Tennessee Code Annotated section 35-15-110(b) provides that “[t]he attorney general of this state
has the rights of a qualified beneficiary with respect to a charitable trust having its place of administration
in this state.”

                                                     -3-
      On February 10, 2014, the trial court entered an order in which it cited three
independent reasons for denying Mr. Lingo’s motion to compel arbitration. The order stated:

       The Court denies the Motion To Compel Arbitration for these reasons, any of
       which, standing alone, would be a sufficient basis to do so:

       1.     Denise Lingo is a necessary participant in any proceeding that seeks to
              resolve significant parts of this dispute. She cannot be a party to an
              arbitration conducted under Section 7.01 of the Leon Henderson
              Revocable Living Trust because she has no interest created by the trust.
              While Mrs. Lingo has offered to submit herself to arbitration, this offer
              has not been accepted by the beneficiaries of the trust, other than Mr.
              Lingo, her husband. Nor can the other beneficiaries be required to
              abandon their right to proceed against Mrs. Lingo in a court proceeding.
              Denise Lingo is a necessary party to this litigation. While it may be
              theoretically possible for the issues to be decided in litigation and in a
              separate arbitration, which could then be, perhaps, enforced by more
              litigation, this is not practical. There is also the possibility of
              inconsistent results coming about from two such parallel proceedings.
              This possibility should be avoided.

       2.     A significant aspect of the dispute involves farm real estate and a
              residence. T.C.A. § 29-5-302(a) requires that an arbitration provision
              within a contract regarding such realty be “additionally signed or
              initialed by the parties.” No such additional signature or initialing
              appears within the Henderson Trust document. Therefore, the
              arbitration provision which relates to realty is not enforceable.

       3.     Section 7.01 of The Henderson Trust contains ambiguities relating to
              how an arbitration is to proceed when there are, as here, multiple
              parties. While T.C.A. § 29-5-304 does provide some guidance to a
              court, it does not address the questions presented here concerning the
              number of arbitrators, how the arbitrators are to be chosen and what
              represents an agreement or the lack of an agreement among the
              arbitrators. These ambiguities and others lead the Court to conclude that
              the arbitration clause is so unclear as to render that clause
              unenforceable. It is not appropriate for the Court to essentially create
              a workable arbitration procedure when the settlor failed to do so
              himself.

                                             -4-
Mr. Lingo filed a notice of appeal from the court’s order pursuant to Tennessee Code
Annotated section 29-5-319.3

                                            II. I SSUE

      The primary issue presented on appeal is whether the trial court erred in denying Mr.
Lingo’s motion to compel arbitration.

                                        III. D ISCUSSION

        A trial court’s order on a motion to compel arbitration primarily requires an
application of contract law principles. Rosenberg v. BlueCross BlueShield of Tenn., Inc., 219
S.W.3d 892, 903 (Tenn. Ct. App. 2006). We therefore review such orders de novo with no
presumption of correctness on appeal. Id. To the extent that the trial court makes findings
of fact, we review its findings with a presumption of correctness unless the preponderance
of the evidence is to the contrary. Tenn. R. App. P. 13(d); T.R. Mills Contractors, Inc. v.
WRH Enters., LLC, 93 S.W.3d 861, 864 (Tenn. Ct. App. 2002).

        The trial court’s first reason for denying the motion to compel arbitration was
premised on its determination that arbitration would not be appropriate in this case because
Ms. Lingo is a necessary participant in any proceeding seeking to resolve a significant part
of the dispute. Mr. Lingo contends that the trial court erred in ruling that Ms. Lingo is a
necessary party. He argues Ms. Lingo is not a necessary party because in the event her
interest in the real estate is impaired by the outcome of this dispute, she would have a
separate legal remedy against him. We do not agree. Because Mr. Lingo and Ms. Lingo
purchased the real estate from the Trust as tenants by the entirety, she is a necessary party to
any suit seeking to encumber her interest in it. See Robinson v. Trousdale Cnty., 516 S.W.2d
626, 630 (Tenn. 1974) (quoting Irwin v. Dawson, 197 Tenn. 314, 273 S.W.2d 6 (Tenn.
1954)) (“It is well settled in this State that a husband cannot dispose of his wife’s interest in
an estate owned as by the tenants by the entirety, and cannot sell or encumber anything but
his interest.” ).

      Arbitration clauses are not binding on third parties who are not parties to the contract.
Cocke Cnty. Bd. of Highway Com’rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn.
1985). Accordingly, the only parties contractually bound by the Trust Agreement’s

       3
        Tennessee Code Annotated section 29-5-319 provides that an appeal may be taken from an order
denying an application to compel arbitration.

                                                -5-
arbitration clause are Mr. Lingo and the beneficiaries.4 Mr. Lingo argues that the trial court
should have enforced the arbitration clause against Ms. Lingo because she consented to be
bound by it. Mr. Lingo argues that such consent constitutes an enforceable agreement to
arbitrate. We find this argument unconvincing. Rather, we find that Ms. Lingo’s statement
of consent was an offer to the beneficiaries to be bound by the arbitrator’s decision. Apart
from Mr. Lingo, however, none of the beneficiaries accepted Ms. Lingo’s offer. Ms. Lingo
may offer to be bound to the arbitration, but unless that offer is accepted by the beneficiaries,
she cannot compel the beneficiaries to arbitrate their claims against her. In the absence of
any agreement between the beneficiaries and Ms. Lingo, the trial court correctly determined
that beneficiaries cannot be held to have forfeited their right to proceed against her in court.
See River Links at Deer Creek, LLC v. Melz, 108 S.W.3d 855, 859-860 (Tenn. Ct. App. 2002)
(“A party cannot be compelled to arbitrate in the absence of a contractual obligation.”).

        In light of its determination that the beneficiaries cannot be compelled to arbitrate
with Ms. Lingo, the trial court observed that it would be preferable to settle the issue as to
both Mr. Lingo and Ms. Lingo in the courts. The court stated that although, in theory, the
same issue could be decided in litigation as to Ms. Lingo and in arbitration as to Mr. Lingo,
such parallel proceedings would not be practical and could lead to inconsistent results.
Moreover, those parallel proceedings would defeat the very purpose of arbitration. The
major advantages of resolving disputes through arbitration are its speed, lack of expense, and
finality of decisions. Buraczynski v. Eyring, 919 S.W.2d 314, 318 n.3 (Tenn. 1996). In a
case such as this one, where a single claim must be resolved as to two defendants, only one
of which is subject to arbitration, a comprehensive resolution cannot be obtained through an
arbitration proceeding. Such a scenario negates the advantages of arbitration. Accordingly,
under the circumstances presented by this case, the fact that the beneficiaries could not be
forced to submit their claims against Ms. Lingo to arbitration was sufficient grounds for the
trial court to reject Mr. Lingo’s motion to compel arbitration.

      Because disposition of the issues to this point is sufficient to uphold the trial court’s
judgment, further issues raised by the appellant are pretermitted.

        Finally, we note that in her appellate brief, Ms. Roberts contends that the appellants
failed to properly present issues for our review on appeal. She therefore requests that we
declare this appeal frivolous and order an award of reasonable attorney’s fees, costs, and
expenses associated with this appeal to the appellees pursuant to Tennessee Code Annotated

        4
         Before an intended third-party beneficiary of a contract may accept the benefits of a contract, he
must accept all of its obligations. Benton v. Vanderbilt Univ., 137 S.W.3d 614, 618 (Tenn. 2004).
Accordingly, the beneficiaries of the Trust Agreement, in order to accept its benefits, must accept the
obligation to arbitrate disputes.

                                                   -6-
section 27-1-122.5 The decision whether to award such damages rests solely in the discretion
of this Court. Whalum v. Marshall, 224 S.W.3d 169, 180–181 (Tenn. Ct. App. 2006). We
decline to grant such an award in this case.

                                             IV. H OLDING

      In light of the foregoing, we affirm the decision of the trial court to deny Mr. Lingo’s
motion to compel arbitration. Costs of this appeal are taxed to the appellants, David Lingo
and Denise Lingo, and their surety, for which execution may issue if necessary.

                                                          _________________________________
                                                          BRANDON O. GIBSON, JUDGE

       5
           Tennessee Code Annotated section 27-1-122 states:

       When it appears to any reviewing court that the appeal from any court of record was
       frivolous or taken solely for delay, the court may, either upon motion of a party or of its own
       motion, award just damages against the appellant, which may include but need not be
       limited to, costs, interest on the judgment, and expenses incurred by the appellee as a result
       of the appeal.

                                                    -7-